**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-K**

 

| **ý** | **Annual report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | **for  the fiscal year ended December 31, 2002**                                                                                                                                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                                                                                                                                                     |
| **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 Registrantas 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, New York 10006**                |
| (Address of  Principal Executive Offices) (Zip Code)             |
|                                                             |   |                                                       |
| **(212)  425-1144**                                              |
| (Registrant’s  telephone number, including area code)       |
|                                                             |   |                                                       |
| Securities registered pursuant to Section 12(b) of  the Act:     |   | **Common Stock, par value $0.01  New York Stock Exchange** |
|                                                             |   |                                                       |
| Securities registered pursuant to Section 12(g) of  the Act:     |   | **None**                                                   |
|                                                                  |        |                                                            |  |  |

 

Indicate by check mark whether the registrant: (1) 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.   ý

 

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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The aggregate market value of the Common Stock held bynon-affiliates of the registrant, based upon the last sale price of the CommonStock reported on the New York Stock Exchange on June 28, 2002, wasapproximately $439,700,000.

 

The number of shares of Common Stock outstanding as ofMarch 10, 2003 was 59,528,433.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

As stated in Part III of this Annual Report on Form10-K, portions of the registrant’s definitive proxy statement for theregistrant’s 2003 Annual Meeting of Stockholders are incorporated by referencein Part III of this Annual Report on Form 10-K.

 

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**PART I**

 

*This Annual Reporton Form 10-K and the documents incorporated by reference containforward-looking statements that have been made pursuant to the provisions ofthe Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on currentexpectations, estimates and projections about the registrant’s industry,management’s beliefs and certain assumptions made by management.  Words such as “anticipates,” “expects,”“intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such wordsand similar expressions are intended to identify such forward-lookingstatements.  These statements are notguarantees of future performance and are subject to certain risks,uncertainties and assumptions that are difficult to predict; therefore, actualresults may differ materially from those expressed or forecasted in any suchforward-looking statements.  Unlessrequired by law, the registrant undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  However, readersshould carefully review the risk factors set forth in other reports ordocuments the registrant files from time to time with the Securities andExchange Commission.*

 

# **Item1.**                                   BUSINESS.

 

## **Overview**

 

LaBranche& Co Inc. (“LaBranche”) is a holding company that is the sole member ofLaBranche & Co. LLC and LaBranche Structured Products, LLC (“LSP”).LaBranche owns all of the outstanding stock of LaBranche Financial Services,Inc. (“LFSI”) and is the sole owner of LaBranche & Co. B.V. (“BV”). Foundedin 1924, LaBranche & Co. LLC is one of the oldest and largestspecialist firms on the New York Stock Exchange (“NYSE”). LaBranche & Co.LLC also acts as a specialist in equities on the American Stock Exchange(“AMEX”). LFSI is a registered broker-dealer and a member of the NYSEand other exchanges, and provides securities clearing, securities execution andother related services to its own retail customers, customers of introducingbrokers and institutional customers, including traders, professional investorsand broker-dealers. LFSI also provides direct-access floor brokerage servicesto institutional customers. LSP wasorganized in September 2002, and is a registered broker-dealer that operates asa specialist in options and a market-maker in Exchange-Traded-Funds (“ETFs”) onthe AMEX. BV was organized in April 2002 to represent LaBranche & Co. LLCin European markets and to provide client services to LaBranche & Co. LLC’sEuropean listed companies.

 

We are a Delawarecorporation that was incorporated in June 1999. Our principal executive officesare located at One Exchange Plaza, 25th Floor, New York, New York 10006, andour telephone number is (212) 425-1144. Our Internet address iswww.labranche.com. We make available free of charge, on or through the investorrelations section of our web site, annual reports on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 as soon as reasonably practicable after we electronicallyfile such material with, or furnish it to, the Securities and ExchangeCommission.

 

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We currently view our business under two separatesegments: the specialist segment and the execution and clearing segment.

 

Our specialist segment currentlyincludes the operations of LaBranche & Co. LLC, LSP and BV. Our NYSE andAMEX members within the specialist segment act as the specialists for 589 commonstock listings on the NYSE, 82 common stock listings and 143 options on theAMEX, and act as market-maker for approximately 40 ETFs.

 

Our execution and clearingsegment currently includes the operations of LFSI, which provides securitiesexecution and clearing services to retail and institutional clients andcorrespondents. LFSI’s central focus is to bring the customer closer to thepoint of sale and provide price discovery at the highest speed and lowestpossible cost.

 

Compensation and related benefits for certainemployees and certain company wide professional fees are allocated to our twoprincipal business segments. However, certain revenues and administrative andcorporate overhead expenses, which consist primarily of interest on LaBranche’spublic debt, are not specifically allocated to our two principal businesssegments and thus are treated as “other” revenues and expenses. A descriptionof our principal business segments is presented below.

 

**Our Specialist Segment**

 

***The Specialist Industry***

 

The NYSE is currently the largest securities market inthe world. As of year-end 2002, the global market capitalization of all shareslisted on the NYSE was approximately $13.4 trillion and the NYSE had nearly2,800 listed companies, including approximately 470 non-U.S. companies from 51countries.

 

The NYSE’s average daily trading volume for 2002 was1.4 billion shares, up from 1.2 billion shares in 2001.

 

All trading of securities on the NYSE is conductedthrough an auction process. The auction process for each security is managed bythe exclusive specialist for that security. The specialist is a broker-dealerwho applies for and, if accepted, is assigned the role to maintain a fair andorderly market in its specialist stocks. The number of specialist units on theNYSE has decreased substantially over the past several years due toconsolidation within the industry. There are currently seven NYSE specialistfirms, of which the three largest, as ranked by number of specialist stocks,were responsible for approximately 69.0% and 69.6% of the average daily sharevolume in 2002 and 2001, respectively.

 

A specialist firm is granted an exclusive franchise bythe NYSE to conduct the auction in each of its NYSE-listed stocks. Specialistfirms conduct their auctions at specific trading posts located on the floor ofthe NYSE. Because the specialist firm runs the auction in its specialiststocks, it knows of all bids and offers in those stocks and gathers orders toprice its stocks appropriately.

 

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Specialist firms compete for the original listing ofstocks through an allocation process organized by the NYSE. As part of thisallocation process, companies seeking a listing may select a specialist firm inone of two ways. Under the first method, the NYSE’s allocation committeeselects the specialist firm based on specific criteria. Under the secondmethod, available since March 1997, the listing company requests that theallocation committee select three to five potential specialist firms suitablefor the stock, based on criteria specified by the listing company. The listingcompany then has the opportunity to meet with each specialist firm identifiedby the allocation committee. Within one week after meeting the competing specialistfirms, the listing company must select a specialist firm. Currently,substantially all of the companies seeking a listing on the NYSE are opting tomake the final choice of their own specialist firm under the second allocationmethod.

 

When assigned a particular stock, the specialist firmagrees to specific obligations. The specialist firm’s role is to maintain, asfar as practicable, trading in the stock that will be fair and orderly. Thisimplies that the trading will have reasonable depth and price continuity, sothat, under normal circumstances, a customer may buy or sell stock in a mannerconsistent with market conditions. A specialist firm helps market participantsachieve price improvement in their trades because the best bids and offers are discoveredthrough the auction process. In performing its obligations, the specialist firmis exposed to all transactions that occur in each of its specialist stocks onthe NYSE floor. In any given transaction, the specialist firm may act as:

 

•                    an auctioneerby setting opening prices for its specialist stocks and by matching the highestbids with the lowest offers, permitting buyers and sellers to trade directly;

 

•                    a facilitatorbringing together buyers and sellers who do not know of each other in order to executea trade which would not otherwise occur;

 

•                    an agent forbroker-dealers who wish to execute transactions as instructed by theircustomers (typically, these orders are limit orders entrusted to the specialistat prices above or below the current market price); or

 

•                    a principalusing its own capital to buy or sell stocks for its own account.

 

The specialist firm’s decision to buy or sell sharesof its specialist stocks as principal for its own account may be based onobligation or inclination. For example, the specialist firm may be obligated tobuy or sell its specialist stock to counter short-term imbalances in theprevailing market, thus helping to maintain a fair and orderly market in thatstock. At other times, the specialist firm may be inclined to buy or sell thestock as principal based on attractive opportunities. The specialist firm maytrade at its election so long as the trade will contribute to a fair andorderly market. In actively-traded stocks, the specialist firm continually buysand sells its specialist stocks at varying prices throughout each trading day.The specialist firm’s goal and expectation is to profit from differencesbetween the prices at which it buys and sells these stocks. In fulfilling itsspecialist obligations, however, the specialist firm may, at times, beobligated to trade against the market, adversely impacting the profitability ofthe firm. In addition, the specialist firm’s trading practices are subject to anumber of restrictions, as described in “NYSE and AMEX Rules Governing OurSpecialist Activities.”

 

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### ***Recent Trends in NYSE Trading***

 

Specialist firms generate revenues by executingtrades, either as agent or principal, in their specialist stocks. Accordingly,the specialist firms’ revenues are significantly impacted by the volume oftrading on the NYSE. This volume has increased significantly in recent years asa result of many factors, including:

 

•                    an increase inthe amount of assets managed through retirement plans, mutual funds, annuityand insurance products, index funds and other institutional investmentvehicles;

 

•                    an increase inNYSE listings of non-U.S. companies;

 

•                    transfers fromNasdaq;

 

•                    spin-offs;

 

•                    trading indecimal price increments.

 

Despite theincreases in NYSE share volume, the difficult global market and economicconditions that existed during 2001 continued throughout 2002, adverselyaffecting our specialist operations. Although 2002 began with expectations ofimproved economic performance, weak corporate earnings, increased uncertaintyabout the strength and pace of the global economic recovery and continuedrevelation of numerous corporate accounting and governance irregularitiesundermined investor confidence. As a result, the equity markets in which weoperate experienced sharp declines during 2002. Uncertainty surroundingcontinuing terrorist threats and increased geopolitical tensions also havecontributed to investor lack of confidence and reluctance to participate in theequity markets.

 

In January 2001,the NYSE commenced trading in decimals. To date, studies on the effects ofdecimalization on NYSE trading have shown that bid-asked spreads and quotesizes have decreased, and the percentage of shares receiving price improvementhas increased. Despite the documentation of these findings, it has beendifficult to determine the precise effect of decimalization on our principaltrading revenue, and we do not know the effect decimalization will have on ourprincipal trading revenue in the future.

 

The majority of trades in NYSE-listed stocks takeplace through NYSE specialist firms. In 2002, specialist firms handledapproximately 81.9% of trades in NYSE-listed stocks as compared to 84.0% in2001. Trades in NYSE-listed stocks also are generally effected as follows:

 

•                    some stocksare listed on multiple exchanges, such as regional exchanges, and trades takeplace on those exchanges; and

 

•                    NYSE-listedstocks may be traded off the NYSE in the over-the-counter market.

 

Technological advances have contributed to increasedtrading through alternative trading systems, called ATSs, such as electroniccommunications networks, or ECNs, and crossing

 

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systems. While the firstECN was created in 1969, most of the others currently in operation were startedin the past several years. These systems electronically facilitate the matchingof buy and sell orders that are entered by their network members. If a matchdoes not occur, some ATSs will forward unfilled orders to other ATSs or toexchanges such as the NYSE. Some of these networks also allow limitednegotiation between members to facilitate a match. These ATSs generally limittrades over their systems to their members, who are typically large financial institutions,professional traders or brokerage firms. Additionally, some ATSs are beingdeveloped to facilitate trading by retail investors. In April 1999, theSEC ruled that these networks are allowed, and in specified cases are required,to register and become subject to regulation as stock exchanges.

 

Despite the presence of these ATSs, thus far, therehas been an insignificant decline in the volume of equities traded on the NYSEas opposed to these alternative systems. The percentage of annual trading ofNYSE-listed stocks on the NYSE has ranged from 81.9% to 84.0% for the past fiveyears. The decline in NYSE’s share of consolidated tape volume from 84.0% in2001 to 81.9% in 2002 was primarily due to the increase in NYSE stocks tradingbelow $5 as a result of the continuing bear market. It is unclear, however, howthe alternative trading methods and new technologies just described or that maybe developed will affect the future percentage of trading in listed stocksconducted on the NYSE.

 

In response to the advent of these ATSs, the NYSE haslaunched Network NYSE, a suite of market information and auto-executionproducts offering new choices to different types of customers. Some examples ofthese new products include:

 

•                    NYSE Direct+©,an automatic execution service for limit orders up to 1,099 shares, enablinginvestors to automatically execute orders at the national best bid offer;

 

•                    NYSEOpenBook(SM), an online market data product allowing subscribers to viewinformation on the NYSE limit order books; and

 

•                    InstitutionalExpress(SM), an electronic gateway to satisfy large order requirements,including the growing information needs of NYSE member firms and theirinstitutional customers.

 

We believe these recentNYSE product developments will further benefit our specialist business byoffering investors new choices within the NYSE auction market system. Thesechoices should enable both retail and institutional investors to access theworld’s largest pool of liquidity, and execute their trades through NYSE specialists– the focal point of the NYSE’s auction-based system.

 

## ***OurSpecialist Operations***

 

## ***Our NYSE and AMEXEquity Specialists***

 

Our NYSE and AMEX equity specialist operationsare conducted through our LaBranche & Co. LLC subsidiary. As a specialistin equities on the NYSE and AMEX, its role is to maintain, as far aspracticable, a fair and orderly market in its specialist stocks. In doing so,it provides a service

 

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to its listed companies, and to the brokers, traders and investors whotrade in its specialist stocks. We believe that, as a result of our commitmentto providing high quality specialist services, we have developed a strongreputation among our constituencies, including investors, members of the WallStreet community and our listed companies.

 

Our specialist business hasgrown considerably over the past several years. Our revenues from ourspecialist operations have increased from approximately $95.0 million in1998 to $340.8 million in 2002. We have accomplished our growth bothinternally and through acquisitions. Since the NYSE implemented its newspecialist allocation process in March 1997, we have been selected by 124new listed companies, resulting from 261 listing interviews through December31, 2002. In addition, we have acquired eleven specialist operations since1997, adding approximately 500 NYSE common stocks and 52 AMEX common stocks. Asa result of internal growth and selective acquisitions, our LaBranche & Co.LLC subsidiary currently is one of the leading NYSE specialists as illustratedby the following data:

 

•                    the annualdollar volume on the NYSE of stocks for which LaBranche & Co. LLC acted asspecialist was $2.7 trillion, or 27.2% of total NYSE dollar volume in2002, and $2.5 trillion, or 27.6% of total NYSE dollar volume in 2001. By thismeasure, LaBranche & Co. LLC was the largest NYSE specialist firm in 2002;

 

•                    the annualshare volume on the NYSE of stocks for which LaBranche & Co. LLC acted asspecialist was 102.0 billion, or 28.7% of total NYSE share volume in 2002,and 76.0 billion, or 28.5% of total NYSE share volume in 2001. By this measure,LaBranche & Co. LLC was the largest NYSE specialist firm in 2002; and,

 

•                    the totalnumber of LaBranche & Co. LLC’s common stock listings was 589, or 22.8% ofall NYSE common stock listings as of December 31, 2002, and 591, or 22.9% ofall NYSE common stock listings as of December 31, 2001. By this measure,LaBranche & Co. LLC was the largest NYSE specialist firm as of December 31,2002. In addition, LaBranche & Co. LLC acted as the specialist for 272other NYSE-listed securities (e.g., preferred and convertible securities).

 

As of December 31, 2002, our listed companiesincluded:

 

•                    101 of theS&P 500 Index companies; and

 

•                    nine of the 30companies comprising the Dow Jones Industrial Average. Our Dow stocks are 3MCo., Altria Group, Inc., American Express Company, AT&T, DuPont, EastmanKodak, ExxonMobil, Merck, and SBC Communications.

 

*Our**AMEX Options Specialist*

 

We originally entered into the AMEX options specialistbusiness through our LaBranche & Co. LLC subsidiary upon the acquisition inDecember 2000, of the assets and operations of an AMEX options specialistunit and, in August 2001, we expanded our AMEX specialist activities bypurchasing the assets and operations of Cranmer & Cranmer, Inc., a firmwhich acted as the specialist for both equities and options on the AMEX.Through September 25, 2002 our AMEX

 

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specialist operations forboth equities and options were conducted entirely by LaBranche & Co.LLC. Since September 25, 2002, we have conducted our AMEX options specialistbusiness activities through LSP, our newly-organized wholly-owned subsidiary.Our specialist activities related to equities on the AMEX remained at LaBranche& Co. LLC. In addition to acting as the specialist for 143 AMEX-listedoptions, LSP acts as a market-maker in approximately 40 ETFs.

 

As a specialist in options on the AMEX, LSP isresponsible for creating a fair and orderly market in the trading of itsspecialist options. In doing so, LSP may at times be obligated to trade againstthe market, adversely impacting the profitability of the trade or creating aposition that may not necessarily be desired. To hedge the risk of its optionpositions, LSP may buy or sell the stock underlying the option.

 

As a market-maker in approximately 40 ETFs, LSP is notobligated to create a fair and orderly market. Thus, it can willingly buy andsell the ETFs for which it acts as a market-maker, but it is not obligated todo so. LSP hedges its ETF positions with a combination of financial futures,baskets of underlying stocks and other ETFs.

### * *

### *Our Specialist Support Services*

 

In April 2002, BV was organized to represent our specialistsegment in European markets and to provide client services to our specialistsegment’s European listed companies. BV was established under Dutch law, andits office is in Amsterdam. The entity, through a services agreement, providesmonitoring and trading services for LaBranche & Co. LLC’s specialist stockpositions on an overnight basis, as specifically directed by appropriatelydesignated LaBranche & Co. LLC personnel. In addition, BV markets theservices of our specialist entities to existing and prospective Europeancompanies.

 

### ***NYSE and AMEX Rules Governing OurSpecialist Activities***

 

Under NYSE and AMEX rules, a specialist has a duty tomaintain, as far as practicable, a fair and orderly market in its specialiststocks. In order to fulfill its obligations, the specialist must at times tradefor its own account, even when it may adversely affect the specialist’sprofitability. In addition, under some circumstances, the specialist isprohibited from making trades as principal in its specialist stocks. Thespecialist’s obligations are briefly described below.

 

*Requirementto Trade as Principal*. A specialist must buy and sellsecurities as principal when necessary to minimize an actual or reasonablyanticipated short-term imbalance between supply and demand in the auctionmarket. The specialist must effect these transactions when their absence couldresult in an unreasonable lack of continuity and/or depth in its specialiststocks. The specialist is not expected to act as a barrier in a rising market ora support in a falling market, but must use its own judgment to try to keepsuch price increases and declines equitable and consistent with marketconditions.

 

A specialist must make firm and continuous two-sidedquotations that are timely and that accurately reflect market conditions. Inmaking these quotations, the specialist’s transactions are calculated tocontribute to the maintenance of price continuity with reasonable depth.

 

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*Trading Restrictions.* In trading for its own account, the specialist must avoid initiating amarket-destabilizing transaction. All purchases and sales must be reasonablynecessary to permit the specialist to maintain, as far as practicable, a fairand orderly market in its specialist stocks. In addition, the specialist mustcomply with the following trading requirements:

 

•                    A specialistmust first satisfy a customer’s market buy order (an order to buy at theprevailing market price) before buying any stock for its own account.Similarly, a specialist must first satisfy a customer’s market sell order (anorder to sell at the prevailing market price) before selling any stock for itsown account;

 

•                    A specialistmust first satisfy a customer’s limit order held by it before buying or sellingat the same price for its own account. A limit order is an order either to buyonly at or below a specified price, or to sell only at or above a specifiedprice. A specialist may not have priority over any customer’s limit order. Aspecialist, however, may buy or sell at the same price as a customer limitorder as long as that limit order is executed first;

 

•                    If a publicbuyer wants to buy at a particular price and a seller wants to sell at the sameprice, the buyer and seller trade directly with each other, and the specialistshould not interfere in the transaction;

 

•                    The specialistdoes not charge commissions for trades in which it acts as a principal;

 

•                    Except in somecircumstances in less active markets, the specialist may not, without permissionfrom an exchange official, initiate destabilizing trades for its own accountwhich cause the stock price to rise or fall; and

 

•                    Anytransactions by the specialist for its own account must be effected in areasonable and orderly manner in relation to the condition of the generalmarket, the market in the particular stock and the adequacy of the specialist’sposition to the immediate and reasonably anticipated needs of the market.

 

In addition, the specialist cannot be in a controlrelationship with any of its listed companies. This means a specialist may notacquire more than 5% of any common or preferred issue of its specialist stocksand may not own 10% or more of any common or preferred stock. A specialist maynot hold any position as an officer or director with, receive payments or loansfrom, or engage in certain business transactions with any of its listedcompanies.

 

## ***ListedCompany Services***

 

We are committed to providing our listed companieswith a high level of service, in addition to our specialist functions on thetrading floor. We have a Corporate Relations Department consisting of 20full-time employees devoted to serving our listed companies. The most importantfunction of the Corporate Relations Department is to provide current market informationto the listed companies.

 

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In addition, we help to educate our listed companieson general market trends. We organize annual educational conferences thatreview trends in the securities industry and equity markets. We also survey ourspecialist companies annually on the quality of our services, and use theinformation obtained in these surveys to continually improve our services. Fornewly listed companies on the NYSE, we provide additional investor relationssupport services to assist the companies with their transition to the NYSE.These services, which are often outsourced, add significant value for companiesconsidering a listing on the NYSE.

 

## ***Competitionin the Specialist Industry***

 

We obtain each of our new listings on the NYSE andAMEX by participating in an allocation process. As part of this process, eitherthe allocation committee of the NYSE or AMEX or the listing company chooses thespecialist firm. We compete with other specialist firms based on a number offactors, including:

 

•                    the strengthof our capital base;

 

•                    ourwillingness to commit our own capital and trade for our own account whileconducting our specialist operations; and

 

•                    the ancillaryservices we offer our specialist companies, such as providing information onthe trading activities in their stocks.

 

The specialist industry experienced a vast andaccelerated consolidation over the past several years. In 2002, the threelargest specialist units as ranked by their number of specialist stock listingsaccounted for 69.0% of the daily share volume traded on the NYSE. As a resultof the consolidation, the competition for obtaining new listed companies isintense. We expect competition to continue and intensify in the future as someof our competitors may have greater financial resources and product serviceofferings.

 

## ***OurSpecialist Segment’s Competitive Position***

 

We are committed to providing the highest qualityservice to our various constituencies. We believe our success is based on thefollowing factors:

 

•                    *LeadingPosition in the Specialist Market.* We have a long-standingreputation as one of the leading specialist firms on the NYSE and haveestablished and are expanding our presence on the AMEX. We have successfullygrown our business and improved our services through widely varying marketconditions. Trading in the stocks for which we acted as specialist during 2002accounted for 27.2% of the dollar volume on the NYSE and 28.7% of the sharevolume. By these measures, we were the largest specialist firm on the NYSE. Asof December 31, 2002, we acted as specialist for 589 common stocks listed onthe NYSE and 82 listed on the AMEX. Of our NYSE common stock listings, 134 and123 were non-U.S. listings as of December 31, 2002 and December 31, 2001,respectively.

 

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•                    *Diverse andHigh Quality Specialist Stocks.* Our listed companies operate in avariety of industries including financial services, media, oil and gas, retail,technology and telecommunications. Many of our listed companies are leaders intheir respective fields. They range in market capitalization from some of thesmallest on the NYSE and AMEX to some of their largest and most well-known.Acting as specialist in the stocks of industry leaders should benefit us asthese leading companies continue to expand their businesses through internalgrowth and acquisitions.

 

•                    *StrongMarket-Making Skills.* We utilize our strong market-making skills toactively trade as principal in our specialist stocks. In our opinion, wesignificantly improve liquidity in our specialist stocks, particularly duringperiods of market volatility. In 2002, approximately 32.4% of our trades wereas principal as compared to an average of approximately 30.2% for all NYSEspecialists.

 

•                  *InnovativeCustomer-Oriented Services.* We are committed to providing our listed companieswith a high level of service, in addition to our specialist functions on thetrading floor. We provide our listed companies with detailed information on thetrading activity of their stocks. We also maintain frequent contact with ourlisted companies to discuss the trading in their stock. In addition, we providecustomized support services for our listed companies to assist in their investorrelations efforts.

 

•                    *CompletedAcquisitions.* Since 1997, we have acquired eleven specialistoperations adding approximately 500 NYSE common stocks and 52 AMEX commonstocks, solidifying our position as one of the leading NYSE specialist firms,as well as establishing and expanding our presence on the AMEX.

 

**Our Execution and Clearing Segment**

 

## ***RecentTrends in Execution and Clearing Industry***

 

During the last few years, the traditional, clearingindustry has experienced a major consolidation, resulting in a small number ofhighly capitalized and extremely focused competitors. Utilizing enormous scale,the top few competitors in the business have captured the majority of thecorrespondent clearing market while providing retail sales organizations with acost effective and dependable operations platform. This business is highlyspecialized, requires significant balance sheet resources and has becomedominated by large commercial and investment banks.

 

As electronic delivery methods and clearing proceduresproliferate, the cost of providing executions has dropped and there has been anaccompanying drop in the general level of commissions. The contraction infinancing activity and flow of money to mutual fund managers has pressured boththe “buy” and “sell” sides severely. With the resumption of economic growth andthe return of financing activity, we believe that industry capacity should bemore fully utilized and commissions should stabilize.

 

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**Our Execution and Clearing Operations**

 

Our execution and clearing segment provides securitiesclearing, trade execution and other related services to its own retailcustomers, customers of introducing brokers and institutional customers,including traders, professional investors and other broker-dealers. We alsoprovide direct access floor brokerage services to institutional customers andprovide front-end order execution to a range of clients.

 

Unlike traditional clearing firms, LFSI is not focusedon the commoditized, bulk clearance, custody and execution business. Rather, ittargets specialized lines of business where flexibility, technologicalexpertise and a highly versatile execution and clearance platform provides uswith a competitive advantage. LFSI’s central focus is to bring the customercloser to the point of sale and provide price discovery at the highest speedand lowest possible cost.

 

In July 2002, we formed the Insitutional ExecutionGroup (“IEG”), which specializes in providing institutions with personalizedservice by reacting to their execution needs. IEG’s primary focus is to provideinstitutional customers with timely executions at the best price with minimalmarket impact. IEG offers the ability to both execute and clear trades on theNYSE, AMEX and Nasdaq/OTC with seamless straight-through processing from orderorigination to trade execution. Customers of IEG can also utilize its web-basedtechnology in order to preserve anonymous representation of their orders on theNYSE trading floor and other venues.

 

### ***Regulatory Matters***

 

The securities industry in the United States,including all broker-dealers, is subject to regulation under both federal andstate laws. In addition, the SEC, the NYSE, AMEX and other regulatoryorganizations require compliance with their rules and regulations. As a matterof public policy, regulatory bodies are charged with safeguarding the integrityof the securities and other financial markets and with protecting the interestsof investors participating in those markets.

 

Our broker-dealer subsidiaries, LaBranche & Co.LLC, LFSI and LSP, are subject to regulations concerning operational andfinancial aspects of their respective businesses. They are subject toregistration requirements with various government entities and self-regulatoryorganizations, commonly referred to as SROs, with which they must comply beforethey can conduct business. They are also subject to laws, rules and regulationsrequiring them to comply with financial reporting rules, trade practices,capital structure obligations, and record retention requirements. Failure byany of our broker-dealer subsidiaries to comply with any of these laws, rulesor regulations could result in censure, fine, the issuance of cease-and-desistorders or the suspension or disqualification of its directors, officers oremployees, and other negative consequences, which could have an adverse effecton our businesses. From time to time, in the ordinary course of business, wehave been subject to immaterial fines for violations of such laws, rules orregulations.

 

As a NYSE specialist firm, LaBranche & Co. LLC isunder constant review by the NYSE on all aspects of its operations andfinancial condition. As part of the price discovery mechanism implemented bythe NYSE, every specialist transaction is published immediately on the tape andis broadcast worldwide. The NYSE also employs sophisticated monitoring andstringent rules

 

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approved by the SEC. TheNYSE’s Market Surveillance Division examines specialists’ trading in allstocks, every trading day, including specialists’ decisions to trade or to nottrade as principal.

 

### *CapitalRequirements*

 

Our broker-dealersubsidiaries, LaBranche & Co. LLC, LFSI and LSP, are also subject to netcapital requirements as required by SEC Rule 15c3-1, and net liquid assetrequirements as required by the NYSE and AMEX. Please see the Liquidity sectionof our Management’s Discussion and Analysis of Financial Condition and Resultsof Operations for our subsidiaries’ capital requirements and actual amounts.

 

Failure to maintain therequired net capital and/or net liquid assets may subject our broker-dealers tosuspension or revocation of SEC registration or suspension or expulsion by theappropriate exchanges.

 

## **Employees**

 

As of December 31, 2002,we had 595 full-time employees, including 65 managing directors. As of February28, 2003, we had 597 full time employees, including 67 managing directors, ofwhich 437 were employed at our specialist segment, 123 were employed at ourexecution and clearing segment, and 37 were employed at LaBranche. Of the total597 full time employees, 110 were NYSE specialists, 14 were AMEX specialists,256 were trading assistants, and the remaining 217 employees worked in clearingoperations, corporate relations, registered representatives, management,administration, finance and other departments.

 

Our employees are not covered by a collectivebargaining agreement. We have never experienced an employment-relatedwork stoppage. We consider our employee relations to be good.

 

# **Item2.**                                   PROPERTIES.

 

Our offices are located at One Exchange Plaza, NewYork, New York, where we lease approximately 36,000 square feet under twoseparate leases expiring in January 2008, and at 120 Broadway, where we leaseapproximately 45,000 square feet under a sublease expiring in March 2006. Inaddition, we also leased approximately 9,000 square feet at One Exchange Plazaunder a lease, which expired in January 2003. We also lease five trading postson the floor of the NYSE, approximately 24,000 square feet of additional spaceat locations in New York and New Jersey under leases expiring between August2003 and September 2012 and approximately 1,100 square feet in Amsterdam,Netherlands, under a lease expiring in April 2004. We believe that our currentleased space is suitable and adequate for the operation of our business aspresently conducted and as contemplated to be conducted in the near future.

 

# **Item3.**                                   LEGALPROCEEDINGS.

 

The Company and, in particular, certain of thebusiness operations conducted by LFSI’s predecessor in interest, ROBB PECKMcCOOEY Clearing Corporation, have been the target, from time to time, ofvarious claims and lawsuits incidental to the ordinary course of their

 

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respective businesses.While the ultimate outcome of those claims and lawsuits which currently arepending cannot be predicted with certainty, we believe, based on ourunderstanding of the facts of these proceedings, that their ultimate resolutionwill not, in the aggregate, have a material adverse effect on our financialcondition or results of operations.

 

# **Item4.**                                   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

There were no matters submitted to a vote of securityholders during the fourth quarter of our fiscal year ended December 31, 2002.

 

**PART II**

 

# **Item5.**                                   MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

 

## **MarketInformation and Holders**

 

Our common stock is quoted on the NYSE under thesymbol “LAB.” The following table sets forth the range of high and low closingsales prices for our common stock on the NYSE for the periods indicated:

 
|                                      |   | **High** |   | **Low** |   |
|-------------------------------------------|--------|----------|--------|---------|--------|
| **Fiscal 2001**                           |   |     |   |    |   |
|                                      |   |     |   |    |   |
| First Quarter                             |   | $        | 51.03  |    | $      | 27.69 |   |
|                                      |   |     |   |    |   |
| Second Quarter                            |   | 44.52    |   | 28.56   |   |
|                                      |   |     |   |    |   |
| Third Quarter                             |   | 30.22    |   | 19.50   |   |
|                                      |   |     |   |    |   |
| Fourth Quarter                            |   | 35.11    |   | 22.12   |   |
|                                      |   |     |   |    |   |
| **Fiscal  2002**                          |   |     |   |    |   |
|                                      |   |     |   |    |   |
| First Quarter                             |   | 36.11    |   | 29.88   |   |
|                                      |   |     |   |    |   |
| Second Quarter                            |   | 30.93    |   | 21.90   |   |
|                                      |   |     |   |    |   |
| Third Quarter                             |   | 23.50    |   | 17.50   |   |
|                                      |   |     |   |    |   |
| Fourth Quarter                            |   | 30.38    |   | 18.15   |   |
|                                      |   |     |   |    |   |
| **Fiscal  2003**                          |   |     |   |    |   |
|                                      |   |     |   |    |   |
| First Quarter (through February 28, 2003) |   | 26.99    |   | 19.18   |   |
|                                           |        |          |        |         |        |  |  |

 

As of February 28, 2003, we had approximately 149stockholders of record of our common stock and an estimated 6,500 beneficialowners. The closing sale price of our common stock on February 28, 2003 was$20.32 per share.

 

15

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## **DividendPolicy**

 

On January 16, 2003, our board of directors declaredan $.08 per share cash dividend payable on February 14, 2003 to holders ofrecord of our common stock on January 31, 2003. This dividend was paid onFebruary 14, 2003. The payment of future dividends is within the discretion ofour board of directors and will depend on our future earnings, our capitalrequirements, applicable regulatory restrictions, our financial condition andother relevant factors. This transaction has not been reflected in theaccompanying consolidated financial statements as of December 31, 2002.

 

In connection with our acquisition of ROBB PECK McCOOEYFinancial Services, Inc. in March 2001, we issued 100,000 shares of our SeriesA preferred stock. Each outstanding share of our Series A preferred stockentitles the holder thereof to cumulative preferred cash dividends at an annualrate of 8% of the liquidation preference per share until March 15, 2005, 10%until March 15, 2006 and 10.8% thereafter. Dividends are payable on the firstday of January and the first day of July of each year (or if such date is not aregular business day, then the next business day thereafter), and all dividendshave been paid on the scheduled date since inception. Dividends on the issuedand outstanding shares of Series A preferred stock are preferred andcumulative and accrue from the date on which they were originally issued.

 

On February 19, 2002, we repurchased approximately28,164 shares of our Series A preferred stock at $1,000 per share plus accruedand unpaid dividends through the date of purchase, pursuant to a tender offercommenced on January 18, 2002. On August 7, 2002, we issued to RPM NauticalFoundation, Inc. (“RPM Nautical”), a non-profit organization of which George E.Robb, Jr., a former member of our Board of Directors, is a founder anddirector, subordinated notes in the aggregate principal amount of $8.0 million(the “Notes”) in exchange for the 8,000 shares of our Series A preferred stockthen held by RPM Nautical. We also paid to RPM Nautical, in cash, the amount ofaccrued and unpaid dividends with respect to the shares of our Series Apreferred stock held by RPM Nautical as of August 6, 2002.

 

On February 6, 2003, we repurchased approximately24,650 additional shares of our Series A preferred stock at $1,000 per shareplus accrued and unpaid dividends through the date of purchase, pursuant to atender offer commenced on January 6, 2003. As of February 28, 2003, 39,186shares of our Series A preferred stock were outstanding. This transaction hasnot been reflected in the accompanying consolidated financial statements as ofDecember 31, 2002.

 

## **RecentIssuance of Unregistered Securities**

 

None.

 

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# **Item6.**                                   SELECTEDCONSOLIDATED FINANCIAL DATA.

 

The selected consolidated financial data set forthbelow for the year ended December 31, 2002 and as of December 31, 2002have been derived from our consolidated financial statements, which have beenaudited by KPMG LLP, independent auditors, and are included elsewhere in thisfiling. The selected consolidated financial data set forth below for the yearsended December 31, 2001 and 2000 and as of December 31, 2001 havebeen derived from our consolidated financial statements, which were audited byArthur Andersen LLP, independent public auditors, and are included elsewhere inthis filing. The selected consolidated financial data set forth below for theyears ended December 31, 1999 and 1998 and as of December 31, 2000,1999 and 1998 have been derived from our consolidated financial statements,audited by Arthur Andersen LLP, independent public auditors, which are notincluded elsewhere in this filing. The selected consolidated financial data setforth below should be read in conjunction with the consolidated financialstatements and related notes thereto and with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” which are includedelsewhere in this filing. 

 
|                                                                                                                                                   |   | **Year Ended December 31,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|
| **(000’s  omitted)**                                                                                                                              |   | **2002**                    |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **STATEMENT OF OPERATIONS DATA**:                                                                                                                      |   |                        |    |   |   |   |   |   |   |   |   |
| **Revenues**:                                                                                                                                          |   |                        |    |   |   |   |   |   |   |   |   |
| Net gain on principal  transactions                                                                                                                    |   | $                           | 342,400 |   | $ | 340,795 |   | $ | 282,948 |   | $ | 150,971 |   | $ | 95,048 |   |
| Commissions                                                                                                                                            |   | 92,044                      |    | 62,866 |   | 45,381 |   | 37,222 |   | 26,576 |   |
| Other                                                                                                                                                  |   | 18,401                      |    | 20,469 |   | 16,480 |   | 12,844 |   | 4,787 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| Total revenues                                                                                                                                         |   | 452,845                     |    | 424,130 |   | 344,809 |   | 201,037 |   | 126,411 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| **Expenses**:                                                                                                                                          |   |                        |    |   |   |   |   |   |   |   |   |
| Employee compensation and  benefits                                                                                                                    |   | 131,511                     |    | 110,832 |   | 88,759 |   | 34,268 |   | 13,921 |   |
| Interest                                                                                                                                               |   | 48,589                      |    | 52,049 |   | 41,893 |   | 8,286 |   | 3,577 |   |
| Exchange, clearing and  brokerage fees                                                                                                                 |   | 37,729                      |    | 22,367 |   | 5,148 |   | 3,601 |   | 2,778 |   |
| Lease of exchange memberships                                                                                                                          |   | 25,939                      |    | 20,536 |   | 10,933 |   | 8,416 |   | 6,568 |   |
| Depreciation and amortization  of intangibles                                                                                                          |   | 13,446                      |    | 39,450 |   | 18,476 |   | 5,144 |   | 3,020 |   |
| Legal and professional fees                                                                                                                            |   | 8,072                       |    | 4,959 |   | 1,868 |   | 1,622 |   | 916 |   |
| Communications                                                                                                                                         |   | 6,653                       |    | 4,795 |   | 1,500 |   | 1,193 |   | 964 |   |
| Occupancy                                                                                                                                              |   | 5,446                       |    | 3,932 |   | 1,310 |   | 998 |   | 747 |   |
| Other                                                                                                                                                  |   | 9,336                       |    | 8,499 |   | 8,345 |   | 3,041 |   | 2,285 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| Total expenses before managing  directors’compensation, limited partners’ interest in earnings of subsidiary  and provision for income taxes |   | 286,721                     |    | 267,419 |   | 178,232 |   | 66,569 |   | 34,776 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| Income before managing  directors’ compensation, limited partners’ interest in earnings of subsidiary  and provision for income taxes        |   | 166,124                     |    | 156,711 |   | 166,577 |   | 134,468 |   | 91,635 |   |
| Managing directors’  compensation                                                                                                                 |   | —                      |    | — |   | — |   | 56,191 |   | 58,783 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| Income before limited partners’  interest in earnings of subsidiary and provision for income taxes                                                |   | 166,124                     |    | 156,711 |   | 166,577 |   | 78,277 |   | 32,852 |   |
| Limited partners’ interest in  earnings of subsidiary                                                                                             |   | —                      |    | — |   | — |   | 25,344 |   | 26,292 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| Income before provision for  income taxes                                                                                                              |   | 166,124                     |    | 156,711 |   | 166,577 |   | 52,933 |   | 6,560 |   |
| Provision for income taxes                                                                                                                             |   | 78,898                      |    | 85,124 |   | 84,654 |   | 23,899 |   | 3,900 |   |
|                                                                                                                                                   |   |                        |    |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                             |   | 87,226                      |    | 71,587 |   | 81,923 |   | 29,034 |   | 2,660 |   |
| Series A preferred dividends  and discount accretion                                                                                                   |   | 6,941                       |    | 7,472 |   | — |   | — |   | — |   |
| Net income available to common  stockholders                                                                                                           |   | $                           | 80,285  |   | $ | 64,115 |   | $ | 81,923 |   | $ | 29,034 |   | $ | 2,660 |   |

 

17

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|                                              |   | **As of December 31,** |    |
|---------------------------------------------------|--------|------------------------|---------|
| **(000’s  omitted)**                         |   | **2002**               |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **BALANCE SHEET DATA**:                           |   |                   |    |   |   |   |   |   |   |   |   |
| Cash and short term investments                   |   | $                      | 119,045 |   | $ | 189,524 |   | $ | 287,643 |   | $ | 109,196 |   | $ | 25,822 |   |
| United States government  obligations             |   | 395,840                |    | 328,048 |   | — |   | 1,471 |   | 1,468 |   |
| Securities owned, at market  value                |   | 189,228                |    | 225,559 |   | 146,505 |   | 148,563 |   | 114,994 |   |
| Total assets                                      |   | 1,912,802              |    | 2,000,837 |   | 1,004,122 |   | 505,896 |   | 272,201 |   |
| Total long-term and  subordinated indebtedness(1) |   | 383,233                |    | 429,205 |   | 397,828 |   | 162,330 |   | 48,073 |   |
| Members’ capital/stockholders’  equity  |   | 989,688                |    | 928,358 |   | 370,901 |   | 251,972 |   | 77,093 |   |
|                                                   |        |                        |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Excludes subordinated liabilities related tocontributed exchange memberships.

 

*Quarterly Results(unaudited)*

 

The following representsthe firm’s unaudited quarterly results for 2002 and 2001. These quarterlyresults were prepared in accordance with accounting principles generallyaccepted in the United States of America and reflect all adjustments.

 
|                                                 |   | **2002  Fiscal Quarter** |    |
|------------------------------------------------------|--------|--------------------------|---------|
| **(000’s omitted, except per share  data)**     |   | **First**                |    | **Second** |   | **Third** |   | **Fourth** |   |
| Total Revenues                                       |   | $                        | 122,680 |   | $ | 98,108 |   | $ | 118,265 |   | $ | 113,792 |   |
| Total Operating  Expenses                            |   | 69,164                   |    | 69,884 |   | 77,582 |   | 70,091 |   |
| Income before  provision for income taxes            |   | 53,516                   |    | 28,224 |   | 40,683 |   | 43,701 |   |
| Provision for  income taxes                          |   | 25,864                   |    | 13,283 |   | 19,306 |   | 20,445 |   |
| Net Income                                           |   | 27,652                   |    | 14,941 |   | 21,377 |   | 23,256 |   |
| Series A  preferred dividends and discount accretion |   | 2,076                    |    | 1,741 |   | 1,600 |   | 1,524 |   |
| Net income  available to common stockholders         |   | 25,576                   |    | 13,200 |   | 19,777 |   | 21,732 |   |
|                                                 |   |                     |    |   |   |   |   |   |   |
| Earnings per  share                                  |   |                     |    |   |   |   |   |   |   |
| Basic                                                |   | $                        | 0.44    |   | $ | 0.22 |   | $ | 0.34 |   | $ | 0.37 |   |
| Diluted                                              |   | 0.43                     |    | 0.22 |   | 0.33 |   | 0.36 |   |

 
|                                                 |   | **2001  Fiscal Quarter** |   |
|------------------------------------------------------|--------|--------------------------|--------|
| **(000’s omitted, except per share  data)**     |   | **First**                |   | **Second** |   | **Third** |   | **Fourth** |   |
| Total Revenues                                       |   | $                        | 97,760 |   | $ | 112,762 |   | $ | 89,121 |   | $ | 124,487 |   |
| Total Operating  Expenses                            |   | 53,076                   |   | 69,022 |   | 64,504 |   | 80,817 |   |
| Income before  provision for income taxes            |   | 44,684                   |   | 43,740 |   | 24,617 |   | 43,670 |   |
| Provision for  income taxes                          |   | 23,760                   |   | 24,523 |   | 13,379 |   | 23,462 |   |
| Net Income                                           |   | 20,924                   |   | 19,217 |   | 11,238 |   | 20,208 |   |
| Series A  preferred dividends and discount accretion |   | 388                      |   | 2,378 |   | 2,353 |   | 2,353 |   |
| Net income  available to common stockholders         |   | 20,536                   |   | 16,839 |   | 8,885 |   | 17,855 |   |
|                                                 |   |                     |   |   |   |   |   |   |   |
| Earnings per  share                                  |   |                     |   |   |   |   |   |   |   |
| Basic                                                |   | $                        | 0.41   |   | $ | 0.30 |   | $ | 0.16 |   | $ | 0.31 |   |
| Diluted                                              |   | 0.40                     |   | 0.29 |   | 0.15 |   | 0.30 |   |

 

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# **Item7.**                                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

*Youshould read the following discussion of our financial condition and results ofoperations together with the financial statements and the notes to suchstatements included elsewhere in this filing. This discussion containsforward-looking statements based on our current expectations, assumptions,estimates and projections about us and our industry. These forward-lookingstatements involve risks and uncertainties including, but not limited to thosediscussed in “Risk Factors” attached hereto as Exhibit 99.1. Our actual resultscould differ materially from those anticipated in these forward-lookingstatements as a result of certain factors. We undertake no obligation to updatepublicly any forward-looking statements for any reason, even if new informationbecomes available or other events occur in the future.*

 

## **Overview**

 

We were organized in 1999 in connection with thereorganization of LaBranche & Co. from partnership to corporate form andthe related initial public offering of our common stock. We currently view ourbusiness as operating principally in two separate segments: the specialistsegment and the execution and clearing segment. Our specialist segment operatesas a specialist in equities and rights on the NYSE and in equities and optionson the AMEX, a market-maker in ETFs on the AMEX, and provides support servicesfor our specialist activities. Our execution and clearing segment providessecurities clearing, securities execution and other related services to its ownretail customers, customers of introducing brokers and institutional customers,including traders, professional investors and broker-dealers. Our execution andclearing segment also provides direct access floor brokerage services toinstitutional customers.Certainrevenues and administrative and corporate overhead expenses, which consistprimarily of interest on our public debt, are not specifically related to ourtwo principal business segments, and thus are treated as “other” revenues andexpenses.

 

Our specialist segment currentlyincludes the operations of our LaBranche & Co. LLC, LSP and BVsubsidiaries. Our execution and clearing segment currently includes theoperations of our LFSI subsidiary.

 

Our business has grown considerably during the pastfive years. Our revenues increased from $126.4 million in 1998 to $452.8million in 2002, representing a compound annual growth rate of 37.6%.

 

*ReorganizationTransactions*

 

As of December 31, 2001, our Henderson Brothers, Inc.(“Henderson Brothers”) and Internet Trading Technologies, Inc. (“ITTI”)subsidiaries were merged with and into our ROBB PECK McCOOEY ClearingCorporation (“RPM Clearing Corporation”) subsidiary. RPM Clearing Corporationthen changed its name to LFSI in January 2002.

 

19

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### *CompletedAcquisition*

 

On October 24, 2002, we acquired all the outstandingstock of Hochstin & Company, Inc. (“Hochstin”), which conducted a rightsspecialist and floor brokerage business on the NYSE, for an aggregate of $7.8million in cash. Of the $7.8 million consideration, $3.6 million was paid atthe closing and the remainder is to be paid by us as follows: (a) $1.0 millionon each of October 24, 2003, 2004 and 2005, and (b) $1.2 million on October 24,2007, although the final payment may be reduced to $200,000 if the employmentwith us of a certain former employee of Hochstin is either terminated by us forcause or is terminated by such employee voluntarily prior to October 24, 2007.The Hochstin acquisition was accounted for under the purchase method ofaccounting and the excess of purchase price over fair value of net assets ofapproximately $4.6 million was allocated to goodwill.

 

*RecentDevelopments*

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No.146 requires that a liability for a cost associated with an exit or disposalactivity be recognized at fair value when the liability is incurred. SFAS No.146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002. We do not believe the implementation of SFAS No. 146 willhave a material impact on our financial statements.

 

In November 2002, the FASB issued FASB InterpretationNo. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45details the required disclosures to be made about obligations under certainissued guarantees and requires the recognition of a liability for the fairvalue of the guarantee. The initial recognition and measurement provisions areapplicable on a prospective basis to guarantees issued after December 31, 2002.The disclosure requirements are effective for financial statements ending afterDecember 15, 2002. We do not believe the implementation of FIN 45 will have amaterial impact on our financial statements.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure, anAmendment of FASB Statement No. 123.” SFAS No. 148 provides two additionalmethods for accounting for stock-based compensation, the modified prospectiveand the retroactive restatement methods, by an entity that voluntarily changesto the fair value based method of accounting for stock-based employeecompensation, in addition to the prospective method required by SFAS No. 123,“Accounting for Stock-Based Compensation.” Prior to January 1, 2003, we electedto account for stock-based employee compensation plans in accordance withAccounting Principles Board Opinion (“APB”) No. 25, “Accounting for StockIssued to Employees,” as permitted by SFAS No. 123. Under APB No. 25,compensation expense is not recognized for stock options that have no intrinsicvalue on the date of grant. In October 2002, however, our board of directorsapproved the implementation of procedures to account for stock-based employeecompensation issued on or after January 1, 2003 in accordance with theprospective fair-value method. Under this new method, compensation expense willbe recognized over the related service period based on the fair-value of stockoptions on the date of grant. We do not believe the implementation of SFAS No.148 will have a material impact on our financial statements. We are evaluatingthe potential impact of SFAS No.

 

20

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148 on future awards ofstock-based compensation. Please see Footnote No. 11 in our consolidatedfinancial statements for further discussion.

 

In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities.” FIN 46 requires a company toconsolidate a variable interest entity (VIE) if the company has variableinterests that give it a majority of the expected losses or a majority of theexpected residual returns of the entity. FIN 46 is effective immediately forVIEs created after January 31, 2003. We do not believe the implementation ofFIN 46 will have a material impact on our financial statements.

 

*CriticalAccounting Policies*

 

All of our principal securities transactions and therelated gains and losses are recorded on a trade date basis. Customersecurities transactions and the related revenues and expenses are recorded on asettlement date basis. Corporate equities, options and other securities owned,and securities sold, but not yet purchased are reflected at market value andunrealized gains and losses are reflected in net gain on principaltransactions. United States Government obligations, together with relatedinterest receivable as reported in other assets, are reflected at market value,with interest income included in other income. The market value for the equitysecurities for which we act as specialist on both the AMEX and NYSE is based onthe closing price posted by the exchange on which they are traded. The marketvalue for ETFs and futures contracts is also based on the closing price postedon the exchange on which they are traded. The market value of ourexchange-traded options is based on the national best bid/offer as determinedby our options clearing agent.

 

Investments in non-marketable securities consist ofprivate equity, limited liability company and limited partnership investments,and are included in other assets on the statement of financial condition. Theseinvestments do not have readily available price quotations. These investmentsare accounted for under the equity method, which approximates fair value, orare accounted for at fair value as estimated by our management. In determiningthe estimated fair value, we considered all appropriate factors relevant tosuch investments and consistently apply industry standard methodology forarriving at fair value. Gains and losses for changes in fair value are includedin other revenues in the accompanying consolidated statement of operations.

 

Our balance sheet contains significant intangibleassets. These intangible assets are comprised of our specialist stock lists,trade name and goodwill acquired in connection with our various acquisitionsand the limited partner buyout that occurred in 1999 in connection with ourreorganization from partnership to corporate form. The allocations of purchaseprice and determinations of useful lives were based on independent appraisalsfor all acquisitions through March 2001. The useful lives of the acquiredspecialist stock lists were determined based on analysis of historical turnovercharacteristics of the specialist stocks comprising these lists. Foracquisitions subsequent to March 2001, the allocations of purchase price anddeterminations of useful lives were based on management’s analysis of revenues,consideration paid, common stock listings and other relevant data and ratios.This information was analyzed and compared with the results of the independentappraisals conducted on acquisitions prior to April 2001.

 

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Since the implementation of SFAS No. 142 on January 1,2002, acquired trade name and goodwill are no longer amortized; instead theseassets are tested at least annually for impairment by applying a fair-valuebased test. Our acquired specialist stock lists, however, continue to beamortized over their respective lives. Accordingly since January 2002, we haveceased amortization of acquired goodwill and trade name. During 2002,management performed the required impairment tests and determined that therewas no impairment of our intangible assets. It is possible that in the future,as a result of periodic testing, we may incur impairment charges related to thecarrying value of goodwill and intangible assets recorded in our financialstatements. We test goodwill for impairment on a regular basis or when eventsand circumstances indicate a revision may be necessary by applying a fair-valuebased test. The fair-value test involves the comparison of the fair value ofthe reporting unit to the carrying value of the reporting unit. The fair valueof the reporting unit is determined using both our market capitalization andthe present value of our estimated future cash flows based on certainmanagement assumptions. If the carrying amount of the reporting unit exceedsits estimated fair value, we will determine if impairment is necessary throughadditional testing. Additionally, we test our specialist stock lists and tradename intangible assets whenever events or circumstances indicate that theircarrying amount may not be recoverable. If the carrying value of the specialiststock lists and trade name exceeds their fair value, an impairment loss wouldbe recognized for the excess of carrying value over fair value.

 

### *Repurchase of ourPreferred Stock*

 

OnJanuary 18, 2002, we offered to repurchase up to 30,000 shares of ouroutstanding Series A preferred stock for $1,000 per share, plus accrued andunpaid dividends up to but not including the date of purchase. On February 15,2002, the offer expired, and on February 19, 2002, we purchased all theapproximately 28,164 shares that had been tendered for approximately $28.5million, including accrued but unpaid dividends. As a result of the purchase,we recorded an expense due to the acceleration of the discount accretion on theshares purchased of approximately $1.5 million, which was included in otherexpenses.

 

On August 7, 2002, we issued to RPM NauticalFoundation, Inc. (“RPM Nautical”), a non-profit organization of which George E.Robb, Jr., a former member of our Board of Directors, is a founder anddirector, subordinated notes in the aggregate principal amount of $8.0 millionin exchange for the 8,000 shares of our Series A preferred stock then held byRPM Nautical. We also paid to RPM Nautical, in cash, the amount of accrued andunpaid dividends with respect to the shares of our Series A preferred stockheld by RPM Nautical as of August 6, 2002. As a result of the exchange, werecorded an expense due to the acceleration of the discount accretion on theshares exchanged of approximately $0.4 million, which was included in otherexpenses.

 

On January 6, 2003, we offered to repurchase up to30,000 shares of our outstanding Series A preferred stock for $1,000 per share,plus accrued and unpaid dividends up to but not including the date of purchase.On February 4, 2003, the offer expired, and on February 6, 2003, we purchasedall of the approximately 24,650 shares that had been tendered for approximately$24.8 million, including accrued but unpaid dividends. As a result of thepurchase, we recorded an expense due to the acceleration of the discountaccretion on the shares purchased of approximately $0.9 million, which was includedin other expenses.

### * *

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### *Trust DECS Offering*

 

On February 8, 2002, certain managing directors andformer managing directors of LaBranche & Co. LLC entered into prepaidforward contracts with DECS Trust IX, a statutory business trust, pursuant towhich the trust agreed to purchase from the participating managing directors,on a date which is expected to be February 8, 2005, an aggregate of 3,800,000shares of our common stock owned by these managing directors, subject to theterms and conditions set forth in the contracts. The trust concurrently sold3,800,000 trust securities, known as DECS, to investors. We did not receive,nor will we receive, any portion of the proceeds from the sale of shares pursuantto the contracts or from the sale of the DECS. The participating managingdirectors bore responsibility for payment of the expenses incurred by them inconnection with this transaction.

 

## **Results of Operations**

# ** **

# **SpecialistSegment Operating Results**

 
|                               |   | **For the Years Ended December 31,** |    | **2002 vs 2001  Percentage****Change** |   | **2001 vs 2000  Percentage  Change** |   |
|------------------------------------|--------|--------------------------------------|---------|----------------------------------------|--------|--------------------------------------|--------|
| **(000’s  omitted)**          |   | **2002**                             |    | **2001**                               |   | **2000**                             |   |   |   |
|                               |   |                                 |    |                                   |   |                                 |   |   |   |   |   |
| REVENUES:                          |   |                                 |    |                                   |   |                                 |   |   |   |   |   |
| Net gain on principal transactions |   | $                                    | 342,400 |                                   | $      | 340,795                              |   | $ | 282,948 |   | 0.5 | % | 20.4 | % |
| Commissions                        |   | 50,653                               |    | 42,098                                 |   | 43,645                               |   | 20.3 |   | (3.5 | ) |
| Other                              |   | 8,116                                |    | 12,838                                 |   | 14,302                               |   | (36.8 | ) | (10.2 | ) |
| Total segment revenues             |   | 401,169                              |    | 395,731                                |   | 340,895                              |   | 1.4 |   | 16.1 |   |
|                               |   |                                 |    |                                   |   |                                 |   |   |   |   |   |
| Operating expenses                 |   | 176,704                              |    | 174,937                                |   | 129,247                              |   | 1.0 |   | 35.4 |   |
|                               |   |                                 |    |                                   |   |                                 |   |   |   |   |   |
| Pre-tax income                     |   | $                                    | 224,465 |                                   | $      | 220,794                              |   | $ | 211,648 |   | 1.7 |   | 4.3 |   |

 

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, and are earned by us when we act asprincipal buying and selling our specialist stocks, rights and options. Alsoincluded in net gain on principal transactions are net gains and lossesresulting from our market-making activities in ETFs, the trading of futuresused to hedge our ETF positions, and the trading of equities underlying therights and options for which we act as specialist. These revenues are primarilyaffected by changes in share volume and fluctuations in price of our specialiststocks and options.

 

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.

 

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

 

## **Year Ended December 31, 2002 Compared to Year EndedDecember 31, 2001**

 

Net gain on principal transactions increased as aresult of increased share volumes in our specialist stocks traded on the NYSE,which led to a 31.3% increase in our principal trading share volumes from 27.2billion shares for 2001 to 35.7 billion shares for 2002. The increase in netgain on principal transactions was also the result of a full year of revenuesfrom our 2001 acquisitions. The increase was partially offset by unfavorablemarket conditions including a 19.8% decline in the NYSE Composite Index for2002. Notwithstanding these unfavorable market conditions, we were required tofulfill our obligation as a specialist to minimize short-term imbalancesbetween supply and demand and maintain fair and orderly markets in our listedcompany stocks.

 

Commissions revenue earned by our specialist segmentincreased as a result of increased share volume executed by us as agent, aswell as the impact of our 2001 acquisitions, which increased the number of ourspecialist stocks. This increase was partially offset by a reduction in billedcommissions, as a result of our effort to provide the lowest execution costs toour clients. The total share volume executed by us as agent in our specialiststocks increased 45.2% to 9.0 billion shares for 2002, from 6.2 billion sharesfor 2001.

 

Other revenue earned by our specialist segment decreasedprimarily due to a decline in interest income as a result of significantlylower interest rates for our short to medium term investments and stock-borrowtransactions. In addition, the decrease was due to a decline in proprietarytrading revenues, as well as an increase in losses from our investment in ahedge fund. The decrease in other revenue was partially offset by a reductionof losses from our investments in joint trading books, as well as the reversalof a commercial paper investment loss accrual.

 

Operating expenses for our specialist segmentincreased slightly due to an increase in employee compensation and relatedbenefits and an increase in lease of exchange memberships, both of which werethe result of a full year effect from our 2001 acquisitions. These increaseswere offset by a significant decrease in amortization of intangibles, a resultof the adoption of SFAS No. 142 on January 1, 2002. For a further discussion ofoperating expenses see “Our Operating Expenses” below.

 

## **Year Ended December 31, 2001 Compared to Year EndedDecember 31, 2000**

 

Net gain on principal transactions increased due tothe RPM and Bocklet & Company, LLC (“Bocklet”) acquisitions, as well as theacquisition of the interests in the Freedom Specialist Inc. (“Freedom”), R.Adrian & Company, LLC (“Adrian”) and LaBranche & Co LLC Joint Book (the“Joint Book”) during 2001. As a result of these acquisitions, we became thespecialist for 218 additional common stock listings. In addition, an increasein principal trading share volume in our specialist stocks traded on the NYSEcontributed to the increase in revenue. Our share volume as principal increased51.1% to 27.2 billion shares for 2001, from 18.0 billion shares for 2000.

 

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Commissions revenue earned by our specialist segmentdecreased, despite the increase in share volume, due to the competitive pricepressures within the marketplace and our effort to provide lower executioncosts to our customers. The share volume executed by us as agent in ourspecialist stocks increased 10.7% to 6.2 billion shares for 2001, from 5.6billion shares for 2000.

 

Other revenue from our specialist segment decreased asa result of the losses incurred by our investments in a hedge fund and jointtrading books, as well as the decline in proprietary trading revenues. Thedecrease in other revenue was partially offset by additional interest incomedue to the investment of additional funds.

 

The increase in operating expenses in our specialist segmentfor 2001 was primarily the result of increases in amortization of intangibles,lease of exchange memberships and exchange, clearing and brokerage fees.Amortization of intangibles and lease of exchange memberships both increased asa result of our 2001 acquisitions. Exchange, clearing and brokerage feesexpense increased due to a new NYSE allocation fee, requiring specialist firmsto share the cost of newly allocated listings on the NYSE, an increase in NYSEregulatory fees based on exchange seat use and an increase in trading volumesas a result of our 2001 acquisitions. For a further discussion of operatingexpenses see “Our Operating Expenses” below.

 

### *Execution and Clearing Segment Operating Results*

 
|                      |   |                                 |       | **2002 vs 2001  Percentage  Change** |       | **2001 vs 2000  Percentage  Change** |       |
|---------------------------|--------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
|                      |   | **For the Years Ended December 31,** |       |                                 |       |
| **(000’s  omitted)** |   | **2002**                             |       | **2001**                             |       | **2000**                             |       |   |   |
|                      |   |                                 | ** ** |                                 | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| REVENUES:                 |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Commissions               |   | $                                    | 41,391     |                                 | $          | 20,768                               |       | $ | 1,736 |   | 99.3 | % | 1,096.3 | % |
| Other                     |   | 3,174                                |       | 6,412                                |       | 858                                  |       | (50.5 | ) | 647.3 |   |
|                      |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Total segment revenues    |   | 44,565                               |       | 27,180                               |       | 2,594                                |       | 64.0 |   | 947.8 |   |
|                      |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Operating expenses        |   | 54,390                               |       | 39,805                               |       | 5,527                                |       | 36.6 |   | 620.2 |   |
|                      |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Pre-tax loss              |   | $                                    | (9,825     | )                                    | $          | (12,625                              | )          | $ | (2,933 | ) | (22.2 | ) | 330.4 |   |

 

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 gains or losses and feescharged to customers for use of our proprietary front-end order executionsystem.

 

## **Year Ended December 31, 2002 Compared to Year EndedDecember 31, 2001**

 

Commissions revenue from our execution and clearingsegment increased due to the growth and expansion of our business, as well as afull year of revenues from the operations of the execution and clearingbusiness which we acquired on March 15, 2001.

 

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Other revenue from our execution and clearing segmentdecreased primarily due to the decline in interest income at our execution andclearing segment as a result of significantly lower interest rates for ourshort term investments and stock-borrow transactions.

 

The increase in operating expenses for our executionand clearing segment was primarily due to an increase in exchange, clearing andbrokerage fees expense. This increase was due to the growth and expansion ofour execution and clearing business, as well as a full year of fees from ourexecution and clearing segment. For a further discussion of operating expensessee “Our Operating Expenses” below.

 

## **Year Ended December 31, 2001 Compared to Year EndedDecember 31, 2000**

 

Commissions revenue from our execution and clearingsegment increased primarily due to additional revenues from the operations ofRPM

 

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Clearing Corporationwhich we acquired on March 15, 2001.

 

Other revenue from our execution and clearing segmentincreased primarily due to the revenues from execution and clearing activitiesof RPM Clearing Corporation and fee revenue from ITTI, both of which wereacquired in March 2001.

 

Operating expenses for our execution and clearingsegment increased primarily due to increases in employee compensation andrelated benefits expense and exchange, clearing and brokerage fees expense.These increases were the result of the expansion of our execution and clearingsegment. For a further discussion of operating expenses see “Our OperatingExpenses” below.

 

Our execution and clearing segment has generatedlosses of approximately $9.8 million, $12.6 million and $2.9 million during the2002, 2001 and 2000 fiscal years, respectively, due to several factors,including (i) the dispersion of its activities over a number of unprofitablebusiness lines inherited in connection with our acquisitions of HendersonBrothers Holdings, Inc. in March 2000 and ROBB PECK McCOOEY Financial Services,Inc. in March 2001, (ii) a months-long conversion of its clearing platformwhich required considerable financial and human resources, but which should becompleted soon and generate significant savings and increased operatingflexibility, and (iii) an industry-wide contraction in trading activity,particularly during the 2002 fiscal fourth quarter. We have devoted increasedmanagement resources to rationalize our execution and clearing segment’sbusinesses, control its costs and respond to changes in market structure andcustomer needs.

 

# **OtherSegment Operating Results**

 
|                      |   |                                 |       | **2002 vs 2001  Percentage  Change** |       | **2001 vs 2000  Percentage  Change** |       |
|---------------------------|--------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
|                      |   | **For the Years Ended December 31,** |       |                                 |       |
| **(000’s  omitted)** |   | **2002**                             |       | **2001**                             |       | **2000**                             |       |   |   |
|                      |   |                                 | ** ** |                                 | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| REVENUES:                 |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Other                     |   | $                                    | 7,111      |                                 | $          | 1,219                                |       | $ | 1,320 |   | 483.3 | % | (7.7% | ) |
|                      |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Total segment revenues    |   | 7,111                                |       | 1,219                                |       | 1,320                                |       | 483.3 |   | (7.7 | ) |
|                      |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Operating expenses        |   | 55,627                               |       | 52,677                               |       | 43,458                               |       | 5.6 |   | 21.2 |   |
|                      |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Pre-tax loss              |   | $                                    | (48,516    | )                                    | $          | (51,458                              | )          | $ | (42,138 | ) | (5.7 | ) | 22.1 |   |

 

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The portion of ourrevenues that is not generated from our two principal business segmentsconsists primarily of appreciation or depreciation of our non-marketableinvestments and interest income.

 

## **Year Ended December 31,2002 Compared to Year Ended December 31, 2001**

 

Other revenueincreased due to the appreciation in the value of our investment in LavaTrading Inc. by approximately $9.0 million. This increase was partially offsetby a decline in interest income as a result of significantly lower interestrates for our short to medium term investments, as well as the decrease in thevalues related to certain of our other non-marketable investments.

 

Operating expensesincreased primarily due to an increase in employee compensation and relatedbenefits expense. For a further discussion of operating expenses see “OurOperating Expenses” below.

 

## **Year Ended December 31,2001 Compared to Year Ended December 31, 2000**

 

Other revenuedecreased primarily due to the decline in the values of certain of ournon-marketable investments. The decrease was partially offset by additionalinterest income due to the investment of additional funds.

 

Operating expensesincreased primarily due to an increase in interest expense and employeecompensation and related benefits expense. These increases were the result ofour issuance of indebtedness and the growth of our business. For a furtherdiscussion of operating expenses see “Our Operating Expenses” below.

 

**OurOperating Expenses**

 
|                                             |   |                                 |       | **2002 vs 2001  Percentage  Change** |       | **2001 vs 2000  Percentage  Change** |       |
|--------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
|                                             |   | **For the Years Ended December 31,** |       |                                 |       |
| **(000’s  omitted)**                        |   | **2002**                             |       | **2001**                             |       | **2000**                             |       |   |   |
|                                             |   |                                 | ** ** |                                 | ** ** |                                 | ** ** |   | ** ** |   | ** ** |
| EXPENSES:                                        |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Employee compensation and related benefits       |   | $                                    | 131,511    |                                 | $          | 110,832                              |       | $ | 88,759 |   | 18.7 | % | 24.9 | % |
| Interest                                         |   | 48,589                               |       | 52,049                               |       | 41,893                               |       | (6.6 | ) | 24.2 |   |
| Exchange, clearing and brokerage fees            |   | 37,729                               |       | 22,367                               |       | 5,148                                |       | 68.7 |   | 334.5 |   |
| Other operating expenses                         |   | 68,892                               |       | 82,171                               |       | 42,432                               |       | (16.2 | ) | 93.7 |   |
|                                             |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Total expenses before provision for income taxes |   | 286,721                              |       | 267,419                              |       | 178,232                              |       | 7.2 |   | 50.0 |   |
|                                             |   |                                 |       |                                 |       |                                 |       |   |   |   |   |
| Provision for income taxes                       |   | $                                    | 78,898     |                                 | $          | 85,124                               |       | $ | 84,654 |   | (7.4 | ) | 0.6 |   |

 

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Our largest operating expense is employee compensationand related benefits. Our specialist segment’s employee compensation andrelated benefits consists of salaries, wages and profitability-basedcompensation paid to our floor 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 compensation and stock-based compensation paid orgranted to managing directors, trading professionals and other employees basedon our profitability.

 

Interest expense is primarily generated from theindebtedness not allocated to either of our two principal segments. Thisindebtedness was incurred in connection with our reorganization frompartnership to corporate form, our acquisitions and the exchange of ourpreferred stock for a promissory note. The interest expense at our specialistsegment is primarily the result of subordinated indebtedness that has beenapproved by the NYSE for inclusion in our net capital. Customer’s free creditbalances and bank loans generate interest expense at our execution and clearingsegment.

 

Exchange, clearing and brokerage fees expense at ourspecialist segment consists primarily of fees paid by us as a specialist to theNYSE, AMEX, the Depository Trust Clearing Corporation (“DTCC”) and to thirdparty execution and clearing companies. The fees paid by us to these entitiesprimarily are based on the volume of transactions executed by us as principaland as agent, a fee based on exchange seat use, an allocation fee requiringspecialist firms to share the cost of newly allocated listings, a flat annualfee and execution and clearing fees. Our execution and clearing segment’sexchange, clearing and brokerage fees expense consist of commissions paid tothird parties for introduction of customers, use of certain proprietaryinformation and third party execution fees.

 

## **Year Ended December 31, 2002 Compared to Year EndedDecember 31, 2001**

 

Employee compensation and related benefits expenseincreased due to our 2001 acquisitions and the general expansion of our business,which increased our average number of employees by approximately 96 individualsfor the year ended December 31, 2002, as compared to the same period in 2001.Employee compensation and related benefits expense increased to 29.0% of totalrevenues for 2002, from 26.1% of total revenues for 2001.

 

Interest expense decreased as the result of therepayment of $21.4 million principal amount of subordinated indebtedness during2002, as well as the early retirement during 2002 of $12.1 million principalamount of other indebtedness, which we assumed in connection with our 2001acquisitions. This decrease was partially offset by additional interest chargesassociated with the $16.4 million of subordinated indebtedness incurred inconnection with the acquisition of Bocklet in October 2001, which was repaid inOctober 2002. Interest expense decreased to 10.7% of total revenues for 2002,from 12.3% of total revenues for 2001.

 

Exchange, clearing and brokerage fees expenseincreased primarily due to the increased activities, growth and expansion ofour execution and clearing segment, as well as a full year of

 

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fees from our expandedexecution and clearing segment. In addition, an increase in our principal sharevolume as a result of an increase in overall share volume on the NYSE, our 2001acquisitions and the expansion of our AMEX specialist business led to anincrease in fees at our specialist segment. Exchange, clearing and brokeragefees expense increased to 8.3% of total revenues for 2002, from 5.3% of totalrevenues for 2001.

 

Other operating expenses decreased primarily due to adecline in depreciation and amortization of intangibles expense incurred at ourspecialist segment as a result of the adoption of SFAS No. 142 as of January 1,2002. This decrease in other operating expenses was partially offset byincreases in lease of exchange memberships, legal and professional fees,communications, occupancy and other expenses due to the growth and expansion ofour operating segments, as well as our 2001 acquisitions.

 

Provision for income taxes decreased due to a declinein non-deductible amortization of goodwill and other intangible assets as aresult of the adoption of SFAS No. 142.

 

## **Year Ended December 31, 2001 Compared to Year EndedDecember 31, 2000**

 

Employee compensation and related benefits expenseincreased due to the RPM, Bocklet and other 2001 acquisitions, which increasedour average headcount for the year by approximately 226 individuals. Employeecompensation and related benefits expense increased to 26.1% of total revenuesfor 2001, from 25.7% of total revenues for 2000.

 

Interest expense increased due to the assumption ofapproximately $17.4 million and $9.0 million of promissory notes and secureddemand notes, respectively, in connection with the RPM acquisition. As ofDecember 31, 2001, approximately $14.1 million of the promissory notes remainedoutstanding after scheduled repayments throughout the year. The issuance of$16.4 million of subordinated indebtedness in connection with the Bockletacquisition also contributed to the increase in interest expense. In addition,the increase was due to a full year of interest expense on $250.0 million ofindebtedness incurred in connection with the acquisitions of Henderson BrothersHoldings, Inc. and Webco Securities, Inc. (“Webco”). Interest expense increasedto 12.3% of total revenues for 2001, from 12.1% of total revenues for 2000.

 

Exchange, clearing and brokerage fees expenseincreased primarily due to a new NYSE allocation fee, requiring specialistfirms to share the cost of newly allocated listings on the NYSE, an increase inNYSE regulatory fees based on exchange seat use, an increase in exchange andbrokerage fees related to the expansion of our execution and clearing segmentand an increase in trading volumes as a result of the RPM, Bocklet and other2001 acquisitions. Exchange, clearing and brokerage fees expense increased to5.3% of total revenues for 2001, from 1.5% of total revenues for 2000.

 

Other operating expenses increased due to additionaldepreciation and amortization of intangibles, lease of exchange memberships,legal and professional fees, communications, occupancy and other expenses dueto our RPM, Bocklet and other 2001 acquisitions, as well as the growth andexpansion of both of our operating segments.

 

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Provision for income taxes increased due to additionalnon-deductible amortization of intangibles.

 

## **Liquidity**

 

As of December 31, 2002, we had $1,912.8 million inassets, of which $119.0 million consisted of cash and short-term investmentsprimarily in government obligations maturing within three months, cash andsecurities segregated under federal regulations and overnight repurchase agreements.As of December 31, 2001, we had $2,000.8 million in assets, of which $189.5million consisted of cash and short-term investments primarily in governmentobligations and commercial paper maturing within three months, cash andsecurities segregated under federal regulations and overnight repurchaseagreements.

 

In February 2002, our LaBranche & Co. LLCsubsidiary extended its $200.0 million committed line-of-credit with a U.S.commercial bank until February 27, 2003 and in October 2002, it amended andrestated the $200.0 million committed line-of-credit agreement and extended theline-of-credit to October 31, 2003. The line-of-credit may be extended byLaBranche & Co. LLC, subject to the bank’s approval, for additionalone-year terms by giving written notice to the bank at least 30 days prior tothe then-current scheduled termination date. Amounts outstanding under the U.S.commercial bank credit facility would be secured by our inventory of specialiststocks and bear interest at the U.S. commercial bank’s broker loan rate. Todate, we have not utilized this facility. In order to maintain the availabilityof funds under this credit facility, we must comply with certain financial andother covenants.

 

As of December 31, 2002 and 2001, the subordinated indebtednessof LaBranche & Co. LLC aggregated $28.3 million and $66.0 million(excluding subordinated liabilities related to contributed exchangememberships), respectively. The $28.3 million of outstanding subordinatedindebtedness of LaBranche & Co. LLC on December 31, 2002 consisted of thefollowing:

 

•                                            $15.0million in senior subordinated notes, which were privately placed pursuant tonote purchase agreements, mature on June 3, 2008, and bear interest at anannual rate of 7.69%, payable on a quarterly basis; and

 

•                                            $13.3million in junior subordinated notes, of which

 

•                                            $5.3million were issued to former limited partners and family members of formeremployees. These notes mature on varying dates between the second half of 2003and the first half of 2004 and bear interest at an annual rate of 10.0%,payable on a quarterly basis; and

 

•                                            $8.0million is a secured demand note obligation assumed by LaBranche & Co. LLCin connection with our acquisition of RPM, matures in June 2004, and bearsinterest at an adjusting variable rate, payable monthly.

 

The junior subordinated notes and the secured demandnote have automatic rollover provisions, which extend the maturities for anadditional year, unless the lender provides at least seven months advancenotice prior to maturity. LaBranche & Co. LLC is also entitled to prepaythe junior subordinated notes and the secured demand note obligation withoutpenalty under the

 

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terms of the agreementsrelating thereto. During 2002, we repaid $1.4 million of subordinatedindebtedness prior to the scheduled maturity dates and we repaid $36.4 millionof subordinated indebtedness on the scheduled maturity dates, plus accrued andunpaid interest.

 

As of December 31, 2002, $10.0 million of our outstanding indebtednessconsisted of:

 

•                                          a $2.0 million note issued to a formerRPM employee’s family member, which matures in June 2003, bears interest at anannual rate of 12.5%, payable on a quarterly basis and is not classified aslong term debt due to its maturity in less than one year; and

 

•                                          notes in the aggregate principal amountof $8.0 million issued to RPM Nautical in August 2002 in exchange for the 8,000shares of our Series A preferred stock then held by RPM Nautical. This indebtednessmatures on August 7, 2007 and bears interest at an annual rate of 10.0% untilAugust 7, 2003 and 9.0% thereafter, payable semiannually.

 

During 2002, we repaid $12.1 million of promissorynotes, subordinated notes and deferred compensation obligations, withoutpenalty, prior to the scheduled maturity dates, plus accrued and unpaidinterest.

 

In connection with our acquisition of RPM, we assumedits liabilities and obligations under its deferred compensation plan. Thedeferred compensation plan provides for the payment, on or before December 15,2007, of approximately $30.2 million, plus interest at 8.0% per year, tocertain former employees of RPM. While the payment of benefits under thisdeferred compensation plan may be accelerated in certain circumstances, no morethan $6.0 million in deferred compensation benefits (including interest) may bepaid in any 12 consecutive month period beginning March 15, 2001. We paid $6.0million in deferred compensation plan benefits in March 2002. During April and November2002, the following plan year, we paid approximately $1.2 million and $0.7million in additional deferred compensation plan benefits. If the plan isterminated, the deferred compensation benefits (including interest) of allparticipants, to the extent not previously paid, must be distributed to theparticipants in one lump sum. The amounts payable under this deferredcompensation plan may be reduced to satisfy any indemnification obligations ofthe plan participants to us under the agreements governing our acquisition ofRPM.

 

In connection with our acquisition of RPM, we alsoassumed its liabilities and obligations under the Robb Peck McCooey PensionTrust. The pension trust was amended prior to our acquisition of RPM to freezeall future benefit accruals as of March 15, 2001. In May 2002 we contributed$1.2 million to the trust in order to fund a deficiency in the required valueof the assets of the trust. The pension trust was terminated, effective as ofAugust 31, 2001, and in connection with the termination, all assets of thetrust were distributed prior to the end of 2002.

 

We also assumed RPM’s liabilities and obligationsunder its retention bonus pool. The retention bonus pool requires $9.0 millionto be paid as bonus compensation on March 15, 2004 to as many as 31 formeremployees of RPM, under the condition they are still employed on the

 

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payment date. The portionof this retention bonus pool payable to each of these former employees will be determinedby the majority vote of a committee consisting of Robert M. Murphy, George E.Robb, Jr. and Michael LaBranche or their respective successors.

 

In connection with our acquisition of RPM, we issued100,000 shares of our nonconvertible Series A preferred stock to the formerstockholders of RPM. Each outstanding share of our Series A preferred stockentitles the holder to cumulative preferred cash dividends at an annual rate of8.0% of the liquidation preference per share until March 15, 2005, 10.0% untilMarch 15, 2006, and 10.8% thereafter. Dividends are payable on the first day ofJanuary and the first day of July of each year (or if such date is not aregular business day, then the next business day thereafter), with the firstpayment made on July 1, 2001. Dividends on the issued and outstandingshares of Series A preferred stock are preferred and cumulative and accruedaily from the date on which they were originally issued. As of February 28,2003, approximately 39,186 shares of our Series A preferred stock wereoutstanding.

 

On August 24, 1999, we issued $100.0 million aggregateprincipal amount of Senior Notes. The Senior Notes bear interest at a rate of9.5% annually and mature in August 2004. The indenture covering the SeniorNotes includes certain covenants that, among other things, limit our ability toborrow money, pay dividends on our stock or purchase our stock, makeinvestments, engage in transactions with stockholders and affiliates, createliens on our assets, and sell assets or engage in mergers and consolidations,except in accordance with certain specified conditions.

 

On August 24, 1999, in connection with ourreorganization from partnership to corporate form, we issued a $16.0 millionsenior note with an annual interest rate of 9.5%, as partial payment for theacquisition of a certain limited partnership interest in LaBranche & Co.LLC (prior to its conversion to a limited liability company). The note plus allaccrued interest was repaid in full in three annual installments on each anniversaryof issuance, with the final payment made in August 2002.

 

On March 2, 2000, we issued $250.0 million aggregateprincipal amount of Senior Subordinated Notes. These Senior Subordinated Notesbear interest at a rate of 12.0% annually and mature in March 2007. Theindenture covering the Senior Subordinated Notes includes certain covenantsthat, among other things, limit our ability to borrow money, pay dividends onour stock or purchase our stock, make investments, engage in transactions withstockholders and affiliates, create liens on our assets, and sell assets orengage in mergers and consolidations, except in accordance with certainspecified conditions.

 

The Senior Subordinated Notes also require us, within150 days after the end of each fiscal year, to offer to redeem from all holdersof the Senior Subordinated Notes a principal amount equal to our Excess CashFlow at a price equal to 103.0% of the principal amount being offered forpurchase plus accrued and unpaid interest, if any, to the date of redemption.Each holder is entitled to be offered his or her pro rata share based upon hisor her ownership percentage of the outstanding Senior Subordinated Notes.Excess Cash Flow is defined for this purpose as 40.0% of the amount by whichour consolidated EBITDA exceeds the sum of our interest expense, tax expense,increase in net capital or net liquid asset requirements, capital expenditures,any cash amounts related to acquisitions of NYSE specialists or any cashpayments

 

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related to our payment atmaturity of the principal amount of our existing or certain other indebtedness.On April 12, 2001, we offered to purchase approximately $9.9 million aggregateprincipal amount of our Senior Subordinated Notes based on our Excess Cash Flowfor the year ending December 31, 2000. This offer expired on May 22, 2001without the tender of any Senior Subordinated Notes. For the year endingDecember 31, 2001, we did not have Excess Cash Flow, as defined for thispurpose. As of December 31, 2002 our Excess Cash Flow, as calculated, wasapproximately $31.3 million, thus requiring us to offer, by May 30, 2003, topurchase approximately $32.3 million aggregate principal amount of SeniorSubordinated Notes.

 

As a broker-dealer, LaBranche & Co. LLC is subjectto regulatory requirements intended to ensure the general financial soundnessand liquidity of broker-dealers and requiring the maintenance of minimum levelsof net capital, as defined in SEC Rule 15c3-1. LaBranche & Co. LLC isrequired to maintain minimum net capital, as defined, equivalent to the greaterof $100,000 or 1/15 of aggregate indebtedness, as defined. NYSE Rule 326(c)also prohibits a broker-dealer from repaying subordinated borrowings, payingcash dividends, making loans to any parent, affiliates or employees, orotherwise entering into transactions which would result in a reduction of itstotal net capital to less than 150.0% of its required minimum capital.Moreover, broker-dealers are required to notify the SEC prior to repayingsubordinated borrowings, paying dividends and making loans to any parent,affiliates or employees, or otherwise entering into transactions which, ifexecuted, would result in a reduction of 30.0% or more of their excess net capital(net capital less minimum requirement). The SEC has the ability to prohibit orrestrict such transactions if the result is deemed detrimental to the financialintegrity of the broker-dealer.

 

At December 31, 2002, LaBranche & Co. LLC had netcapital of $472.0 million, which was $467.4 million in excess of its requirednet capital of $4.6 million. At December 31, 2001, LaBranche & Co. LLC hadnet capital of $484.2 million, which was $481.4 million in excess of itsrequired net capital of $2.9 million.

 

The NYSE generally requires its specialist firms tomaintain a minimum dollar regulatory capital amount in order to establish thatthey can meet, with their own net liquid assets, their position requirement.LaBranche & Co. LLC’s net liquid asset requirement was $446.0 million as ofDecember 31, 2002 and 2001. LaBranche & Co. LLC’s actual net liquid assetswere approximately $465.2 and $491.5 million as of December 31, 2002 and 2001,respectively.

 

The AMEX generally requires its equity specialistfirms to maintain a cash or liquid asset position of the greater of; (a)$600,000, or (b) an amount sufficient to assume a position of sixty tradingunits of each security in which the specialist is registered. Because LaBranche& Co. LLC adheres to the NYSE’s net liquid asset requirements, itautomatically satisfies the AMEX liquid asset requirements.

 

As a registered broker-dealer and member firm of theNYSE, LFSI also is subject to SEC Rule 15c3-1 as adopted and administered bythe NYSE and the SEC. Under the alternative method permitted by the rule, theminimum required net capital of LFSI as of December 31, 2002 was equal to thegreater of $1.5 million or 2.0% of aggregate debit items as defined.  As of December 31, 2002, LFSI’s net capital,as defined under SEC Rule 15c3-1, was $19.4 million and exceeded minimum netcapital requirements by $17.9 million. As of December 31, 2001, the combinednet capital, as defined under SEC Rule 15c3-1, of Henderson Brothers and RPM

 

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Clearing Corporation was$20.5 million, which exceeded minimum net capital requirements by $19.7million.

 

As a clearing broker-dealer, LFSI elects to compute areserve requirement for Proprietary Accounts of Introducing Broker-Dealers(“PAIB Calculation”), as defined. The PAIB Calculation is computed in order forcorrespondent firms to classify their assets held by LFSI as allowable assetsin the correspondents’ net capital calculation. As of December 31, 2002 thereserve requirement was approximately $11.3 million. LFSI had cash andsecurities on deposit in a Special Reserve Bank Account of $21.9 million as ofJanuary 3, 2003, to comply with its December 31, 2002 requirements. As ofDecember 31, 2001, the combined reserve requirement of Henderson Brothers andRPM Clearing Corporation was approximately $23.3 million. These subsidiarieshad combined cash and securities on deposit in a special reserve bank accountof $24.8 million as of January 3, 2002, to comply with the December 31, 2001requirement.

 

As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered by theAMEX. LSP is required to maintain minimum net capital, as defined, equivalentto the greater of $100,000 or 1/15 of aggregate indebtedness,as defined. As of December 31, 2002, LSP’s net capital, as defined underSEC Rule 15c3-1, was $6.9 million, which exceeded minimum net capitalrequirements by $6.8 million.

 

Failure by any of our broker-dealer subsidiaries tomaintain its required net capital and net liquid assets may subject it tosuspension or revocation of its SEC registration or its suspension or expulsionby the NYSE and/or AMEX.

 

We currently anticipate that our available cashresources and credit facilities will be sufficient to meet our working capital,regulatory capital and capital expenditure requirements through the end of2003.

 

As of December 31, 2002, the scheduled maturities ofour obligations, assuming any available roll-over provisions were inapplicable,were:

 
|                      |   |      |   |           |   |          |   |          |   |             |   |
|---------------------------|--------|-----------|--------|----------------|--------|---------------|--------|---------------|--------|------------------|--------|
| **(000’s omitted)**  |   | **Total** |   | **<1 Year** |   | **1-3 Years** |   | **4-5 Years** |   | **>5  Years** |   |
| Long-Term Debt**          |   | 360,000   |   | 2,000          |   | 100,000       |   | 258,000       |   | —           |   |
| Subordinated  Liabilities |   | 28,285    |   | 2,300          |   | 10,985        |   | —        |   | 15,000           |   |

 

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**   Amounts represent aggregate amount to bepaid at maturity and do not include discounts of approximately $3.1 million asof December 31, 2002. Amounts also include a note payable for $2.0 millionclassified under accounts payable due to its maturity in June 2003.

 

***Credit Ratings***

 

Our $100.0 million Senior Notes and our $250.0 millionSenior Subordinated Notes were both sold to public investors on theirrespective issue dates. The following table sets forth the credit ratings onboth of these issues as of December 31, 2002:

 
|                       |   | **Moody’s Investors Services** |   | **Standard & Poor’s** |   |
|----------------------------|--------|-------------------------------------|--------|--------------------------------|--------|
| Senior Notes               |   | Baa3                                |   | BB+                            |   |
|                       |   |                                |   |                           |   |
| Senior  Subordinated Notes |   | Ba1                                 |   | BB-                            |   |

 

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**CashFlows**

 

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

 

At December 31, 2002, our cash and cash equivalents of$77.0 million represented an increase of $25.0 million during 2002. Thisincrease resulted from $95.5 million provided by our operating activities,offset by $6.1 million used for investing activities, including the Hochstinacquisition in October 2002. Cash of $64.4 million was used for financingactivities, primarily for repayment of indebtedness and the repurchase ofshares of our Series A preferred stocks.

 

At December 31, 2001, our cash and cash equivalents of$52.0 million represented a decrease of $97.9 million during 2001. Thisdecrease resulted from $121.3 million used for our operating activities, offsetby $23.6 million provided by our investing activities, including acquisitionsduring 2001 in which we issued shares of our common stock. Cash of $0.2 millionwas also used by financing activities, primarily from the repayment ofindebtedness, which was offset by the exercise of stock options by ouremployees.

 

At December 31, 2000, our cash and cash equivalents of$149.9 million represented an increase of $66.1 million during 2000. Thisincrease resulted from $22.7 million provided by our operating activities and$235.4 million provided by our financing activities, as a result of theissuance of our Senior Subordinated Notes, offset by $192.0 million used forour investing activities, mainly our acquisitions during 2000.

 

**Certain Risk Factors**

** **

In light of the economic downturn over the past threeyears and the terrorist attacks on the United States in September 2001, webelieve that the following risk factors could have a significant impact on ourbusiness, operating results, financial condition, and cash flows. If any ofthese events actually occur, our business, financial condition, operatingresults and/or cash flows could be adversely affected*.*

 

*Ourrevenues may decrease due to changes affecting the economy, such as increasesin interest rates or inflation, or changes affecting the securities markets,such as decreased volume or liquidity.*

 

An adverse change affecting the economy or thesecurities markets could result in a decline in market volume or liquidity.This would result in lower revenues from our specialist and execution and clearingactivities. Historically, increases in our revenues have resulted primarilyfrom significant increases in the volume of trading on the NYSE and favorableconditions in the securities markets. More recently, however, the economy hasslowed and financial markets have become less prosperous in comparison to theimmediately preceding

 

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several years. If this causes a decline in market volume, or if marketliquidity becomes compromised, our revenues could decline and our results ofoperations could be adversely affected.

 

*Continuedglobal and U.S. economic downturn and declines in price levels of securitiescould cause us to incur losses.*

 

The difficult global market and economic conditionsthat existed during 2001 deteriorated further throughout 2002. Although 2002began with increased expectations of improved economic performance, weakcorporate earnings, continuing uncertainty about the strength and pace of theglobal economic recovery and continued reports of corporate accounting andgovernance irregularities have undermined investor confidence, and the equitymarkets in which we operate experienced sharp declines during 2002. Uncertaintysurrounding lingering terrorist threats and increased geopolitical tensionsalso have contributed to investors becoming increasingly risk-averse.

 

These conditions affected our 2002 results ofoperations and may adversely affect our operations in the future. U.S. equitymarkets declined for the third consecutive year and adverse changes in theeconomy and the securities markets have led to lower price levels ofsecurities. Continued declines in these price levels have resulted in and couldcontinue to result in:

 

•                                          lossesfrom declines in the market value of securities held in our accounts;

 

•                                          thefailure of buyers and sellers of securities to fulfill their settlementobligations; and

 

•                                          increasesin claims and litigation.

 

                Itcurrently is uncertain when these market and economic conditions will improveor whether we will be able to adequately protect our interests or maintainrevenues throughout this period.

 

*Ourresults may fluctuate significantly.*

 

Our revenues may fluctuate significantly based onfactors relating to the securities markets. These factors include:

 

•                                          asignificant decrease in trading volume on the NYSE and the AMEX;

 

•                                          volatilityin the equity securities markets; and

 

•                                          changesin the value of our securities positions.

 

Many elements of our cost structure do not decline ifwe experience reductions in our revenues. As a result, if market conditionscause our revenues to decline, we may be unable to adjust our cost structure ona timely basis and we could suffer losses. Long-term downturns in

 

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the economy or the equity markets in general could cause tradingvolumes and revenues to decline and cause our operating results to suffer.

 

*Recentterrorist attacks have contributed to economic instability in the UnitedStates; continued terrorist attacks, war or other civil disturbances could leadto further economic instability and depress our stock price.*

 

On September 11, 2001, the United States was thetarget of terrorist attacks of unprecedented scope, with the attacks in NewYork City particularly affecting our operations. These attacks may causelong-term instability in the global financial markets. The United States isalso currently conducting military operations in response to the terroristattacks and is also currently contemplating military operations against Iraq.These attacks and the United States military campaign may lead to substantialarmed hostilities, war or further acts of terrorism and civil disturbances inthe United States or elsewhere, which may contribute further to economicinstability in the United States and could have a material adverse effect onour business, financial condition and operating results.

 

Our offices are located in close proximity to theterrorist attacks on the World Trade Center on September 11, 2001. Theaftermath of the attacks on the World Trade Center required us to close ouroperations and temporarily operate from our disaster recovery site. The NYSEalso was forced to stop operating for four consecutive trading days, whichcaused our operations to halt and could have compromised the liquidity of thatmarket during closure. If additional terrorist attacks occur in close proximityto our offices, or upon our office buildings, the NYSE or the AMEX, we could beforced to relocate for a longer period of time, or permanently. Furthermore,additional terrorist attacks in New York City, or on our buildings, the NYSE orthe AMEX, or additional armed hostilities within the United States, could causesignificant delays or stoppages in our business activities, which would significantlyharm our revenues and profits.

 

*Ourinformation or communication systems may fail and interrupt our business.*

 

Any information or communication systems failure ordecrease in information or communications systems performance that causesinterruptions in our operations could have an adverse effect on our business,financial condition and/or operating results. Our systems may fail as a resultof:

 

•                                          hardwareor software failure; or

 

•                                          poweror telecommunications failure.

 

The September 11, 2001terrorist attacks, particularly the attacks on the World Trade Center, caused atemporary lapse in some of our information and communications systems. It ispossible that additional terrorist attacks may occur in the future and thatsuch attacks could compromise or disable our systems. Although we haveestablished back-up disaster recovery centers in New Jersey and New York, theymay not be effective in preventing an interruption of our business. It is alsopossible that any future terrorist activities or an act of war in retaliation

 

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against thecurrent United States military activities could harm our operations and/ordisaster recovery centers, which could significantly harm our business.

 

# **Item7A.**                          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Because our specialist equity activities on the NYSEand AMEX expose our capital to significant risks, managing these risks is aconstant priority for us. Our central role in the auction process helps us toreduce risks by enabling us to incorporate up-to-date market information in themanagement of our inventory, subject to our specialist obligations. We havedeveloped a risk management process which is designed to balance our ability toprofit from our specialist activities with our exposure to potential losses.Our risk management process includes participation by our executive operatingcommittee, our floor management committee, our floor team captains and ourspecialists. These parties’ roles are described as follows:

 

*Executive Operating Committee.* Our executive operating committee is composed of four executive officersof LaBranche & Co. LLC. This committee is responsible for approving allrisk management policies and trading guidelines for particular specialiststocks, after receiving input and proposals by the floor management committee.In addition, our executive operating committee reviews all unusual situationsreported to it by our floor management committee.

 

*Floor Management Committee.* Our floor management committee is composed of seven senior floorspecialists. This committee is responsible for formulating and overseeing ouroverall risk management policies and risk guidelines for each of our specialiststocks. In arriving at these policies and guidelines, our floor managementcommittee considers the advice and input of our floor team captains. Our floormanagement committee meets with all floor team captains no less than once amonth to review and, if necessary, revise the risk management policies for ourfirm as a whole and/or for particular specialist stocks. In addition, a memberof our floor management committee is always available on the trading floor toreview and assist with any unusual situations reported by a captain. Our floormanagement committee reports to our executive operating committee about each ofthese situations.

 

*Floor Team Captains.* We have 24 floor team captains who monitor the activities of ourspecialists throughout the trading day from various positions at our trading posts.The captains observe trades and constantly review trading positions on areal-time basis through our information systems. In addition, the captains arereadily available to assist our specialists in determining when to deviate fromour policies and guidelines to react to any unusual situations or marketconditions. The captains must report these unusual situations to management,including any deviations from our policies and guidelines. Captains meet witheach specialist at least once a week to evaluate the specialist’s adherence toour risk management policies and guidelines. Captains also meet amongthemselves at least twice weekly to review risk policies and guidelines and, ifappropriate, make new recommendations to the floor management committee.

 

*Specialists.* Our specialists conduct auctions based upon the conditions of themarketplace. In doing so, specialists observe our risk management policies andguidelines notwithstanding their responsibility to create a fair and orderlymarket. Specialists must

 

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immediately notifya captain of any unusual situations or market conditions requiring a deviationfrom our policies and guidelines.

 

Due to the relative size of our equity specialistoperations on the AMEX, which consists of five equity specialists, formal riskcommittees do not exist. Nevertheless, our AMEX equity specialists adhere toall risk management policies set by the Executive Operating Committee, and arein constant communication with the executive officers of LaBranche & Co.LLC.

 

*CircuitBreaker Rules.*  TheNYSE and AMEX have instituted certain circuit breaker rules intended to halttrading in all NYSE/AMEX listed stocks in the event of a severe market decline.The circuit breaker rules impose temporary halts in trading when the Dow JonesIndustrial Average drops a certain number of points. Current circuit breakerlevels are set quarterly at 10, 20 and 30 percent of the Dow JonesIndustrial Average closing values of the previous month, rounded to the nearest50 points. These rules provide investors extra time to respond to severe marketdeclines and provide us an opportunity to insure compliance with our riskmanagement policies.

 

*EquityMarket Risk*

 

As a specialist on the NYSE, a high concentration ofLaBranche & Co. LLC’s trading revenue is generated from its ten andtwenty-five most profitable specialist stocks. However, the percentage ofLaBranche & Co. LLC’s specialist trading revenue generated from its tenmost profitable specialist stocks has decreased from 38.7% to 28.2% to 27.5% oftotal principal trading revenue for the years ended December 31, 2000, 2001 and2002, respectively. The percentage of LaBranche & Co. LLC’s specialisttrading revenue generated from its twenty-five most profitable specialiststocks has decreased from 64.7% to 51.9% to 48.2% of total principal tradingrevenue for the years ended December 31, 2000, 2001 and 2002, respectively.LaBranche & Co. LLC is not overly reliant on a particular group ofspecialist stocks, as the composition of its ten and twenty-five mostprofitable specialist stocks changes continuously.

 

Our specialist activities are subject to a number ofrisks, including risks of price fluctuations, rapid changes in the liquidity ofmarkets and foreign exchange risk related to ADRs. In any period, we may incurtrading losses in our specialist stocks for a variety of reasons, includingprice fluctuations of our specialist stocks, lack of trading volume in ourspecialist stocks and the performance of our specialist obligations. From timeto time, we may have large position concentrations in securities of a singleissuer or issuers engaged in a specific industry. In general, because ourinventory of securities is marked to market on a daily basis, any significantprice movement in these securities could result in a reduction of our revenuesand operating profits.

 

We have developed a risk management process, which isintended to balance our ability to profit from our specialist activities withour exposure to potential losses. We have invested substantial capital, alongwith the NYSE, in real-time, on-line systems which give management instantaccess to specific trading information at any time during the trading day,including our aggregate long and short positions and our capital andprofit-and-loss information on an aggregate or per issue basis.

 

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The following table illustrates how our managementbalances the risks associated with our overnight positions with the opportunityto profit from our specialist activities, while fulfilling our specialistobligations:

 
|                     |   | **NYSE  Equity Specialist Only**    |   |
|--------------------------|--------|-------------------------------------|--------|
| **(000’s omitted)** |   | **NYSE  Average Net Long Position** |   | **Principal  Trading Revenues** |   |
| First Quarter  2002      |   | $                                   | 34,217 |   | $ | 88,628 |   |
| Second Quarter  2002     |   | $                                   | 50,872 |   | $ | 73,128 |   |
| Third Quarter  2002      |   | $                                   | 38,808 |   | $ | 92,153 |   |
| Fourth Quarter  2002     |   | $                                   | 23,887 |   | $ | 86,149 |   |

 

*Commodities Market Risk*

 

As a specialist in options on the AMEX, LSP isresponsible for creating a fair and orderly market, and trades options asprincipal out of both obligation and inclination. In addition, LSP acts as amarket-maker in certain ETFs. As is true with LaBranche & Co. LLC’s equitytrading, LSP’s options and ETF trading exposes it to certain risks, such asprice fluctuations and changes in the liquidity of markets. In addition, thesederivative instruments expose LSP to volatility risk, among other types ofrisks.

 

In order to manage these risks LSP has a riskmanagement team. These individuals utilize a third party software applicationto monitor its positions on a real-time basis. By monitoring actual andtheoretical profit and loss, volatility and other standard risk measures, theseindividuals insure all LSP traders are within the parameters set by management.LSP’s traders use futures and the stocks underlying certain positions in anattempt to hedge market risk. The firm’s aggregate risk is under constantevaluation by both the risk management team and traders, and all significanttrading strategies and positions are discussed between both groups. LSP’soptions trading is executed solely on national exchanges. These trades clearthrough the Options Clearing Corporation, thereby reducing potential creditrisk.

 

The following chart illustrates how the specifiedmovements in the underlying securities prices of LSP’s entire portfolio wouldhave impacted profits and losses from its trading activities: 

 
|                        |   | **Profit or  (Loss) if the underlying securities move:** |   |
|-----------------------------|--------|----------------------------------------------------------|--------|
| **(000’s omitted)**    |   | **-15.0%**                                               |   | **-5.0%** |   | **0%** |   | **+5.0%** |   | **+15.0%** |   |
| Commodity  Portfolio as of: |   |                                                     |   |   |   |   |   |   |   |   |   |
| March 28, 2002              |   | $                                                        | 1,362  |   | $ | (147 | ) | $ | (48 | ) | $ | 628 |   | $ | 2,840 |   |
| June 28, 2002               |   | $                                                        | 1,640  |   | $ | 512 |   | $ | (11 | ) | $ | 117 |   | $ | 430 |   |
| September 30,  2002         |   | $                                                        | 1,960  |   | $ | 617 |   | $ | (48 | ) | $ | 366 |   | $ | 1,764 |   |
| December 31,  2002          |   | $                                                        | 1,648  |   | $ | 713 |   | $ | (29 | ) | $ | 1,115 |   | $ | 3,278 |   |

 

The numbers in the above table are based on certaintheoretical assumptions and thus, do not fully represent the profit or lossexposure to changes in volatility, interest rates and dividends. The zeropercent change column represents the loss LSP would experience on a daily basisif the market remained unchanged.

 

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*Execution,Clearing and Operational Risk*

 

As a specialist on the NYSE and AMEX, LaBranche &Co. LLC is engaged in various securities trading and lending activities. Inconnection with its activities as a specialist, LaBranche & Co. LLC assumespositions in stocks for which it is responsible. LaBranche & Co. LLC isexposed to credit risk associated with the nonperformance of counterparties infulfilling their contractual obligations pursuant to these securitiestransactions. LaBranche & Co. LLC also is exposed to market risk associatedwith the sale of securities not yet purchased, which can be directly impactedby volatile trading on the NYSE and AMEX. Additionally, in the event ofnonperformance and unfavorable market price movements, LaBranche & Co. LLCmay be required to purchase or sell financial instruments, which may result ina loss.

 

The execution and clearing segment’s clearanceactivities conducted by LFSI 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 customers or other brokersare unable to fulfill their contractual obligations and it has to purchase orsell securities at a loss. For margin transactions, LFSI may be exposed tosignificant off-balance sheet risk in the event margin requirements are notsufficient to fully cover losses that customers may incur in their accounts.

 

Before conducting business with a prospectivecustomer, LFSI’s Compliance Department reviews the prospective customer’sexperience in the securities industry, financial condition and personal background.For current customers, LFSI seeks to control the risks associated with customeractivities by requiring customers to maintain margin collateral in compliancewith various regulatory and internal guidelines. LFSI monitors margin levelsdaily and pursuant to such guidelines, requires customers to deposit additionalcollateral or to reduce positions when necessary. In addition, LFSI performs abackground check on every customer.

 

In each of our segments, we rely heavily on ourinformation systems in conducting our risk management and therefore we’ve madesignificant investments in our trade processing and execution systems. Our useof and dependence on technology has allowed us to sustain our significantgrowth over the past several years. Management members and floor captains mustconstantly monitor our positions and transactions in order to mitigate ourrisks and identify troublesome trends as they occur. The substantial capital wehave invested, along with the NYSE, in real-time, on-line systems give managementinstant access to specific trading information at any time during the tradingday, including:

 

•                    our aggregatelong and short positions;

 

•                    the variouspositions of each of our trading professionals;

 

•                    our overallposition in a particular stock;

 

•                    capital andprofit-and-loss information on an aggregate, per specialist or per issue basis;and

 

•                    averageposition size.

 

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Our information systems send and receive data from theNYSE and AMEX through dedicated data feeds. The NYSE supplies us withspecialist position reporting system terminals both on the trading floor and inour offices. These terminals allow us to monitor our NYSE trading profits andlosses as well as our positions. For our AMEX equity operations, our in-housetechnology staff has developed applications to monitor our current positionsand profits and losses.

 

During 2002, we developed and implemented a businesscontinuity plan which includes a comprehensive disaster recovery plan. Implementationconsisted of the distribution of a manual defining the roles andresponsibilities of various individuals within our organization in the event ofa disruption to our business, as well as a detailed plan for the communicationand dissemination of information throughout our organization. As part of ourdisaster recovery plan, we enhanced our back-up disaster recovery center in NewJersey which primarily services our LaBranche & Co. LLC subsidiary. Theback-up system operates as a hot-site, simultaneously receiving the sameinformation as transmitted to our primary computer system in New York City. Inaddition, we have established complete connectivity between our New York Cityand New Jersey facilities. We test both systems on a regular basis to assurethat they are fully operational. Currently, LFSI is under contract with athird-party service bureau to provide disaster recovery services. We are in theprocess of establishing a second back-up facility which will serve our LFSI andLSP subsidiaries in another New York state location so that our primary NewYork City operations are safeguarded from potential business interruption. Thissite will also act as a secondary disaster recovery facility for our LaBranche& Co. LLC operations. We expect this site to be fully operational by June2003.

 

*RegulatoryRisk*

 

As registered broker dealers our subsidiariesLaBranche & Co. LLC, LFSI and LSP are subject to certain regulatoryrequirements intended to insure their general financial soundness andliquidity. Our subsidiaries are subject to SEC Rule 15c3-1, 15c3-3 and otherrequirements as adopted and administered by both the NYSE and AMEX.

 

LFSI must comply with the rules and regulations of theexchanges of which it is a member and the Securities Exchange Act of 1934,related to the custody of customers’ assets. In addition, the recently enactedUSA Patriot Act requires U.S. financial institutions, including banks,broker-dealers, futures commission merchants and investment companies, toimplement policies, procedures and controls which are reasonably designed todetect and report instances of money laundering and the financing of terrorism.As a result of this legislation, in July 2002, LFSI hired a complianceprofessional to establish and monitor LFSI’s anti-money laundering practices.

 

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# **Item8.**                                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

 

Our consolidated financial statements andsupplementary data required in this item are set forth at the pages indicatedin Item 14(a)(1).

 

# **Item9.**                                   CHANGESIN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

There were no disagreements with our auditors onaccounting and financial disclosure during the last two fiscal years. EffectiveMay 20, 2002, we dismissed Arthur Andersen LLP as our independent auditors andengaged KPMG LLP as our new independent auditors to audit our financialstatements. The decision to change our independent auditors was approved by ourBoard of Directors. On May 20, 2002, we filed a Form 8-K regarding this changeof independent auditors.

 

**PART III**

 

# **Item10.**                            DIRECTORS,EXECUTIVE OFFICERS AND KEY EMPLOYEES.

 

The information set forth under the caption “Directorsand Executive Officers” in our definitive proxy statement to be used inconnection with our 2003 Annual Meeting of Stockholders is incorporated byreference.

 

# **Item11.**                            EXECUTIVECOMPENSATION.

 

The information set forth under the caption “ExecutiveCompensation” in our definitive proxy statement to be used in connection with our2003 Annual Meeting of Stockholders is incorporated by reference.

 

# **Item12.**                            SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

 

The information set forth under the caption“Beneficial Ownership of Common Stock by Certain Stockholders and Management”in our definitive proxy statement to be used in connection with our 2003 AnnualMeeting of Stockholders is incorporated by reference.

 

# **Item13.**                            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.

 

The information set forth under the caption “CertainRelationships and Related Transactions” in our definitive proxy statement to beused in connection with our 2003 Annual Meeting of Stockholders is incorporatedby reference.

 

 

44

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# **Item14.         CONTROLS AND PROCEDURES.**

 

An evaluation was performed on the effectiveness ofthe design and operation of our disclosure controls and procedures, within the90-day period prior to filing this report, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that the design and operation ofour disclosure controls and procedures were effective. No significant changeswere made in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

**PART IV**

 

# **Item15.**                            EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

 

(a)           (1)           *FinancialStatements*:

 

The financial statements required by this item aresubmitted in a separate section beginning on page F-1 of this report.

 

(2)           *FinancialStatement Schedules*:

 

Schedule 1. LaBranche & Co Inc. (Parent CompanyOnly) Condensed Financial Statements.

 

All other schedules have been omitted because of theabsence of conditions under which they are required or because the requiredinformation is included in the financial statements or notes thereto.

 

(3)           *Exhibits*:

 

The following exhibits are filed as part of thisreport or incorporated herein by reference.

 
| 2.1    | Plan of Incorporation  of LaBranche & Co.*                                                                                                                                                                                                           |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2    | Exchange Agreement by  and among LaBranche & Co Inc., LaB Investing Co., L.L.C. and  the members of LaB Investing Co. L.L.C. listed on Schedule A thereto.*                                                                                |
| 3.1    | Amended and Restated  Certificate of Incorporation of LaBranche & Co Inc.*                                                                                                                                                                                |
| 3.2    | Amended and Restated  Bylaws of LaBranche & Co Inc.*                                                                                                                                                                                                      |
| 4.1    | Specimen Stock  Certificate.*                                                                                                                                                                                                                                 |
| 4.2    | Indenture, dated as of  August 24, 1999, among LaBranche & Co Inc., as issuer, and  Firstar Bank, N.A., as trustee, relating to the 9 1⁄2% Senior Notes due 2004.**                                                                     |
| 4.3    | Form of 9 1⁄2% Senior  Notes due 2004 of LaBranche & Co Inc. (included as  Exhibit A to the Indenture filed as Exhibit 4.2).**                                                                                                     |
| 4.4    | Registration Rights  Agreement, dated as of August 24, 1999, by and among  LaBranche & Co Inc., as issuer, and Salomon Smith  Barney Inc. and Donaldson, Lufkin & Jenrette Securities  Corporation, as initial purchasers.** |
| 4.5    | Indenture, dated as of  March 2, 2000, among LaBranche & Co., as issuer, and                                                                                                                                                                              |
|   | Firstar Bank, N.A., as  trustee, relating to the 12% Senior Subordinated Notes due 2007.***                                                                                                                                                                   |

 

45

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| 4.6   | Form of 12% Senior  Subordinated Notes due 2007 of LaBranche & Co Inc. (included as  Exhibit A to the Indenture filed as Exhibit 4.5).***                                                                                                                                                                                                |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.7   | Registration Rights  Agreement, dated as of March 2, 2000, by and among LaBranche &  Co Inc., as issuer, and Donaldson, Lufkin & Jenrette Securities  Corporation, Salomon Smith Barney Inc. and ABN AMRO Incorporated, as  initial purchasers.***                                                                                   |
| 10.1  | Agreement of Lease  between Aetna Life Insurance Company and LaBranche & Co., dated  January 6, 1984, as amended to date.*                                                                                                                                                                                                                         |
| 10.2  | Second Amendment to  Lease Agreement by and between Bank of Communications and  LaBranche & Co. dated July 1995, as amended to date.*                                                                                                                                                                                                              |
| 10.3  | LaBranche & Co Inc.  Equity Incentive Plan.*******                                                                                                                                                                                                                                                                                                           |
| 10.4  | LaBranche & Co Inc.  Annual Incentive Plan.*                                                                                                                                                                                                                                                                                                                 |
| 10.5  | Form of Employment  Letter between LaBranche & Co Inc. and its executive officers.*                                                                                                                                                                                                                                                                          |
| 10.6  | Form of Agreement Relating  to Noncompetition and Other Covenants.*                                                                                                                                                                                                                                                                                              |
| 10.7  | Form of Pledge  Agreement.*                                                                                                                                                                                                                                                                                                                                      |
| 10.8  | Stockholders’  Agreement by and among LaBranche & Co Inc. and the Stockholders  listed on Schedule I thereto.*                                                                                                                                                                                                                           |
| 10.9  | LaBranche &  Co. Note Purchase Agreement, dated September 15, 1997, relating to the  issuance of $20,000,000 aggregate principal amount of 8.17% Subordinated  Notes, as amended.*                                                                                                                                                                 |
| 10.10 | LaBranche &  Co. Note Purchase Agreement, dated June 3, 1998, relating to the  issuance of $15,000,000 aggregate principal amount of 7.69% Subordinated  Notes.*                                                                                                                                                                                   |
| 10.11 | Amendment to Note  Purchase Agreements, dated as of August 23, 1999, relating to the  issuance of $20,000,000 aggregate principal amount of 8.17% Subordinated  Notes and $15,000,000 aggregate principal amount of 7.69% Subordinated  Notes.**                                                                                                            |
| 10.12 | Form of Subordinated  Note.*                                                                                                                                                                                                                                                                                                                                     |
| 10.13 | Credit Agreement, dated  as of June 26, 1998, by and among LaBranche & Co. and The Bank  of New York.*                                                                                                                                                                                                                                             |
| 10.14 | Amendment No. 1 to  Credit Agreement, dated as of June 23, 1999, by and among  LaBranche & Co. and The Bank of New York.**                                                                                                                                                                                                                    |
| 10.15 | Amendment No. 2 to  Credit Agreement, dated as of August 24, 1999, by and among  LaBranche & Co. and The Bank of New York.**                                                                                                                                                                                                                  |
| 10.16 | Amendment No. 3 to  Credit Agreement, dated as of February 4, 2000, by and among LaBranche &  Co. and The Bank of New York.****                                                                                                                                                                                                                              |
| 10.17 | Form of Indemnification  Agreement.*                                                                                                                                                                                                                                                                                                                             |
| 10.18 | Purchase Agreement,  dated February 24, 2000, by and among LaBranche & Co Inc. and  Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith  Barney Inc. and ABN AMRO Incorporated, as initial purchasers, relating  to the issuance of $250,000,000 aggregate principal amount of 12% Senior  Subordinated Notes due 2007.*** |
| 10.19 | Amended and Restated  Articles of Partnership of LaBranche & Co.**                                                                                                                                                                                                                                                                                      |

 

46

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| 10.20 | LaB Investing Co.,  L.L.C. Amended and Restated Operating Agreement.**                                                                                                                                                                |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21 | Acquisition Agreement,  dated August 16, 1999, by and between Ernst & Company and  LaBranche & Co.**                                                                                                           |
| 10.22 | Acquisition Agreement,  dated August 16, 1999, by and between Mill Bridge Inc., LaB  Investing Co. L.L.C., LaBranche & Co Inc. and  LaBranche & Co.**                                                |
| 10.23 | Stock Purchase  Agreement, dated as of December 23, 1999, among LaBranche & Co Inc.,  Henderson Brothers Holdings, Inc. and the stockholders listed on Schedule A  thereto.*****                                                  |
| 10.24 | Amendment to Stock  Purchase Agreement, dated as of February 1, 2000, by and among LaBranche  & Co Inc., Henderson Brothers Holdings, Inc., and the authorized  representatives of the persons listed on Schedule A thereto.***** |
| 10.25 | Agreement and Plan of  Merger, dated as of January 18, 2001, by and between LaBranche & Co Inc.  and ROBB PECK McCOOEY Financial Services, Inc.******                                                                             |
| 10.26 | Amendment No. 1, dated  as of February 15, 2001, to Agreement and Plan of Merger by and between  LaBranche & Co Inc. and ROBB PECK McCOOEY Financial Services, Inc.******                                                         |
| 10.27 | Amended and Restated  LaBranche & Co Inc. Equity Incentive Plan. *******                                                                                                                                                          |
| 12.1  | Statement re  computation of ratios of earnings to fixed charges                                                                                                                                                                      |
| 21    | List of Subsidiaries.                                                                                                                                                                                                                 |
| 23.1  | Consent of KPMG LLP.                                                                                                                                                                                                                  |
| 23.2  | Information regarding  consent of Arthur Andersen LLP                                                                                                                                                                                 |
| 99.1  | Risk Factors                                                                                                                                                                                                                          |

 

----

*                                                     Incorporatedby reference to our Registration Statement on Form S-1 (RegistrationNo. 333-81079), as amended, effective August 18, 1999.

**                                              Incorporatedby reference to our Registration Statement on Form S-4 (Registration No.333-88119), as amended, effective November 3, 1999.

***                                       Incorporatedby reference to our Annual Report on Form 10K/A for the year ended Decemeber31, 1999, filed April 4, 2000.

****                                Incorporatedby reference to our Current Report on Form 8-K, filed February 8, 2000.

*****                         Incorporated by reference toour Current Report on Form 8-K, filed March 17, 2000.

******                  Incorporated by reference to ourCurrent Report on Form 8-K, filed on March 22, 2001.

*******           Incorporated by reference to Exhibit 4.1 ofour Registration Statement on Form S-8 (Registration No. 333-102607), effectiveJanuary 21, 2003.

 

(b)           *Reports on Form 8-K*:

 

On November 14, 2002, we filed a Form 8-K, datedNovember 14, 2002, with respect to the certifications of our Chief ExecutiveOfficer and our Chief Financial Officer, regarding the information contained inour Quarterly Report on Form 10-Q for the period ended September 30, 2002,under Item 9 of Form 8-K.

 

47

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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 reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| March 20, 2003 | **LaBRANCHE & CO INC.** |
|----------------|-----------------------------|
|           |                        |   |
|           | By:                         | /s/ George M.L.  LaBranche, IV |   |
|           |                        | George M.L.  LaBranche, IV |
|           |                        | Chairman, Chief  Executive Officer and President |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**                  |   | **Title**                     |                                               | **Date** |           |
|--------------------------------|--------|-------------------------------|----------------------------------------------------|----------|----------------|
|                           |   |                          |                                               |     |           |
| /s/ George M.L.  LaBranche, IV |   |                          | Chairman, Chief Executive Officer and President    |     | March 20, 2003 |   |
| George M.L.  LaBranche, IV     |   | (Principal Executive Officer) |                                               |     |           |
|                           |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/ Harvey S.  Traison         |   |                          | Senior Vice President, Chief Financial Officer and |     | March 20, 2003 |   |
| Harvey S.  Traison             |   | (Principal Financial Officer) |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/ Thomas E.  Dooley          |   |                          | Director                                           |     | March 20, 2003 |   |
| Thomas E. Dooley               |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/ E. Margie  Filter          |   |                          | Director                                           |     | March 20, 2003 |   |
| E. Margie Filter               |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/ David A.  George           |   |                          | Director                                           |     | March 20, 2003 |   |
| David A. George                |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/Alfred O. Hayward, Jr.      |   |                          | Director                                           |     | March 20, 2003 |   |
| Alfred O. Hayward, Jr.         |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/ Donald E.  Kiernan         |   |                          | Director                                           |     | March 20, 2003 |   |
| Donald E.  Kiernan             |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/Robert M.  Murphy           |   |                          | Director                                           |     | March 20, 2003 |   |
| Robert M. Murphy               |   |                          |                                               |     |           |
|                           |   |                          |                                               |     |           |
| /s/ Todd A.  Graber            |   |                          | Controller (Principal Accounting                   |     | March 20, 2003 |   |
| Todd A. Graber                 |   | Officer)                      |                                               |     |           |
|                                |        |                               |                                                    |          |                |  |  |  |  |  |  |  |  |  |

 

48

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**CERTIFICATION**

 

I, George M.L. LaBranche, IV, Chairman, ChiefExecutive Officer and President of LaBranche & Co Inc. (the “Registrant”),hereby certify that:

 

1.             Ihave reviewed the Registrant’s Annual Report on Form 10-K for the year endedDecember 31, 2002, as filed with the Securities and Exchange Commission on thedate hereof (the “Report”).

 

2.             Basedon my knowledge, the Report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by the Report.

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in the Report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in the Report.

 

4.             HarveyS. Traison, the Registrant’s Chief Financial Officer, and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inRules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934,as amended) for the Registrant, and we have:

 

(a)                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the Registrant, including its consolidated subsidiaries, has beenmade known to us by others within those entities, particularly during theperiod in which the Report has been prepared;

 

(b)                     evaluated theeffectiveness of the Registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of the Report (the “EvaluationDate”); and

 

(c)                      presented inthe Report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date.

 

5.             HarveyS. Traison, the Registrant’s Chief Financial Officer, and I have disclosed,based on our most recent evaluation, to the Registrant’s independent auditorsand the audit committee of the Registrant’s board of directors:

 

(a)                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Registrant’s ability to record, process, summarizeand report financial data and have identified for the Registrant’s independentauditors any material weaknesses in internal controls; and

 

49

----

 

(b)                     any fraud,whether or not material, that involves management or other employees who have asignificant role in the Registrant’s internal controls.

 

6.             HarveyS. Traison, the Registrant’s Chief Financial Officer, and I have indicated inthe Report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  March  20, 2003 |   |   | /s/ George M.L. LaBranche, IV     |   |
|-----------------------------|--------|--------|-----------------------------------|--------|
|                        |   | Name:  | George M.L. LaBranche, IV         |
|                        |   | Title: | Chairman, Chief Executive Officer |
|                        |   |   | and President                     |

 

50

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**CERTIFICATION**

 

I, Harvey S. Traison, Senior Vice President and ChiefFinancial Officer of LaBranche & Co Inc. (the “Registrant”), hereby certifythat:

 

1.             Ihave reviewed the Registrant’s Annual Report on Form 10-K for the period endedDecember 31, 2002, as filed with the Securities and Exchange Commission on thedate hereof (the “Report”).

 

2.             Basedon my knowledge, the Report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by the Report.

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in the Report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in the Report.

 

4.             GeorgeM.L. LaBranche, IV, the Registrant’s Chief Executive Officer, and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Rules 13a-14 and 15d-14 promulgated under the SecuritiesExchange Act of 1934, as amended) for the Registrant, and we have:

 

(a)                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the Registrant, including its consolidated subsidiaries, has beenmade known to us by others within those entities, particularly during theperiod in which the Report has been prepared;

 

(b)                     evaluated theeffectiveness of the Registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of the Report (the “EvaluationDate”); and

 

(c)                      presented inthe Report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date.

 

5.             GeorgeM.L. LaBranche, IV, the Registrant’s Chief Executive Officer, and I havedisclosed, based on our most recent evaluation, to the Registrant’s independentauditors and the audit committee of the Registrant’s board of directors:

 

(a)                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Registrant’s ability to record, process, summarizeand report financial data and have identified for the Registrant’s independentauditors any material weaknesses in internal controls; and

 

(b)                     any fraud,whether or not material, that involves management or other employees

 

51

----

 

who have a significantrole in the Registrant’s internal controls.

 

6.             GeorgeM.L. LaBranche, IV, the Registrant’s Chief Executive Officer, and I haveindicated in the Report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 
| Date:  March  20, 2003 |   |   | /s/ Harvey S. Traison                     |   |
|-----------------------------|--------|--------|-------------------------------------------|--------|
|                        |   | Name:  | Harvey S. Traison                         |
|                        |   | Title: | Senior Vice President and Chief Financial |
|                        |   |   | Officer                                   |
|                             |        |        |                                           |        |  |

 

52

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**INDEX TOFINANCIAL STATEMENTS**

 
| LaBRANCHE & CO INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL  STATEMENTS                                                 |
|-----------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                        |
| Independent Auditors’  Report                                                                                          |
|                                                                                                                        |
| Report of  Independent Public Accountants                                                                                   |
|                                                                                                                        |
| Consolidated  Statements of Financial Condition as of December 31, 2002 and 2001                                       |
|                                                                                                                        |
| Consolidated  Statements of Operations for the Years Ended December 31, 2002, 2001 and  2000                           |
|                                                                                                                        |
| Consolidated  Statements of Changes in Stockholders’ Equity for the Years Ended  December 31, 2002, 2001 and 2000 |
|                                                                                                                        |
| Consolidated Statements  of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                            |
|                                                                                                                        |
| Notes to  Consolidated Financial Statements                                                                                 |
|                                                                                                                        |
| Schedule 1.  LaBRANCHE & CO INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS                                   |
|                                                                                                                        |
| Condensed  Statements of Financial Condition as of December 31, 2002 and 2001                                          |
|                                                                                                                        |
| Condensed Statements  of Operations for the Years Ended December 31, 2002, 2001 and 2000                               |
|                                                                                                                        |
| Condensed  Statements of Changes in Stockholders’ Equity for the Years Ended December 31,  2002, 2001 and 2000    |
|                                                                                                                        |
| Condensed Statements  of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                               |
|                                                                                                                        |
| Notes to Condensed Financial  Statements                                                                                    |

 

F-1

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

The Board of Directors

LaBranche & Co Inc.:

 

We have audited the accompanying consolidated statement of financialcondition of LaBranche & Co Inc. and subsidiaries as of December 31, 2002,and the related consolidated statements of operations, changes in stockholders’equity and cash flows for the year ended December 31, 2002 and the relatedDecember 31, 2002 financial statement schedule. These consolidated financialstatements and the related financial statement schedule are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements and the related financial statement schedule basedon our audit. The consolidated statement of financial condition of LaBranche& Co Inc. as of December 31, 2001, the related consolidated statements ofoperations, changes in stockholders’ equity and cash flows for each of theyears in the two year period ended December 31, 2001 and the related financialstatement schedule, were audited by other auditors who have ceased operations.Those auditors expressed an unqualified opinion on those financial statementsand financial statement schedule in their report dated January 17, 2002.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of LaBranche & Co Inc. and subsidiaries as of December 31, 2002,and the results of their operations and their cash flows for the year thenended, in conformity with accounting principles generally accepted in theUnited States of America.  Also, in ouropinion, the related December 31, 2002 financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

As discussed in Note 4 to the consolidated financialstatements, effective January 1, 2002, the Company adopted the provisions ofStatement of Financial Accounting Standards No. 142, *Goodwill and Other Intangible Assets.*

 
| /s/  KPMG LLP |   |
|--------------------|--------|
| New York, New York |
| February 19,  2003 |

 

F-2

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Stockholders of LaBranche & Co Inc.:

 

We have auditedthe accompanying consolidated statements of financial condition of LaBranche& Co Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001and 2000, and the related consolidated statements of operations, changes instockholders’ equity/members’ capital and cash flows for each of the threeyears in the period ended December 31, 2001. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of LaBranche & Co Inc. and subsidiaries asof December 31, 2001 and 2000, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2001 inconformity with accounting principles generally accepted in the United States.

 

Our audits wereconducted for the purpose of forming an opinion on the basic financialstatements taken as a whole. The parent company only condensed financialstatements appearing on pages F-29 through F-34 are presented for the purposeof complying with the Securities and Exchange Commission’s rules and are notpart of the basic financial statements. Such statements have been subjected tothe auditing procedures applied in the audit of the basic financial statementsand, in our opinion, are fairly stated in all material respects in relation tothe basic financial statements taken as a whole.

 
| /s/  Arthur Andersen LLP |   |
|-------------------------------|--------|
| New York, New York            |
| January 17, 2002              |

 

**This is a copy of the audit report previously issued by ArthurAndersen LLP in connection with LaBranche & Co Inc.’s annual report on Form10-K for the year ended December 31, 2001. This audit report has not beenreissued by Arthur Andersen LLP in connection with this annual report on Form10-K.  See Exhibit 23.2 for furtherdiscussion.**

 

F-3

----

 

**LaBRANCHE& CO INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF FINANCIAL CONDITION**

**(000’somitted, except share data)**

 
|                                                                                                                                                                                             |   | **December 31,** |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-----------|
|                                                                                                                                                                                             |   | **2002**         |      | **2001** |   |
| **ASSETS**                                                                                                                                                                                       |   |             |      |   |   |
| CASH AND CASH EQUIVALENTS                                                                                                                                                                        |   | $                | 77,033    |   | $ | 52,043 |   |
| CASH AND SECURITIES SEGREGATED UNDER FEDERAL  REGULATIONS                                                                                                                                        |   | 16,012           |      | 78,368 |   |
| SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL                                                                                                                                                  |   | 26,000           |      | 59,113 |   |
| RECEIVABLE FROM BROKERS, DEALERS AND CLEARING  ORGANIZATIONS                                                                                                                                     |   | 145,387          |      | 177,506 |   |
| RECEIVABLE FROM CUSTOMERS                                                                                                                                                                        |   | 12,425           |      | 11,005 |   |
| UNITED STATES GOVERNMENT OBLIGATIONS                                                                                                                                                             |   | 395,840          |      | 328,048 |   |
| SECURITIES OWNED, at market value:                                                                                                                                                               |   |             |      |   |   |
| Corporate equities                                                                                                                                                                               |   | 127,750          |      | 156,088 |   |
| Options                                                                                                                                                                                          |   | 61,478           |      | 68,449 |   |
| Other                                                                                                                                                                                            |   | —           |      | 1,022 |   |
| COMMISSIONS RECEIVABLE                                                                                                                                                                           |   | 4,379            |      | 4,971 |   |
| EXCHANGE MEMBERSHIPS CONTRIBUTED FOR USE, at market  value                                                                                                                                       |   | 26,176           |      | 26,760 |   |
| EXCHANGE MEMBERSHIPS OWNED, at cost (market value of  $78,337 and $84,453, respectively)                                                                                                         |   | 77,815           |      | 75,315 |   |
| OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost,  less accumulated depreciation and amortization of $6,987 and $5,485,  respectively                                                        |   | 6,089            |      | 6,475 |   |
| INTANGIBLE ASSETS, net of accumulated amortization:                                                                                                                                              |   |             |      |   |   |
| Specialist Stock List                                                                                                                                                                            |   | 381,956          |      | 392,332 |   |
| Trade Name                                                                                                                                                                                       |   | 25,011           |      | 25,011 |   |
| Goodwill                                                                                                                                                                                         |   | 470,598          |      | 469,963 |   |
| OTHER ASSETS                                                                                                                                                                                     |   | 58,853           |      | 68,368 |   |
| Total assets                                                                                                                                                                                     |   | $                | 1,912,802 |   | $ | 2,000,837 |   |
|                                                                                                                                                                                             |   |             |      |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                    |   |             |      |   |   |
| LIABILITIES:                                                                                                                                                                                     |   |             |      |   |   |
| Payable to brokers and dealers                                                                                                                                                                   |   | $                | 16,417    |   | $ | 39,533 |   |
| Payable to customers                                                                                                                                                                             |   | 21,971           |      | 63,238 |   |
| Securities sold, but not yet purchased, at market  value:                                                                                                                                        |   |             |      |   |   |
| Corporate equities                                                                                                                                                                               |   | 111,044          |      | 131,355 |   |
| Options                                                                                                                                                                                          |   | 63,695           |      | 58,822 |   |
| Accrued compensation                                                                                                                                                                             |   | 55,185           |      | 54,113 |   |
| Accounts payable and other accrued expenses                                                                                                                                                      |   | 52,268           |      | 89,159 |   |
| Income taxes payable                                                                                                                                                                             |   | 13,201           |      | 14,753 |   |
|                                                                                                                                                                                             |   | 333,781          |      | 450,973 |   |
| DEFERRED TAX LIABILITIES                                                                                                                                                                         |   | 179,924          |      | 165,541 |   |
| LONG TERM DEBT                                                                                                                                                                                   |   | 354,948          |      | 363,170 |   |
| SUBORDINATED LIABILITIES:                                                                                                                                                                        |   |             |      |   |   |
| Exchange memberships contributed for use, at market  value                                                                                                                                       |   | 26,176           |      | 26,760 |   |
| Other subordinated indebtedness                                                                                                                                                                  |   | 28,285           |      | 66,035 |   |
|                                                                                                                                                                                             |   | 54,461           |      | 92,795 |   |
| PREFERRED STOCK, liquidation value of $1,000 per share;  10,000,000 shares authorized; 63,836 and100,000 shares issued and outstanding at December 31, 2002 and  December 31, 2001, respectively |   | 61,361           |      | 94,531 |   |
| COMMON STOCK, $.01 par value, 200,000,000 shares  authorized; 59,504,148 and 58,733,955 shares issuedand outstanding at December 31, 2002 and  December 31, 2001, respectively                   |   | 595              |      | 587 |   |
| ADDITIONAL PAID-IN CAPITAL                                                                                                                                                                       |   | 679,601          |      | 671,422 |   |
| RETAINED EARNINGS                                                                                                                                                                                |   | 249,065          |      | 168,780 |   |
| UNEARNED COMPENSATION                                                                                                                                                                            |   | (934             | )         | (6,962 | ) |
|                                                                                                                                                                                             |   | 989,688          |      | 928,358 |   |
|                                                                                                                                                                                             |   |             |      |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                  |   | $                | 1,912,802 |   | $ | 2,000,837 |   |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

F-4

----

 

**LaBRANCHE& CO INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(000’somitted, except per share data)**

 
|                                                |   | **For the Years Ended December 31,** |    |
|-----------------------------------------------------|--------|-------------------------------------------|---------|
|                                                |   | **2002**                                  |    | **2001** |   | **2000** |   |
|                                                |   |                                      |    |   |   |   |   |
| REVENUES:                                           |   |                                      |    |   |   |   |   |
| Net gain on principal transactions                  |   | $                                         | 342,400 |   | $ | 340,795 |   | $ | 282,948 |   |
| Commissions                                         |   | 92,044                                    |    | 62,866 |   | 45,381 |   |
| Other                                               |   | 18,401                                    |    | 20,469 |   | 16,480 |   |
|                                                |   |                                      |    |   |   |   |   |
| Total revenues                                      |   | 452,845                                   |    | 424,130 |   | 344,809 |   |
|                                                |   |                                      |    |   |   |   |   |
| EXPENSES:                                           |   |                                      |    |   |   |   |   |
| Employee compensation and related benefits          |   | 131,511                                   |    | 110,832 |   | 88,759 |   |
| Interest                                            |   | 48,589                                    |    | 52,049 |   | 41,893 |   |
| Exchange, clearing and brokerage fees               |   | 37,729                                    |    | 22,367 |   | 5,148 |   |
| Lease of exchange memberships                       |   | 25,939                                    |    | 20,536 |   | 10,933 |   |
| Depreciation and amortization of intangibles        |   | 13,446                                    |    | 39,450 |   | 18,476 |   |
| Legal and professional fees                         |   | 8,072                                     |    | 4,959 |   | 1,868 |   |
| Communications                                      |   | 6,653                                     |    | 4,795 |   | 1,500 |   |
| Occupancy                                           |   | 5,446                                     |    | 3,932 |   | 1,310 |   |
| Other                                               |   | 9,336                                     |    | 8,499 |   | 8,345 |   |
|                                                |   |                                      |    |   |   |   |   |
| Total expenses                                      |   | 286,721                                   |    | 267,419 |   | 178,232 |   |
|                                                |   |                                      |    |   |   |   |   |
| Income before provision for income taxes            |   | 166,124                                   |    | 156,711 |   | 166,577 |   |
| PROVISION FOR INCOME TAXES                          |   | 78,898                                    |    | 85,124 |   | 84,654 |   |
|                                                |   |                                      |    |   |   |   |   |
| Net income                                          |   | 87,226                                    |    | 71,587 |   | 81,923 |   |
| Series A preferred dividends and discount accretion |   | 6,941                                     |    | 7,472 |   | — |   |
| Net income available to common stockholders         |   | $                                         | 80,285  |   | $ | 64,115 |   | $ | 81,923 |   |
|                                                |   |                                      |    |   |   |   |   |
| Weighted-average shares outstanding:                |   |                                      |    |   |   |   |   |
| Basic                                               |   | 58,992                                    |    | 55,691 |   | 48,167 |   |
| Diluted                                             |   | 59,939                                    |    | 56,948 |   | 48,581 |   |
| Earnings per share:                                 |   |                                      |    |   |   |   |   |
| Basic                                               |   | $                                         | 1.36    |   | $ | 1.15 |   | $ | 1.70 |   |
| Diluted                                             |   | $                                         | 1.34    |   | $ | 1.13 |   | $ | 1.69 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

F-5

----

 

**LaBRANCHE& CO INC. and SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(000’somitted)**

 

 
|                                                                                 |   |              |   |       |   | **Preferred  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |    | **Unearned  Compensation** |   | **Total** |   |
|--------------------------------------------------------------------------------------|--------|-------------------|--------|------------|--------|----------------------|--------|----------------------------------|--------|------------------------|---------|----------------------------|--------|-----------|--------|
|                                                                                 |   | **Common  Stock** |   |       |   |                 |   |                             |
|                                                                                 |   | **Shares**        |   | **Amount** |   |                 |   |                             |   |                   |
| BALANCE,  December 31, 1999                                                          |   | 45,875            |   | $          | 459    |                 | — |                             | $      | 228,771                |    | $                          | 22,742 |      | — |   | $ | 251,972 |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Net income                                                                           |   | —            |   | —     |   | —               |   | —                           |   | 81,923                 |    | —                     |   | 81,923    |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Issuance of  shares to Webco                                                         |   | 2,800             |   | 28         |   | —               |   | 32,284                           |   | —                 |    | —                     |   | 32,312    |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Issuance of  restricted stocks, shares for option exercises and related compensation |   | 395               |   | 4          |   | —               |   | 12,292                           |   | —                 |    | (7,602                     | )      | 4,694     |   |
| BALANCE,  December 31, 2000                                                          |   | 49,070            |   | 491        |   | —               |   | 273,347                          |   | 104,665                |    | (7,602                     | )      | 370,901   |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Net income                                                                           |   | —            |   | —     |   | —               |   | —                           |   | 71,587                 |    | —                     |   | 71,587    |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Grant of stock  options to former RPM option Holders                                 |   | —            |   | —     |   | —               |   | 89,623                           |   | —                 |    | —                     |   | 89,623    |   |
| Issuance of  stock for option exercises by former RPM option holders                 |   | 1,255             |   | 13         |   | —               |   | 9,411                            |   | —                 |    | —                     |   | 9,424     |   |
| Issuance of  stock to former RPM stockholders                                        |   | 6,924             |   | 69         |   | —               |   | 260,463                          |   | —                 |    | —                     |   | 260,532   |   |
| Issuance of  preferred stock for RPM acquisition                                     |   | —            |   | —     |   | 93,426               |   | —                           |   | —                 |    | —                     |   | 93,426    |   |
| Preferred stock  discount accretion & dividends                                  |   | —            |   | —     |   | 1,105                |   | —                           |   | (7,472                 | )       | —                     |   | (6,367    | )      |
| Issuance of  stock related to other acquisitions                                     |   | 1,254             |   | 12         |   | —               |   | 29,993                           |   | —                 |    | —                     |   | 30,005    |   |
| Recognition of a  tax benefit related to employee option exercises                   |   | —            |   | —     |   | —               |   | 2,496                            |   | —                 |    | —                     |   | 2,496     |   |
| Issuance of  restricted stock, shares for option exercises and related compensation  |   | 231               |   | 2          |   | —               |   | 6,089                            |   | —                 |    | 640                        |   | 6,731     |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| BALANCE, December 31, 2001                                                           |   | 58,734            |   |       | 587    |                 |   | 94,531                           |   |                   | 671,422 |                       |   | 168,780   |   |   | (6,962 | ) |   | 928,358 |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Net income                                                                           |   | —            |   | —     |   | —               |   | —                           |   | 87,226                 |    | —                     |   | 87,226    |   |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| Preferred stock  discount accretion & dividends                                  |   | —            |   | —     |   | 2,994                |   | —                           |   | (6,941                 | )       | —                     |   | (3,947    | )      |
| Recognition of a  tax benefit related to employee option exercises                   |   | —            |   | —     |   | —               |   | 2,610                            |   | —                 |    | —                     |   | 2,610     |   |
| Issuance of  restricted stock, shares for option exercises and related compensation  |   | 770               |   | 8          |   | —               |   | 5,569                            |   | —                 |    | 6,028                      |   | 11,605    |   |
| Preferred stock  buyback                                                             |   | —            |   | —     |   | (36,164              | )      | —                           |   | —                 |    | —                     |   | (36,164   | )      |
|                                                                                 |   |              |   |       |   |                 |   |                             |   |                   |    |                       |   |      |   |
| BALANCE,  December 31, 2002                                                          |   | 59,504            |   | $          | 595    |                 | $      | 61,361                           |   | $                      | 679,601 |                       | $      | 249,065   |   | $ | (934 | ) | $ | 989,688 |   |
|                                                                                      |        |                   |        |            |        |                      |        |                                  |        |                        |         |                            |        |           |        |  |  |  |  |  |  |  |  |  |

 

The accompanying notesare an integral part of these consolidated statements.

 

F-6

----

 

**LaBRANCHE& CO INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(000’somitted)**

 
|                                                                                         |   | **For the Years Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                         |   | **2002**                                  |   | **2001** |   | **2000** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |   |                                      |   |   |   |   |   |
| Net income                                                                                   |   | $                                         | 87,226 |   | $ | 71,587 |   | $ | 81,923 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |                                      |   |   |   |   |   |
| Depreciation and amortization of intangibles                                                 |   | 13,446                                    |   | 39,450 |   | 18,476 |   |
| Amortization of debt issuance costs and bond discount                                        |   | 2,078                                     |   | 1,763 |   | 2,911 |   |
| Compensation expense related to stock-based  compensation                                    |   | 3,114                                     |   | 6,235 |   | 4,343 |   |
| Deferred tax benefit                                                                         |   | 11,734                                    |   | (5,694 | ) | (4,097 | ) |
| Acceleration of preferred stock discount accretion                                           |   | 1,844                                     |   | — |   | — |   |
| Tax benefit related to employee stock transactions                                           |   | 6,639                                     |   | 18,681 |   | 112 |   |
| Changes in operating assets and liabilities:                                                 |   |                                      |   |   |   |   |   |
| Cash and securities segregated under federal  regulations                                    |   | 62,356                                    |   | (74,758 | ) | (3,610 | ) |
| Securities purchased under agreements to resell                                              |   | 33,113                                    |   | 74,998 |   | (108,689 | ) |
| Receivable from brokers, dealers and clearing  organizations                                 |   | 32,142                                    |   | (114,038 | ) | (29,806 | ) |
| Receivable from customers                                                                    |   | (1,419                                    | )      | (10,093 | ) | (912 | ) |
| United States government obligations                                                         |   | (67,792                                   | )      | (328,048 | ) | 1,471 |   |
| Securities owned, corporate equities                                                         |   | 28,338                                    |   | (23,699 | ) | 16,174 |   |
| Securities owned, options                                                                    |   | 6,971                                     |   | (59,785 | ) | (8,664 | ) |
| Securities owned, other                                                                      |   | 1,022                                     |   | 4,427 |   | (2,937 | ) |
| Commissions receivable                                                                       |   | 592                                       |   | (964 | ) | (172 | ) |
| Other assets                                                                                 |   | (6,930                                    | )      | (47,341 | ) | (13,065 | ) |
| Payable to brokers and dealers                                                               |   | (23,116                                   | )      | 35,465 |   | (3,658 | ) |
| Payable to customers                                                                         |   | (41,268                                   | )      | 59,187 |   | 4,051 |   |
| Securities sold, but not yet purchased, corporate equities                                   |   | (20,311                                   | )      | 78,801 |   | 15,654 |   |
| Securities sold, but not yet purchased, options                                              |   | 4,873                                     |   | 50,650 |   | 8,172 |   |
| Accrued compensation                                                                         |   | 1,072                                     |   | 24,873 |   | 17,224 |   |
| Accounts payable and other accrued expenses                                                  |   | (40,644                                   | )      | 72,622 |   | 22,797 |   |
| Income taxes payable                                                                         |   | 411                                       |   | 4,424 |   | 5,025 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| Net cash provided by (used in) operating activities                                          |   | 95,491                                    |   | (121,257 | ) | 22,723 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |   |                                      |   |   |   |   |   |
| Net cash received from (paid for) acquisitions                                               |   | (3,376                                    | )      | 29,050 |   | (189,269 | ) |
| Payments for purchases of office equipment and  leasehold improvements                       |   | (2,683                                    | )      | (3,497 | ) | (2,754 | ) |
| Payment for purchase of an exchange membership                                               |   | —                                    |   | (2,000 | ) | — |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| Net cash (used in) provided by investing activities                                          |   | (6,059                                    | )      | 23,553 |   | (192,023 | ) |
|                                                                                         |   |                                      |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |   |                                      |   |   |   |   |   |
| Repayment of subordinated debt and promissory notes                                          |   | (37,531                                   | )      | (7,700 | ) | (10,573 | ) |
| Proceeds from exercise of stock options                                                      |   | 8,491                                     |   | 9,892 |   | 328 |   |
| Payment of preferred dividends                                                               |   | (7,238                                    | )      | (2,367 | ) | — |   |
| Payment for preferred stock buyback                                                          |   | (28,164                                   | )      | — |   | — |   |
| Net proceeds from long term debt                                                             |   | —                                    |   | — |   | 245,693 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| Net cash (used in) provided by financing activities                                          |   | (64,442                                   | )      | (175 | ) | 235,448 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| Increase (Decrease) in cash and cash equivalents                                             |   | 24,990                                    |   | (97,879 | ) | 66,148 |   |
| CASH AND CASH EQUIVALENTS, beginning of year                                                 |   | 52,043                                    |   | 149,922 |   | 83,774 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS, end of year                                                       |   | $                                         | 77,033 |   | $ | 52,043 |   | $ | 149,922 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:                                                    |   |                                      |   |   |   |   |   |
| Interest                                                                                     |   | $                                         | 46,022 |   | $ | 46,722 |   | $ | 29,609 |   |
| Income taxes                                                                                 |   | 65,513                                    |   | 65,700 |   | 88,443 |   |
|                                                                                         |   |                                      |   |   |   |   |   |
| SUPPLEMENTAL NON-CASH FINANCING AND INVESTING  ACTIVITIES:                                   |   |                                      |   |   |   |   |   |
| Acquisitions:                                                                                |   |                                      |   |   |   |   |   |
| Intangible assets                                                                            |   | $                                         | 4,665  |   | $ | 534,938 |   | $ | 171,936 |   |
| Fair value of tangible assets acquired, other than cash                                      |   | 2,825                                     |   | 229,665 |   | 33,863 |   |
| Deferred tax liabilities related to intangible assets                                        |   | 687                                       |   | 95,994 |   | 61,774 |   |
| Other liabilities                                                                            |   | 3,332                                     |   | 185,359 |   | — |   |
| Common stock issuance                                                                        |   | —                                    |   | 290,468 |   | 32,312 |   |
| Net increase in additional paid in-capital related to  stock-based awards                    |   | $                                         | 14,207 |   | $ | 108,259 |   | $ | 4,692 |   |

 

Theaccompanying notes are an integral part of these consolidated statements.

 

F-7

----

 

**LaBRANCHE &CO INC. and SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

## **1.**                                      ORGANIZATION ANDDESCRIPTION OF BUSINESS

 

The consolidated financial statements include theaccounts of LaBranche & Co Inc., a Delaware corporation (the “HoldingCompany”), and its subsidiaries, LaBranche & Co. LLC, a New York limitedliability company (“LaBranche”), LaBranche Financial Services, Inc., a New Yorkcorporation (“LFSI”), LaBranche Structured Products LLC, a New York limitedliability company (“LSP”), and LaBranche & Co. B.V. (“BV”), a Netherlandsprivate limited liability company (collectively with the Holding Company,LaBranche, LFSI, and LSP, the “Company”). The Holding Company is the solemember of LaBranche and LSP, the 100% stockholder of LFSI and the sole owner ofBV. LaBranche is a registered broker-dealer and operates primarily as aspecialist in equity securities listed on the New York Stock Exchange (the“NYSE”) and on the American Stock Exchange (the “AMEX”). LFSI is a registeredbroker-dealer and a member of the NYSE and other exchanges, and providessecurities clearing, securities execution and other related services to its ownindividual customers, customers of introducing brokers and institutionalcustomers, including traders, professional investors and broker-dealers. LFSIalso provides direct-access floor brokerage services to institutionalcustomers. LSP was organized in September 2002, and is a registeredbroker-dealer and operates as a specialist in options on the AMEX and acts as amarket-maker in Exchange Traded Funds (“ETFs”). BV was organized to represent LaBranche in European markets and toprovide client services to LaBranche’s European listed companies.

 

Asof December 31, 2001, Henderson Brothers, Inc. (“Henderson Brothers”) andInternet Trading Technologies, Inc. (“ITTI”), former subsidiaries of theHolding Company, were merged with and into another Holding Company subsidiary,ROBB PECK McCOOEY Clearing Corporation (“RPM Clearing Corporation”), whichchanged its name to LFSI in January 2002.

## ** **

## **2.**                                      SIGNIFICANTACCOUNTING POLICIES

### * *

### *Basis of Presentation*

 

The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.Management does not believe that actual results will differ materially fromthese estimates. Certain prior period amounts have been reclassified to conformwith current presentation.

* *

*Basis of Consolidation*

 

The consolidatedfinancial statements include the accounts of the Holding Company and itswholly-owned subsidiaries. All inter-company balances and transactions areeliminated in consolidation.

 

F-8

----

 

### *Cash and Cash Equivalents*

 

Cash and cash equivalentsconsist of cash and highly liquid investments with original maturities of lessthan 90 days.

### * *

### *Securities Transactions*

 

Principal securitiestransactions and the related gains and losses are recorded on a trade datebasis. Customer securities transactions and the related revenues and expensesare recorded on a settlement date basis. Receivables from and payables tocustomers represent amounts due from or to customers of the Company inconnection with cash and margin securities transactions. Amounts receivable arecollateralized by customers’ securities held by the Company and by otherbroker-dealers for delivery to the Company, the value of which is not reflectedin the accompanying consolidated financial statements. Corporate equities,options and other securities owned, and securities sold, but not yet purchased,are reflected at market value and unrealized gains and losses are reflected innet gain on principal transactions. United States Government obligations,together with related interest receivable as reported in other assets, arereflected at market value, with interest income included in other income.Dividends and Securities and Exchange Commission (“SEC”) fees are also includedin net gain on principal transactions. Dividend income and expense arerecognized on the record date, which does not differ materially from theex-date. In the normal course of business, the Company is permitted to useclient margin securities to finance customer securities transactions, subjectto certain regulatory guidelines. The market value for the equity securitiesfor which the Company acts as specialist on both the AMEX and NYSE is based onthe closing price posted by the exchange on which they are traded. The marketvalue for ETFs and futures contracts is also based on the closing price postedon the exchange on which they are traded. The market value of exchange-tradedoptions is based on the national best bid/offer as determined by the Company’soptions clearing agent.

 

Investments innon-marketable securities consist of private equity, limited liability companyand limited partnership investments, and are included in other assets on thestatement of financial condition. These investments do not have readilyavailable price quotations. These investments are accounted for under theequity method, which approximates fair value, or are accounted for at fairvalue as estimated by management of the Company. In determining the estimatedfair value, the Company considers all appropriate factors relevant to suchinvestments and consistently applies the procedures for arriving at fair value.Gains and losses related to changes in fair value are included in otherrevenues in the accompanying consolidated statement of operations.

### * *

*Collateralized Financing Transaction*s

 

Securities purchased andsold under agreements to resell and repurchase, as well as securities borrowedand loaned for which cash is deposited or received, are treated ascollateralized financing transactions and are recorded at contract amount plusaccrued interest. It is the policy of the Company to obtain possession ofcollateral with market value equal to or in excess of the principal amountloaned under resale agreements. Collateral is valued daily, and the Company mayrequire counterparties to deposit additional collateral when appropriate. Themarket value of securities received for securities purchased under agreementsto resell at

 

F-9

----

 

December 31, 2002 approximated 102.0% of cash paid. None of thesecurities received were subsequently repledged or resold.

### * *

### *Goodwill and Other Intangible Assets*

 

Goodwill and otherintangible assets are comprised of the Company’s specialist stock lists, tradename and goodwill acquired in connection with various acquisitions and thelimited partner buyout that occurred in concurrence with its reorganizationfrom partnership to corporate form. The allocations of purchase price to theseassets and determinations of their respective useful lives were based uponindependent appraisals for all acquisitions through March 2001. The usefullives of the acquired specialist stock lists were determined based uponanalysis of historical turnover characteristics of the specialist stockscomprising these lists. For acquisitions subsequent to March 2001, theallocations of purchase price and determinations of useful lives were basedupon management’s analysis of revenues, consideration paid, common stocklistings and other relevant data and ratios. This information was analyzed andcompared to the results of the independent appraisals conducted in connectionwith the acquisitions prior to April 2001.

 

With the adoption ofStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets” on January 1, 2002, which was issued by the FinancialAccounting Standards Board (“FASB”), the acquired trade name and goodwill areno longer amortized. The acquired specialist stock lists, however, willcontinue to be amortized over their respective lives. The Company will testgoodwill for impairment on a regular basis or when events and circumstancesindicate an impairment may be necessary by applying a fair-value based test.The fair-value test involves the comparison of the fair value to the carryingvalue of the reporting units. The fair value of the reporting units isdetermined using both the market capitalization of the Company and the presentvalue of the Company’s estimated future cash flows based on certain managementassumptions. If the carrying amount of the reporting unit exceeds its estimatedfair value, the Company will determine if impairment is necessary throughadditional testing. Additionally, the Company will test the specialist stocklists and trade name intangible assets whenever events or circumstancesindicate that their carrying amount may not be recoverable. If the carrying valueof the specialist stock lists and trade name exceeds their fair value, animpairment loss would be recognized for the excess of carrying value over fairvalue.

### * *

### *Exchange Memberships*

 

Exchange membershipsowned by the Company are carried at cost, or if a non-temporary impairment invalue has occurred, at a value that reflects management’s estimate of theimpairment.

 

Certain employees of theCompany have contributed the use of thirteen memberships on the NYSE and onemembership on the AMEX to the Company. These memberships are subordinated toclaims of general creditors and are carried at market value with acorresponding amount recorded in subordinated liabilities. Lease payments arepaid by the Company to these employees for the use of the exchange membershipsat a rate that is commensurate with the rent paid to nonaffiliated parties forthe use of their exchange memberships.

 

F-10

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The Company leasesadditional memberships on the NYSE and AMEX from nonaffiliated parties andmakes lease payments to these parties at the prevailing market rates.

 

### *Depreciation and Amortization*

 

Depreciation of officeequipment and amortization of leasehold improvements are calculated using thestraight-line method over the estimated useful lives of the office equipmentand the lesser of the economic useful life of the leasehold improvement or theterm of the lease.

 

Prior to the adoptionSFAS No. 142, the specialist stock lists and trade name were being amortized ona straight-line basis over 15 to 40 years and the goodwill was beingamortized on a straight-line basis over 15 years. With the implementationof SFAS No. 142 in January 2002, the Company has ceased the amortization ofrecorded goodwill and the trade name intangible asset, and thus it will nolonger be included in the results of operations. The acquired specialist stocklists will continue to be amortized over their respective lives.

* *

*Stock Based Compensation*

 

For the year endingDecember 31, 2002, and prior years, the Company elected to account forstock-based employee compensation plans in accordance with AccountingPrinciples Board Opinion (“APB”) No. 25,"Accounting for Stock Issuedto Employees" as permitted by SFAS No. 123, "Accounting forStock-Based Compensation". In accordance with APB No. 25,compensation expense was not recognized for stock options that had no intrinsicvalue on the date of grant.

 

Compensation expense alsowas not recognized for options issued as part of purchase accounting for theacquisition of RPM. The Company determined the estimated fair-value of optionsgranted during 1999 was $4.97 per option granted, the weighted averagefair-value of options granted to employees during 2001 was $23.65 per optionand the weighted average fair-value of options granted during 2002 was $21.95per option. Fair-value is estimated as of the grant date based on a BlackScholes option pricing model using the following assumptions:

 
|                    |   | **Options Granted in:** |   |
|-------------------------|--------|-------------------------|--------|
|                    |   | **October 2002**        |   | **January 2002** |   | **March 2001** |   | **January 2001** |   | **August 1999** |   |
| Risk-free interest rate |   | 3.89                    | %      | 4.94 | % | 4.89 | % | 4.89 | % | 5.25 | % |
| Expected life           |   | 6 yrs                   |   | 7 yrs |   | 7 yrs |   | 7 yrs |   | 7 yrs |   |
| Volatility              |   | 51                      | %      | 64 | % | 66 | % | 64 | % | 40 | % |
| Dividend yield          |   | 0                       | %      | 0 | % | 0 | % | 0 | % | 0 | % |

 

If the Company hadrecognized compensation expense under the fair-value based method of SFASNo. 123, using the fair-values indicated, its net income would havedecreased by approximately $7.2 million, $1.8 million and $0.8 million for theyears ended December 31, 2002, 2001 and 2000, respectively, resulting in proforma net income and earnings per share as follows:

 

F-11

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|                                                                |   | **Years  Ended December 31,** |   |
|---------------------------------------------------------------------|--------|-------------------------------|--------|
| **(000’s omitted, except per share data)**                     |   | **2002**                      |   | **2001** |   | **2000** |   |
|                                                                |   |                          |   |   |   |   |   |
| Net  income available to common stockholders, asreported            |   | $                             | 80,285 |   | $ | 64,115 |   | $ | 81,923 |   |
| Stock  based compensation expense under SFAS 123(net of tax effect) |   | 7,212                         |   | 1,824 |   | 817 |   |
| Pro  forma net income available to commonstockholders               |   | 73,073                        |   | 62,291 |   | 81,106 |   |
| Diluted  EPS, as reported                                           |   | 1.34                          |   | 1.13 |   | 1.69 |   |
| Pro  forma diluted EPS                                              |   | 1.22                          |   | 1.09 |   | 1.67 |   |
|                                                                     |        |                               |        |  |  |  |  |  |  |  |

 

The effect of applying SFAS No. 123 in the proforma disclosure above may not be representative of the potential pro formaeffect on net income in future periods.

 

### *New Accounting Pronouncements*

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No.146 requires that a liability for a cost associated with an exit or disposalactivity be recognized at fair value when the liability is incurred. SFAS No.146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002. The Company does not believe the implementation of SFAS No.146 will have a material impact on its financial statements.

 

In November 2002, the FASB issued FASB InterpretationNo. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45details the required disclosures to be made about obligations under certainissued guarantees and requires the recognition of a liability for the fairvalue of the guarantee. The initial recognition and measurement provisions areapplicable on a prospective basis to guarantees issued after December 31, 2002.The disclosure requirements are effective for financial statements ending afterDecember 15, 2002. The Company does not believe the implementation of FIN 45will have a material impact on its financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure, an Amendment of FASBStatement No. 123.” SFAS No. 148 provides two additional methods, the modifiedprospective and the retroactive restatement methods, for an entity thatvoluntarily changes to the fair-value based method of accounting forstock-based employee compensation, in addition to the prospective methodrequired by SFAS No. 123. Prior to January 1, 2003, the Company elected toaccount for stock based employee compensation in accordance with APB No. 25. InOctober 2002, the Company’s board of directors approved the implementation ofprocedures to account for stock-based employee compensation issued on or afterJanuary 1, 2003 in accordance with the prospective fair value method. Under thisnew method, compensation expense will be recognized over the related serviceperiod based on the fair value of stock options on the date of grant. TheCompany does not believe the implementation of SFAS No. 148 will have amaterial impact on its financial statements. The Company will assess thepotential impact of SFAS No. 142 on future awards of stock options.

 

F-12

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In January 2003, the FASB issued FIN 46,“Consolidation of Variable Interest Entities.” FIN 46 requires a company toconsolidate a variable interest entity (VIE) if the company has variableinterests that give it a majority of the expected losses or a majority of theexpected residual returns of the entity. FIN 46 is effective immediately forVIEs created after January 31, 2003. Included in other assets on the Company’sstatement of financial condition are nonmarketable investments totaling $19.4million and $10.5 million as of December 31, 2002 and 2001, respectively. Theseinvestments consist of equity interests in private corporations, investments inlimited liability companies and an investment in a limited liabilitypartnership. These investments were made prior to January 1, 2002 at thediscretion of management in order to leverage new trading technologies and helpmanage the Company’s cost structure. Certain investments were assumed inconnection with one of the Company’s 2001 acquisitions. As of December 31,2002, there were no material future contractual commitments in regard to theseinvestments. The Company is currently evaluating the impact of FIN 46 on theseinvestments, and it does not believe FIN 46 will have a material impact on itsfinancial statements.

 

## **3.**                                   RECEIVABLEFROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS

 

The balances presented as receivables from andpayables to brokers, dealers and clearing organizations consist of thefollowing:

 
|                                                          |   | **For the  Years Ended  December 31,** |    |
|---------------------------------------------------------------|--------|----------------------------------------|---------|
| **(000’s omitted)**                                      |   | **2002**                               |    | **2001** |   |
|                                                          |   |                                   |    |   |   |
| Receivable  from brokers, dealers and clearing organizations: |   |                                   |    |   |   |
| Pending  trades, net                                          |   | $                                      | 24,373  |   | $ | — |   |
| Securities  borrowed                                          |   | 50,348                                 |    | 103,356 |   |
| Receivable  from clearing organizations                       |   | 49,050                                 |    | 56,175 |   |
| Securities  failed to deliver                                 |   | 19,943                                 |    | 16,552 |   |
| Other  receivables from brokers and dealers                   |   | 1,673                                  |    | 1,423 |   |
|                                                          |   | $                                      | 145,387 |   | $ | 177,506 |   |
|                                                          |   |                                   |    |   |   |
| Payable  to brokers and dealers:                              |   |                                   |    |   |   |
| Pending  trades, net                                          |   | $                                      | —  |   | $ | 18,209 |   |
| Securities  failed to receive                                 |   | 11,773                                 |    | 12,102 |   |
| Securities  loaned                                            |   | —                                 |    | 8,050 |   |
| Other  payables to brokers and dealers                        |   | 4,644                                  |    | 1,172 |   |
|                                                          |   | $                                      | 16,417  |   | $ | 39,533 |   |

 

With respect to securitiesloaned, the Company receives collateral in the form of cash in an amount inexcess of the market value of securities loaned. If the Company’scounterparties to its securities loaned transactions have the right by contractor custom to sell or repledge the Company’s pledged proprietary securities,then the Company will disclose these securities as “securities pledged tocounterparties” on the accompanying consolidated statement of financial condition.As of December 31, 2002, there were no proprietary or customer securitiespledged

 

F-13

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related to the Company’ssecurities loaned transactions included in securities pledged tocounterparties.

 

The Company monitors the marketvalue of securities borrowed and loaned on a daily basis, with additionalcollateral obtained or refunded as necessary.

** **

**4.             GOODWILL AND OTHER INTANGIBLE ASSETS**

 

In July 2001, the FASB issued SFAS No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141addresses financial accounting and reporting for goodwill and other intangibleassets acquired in a business combination, requiring that the purchase methodof accounting be used in all business combinations initiated after June 30,2001. SFAS No. 142 addresses financial accounting and reporting for acquiredgoodwill and other intangible assets acquired individually or with a group ofassets.

 

Under the new standard, acquired trade name andgoodwill is no longer be amortized; instead these assets will be tested atleast annually for impairment by applying a fair-value based test. TheCompany’s acquired specialist stock lists will continue to be amortized overtheir respective lives. Accordingly, effective January 1, 2002, the Companyceased amortization of acquired goodwill and trade name. During the secondquarter of 2002, the Company performed the required impairment tests on thegoodwill as of December 31, 2001 and determined that there was no impairment.In addition, as of December 31, 2002, management determined that there was noimpairment of the Company’s specialist stock lists or trade name. However, itis possible that in the future, after periodic testing, the Company may incur impairmentcharges related to the carrying value of acquired goodwill and intangibleassets recorded in its financial statements.

 

The reported net income and Earnings per Share(“EPS”), as adjusted to exclude amortization of goodwill and trade name, areset forth below:

 
|                                                      |   | **For the  Years Ended December 31,** |   |
|-----------------------------------------------------------|--------|---------------------------------------|--------|
| **(000’s omitted)**                                  |   | **2002**                              |   | **2001** |   | **2000** |   |
| Net income  available to common stockholders, as reported |   | $                                     | 80,285 |   | $ | 64,115 |   | $ | 81,923 |   |
| Net income  available to common stockholders, as adjusted |   | 80,285                                |   | 92,568 |   | 95,094 |   |
|                                                      |   |                                  |   |   |   |   |   |
| EPS, as reported                                          |   |                                  |   |   |   |   |   |
| Basic                                                     |   | $                                     | 1.36   |   | $ | 1.15 |   | $ | 1.70 |   |
| Diluted                                                   |   | 1.34                                  |   | 1.13 |   | 1.69 |   |
| EPS, as adjusted                                          |   |                                  |   |   |   |   |   |
| Basic                                                     |   | $                                     | 1.36   |   | $ | 1.66 |   | $ | 1.97 |   |
| Diluted                                                   |   | 1.34                                  |   | 1.62 |   | 1.96 |   |

 

The net carrying value of goodwill increased approximately$0.6 million from $470.0 million as of December 31, 2001 to $470.6 million asof December 31, 2002. The increase was due to the recognition of $4.6 millionof goodwill as the result of the acquisition of Hochstin & Company, Inc.(“Hochstin”), and was partially offset by $4.0 million of tax benefitassociated

 

F-14

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with the exercise ofoptions, which the Company assumed as a part of the acquisition of ROBB PECKMcCOOEY Financial Services, Inc. (“RPM”).

 

Under the new standard, the Company’s acquiredspecialist stock lists will continue to be amortized over their respectivelives ranging from 15 to 40 years, with a weighted-average amortization periodof 39.6 years. The gross carrying amount, accumulated amortization and netcarrying amount of the Company’s acquired specialist stock lists are set forthbelow:

 
| **(000’s omitted)** |   | **As of  December 31, 2002** |    | **As of  December 31, 2001** |   |
|--------------------------|--------|------------------------------|---------|------------------------------|--------|
|                     |   |                         |    |                         |   |
| Gross carrying amount    |   | $                            | 406,190 |                         | $      | 406,190 |   |
| Accumulated amortization |   | (24,234                      | )       | (13,858                      | )      |
| Net carrying amount      |   | $                            | 381,956 |                         | $      | 392,332 |   |

 

Amortization expense associated with the Company’sacquired specialist stock lists was $10.4 million, $8.7 million and $4.4million for the years ended December 31, 2002, 2001 and 2000, respectively.Estimated amortization expense for the existing specialist stock lists is $10.4million for each of the fiscal years ending December 31, 2003 through December31, 2007.

 

## **5.**                                   INCOMETAXES

 

The Company accounts for taxesin accordance with SFAS No. 109, “Accounting for Income Taxes,” which requiresthe recognition of tax benefits or expenses on temporary differences betweenthe financial reporting and tax bases of its assets and liabilities. Deferredtax assets and liabilities relate to stock-based compensation, amortizationperiods of certain intangibles and differences between the financial and taxbasis of assets acquired. The Company’s effective tax rate differs from thefederal statutory rate primarily due to the non-deductible amortization ofintangible assets and state and local taxes.

 

Tax benefits of approximately$6.6 million and $18.7 million for the years ended December 31, 2002 and 2001,respectively, related to the delivery of restricted stock units and restrictedstock and the exercise of options, were credited directly to goodwill oradditional paid-in capital in the consolidated statements of financialcondition and changes in stockholders’ equity.

 

The net operating losscarryforwards, as a result of the acquisition of ITTI, totaled $1.8 million and$2.0 million, as of December 31, 2002 and 2001, respectively. The utilizationof the losses is limited under Section 382 of the Internal Revenue Code to $0.2million per year as a deduction. These losses will begin expiring between 2019and 2021.

 

The components of provision for income taxes reflectedon the consolidated statements of operations are set forth below:

 
|                     |   | **For the Years Ended December 31,** |   |
|--------------------------|--------|--------------------------------------|--------|
| **(000’s omitted)** |   | **2002**                             |   | **2001** |   | **2000** |   |
| Current Income Taxes:    |   |                                 |   |   |   |   |   |
| Federal                  |   | $                                    | 43,592 |   | $ | 58,538 |   | $ | 61,123 |   |
| Foreign, State and Local |   | 23,572                               |   | 32,280 |   | 27,628 |   |
| Total Current            |   | 67,164                               |   | 90,818 |   | 88,751 |   |
|                     |   |                                 |   |   |   |   |   |
| Deferred Income Taxes:   |   |                                 |   |   |   |   |   |
| Federal                  |   | 7,615                                |   | (3,670 | ) | (2,822 | ) |
| Foreign, State and Local |   | 4,119                                |   | (2,024 | ) | (1,275 | ) |
| Total Deferred           |   | 11,734                               |   | (5,694 | ) | (4,097 | ) |
|                     |   |                                 |   |   |   |   |   |
| Total Income Tax Expense |   | $                                    | 78,898 |   | $ | 85,124 |   | $ | 84,654 |   |

 

F-15

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The following table presents thecomponents of deferred tax asset and liability balances:

 
|                           |   | **For the Years Ended December 31,** |    |
|--------------------------------|--------|--------------------------------------|---------|
| **(000’s omitted)**       |   | **2002**                             |    | **2001** |   |
|                           |   |                                 |    |   |   |
| Deferred Tax Assets:           |   |                                 |    |   |   |
| Deferred compensation          |   | $                                    | 16,301  |   | $ | 16,521 |   |
| Other                          |   | 4,434                                |    | 1,565 |   |
| Total Deferred Tax Assets      |   | $                                    | 20,735  |   | $ | 18,086 |   |
|                           |   |                                 |    |   |   |
| Deferred Tax Liabilities:      |   |                                 |    |   |   |
| Acquisitions                   |   | $                                    | 170,497 |   | $ | 161,550 |   |
| Other                          |   | 9,427                                |    | 3,991 |   |
| Total Deferred Tax Liabilities |   | $                                    | 179,924 |   | $ | 165,541 |   |

 

A reconciliation of the statutory U.S. Federal IncomeTax Rate of 35.0% to the Company’s effective income tax rate is set forthbelow:

 
|                                    |   | **For the Years Ended December 31,** |   |
|-----------------------------------------|--------|--------------------------------------|--------|
|                                    |   | **2002**                             |   | **2001** |   | **2000** |   |
|                                    |   |                                 |   |   |   |   |   |
| U.S. Federal Income tax rate            |   | 35.0                                 | %      | 35.0 | % | 35.0 | % |
| Increase(decrease) in taxes related to: |   |                                 |   |   |   |   |   |
| State and local taxes                   |   | 11.1                                 |   | 11.4 |   | 11.6 |   |
| Merger related costs and other costs    |   | 2.5                                  |   | 8.3 |   | 4.5 |   |
| Other                                   |   | (1.1                                 | )      | (0.4 | ) | (0.3 | ) |
| Effective tax rate                      |   | 47.5                                 | %      | 54.3 | % | 50.8 | % |

 

## **6.**                                   CAPITALAND NET LIQUID ASSET REQUIREMENTS

 

LaBranche, as a specialist and member of the NYSE andAMEX, is subject to SEC Rule 15c3-1 as adopted and administered by theNYSE, AMEX and the SEC. LaBranche is required to maintain minimum net capital,as defined, equivalent to the greater of $100,000 or 1/15 of aggregateindebtedness, as defined.

 

F-16

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As of December 31, 2002 and 2001, LaBranche’s netcapital, as defined under SEC Rule 15c3-1, was $472.0 million and$484.2 million, respectively, which exceeded minimum requirements by$467.4 million and $481.4 million, respectively. LaBranche’saggregate indebtedness to net capital ratio was .15 to 1 and .09 to 1, as ofDecember 31, 2002 and 2001, respectively.

 

The NYSE generally requires itsspecialist firms to maintain a minimum dollar regulatory capital amount inorder to establish that they can meet, with their own net liquid assets, theirposition requirement. Effective October 30, 2000, with SEC approval, theNYSE changed Rule 104, its minimum net liquid asset requirements. Specialistunits that exceed five percent in any of the NYSE’s four concentration measuresmust maintain minimum net liquid assets based upon the securities for whichthey act as the specialist. The requirements state that the net liquid assetsmust be equivalent to $4.0 million for each stock in the Dow Jones IndustrialAverage, $2.0 million for each stock in the S&P 100 Stock Price Index,excluding stocks included in the previous classification, $1.0 million for eachstock in the S&P 500 Stock Price Index, excluding stock included in theprevious classifications, $500,000 for each common stock, excluding bond fundsand stocks included in the previous classifications, and $100,000 for eachstock not included in any of the above classifications. In addition, the NYSErequires any new specialist entities that result from a merger, acquisition,consolidation or other combination of specialist entities to maintain netliquid assets equivalent to the greater of either: (1) the aggregate net liquidassets of the specialist entities prior to their combination or (2) the newcapital requirements prescribed under Rule 104. Net liquid assets for aspecialist who also engages in transactions other than specialist activities isbased upon its excess net capital as determined in accordance with SEC Rule15c3-1.

 

LaBranche’s net liquid asset requirement was $446.0million as of December 31, 2002 and 2001. LaBranche’s actual net liquid assetswere approximately $465.2 and $491.5 million as of December 31, 2002 and 2001,respectively.

 

The AMEX generally requires its equity specialistfirms to maintain a cash or liquid asset position of the greater of (a)$600,000, or (b) an amount sufficient to assume a position of sixty tradingunits of each security in which the specialist is registered. Because LaBrancheadheres to the NYSE’s net liquid asset requirements, it automatically satisfiesthe AMEX liquid asset requirements.

 

As a registered broker-dealer and member firm of theNYSE, LFSI is also subject to SEC Rule 15c3-1 as adopted and administered bythe NYSE and the SEC. Under the alternative method permitted by this rule, theminimum required net capital is equal to the greater of $1.5 million or 2% ofaggregate debit items as defined. As of December 31, 2002, LFSI’s net capital,as defined under SEC Rule 15c3-1, was $19.4 million and exceeded minimumrequirements by $17.9 million. As of December 31, 2001, the combined netcapital, as defined under SEC Rule 15c3-1, of Henderson Brothers and RPMClearing Corporation was $20.5 million which exceeded minimum requirements by$19.7 million.

 

As a clearing broker-dealer, LFSI has elected tocompute a reserve requirement for Proprietary Accounts of IntroducingBroker-Dealers (“PAIB Calculation”), as defined. The PAIB Calculation iscomputed in order for correspondent firms to classify their assets held by LFSIas

 

F-17

----

 

allowable assets in thecorrespondents’ net capital calculation. At December 31, 2002 the reserverequirement was approximately $11.3 million. LFSI had cash and securities ondeposit in a Special Reserve Bank Account of $21.9 million as of January 3,2003, to comply with its December 31, 2002 requirements. At December 31, 2001,the combined reserve requirement of Henderson Brothers and RPM ClearingCorporation was approximately $23.3 million. These subsidiaries had combinedcash and securities on deposit in a special reserve bank account of $24.8million as of January 3, 2002, to comply with the December 31, 2001requirement.

 

As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered by theAMEX. LSP is required to maintain minimum net capital, as defined, equivalentto the greater of $100,000 or 1/15 of aggregateindebtedness, as defined. As of December 31, 2002, LSP’s net capital, asdefined under SEC Rule 15c3-1, was $6.9 million, which exceeded minimumrequirements by $6.8 million.

 

## **7.**                                   ACQUISITIONS

 

Effective March 2, 2000, the Holding Company acquiredall the outstanding capital stock of Henderson Brothers Holdings, Inc., whichin turn wholly owned Henderson Brothers, a specialist on the NYSE, for anaggregate purchase price of approximately $228.4 million. The acquisition wasaccounted for under the purchase method of accounting. The results of HendersonBrothers’ operations have been included in the Company’s consolidated financialstatements since March 3, 2000. The excess of purchase price over fair value ofnet tangible assets of approximately $204.9 million was allocated to intangibleassets with corresponding respective lives as follows: 

 
| **(In millions)**     |   | **Original  Amount** |   | **Life**  |      |
|-----------------------|--------|----------------------|--------|-----------|-----------|
|                  |   |                 |   |      |      |
| Specialist Stock List |   | $                    | 87.7   |      | 40  years |   |
| Goodwill              |   | 117.2                |   | 15  years |      |
|                  |   |                 |   |      |      |
|                  |   | $                    | 204.9  |      |      |   |

 

Effective March 9, 2000, the Holding Company acquired,through a merger, Webco Securities, Inc. (“Webco”), a specialist on the NYSE,for an aggregate purchase price of $11.0 million in cash, $3.0 million insenior promissory notes and 2.8 million shares of the Company’s common stock.The acquisition was accounted for under the purchase method of accounting. Theresults of Webco’s specialist operations have been included in the Company’sconsolidated financial statements since March 10, 2000. The excess of purchaseprice over fair value of net tangible assets of approximately $28.8 million wasallocated to intangible assets with corresponding respective lives as follows: 

 
| **(In millions)**     |   | **Original  Amount** |   | **Life**  |      |
|-----------------------|--------|----------------------|--------|-----------|-----------|
|                  |   |                 |   |      |      |
| Specialist Stock List |   | $                    | 9.8    |      | 36  years |   |
| Goodwill              |   | 19.0                 |   | 15  years |      |
|                  |   |                 |   |      |      |
|                  |   | $                    | 28.8   |      |      |   |

 

F-18

----

 

Effective December 21, 2000, LaBranche acquired anAMEX specialist unit from a joint venture of Midland Trading L.P., Pal-BroPartners L.L.C. and Cohen Specialists L.L.C. The acquisition was accounted forunder the purchase method of accounting. The results of the AMEX specialistunit operations have been included in the Company’s consolidated financialstatements since December 22, 2000. The excess of purchase price over fairvalue of net tangible assets of approximately $3.8 million was allocated togoodwill.

 

Effective March 13, 2001, the Holding Company acquiredall the outstanding capital stock of ITTI, a company that provided front-endorder execution, analysis and reporting solutions for the wholesale securitiesdealer market. The excess of purchase price over fair value of net tangibleassets of approximately $4.3 million was allocated to goodwill.

 

Effective March 15, 2001, the Holding Companyacquired, through a merger, RPM for an aggregate of approximately 6.9 millionshares of the Company’s common stock and shares of the Company’s nonconvertiblepreferred stock having an aggregate face and liquidation value of approximately$100.0 million and a fair value of approximately $93.4 million. Each share of the Series A preferred stockentitles the holder thereof to cumulative preferred cash dividends at an annualrate of 8% for the first four years, 10% for the fifth year and 10.8%thereafter, certain voting rights and preferred distributions upon liquidation.In addition, the Company assumed RPM’s obligations under RPM’soutstanding option agreements with its employees. Thus, each option to purchaseRPM common stock was converted into a vested option to purchase 98.778 sharesof the Company’s common stock. The acquisition was accounted for under thepurchase method of accounting and the results of RPM’s operations have beenincluded in the Company’s consolidated financial statements since March 16,2001. The excess of purchase price over fair value of net tangible assets ofapproximately $452.5 million was allocated to intangible assets withcorresponding respective lives as follows: 

 
| **(In millions)**     |   | **Original  Amount** |   | **Life**  |      |
|-----------------------|--------|----------------------|--------|-----------|-----------|
|                  |   |                 |   |      |      |
| Specialist Stock List |   | $                    | 180.0  |      | 40  years |   |
| Goodwill              |   | 272.5                |   | 15  years |      |
|                  |   |                 |   |      |      |
|                  |   | $                    | 452.5  |      |      |   |

 

Effective August 13, 2001, LaBranche acquired all theassets relating to the AMEX stocks and options specialist operations of Cranmer& Cranmer, Inc. (“Cranmer”) for an aggregate of approximately $9.2 million,100,000 shares of the Company’s common stock and an amount equal to the equitycapital of Cranmer, including the net value of Cranmer’s open securitypositions on the closing date of the acquisition. The excess of purchase priceover fair value of net tangible assets of approximately $14.0 million wasallocated to specialist stock list and goodwill. The acquisition was accountedfor under the purchase method of accounting. The results of the AMEX specialistoperations formerly conducted by Cranmer have been included in the Company’sconsolidated financial statements since August 14, 2001.

 

Effective September 20, 2001, LaBranche acquired theinterests in the Freedom Specialist Inc. (“Freedom”), R. Adrian & Company,LLC (“Adrian”) and LaBranche Joint Book (the “Joint

 

F-19

----

 

Book”) which it did notpreviously own for an aggregate of approximately $13.6 million in cash, 54,750shares of the Company’s common stock and an amount equal to Freedom’s andAdrian’s respective shares of the equity capital of the Joint Book on theclosing date of the acquisition. The acquisition was accounted for under thepurchase method of accounting. The excess of purchase price over fair value ofnet tangible assets of approximately $15.0 million was allocated to specialiststock list and goodwill. The results of the operations formerly conducted bythe Joint Book in which LaBranche previously did not own an interest have beenincluded in the Company’s consolidated financial statements since September 21,2001.

 

Effective October 18, 2001, LaBranche acquired Bocklet& Company, LLC (“Bocklet”) for an aggregate of $20.0 million in cash, ofwhich $5.0 million was paid upon the closing and the remaining amount was paidin equal installments three, six and nine months from the closing date, and1,100,000 shares of the Company’s common stock. In addition, an amount equal tothe equity capital of Bocklet on the closing date of the acquisition was paidin equal installments three, six and nine months from the closing date. Theacquisition was accounted for under the purchase method of accounting. Theexcess of purchase price over fair value of net tangible assets ofapproximately $53.4 million was allocated to specialist stock list andgoodwill. The results of the operations formerly conducted by Bocklet have beenincluded in the Company’s financial statements since October 19, 2001.

 

Effective October 24, 2002, the Holding Companyacquired all the outstanding stock of Hochstin, which conducted a rightsspecialist and floor brokerage business on the NYSE, for an aggregate of $7.8million in cash. Of the $7.8 million consideration, $3.6 million was paid atthe closing and the remainder is to be paid by the Holding Company as follows:(a) $1.0 million on each of October 24, 2003, 2004 and 2005, and (b) $1.2million on October 24, 2007, although the final payment may be reduced to$200,000 if the employment with LFSI of a certain former employee of Hochstinis either terminated by LFSI for cause or is terminated by such employeevoluntarily prior to October 24, 2007. The acquisition was accounted for underthe purchase method of accounting. The Company finalized its purchaseaccounting during the fourth quarter of 2002. The excess of purchase price overfair value of net intangible assets of approximately $4.6 million was allocatedto goodwill at LaBranche, which is part of our specialist segment. The goodwillwill not be deductible for income tax purposes. The results of operationsformerly conducted by Hochstin have been included in the Company’s financialstatements since October 24, 2002.

 

## **8.**                                   COMMITMENTSAND CONTINGENCIES

 

In February 2002, LaBranche extended its $200.0million committed line-of-credit with a U.S. commercial bank until February 27,2003. In October 2002, LaBranche entered into an amended and restated creditagreement regarding this committed line-of-credit, pursuant to which theline-of-credit was extended to October 31, 2003. The line-of-credit may beextended by LaBranche, subject to the bank’s approval, for additional one-yearterms by giving written notice to the bank at least 30 days prior to thethen-current scheduled termination date. Borrowings under this U.S. commercialbank credit facility would be secured by the inventory of specialist stocks andwould bear interest at the U.S. commercial bank’s broker loan rate. To date,

 

F-20

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LaBranche has notutilized this facility. In order to maintain the availability of funds underthis credit facility, LaBranche must comply with certain customary covenants.

 

The Company has entered into long-term noncancelablelease agreements for certain office space and equipment, which expire atvarious dates through 2008. Certain lease agreements contain escalation clausesproviding for increased rental payments based on increases in maintenancecharges and real estate taxes. Minimum future rental commitments under existingnoncancelable leases for office space and equipment are as follows:

 

| **Year Ending December 31,** |   |      |      |
|------------------------------|--------|-----------|-----------|
|                         |   |      |      |
| 2003                         |   | $         | 3,123,013 |   |
| 2004                         |   | 2,580,778 |      |
| 2005                         |   | 2,507,845 |      |
| 2006                         |   | 1,727,033 |      |
| 2007                         |   | 1,424,318 |      |
| Thereafter                   |   | 291,966   |      |
|                              |        |           |           |  |

 

The Company and, in particular, certain of thebusiness operations conducted by LFSI’s predecessor in interest, RPM ClearingCorporation have been the target, from time to time, of various claims andlawsuits incidental to the ordinary course of their respective businesses.While the ultimate outcome of those claims and lawsuits which currently arepending cannot be predicted with certainty, the Company believes, based on theunderstanding of the facts of these proceedings, that their ultimate resolutionwill not, in the aggregate, have a material adverse effect on the Company’sfinancial condition or results of operations.

 

## **9.**                                   SUBORDINATEDLIABILITIES

 

LaBranche is a party to subordinated loan agreementsunder which it has indebtedness approved by the NYSE for inclusion as netcapital, as defined. Interest is payable quarterly at various annual rates.Four of the agreements representing $2.3 million mature within the last sixmonths of 2003 and six agreements representing approximately $3.0 millionmature within the first six months of 2004. These subordinated notes, whichbear an annual interest rate of 10.0%, all have automatic rollover provisions,and each scheduled maturity date will be extended an additional year, unlessthe lender gives LaBranche seven months advance notice that the maturity datewill not be extended. LaBranche is also entitled to prepay these subordinatednotes without penalty under the terms of the agreements relating thereto.During October and November 2002, LaBranche repaid, on the scheduled maturitydate, four subordinated notes representing $2.4 million, plus accrued andunpaid interest. These subordinated notes did not have automatic rolloverprovisions and had an annual interest rate of 10.0%. In addition, at therequest of the lender, LaBranche repaid a subordinated note in the principalamount of approximately $350,000, plus accrued interest, during September 2002.This subordinated note had an annual interest rate of 10.0%. Interest expenseincurred for the years ended December 31, 2002, 2001 and 2000 onsubordinated loan agreements was approximately $0.8 million,$0.6 million and $1.0 million, respectively.

 

In 1998, LaBranche issued five subordinated notesrepresenting aggregate indebtedness of $15.0 million, which mature onJune 3, 2008 and bear interest at an annual rate of 7.69%,

 

F-21

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payable on a quarterlybasis. These notes are senior to all other subordinated notes of LaBranche. Theagreements covering these subordinated notes require LaBranche to comply withcertain covenants that, among other things, restrict the type of business inwhich LaBranche may engage, set certain net capital levels and prohibitrestricted payments. During the year ended December 31, 2002, LaBranche repaid,on the scheduled maturity date, seven subordinated notes representing aggregateindebtedness of $20.0 million, plus accrued and unpaid interest. These noteshad an annual interest rate of 8.17% payable on a quarterly basis. Interestexpense incurred for the years ended December 31, 2002, 2001 and 2000 onthese subordinated notes was approximately $2.3 million, $2.8 million and$2.8 million, respectively.

 

In connection with the acquisition of RPM, LaBrancheassumed a secured demand note obligation of $8.0 million, which matures in June2004 and bears interest at an annual rate of 11.0% on the amount of cashcollateral and 4.0% on non-cash collateral, payable monthly. The agreement hasautomatic rollover provisions, and the scheduled maturity date of theobligation will be extended an additional year, unless the lender givesLaBranche seven months advance notice that the maturity date will not be extended.During September 2002, at the request of the lender, LaBranche repaid a secureddemand note in the principal amount of $1.0 million, plus accrued interest. Thenote had been assumed in connection with the acquisition of RPM and had avariable interest rate. LaBranche also repaid two additional secured demandnote obligations in the principal amount of $3.0 million and $11.0 million,respectively, during October 2002 which were incurred in connection with theacquisition of Bocklet and had annual interest rates of 10.0%. Interest expenseincurred for the years ended December 31, 2002, 2001 and 2000 on secureddemand notes was approximately $2.0 million, $1.0 million and $0.1 million,respectively.

 

## **10.**                            EARNINGSPER SHARE

 

EPS are computed in accordance with SFAS No. 128,“Earnings Per Share.” Basic EPS is calculated by dividing net income availableto common shareholders by the weighted-average number of common sharesoutstanding. Diluted EPS includes the determinants of basic EPS and, inaddition, gives effect to dilutive potential common shares.

 

The computations of basic and diluted EPS are setforth below:

 
|                                                                                                    |   | **Years  Ended December 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
| **(000’s omitted, except per share data)**                                                         |   | **2002**                      |   | **2001** |   | **2000** |   |
| Net income                                                                                              |   | $                             | 87,226 |   | $ | 71,587 |   | $ | 81,923 |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Less preferred  dividends and accretion                                                                 |   | 6,941                         |   | 7,472 |   | — |   |
| Numerator for  basic and diluted earnings per share – net income available to common  stockholders |   | $                             | 80,285 |   | $ | 64,115 |   | $ | 81,923 |   |
| Denominator for  basic earnings per share – weighted-average number of common shares               |   | 58,992                        |   | 55,691 |   | 48,167 |   |
| Dilutive Shares                                                                                         |   |                          |   |   |   |   |   |
| Stock  options                                                                                          |   | 681                           |   | 822 |   | 150 |   |
| Restricted  stock                                                                                       |   | —                        |   | 50 |   | 14 |   |
| Restricted stock  units                                                                                 |   | 266                           |   | 385 |   | 250 |   |
| Denominator for  diluted earnings per share – weighted-average number of common shares             |   | 59,939                        |   | 56,948 |   | 48,581 |   |
|                                                                                                    |   |                          |   |   |   |   |   |
| Basic earnings  per share                                                                               |   | $                             | 1.36   |   | $ | 1.15 |   | $ | 1.70 |   |
| Diluted earnings  per share                                                                             |   | $                             | 1.34   |   | $ | 1.13 |   | $ | 1.69 |   |

 

F-22

----

 

The exercise prices for options to purchase anaggregate of 1,807,500, 262,500 and 0 shares of common stock exceeded theaverage market price of the Company’s common stock for the years ended December31, 2002, 2001 and 2000 respectively. Accordingly, the calculation of dilutedearnings per share does not include the antidilutive effect of these optionsfor years ended December 31, 2002, 2001 and 2000.

 

## **11.**                               EMPLOYEEINCENTIVE PLANS

 

### * Equity Incentive Plan*

 

The Company sponsors an Equity Incentive Plan whichprovides for grants of incentive stock options, nonqualified stock options,restricted shares of common stock, restricted stock units, unrestricted sharesand stock appreciation rights.

 

Upon inception, 4,687,500 shares of common stock werereserved for issuance under the Equity Incentive Plan. On July 20, 2001, theBoard of Directors approved, subject to the subsequent approval of theCompany’s stockholders, an increase in the number of shares of the Company’scommon stock available for issuance under the Equity Incentive Plan by an additional3,000,000 shares. This increase was approved by a majority of the stockholdersof the Company at its annual meeting of stockholders on May 21, 2002. Themaximum number of shares of common stock with respect to which options,restricted stock, restricted stock units or other equity-based awards maybe granted under the Equity Incentive Plan during any calendar year to anyemployee may not exceed 500,000 shares, subject to adjustment upon certaincorporate transactions.

 

The Company granted restricted stock units toemployees in connection with its initial public offering and subsequently asstock-based compensation. The Company granted restricted stock as part ofemployment contracts and in connection with certain acquisitions. In general,both the restricted stock units and the restricted stock awards vest in threeto five annual installments, on the anniversary of the grant date. Thecompensation expense for all of these stock awards is recognized on astraight-line basis over the respective vesting periods. In addition, all ofthe awards are subject to continuing service with the Company and otherrestrictions. For the years ended December 31, 2002, 2001 and 2000,respectively, the Company recorded compensation expense, net of forfeitures,and a credit to additional paid-in-capital related to these awards of $3.1million, $6.2 million and $4.3 million.

 

F-23

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The following table provides information about grantsof restricted stock (“RS”) and restricted stock units (“RSUs”):

 
|                                            |   | **Number of Shares** |   |
|-------------------------------------------------|--------|----------------------|--------|
| RS and RSUs Outstanding as of January 1, 2000   |   | 1,062,600            |   |
| Granted                                         |   | 302,055              |   |
| Vested                                          |   | (77,502              | )      |
| Forfeited                                       |   | (36,891              | )      |
| RS and RSUs Outstanding as of December 31, 2000 |   | 1,250,262            |   |
| Granted                                         |   | 60,000               |   |
| Vested                                          |   | (223,906             | )      |
| Forfeited                                       |   | (60,142              | )      |
| RS and RSUs Outstanding as of December 31, 2001 |   | 1,026,214            |   |
| Granted                                         |   | 20,000               |   |
| Vested                                          |   | (308,436             | )      |
| Forfeited                                       |   | (193,660             | )      |
| RS and RSUs Outstanding as of December 31, 2002 |   | 544,118              |   |

 

*Stock Options*

 

In general, most of the stock options granted toemployees as stock based compensation vest and become exercisable in annualinstallments over three years. Options granted as part of purchase accountingwere fully vested and exercisable on the grant date. Pursuant to APB No. 25,no compensation expense was recognized for any of these option grants since, onthe date of grant, these options had no intrinsic value. In addition, theseoption grants will generally expire ten years from the date of grant, unlesssooner terminated or exercised.

 

The following table provides information about optionsto purchase the Company’s common stock:

 
|                                        |   | **Number of  Shares** |   | **Weighted Average  Exercise Price per Share** |   |
|---------------------------------------------|--------|-----------------------|--------|------------------------------------------------|--------|
| Options Outstanding as of January 1, 2000   |   | 1,200,000             |   | $                                              | 14.00  |   |
| Options Granted                             |   | —                |   | —                                         |   |
| Options Exercised                           |   | (16,667               | )      | 14.00                                          |   |
| Options Forfeited                           |   | (33,333               | )      | 14.00                                          |   |
| Options Outstanding as of December 31, 2000 |   | 1,150,000             |   | 14.00                                          |   |
| Options Granted                             |   | 3,038,162             |   | 11.22                                          |   |
| Options Exercised                           |   | (1,287,936            | )      | 7.68                                           |   |
| Options Forfeited                           |   | (66,667               | )      | 14.00                                          |   |
| Options Outstanding as of December 31, 2001 |   | 2,833,559             |   | 13.90                                          |   |
| Options Granted                             |   | 1,545,000             |   | 34.64                                          |   |
| Options Exercised                           |   | (705,890              | )      | 12.03                                          |   |
| Options Forfeited                           |   | —                |   | —                                         |   |
| Options Outstanding as of December 31, 2002 |   | 3,672,669             |   | 22.98                                          |   |
|                                        |   |                  |   |                                           |   |
| Options Exercisable as of:                  |   |                  |   |                                           |   |
| December 31, 2000                           |   | 1,150,000             |   | 8.63                                           |   |
| December 31, 2001                           |   | 2,287,726             |   | 10.89                                          |   |
| December 31, 2002                           |   | 1,977,669             |   | 12.42                                          |   |
|                                             |        |                       |        |                                                |        |  |

 

F-24

----

 

The following table summarizes information about stockoptions outstanding as of December 31, 2002:

 
|                          |   | **Options  Outstanding** |   | **Options  Exercisable**                           |   |
|-------------------------------|--------|--------------------------|--------|----------------------------------------------------|--------|
| **Range of  Exercise Prices** |   | **Number  Outstanding**  |   | **Weighted  Average  Remaining  Contractual Life** |   | **Weighted  Average  Exercise Price  per Share** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
| $2.00 – 10.99            |   | 493,890                  |   | 10.0                                               |   | $ | 2.78 |   | 493,890 |   | $ | 2.78 |   |
| 11.00 – 20.99            |   | 1,371,279                |   | 7.4                                                |   | 13.86 |   | 1,371,279 |   | 13.86 |   |
| 21.00 – 30.99            |   | 75,000                   |   | 9.8                                                |   | 27.50 |   | 25,000 |   | 27.50 |   |
| 31.00 – 40.99            |   | 1,732,500                |   | 8.9                                                |   | 35.76 |   | 87,500 |   | 40.00 |   |
|                          |   | 3,672,669                |   |                                               |   |   |   | 1,977,669 |   |   |   |
|                               |        |                          |        |                                                    |        |  |  |  |  |  |  |  |  |

 

## **12.**                            LONGTERM DEBT

 

On August 24, 1999, the Holding Company issued$100.0 million aggregate principal amount of Senior Notes. The SeniorNotes bear interest at a rate of 9.5% annually and mature on August 15, 2004.The carrying value of the Senior Notes as of December 31, 2002 and 2001was $99.9 million. The discount on the bond is being amortized as anadjustment to interest expense over the life of the Senior Notes. Debt issuancecosts incurred as a result of the Senior Note offering were approximately$2.7 million, which are also being amortized on a straight-line basis asan adjustment to interest expense over the life of the Senior Notes. Interestexpense related to the Senior Notes for the years ended December 31, 2002,2001 and 2000 was approximately $10.1 million. The indenture covering theSenior Notes includes certain covenants that, among other things, limits theCompany’s ability to borrow money, pay dividends or repurchase stock, makeinvestments, engage in transactions with stockholders and affiliates, createliens on assets, and sell assets or engage in mergers and consolidations exceptin accordance with certain specified conditions.

 

In addition, in connection with the reorganization ofthe Company from partnership to corporate form on August 24, 1999, theHolding Company issued a $16.0 million senior note as partial payment for theacquisition of a limited partner interest in LaBranche (prior to its conversionto a limited liability company). The note was payable in three annualinstallments and had an annual interest rate of 9.5%. The Company repaid thefull aggregate principal amount of $16.0 million plus the accrued interest ofthis note in August 2000, 2001 and 2002. Interest expense related to this notefor the years ended December 31, 2002, 2001 and 2000 was approximately$0.3 million $0.8 million and $1.3 million, respectively.

 

In connection with the acquisitions of HendersonBrothers and Webco, the Holding Company issued $250.0 million aggregateprincipal amount of Senior Subordinated Notes (the “Notes”) that bear interestat a rate of 12.0% annually and mature on March 2, 2007. The carrying value ofthe Notes as of December 31, 2002 and 2001 was $247.0 million and $246.5million, respectively. The discount on the Notes is being amortized as anadjustment to interest expense over the life of the Notes. Debt issuance costsincurred as a result of the Note offering were approximately $6.9 million,which are also being amortized as an adjustment to interest expense over thelife of the Notes. Interest expense related to these Notes for the years endedDecember 31, 2002, 2001 and 2000 was approximately $31.3 million$31.2 million and $25.8

 

F-25

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million, respectively.The indenture covering the Notes includes certain covenants that, among otherthings, limit the Company’s ability to borrow money, pay dividends orrepurchase stock, make investments, engage in transactions with stockholdersand affiliates, create liens on assets, and sell assets or engage in mergersand consolidations except in accordance with certain specified conditions.

 

The Notes also require the Company, within 150 daysafter the end of each fiscal year, to offer to redeem from all holders of theNotes a principal amount equal to the Excess Cash Flow of the Company for thepreceding fiscal year at a price equal to 103.0% of the principal amount beingoffered for purchase plus accrued and unpaid interest, if any, to the date ofredemption. Each holder is entitled to be offered a pro rata share of theamount subject to redemption based upon his or her ownership percentage of theoutstanding Notes. Excess Cash Flow is defined for this purpose as 40.0% of theamount by which the Company’s consolidated EBITDA exceeds the sum of theCompany’s interest expense, tax expense, increase in net capital or net liquidasset requirements, capital expenditures, any cash payments related toacquisitions of NYSE specialists and any cash payments related to the Company’sprincipal payments of certain other indebtedness.

 

As of December 31, 2002 and 2001, the Holding Companyhad a promissory note for $2.0 million, which was assumed in connection withthe RPM acquisition and was issued to a family member of a former employee ofRPM. The note matures in the first half of 2003 and bears an annual interestrate of 12.5%, payable on a quarterly basis. Because this note will mature inless than one year, it is classified in accounts payable and other accrued expenseson the statement of financial condition. In addition, the Holding Companyissued to RPM Nautical $8.0 million of indebtedness on August 7, 2002 inexchange for the 8,000 shares of the Company’s Series A Preferred Stock thenheld by RPM Nautical. This indebtedness accrues interest at the rate of 10.0%per year until August 7, 2003 and at the rate of 9.0% per year thereafter,payable semiannually, and matures on August 7, 2007. Interest expense incurredby the Holding Company related to these notes for the years ended December 31,2002, 2001 and 2000 was approximately $0.6 million, $0.2 million and $0,respectively.

 

During the year ended 2002, the Holding Companyrepaid, without penalty, indebtedness in the aggregate principal amount of$12.1 million which the Holding Company had assumed in connection with the RPMacquisition. Of the total $12.1 million, $9.8 million was promissory notesissued to former employees and their family members and had annual interestrates ranging from 8.0% to 12.0%. The remaining $2.3 million representeddeferred compensation obligations to former RPM employees and had annualinterest rates ranging from 9.5% to 10.0%. Interest expense incurred by theHolding Company related to these obligations for the years ended December 31,2002, 2001 and 2000 was approximately $0.8 million, $1.1 million and $0,respectively.

 

Long term debt as of December 31, 2002 matures asfollows:

 
| **(000’s omitted) ,**    |   |       |   |
|-------------------------------|--------|------------|--------|
| **Year Ending  December 31,** |   | **Amount** |   |
| 2003                          |   | —     |   |
| 2004                          |   | 100,000    |   |
| 2005                          |   | —     |   |
| 2006                          |   | —     |   |
| 2007 and thereafter           |   | 258,000    |   |

 

F-26

----

 

## **13.**                            DISCLOSURESABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

SFAS No. 107, “Disclosures About Fair Value ofFinancial Instruments,” requires companies to report the fair value offinancial instruments for certain assets and liabilities. Substantially all ofthe Company’s assets and liabilities are carried at fair value or contractedamounts, which approximate fair value.

 

The fair value of the fixed rate debt, in millions, isas follows: 

 
|                     |   | **As of December 31,** |   |
|--------------------------|--------|------------------------|--------|
|                     |   | **2002**               |   | **2001** |   |
|                     |   | **Carrying  Value**    |   | **Fair  Value** |   | **Carrying  Value** |   | **Fair  Value** |   |
|                     |   |                   |   |   |   |   |   |   |   |
| Senior Debt              |   | $                      | 99.9   |   | $ | 104.9 |   | $ | 99.9 |   | $ | 106.9 |   |
| Senior Subordinated Debt |   | 247.0                  |   | 280.5 |   | 246.5 |   | 287.3 |   |
| Fixed Rate Note          |   | —                 |   | — |   | 5.0 |   | 5.2 |   |
| Other                    |   | 30.3                   |   | 33.6 |   | 71.1 |   | 75.9 |   |
|                          |        |                        |        |  |  |  |  |  |  |  |  |  |  |

 

The fair value of the Senior Notes and the Notes wasdetermined based upon their market value as of December 31, 2002. The fairvalue of the fixed rate and other notes was determined using current marketrates to discount their cash flows.

 

## **14.**                               RETIREMENT PLAN

 

The Company has a defined contribution retirement plan(the “Plan”) that is subject to the provisions of the Employee RetirementIncome Security Act of 1974 (“ERISA”). The Fidelity Management Trust Companyacts as the recordkeeper of the Plan. Effective January 1, 2003, the Plansponsor changed from LaBranche to the Holding Company.

 

All employees are eligible to participate in the Planafter they have completed twelve months of service and have been credited with1,000 hours of service. Participants are entitled to contribute voluntarily inan amount equal to not less than 1% and not more than 60% of their annualpre-tax compensation, to a maximum amount permitted under the Internal RevenueService (“IRS”) regulations for the applicable Plan year. The Company, actingin its sole discretion, can declare and contribute to the Plan an employermatching contribution and an additional voluntary contribution. During theyears ended December 31, 2002, 2001 and 2000, the Company contributedapproximately $1.2 million, $1.0 million and $590,000, respectively, asemployer matching contributions to the Plan, and approximately $4.2 million,$3.4 million and $2.0 million, respectively, as additional voluntarycontributions.

 

Upon the completion of the acquisition of RPM, theemployee participant balances of the Robb, Peck, McCooey 401(k) Plan totalingapproximately $3.7 million were rolled over into the Plan. In addition, theRobb, Peck, McCooey Pension Trust and the Robb, Peck, McCooey Profit SharingPlan were assumed by the Holding Company. All benefits and service accruals ofthese

 

F-27

----

 

two plans were frozeneffective as of March 15, 2001. On June 15, 2001, the Board of Directors of theHolding Company elected to terminate both plans, effective August 31, 2001. TheHolding Company applied and received approval for termination from the InternalRevenue Service. All participants became fully vested in their accrued benefitsin the Profit Sharing Plan and the Pension Trust on the termination date, andreceived lump-sum payments by December 31, 2002.

 

As of December 31, 2002, the Plan had approximately489 participants compared to 492 participants as of December 31, 2001.

 

**15.          BUSINESS SEGMENTS**

 

Segment information is presented in accordance withSFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation.” Currently, the Company views its business under two separatesegments: Specialist and Execution and Clearing. The Company’s businesssegments are based upon the nature of the financial services provided, theirrevenue source and the Company’s management organization. Prior to January 1,2002, the Company considered its operations to be one reportable segment forpurposes of presenting consolidated financial information and evaluating itsperformance.

 

The Company’s Specialist segment operates as aspecialist in equities on the NYSE and in equities and options on the AMEX andprovides support services for the specialist activities. In addition, thissegment acts as a market maker in ETFs.

 

The Company’s Execution and Clearing segment providessecurities execution, securities clearing and other related services to its ownindividual customers, customers of introducing brokers and institutionalcustomers, including traders, professional investors and broker-dealers. Thesegment also provides direct access floor brokerage services to institutionalcustomers.

 

The Specialist segment currently includes the operations of LaBranche, LSP and BV.The Execution and Clearing segment currently includes the operations of LFSI.

 

Revenues and expenses directly associated with eachsegment are included in determining its operating results. Other expenses, includingcorporate overhead, which are not directly attributable to a particularsegment, generally are allocated to each segment based on its resource usagelevels or other appropriate measures. Certain administrative expenses,corporate overhead expenses and other sources of revenues are not specificallyallocated by management when reviewing the Company’s segments’ performance, andappear in the Other section. Selected financial information for each segment isset forth below:

 
|                                   |   | ***For the Years Ended December 31,*** |    |
|----------------------------------------|--------|----------------------------------------|---------|
| ***(000’s omitted):***            |   | ***2002***                             |    | ***2001*** |   | ***2000*** |   |
| **Specialist Segment:**                |   |                                   |    |   |   |   |   |
| Revenues                               |   | $                                      | 401,169 |   | $ | 395,731 |   | $ | 340,895 |   |
| Operating  expenses                    |   | 164,367                                |    | 136,751 |   | 110,923 |   |
| Depreciation and  amortization expense |   | 12,337                                 |    | 38,186 |   | 18,324 |   |
| Pre-Tax Income                         |   | 224,465                                |    | 220,794 |   | 211,648 |   |
|                                   |   |                                   |    |   |   |   |   |
| Segment assets                         |   | 1,726,935                              |    | 1,776,794 |   | 908,482 |   |
|                                   |   |                                   |    |   |   |   |   |
| **Execution and Clearing Segment:**    |   |                                   |    |   |   |   |   |
| Revenues                               |   | $                                      | 44,565  |   | $ | 27,180 |   | $ | 2,594 |   |
| Operating  expenses                    |   | 53,297                                 |    | 38,838 |   | 5,375 |   |
| Depreciation and  amortization expense |   | 1,093                                  |    | 967 |   | 152 |   |
| Pre-Tax Loss                           |   | (9,825                                 | )       | (12,625 | ) | (2,933 | ) |
|                                   |   |                                   |    |   |   |   |   |
| Segment assets                         |   | 88,666                                 |    | 156,745 |   | 27,647 |   |
|                                   |   |                                   |    |   |   |   |   |
| **Other: (1)**                         |   |                                   |    |   |   |   |   |
| Revenues                               |   | $                                      | 7,111   |   | $ | 1,219 |   | $ | 1,320 |   |
| Operating  expenses                    |   | 55,611                                 |    | 52,380 |   | 43,458 |   |
| Depreciation and  amortization expense |   | 16                                     |    | 297 |   | — |   |
| Pre-Tax Loss                           |   | (48,516                                | )       | (51,458 | ) | (42,138 | ) |
|                                   |   |                                   |    |   |   |   |   |
| Segment assets                         |   | 97,201                                 |    | 67,298 |   | 67,993 |   |
|                                   |   |                                   |    |   |   |   |   |
| **Total:**                             |   |                                   |    |   |   |   |   |
| Revenues                               |   | $                                      | 452,845 |   | $ | 424,130 |   | $ | 344,809 |   |
| Operating  Expenses                    |   | 273,275                                |    | 227,969 |   | 159,756 |   |
| Depreciation and  amortization expense |   | 13,446                                 |    | 39,450 |   | 18,476 |   |
| Pre-Tax Income                         |   | 166,124                                |    | 156,711 |   | 166,577 |   |
|                                   |   |                                   |    |   |   |   |   |
| Total assets                           |   | 1,912,802                              |    | 2,000,837 |   | 1,004,122 |   |

 

F-28

----

 

----

(1)           Other is comprisedprimarily of the interest on the Holding Company’s indebtedness, unallocatedcorporate administrative expenses, including legal costs, unallocated revenues(primarily income from non-marketable investments as well as interest income),and elimination entries.

 

**16.          REPURCHASESOF PREFERRED STOCK**

 

During January 2002, the Company offered to repurchaseup to 30,000 shares of its outstanding Series A preferred stock for $1,000 pershare, plus accrued and unpaid dividends up to but not including the date ofpurchase. The Company’s Series A preferred stock entitles the holder tocumulative preferred cash dividends at an annual rate of 8.0% of theliquidation preference per share until March 15, 2005, 10.0% until March 15,2006 and 10.8% thereafter. On February 15, 2002, the offer expired, and onFebruary 19, 2002, the Company purchased all of the approximately 28,164 sharesthat had been tendered for approximately $28.5 million, including accrued butunpaid dividends. As a result of the purchase, the Company recorded an expensedue to the acceleration of the discount accretion on the shares purchased ofapproximately $1.5 million, which was included in other expenses.

 

On August 7, 2002, the Company issued to RPM NauticalFoundation, Inc. (“RPM Nautical”), a non-profit organization of which George E.Robb, Jr., a former member of the Company’s Board of Directors, is a founderand director, subordinated notes in the aggregate principal amount of $8.0million in exchange for the 8,000 shares of the Company’s Series A preferredstock then held by RPM Nautical. The Company also paid to RPM Nautical, incash,

 

F-29

----

 

the amount of accrued andunpaid dividends with respect to the shares of our Series A preferred stockheld by RPM Nautical as of August 6, 2002. As a result of the exchange, theCompany recorded an expense due to the acceleration of the discount accretionon the shares exchanged of approximately $0.4 million, which was included in otherexpenses.

 

## **17.**                            FINANCIALINSTRUMENTS WITH CONCENTRATION OF CREDIT AND OFF-BALANCE SHEET RISK

 

As a specialist on the NYSE and AMEX, LaBranche isengaged in various securities trading and lending activities. In connectionwith its activities as a specialist, LaBranche assumes positions in stocks forwhich it is responsible. LaBranche is exposed to credit risk associated withthe nonperformance of counterparties in fulfilling their contractualobligations pursuant to these securities transactions. LaBranche is exposed tomarket risk associated with the sale of securities not yet purchased, which canbe directly impacted by volatile trading on the NYSE and AMEX. Additionally, inthe event of nonperformance and unfavorable market price movements, LaBranchemay be required to purchase or sell financial instruments, which may result ina loss to LaBranche.

 

The Company enters into collateralized financingagreements in which it extends short-term credit to major financialinstitutions. The Company controls access to the collateral pledged by thecounterparties, which generally consists of U.S. equity and governmentsecurities. The value and adequacy of the collateral are continually monitored.Consequently, the risk of credit loss from counterparties’ failure to performin connection with collateralized lending activities is minimal.

 

In addition, LFSI, through the normal course ofbusiness, enters into various securities transactions as agent. The execution,settlement and financing of those transactions can result in off-balance sheetrisk and concentration of credit risk.

 

LFSI’s execution and clearing activities involvesettlement and financing of various customer securities transactions on a cashor margin basis. These activities may expose LFSI to off-balance sheet risk inthe event the customer or other broker is unable to fulfill its contractualobligations and LFSI has to purchase or sell securities at a loss. For margintransactions, LFSI may be exposed to significant off-balance sheet risk in theevent margin requirements are not sufficient to fully cover losses thatcustomers may incur in their accounts.

 

LFSI seeks to control the risks associated withcustomer activities by requiring customers to maintain margin collateral incompliance with various regulatory and internal guidelines. LFSI monitorsmargin levels daily and pursuant to such guidelines, requires customers todeposit additional collateral or to reduce positions when necessary.

 

LFSI is engaged in various brokerage activities inwhich its counterparties primarily include broker-dealers, banks and otherfinancial institutions. LFSI may be exposed to the risk of default, whichdepends on the creditworthiness of the counterparty. It is LFSI’s policy toreview, as necessary, the credit standing of each counterparty with which itconducts business.

 

F-30

----

 

LSP uses derivative financial instruments, whichgenerally include exchange-traded options and futures contracts, for tradingpurposes and to economically hedge other positions or transactions as part ofits options specialist and market-making business and overall risk managementprocess. These financial instruments subject LSP to varying degrees of marketand credit risk. LSP records its derivative trading activities at market value,with corresponding gains or losses recorded in net gain on principaltransactions. In order to minimize risk, management continually monitorspositions, profit and loss, volatility and other standard risk measures on areal-time basis and communicates its risk tolerance to LSP’s traders.

 

The following table indicates the fair value of LSP’sexchange-traded options :

 
|                      |   | **As of December 31,** |   |
|---------------------------|--------|------------------------|--------|
| **(000’s  omitted)** |   | **2002**               |   | **2001** |   |
|                      |   | **Assets**             |   | **Liabilities** |   | **Assets** |   | **Liabilities** |   |
| Exchange-traded options   |   | 61,478                 |   | 63,695 |   | 68,499 |   | 58,822 |   |

 

**18.**                               PRO FORMA FINANCIALINFORMATION (Unaudited)

 

The following 2000 pro forma consolidated results giveeffect to the Company’s March 2000 acquisition of all the outstanding capitalstock of Henderson Brothers, the March 2000 acquisition of Webco and the March2000 issuance of $250.0 million of Senior Subordinated Notes as if theyoccurred on January 1, 2000. In addition, the 2000 pro forma consolidatedresults give effect to the March 2001 acquisition of RPM including the issuanceof common stock, the issuance of preferred stock, the assumption of RPM’soption agreements and the reversal of the historical results of operations forcertain business lines (collectively, the “Acquisition Transactions”), as ifthey occurred on January 1, 2000. The 2001 pro forma consolidated results giveeffect to the Acquisition Transactions as if they occurred on January 1, 2001.The pro forma impact on revenues, pre-tax income and earnings are asfollows: 

 
|                                             |   | **For the years  ended December 31,** |    |
|--------------------------------------------------|--------|---------------------------------------|---------|
| **(000’s omitted, except per share  data)** |   | **2001**                              |    | **2000** |   |
|                                             |   | **(Pro Forma)**                       |    | **(Pro Forma)** |   |
|                                             |   |                                  |    |   |   |
| Revenues                                         |   | $                                     | 450,928 |   | $ | 503,980 |   |
| Pre-Tax Income                                   |   | 123,627                               |    | 175,670 |   |
| Net Income                                       |   | 53,846                                |    | 78,226 |   |
| EPS                                              |   | 0.77                                  |    | 1.21 |   |
|                                                  |        |                                       |         |  |  |  |  |

 

**19.          SUBSEQUENT EVENTS**

 

During January 2003, the Company offered to repurchaseup to 30,000 shares of its outstanding Series A preferred stock for $1,000 pershare, plus accrued and unpaid dividends up to but not including the date ofpurchase. On February 4, 2003, the offer expired, and on February 6, 2003, theCompany purchased all of the approximately 24,650 shares that had been tenderedfor approximately $24.8 million, including accrued but unpaid dividends. As aresult of the purchase, the Company recorded an expense due to the accelerationof the discount accretion on the shares purchased of approximately $0.9million, which will be included in other expenses.

 

F-31

----

 

The Company’s Board ofDirectors declared an $.08 per share cash dividend on the Company’s commonstock on January 16, 2003. The record date was January 31, 2003 and thedividend was paid on February 14, 2003. The payment of future dividends iswithin the discretion of the Company’s Board of Directors and will depend onfuture earnings, capital requirements, applicable regulatory restrictions,financial condition and other relevant factors.

 

F-32

----

 

**Schedule1.**

 

**LaBRANCHE& CO INC.**

**(ParentCompany Only)**

**CONDENSEDSTATEMENTS OF FINANCIAL CONDITION**

**(000’somitted, except share data)**

 
|                                                                                                                                                                                     |   | **December 31,** |      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-----------|
|                                                                                                                                                                                     |   | **2002**         |      | **2001** |   |
| **ASSETS**                                                                                                                                                                               |   |             |      |   |   |
| CASH AND CASH EQUIVALENTS                                                                                                                                                                |   | $                | 10,298    |   | $ | 32,577 |   |
| SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL                                                                                                                                          |   | 26,000           |      | — |   |
| UNITED STATES GOVERNMENT OBLIGATIONS                                                                                                                                                     |   | 28,897           |      | 30,084 |   |
| INVESTMENT IN SUBSIDIARIES, AT EQUITY VALUE                                                                                                                                              |   | 1,281,411        |      | 1,273,728 |   |
| SUBORDINATED NOTE RECEIVABLE                                                                                                                                                             |   | 9,000            |      | 9,000 |   |
| OTHER                                                                                                                                                                                    |   | 99,917           |      | 72,770 |   |
|                                                                                                                                                                                     |   |             |      |   |   |
| Total Assets                                                                                                                                                                             |   | $                | 1,455,523 |   | $ | 1,418,159 |   |
|                                                                                                                                                                                     |   |             |      |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                            |   |             |      |   |   |
| LIABILITIES:                                                                                                                                                                             |   |             |      |   |   |
| Interest payable                                                                                                                                                                         |   | $                | 14,850    |   | $ | 15,035 |   |
| Accrued compensation                                                                                                                                                                     |   | 31,898           |      | 37,784 |   |
| Accounts payable and other accrued expenses                                                                                                                                              |   | 30,772           |      | 55,905 |   |
| Income taxes payable                                                                                                                                                                     |   | 13,196           |      | 14,753 |   |
|                                                                                                                                                                                     |   | 90,716           |      | 123,477 |   |
| DEFERRED TAX LIABILITIES                                                                                                                                                                 |   | 20,171           |      | 3,154 |   |
| LONG TERM DEBT                                                                                                                                                                           |   | 354,948          |      | 363,170 |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                               |   |             |      |   |   |
| Preferred stock, liquidation value of $1,000 per share;  10,000,000 authorized; 63,836And  100,000 shares issued and outstanding at December 31, 2002 and December 31,2001, respectively |   | 61,361           |      | 94,531 |   |
| Common stock, $.01 par value, 200,000,000 shares  authorized;59,504,148 and  58,733,955 shares issued and outstanding at December 31, 2002 andDecember 31, 2001, respectively            |   | 595              |      | 587 |   |
| Additional paid-in-capital                                                                                                                                                               |   | 679,601          |      | 671,422 |   |
| Retained earnings                                                                                                                                                                        |   | 249,065          |      | 168,780 |   |
| Unearned compensation                                                                                                                                                                    |   | (934             | )         | (6,962 | ) |
|                                                                                                                                                                                     |   | 989,688          |      | 928,358 |   |
|                                                                                                                                                                                     |   |             |      |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                          |   | $                | 1,455,523 |   | $ | 1,418,159 |   |

 

See accompanying note to condensed financial statements.

 

 

1

----

 

**LaBRANCHE& CO INC.**

**(ParentCompany Only)**

**CONDENSEDSTATEMENTS OF OPERATIONS**

**(000’somitted)**

 
|                                                |   | **For the Years Ended December 31,** |    |
|-----------------------------------------------------|--------|--------------------------------------|---------|
|                                                |   | **2002**                             |    | **2001** |   | **2000** |   |
|                                                |   |                                 |    |   |   |   |   |
| REVENUES:                                           |   |                                 |    |   |   |   |   |
| Earnings from investment in subsidiaries            |   | $                                    | 107,776 |   | $ | 98,853 |   | $ | 104,044 |   |
| Investment income                                   |   | 10,182                               |    | 2,074 |   | 1,534 |   |
| Total revenue                                       |   | 117,958                              |    | 100,927 |   | 105,578 |   |
|                                                |   |                                 |    |   |   |   |   |
| EXPENSES:                                           |   |                                 |    |   |   |   |   |
| Interest                                            |   | 42,734                               |    | 44,550 |   | 37,700 |   |
| Employee compensation and related benefits          |   | 10,824                               |    | 7,847 |   | 3,633 |   |
| Other                                               |   | 5,140                                |    | 1,135 |   | 2,337 |   |
| Total expenses                                      |   | 58,698                               |    | 53,532 |   | 43,670 |   |
| Income before income tax benefit                    |   | 59,260                               |    | 47,395 |   | 61,908 |   |
|                                                |   |                                 |    |   |   |   |   |
| INCOME TAX BENEFIT                                  |   | (27,966                              | )       | (24,192 | ) | (20,015 | ) |
| Net income                                          |   | 87,226                               |    | 71,587 |   | 81,923 |   |
| Series A preferred dividends and discount accretion |   | 6,941                                |    | 7,472 |   | — |   |
| Net income available to common stockholders         |   | $                                    | 80,285  |   | $ | 64,115 |   | $ | 81,923 |   |

 

See accompanying note to condensed financial statements.

 

2

----

 

**LaBRANCHE& CO INC.**

**(ParentCompany Only)**

**CONDENSEDSTATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**

**(000’somitted)**

 
|                                                                                 |   | **Common Stock** |   | **Preferred  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Unearned  Compensation** |    | **Total** |   |
|--------------------------------------------------------------------------------------|--------|------------------|--------|----------------------|--------|----------------------------------|--------|------------------------|--------|----------------------------|---------|-----------|--------|
| **Shares**                                                                           |   | **Amount**       |
| BALANCE,  December 31, 1999                                                          |   | 45,875           |   | $                    | 459    |                             | $      | —                 |   | $                          | 228,771 |      | $      | 22,742 |   | $ | — |   | $ | 251,972 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Net income                                                                           |   | —           |   | —               |   | —                           |   | —                 |   | 81,923                     |    | —    |   | 81,923 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Issuance of  shares to Webco                                                         |   | 2,800            |   | 28                   |   | —                           |   | 32,284                 |   | —                     |    | —    |   | 32,312 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Issuance of  restricted stocks, shares for option exercises and related compensation |   | 395              |   | 4                    |   | —                           |   | 12,292                 |   | —                     |    | (7,602    | )      | 4,694 |   |
| BALANCE,  December 31, 2000                                                          |   | 49,070           |   | 491                  |   | —                           |   | 273,347                |   | 104,665                    |    | (7,602    | )      | 370,901 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Net  income                                                                          |   | —           |   | —               |   | —                           |   | —                 |   | 71,587                     |    | —    |   | 71,587 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Grant of stock  options to former RPM option Holders                                 |   | —           |   | —               |   | —                           |   | 89,623                 |   | —                     |    | —    |   | 89,623 |   |
| Issuance of  stock for option exercises by former RPM option holders                 |   | 1,255            |   | 13                   |   | —                           |   | 9,411                  |   | —                     |    | —    |   | 9,424 |   |
| Issuance of  stock to former RPM stockholders                                        |   | 6,924            |   | 69                   |   | —                           |   | 260,463                |   | —                     |    | —    |   | 260,532 |   |
| Issuance of  preferred stock for RPM acquisition                                     |   | —           |   | —               |   | 93,426                           |   | —                 |   | —                     |    | —    |   | 93,426 |   |
| Preferred stock  discount accretion & dividends                                  |   | —           |   | —               |   | 1,105                            |   | —                 |   | (7,472                     | )       | —    |   | (6,367 | ) |
| Issuance of  stock related to other acquisitions                                     |   | 1,254            |   | 12                   |   | —                           |   | 29,993                 |   | —                     |    | —    |   | 30,005 |   |
| Recognition of a  tax benefit related to employee option exercises                   |   | —           |   | —               |   | —                           |   | 2,496                  |   | —                     |    | —    |   | 2,496 |   |
| Issuance of  restricted stock, shares for option exercises and related compensation  |   | 231              |   | 2                    |   | —                           |   | 6,089                  |   | —                     |    | 640       |   | 6,731 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| BALANCE,  December 31, 2001                                                          |   | 58,734           |   |                 | 587    |                             |   | 94,531                 |   |                       | 671,422 |      |   | 168,780 |   |   | (6,962 | ) |   | 928,358 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Net income                                                                           |   | —           |   | —               |   | —                           |   | —                 |   | 87,226                     |    | —    |   | 87,226 |   |
|                                                                                 |   |             |   |                 |   |                             |   |                   |   |                       |    |      |   |   |   |
| Preferred stock  discount accretion & dividends                                  |   | —           |   | —               |   | 2,994                            |   | —                 |   | (6,941                     | )       | —    |   | (3,947 | ) |
| Recognition of a  tax benefit related to employee option exercises                   |   | —           |   | —               |   | —                           |   | 2,610                  |   | —                     |    | —    |   | 2,610 |   |
| Issuance of  restricted stock, shares for option exercises and related compensation  |   | 770              |   | 8                    |   | —                           |   | 5,569                  |   | —                     |    | 6,028     |   | 11,605 |   |
| Preferred stock  buyback                                                             |   | —           |   | —               |   | (36,164                          | )      | —                 |   | —                     |    | —    |   | (36,164 | ) |
| BALANCE,  December 31, 2002                                                          |   | 59,504           |   | $                    | 595    |                             | $      | 61,361                 |   | $                          | 679,601 |      | $      | 249,065 |   | $ | (934 | ) | $ | 989,688 |   |

 

See accompanying note to condensed financial statements.

 

3

----

 

**LaBRANCHE& CO INC.**

**(ParentCompany Only)**

**CONDENSED STATEMENTS OF CASH FLOW****S**

**(000’somitted)**

** **
|                                                                                        |   | **For the Years Ended December 31,** |   |
|---------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                        |   | **2002**                             |   | **2001** |   | **2000** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |   |                                 |   |   |   |   |   |
| Net income                                                                                  |   | $                                    | 87,226 |   | $ | 71,587 |   | $ | 81,923 |   |
| Adjustments to reconcile net income to net cash  provided by (used in)operating  activities |   |                                 |   |   |   |   |   |
| Depreciation and amortization of fixed assets                                               |   | 16                                   |   | 297 |   | — |   |
| Amortization of debt issuance costs and bond discount                                       |   | 1,926                                |   | 1,763 |   | 1,461 |   |
| Compensation expense related to stock based  compensation                                   |   | 3,114                                |   | 3,263 |   | 3,633 |   |
| Tax benefit related to exercise of stock options                                            |   | 6,639                                |   | 18,681 |   | 112 |   |
| Acceleration of preferred stock discount accretion                                          |   | 1,844                                |   | — |   | — |   |
| Undistributed equity earnings from investment in  subsidiaries                              |   | (79,814                              | )      | (74,660 | ) | (104,044 | ) |
| Deferred tax benefit                                                                        |   | (27,966                              | )      | (24,192 | ) | (20,015 | ) |
| Changes in assets and liabilities:                                                          |   |                                 |   |   |   |   |   |
| Securities purchased under agreements to resell                                             |   | (26,000                              | )      | — |   | 1,422 |   |
| United States government obligations                                                        |   | 1,187                                |   | (30,084 | ) | — |   |
| Other assets                                                                                |   | (47,190                              | )      | (54,690 | ) | (8,469 | ) |
| Accrued compensation                                                                        |   | (5,887                               | )      | 37,784 |   | — |   |
| Accounts payable and other accrued expenses                                                 |   | 75,569                               |   | 68,282 |   | 13,280 |   |
| Net cash provided by (used in) operating activities                                         |   | (9,336                               | )      | 18,031 |   | (30,697 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |   |                                 |   |   |   |   |   |
| Payments for office equipment and leasehold  improvements                                   |   | (96                                  | )      | — |   | — |   |
| Net cash paid for acquisitions                                                              |   | (3,600                               | )      | — |   | (184,364 | ) |
| Return of capital from subsidiary                                                           |   | 154,000                              |   | 200,915 |   | 99,750 |   |
| Payment for investment in subsidiary                                                        |   | (31,494                              | )      | (141,735 | ) | (50,000 | ) |
| Net cash provided by (used in) investing activities                                         |   | 118,810                              |   | 59,180 |   | (134,614 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |   |                                 |   |   |   |   |   |
| Repayment of subordinated debt and promissory notes                                         |   | (14,781                              | )      | (7,500 | ) | — |   |
| Payment of preferred dividends                                                              |   | (7,238                               | )      | (2,367 | ) | — |   |
| Proceeds from exercise of stock options                                                     |   | 8,491                                |   | 9,892 |   | 328 |   |
| Net cash received from the issuance of debt                                                 |   | —                               |   | — |   | 245,693 |   |
| Payments for interest and taxes                                                             |   | (90,061                              | )      | (101,850 | ) | (70,391 | ) |
| Payments for preferred stock buyback                                                        |   | (28,164                              | )      | — |   | — |   |
| Net cash (used in) provided by financing activities                                         |   | (131,753                             | )      | (101,825 | ) | 175,630 |   |
| Increase in cash and cash equivalents                                                       |   | (22,279                              | )      | (24,614 | ) | 10,319 |   |
| CASH AND CASH EQUIVALENTS, beginning of year                                                |   | 32,577                               |   | 57,191 |   | 46,872 |   |
| CASH AND CASH EQUIVALENTS, end of year                                                      |   | $                                    | 10,298 |   | $ | 32,577 |   | $ | 57,191 |   |
| SUPPLEMENTAL DISCLOSURES OF CASH PAID FOR:                                                  |   |                                 |   |   |   |   |   |
| Income taxes                                                                                |   | $                                    | 48,063 |   | $ | 65,700 |   | $ | 46,193 |   |
| Interest                                                                                    |   | 41,998                               |   | 42,421 |   | 24,179 |   |
| SUPPLEMENTAL NONCASH ACTIVITIES:                                                            |   |                                 |   |   |   |   |   |
| Increase in investment in subsidiaries for forgiveness  of intercompany tax receivables     |   | —                               |   | — |   | 20,015 |   |

 

See accompanying note to condensed financial statements.

 

4

----

 

**LaBRANCHE & CO INC.**

**(ParentCompany Only)**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

 

## **1.             OVERVIEW**

 

The condensed financial statements of LaBranche &Co Inc. (Parent Company Only) should be read in conjunction with theconsolidated financial statements of LaBranche & Co Inc. and Subsidiariesand the notes thereto contained elsewhere in this filing.

 

## **2.             TRANSACTIONSWITH SUBSIDIARIES**

 

LaBranche & Co Inc.has transactions with its consolidated subsidiaries determined on anagreed-upon basis.

 

LaBranche & Co Inc. received cash dividends fromits consolidated subsidiaries totaling $154.0 million, $200.9 million and $99.6for the years ended December 31, 2002, 2001 and 2000, respectively.

 

5

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