**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

|   | **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------|------------|-----------------------------------------------------------------------------------------------|
|   |       |                                                                                          |
|   |       | **For the quarterly period ended March 31, 2004**                                             |
|   |       |                                                                                          |
|   |       | **OR**                                                                                        |
|   |       |                                                                                          |
|   | **o**      | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |

 

**For the transition period from             to                **

** **

**Commission File Number 001-15251**

** **

**LABRANCHE& CO INC.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **13-4064735**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**One Exchange Plaza, New York, New York 10006**

(Addressof principal executive offices)

 

**(212) 425-1144**

(Registrant’stelephone number, including area code)

 

**Not Applicable**

(Formername, former address and former fiscal year,if changed since last report)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý        Noo

 

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

 

The number of shares of the registrant’s common stock outstanding as ofMay 10, 2004 was 59,821,322.

 

 

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**TABLEOF CONTENTS**

 
| PART I                                                    | FINANCIAL INFORMATION                                                                        |   |
|-----------------------------------------------------------|----------------------------------------------------------------------------------------------|--------|
|                                                      |                                                                                         |   |
| Item 1.                                                   | Financial Statements.                                                                        |   |
|                                                      |                                                                                         |   |
| CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS          |                                                                                         |
|                                                      |                                                                                         |   |
| CONDENSED  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |                                                                                         |
|                                                      |                                                                                         |   |
| CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS          |                                                                                         |
|                                                      |                                                                                         |   |
| NOTES  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     |                                                                                         |
|                                                      |                                                                                         |   |
| Item 2.                                                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |   |
|                                                      |                                                                                         |   |
| Item 3.                                                   | Quantitative and Qualitative Disclosures about  Market Risk.                                 |   |
|                                                      |                                                                                         |   |
| Item 4.                                                   | Controls and Procedures.                                                                     |   |
|                                                      |                                                                                         |   |
| PART II                                                   | OTHER INFORMATION                                                                            |   |
|                                                      |                                                                                         |   |
| SIGNATURES                                                |                                                                                         |
|                                                      |                                                                                         |
| CERTIFICATIONS                                            |                                                                                         |

 

2

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# **PART I**  FINANCIAL INFORMATION

# **Item 1**.    Financial Statements.

 

 

**LaBRANCHE& CO INC. and SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

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

 
|                                                            |   | **For the  Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                            |   | **2004**                                   |   | **2003** |   |
|                                                            |   | **(unaudited)**                            |   | **(unaudited)** |   |
| REVENUES:                                                       |   |                                       |   |   |   |
| Net gain on principal transactions                              |   | $                                          | 52,298 |   | $ | 51,803 |   |
| Commissions                                                     |   | 25,523                                     |   | 22,516 |   |
| Other                                                           |   | 2,092                                      |   | 2,315 |   |
| Total revenues                                                  |   | 79,913                                     |   | 76,634 |   |
| EXPENSES:                                                       |   |                                       |   |   |   |
| Employee compensation and related benefits                      |   | 27,791                                     |   | 25,819 |   |
| Interest                                                        |   | 12,358                                     |   | 11,721 |   |
| Exchange, clearing and brokerage fees                           |   | 8,894                                      |   | 10,662 |   |
| Lease of exchange memberships                                   |   | 4,143                                      |   | 6,469 |   |
| Depreciation and amortization of  intangibles                   |   | 3,055                                      |   | 3,310 |   |
| Other                                                           |   | 10,031                                     |   | 7,380 |   |
| Total expenses                                                  |   | 66,272                                     |   | 65,361 |   |
|                                                            |   |                                       |   |   |   |
| Income before minority interest and  provision for income taxes |   | 13,641                                     |   | 11,273 |   |
|                                                            |   |                                       |   |   |   |
| MINORITY INTEREST                                               |   | 175                                        |   | 3⁄4 |   |
|                                                            |   |                                       |   |   |   |
| Income before provision for income taxes                        |   | 13,466                                     |   | 11,273 |   |
|                                                            |   |                                       |   |   |   |
| PROVISION FOR INCOME TAXES                                      |   | 5,552                                      |   | 5,746 |   |
|                                                            |   |                                       |   |   |   |
| Net income                                                      |   | 7,914                                      |   | 5,527 |   |
| Preferred dividends and discount accretion                      |   | 1,056                                      |   | 1,167 |   |
| Net income available to common stockholders                     |   | $                                          | 6,858  |   | $ | 4,360 |   |
|                                                            |   |                                       |   |   |   |
| Weighted-average common shares outstanding:                     |   |                                       |   |   |   |
| Basic                                                           |   | 59,806                                     |   | 59,495 |   |
| Diluted                                                         |   | 60,224                                     |   | 60,289 |   |
| Earnings per share:                                             |   |                                       |   |   |   |
| Basic                                                           |   | $                                          | 0.11   |   | $ | 0.07 |   |
| Diluted                                                         |   | $                                          | 0.11   |   | $ | 0.07 |   |

 

The accompanying notes are an integral partof these consolidated statements.

 

3

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**LaBRANCHE& CO INC. and SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL CONDITION**

**(UNAUDITED)**

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

** **
|                                                                                                                                                                                                                  |   | **As of**           |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|
|                                                                                                                                                                                                                  |   | **March 31,  2004** |      | **December  31, 2003** |   |
|                                                                                                                                                                                                                  |   | **(unaudited)**     |      | **(audited)** |   |
| **ASSETS**                                                                                                                                                                                                            |   |                |      |   |   |
|                                                                                                                                                                                                                  |   |                |      |   |   |
| Cash and cash equivalents                                                                                                                                                                                             |   | $                   | 512,639   |   | $ | 491,885 |   |
| Cash and securities segregated under  federal regulations                                                                                                                                                             |   | 5,819               |      | 3,959 |   |
| Securities purchased under agreements to  resell                                                                                                                                                                      |   | 9,000               |      | 13,000 |   |
| Receivable from brokers, dealers and  clearing organizations                                                                                                                                                          |   | 247,613             |      | 142,639 |   |
| Receivable from customers                                                                                                                                                                                             |   | 7,340               |      | 3,434 |   |
| Securities owned, at market value:                                                                                                                                                                                    |   |                |      |   |   |
| Corporate equities                                                                                                                                                                                                    |   | 240,948             |      | 265,568 |   |
| Options                                                                                                                                                                                                               |   | 96,141              |      | 73,694 |   |
| Exchange-traded funds                                                                                                                                                                                                 |   | 269,021             |      | 102,626 |   |
| U.S. Government obligations                                                                                                                                                                                           |   | 4,043               |      | 3⁄4 |   |
| Commissions receivable                                                                                                                                                                                                |   | 4,879               |      | 4,613 |   |
| Exchange memberships contributed for use,  at market value                                                                                                                                                            |   | 13,500              |      | 15,000 |   |
| Exchange memberships owned, at cost (market  value of $58,927and $58,870, respectively)                                                                                                                               |   | 77,319              |      | 77,319 |   |
| Office equipment and leasehold  improvements, at cost, less accumulated depreciation and amortization of  $9,391 and $8,931, respectively                                                                             |   | 4,333               |      | 4,659 |   |
| Intangible assets, net of accumulated amortization:                                                                                                                                                                   |   |                |      |   |   |
| Specialist stock lists                                                                                                                                                                                                |   | 368,986             |      | 371,580 |   |
| Trade name                                                                                                                                                                                                            |   | 25,011              |      | 25,011 |   |
| Goodwill                                                                                                                                                                                                              |   | 289,593             |      | 289,593 |   |
| Other assets                                                                                                                                                                                                          |   | 63,381              |      | 75,022 |   |
| Total assets                                                                                                                                                                                                          |   | $                   | 2,239,566 |   | $ | 1,959,602 |   |
|                                                                                                                                                                                                                  |   |                |      |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                         |   |                |      |   |   |
| Liabilities:                                                                                                                                                                                                          |   |                |      |   |   |
| Payable to brokers and dealers                                                                                                                                                                                        |   | $                   | 52,211    |   | $ | 45,172 |   |
| Payable to customers                                                                                                                                                                                                  |   | 16,608              |      | 9,010 |   |
| Securities sold, but not yet purchased, at  market value:                                                                                                                                                             |   |                |      |   |   |
| Corporate equities                                                                                                                                                                                                    |   | 378,648             |      | 232,942 |   |
| Options                                                                                                                                                                                                               |   | 83,872              |      | 67,079 |   |
| Exchange-traded funds                                                                                                                                                                                                 |   | 227,513             |      | 115,140 |   |
| U.S. Government obligations                                                                                                                                                                                           |   | 15,260              |      | 3⁄4 |   |
| Accrued compensation                                                                                                                                                                                                  |   | 25,109              |      | 42,833 |   |
| Accounts payable and other accrued expenses                                                                                                                                                                           |   | 91,121              |      | 99,844 |   |
| Income taxes payable                                                                                                                                                                                                  |   | 6,925               |      | 8,588 |   |
| Deferred tax liabilities                                                                                                                                                                                              |   | 169,226             |      | 172,846 |   |
| Short term debt                                                                                                                                                                                                       |   | 101,983             |      | 101,971 |   |
| Long term debt                                                                                                                                                                                                        |   | 255,763             |      | 255,606 |   |
| Subordinated liabilities:                                                                                                                                                                                             |   |                |      |   |   |
| Exchange memberships contributed for use,  at market value                                                                                                                                                            |   | 13,500              |      | 15,000 |   |
| Other subordinated indebtedness                                                                                                                                                                                       |   | 20,285              |      | 20,285 |   |
| Total liabilities                                                                                                                                                                                                     |   | 1,458,024           |      | 1,186,316 |   |
|                                                                                                                                                                                                                  |   |                |      |   |   |
| Minority interest                                                                                                                                                                                                     |   | 175                 |      | 322 |   |
|                                                                                                                                                                                                                  |   |                |      |   |   |
| Commitments and contingencies                                                                                                                                                                                         |   |                |      |   |   |
|                                                                                                                                                                                                                  |   |                |      |   |   |
| Preferred stock, Series A, $.01 par value,  liquidation value of $1,000 per share; 10,000,000 shares authorized; -0- and  39,186 shares issued and outstanding at March 31, 2004 and December 31, 2003,  respectively |   | 3⁄4              |      | 38,317 |   |
| Preferred stock, Series B, $.01 par value,  liquidation value of $1,000 per share; 10,000,000 shares authorized; 39,186  and -0- shares issued and outstanding at March 31, 2004 and December 31,  2003, respectively |   | 38,491              |      | 3⁄4 |   |
| Common stock, $.01 par value, 200,000,000  shares authorized; 59,821,322 and 59,791,036 shares issued and outstanding at  March 31, 2004 and December 31, 2003, respectively                                          |   | 598                 |      | 598 |   |
| Additional paid-in capital                                                                                                                                                                                            |   | 684,045             |      | 682,816 |   |
| Retained earnings                                                                                                                                                                                                     |   | 58,233              |      | 51,374 |   |
| Unearned compensation                                                                                                                                                                                                 |   | 3⁄4              |      | (141 | ) |
| Total stockholders’ equity                                                                                                                                                                                       |   | 781,367             |      | 772,964 |   |
|                                                                                                                                                                                                                  |   |                |      |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                       |   | $                   | 2,239,566 |   | $ | 1,959,602 |   |

 

The accompanying notes are an integral partof these consolidated statements.

 

4

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** LaBRANCHE & CO INC. and SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(000’s omitted)**

** **
|                                                                                     |   | **Three  Months Ended March 31,** |    |
|------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                     |   | **2004**                          |    | **2003** |   |
| **CASH FLOWS FROM  OPERATING ACTIVITIES:**                                               |   |                              |    |   |   |
| Net income                                                                               |   | $                                 | 7,914   |   | $ | 5,527 |   |
|  Adjustments to reconcile net income to net cash provided by  operating activities: |   |                              |    |   |   |
| Depreciation and amortization of intangibles                                             |   | 3,055                             |    | 3,310 |   |
| Amortization of debt issuance costs and  bond discount                                   |   | 568                               |    | 519 |   |
| Minority interest in consolidated  subsidiary                                            |   | 175                               |    | — |   |
| Compensation expense related to stock-based  compensation                                |   | 1,371                             |    | 839 |   |
| Deferred tax provision                                                                   |   | 6,679                             |    | 1,650 |   |
| Acceleration of preferred stock discount  accretion                                      |   | —                            |    | 918 |   |
|  Tax  benefit related to employee stock transactions                                |   | —                            |    | 61 |   |
|  Changes in operating assets and liabilities:                                       |   |                              |    |   |   |
| Cash and securities segregated under  federal regulations                                |   | (1,860                            | )       | (1,882 | ) |
| Securities purchased under agreements to  resell                                         |   | 4,000                             |    | 15,560 |   |
| Receivable from brokers, dealers and  clearing organizations                             |   | (104,974                          | )       | (3,919 | ) |
| Receivable from customers                                                                |   | (3,906                            | )       | 6,903 |   |
| United States Government obligations                                                     |   | —                            |    | 395,840 |   |
| Securities owned, at market value:                                                       |   |                              |    |   |   |
| Corporate equities                                                                       |   | 24,620                            |    | (99,728 | ) |
| Options                                                                                  |   | (22,447                           | )       | 25,652 |   |
| Exchange-traded funds                                                                    |   | (166,395                          | )       | — |   |
| U.S. Government obligations                                                              |   | (4,043                            | )       | — |   |
| Commissions receivable                                                                   |   | (266                              | )       | (40 | ) |
| Other assets                                                                             |   | 942                               |    | 1,325 |   |
| Payable to brokers and dealers                                                           |   | 7,039                             |    | (901 | ) |
| Payable to customers                                                                     |   | 7,598                             |    | (6,556 | ) |
| Securities sold, but not yet purchased, at  market value:                                |   |                              |    |   |   |
| Corporate equities                                                                       |   | 145,706                           |    | 98,581 |   |
| Options                                                                                  |   | 16,793                            |    | (27,216 | ) |
| Exchange-traded funds                                                                    |   | 112,373                           |    | — |   |
| U.S. Government obligations                                                              |   | 15,260                            |    | — |   |
| Accrued compensation                                                                     |   | (17,724                           | )       | (20,595 | ) |
| Accounts payable and other accrued expenses                                              |   | (9,604                            | )       | (11,468 | ) |
| Income taxes payable                                                                     |   | (1,663                            | )       | (7,804 | ) |
| Net cash provided by operating activities                                                |   | 21,211                            |    | 376,576 |   |
|                                                                                     |   |                              |    |   |   |
| **CASH FLOWS FROM  INVESTING ACTIVITIES:**                                               |   |                              |    |   |   |
| Payments for purchases of office equipment  and leasehold improvements                   |   | (135                              | )       | (380 | ) |
| Net cash (used in) investing activities                                                  |   | (135                              | )       | (380 | ) |
|                                                                                     |   |                              |    |   |   |
| **CASH FLOWS FROM  FINANCING ACTIVITIES:**                                               |   |                              |    |   |   |
| Payment to minority interest holder                                                      |   | (322                              | )       | — |   |
| Proceeds from exercise of stock options                                                  |   | —                            |    | 216 |   |
| Payment of common stock dividends                                                        |   | —                            |    | (4,761 | ) |
| Payment of preferred stock dividends                                                     |   | —                            |    | (2,745 | ) |
| Payment for preferred stock buyback                                                      |   | 3⁄4                            |    | (24,650 | ) |
| Net cash (used in) financing activities                                                  |   | (322                              | )       | (31,940 | ) |
| Increase in cash and cash equivalents                                                    |   | 20,754                            |    | 344,256 |   |
| CASH AND CASH EQUIVALENTS, beginning of  period                                          |   | 491,885                           |    | 77,033 |   |
| CASH AND CASH EQUIVALENTS, end of period                                                 |   | $                                 | 512,639 |   | $ | 421,289 |   |
|                                                                                     |   |                              |    |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:**                                            |   |                              |    |   |   |
| Interest                                                                                 |   | $                                 | 20,407  |   | $ | 20,660 |   |
| Income taxes                                                                             |   | $                                 | 8       |   | $ | 10,693 |   |
|                                                                                     |   |                              |    |   |   |
| **SUPPLEMENTAL NON-CASH FINANCING AND  INVESTING ACTIVITIES:**                           |   |                              |    |   |   |
|    Net increase in additional paid-in capital related to stock-based  awards        |   | $                                 | 1,371   |   | $ | 1,055 |   |

** **

The accompanying notes are an integral partof these consolidated statements.

 

5

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**LaBRANCHE & CO INC. and SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

** **

**1.**             ORGANIZATION AND DESCRIPTION OF BUSINESS

** **

The condensed consolidated financial statementsinclude the accounts of LaBranche & Co Inc., a Delaware corporation (the“Holding Company”), and its subsidiaries, LaBranche & Co. LLC, a New Yorklimited liability company (“LaBranche”), LaBranche Financial Services, Inc., aNew York corporation (“LFSI”), LaBranche Structured Products, LLC, a New Yorklimited liability company (“LSP”), LaBranche Structured Products Specialists,LLC, a New York limited liability company (“LSPS”), LABDR Services, Inc., aDelaware corporation (“LABDR”), and LaBranche & Co. B.V., a Netherlandsprivate limited liability company (“BV” and collectively with the HoldingCompany, LaBranche, LFSI, LSP, LSPS and LABDR, the “Company”). The HoldingCompany is the sole member of LaBranche, LSP and LSPS, the 100% stockholder ofLFSI and LABDR, and the sole owner of BV. LaBranche is a registeredbroker-dealer and operates primarily as a specialist in equity securities andrights listed on the New York Stock Exchange (the “NYSE”) and in equitysecurities 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 ownretail customers, customers of introducing brokers and institutional customers,including traders, professional investors and broker-dealers. LFSI alsoprovides direct-access floor brokerage services to institutional customers. LSPis a registered broker-dealer and operates as a specialist in options,Exchange-Traded Funds (“ETFs”) and futures on the AMEX, the New York Board ofTrade (“NYBOT”) and the Philadelphia Stock Exchange (“PHLX”) and acts as amarket-marker in options, ETFs and futures on several exchanges. LSPS wasorganized in February 2004 to operate as a specialist in ETFs traded on theNYSE, but had yet to commence operations as of March 31, 2004. LABDR was incorporated in 2003 toprovide disaster recovery services and back-up facilities to other HoldingCompany subsidiaries. BV represents LaBranche in European markets and providesclient services to LaBranche’s European listed companies.

 

**2.**             INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTSAND FINANCIAL INFORMATION

 

The unaudited interim condensed consolidated financialinformation as of March 31, 2004 and for the three months ended March 31, 2004and 2003 is presented in the accompanying condensed consolidated financialstatements. The unaudited interim condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial information. The unaudited interim condensed consolidated financialinformation reflects all adjustments which are, in the

 

6

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opinion of management,necessary for a fair presentation of the results for such periods. Thisunaudited interim condensed consolidated financial information as of March 31,2004 should be read in conjunction with the audited consolidated financialstatements and notes thereto as of December 31, 2003 included in the Company’sForm 10-K filed with the Securities and Exchange Commission (“SEC”) on March15, 2004. Results of the interim periods are not necessarily indicative ofresults to be obtained for a full fiscal year.

## ** **

## **3.**             SHORTTERM AND LONG TERM DEBT

 

The Company is currently in the process of refinancingits outstanding $100.0 million principal amount of 9.5% Senior Notes due August2004 (the “Senior Notes”) and $250.0 million principal amount of SeniorSubordinated Notes due March 2007 (the “Senior Subordinated Notes”).  Although the Company believes it will beable to refinance the Senior Notes (see Note 11), there can be no assurance inthis regard.  If the Company is unableto repurchase the Senior Notes prior to their maturity in August 2004, it willseek to raise sufficient funds to repay the Senior Notes without impairing itscore specialist business operations by borrowing under a committed $25.0million revolving credit facility, disposing of certain of its investmentassets, scaling back or liquidating certain of its non-core specialistoperations, disposing of certain of its non-core business assets and/or sellingadditional shares of its common stock.

 

In the event that the Company is unable to repurchaseor repay the Senior Notes when due, the failure to repay the Senior Notes andaccrued interest when due would be deemed an “event of default” under theindenture governing the Senior Notes and also would trigger an “event ofacceleration” under certain of the Company’s other indebtedness, including theSenior Subordinated Notes, requiring immediate repayment of such otherindebtedness.  Such an “event ofdefault” and “event of acceleration” would materially and adversely affect theCompany’s financial condition.

 

## **4.**             INCOMETAXES

## ** **

The Company accounts for income taxes in accordancewith SFAS No. 109, “Accounting for Income Taxes,” which requires therecognition of tax benefits or expenses based on the estimated future taxeffects of temporary differences between the financial statement and tax basesof its assets and liabilities. Deferred tax assets and liabilities primarilyrelate to the deductible portion of fines and restitution, stock-basedcompensation, other compensation accruals, amortization periods of certainintangibles and differences between the financial statement and tax bases ofassets acquired.

 

The components of the provision for income taxesreflected on the condensed consolidated statements of operations are set forthbelow (000’s omitted):

 

|                                   |   | **Three  Months Ended March 31,** |   |
|----------------------------------------|--------|-----------------------------------|--------|
|                                   |   | **2004**                          |   | **2003** |   |
| Current federal, state and local taxes |   | $                                 | (1,126 | ) | $ | 4,096 |   |
| Deferred tax provision                 |   | 6,678                             |   | 1,650 |   |
| Total provision for income taxes       |   | $                                 | 5,552  |   | $ | 5,746 |   |

 

7

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**5.**             CAPITAL AND NET LIQUID ASSET REQUIREMENTS

** **

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

 

As of March 31, 2004 and December 31, 2003, LaBranche’snet capital, as defined under SEC Rule 15c3-1, was $453.3 million and $408.7million, respectively, which exceeded the minimum requirements by $447.4million and $403.1 million, respectively. LaBranche’s aggregate indebtedness tonet capital ratio on those dates was .20 to 1 and .21 to 1, 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.

 

As of March 31, 2004 and December 31, 2003,LaBranche’s NYSE minimum required dollar amount of net liquid assets, asdefined, was $446.0 million, compared to actual net liquid assets, as defined,of $454.8 million and $473.0 million, respectively.  The net liquid assets of $473.0 million as of December 31, 2003was reported to the NYSE prior to recording the $63.5 million charge thatresulted from the settlement of investigations by the NYSE and SEC of NYSE specialisttrading activity. After accruing for the settlement charge as a subsequentevent in February 2004, LaBranche’s net liquid assets as of December 31, 2003would have been reduced to $406.1 million. However, since LaBranche’s netliquid assets are reported to the NYSE on a daily basis, LaBranche hadsufficient net liquid assets as of December 31, 2003. Concurrent withLaBranche’s recording of the settlement accrual in February 2004, the HoldingCompany contributed capital to LaBranche sufficient to enable LaBranche tomaintain compliance with its net liquid asset requirements.

 

The AMEX generally requires its equity specialistfirms to maintain a cash or liquid asset position of the greater of (a) $1.0million, or (b) an amount sufficient to assume a position of sixty tradingunits of each security in which the equity specialist is registered. As ofMarch 31, 2004, LaBranche satisfied the AMEX equity specialist liquid assetrequirements.

 

As a registered broker-dealer and member firm of theNYSE, LFSI is also subject to SEC Rule 15c3-1, as adopted and administered bythe SEC and the NYSE. 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 March 31, 2004 and December 31, 2003,LFSI’s net capital, as defined, was $13.6 million and $14.4 million,respectively, which exceeded minimum requirements by $12.1 million and $12.9million, respectively.

 

8

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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 allowable assets in the correspondents’ net capital calculation.  At March 31, 2004 and December 31, 2003, thereserve requirement was approximately $2.1 million and $2.2 million,respectively.  LFSI had cash andsecurities on deposit in a Special Reserve Bank Account of $3.6 million as ofApril 1, 2004 and $3.7 million as of January 5, 2004 to comply with itsrespective period-end requirements.

 

As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered by the SEC andthe AMEX. LSP is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 ofaggregate indebtedness, as defined. As of March 31, 2004 and December 31,2003, LSP’s net capital, as defined, was $21.3 million and $32.8 million,respectively, which exceeded minimum requirements by $21.1 million and $32.6million, respectively.

 

## **6.**             EARNINGSPER SHARE

 

Earnings per share (“EPS”) are computed in accordancewith SFAS No. 128, “Earnings Per Share.” Basic EPS is calculated by dividingnet income available to common stockholders by the weighted-average number ofcommon shares outstanding. Diluted EPS includes the determinants of basic EPSand, in addition, gives effect to dilutive potential common shares.

 

The computations of basic and diluted EPS are setforth below (000’s omitted, except per share data):

 

|                                                                                                    |   | **Three  Months Ended March 31,** |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                    |   | **2004**                          |   | **2003** |   |
| Net income                                                                                              |   | $                                 | 7,914  |   | $ | 5,527 |   |
| Less:   preferred dividends and discount accretion                                                 |   | 1,056                             |   | 1,167 |   |
| Numerator for basic and diluted earnings  per share – net income available to common stockholders  |   | $                                 | 6,858  |   | $ | 4,360 |   |
| Denominator for basic earnings per share –  weighted-average number of common shares outstanding   |   | 59,806                            |   | 59,495 |   |
| Dilutive shares:                                                                                        |   |                              |   |   |   |
| Stock options                                                                                           |   | 196                               |   | 510 |   |
| Restricted stock units                                                                                  |   | 222                               |   | 284 |   |
| Denominator for diluted earnings per share  – weighted-average number of common shares outstanding |   | 60,224                            |   | 60,289 |   |
| Basic earnings per share                                                                                |   | $                                 | 0.11   |   | $ | 0.07 |   |
| Diluted earnings per share                                                                              |   | $                                 | 0.11   |   | $ | 0.07 |   |

 

9

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The exercise prices for options to purchase anaggregate of 3,063,001 and 1,807,500 shares of common stock exceeded theaverage market price of the Company’s common stock for the three months endedMarch 31, 2004 and 2003, respectively. In addition, potential common shares relating to restricted stock andrestricted stock units whose fair value was below the average market price ofthe Company’s common stock for the three months ended March 31, 2004 and 2003totaled -0- and 19,976 shares, respectively. Accordingly, the calculation of diluted earnings per share does notinclude the antidilutive effect of these stock-based awards for the threemonths ended March 31, 2004 and 2003.

 

## **7.**             EMPLOYEEINCENTIVE PLANS

## ** **

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, the modified prospective and the retroactive restatement methods, foran entity that voluntarily changes to the fair-value based method of accountingfor stock-based employee compensation, in addition to the prospective methodrequired by SFAS No. 123, “Accounting for Stock-Based Compensation.” Prior toJanuary 1, 2003, the Company elected to account for stock based employeecompensation in accordance with Accounting Principles Board Opinion (“APB”) No.25 as permitted by SFAS No. 123. In accordance with APB No. 25,compensation expense was not recognized for stock options that had no intrinsicvalue on the date of grant. In addition, compensation expense was notrecognized for those options issued in connection with the Company’sacquisition of ROBB PECK McCOOEY Financial Services, Inc. (“RPM”) in March 2001and treated as part of the purchase price of RPM in accordance with the rulesof purchase accounting. On January 1, 2003, the Company adopted the prospectivemethod provided by SFAS No. 148 to account for stock-based employeecompensation. Accordingly, the Company expenses the fair value, as of the dateof grant, of stock options issued to employees on or after January 1, 2003 overthe related service periods. The Company has not issued any stock options sinceJanuary 1, 2003.

 

If the Company had recognized compensation expense foroptions granted prior to January 1, 2003 under the fair-value based method ofSFAS No. 123, net income available to common stockholders and earnings pershare would have been reduced to the pro forma amounts indicated below:

 

10

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|                                                                                       |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **(000’s omitted, except per share  data)**                                           |   | **2004**                          |   | **2003** |   |
|                                                                                       |   |                              |   |   |   |
| Net income available to common  stockholders, as reported                                  |   | $                                 | 6,858  |   | $ | 4,360 |   |
| Add: Stock-based compensation expense  included in reported net income (net of tax effect) |   | 622                               |   | 419 |   |
| Less: Stock-based compensation expense  under SFAS 123 (net of tax effect)                 |   | (2,105                            | )      | (2,212 | ) |
| Pro forma net income available to common  stockholders                                     |   | $                                 | 5,375  |   | $ | 2,567 |   |
| Diluted EPS, as reported                                                                   |   | $                                 | 0.11   |   | $ | 0.07 |   |
| Diluted EPS, pro forma                                                                     |   | $                                 | 0.09   |   | $ | 0.04 |   |

 

The effect of applying SFAS No. 123 in the proforma disclosure above may not be representative of the potential effectstock-based compensation would have on net income in future periods.

 

On January 21, 2004, the Company granted 600,000 RSUsto employees under the Equity Incentive Plan. These RSUs will generally vest infull on the third anniversary of the date of grant, subject to the granteesremaining in the continuous employ of the Company through the vesting date.

 

## **8.**             BUSINESSSEGMENTS

## ** **

Segment information is presented in accordance withSFAS No. 131, “Disclosures About Segments of an Enterprise and RelatedInformation.” Prior to January 1, 2002, the Company considered its operationsto be one reportable segment for purposes of presenting consolidated financialinformation and evaluating its performance. Since adopting SFAS No. 131 in2002, the Company views its business under two separate segments: Specialistand Execution and Clearing. The Company’s business segments are based upon thenature of the financial services provided, their revenue source and theCompany’s management organization.

 

The Company’s Specialist segment operates as aspecialist in equities and rights listed on the NYSE, as a specialist inequities, options, ETFs and futures on the AMEX, NYBOT and the PHLX and as amarket-maker in options, ETFs and futures on several exchanges. This segmentalso provides support services for the Company’s specialist activities. TheSpecialist segment currently includes the operations of LaBranche, LSP, LABDRand BV.

 

The Company’s Execution and Clearing segment providessecurities execution, securities clearing and other related services to its ownretail customers, customers of introducing brokers and institutional customers,including traders, professional investors and broker-dealers. This segment alsoprovides direct-access floor brokerage services to institutional customers. TheExecution and Clearing segment currently includes the operations of LFSI.

 

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Revenues and expenses directly associated with eachsegment are included in determining its operating results. Other expenses,including corporate overhead, which are not directly attributable to aparticular segment, generally are allocated to each segment based on itsresource usage levels or other appropriate measures. Certain administrativeexpenses, corporate overhead expenses and other sources of revenue are notspecifically allocated by management when reviewing the Company’s segments’performance, and appear in the Other section. Selected financial informationfor each segment is set forth below (000’s omitted):

 
|                                       |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------|--------|-----------------------------------|--------|
|                                       |   | **2004**                          |   | **2003** |   |
| **Specialist Segment:**                    |   |                              |   |   |   |
| Revenues                                   |   | $                                 | 66,344 |   | $ | 64,775 |   |
| Operating expenses                         |   | 34,381                            |   | 33,310 |   |
| Depreciation and amortization expense      |   | 2,904                             |   | 2,959 |   |
| Income before  minority interest and taxes |   | 29,059                            |   | 28,506 |   |
| Segment goodwill                           |   | 289,593                           |   | 466,485 |   |
| Segment assets                             |   | 2,104,583                         |   | 1,782,631 |   |
|                                       |   |                              |   |   |   |
| **Execution and Clearing Segment:**        |   |                              |   |   |   |
| Revenues                                   |   | $                                 | 13,240 |   | $ | 11,494 |   |
| Operating expenses                         |   | 14,131                            |   | 14,581 |   |
| Depreciation and amortization expense      |   | 127                               |   | 346 |   |
| Loss before  minority interest and taxes   |   | (1,018                            | )      | (3,433 | ) |
| Segment goodwill                           |   | —                            |   | 4,052 |   |
| Segment assets                             |   | 59,043                            |   | 71,265 |   |
|                                       |   |                              |   |   |   |
| **Other (1):**                             |   |                              |   |   |   |
| Revenues                                   |   | $                                 | 329    |   | $ | 365 |   |
| Operating expenses                         |   | 14,705                            |   | 14,160 |   |
| Depreciation and amortization expense      |   | 24                                |   | 5 |   |
| Loss before  minority interest and taxes   |   | (14,400                           | )      | (13,800 | ) |
| Segment assets                             |   | 75,940                            |   | 55,055 |   |
|                                       |   |                              |   |   |   |
| **Total:**                                 |   |                              |   |   |   |
| Revenues                                   |   | $                                 | 79,913 |   | $ | 76,634 |   |
| Operating expenses                         |   | 63,217                            |   | 62,051 |   |
| Depreciation and amortization expense      |   | 3,055                             |   | 3,310 |   |
|                                       |   |                              |   |   |   |
| Income before  minority interest and taxes |   | 13,641                            |   | 11,273 |   |
|                                       |   |                              |   |   |   |
| Goodwill                                   |   | 289,593                           |   | 470,537 |   |
| Assets                                     |   | 2,239,566                         |   | 1,908,951 |   |

 

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(1)           Other is comprised primarily of the interest on theHolding Company’s indebtedness, unallocated corporate administrative expenses,including legal costs, unallocated revenues (primarily income fromnon-marketable investments and interest income), and elimination entries.

 

## **9.**             STOCKHOLDERS’EQUITY

 

On January 21, 2004, the Company completed an exchangeoffer, pursuant to an exemption from registration under Section 3(a)(9) of theSecurities Act of 1933, as amended,

 

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pursuant to which itexchanged one share of a newly-created Series B preferred stock for each shareof its issued and outstanding Series A preferred stock. In the exchange offer,all of the approximately 39,186 shares of Series A preferred stock wereexchanged by the fourteen holders of record for shares of the Company’s SeriesB preferred stock.  Issuance of thenewly-created shares of Series B preferred stock was contingent upon the tenderfor exchange of 100% of the issued and outstanding shares of Series A preferredstock.

 

Each share of newly-issued Series B preferred stockhas a liquidation preference of $1,000 per share and generally accruescumulative preferred dividends at an annual rate of 8.0% of the liquidationpreference until March 15, 2005, 10.0% until March 15, 2006 and 10.8%thereafter, payable on the first day of January and the first day of July ofeach year.  The terms of the Series Bpreferred stock provide, however, that if the dividend payable on January 1,2004 with respect to the then-outstanding Series A preferred stock is nottimely paid, the dividend payable on July 1, 2004 with respect to the Series Bpreferred stock will accrue at an annual rate of 9.0%.  Because the Company did not pay the January1, 2004 dividend with respect to the then-outstanding Series A preferred stock,the dividend payable on July 1, 2004 with respect to the Series B preferredstock currently is accruing at an annual rate of 9.0%.  Additionally, if the dividend payable onJuly 1, 2004 with respect to the Series B preferred stock is not timely paid,then the dividend payable on January 1, 2005 will accrue at an annual rate of9.0% through September 30, 2004 and 8.0% thereafter through December 31, 2004.

 

## **10.**          COMMITMENTSAND CONTINGENCIES

## ** **

Therehave been no material new developments in the Company’s legal proceedings sincethe filing of the Company’s Form 10-K for the year ended December 31, 2003,filed on March 15, 2004 (the “2003 10-K”) except as follows:

 

OnMarch 29, 2004, the Company entered into a definitive agreement with the NYSEand the SEC to settle the NYSE and SEC investigations concerning specialisttrading activity described in the 2003 10-K. The settlement is in the form of administrative orders with findingsbased on a neither admit nor deny offer of settlement.  The findings, neither admitted nor denied,include violations of Section 11(b) of the Securities Exchange Act of 1934 (the“Exchange Act”) and rules promulgated thereunder concerning specialist trading,including the requirement that a specialist maintain a fair and orderly market,and violations of Section 15(b)(4)(E) of the Exchange Act, including failure tosupervise with respect to certain transactions in which one or more employeesallegedly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgatedthereunder.  Pursuant to the agreement,and without admitting or denying any wrongdoing, the Company paid on April 7,2004 a total of $63.5 million in disgorgement and civil penalties for certaintrades that occurred during the five-year period from 1999 through 2003.  This settlement resolved the NYSE and SEC investigationsof the NYSE specialist trading activity concerning the Company for all periodsthrough 2003.  Of the total $63.5million, $41.6 million represents disgorgement and $21.9 million representscivil penalties.  As the settlement wasa subsequent event reportable for 2003 under accounting principles generallyaccepted in the United States of America, the Company recorded a $63.5 millionpre-tax charge for 2003.

 

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OnMarch 22, 2004, the *Sofran, Semon, Haug, Labul, Murphy, Strain, Yopp, Ferris*and *Levin*purported lawsuits described in the 2003 10-K were consolidated by the UnitedStates District Court for the Southern District of New York, and leadplaintiffs and lead plaintiffs’ counsel were appointed by the Court.

 

OnMarch 11, 2004, a new action, *Rosenbaum Partners, LP v. The New York StockExchange, Inc., et al.*, No. 04 CV 2038, was filed in the UnitedStates District Court for the Southern District of New York.  The *Rosenbaum* action asserts claims similar tothe claims asserted in the *Pirelli, Marcus, Empire* and *CalPERS*lawsuits in the United States District Court for the Southern District of NewYork described in the 2003 10-K.  The *Rosenbaum*case has been brought by an individual plaintiff who does not allege to berepresenting a class.

 

TheCompany believes that the claims assertedagainst it in the lawsuits listed above, as described in the 2003 10-K, arewithout merit, and the Company denies all allegations of wrongdoing.  There can be no assurance, however,as to the outcome or timing of theresolution of these proceedings.  TheCompany therefore is unable to estimate the amount or potential range of anyloss that may arise out of these proceedings. The range of possible resolutions could include determinations andjudgments against the Company or settlements and could require substantialpayments by the Company that could have a material adverse effect on theCompany’s financial condition, results of operations and cash flows.

 

The Company has been the target, from time to time, ofvarious claims and lawsuits incidental to the ordinary course of its and itssubsidiaries’ business operations. While the ultimate outcome of those claimsand lawsuits which currently are pending cannot be predicted with certainty,the Company believes, based on its understanding of the facts of theseproceedings, that their ultimate resolution will not, in the aggregate, have amaterial adverse effect on the Company’s financial condition or results ofoperations.

 

## **11.**          SUBSEQUENTEVENTS

## ** **

The Company currently is in the process of refinancingthe Senior Notes and Senior Subordinated Notes.  On April 5, 2004, the Company commenced an offer to purchase forcash any and all of its outstanding Senior Notes in the aggregate principalamount of $100.0 million and Senior Subordinated Notes in the aggregateprincipal amount of $250.0 million from each holder thereof.  In conjunction with this offer, the Companyalso has solicited consents of the registered holders of the Senior Notes andthe Senior Subordinated Notes to certain proposed amendments of the respectiveindentures governing the Senior Notes and the Senior Subordinated Notes thatwould eliminate substantially all of the restrictive covenants, certain eventsof default and related provisions contained in the indentures.  This tender offer and consent solicitationwill expire at midnight, New York City time, on May 17, 2004, unless extendedor earlier terminated.

 

As of May 8, 2004, the Company had received consentsfrom the holders of more than 92.9% of the Senior Notes and more than 94.4% ofthe Senior Subordinated Notes.  Theseconsents are sufficient to effect the proposed amendments of the respectiveindentures governing the

 

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Senior Notes and theSenior Subordinated Notes.  Accordingly,the Company has executed a supplemental indenture to each of the indenturesgoverning the Senior Notes and the Senior Subordinated Notes, which will effectthe proposed amendments eliminating the restrictive covenants, certain eventsof default and related provisions in the indentures.  These proposed amendments will not become operative (with certainexceptions) until the tendered Senior Notes and Senior Subordinated Notes havebeen accepted for purchase pursuant to the tender offer.  The Company expects to make payment for theSenior Notes and the Senior Subordinated Notes tendered pursuant to the tenderoffer on or about May 18, 2004.

 

Upon consummation of thetender offer, assuming the payment date is May 18, 2004 (as currentlyscheduled), the Company will pay $1,043.54 (which includes accrued and unpaidinterest) for each $1,000 principal amount of Senior Notes purchased in thetender offer. The purchase price was determined based on a formula providingfor a fixed spread of 50 basis points over the bid side yield (as quoted onBloomberg Screen PX3 at 10:00 a.m., New York City time, on April 20, 2004) ofthe 2-1/8% U.S. Treasury Note due August 31, 2004, plus accrued and unpaidinterest up to, but not including, the payment date. The purchase price for theSenior Notes may be higher or lower, based on this formula, depending on theactual payment date for the 9.5% Notes.

 

The total consideration forthe Senior Notes includes a consent payment of $20.00 per $1,000 principal amountof Senior Notes that is payable only to holders who validly tendered (and didnot withdraw) their Senior Notes before April 19, 2004. Holders who validlytender their Senior Notes after April 19, 2004, but before the expiration ofthe tender offer (currently May 17, 2004), will be paid $1,023.54 (whichincludes accrued and unpaid interest) per $1,000 principal amount of SeniorNotes purchased in the tender offer.

 

The Company also will pay $1,200.00 plus accrued andunpaid interest up to, but not including, the payment date, per $1,000principal amount of Senior Subordinated Notes. The total consideration includesa consent payment of $20.00 per $1,000 principal amount of Senior SubordinatedNotes that is payable only to holders who validly tendered (and did notwithdraw) their Senior Subordinated Notes before April 19, 2004. Holders whovalidly tender their Senior Subordinated Notes after April 19, 2004 but beforethe expiration of the tender offer (currently May 17, 2004), will be paid$1,180.00 per $1,000 principal amount of Senior Subordinated Notes plus accruedand unpaid interest up to, but not including, the payment date.

 

In order to fund the repurchase of the Senior Notesand Senior Subordinated Notes, the Company commenced on April 23, 2004 an offeringof new senior notes in the aggregate principal of $460.0 million (the “NewNotes”) only to qualified institutional buyers in the United States pursuant toRule 144A under the Securities Act of 1933, as amended (the “Securities Act”),and outside the United States pursuant to Regulation S under the SecuritiesAct.  On May 4, 2004, the Companyentered into a definitive purchase agreement pursuant to which it will issueNew Notes due 2009 in the aggregate principal amount of $200.0 million (the“2009 Notes”) and New Notes due 2012 in the aggregate principal amount of$260.0 million (the “2012 Notes”). The 2009 Notes will bear interest at a rateof 9.5% per annum and mature in May 2009, and the 2012 Notes will bear interestat a rate of 11.0% per annum and mature in May 2012.  The 2009 Notes are redeemable at the option of the Companyanytime

 

15

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after May 15, 2007, andthe 2012 Notes are redeemable at the option of the Company anytime after May15, 2008. The issuance of the New Notes is expected to close on or about May18, 2004.

 

The Company intends to use the net proceeds of theissuance of New Notes to repurchase the tendered Senior Notes and SeniorSubordinated Notes following the closing of the issuance of the New Notes andto repurchase the approximately 39,186 outstanding shares of its Series Bpreferred stock within 120 days following the issuance of the New Notes,although the preferred stock is not by its terms callable and the Companycannot be certain that it will make an offer or be able to repurchase thepreferred stock on acceptable terms.

 

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## **Item 2**.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

## ** **

*Unless the contextotherwise requires, the “Company” or “we” shall mean LaBranche & Co Inc.and its wholly-owned subsidiaries.*

* *

*This discussionshould be read in conjunction with the Company’s Condensed ConsolidatedFinancial Statements and the Notes thereto contained in this report.*

* *

***Executive Overview***

* *

Total revenues for the 2004 first quarter increased to$79.9 million from $76.6 million for the comparable 2003 period. The increasein revenues was attributable mainly to the continued growth and development ofour LaBranche Structured Products, LLC subsidiary (“LSP”), which recordedrevenues of $7.0 million for the first quarter of 2004, its highest quarterlyrevenue to date. Our New York Stock Exchange, Inc. (“NYSE”) principal tradingrevenues decreased as a result of the trends in certain of our importantrevenue drivers.

 

During the first quarter of 2004, we saw evidence of apossible return of robust equity trading activity on the NYSE. The averagedaily share volume traded on the NYSE and the share and dollar volume of ourspecialist stocks were greater in the first quarter of 2004 than during anysingle quarter of 2003. These factors generally create an environment in whichthe specialist has a greater opportunity to commit its capital for principaltrades and thus potentially profit from its principal trades. However, thesignificant decline in market volatility during the first quarter of 2004negatively affected our equity specialist revenue generation. In addition, thedecline in our shares traded as principal indicates the impact of factors suchas program trading which reduces our opportunity to potentially profit fromprincipal trades.

 

We cannot predict whether the current trends in ourrevenue drivers will continue, and we cannot predict the effect of theserevenue drivers on our NYSE Specialist trading in future periods. The impact ofeach driver on our quarterly operating results may vary significantly, withpositive and negative trends offsetting each other. If trends in NYSE sharevolume, market volatility and our shares traded as principal deteriorate, suchtrends may negatively affect our results of operations. In addition, we cannotpredict how the proposed NYSE and Securities and Exchange Commission (the“SEC”) changes to the NYSE marketplace structure will affect our ability togenerate revenue in the future. While there has been considerable discussionand numerous comments on the proposed regulatory changes, the extent, natureand timing of these changes are currently unknown.

 

On March 29, 2004, we entered into an agreement with the NYSE and theSEC to settle their investigations concerning our NYSE specialist tradingactivity.  On April 7, 2004, under theterms of the settlement, we paid an aggregate of $63.5 million in disgorgementand civil penalties.  This settlementresolved the NYSE and the SEC investigations of our NYSE specialist tradingactivity for all periods through 2003. As part of the settlement with the NYSE

 

17

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and the SEC, we have agreed to the following undertakings:

 

•              implementation ofsystems and procedures to ensure appropriate follow up and review with regardto information provided to LaBranche & Co. LLC on a daily basis by the NYSEwith regard to specialists’ override of the Principal Inhibitor function, whichhelps detect and prevent improper specialist trades;

 

•              creation of acommittee, including LaBranche & Co. LLC’s chief compliance officer and atleast two members of senior management, specifically charged with meetingperiodically (no less frequently than monthly) to evaluate specialist rulecompliance;

 

•              development and/orenhancement of systems and procedures to track and maintain records identifyingthe individuals acting as specialist and clerk for each security at all timesthroughout each trading day;

 

•              annualcertification, through LaBranche & Co. LLC’s chief executive officer, thata review has been conducted by the chief compliance officer of trading inLaBranche & Co. LLC’s principal account for the purpose of detectinginterpositioning, trading ahead and unexecuted limit order violations;

 

•              bi-annual assessmentof, and reports on, the adequacy of the resources devoted to LaBranche &Co. LLC’s compliance function, and devotion of adequate funds and staffing tothe compliance department; and

 

•              retention of an independent consultant to review andevaluate LaBranche & Co. LLC’s compliance systems, policies and procedures reasonablydesigned to ensure that LaBranche & Co. LLC is in compliance with federalsecurities laws and NYSE rules with regard to specialist trading.

 

We have enhanced ourexisting compliance committee and specialist trading procedures in response tothese undertakings and will satisfy the remaining undertakings within the timeframe required by the settlement. We do not expect these changes orenhancements to adversely affect our net gain on principal transactions, butinstead should serve to enhance our risk management activities related to ourspecialist trading activity.

 

In terms of liquidity, the closing of our offering of$460.0 million principal amount of new senior notes will enable us to extendthe maturities of our short term debt and the majority of our long term debtand will enable us to offer to repurchase all outstanding shares of our SeriesB preferred stock. For a more complete discussion of the offering of new seniornotes, please see “—Liquidity and Capital Resources.”

 

**New Accounting Developments**

 

In December 2003, the FASB issued FIN 46(R),“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.”FIN 46(R) requires a company to consolidate a variable interest entity (“VIE”)if the company has variable interests that give it a majority of the expectedlosses or a majority of the expected residual returns, or both, of the entity.FIN

 

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46(R) is effective nolater than the end of the first reporting period that ends after March 15,2004. As of March 31, 2004 we have determined that none our investments wouldbe considered a VIE under the guidance provided in FIN 46(R), and therefore,the implementation of FIN 46(R) had no impact on our consolidated financialstatements.

 

**Critical Accounting Estimates**

 

*Goodwill*

 

We determine the fair value of each of our reportingunits and the fair value of each reporting unit’s goodwill under the provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill andOther Intangible Assets.”  Indetermining fair value, we use standard analytical approaches to businessenterprise valuation (“BEV”), such as the market comparable approach and theincome approach. The market comparable approach is based on comparisons of thesubject company to similar companies engaged in an actual merger or acquisitionor to public companies whose stocks are actively traded.  As part of this process, multiples of valuerelative to financial variables, such as earnings or stockholders’ equity, aredeveloped and applied to the appropriate financial variables of the subject companyto indicate its value.  The incomeapproach involves estimating the present value of the subject company’s futurecash flows by using projections of the cash flows that the business is expectedto generate, and discounting these cash flows at a given rate of return. Eachof these BEV methodologies requires the use of management estimates andassumptions. For example, under the market comparable approach, we assigned acertain control premium to the average public market price of our common stockduring the fourth quarter of 2003 in estimating the fair value of our reportingunits.  Similarly, under the incomeapproach, we assumed certain growth rates for our revenues, expenses, earningsbefore interest, depreciation and amortization, income taxes, returns onworking capital and other assets and capital expenditures, among others.  We also assumed a certain discount rate andterminal growth rates in our calculations. For our 2003 goodwill impairmenttest, we engaged an independent business valuation firm to assist us in our BEVanalyses.  In our 2003 SFAS No. 142test, we compared the fair values of our reportable units and the fair valuesof our reporting units’ goodwill—based on the methods described above—to theirrespective carrying values in two separate steps under SFAS No. 142 guidelinesto arrive at the $170.3 million impairment charge we recognized during the 2003fiscal fourth quarter.

 

Given the subjectivity involved in selecting which BEVapproach to use and in determining the input variables for use in our analyses,it is possible that a different valuation model and the selection of differentinput variables could produce a materially different estimate of fairvalue.  For the three month period endedMarch 31, 2004, no events occurred that would more likely than not reduce thefair value of our goodwill below its carrying value at March 31, 2004.Accordingly, no goodwill impairment testing was required for the 2004 fiscalfirst quarter.

 

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*Non-Marketable Securities*

 

The use of fair value to measure certainnon-marketable investments is a critical accounting estimate.  Investments in non-marketable securitiesconsist of investments in equity securities of private companies, limitedliability company interests and limited partnership interests, which do nothave readily available price quotations. Our principal non-marketableinvestment, by its nature, has little or no price transparency.  Certain investments in non-marketablesecurities are initially carried at cost as an approximation of fairvalue.  Adjustments to carrying valueare made if there are third-party transactions evidencing a change invalue.  In the absence of suchtransactions, we apply a discount factor to the carrying value of theinvestment, if we conclude that the expected realizable value of the investmentis less than its carrying value. In arriving at these conclusions, we considerfactors such as the financial performance of the entity, its cash flowforecasts, expected timing of a possible initial public offering, trends withinthat company’s industry and any specific rights associated with our investment,such as conversion features. Given management’s judgment involved in valuingcertain of our non-marketable securities, it is possible, as of a given pointin time, that a third-party could reach a different conclusion of fair valueutilizing the same variables as we have in our analysis.

 

*Other-Than-Temporary Impairment of Exchange Memberships*

 

The determination of the fair value of our exchangememberships is a critical accounting estimate. Exchange memberships owned by usare originally carried at cost, pursuant to the American Institute of CertifiedPublic Accountants’ (“AICPA”), *Audit and Accounting Guide—Brokers and Dealers inSecurities*.  Adjustments tocarrying value are made if we deem that an “other-than-temporary” decline invalue, as defined in Emerging Issues Task Force (“EITF”) Issue No. 03-1, *The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,*has occurred. In determining whether thevalue of the exchange memberships we own is impaired (*i.e*., fair market value isbelow cost) and whether such impairment is temporary or other-than-temporary,we consider many factors, including, but not limited to, information regardingrecent sale and lease prices of exchange memberships, historical trends of saleand lease prices of memberships on a particular exchange, the current conditionof the particular exchange’s market structure, legal and regulatorydevelopments affecting the particular exchange’s market structure and earningscapability, trends in new listings on the particular exchange, general globaland national economic factors and our knowledge and judgment of the specialistindustry and the securities market as a whole.

 

The NYSE corporate governance reforms, the NYSE andSEC specialist trading activity investigations and the SEC and NYSE marketstructure proposals during the past year have provided a high level ofuncertainty for the NYSE. These developments have challenged the effectivenessof the NYSE and the auction market and have contributed to the lower value ofexchange memberships. We believe that the effects of these factors on currentexchange membership prices are temporary due to the unusual and infrequentnature of these events. We believe the unknown consequences of potentialchanges to the current specialist business model and to the current NYSEtrading rules have indirectly influenced the level of demand for exchangememberships, thereby reducing their market value. Certain market analysts have

 

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initially concluded thatthese potential changes reflect an uncertain outcome for NYSE specialists,which has further depressed the market value of exchange memberships.

 

As a result of the above-mentioned uncertainties andtrends, the market value of NYSE memberships has remained at a depressed pricesince the fourth quarter of 2003 through the first quarter of 2004. In determiningwhether this depressed value in NYSE memberships has been“other-than-temporary,” we not only consider such quantitative factors asshort-term trends in exchange membership prices, but also evaluate historicalhighs and lows of NYSE membership sales prices over long periods of time.  Values of NYSE memberships over the past 25years have experienced significant price differentials between high and lowsales prices and, historically, sales prices of such memberships can reboundquickly at any given time.  In addition,we consider the fact that our NYSE memberships are our core operating assets,that we do not sell our NYSE memberships in the ordinary course of business,and that we hold such memberships indefinitely because they provide us with acompetitive advantage through direct access to the NYSE trading floor.  Moreover, we analyze the short-term salesprices of NYSE memberships in conjunction with lease prices for suchmemberships for possible trends. On a qualitative basis, we believe there havebeen no significant changes in NYSE market structure, no fundamentaldeterioration of national economic conditions or technological developments andno adverse trends in new listings on the NYSE. Additionally, there were no changes to the overall corporate governanceof the NYSE during the first quarter of 2004 and the NYSE appears poised toadapt in order to meet the SEC’s proposed market structure rule changes.

 

We believe the SEC-proposed rule changes will bringabout needed modifications to the NYSE auction trading model and will make itmore competitive. Although we cannot predict the effect of the proposed changesto the NYSE marketplace, we believe certain proposals may have a positiveeffect on the role of the NYSE specialist. Accordingly, when the abovedevelopments materialize, rule changes are implemented, and there is lessuncertainty surrounding the NYSE auction market, we believe that sales pricesof NYSE memberships will improve and that the recent six-month decline is stilltemporary.  However, we can provide noassurance that the consistent application of this accounting policy to futureperiods will not result in a conclusion that such impairment is no longertemporary.

 

As a result of the factors set forth above, we believethe current difference between the market value and our carrying value ofexchange memberships as of the quarter ended March 31, 2004 remains temporary.

 

**Completed Preferred Stock ExchangeOffer**

 

On January 21, 2004, we issued one share of our SeriesB preferred stock in exchange for each of the approximately 39,186 shares ofour issued and outstanding Series A preferred stock pursuant to an exchangeoffer commenced on December 6, 2003. Each share of Series B preferred stock has a liquidation preference of$1,000 per share and generally accrues cumulative preferred dividends at anannual rate of 8.0% of the liquidation preference of each share until March 15,2005, 10.0% until March 15, 2006 and 10.8% thereafter, payable on the first dayof January and the first day of July of each year.  Under the terms of the Series B

 

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preferred stock, becausewe did not pay the January 1, 2004 dividend with respect to thethen-outstanding Series A preferred stock, the dividend payable on July 1, 2004with respect to the Series B preferred stock currently is accruing at an annualrate of 9.0%.  Additionally, if we donot timely pay the dividend payable on July 1, 2004 with respect to the SeriesB preferred stock, then the dividends payable on January 1, 2005 will accrue atan annual rate of 9.0% through September 30, 2004 and 8.0% thereafter throughDecember 31, 2004. The increase in the annual dividend rate from 8.0% to 9.0%****withrespect to the Series B preferred stock will result in an additional charge ofapproximately $0.1 million per quarter through September 30, 2004.

 

Prior to the completion of the exchange offer, theterms of the Series A preferred stock prevented us from paying bonuses to our employees (orcompensation in lieu thereof) while we were not then current in our dividendpayments with respect to the Series A preferred stock.  Under the terms of the Series B preferredstock, however, until September 30, 2004, we are entitled to pay employeebonuses (or compensation in lieu thereof) while we are not current in ourpayment of dividends with respect to our preferred stock.  Thereafter, unless the full amount of alldividends on the Series B preferred stock initially payable after September 30,2004 has been paid, we will again be prevented from paying any bonuses to ouremployees (or compensation in lieu thereof) unless the holders of a majority ofthe outstanding shares of Series B preferred stock waive this prohibition onthe payment of employee bonuses.

 

**Results of Operations**

** **

# **Specialist Segment Operating Results**

# ** **

 
|                                       |   | **For the  Three Months  Ended March 31,** |   | **Percentage  Change** |   |
|--------------------------------------------|--------|--------------------------------------------|--------|------------------------|--------|
| **(000’s omitted)**                   |   | **2004**                                   |   | **2003**               |   |   |
|                                       |   |                                       |   |                   |   |   |   |
| Revenues:                                  |   |                                       |   |                   |   |   |   |
| Net gain on principal transactions         |   | $                                          | 52,298 |                   | $      | 51,803 |   | 1.0 | % |
| Commissions                                |   | 12,506                                     |   | 11,273                 |   | 10.9 |   |
| Other                                      |   | 1,540                                      |   | 1,699                  |   | (9.4 | ) |
| Total segment revenues                     |   | 66,344                                     |   | 64,775                 |   | 2.4 |   |
|                                       |   |                                       |   |                   |   |   |   |
| Operating expenses                         |   | 37,285                                     |   | 36,269                 |   | 2.8 |   |
|                                       |   |                                       |   |                   |   |   |   |
| Income before  minority interest and taxes |   | $                                          | 29,059 |                   | $      | 28,506 |   | 1.9 | % |

 

Revenues from our Specialist segment consist primarilyof net gain on principal transactions in securities for which we act asspecialist. Net gain on principal transactions represents trading gains net oftrading losses and SEC transaction fees, where applicable, and are earned by uswhen we act as principal buying and selling our specialist stocks, rights,options, ETFs and futures. Also included in net gain on principal transactionsare accrued dividends receivable or payable on our stock positions, net gainsand losses resulting from our market-making activities in ETFs, options andfutures, and the net gains and losses resulting from trading of foreigncurrencies, futures, equities and U.S. Government obligations

 

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underlying therights, ETFs and options for which we act as specialist or market-maker.  These revenues are primarily affected bychanges in share volume traded and fluctuations in the price of our stocks,options, ETFs and futures in which we are the specialist or in which we make amarket.

 

Commissions revenue generated by our Specialistsegment consists primarily of fees earned when our specialists act as agents byexecuting limit orders in equities on behalf of brokers, professional tradersand broker-dealers after a specified period of time; we do not earn commissionsin equities when we match market orders or when we act as a specialist or amarket-maker in other products.

 

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

 

## **Three Months Ended March 31, 2004 Compared to ThreeMonths Ended March 31, 2003**

## ** **

When assessing the performance and financial resultsof a specific period, management examines certain metrics to determine theirimpact on financial results.  Some ofthe key metrics that our management reviews and their values for the firstquarter of 2004 and 2003 are as follows:

 
|                                                   |   | **For the  Three Months  Ended March 31,** |   | **Percentage  Change** |   |
|--------------------------------------------------------|--------|--------------------------------------------|--------|------------------------|--------|
|                                                   |   | **2004**                                   |   | **2003**               |   |   |
| NYSE average daily share volume (in  millions)         |   | 1,538.5                                    |   | 1,419.4                |   | 8.4 | % |
| LAB share volume on the NYSE (in billions)             |   | 26.0                                       |   | 23.2                   |   | 11.6 | % |
| LAB dollar value on the NYSE (in billions)             |   | $                                          | 743.4  |                   | $      | 566.7 |   | 31.2 | % |
| Share volume of principal shares traded (in  billions) |   | 6.6                                        |   | 7.7                    |   | (14.5 | )% |
| Dollar value of principal shares traded (in  billions) |   | $                                          | 196.0  |                   | $      | 191.9 |   | 2.2 | % |
| Average closing price of the CBOE  Volatility Index    |   | 16.7                                       |   | 34.1                   |   | (50.9 | )% |

 

Generally, an increase in the average daily sharevolume on the NYSE, an increase in volatility (as measured by the averageclosing price of the Chicago Board of Options Exchange’s Volatility Index®, orthe “VIX”) or an increase in the dollar value and share volume of principalshares traded enables the specialist to increase its level of principalparticipation and thus its ability to realize net gain on principaltransactions.  While we monitor thesemetrics each period, they are not the sole indicators or factors in any givenperiod that determine our level of revenues, profitability or overallperformance.  Other factors, such asextreme price movements, unanticipated listed company news and events and otheruncertainties may influence our financial performance either positively ornegatively.

 

Net gain on principal transactions during the firstquarter of 2004 increased as a result of an increase in principal tradingrevenues at our LSP subsidiary, which was partially offset by a decrease in ourNYSE equity specialist revenues.  Netgain on principal transactions for our LaBranche & Co.  LLC subsidiary decreased to $45.3 millionfor the first quarter of 2004 as compared to $50.1 million for the same periodin 2003.  This decrease in revenues wasthe result of the decrease in share volume of principal shares traded, whichoccurred despite the increase in the share volume of LaBranche & Co. LLC’sspecialist stocks on the NYSE.  The

 

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increase in LaBranche& Co. LLC’s share volume on the NYSE and the decrease in the share volumeof principal shares traded indicated our specialists’ reduced level ofparticipation in the increased share volume. The significant decline in the volatility in the market, as measured bythe average closing price of the VIX, also reduced our opportunity to tradeprofitably as principal.  The net gainon principal transactions related to derivatives trading activity increased to$7.0 million in the first quarter of 2004 from $1.7 million in the firstquarter of 2003 as a result of the growth and expansion of LSP’s derivativetrading activities.  This growth andexpansion were the result of an increase in the number of derivatives traders,the number of different products in which LSP trades, the volume of trading,and the expansion of LSP’s trading activities to additional exchanges.

 

Commissions revenue earned by our Specialist segmentincreased due to an increase in the share volume of our NYSE specialiststocks.  As the share volume ofLaBranche & Co. LLC’s specialist stocks traded on the NYSE increases, thenumber of trades on which we may earn a commission generally increases, therebyincreasing commissions revenue for our Specialist segment.

 

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

 

# **Execution and Clearing SegmentOperating Results**

 
|                                     |   | **For the  Three Months  Ended March 31,** |   | **Percentage  Change** |   |
|------------------------------------------|--------|--------------------------------------------|--------|------------------------|--------|
| **(000’s omitted)**                 |   | **2004**                                   |   | **2003**               |   |   |
|                                     |   |                                       |   |                   |   |   |   |
| Revenues:                                |   |                                       |   |                   |   |   |   |
| Commissions                              |   | $                                          | 13,016 |                   | $      | 11,243 |   | 15.8 | % |
| Other                                    |   | 224                                        |   | 251                    |   | (10.7 | ) |
| Total segment revenues                   |   | 13,240                                     |   | 11,494                 |   | 15.2 |   |
|                                     |   |                                       |   |                   |   |   |   |
| Operating expenses                       |   | 14,258                                     |   | 14,927                 |   | (4.5 | ) |
|                                     |   |                                       |   |                   |   |   |   |
| Loss before  minority interest and taxes |   | $                                          | (1,018 | )                      | $      | (3,433 | ) | 70.4 | % |

 

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

 

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

 

## **Three Months Ended March 31, 2004 Compared to ThreeMonths Ended March 31, 2003**

## ** **

Commissions revenue from our Execution and Clearingsegment increased due to the growth of our institutional execution group’s revenuesas a result of the general growth and expansion of its customer base.  This increase was partially offset by adecline in direct-access and clearance revenues resulting from a decrease inthe volume of direct access executions and a decline in clearing customers.

 

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

 

# **Other Segment Operating Results**

 
|                                     |   | **For the  Three Months  Ended March 31,** |    | **Percentage  Change** |   |
|------------------------------------------|--------|--------------------------------------------|---------|------------------------|--------|
| **(000’s omitted)**                 |   | **2004**                                   |    | **2003**               |   |   |
|                                     |   |                                       |    |                   |   |   |   |
| Other revenues (losses)                  |   | 329                                        |    | $                      | 365    |   | (10.0 | )% |
| Total segment revenues                   |   | 329                                        |    | 365                    |   | (10.0 | ) |
|                                     |   |                                       |    |                   |   |   |   |
| Operating expenses                       |   | 14,729                                     |    | 14,165                 |   | 4.0 |   |
|                                     |   |                                       |    |                   |   |   |   |
| Loss before  minority interest and taxes |   | $                                          | (14,400 | )                      | $      | (13,800 | ) | (4.4 | )% |
|                                          |        |                                            |         |                        |        |  |  |  |  |

 

The portion of our revenues that is not generated fromour two principal business segments consists primarily of unrealized gains orlosses from our non-marketable investments and interest income.  No material changes were noted in comparingour 2004 first quarter Other segment operating results to those for the 2003comparable period.

 

# **Our Operating Expenses**

 
|                                               |   | **For the  Three Months  Ended March 31,** |   | **Percentage  Change** |   |
|----------------------------------------------------|--------|--------------------------------------------|--------|------------------------|--------|
| **(000’s omitted)**                           |   | **2004**                                   |   | **2003**               |   |   |
|                                               |   |                                       |   |                   |   |   |   |
| Expenses:                                          |   |                                       |   |                   |   |   |   |
| Employee compensation and related benefits         |   | $                                          | 27,791 |                   | $      | 25,819 |   | 7.6 | % |
| Interest                                           |   | 12,358                                     |   | 11,721                 |   | 5.4 |   |
| Exchange, clearing and brokerage fees              |   | 8,894                                      |   | 10,662                 |   | (16.6 | ) |
| Other operating expenses                           |   | 17,229                                     |   | 17,159                 |   | 0.4 |   |
|                                               |   |                                       |   |                   |   |   |   |
| Total expenses before minority interest and  taxes |   | 66,272                                     |   | 65,361                 |   | 1.4 |   |
|                                               |   |                                       |   |                   |   |   |   |
| Provision for income taxes                         |   | $                                          | 5,552  |                   | $      | 5,746 |   | (3.4 | )% |

 

Our largest operating expense is employee compensationand related benefits.  Our Specialistsegment’s employee compensation and related benefits expense consists ofsalaries, wages and profitability-based compensation paid to our floor tradersand related support staff.  The employeecompensation and related benefits expense related to our Execution and Clearingsegment consists of salaries, wages and profitability-based compensation paidto our execution and clearing professionals, as well as compensation based oncommissions earned by various trading professionals.  Profitability-based compensation may include cash awards andstock-based compensation paid or granted to managing directors, tradingprofessionals and other employees based on our profitability.

 

Interest expense is primarily generated from theindebtedness not allocated to either of our two principal business segments.This indebtedness was incurred in connection with our

 

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reorganization frompartnership to corporate form in 1999, our subsequent acquisitions and theissuance of promissory notes in exchange for our preferred stock.  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 as well as margininterest expense related to our derivative specialist and market-makingbusiness.  Customers’ 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 to the NYSE, AMEX, theDepository Trust Clearing Corporation (“DTCC”) and to third party execution andclearing companies.  The fees paid by usto these entities are primarily based on the volume of transactions executed byus as principal and as agent, a fee based on exchange seat use, an allocationfee requiring specialist firms to share the cost of newly allocated listings,technology fees, a flat annual fee and execution and clearing fees.  Our Execution and Clearing segment’s exchange,clearing and brokerage fees expense consists of commissions paid to thirdparties for introduction of customers, use of certain proprietary informationand third-party execution fees.

 

## **Three Months Ended March 31, 2004 Compared to ThreeMonths Ended March 31, 2003**

## ** **

Employee compensation and related benefits expenseincreased as a result of an increase in salaries and profitability-basedcompensation accruals.  The increase insalaries is attributable to the 31 additional trading and support personnel hiredby our LSP subsidiary from the first quarter of 2003 to the first quarter of2004.  In addition, in the first quarterof 2004, we incurred severance expense related to employee terminations.  The issuance of 600,000 restricted stockunits, or RSUs, with the related compensation expense being recognized overthree years and an increase in incentive compensation associated withcommissions earned also increased compensation expense for the first quarter of2004 as compared to the same period in 2003. Employee compensation and related benefits expense increased to 34.8% oftotal revenues for the first quarter of 2004, from 33.7% of total revenues forthe same period in 2003.

 

Interest expense increased as a result of an increasein margin interest charges attributable to the growth and expansion of ourderivative trading activities.  Interestexpense increased to 15.5% of revenues for the first quarter of 2004, from15.3% for the comparable period in 2003.

 

Exchange, clearing and brokerage fees expensedecreased primarily due to a decrease in fees at our Specialist segment.  The decrease at our Specialist segment wasthe result of the removal of the NYSE technology fee in July 2003, the lack ofallocation fees for new listings in the first quarter of 2004 and a decrease inodd lot fees.  This decrease waspartially offset by an increase in commission expense and exchange fees due tothe increased activity of our derivatives trading business. Exchange, clearingand brokerage fee expense for our Execution and Clearing segment remainedrelatively flat for the first quarter of 2004, compared to the first quarter of2003. Our exchange, clearing and brokerage fees expense decreased to 11.1% oftotal revenues for the first quarter of 2004, from 13.9% of total revenues forthe same period in 2003.

 

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Certain first quarter 2004 account balances thatcomprise our other operating expenses materially changed from those for the2003 comparable period.  Lease ofexchange memberships expense decreased due to the decrease in the averageannual lease cost of an NYSE membership and a decrease in the number of NYSEleased memberships. The average annual lease cost of our NYSE membershipsdecreased to approximately $238,000 for the first quarter of 2004 from $322,000for the same period in 2003. In addition, during the first quarter of 2004, weleased approximately 12 fewer memberships than we leased in the first quarterof 2003. Lease of exchange memberships expense decreased to 5.2% of totalrevenues for the first quarter of 2004, from 8.4% of total revenues for thesame period in 2003. Other operating expenses increased primarily due to anincrease in legal and professional fees expense, bank fees and directedbrokerage arrangement expenses. Legal and professional fees expense increasedas the result of legal, consulting and accounting fees incurred in connectionwith the concluded NYSE and SEC investigations of our specialist tradingactivity. The increase in bank fees was due to the fees on the committedrevolving credit facility established in the first quarter of 2004. OurExecution and Clearing segment experienced an increase in directed brokeragearrangement expenses as a result of the growth and expansion of ourinstitutional execution group.

 

The decrease in the provision for income taxes,despite the increase in income before provision for income taxes, was theresult of additional tax refunds related to fiscal 2002 and the adjustment ofNew York State credits and incentives during the first quarter of 2004.

 

## **Liquidity and Capital Resources**

## ** **

As of March 31, 2004, we had $2,239.6 million inassets, of which $527.5 million consisted of cash and short-term investments,primarily in government obligations maturing within three months, cash andsecurities segregated under federal regulations and overnight repurchaseagreements.  To date, we have financedour operations primarily with retained earnings from operations and proceedsfrom our debt and equity offerings. Due to the nature of the securitiesbusiness and our role as a specialist, market-maker and execution agent, theamount of our cash and short-term investments, as well as our operating cashflow, may vary considerably due to a number of factors, including the dollarvalue of our positions as principal, whether we are net buyers or sellers ofsecurities, the dollar volume of executions by our customers and clearing houserequirements. Certain regulatory requirements constrain the use of a portion ofour liquid assets for financing, investing or operating activities. Similarly,the nature of our business lines, capital necessary to maintain currentoperations and our current funding needs subject our cash and cash equivalentsto different requirements and uses.

 

As of March 31, 2004, our indebtedness had short-term andlong-term maturities, and the related interest and principal payments have asignificant effect on the liquidity necessary to finance our currentoperations. Our most significant short-term indebtedness relates to our $100.0million aggregate principal amount of 9.5% senior notes which mature in August2004 (the “Senior Notes”). As of March 31, 2004, our most significant long-termindebtedness was the $250.0 million aggregate principal amount of 12.0% seniorsubordinated notes which mature in March 2007 (the “Senior SubordinatedNotes”).  As of March 31, 2004, therewere no material changes to the scheduled maturities of our indebtedness andoperating lease

 

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obligations, other thanwith respect to the proposed refinancing of our Senior Notes and SeniorSubordinated Notes, as described below**.**

 

The indentures governing the Senior Notes and theSenior Subordinated Notes include certain covenants that, among other things,limit our ability to incur additional indebtedness, pay dividends on, orrepurchase, our stock, make certain 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.****Under these financial covenants, ourability to incur additional indebtedness, pay dividends or redeem stock islimited if our “consolidated fixed charge coverage ratio,” which is based on atrailing four quarters, is at or below a threshold of 2.75:1. The “consolidatedfixed charge coverage ratio” reflects a comparison between (1) our consolidatedearnings before interest, taxes, depreciation and amortization expenses(“EBITDA”), and (2) the sum of our consolidated interest expense and thetax-effected multiple of dividend payments with respect to the outstandingshares of our preferred stock.

 

As of March 31, 2004, we were not in default of theindentures governing our Senior Notes and Senior Subordinated Notes, but wewere subject to both the covenant limiting our ability to incur additionalindebtedness and the covenant limiting our ability to make certain “restrictedpayments” (such as dividends or cash payments to purchase our stock), becauseour consolidated fixed charge coverage ratio was below 2.75:1.  However, we still are permitted to incurindebtedness pursuant to working capital facilities, including the $200.0million line of credit maintained by our LaBranche & Co. LLC subsidiary,subject to certain conditions and limitations.

 

As of March 31, 2004, due to the net losses weincurred during 2003, our ability to make restricted payments also was subjectto a second limitation contained in the indentures governing our Senior Notesand Senior Subordinated Notes.  Becauseour cumulative restricted payments since the original issuance of the SeniorNotes, including paying dividends with respect to our Series A preferred stock,repurchasing shares of our Series A preferred stock and making certaininvestments, was greater than the sum of (i) 50% of our cumulative consolidatednet income and (ii) 100% of the net cash proceeds received from any issuance orsale of our capital stock, we were subject to this second limitation on ourability to make restricted payments.

 

Accordingly, unless our EBITDA increases above recentlevels and our consolidated fixed charge coverage ratio again exceeds the2.75:1 threshold, and our cumulative consolidated net income returns tohistorical levels, the continued application of these limitations wouldrestrict our access to certain sources of financing and our ability todistribute earnings to our stockholders and strategically and flexibly deployour capital. We cannot be sure as to when our consolidated fixed chargecoverage ratio will again exceed 2.75:1. As of March 31, 2004, our four quartertrailing consolidated fixed charge coverage ratio was 1.0:1, due to our 2003operating results and the $63.5 million charge recorded in 2003 related to thesettlement of the NYSE and SEC investigations of our NYSE specialist tradingactivity.  We anticipate that thepending refinancing of the Senior Notes and the Senior Subordinated Notes, asdescribed below, will alleviate the effects of certain financial covenants, restrictionsand

 

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limitations to which wecurrently are subject under the indentures governing the Senior Notes and theSenior Subordinated Notes.  In the eventthe refinancing is not completed, we believe we will remain in compliance withthe covenants contained in the indentures. Although we believe it is very unlikely, a failure to comply with suchcovenants could trigger an event of default under the indentures, which wouldmaterially and adversely affect our financial condition.

 

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, as defined, 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 his or her pro rata sharebased upon his or her ownership percentage of the outstanding Senior SubordinatedNotes. An Excess Cash Flow offer is not required to be made for any fiscal yearif the amount of such offer would be less than $5.0 million.  Excess Cash Flow is defined for this purposeas 40.0% of the amount by which our consolidated EBITDA exceeds the sum of ourinterest expense, tax expense, increase in net capital or net liquid assetrequirements, capital expenditures, any cash amounts related to acquisitions ofNYSE specialists or any cash payments related to our payment at maturity of theprincipal amount of our existing or certain other indebtedness. In 2003 and2001, we were required to make Excess Cash Flow offers, but no holders of theSenior Subordinated Notes tendered their notes pursuant to such offer. We arenot required to make an Excess Cash Flow offer in 2004 based on our financialresults in 2003.

 

In view of the impending maturity of the Senior Notesin August 2004 and to take advantage of current market opportunities, we begana process in April 2004 to refinance the Senior Notes and Senior SubordinatedNotes.

 

On April 5, 2004, we commenced a tender offer topurchase for cash all the outstanding Senior Notes and Senior SubordinatedNotes.  In conjunction with this tenderoffer, we also have solicited consents of the registered holders of the SeniorNotes and Senior Subordinated Notes to certain proposed amendments of therespective indentures governing the Senior Notes and the Senior SubordinatedNotes that would eliminate substantially all of the restrictive covenants,certain events of default and related provisions contained in theindentures.  This tender offer andconsent solicitation will expire at midnight, New York City time, on May 17,2004, unless extended or earlier terminated. The tender offer is conditioned upon our receiving the requisite numberof consents to approve the proposed amendments to the indentures and ourreceipt of gross proceeds from a new financing sufficient to finance therepurchase of tendered Senior Notes and Senior Subordinated Notes.

 

As of May 8, 2004, we had received consents to theproposed amendments from the holders of more than 92.9% of the Senior Notes andmore than 94.4% of the Senior Subordinated Notes.  These consents are sufficient to effect the proposed amendmentsof the respective indentures governing the Senior Notes and the SeniorSubordinated Notes.  Accordingly, wehave executed a supplemental indenture to each of the indentures governing theSenior Notes and the Senior Subordinated Notes, which will effect the proposedamendments of the indentures.  Theproposed amendments will not become operative (with

 

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certain exceptions) untilthe tendered Senior Notes and Senior Subordinated Notes have been accepted forpurchase pursuant to the tender offer. We expect to make payment for the Senior Notes and the SeniorSubordinated Notes tendered pursuant to the tender offer on or about May 18,2004.

 

Upon consummation of thetender offer, assuming the payment date is May 18, 2004, we will pay $1,043.54(which includes accrued and unpaid interest) for each $1,000 principal amountof Senior Notes purchased in the tender offer. The purchase price wasdetermined based on a formula providing for a fixed spread of 50 basis pointsover the bid side yield (as quoted on Bloomberg Screen PX3 at 10:00 a.m., NewYork City time, on April 20, 2004) of the 2-1/8% U.S. Treasury Note due August31, 2004, plus accrued and unpaid interest up to, but not including, thepayment date. The purchase price for the Senior Notes may be higher or lower,based on this formula, depending on the actual payment date for the SeniorNotes.

 

The total consideration forthe Senior Notes includes a consent payment of $20.00 per $1,000 principalamount of Senior Notes that is payable only to holders who validly tendered(and did not withdraw) their Senior Notes before April 19, 2004. Holders whovalidly tender their Senior Notes after April 19, 2004, but before theexpiration of the tender offer (currently May 17, 2004), will be paid $1,023.54(which includes accrued and unpaid interest) per $1,000 principal amount ofSenior Notes purchased in the tender offer.

 

We also will pay $1,200.00 plus accrued and unpaidinterest up to, but not including, the payment date, per $1,000 principalamount of Senior Subordinated Notes. The total consideration includes a consentpayment of $20.00 per $1,000 principal amount of Senior Subordinated Notes thatis payable only to holders who validly tendered (and did not withdraw) theirSenior Subordinated Notes before April 19, 2004. Holders who validly tendertheir Senior Subordinated Notes after April 19, 2004, but before the expirationof the tender offer (currently May 17, 2004), will be paid $1,180.00 per $1,000principal amount of Senior Subordinated Notes plus accrued and unpaid interestup to, but not including, the payment date.

 

In order to fund the repurchase of the Senior Notesand Senior Subordinated Notes, we commenced on April 23, 2004 an offering ofnew senior notes in the aggregate principal amount of $460.0 million (the “NewNotes”) only to qualified institutional buyers in the United States pursuant toRule 144A under the Securities Act of 1933, as amended (the “Securities Act”),and outside the United States pursuant to Regulation S under the SecuritiesAct. On May 4, 2004, we entered into a definitive purchase agreement pursuantto which we will issue New Notes due 2009 in the aggregate principal amount of$200.0 million (the “2009 Notes”) and New Notes due 2012 in the aggregateprincipal amount of $260.0 million (the “2012 Notes”). The 2009 Notes will bearinterest at a rate of 9.5% per annum and mature in May 2009, and the 2012 Noteswill bear interest at a rate of 11.0% per annum and mature in May 2012.  The issuance of the New Notes is expected toclose on or about May 18, 2004.

 

If the offering of the New Notes is consummated, theNew Notes will be issued pursuant to a new indenture (a “New Indenture”),containing covenants that, with certain exceptions, will be substantiallysimilar to the indenture governing the Senior Notes.  Under the New Indenture our ability to incur additionalindebtedness (other than certain “permitted indebtedness”), pay

 

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dividends or redeem stockwill be limited if our consolidated fixed charge coverage ratio is at or belowa threshold of 1.75:1 during the first two quarters following the date ofissuance and 2.00:1 thereafter.  Inaddition, the New Indenture will provide for certain exceptions to thelimitations on restricted payments.  Forexample, the New Indenture will permit us to repurchase, within 120 days afterthe issuance of the New Notes, all the approximately 39,186 outstanding sharesof our Series B preferred stock without violating the limitation on restrictedpayments.

 

The New Indenture also will permit us to redeem someor all of the 2009 Notes on or after May 15, 2007 and some or all of the 2012Notes on or after May 15, 2008 at varying redemption prices, based on the dateof redemption.  We will be required toredeem up to 33.0% of the aggregate principal amount of the 2009 Notes at aredemption price of 109.5% and up to 33.0% of the aggregate principal amount ofthe 2012 Notes at a redemption price of 111.0% using the proceeds of certainequity offerings we complete on or prior to May 15, 2007.  In addition, if we sell substantially allour assets or experience specific kinds of changes in control, the NewIndenture will require us to offer to repurchase the New Notes at a price incash equal to 101.0% of their principal amount, plus accrued and unpaidinterest, if any, to the date of purchase.

 

We intend to use the net proceeds of the issuance ofthe New Notes to repurchase the Senior Notes and Senior Subordinated Notestendered pursuant to the above-described tender offer and consent solicitation.We also intend to use a portion of the net proceeds from the issuance of theNew Notes to offer to repurchase, within 120 days after the issuance of the NewNotes, all the outstanding shares of our Series B preferred stock. Thepreferred stock is not by its terms callable, however, and we thus cannot becertain that we will make an offer or be able to repurchase the Series Bpreferred stock on acceptable terms. Under the New Indenture, in the event weare unable to repurchase the outstanding shares of our Series B preferred stockwithin 120 days after the initial issuance date of the New Notes, we will berequired to use any excess proceeds from the issuance of the New Notes torepurchase an equal principal amount of then-outstanding New Notes.  As a result, we do not anticipate any of theexpected proceeds of the New Notes offering to be used to finance ourday-to-day operating needs.

 

In connection with the anticipated issuance of the NewNotes, we have agreed to file with the SEC within 90 days after the date ofinitial issuance of the New Notes, and to use best efforts to cause to becomeeffective within 180 days after the date of initial issuance of the New Notes,a registration statement with respect to an offer to exchange each of the NewNotes for a new issue of debt securities registered under the Securities Act,with terms identical to those of the New Notes (except for the provisionsrelating to the transfer restrictions and payment of additional interest) or,in certain circumstances, a shelf registration statement.  If we fail to satisfy our registrationobligations under the registration rights agreement, we will be required to payadditional interest to the holders of the New Notes under certain circumstances.

 

We believe the New Notes offering and the repurchaseof our Senior Notes and Senior Subordinated Notes should allow us to meet ourfinancing and liquidity requirements for the foreseeable future. We anticipatethat the completion of the refinancing at the stated terms and the proposedrepurchase of our outstanding Series B preferred stock would result inapproximately the same level of

 

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costs, in the aggregate,of interest, preferred dividends and preferred stock discount accretion that wecurrently incur on our Senior Notes, Senior Subordinated Notes and Series Bpreferred stock. We believe the completed refinancing and repurchase of SeriesB preferred stock will enable us to better deploy our capital and anticipatedcash flows from operations in order to enhance our profitability and overallrevenue growth.

 

The closing of the offering of the New Notes currentlyis expected to occur on May 18, 2004, which we anticipate will coincide with theexpected payment for the Senior Notes and the Senior Subordinated Notespursuant to the tender offer. We believe it is very likely that the offering ofthe New Notes will be consummated, and thereby will enable us to complete therefinancing of both our Senior Notes and our Senior Subordinated Notes.However, in the event the refinancing is not consummated, we nonethelesscurrently expect to be able to repay the Senior Notes before their maturity inAugust 2004 without impairing our core specialist business operations. We wouldaccomplish this, if necessary, by disposing of certain of our private equityinvestments, which would have no effect on our specialist and market-makingactivities. We believe that there is a market for selling such investments and apurchaser for such investments could be readily found. Additional funds torepurchase our Senior Notes could be obtained by borrowing under a committed$25.0 million revolving credit facility we recently received from a financialinstitution. If additional funds are still necessary to repay our Senior Notes,we could scale back or liquidate certain of our non-core specialist operationsthrough the reduction of our trading positions not related to our NYSEspecialist positions and the discontinuation of certain business lines.Although we believe the funds we would raise as a result of the aforementionedactions would be sufficient for the repayment of the Senior Notes, anyshortfall could be met by selling additional shares of our common stock. Giventhe price of our common stock as of March 31, 2004, we believe that the numberof additional shares of our common stock we would issue would not have asignificant impact on our share price.

 

One or more of the above steps may be necessary inview of the recent level of our cash flow from operations, our working capitalneeds, the net liquid asset requirements under NYSE and AMEX rules, the capitalrequirements under SEC regulations and other liquidity factors, as well as thesettlement of the SEC and NYSE investigations of our NYSE specialist tradingactivity.  In the unlikely event we areunable to refinance or repay the Senior Notes when due, such inability would bedeemed an “event of default” under the indenture governing the SeniorNotes.  A default in repayment of theSenior Notes would also trigger an “event of acceleration” under certain of ourother indebtedness, including the Senior Subordinated Notes, requiringimmediate repayment of such other indebtedness.

 

Another potential source of liquidity to fund ourLaBranche & Co. LLC subsidiary’s inventory requirements is the committedline of credit maintained with a bank. In October 2003, LaBranche & Co. LLCextended this $200.0 million committed line of credit agreement to October 29,2004 on the same terms and conditions as the expiring agreement. Total feespaid in 2003 in connection with this extension were $150,000. In addition, wepay a quarterly fee of .25% of the total committed line of credit.  The credit agreement 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.

 

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Amounts outstanding underthis credit facility would be secured by our inventory of specialist stocks andbear interest at the bank’s broker loan rate. This facility can only be used tofinance inventory requirements at LaBranche & Co. LLC. To date, we have notutilized this facility. In order to maintain the availability of funds underthis credit facility, we must comply with certain financial and othercovenants.

 

As a specialist and market-maker, we are required tomaintain certain levels of capital and liquid assets as promulgated by variousregulatory agencies, which regulate our business. As part of our overall riskmanagement policy (for further discussion refer to Part I, Item 3. “Qualitativeand Quantitative Disclosures About Market Risk”), we attempt to balance ourresponsibility as specialist with our overall capital resources. Theserequirements restrict our ability to make use of cash and other liquid assetsfor corporate actions, such as repaying our debt, repurchasing stock or makingan acquisition.

 

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, asdefined. NYSE Rule 326(c) also prohibits a broker-dealer from repayingsubordinated borrowings, paying cash dividends, making loans to any parent,affiliates or employees, or otherwise entering into transactions which wouldresult in a reduction of its total net capital to less than 150.0% of itsrequired minimum capital. Moreover, broker-dealers are required to notify the SECprior to repaying subordinated borrowings, paying dividends and making loans toany parent, affiliates or employees, or otherwise entering into transactionswhich, if executed, would result in a reduction of 30.0% or more of theirexcess net capital (net capital less minimum requirement). The SEC has theability to prohibit or restrict such transactions if the result is deemeddetrimental to the financial integrity of the broker-dealer. As of March 31,2004, LaBranche & Co. LLC’s net capital, as defined, was $453.3 million,which exceeded the minimum requirements by $447.4 million.

 

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.As of March 31, 2004, LaBranche & Co. LLC’s NYSE minimum required dollaramount of net liquid assets, as defined, was $446.0 million, compared to actualnet liquid assets, as defined, of $454.8 million.

 

The AMEX generally requires its equity specialistfirms to maintain a cash or liquid asset position of the greater of (a) $1.0million or (b) an amount sufficient to assume a position of sixty trading unitsof each security in which the specialist is registered. As of March 31, 2004,LaBranche satisfied the AMEX equity specialist liquid asset requirements.

 

As a registered broker-dealer and member firm of theNYSE, our LaBranche Financial Services, Inc. subsidiary (“LFSI”) also issubject to SEC Rule 15c3-1, as adopted and administered by the NYSE and theSEC. Under the alternative method permitted by the rule, the minimum requirednet capital of LFSI as of March 31, 2004 was equal to the greater of $1.5

 

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million or 2.0% of aggregatedebit items, as defined. As of March 31, 2004, LFSI’s net capital, as defined,was $13.6 million, which exceeded its minimum net capital requirement by $12.1million.

 

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 allowable assets in the correspondents’ net capital calculation.  At March 31, 2004, the reserve requirementwas approximately $2.1 million.  LFSIhad cash and securities on deposit in a Special Reserve Bank Account of $3.6million as of April 1, 2004 to comply with its reserve requirement.

 

As a registered broker-dealer and AMEX member firm,LSP is subject to SEC Rule 15c3-1, as adopted and administered by the AMEX andthe SEC. LSP is required to maintain minimum net capital, as defined,equivalent to the greater of $100,000 or 1/15 ofaggregate indebtedness, as defined. As of March 31, 2004, LSP’s netcapital, as defined, was $21.3 million, which exceeded its minimum net capitalrequirement by $21.1 million.

 

Failure by any of our broker-dealer subsidiaries tomaintain its required net capital and net liquid assets, where applicable, maysubject it to suspension or revocation of its SEC registration or itssuspension or expulsion by the NYSE, the AMEX and/or any other exchange ofwhich it is a member firm.

 

As evidenced by the foregoing requirements, ourbroker-dealer subsidiaries require a substantial amount of capital. Inparticular, LaBranche & Co. LLC’s net liquid asset (“NLA”) requirement of$446.0 million limits our ability to utilize a substantial portion of ourliquid assets for other corporate purposes. Although a portion of the NLArequirement of $446.0 million is met by LaBranche & Co. LLC’s securitiespositions, pending trades and other assets associated with its equityspecialist activities, a substantial portion of LaBranche & Co. LLC’s cashand cash equivalents as of March 31, 2004 was used to meet its NLA requirement.

 

On March 29, 2004, we agreedwith the NYSE and the SEC to settle the NYSE and SEC investigations concerningNYSE specialist trading activity. Pursuant to this agreement, we paid on April7, 2004 a total of $63.5 million in disgorgement ($41.6 million) and civilpenalties ($21.9 million) for certain trades that occurred during the five-yearperiod from 1999 through 2003.  Thissettlement resolved the NYSE and the SEC investigations of specialist tradingactivity concerning us for all periods through 2003.  Concurrentlywith settlement payment, we contributed capital to our LaBranche & Co. LLCsubsidiary sufficient to enable it to remain in compliance with its capital andregulatory requirements. Although this capital contribution reduced our excessshort term assets available for financing our operations and limited our excesscash available for developing certain segments of our business operations, ourcash flows from operations are projected to be sufficient to meet our day today operating needs for at least the next 12 months.

 

In addition to our indebtedness, the related covenantsand regulatory requirements, our capital resources are subject to additionalrestrictions and limitations. In connection with our

 

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March 2001 acquisition ofRPM, we issued 100,000 shares of our nonconvertible Series A preferred stock tothe former stockholders of RPM. After our 2002 and 2003 repurchases of Series Apreferred stock, approximately 39,186 shares of Series A preferred stockremained issued and outstanding. On January 21, 2004, we completed an exchangeoffer, pursuant to which we exchanged one share of a newly-created Series Bpreferred stock for each share of our issued and outstanding Series A preferredstock. As a result of this exchange, no shares of Series A preferred stock areissued or outstanding. As described above, we intend to use a portion of thenet proceeds from our offering of the New Notes to fund the purchase of all theoutstanding shares of our Series B preferred stock within 120 days after theinitial issuance of the New Notes.

 

Each of the approximately 39,186 outstanding shares ofour Series B preferred stock has a liquidation preference of $1,000 per shareand generally accrues cumulative preferred dividends at an annual rate of 8.0%of the liquidation preference until March 15, 2005, 10.0% until March 15, 2006and 10.8% thereafter, payable on the first day of January and the first day ofJuly of each year.  The terms of theSeries B preferred stock provide, however, that if the dividend payable onJanuary 1, 2004 with respect to the then-outstanding Series A preferred stockis not timely paid, the dividend payable on July 1, 2004 with respect to theSeries B preferred stock will accrue at an annual rate of 9.0%.  Because we did not pay the January 1, 2004dividend with respect to the then-outstanding Series A preferred stock, thedividend payable on July 1, 2004 with respect to the Series B preferred stockcurrently is accruing at an annual rate of 9.0%.  Additionally, if the dividend payable on July 1, 2004 withrespect to the Series B preferred stock is not paid timely, then the dividends payableon January 1, 2005 will accrue at an annual rate of 9.0% through September 30,2004 and 8.0% thereafter through December 31, 2004.

 

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. The amounts payable under this deferredcompensation plan may be reduced to satisfy certain indemnification obligationsof the plan participants to us under the agreements governing our acquisitionof RPM. While the payment of benefits under this deferred compensation plan maybe accelerated in certain circumstances, no more than $6.0 million in deferredcompensation benefits (including interest) may be paid in any 12 consecutivemonth period beginning March 15, 2001. In addition, payments of benefits underthe RPM deferred compensation plan are prohibited and must be deferred if weare not current in the payment of any preferred dividend initially payableafter September 30, 2004, unless such prohibition is waived in writing by theholders of a majority of the outstanding shares of Series B preferred stock.During the three months ended March 31, 2004, we paid $5.3 million in deferredcompensation plan benefits. After taking into account all payments of deferredcompensation plan benefits through March 31, 2004, approximately $18.3 million,plus interest, remains payable under the RPM deferred compensation plan.  If the plan is terminated, the deferredcompensation benefits (including interest) of all participants, to the extentnot previously paid, must be distributed to the participants in one lump sum.

 

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We also assumed RPM’s liabilities and obligationsunder its retention bonus pool, which required that we pay, on March 15, 2004,$9.0 million as bonus compensation to certain former employees of RPMdesignated by a committee appointed in the agreement governing our acquisitionof RPM.  No further amounts are dueunder this retention bonus pool.

 

As of March 31, 2004, the subordinated indebtedness ofLaBranche & Co. LLC aggregated $20.3 million (excluding subordinatedliabilities related to contributed exchange memberships) and consisted ofsenior subordinated notes and junior subordinated notes. These notes mature onvarious dates between December 2004 and June 2008, and bear interest at annualrates ranging from 7.7% to 10.0%. Each of the junior subordinated notes has anautomatic rollover provision, which extends the maturity for an additionalyear, unless the lender provides at least seven months advance notice of itsintention not to renew prior to maturity. LaBranche & Co. LLC is entitledto prepay—with written consent from the NYSE—the junior subordinated noteswithout penalty under the terms of the agreements relating thereto.

 

As ofMarch 31, 2004, $10.0 million of our outstanding indebtedness consisted of onenote for $2.0 million, which matures in June 2004 and bears interest at anannual rate of 8.0%, and eight separate notes, each in the principal amount of$1.0 million, which mature in August 2007 and bear interest at annual ratesranging from 9.0% to 10.0%.

 

Subject to our ability to refinance or otherwise repaythe Senior Notes, we currently anticipate that we will be able to meet ourworking capital, regulatory capital and capital expenditure requirementsthrough at least the next twelve months.

 

***Credit Ratings***

 

Our $100.0 million Senior Notes and our $250.0 millionSenior Subordinated Notes were both sold to public investors on theirrespective issuance dates. The following table sets forth the credit ratings onboth of these issues as of March 31, 2004:

 
|                      |   | **Moody’s  Investors Services** |   | **Standard &  Poor’s** |   |
|---------------------------|--------|--------------------------------------|--------|---------------------------------|--------|
|                      |   |                                 |   |                            |   |
| Senior Notes              |   | Ba1                                  |   | B                               |   |
|                      |   |                                 |   |                            |   |
| Senior Subordinated Notes |   | Ba2                                  |   | CCC+                            |   |

** **

**In January 2004, Standard & Poor’s downgraded ourSenior Notes to a B rating and our Senior Subordinated Notes to a CCC+rating.  On February 23, 2004,**Moody’s cut our Senior Notes rating to Ba1 and our Senior SubordinatedNotes rating to Ba2 from Ba1, changing our rating outlook to negative fromstable.

** **

## **Item 3**.      Quantitativeand Qualitative Disclosures about Market Risk.

## ** **

Because our equity specialist activities on the NYSEand AMEX expose our capital to significant risks, managing these risks is aconstant priority for us. Our central role in the

 

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auction process helps usto manage risks by incorporating 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 as follows :

 

*Executive Operating Committee.* Our executive operating committee is composed of two executive officersof LaBranche & Co. LLC. This committee is responsible for approving allrisk management procedures and trading guidelines for particular specialiststocks, after receiving input and proposals from our floor managementcommittee. In addition, our executive operating committee reviews all unusualsituations reported to it by our floor management committee.

 

*Floor Management Committee.*  Our floormanagement committee is composed of seven senior floor specialists. Thiscommittee is responsible for formulating and overseeing our overall riskmanagement procedures and trading guidelines for each of our specialist stocks.In determining these procedures and guidelines, our floor management committeeconsiders the advice and input from our floor team captains. Our floormanagement committee meets with all floor team captains on a weekly basis toreview and, if necessary, revise the risk management procedures for LaBranche& Co. LLC and/or for particular specialist stocks. In addition, a member ofour floor management committee is always available on the trading floor toreview and assist with any unusual situations reported by a floor team captain.Our floor management committee reports to our executive operating committeeabout each of these situations as they occur.

 

*Floor Team Captains.*  We havetwenty-six floor team captains who monitor the activities of LaBranche &Co. LLC’s specialists throughout the trading day from various positions atLaBranche & Co. LLC’s trading posts. The captains observe trades andconstantly review trading positions on a real-time basis through ourinformation systems. In addition, the captains are readily available to assistLaBranche & Co. LLC’s specialists in determining when to deviate from ourprocedures and guidelines to react to any unusual situations or marketconditions. The captains must report these unusual situations to floormanagement, including any deviations from our procedures and guidelines.Captains meet with each specialist at least once a week to evaluate thespecialist’s adherence to our risk management procedures and tradingguidelines. Captains also meet to review risk procedures and guidelines and, ifappropriate, make recommendations to the floor management committee.

 

*Specialists.*  LaBranche& Co. LLC’s specialists conduct auctions of our specialist stocks basedupon the conditions of the marketplace. In doing so, specialists observe ourrisk management procedures and trading guidelines in tandem with theirresponsibility to create a fair and orderly market. Specialists mustimmediately notify a captain of any unusual situations or market conditionsrequiring a deviation from our procedures and guidelines.

 

Our equity specialist operations on the AMEX areconducted by six equity specialists. We have one post manager on the AMEX whomonitors the trading activities of the AMEX

 

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equity specialists byobserving trades and reviewing positions on a real-time basis. The post managerregularly communicates with management to ensure that our AMEX equityspecialists adhere to all risk management policies set by LaBranche & Co.LLC’s executive operating committee.

 

*Circuit Breaker Rules.*  The NYSE andAMEX have instituted certain circuit breaker rules intended to halt trading inall NYSE/AMEX listed stocks in the event of a severe market decline. Thecircuit 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 procedures.

 

*Equity Market Risk*

 

A high concentration of LaBranche & Co. LLC’sprincipal trading revenue is generated from its ten and twenty-five mostprofitable NYSE specialist stocks. However, the percentage of LaBranche &Co. LLC’s specialist trading revenue generated from its ten most profitablespecialist stocks has decreased from 21.8% to 18.4% of total principal tradingrevenue for the three months ended March 31, 2003 and 2004, respectively. Thepercentage of LaBranche & Co. LLC’s specialist trading revenue generatedfrom its twenty-five most profitable specialist stocks has decreased from 42.3%to 34.4% of total principal trading revenue for the three months ended March31, 2003 and 2004, 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 frequently.

 

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 American Depositary Receipts(“ADRs”). In any period, we may incur trading losses in our specialist stocksfor a variety of reasons, including price fluctuations of our specialiststocks, lack of trading volume in our specialist stocks and the performance ofour specialist obligations. From time to time, we may have large positionconcentrations in securities of a single issuer or issuers engaged in aspecific industry. In general, because our inventory of securities ismarked-to-market on a daily basis, any significant price movement in thesesecurities could result in a reduction of our revenues and 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 our 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.  Subject to the specialist’s obligation tomaintain a fair and orderly market and to applicable regulatory requirements,we constantly seek to manage our trading positions relative to our principaltrading revenues.

 

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*Derivatives Market Risk*

 

As a specialist and market-maker in options, ETFs andfutures, LSP is responsible for creating a fair and orderly market, and tradessecurities as principal out of both obligation and inclination. LSP’s options,ETFs, futures, U.S. Government obligations and foreign currency trading exposesit to certain risks, such as price and interest rate fluctuations, foreigncurrency movements and changes in the liquidity of markets. In addition, thesederivative instruments expose LSP to volatility, interest rate, credit andforeign exchange risk, among other types of risks.

 

Certain members of LSP’s management are responsiblefor managing these risks. These individuals utilize a third-party softwareapplication to monitor LSP’s positions on a real-time basis. By monitoringactual and theoretical profit and loss, volatility and other standard riskmeasures, these individuals seek to assure that all LSP traders are within theparameters set by management. LSP’s traders purchase and sell futures, thestocks underlying certain positions, and foreign currencies in an attempt tohedge market and foreign currency risk. LSP’s aggregate risk is under constantevaluation by certain members of management and its traders, and all significanttrading strategies and positions are discussed among them. LSP’s options,futures and ETF trading is executed on national and foreign exchanges. Thesetrades clear through the Options Clearing Corporation, the National SecuritiesClearing Corporation or the applicable exchange clearing organization, therebyreducing potential credit risk.

 

The following chart illustrates how specifiedmovements in the underlying securities prices of LSP’s entire portfolio onMarch 31, 2004 would have impacted profits and losses from its tradingactivities: 

 
|                     |   | **Profit or  (Loss) if the underlying securities move:** |   |
|--------------------------|--------|----------------------------------------------------------|--------|
| **(000’s omitted)** |   | **-15.0%**                                               |   | **-5.0%** |   | **0%** |   | **+5.0%** |   | **+15.0%** |   |
| Portfolio as of:         |   |                                                     |   |   |   |   |   |   |   |   |   |
| March 31, 2004           |   | $                                                        | 1,646  |   | $ | (477 | ) | $ | (4 | ) | $ | 1,557 |   | $ | 4,893 |   |
|                          |        |                                                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The information in the above table is based on certaintheoretical assumptions, and thus does not fully represent the profit or lossexposure to changes in volatility, interest rates dividends. The zero percentchange column represents the profit or loss LSP would experience on a dailybasis if the relevant market remained unchanged.

 

*Foreign Currency Risk*

 

In connection with LaBranche & Co. LLC’s tradingof U.S. registered shares of foreign issuers, it is exposed to varying degreesof foreign currency risk. The pricing of these securities is based upon thevalue of the ordinary securities as denominated in their local currencies.Thus, a change in a foreign currency rate relative to the U.S. dollar willresult in a change in the value of U.S. registered shares in which LaBranche& Co. LLC acts as the specialist.

 

LSP trades international ETFs that are denominated andsettled in U.S. dollars, but the pricing of these ETFs is also affected bychanges in the relevant foreign currency rate. In

 

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addition, LSP tradesforeign currencies and derivatives denominated in foreign currencies whichcreates exposure to foreign currency risk for LSP.

 

The following chart illustrates how the specifiedmovements in the U.S. dollar versus the foreign currencies to which LSP andLaBranche & Co. LLC are exposed as of March 31, 2004 would have impactedprofits and losses from its trading activities:

 
|                     |   | **Profit or  (Loss) if the U.S. dollar relative to the  foreign currencies move:** |   |
|--------------------------|--------|------------------------------------------------------------------------------------|--------|
| **(000’s omitted)** |   | **-15.0%**                                                                         |   | **-5.0%** |   | **+5.0%** |   | **+15.0%** |   |
| Portfolio as of:         |   |                                                                               |   |   |   |   |   |   |   |
| March 31, 2004           |   | $                                                                                  | 1,325  |   | $ | 442 |   | $ | (422 | ) | $ | (1,325 | ) |
|                          |        |                                                                                    |        |  |  |  |  |  |  |  |  |  |  |

 

The information in the abovetable is based on certain assumptions and it does not fully represent theprofit and loss exposure to changes in security prices, volatility, interestrates and other related factors.

 

*Execution, Clearing and Operational Risk*

 

In connection with their specialist and market-makingactivities, LaBranche & Co. LLC and LSP are engaged in various securitiestrading and lending activities and assume positions in stocks, rights, options,ETFs, futures and foreign currencies for which they are exposed to credit riskassociated with the nonperformance of counterparties in fulfilling theircontractual obligations pursuant to these securities transactions. LaBranche& Co. LLC and LSP are also exposed to market risk associated with the saleof securities not yet purchased, which can be directly impacted by volatiletrading on the NYSE, AMEX and other exchanges. Additionally, in the event ofnonperformance and unfavorable market price movements, LaBranche & Co. LLCand LSP may be required to purchase or sell financial instruments at a loss.

 

LFSI’s execution and clearing activities require that LFSI executetransactions in accordance with customer instructions and accurately record andprocess the resulting transactions. Any failure, delay or error in executing,recording and processing transactions whether due to human error or failure ofLFSI’s information or communication systems could cause substantial losses forbrokers, customers and/or LFSI and could subject LFSI to claims for losses.

 

Clearing activities include settling each transaction with both thecontra broker and the customer. In connection with LFSI’s institutional anddirect access floor brokerage customers a transaction is settled either whenthe customer pays for securities purchased and takes delivery, or deliverssecurities sold for payment. Settling retail customers and professionalinvestors involves financing the transaction until the customer makes paymentor, for margin accounts, advancing credit to the customer within regulatory andinternal guidelines. Clearing direct access brokers’ transactions includesguaranteeing their transactions to the contra broker on the exchange floor.

 

These clearing activities may expose LFSI to off-balance sheet risk inthe event

 

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customers or brokers are unable to fulfill their contractualobligations and it is necessary to purchase or sell securities at a loss. Formargin transactions, LFSI may be exposed to off-balance sheet risk in the eventmargin requirements are not sufficient to fully cover losses that customers mayincur in their accounts.

 

The amount of risk related to LFSI’s execution and clearance activitiesis linked to the size of the transaction, market volatility and thecreditworthiness of customers and brokers. LFSI’s largest transactions involvethose for institutional and direct access floor brokerage customers.

 

LFSI systematically monitors its open transaction risk starting whenthe transaction occurs and continuing until the designated settlement date.Transactions that remain unsettled after settlement date are scrutinized andnecessary action is taken to reduce LFSI’s risk is taken. Credit risk thatcould result from contra brokers defaulting is minimized since much of thesettlement risk for transactions with brokers is essentially transferred to theNational Stock Clearing Corporation. The credit risk associated withinstitutional and direct access clearing customers is minimized since thesecustomers have been qualified by the Depository Trust Company (“DTC”), the DTCparticipants or have met the prime broker qualification standards at other brokeragefirms. Before conducting business with a prospective customer, LFSI’s seniormanagement, in conjunction with its compliance department, reviews theprospective customer’s experience in the securities industry, financialcondition and personal background, including a background check with a riskreporting agency. For retail customers and professional investors, LFSI seeksto control the risks associated with customer activities by requiring customersto maintain margin collateral in compliance with various regulatory andinternal guidelines. LFSI monitors margin levels daily pursuant to suchguidelines and requires customers to deposit additional collateral or reducepositions when necessary.

 

In each of our segments, we rely heavily on ourinformation systems in managing our risk. Accordingly, working in conjunctionwith the NYSE, we have made investments in our trade processing and executionsystems. Our use of, and dependence on, technology has allowed us to sustainour growth over the past several years. Management members and floor captainsat our NYSE and AMEX operations must constantly monitor our positions andtransactions in order to mitigate our risks and identify troublesome trendsshould they occur. The capital we have invested, along with the NYSE, inreal-time, on-line systems give management instant access to specific tradinginformation at any time during the trading day, including:

 

•                  our aggregate long and short positions;

 

•                  the various positions of each of our tradingprofessionals;

 

•                  our overall position in a particular stock; and

 

•                  capital and profit-and-loss information on anaggregate, per specialist or per issue basis.

 

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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.  Our derivativetrading operation utilizes a third-party software application to monitor itspositions and profits and losses on a real-time basis.

 

We have developed and implemented a businesscontinuity plan, which includes a comprehensive disaster recovery plan. We havea back-up disaster recovery center in New Jersey which has connectivity withour LaBranche & Co. LLC, LFSI and LSP subsidiaries, as well as a secondback-up facility in New York which serves our LFSI and LSP subsidiaries.  This second back-up facility also acts as asecondary disaster recovery facility for our LaBranche & Co. LLCoperations.

 

*Regulatory Risk*

 

As registered broker-dealers, LaBranche & Co. LLC,LFSI and LSP are subject to certain regulatory requirements intended to insuretheir general financial soundness and liquidity. These subsidiaries are subjectto SEC Rules 15c3-1, 15c3-3 and other requirements adopted and administered byboth the NYSE and AMEX.

 

The USA Patriot Act requires U.S. financialinstitutions, including banks, broker-dealers, futures commission merchants andinvestment companies, to implement policies, procedures and controls which arereasonably designed to detect and report instances of money laundering and thefinancing of terrorism. We actively monitor and update our anti-moneylaundering practices.

 

## **Item 4**.       Controlsand Procedures

## ** **

As of the end of the period covered by this report, an evaluation wasperformed on the effectiveness of the design and operation of our disclosurecontrols and procedures under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Financial Officer.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that the design and operation of our disclosure controls andprocedures were effective as of the end of the period covered by this report.In addition, no change in our internal control over financial reporting (asdefined in Rule 13a-15(f) under the Securities Exchange Act of 1934)occurred during the three months ended March 31, 2004 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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## **PART II** OTHER INFORMATION

## ** **

## **Item 1. Legal Proceedings**

## ** **

Therehave been no material new developments in our legal proceedings since the filingof our Form 10-K for the year ended December 31, 2003, filed on March 15, 2004(the “2003 10-K”) except as follows:

 

OnMarch 29, 2004, we entered into a definitive agreement with the NYSE and theSEC to settle the NYSE and SEC investigations concerning NYSE specialisttrading activity described in the 2003 10-K. The settlement is in the form of administrative orders with findingsbased on a neither admit nor deny offer of settlement.  The findings, neither admitted nor denied,include violations of Section 11(b) of the Securities Exchange Act of 1934 (the“Exchange Act”) and rules promulgated thereunder concerning specialist trading,including the requirement that a specialist maintain a fair and orderly market,and violations of Section 15(b)(4)(E) of the Exchange Act, including failure tosupervise with respect to certain transactions in which one or more employeesallegedly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgatedthereunder.  Pursuant to the agreement,and without admitting or denying any wrongdoing, we paid on April 7, 2004 atotal of $63.5 million in disgorgement and civil penalties for certain tradesthat occurred during the five-year period from 1999 through 2003.  This settlement resolved the NYSE and SECinvestigations of NYSE specialist trading activity concerning us for allperiods through 2003.  Of the total$63.5 million, $41.6 million represents disgorgement and $21.9 millionrepresents civil penalties.  As thesettlement was a subsequent event reportable for 2003 under accountingprinciples generally accepted in the United States of America, we recorded a$63.5 million pre-tax charge for 2003. The four other largest NYSE specialist firms also settled investigationsconcerning their specialist trading activity during the 1999 through 2003period.

 

OnMarch 22, 2004, the *Sofran, Semon, Haug, Labul, Murphy, Strain, Yopp,Ferris* and *Levin* purported lawsuits described in the2003 10-K were consolidated by the United States District Court for theSouthern District of New York, and lead plaintiffs and lead plaintiffs’ counselwere appointed by the Court.

 

OnMarch 11, 2004, a new action, *Rosenbaum Partners, LP v. The New York StockExchange, Inc., et al.*, No. 04 CV 2038, was filed in the UnitedStates District Court for the Southern District of New York.  The *Rosenbaum* action asserts claims similar tothe claims asserted in the *Pirelli, Marcus, Empire* and *CalPERS*lawsuits in the United States District Court for the Southern District of NewYork described in the 2003 10-K.  The *Rosenbaum*case has been brought by an individual plaintiff who does not allege to berepresenting a class.

 

Webelieve that the claims asserted against usin the lawsuits listed above, as described in the 2003 10-K, are without merit,and we deny all allegations of wrongdoing. There can be no assurance, however, as to the outcome or timing of the resolution of these proceedings.  We therefore are unable to estimate theamount or potential range of any loss that may arise out of these proceedings.The range of possible resolutions could include determinations and judgmentsagainst us or settlements and could require substantial payments by us thatcould

 

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have a material adverseeffect on our financial condition, results of operations and cash flows.

 

We have been the target,from time to time, of various claims and lawsuits incidental to the ordinarycourse of our and our subsidiaries’ business operations. While the ultimateoutcome of those claims and lawsuits which currently are pending cannot bepredicted with certainty, we believe, based on our understanding of the factsof these proceedings, that their ultimate resolution will not, in theaggregate, have a material adverse effect on our financial condition or resultsof operations.

## ** **

 

## **Item 5.       OtherInformation.**

## ** **

*We have included in this Form 10-Qfiling, and from time to time our management may make, statements which mayconstitute “forward-looking statements” within the meaning of the safe harborprovisions of The Private Securities Litigation Reform Act of 1995. TheCompany’s quarterly and annual operating results are affected by a wide varietyof factors that could materially and adversely affect actual results, includinga decrease in trading volume on the NYSE or the AMEX, excessive volatility inthe equity securities market and changes in the value of our securitiespositions. As a result of these and other factors, we may experience materialfluctuations in future operating results on a quarterly or annual basis, whichcould materially and adversely affect our business, financial condition,operating results and stock price. An investment in the Company involvesvarious risks, including those mentioned above and those that are detailed fromtime to time in our SEC filings.*

* *

Certain statements contained in this report, includingwithout limitation, statements containing the words “believe,” “intend,”“expect,” “anticipate” and words of similar import, also may constitute“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Readers are cautioned that any suchforward-looking statements are not guarantees of future performance, and sincesuch statements involve risks and uncertainties, the actual results andperformance of the Company and the specialist industry may turn out to bematerially different from the results expressed or implied by suchforward-looking statements. Given these uncertainties, readers are cautionednot to place undue reliance on such forward-looking statements. The Companyalso disclaims any obligation to update its view of any such risks oruncertainties or to publicly announce the result of any revisions to theforward-looking statements made in this report.

 

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## **Item 6.     Exhibits andReports on Form 8-K.**

 

(a)                                  *Exhibits.*

 
| **Exhibit No.** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                         |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                |
| 31.1            |   | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                |
| 31.2            |   | Certification of Harvey S. Traison, Senior Vice President and Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                |
| 32.1            |   | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002, regarding the information contained in LaBranche & Co Inc.’s  Quarterly Report on Form 10-Q for the period ended March 31, 2004. |
|            |   |                                                                                                                                                                                                                                                                                                |
| 32.2            |   | Certification of Harvey S. Traison, Senior Vice President and Chief  Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  regarding the information contained in LaBranche & Co Inc.’s Quarterly  Report on Form 10-Q for the period ended March 31, 2004.       |

 

(b)                                 *Reports onForm 8-K.*

 

**(i)**                         On January 23, 2004, wefiled a Form 8-K, dated January 23, 2004, with respect to the announcementof our receipt of a “Well’s Notice” from the staff of the Securities andExchange Commission.

 

(ii)                      On March 31, 2004, we filed aForm 8-K, dated March 30, 2004, with respect to the joint announcement bythe NYSE and the SEC regarding the execution of a definitive agreement settlingthe NYSE and SEC investigations of LaBranche & Co. LLC’s NYSE specialisttrading activity during the five-year period from 1999 to 2003.

 

All other items ofthis report are inapplicable.

 

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**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| May 10, 2004 | LaBranche & Co Inc. |
|--------------|-------------------------|
|         |                    |   |
|         |                    |   |
|         | By:                     | /s/ Harvey S. Traison |   |
|         | Name:                   | Harvey S. Traison |
|         | Title:                  | Senior Vice President and Chief |
|         |                    | Financial Officer |

 

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EXHIBIT INDEX

 
| **Exhibit No.** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                         |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                |
| 31.1            |   | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                |
| 31.2            |   | Certification of Harvey S. Traison, Senior Vice President and Chief  Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                |
| 32.1            |   | Certification of George M.L. LaBranche, IV, Chairman, Chief Executive  Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002, regarding the information contained in LaBranche & Co Inc.’s  Quarterly Report on Form 10-Q for the period ended March 31, 2004. |
|            |   |                                                                                                                                                                                                                                                                                                |
| 32.2            |   | Certification of Harvey S. Traison, Senior Vice President and Chief  Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  regarding the information contained in LaBranche & Co Inc.’s Quarterly  Report on Form 10-Q for the period ended March 31, 2004.       |

 

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