As filed with the Securities and Exchange Commission on June 27, 2003
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 13(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-16731
Van der Moolen Holding N.V.
(Exact name of registrant as specified in its charter)
The Netherlands
(Jurisdiction of incorporation or organization)
Keizersgracht 307
1016 ED Amsterdam
The Netherlands
(31) 20 535 6789
(Address of principal executive offices)
Securities registered to or to be registered pursuant to
Section 12(b) of the Act:
Title of each class Name of each exchange on which
Common shares of EUR0.08 each registered
American Depositary Shares, each of which New York Stock Exchange*
represents one common share New York Stock Exchange
*Not for trading, but only in connection with the registration of the American
Depositary Shares pursuant to the requirements of the Securities and Exchange
Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
Number of outstanding shares of each of the registrant's classes of capital or
common stock as of December 31, 2002, the close of the period covered by the
annual report:
38,419,282 common shares
251,000 financing preferred A shares
391,304 financing preferred B shares
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [ ] Item 18 [X]
1
TABLE OF CONTENTS
Page
Presentation of Financial and Other Information...........................................................3
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Forward-Looking Statements................................................................................4
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PART I
Item 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.............................................5
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Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE...........................................................5
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Item 3: KEY INFORMATION...................................................................................5
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Item 4: INFORMATION ON THE COMPANY.......................................................................22
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Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS.....................................................41
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Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................................................64
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Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS................................................72
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Item 8: FINANCIAL INFORMATION............................................................................74
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Item 9: THE OFFER AND LISTING............................................................................77
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Item 10: ADDITIONAL INFORMATION..........................................................................79
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Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................98
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Item 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.........................................102
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PART II
Item 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................................................103
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Item 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS...................103
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Item 15: CONTROLS AND PROCEDURES........................................................................103
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Item 16: RESERVED.......................................................................................103
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PART III
Item 17: FINANCIAL STATEMENTS...........................................................................104
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Item 18: FINANCIAL STATEMENTS...........................................................................104
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Item 19: EXHIBITS.......................................................................................105
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2
Presentation of Financial and Other Information
We prepare our financial statements on a consolidated basis in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP"). U.S. GAAP selected consolidated financial information as of and
for the years ended December 31, 2000, 2001 and 2002, together with our U.S.
GAAP financial statements and the notes thereto as of and for the years ended
December 31, 2000, 2001 and 2002, are set forth elsewhere in this annual report.
We have also included in Annex A of this annual report selected consolidated
financial information as of and for the years ended December 31, 1998, 1999,
2000, 2001 and 2002, which has been prepared in accordance with accounting
principles generally accepted in the Netherlands ("Dutch GAAP"). We will
continue to prepare our annual financial statements on a consolidated basis in
accordance with U.S. GAAP, as well as in accordance with Dutch GAAP. Other than
in Annex A, all of our financial information presented in this annual report has
been prepared in accordance with U.S. GAAP.
While we currently publish our financial statements in euros, prior to
January 1, 1999 we published our financial statements in Dutch guilders. In this
annual report, references to "EUR" and "euro" are to the currency introduced at
the start of the third stage of the European Economic and Monetary Union
pursuant to the Treaty establishing the European Economic Community as amended
by the Treaty on the European Union, references to "$" and "dollars" are to the
currency of the United States and references to "NLG" and "Dutch guilders" are
to the former currency of the Netherlands prior to its adoption of the euro. We
have converted certain amounts in this annual report, including our Dutch GAAP
historical financial statements for the year ended December 31, 1998, into euros
at the rate of EUR1.00 to NLG 2.20371, the euro/Dutch guilder exchange rate
fixed on January 1, 1999.
In this annual report, we have translated euro amounts into dollars at an
exchange rate of EUR1.00 to $1.0485, the December 31, 2002 noon buying rate in
New York City for cable transfers in foreign currencies as certified for customs
purposes by the Federal Reserve Bank of New York, solely for the convenience of
the reader. You should not construe these translations as representations that
the euro amounts actually represent such dollar amounts or that we could convert
these amounts into dollars at the rate indicated. On June 11, 2003 the noon
buying rate was EUR1.00 to $1.1764. See "Key Information -- Exchange Rate
Information" for historical information regarding the exchange rate of dollars
for the euro.
3
Forward-Looking Statements
This annual report and the documents incorporated by reference herein
contain forward-looking statements within the meaning of, and which have been
made pursuant to, the Private Securities Litigation Reform Act of 1995. All
statements regarding our future financial condition, results of operations and
business strategy, plans and objectives are forward-looking. Statements
containing the words "anticipate", "believe", "intend", "estimate", "expect" and
words of similar meaning are also forward-looking. In particular, the following
are forward-looking in nature: statements with regard to strategy and management
objectives; pending or potential acquisitions; future revenue sources; the
effects of changes or prospective changes in regulation or structure of the
securities exchanges on which our subsidiaries operate in the United States and
Europe; and trends in results, operations and the markets in which our
subsidiaries operate.
These forward-looking statements involve risks, uncertainties and other
factors, some of which are beyond our control, that may cause our results,
performance or achievements or conditions in the markets in which we operate to
differ from those expressed or implied in these forward-looking statements. We
describe certain of these risks and uncertainties in "Key Information -- Risk
Factors" and elsewhere in this annual report. We caution you not to place undue
reliance on these forward-looking statements, which reflect our management's
view only as of the date of this annual report.
4
PART I
Item 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3: KEY INFORMATION
Selected Consolidated Financial Data
You should read the following selected U.S. GAAP historical financial data
in conjunction with "Operating and Financial Review and Prospects", as well as
our consolidated financial statements and the notes thereto, which we have
included elsewhere in this annual report. We have extracted the selected
financial data set out below from our audited consolidated financial statements
as of and for the years ended December 31, 2000, 2001 and 2002. We have prepared
these financial statements in accordance with U.S. GAAP.
PricewaterhouseCoopers Accountants N.V., independent auditors, have audited
our financial statements as of and for the years ended December 31, 2000, 2001
and 2002. We have included a convenience translation of euro amounts into
dollars for the following selected U.S. GAAP financial data as of and for the
year ended December 31, 2002 at the noon buying rate on December 31, 2002 of
EUR1.00 = $1.0485. You should not construe these translations as representations
that the euro amounts actually represent such dollar amounts or that we could
convert these amounts into dollars at the rate indicated.
5
For the year ended December 31,
---------------------------------------------
2000 2001 2002 2002
-------- -------- ------------ ------------
(in $
millions,
(in EUR millions, except per
except per share data) share data)
Consolidated Profit and Loss Account
Data:
Revenues:
Specialist activities EUR281.8 EUR225.6 EUR223.2 $212.9
Commission income 39.0 38.5 35.0 33.4
Proprietary trading activities 123.7 65.0 56.1 53.5
Net interest income from stock
lending activities 6.3 5.1 4.2 4.0
Other revenues -- -- 3.3 3.1
-------- -------- ------------ ------------
Total revenues EUR450.8 EUR334.2 EUR321.8 $306.9
-------- -------- ------------ ------------
Expenses:
Exchange, clearing and brokerage fees 28.5 32.9 42.8 40.8
Employee compensation and benefits 123.8 98.3 93.8 89.5
Lease of exchange memberships
(1) 9.0 14.2 18.3 17.5
Information and communication
(1) 5.3 6.1 6.6 6.3
General and administrative expenses
(2) 19.2 29.9 23.1 22.0
Depreciation and amortization 17.6 22.7 12.0 11.4
Impairment of intangible fixed assets -- -- 33.7 32.1
-------- -------- ------------ ------------
Total expenses EUR203.4 EUR204.1 EUR230.3 $219.6
-------- -------- ------------ ------------
Income from operations EUR247.4 EUR130.1 EUR91.5 $87.3
-------- -------- ------------ ------------
Income (loss) from associates 0.2 (0.1 ) 0.3 0.3
Gain on disposal of long-term
investments and associates 10.9 29.8 0.4 0.4
Interest expense, net (6.4) (10.4) (14.1) (13.5)
Other income 1.5 7.8 5.2 5.0
-------- -------- ------------ ------------
Income before income taxes and minority
interest EUR253.6 EUR157.2 EUR83.3 $79.5
-------- -------- ------------ ------------
Provision for income taxes (2) (86.0) (39.8) (24.7) (23.6)
Minority interest (43.4) (25.3) (28.5) (27.2)
-------- -------- ------------ ------------
Net income EUR124.2 EUR92.1 EUR30.1 $28.7
======== ======== ============ ============
As adjusted to reflect our three-for-
one stock split that took effect on
May 1, 2001:
Basic earnings per common share (3) EUR3.28 EUR2.34 EUR0.71 $0.68
Diluted earnings per common
share (4) EUR3.25 EUR2.32 EUR0.71 $0.68
6
As of December 31,
---------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- -----------
(in $
(in EUR millions) millions)
Consolidated Balance Sheet Data:
Assets:
Cash and cash equivalents EUR65.5 EUR292.3 EUR334.0 $318.6
Cash segregated under federal and
other regulations 0.5 0.6 -- --
Securities purchased under agreements
to resell 156.4 11.3 244.9 233.6
Receivable from clearing
organizations and professional
parties 120.7 729.0 398.1 379.7
Securities owned at market value 473.4 775.5 456.9 435.8
Secured demand notes 6.4 0.2 0.1 0.1
Notes receivable 25.8 19.7 11.9 11.3
Stock borrowed 1,469.6 1,685.0 1,102.1 1,051.1
Memberships in exchanges:
Owned, at cost (market value of
EUR20.8 million, EUR28.0 million
and EUR20.6 million respectively) 19.2 21.5 18.1 17.3
Contributed by members, at market
value 15.0 27.5 21.0 20.0
Deferred tax assets -- -- 1.1 1.0
Property and equipment, net 7.9 11.1 9.3 8.9
Goodwill, net 129.0 176.5 141.9 135.3
Other intangible assets, net 212.0 293.7 266.7 254.3
Other assets 41.1 35.7 31.0 29.6
---------- ---------- ---------- -----------
Total assets EUR2,742.5 EUR4,079.6 EUR3,037.1 $2,896.6
========== ========== ========== ===========
Liabilities and shareholders' equity:
Liabilities:
Short-term borrowings 6.5 46.7 42.5 40.5
Securities sold under agreements to
repurchase -- -- 275.1 262.4
Payable to clearing organizations and
professional parties 70.3 151.9 69.2 66.0
Securities sold, not yet purchased,
at market value 403.8 1,178.4 691.3 659.3
Stock loaned 1,446.7 1,690.6 1,126.6 1,074.5
Current taxes payable 39.3 19.0 20.1 19.2
7
As of December 31,
---------------------------------------------
2000 2001 2002 2002
---------- ---------- ---------- -----------
(in $
(in EUR millions) millions)
Accounts payable, accrued expenses,
and other liabilities 94.6 61.8 22.7 21.6
Deferred tax liabilities, net 10.1 17.1 11.5 11.0
Notes payable 17.5 69.6 7.3 7.0
Subordinated borrowings:
Subordinated notes 74.6 180.4 197.3 188.2
Memberships in exchanges, contributed
by members, at market value 15.0 27.5 21.0 20.0
Minority interest 26.7 31.6 29.2 27.8
Shareholders' equity:
Financing preferred A shares, EUR0.60
(5) par value, authorized 1,200,000
shares, issued and outstanding
236,000, 241,000 and 251,000 shares,
respectively 0.1 0.1 0.1 0.1
Financing preferred B shares, EUR0.60
(5) par value, authorized 1,200,000
shares, issued and outstanding
391,304 shares 0.2 0.3 0.3 0.3
Common shares, EUR0.08 (5) par value,
authorized 54,000,000 shares, issued
and outstanding 37,061,811,
37,502,455 and 38,419,282 shares,
respectively
(4) 2.8 3.0 3.1 3.0
Additional paid-in capital 229.9 242.8 272.3 259.7
Retained earnings 257.8 289.3 275.1 262.3
Accumulated other comprehensive
income 46.6 69.5 (27.6) (26.3)
---------- ---------- ---------- -----------
Total shareholders' equity EUR537.4 EUR605.0 EUR523.3 $499.1
---------- ---------- ---------- -----------
Total liabilities and shareholders'
equity EUR2,742.5 EUR4,079.6 EUR3,037.1 $2,896.6
========== ========== ========== ===========
8
As of and for the year ended
December 31,
-----------------------------------
2000 2001 2002
----------- ----------- -----------
Other Financial and Operating Data:
Pre-tax return on equity (6) 39.1 % 21.8 % 10.5 %
Percent of revenues:
Specialist activities 62.5 % 67.5 % 69.4 %
Commission income 8.6 % 11.5 % 10.9 %
Proprietary trading activities 27.5 % 19.5 % 17.4 %
Net interest income from stock lending activities 1.4 % 1.5 % 1.3 %
Other revenues -- % -- % 1.0 %
Weighted average number of common shares outstanding
(7) 36,990,191 38,139,964 38,388,043
VDM Specialists, LLC:
Number of common stock listings 239 388 379
Notes:
(1) Prior to the 2001 financial year, lease of exchange memberships were
included in information and communication expenses, and are now shown on a
stand-alone basis.
(2) Unincorporated business tax expenses are included in the provision for
income taxes. For the years ended 2000 and 2001, these expenses have been
reallocated from general and administrative expenses to provision for
income taxes.
(3) Calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding. See note 20 to our
audited consolidated financial statements.
(4) Calculated in the same manner as basic earnings per common share and
reflects the dilutive effect of the common shares deliverable pursuant to
stock options and warrants. See note 20 to our audited consolidated
financial statements.
(5) As a result of our having amended our articles on May 1, 2001, the par
value of our financing preferred A shares, financing preferred B shares and
common shares was changed from NLG 1.25, NLG 1.25 and NLG 0.50 to EUR0.60,
EUR0.60 and EUR0.08, respectively.
(6) Pre-tax return on equity is calculated by dividing income before income
taxes less minority interest by shareholders' equity.
(7) As adjusted to reflect our three-for-one stock split that took effect on
May 1, 2001. The weighted average number of shares for prior reporting
periods is adjusted for the issue of stock dividends.
Exchange Rate Information
Unless otherwise stated, we present all of the financial information in
this annual report in euro. The majority of our revenues and expenses is
denominated in dollars. In addition, a certain portion of our revenues and
expenses is denominated in currencies other than the dollar, which are not
linked to the euro, in particular the pound sterling. To the extent the euro
appreciates relative to the dollar or other non-euro-linked currencies in which
our subsidiaries report, our revenues will be adversely affected.
9
Before January 1, 1999, there was no exchange rate between the euro and the
dollar. The following tables present, for the periods prior to January 1, 1999,
information concerning the exchange rate of dollars for the Dutch guilder,
restated in euro, and, for all subsequent periods, information concerning the
exchange rate of dollars for the euro. For the calculation of the euro amounts
for all periods prior to January 1, 1999, we have restated the applicable noon
buying rate for the Dutch guilder at the official fixed conversion rate of NLG
2.20371 per EUR1.00. Amounts are expressed in dollars per EUR1.00 during the
relevant period. These amounts are indicative only and are not necessarily the
same rates at which we translated dollars into euro during any of the financial
periods discussed in this annual report.
Rate at period
Dollars per euro end Average(1) High Low
- --------------------------- -------------- ----------- ----------- -------------
For the year ended December
31, 1998 0.8573 0.8992 0.9497 0.8126
For the year ended December
31, 1999 1.0062 1.0660 1.1899 0.9990
For the year ended December
31, 2000 0.9427 0.9238 1.0414 0.8230
For the year ended December
31, 2001 0.8895 0.8961 0.9594 0.8352
For the year ended December
31, 2002 1.0492 0.9506 1.0505 0.8565
Source: Bloomberg.
Note:
(1) Calculated by using the average of the exchange rates on the last day of
each month during the relevant period.
Rate at
Dollars per euro period end High Low
- -------------------------------------------- ----------- ----------- -------------
For the month ended November 30, 2002 0.9943 1.0171 0.9881
For the month ended December 31, 2002 1.0492 1.0505 0.9863
For the month ended January 31, 2003 1.0768 1.0905 1.0336
For the month ended February 28, 2003 1.0806 1.0935 1.0667
For the month ended March 31, 2003 1.0915 1.1083 1.0504
For the month ended April 30, 2003 1.1184 1.1187 1.0562
For the month ended May 31, 2003 1.1784 1.1933 1.1158
Source: Bloomberg.
The noon buying rate for the euro on June 11, 2003 was EUR1.00 = $1.1764.
Fluctuations in the exchange rate between the euro and the dollar will affect
the dollar equivalent of the price of the common shares on Euronext, which will
likely affect the market price of the American Depositary Shares ("ADSs") on the
New York Stock Exchange. These fluctuations will also affect the dollar amounts
received by owners of ADSs on the conversion of any dividends we pay in euro on
the common shares.
(B) Capitalization and Indebtedness
Not applicable.
10
(C) Reasons for the Offer and Use of Proceeds
Not applicable.
(D) Risk Factors
We have listed below considerations that could have a material adverse
effect on our business, financial condition or results of operations. Additional
considerations not presently known to us or that we currently deem immaterial
may also impair our business operations. These factors should be considered
carefully, together with the information and financial data set forth in this
document.
Risks Associated with the Company
We depend heavily on our New York Stock Exchange specialist
activities, and if revenues decline, it would have a material effect
on our results of operations.
We derive a substantial majority of our revenues (63.4%, 78.5% and
82.9% of total revenues in 2000, 2001 and 2002 respectively) from our
New York Stock Exchange specialist subsidiary, Van der Moolen
Specialists USA, LLC ("VDM Specialists" or "VDM Specialists, LLC").
The recent difficult global market and economic conditions have
resulted in a decline in VDM Specialists' revenues from EUR289.9
million in 2000 to EUR262.4 million and EUR266.7 million in 2001 and
2002 respectively. If conditions do not improve or decline further,
our revenues will continue to be adversely effected. In addition, if
demand for its specialist services fails to grow or declines, our
potential revenue growth would be adversely affected. We expect our
New York Stock Exchange specialist activities to continue to account
for a significant portion of our revenues for the foreseeable future.
Our future success will depend on:
- -- development in trading volumes with an appropriate level of volatility;
- -- VDM Specialists' success in being chosen to act as specialist for newly
listed companies;
- -- VDM Specialists' ability to respond to regulatory and technological
changes;
- -- VDM Specialists' ability to respond to changing demands in the marketplace;
and
- -- the impact of alternative trading systems and other "third market"
execution venues on the volume of trading through specialists on the New
York Stock Exchange.
We depend significantly on revenues from our specialist activities
for a small group of companies listed on the New York Stock Exchange,
and the loss of any of them could reduce our revenues.
Historically, a small number of companies listed on the New York
Stock Exchange have accounted for a significant portion of VDM
Specialists' revenues and operating profit. The loss of its specialist
designation with respect to any of these listed companies could have
an adverse effect on our revenues and operating profit. For the years
ended December 31, 2000, 2001 and 2002, transactions in our ten most
actively traded specialist stocks accounted for 30.6%, 33.2% and 26.6%
of our total New York Stock Exchange specialist revenues,
respectively. For the year ended December 31, 2002, our ten most
actively traded specialist stocks were Pfizer, Wyeth, Eli Lilly,
Hewlett Packard, Kohl's Corp., Walt Disney Co., HCA Inc., FleetBoston,
International Paper and Duke Energy. We cannot assure you that VDM
Specialists will be able to retain its specialist designation with
respect to these or other listed companies. VDM Specialists can lose
these listed companies if they cease to be traded on the New York
Stock Exchange as a result of being acquired or are otherwise
delisted, which in turn can adversely affect our revenues. This was
the case in the first half of 2001 when VDM Specialists lost its
specialist assignment for Time Warner, Inc. following its merger with
America Online, Inc. In addition, if the New York Stock Exchange were
to determine that VDM Specialists has failed
11
to fulfill its obligations as specialist for a listed company, its
registration as a specialist for that listed company could be cancelled or
suspended.
Risks associated with our trading transactions could result in
trading losses.
The majority of our specialist and proprietary trading revenues is
derived from trading by our subsidiaries as principal. Our
subsidiaries may incur trading losses relating to these activities,
because each primarily involves the purchase, sale or short sale of
securities for its own account. In any period, our subsidiaries may
incur trading losses in a significant number of securities for a
variety of reasons in the fulfillment of some of our subsidiaries'
specialist obligations, which may require them to effect trades when
it is not profitable to do so. See "Information on the Company -- Our
Business -- VDM Specialists -- Specialist activities" and "--
Regulation -- The United States".
Although we have adopted risk management policies, we cannot be
sure that these policies have been formulated properly to identify or
limit our risks. Even if these policies are formulated properly, we
cannot be sure that we will successfully implement these policies. As
a result, we may not be able to manage our risks successfully to avoid
trading losses.
We may not have sufficient capital in the future and may not be
able to refinance our existing indebtedness or secure additional
financing when we need it.
Our business depends on the availability of adequate capital. We
cannot be sure that we will have sufficient capital in the future or
that we will be able to refinance existing indebtedness or that
additional financing will be available on a timely basis or on terms
that are favorable to us. Historically, we have satisfied these needs
with internally generated funds and bank credit facilities, as well as
the issuance of financing preferred shares and common shares. We
currently anticipate that our available cash resources and credit
facilities will be sufficient to meet our anticipated working capital,
regulatory capital and capital expenditure requirements through the
end of 2003.
We may, however, need to raise additional funds to, among other
things, increase the capital available to us for our inventory
positions, support expansion opportunities when they present
themselves or to respond to unanticipated capital requirements. We may
also be required to obtain this additional financing on short notice
as a result of rapid, unanticipated developments, such as a steep
market decline.
We may have difficulty identifying and financing suitable
acquisitions, and any acquisitions that we do complete could adversely
affect operating results.
As part of our strategy, we intend to seek out appropriate
acquisitions that we believe will complement or expand our existing
businesses. We do not know if we will be able to identify appropriate
acquisitions or be able to finance these transactions successfully
once identified. In particular, because of the recent consolidation in
the New York Stock Exchange specialist industry, there are few viable
acquisition targets left in that segment. Furthermore, an acquisition
could require significant capital resources. Any failure to identify
or finance future transactions may impair our growth.
Any acquisitions which we do complete will be accompanied by the
risks commonly encountered with acquisitions of companies, such as the
difficulty of integrating the operations and personnel of the acquired
businesses, the potential disruption of our existing business, the
assumption of unexpected liabilities relating to the acquired assets,
difficulties with the imposition and maintenance of common standards,
controls, procedures and policies, and the impairment of relationships
with employees and counterparties as a result of difficulties arising
out of integration. Furthermore, the value of any business we acquire
may be less than the amount we paid for it if, for example, there is a
decline in the position of that business in the relevant market in
which it operates or there is a decline in that market generally.
12
Fluctuations in exchange rates could adversely affect results of
our operations outside the euro region
We publish our Consolidated Financial Statements in euros. In
2002, we derived nearly all of our income from operations in the
United States. Because of this exposure to non-Euro currencies,
fluctuations in the exchange rates used to translate foreign
currencies, particularly the U.S. dollar, into euros will impact our
reported result from operations and cash flows from year to year.
Exchange rate fluctuations will also affect the value (denominated in
euros) of our investments in our non-European subsidiaries. Our
shareholders' equity is denominated in euros and we pay dividends on
our common shares in euros. The euro value of those dividends in other
currencies is also subject to exchange rate fluctuations.
The contribution of our U.S. operations to our results has grown
substantially during the last five years as a result of our
acquisitions in the United States over the period. As a result, our
sensitivity to changes in the value of the U.S. dollar has increased.
In early 2003, we purchased a series of U.S. dollar put options in
order to create a "stop loss" on the translation exposure arising on
our U.S. dollar denominated net income in 2003. As a result, we expect
that any further appreciation of the euro against the U.S. dollar will
have a limited effect on our net income for 2003. See "Quantitative
and Qualitative Disclosures About Market Risk".
We are highly dependent on technology in order to operate our
businesses effectively.
Our business activities require us to record and process
accurately a very large number of transactions on a daily basis. Any
failure or delay in recording or processing transactions could result
in losses to us and could subject us to claims for losses and
regulatory fines and penalties. We rely on our employees to operate
and maintain our systems properly, and are similarly reliant on the
proper functioning of the systems of the exchanges on which we operate
and their supporting depository, clearing and settlement
organizations, including in particular those of the New York Stock
Exchange. Our recording and processing of trades is subject to human,
computer and mechanical errors. Moreover, extraordinary trading volume
or other events could cause our systems, or those of the exchanges on
which we trade, to operate at an unacceptably low speed or even fail.
Our systems may fail as a result of hardware or software failure or
power or telecommunications failure. Although we have back-up servers
and systems and, in the case of VDM Specialists, operate a disaster
recovery site, these measures may not be effective in preventing an
interruption of our business. Any significant degradation or failure
of our information systems or any other systems in the trading
process, which could cause us to fail to complete transactions on a
timely basis, could have an adverse effect on our business, financial
conditions and/or operating results or could damage our relationships
with our counterparties.
Our future success will depend on our ability to respond to
changing technologies and demands of the market place on a timely and
cost-effective basis. Our failure to upgrade our information and
communications systems on a timely or cost-effective basis could have
an adverse effect on our business, financial condition and/or
operating results and could damage our relationships with our
counterparties.
If we lose the services of a number of qualified personnel or
cannot hire additional qualified personnel, our businesses will be
harmed.
The future success of our businesses depends on the continued
service of highly qualified personnel. Competition for highly
qualified management, trading, compliance and technical personnel is
intense. We cannot assure you that we will be able to attract new
highly qualified personnel or retain those that we currently employ.
In order to do so, we may need to increase the value of the
compensation packages we offer our employees. The loss of the services
of a group of qualified employees, such as a team of traders (as was
the case in March 2003 when nine traders working at the trading desk
of Van der Moolen Effecten Specialist in Amsterdam left the firm), or
the inability to identify, hire, train and retain other qualified
personnel in the future could have an adverse effect on our business,
financial condition and/or operating results.
13
We are subject to risk relating to litigation and potential
securities laws liability.
Our businesses are exposed to substantial risks of liability under
federal and state securities laws, other federal and state laws and
court decisions, as well as rules and regulations of the Securities
and Exchange Commission, the New York Stock Exchange and similar
regulatory authorities and self-regulatory organizations in the United
States and Europe, as well as national and local legislation in
various European jurisdictions. We are also subject to the risk of
litigation and claims that may be without merit. We could incur
significant legal expenses in defending ourselves against such
lawsuits or claims. An adverse resolution of any future lawsuits or
claims against us could have an adverse effect on our business,
financial condition and/or operating results.
The New York Stock Exchange has commenced an investigation of
trading practices at several specialist firms, including VDM
Specialists. See "Consolidated Statements and Other Financial
Information -- Regulatory Proceedings and Litigation".
We do not have operations of our own and we are dependent on
inter-company cash flow to generate funds.
We have no operations of our own. We are a holding company and our
only principal assets, other than the portion of past inter-company
cash flows retained, are the shares of our subsidiaries. We are wholly
dependent on interest, dividends, loan repayments and other
inter-company cash flows received from our subsidiaries to generate
funds.
The ability of our subsidiaries to make funds available to us is
dependent, in part, on their ability to generate positive cash flow.
The ability of our subsidiaries to pay dividends and to make payments
on inter-company debt owed to us is subject to regulatory, statutory,
tax and other restrictions, including debt covenants, the earnings,
level of statutory reserves and capitalization of our subsidiaries,
and various business considerations. See "Information on the Company
- -- Regulation" and "Financial Information -- Dividends and Dividend
Policy".
The tax treatment of our Dutch finance entity will change, as a
result of which the effective tax rate to which we are subject may
increase.
In accordance with applicable Dutch law, in particular the Special
Fiscal Regime for International Financing Activities, we are able
through our Dutch finance entity to defer taxation of interest income
received from subsidiaries within the group, as well as any currency
exchange gains realized on group loans that are repaid, subject to the
satisfaction of certain conditions. This has allowed us to structure
financing undertaken by the group in a tax-efficient manner so as to
reduce the effective tax rate payable by us on a consolidated basis on
income before taxes and minority interests less minority interests.
Following its investigation announced in 2001, the European Commission
announced on February 18, 2003, that the Netherlands' Special Fiscal
Regime for International Financing Activities constitutes state aid,
which is contrary to the European Community Treaty. However, the
Commission has allowed The Netherlands a transitional period to phase
out the Special Fiscal Regime for International Financing Activities,
allowing us to benefit from this regime until the end of 2007.
Following the Commission's announcement, the Dutch tax authorities
have not yet commented on the fiscal consequences of abolishing the
regime. It is therefore uncertain whether we will be able to continue
to benefit from this regime until the end of 2007 to the extent that
we have in the past. The effective tax rate payable by us on a
consolidated basis on income before taxes less minority interests may
increase depending on the effectiveness of possible new financing
structures that will be implemented.
The tax law in the United States may change, as a result of which
the effective tax rate to which we are subject may increase.
In February 2003, the U.S. Treasury Department proposed certain
amendments to the U.S. Internal Revenue Code that, if enacted as
proposed, would reduce or eliminate the deductible interest expense of
certain U.S. corporations making interest payments to related foreign
persons. If the proposal is enacted into law as currently proposed, it
14
could cause one or more of our U.S. subsidiaries to be denied a
portion of their deductions for interest paid to certain of our Dutch
subsidiaries, and therefore could have an adverse impact on the
effective tax rate of our U.S. operations and on the effective tax
rate payable by us on a consolidated basis on income before taxes less
minority interests.
A different legislative proposal, introduced in July 2002 by the
Chairman of the U.S. House of Representatives Committee on Ways and
Means, but not reintroduced in the current session of Congress, if
reintroduced and enacted as proposed, could cause our U.S.
subsidiaries to be denied all of their deductions for interest paid to
our Dutch subsidiaries, which could have a significantly greater
adverse impact on the effective tax rate payable by us.
We are unable to predict whether these proposals will be
introduced in the current or a future session of the U.S. Congress,
and if so, whether they will be enacted in their current or a modified
form and, if enacted, what their ultimate effect would be on us.
The tax laws in other countries in which we operate may change, as
a result of which the effective tax rate to which we are subject may
increase.
In Germany, the Government has introduced proposals to change the
tax laws substantially. Although it is uncertain whether these
proposals will be enacted in their current form, it is expected that
these or alternative proposals will adversely influence the
possibilities for companies, such as Van der Moolen Trading, to offset
taxable profits with fiscal losses. Such measures and other changes in
tax laws, especially in Germany and/or the United Kingdom, could cause
the effective tax rate payable by us to increase.
Risks Associated with the Industry in which we operate
Specialist rules may require us to make unprofitable trades or to
refrain from making profitable trades.
Specialists operating on the New York Stock Exchange and other
exchanges are assigned the role of conducting the auction in a
particular security. When assigned a particular security, the
specialist firm agrees to specific obligations including maintaining,
as far as practicable, trading in the security that will be fair and
orderly. In acting as a specialist, our subsidiary, VDM Specialists,
for example, is subjected to a high degree of risk by having to
support an orderly market, maintain inventory positions and refrain
from trading under some favorable conditions. Its role as a
specialist, may, at times, require it to make trades that adversely
affect its profitability, while at other times it is required to
refrain from trading for its own account in circumstances in which it
may be advantageous to do so. For example, VDM Specialists may be
obliged to act as a principal when buyers or sellers outnumber each
other. In those instances, it may take a position counter to the
market, buying or selling shares to support an orderly market in the
affected stocks. In order to perform these obligations, it holds
varying amounts of securities in inventory. In addition, New York
Stock Exchange specialists may not trade for their own account when
public buyers are meeting public sellers in an orderly fashion and may
not compete with public orders at the same price. Certain of our
subsidiaries also act as specialists on other exchanges, and while the
rules and obligations relating to their operations may differ from
those of our New York Stock Exchange specialist operations, such rules
may also require them to make unprofitable trades or refrain from
making profitable trades. The New York Stock Exchange, the American
Stock Exchange, the Philadelphia Stock Exchange, the Chicago Board
Options Exchange or other exchanges on which our subsidiaries operate
may make their rules governing the specialist or similar function more
stringent or may implement changes which could adversely affect their
trading revenues as a specialist or in performing similar functions.
15
We are subject to competition for new listings and the effects of
industry consolidation, and our financial results will suffer if we do
not compete effectively.
We cannot be sure that we will be able to compete effectively with
current or future competitors for the specialist designation with
respect to new listings, including foreign issuers listing American
depositary shares on the New York Stock Exchange. We obtain our
specialist designation for new listings on a given securities exchange
through an allocation process run by that exchange. Our failure to
compete effectively and gain new specialist designations could reduce
future revenue and profit growth.
The financial markets are rapidly evolving and are highly
competitive. We expect competition to continue to intensify. We face
competition from many firms varying in size and strategy. Large global
financial institutions represent a significant group of our
competitors. In addition, our current and potential competitors have
established or may establish other co-operative relationships or may
consolidate to enhance their services. This trend is evidenced in
particular by the rapid consolidation of New York Stock Exchange
specialists, the number of which has fallen from 37 as of December 31,
1996 to 7 as of March 31, 2003. Three of the top five of these
specialists are owned or affiliated with banking groups which have
significantly greater financial resources than we do and two of the
top five are affiliated with investment banks which act as
underwriters of the initial public offerings of companies seeking to
list on the New York Stock Exchange. As a result of this
consolidation, there are now fewer potential acquisition targets among
the remaining specialist firms, which hinders our growth. In addition,
new competitors may emerge and they may acquire significant market
share. Some of our competitors also offer a wider range of services
and products than we offer and have greater name recognition and more
extensive customer bases. These competitors may be able to respond
more quickly to new or evolving opportunities, technologies and
customer requirements than we can, and may be able to undertake more
extensive promotional activities. If we are unable to compete
successfully, our future revenue and profit growth could be materially
adversely affected.
Our revenues and operating profit depend on the volume and
volatility of trading and our ability to translate the increase in
volume and volatility to an increase in trading revenues on the U.S.
and European securities markets on which we operate.
In 2002, we experienced a significant decline in the revenues and
operating profit we earned. This decrease was largely the result of
decreased trading activity on many of the markets on which we trade,
and lower price volatility on those markets for a large portion of the
year. These decreases resulted from a variety of influences, including
the sustained slowdown of the U.S. economy, a reallocation of
investors' portfolios away from equities and reduced price volatility
(in dollar terms) as equity prices declined. Any one or more of the
following factors may, if not reversed, contribute to a further
reduction in the level of activity in the securities markets
generally, which could in future periods result in a continued
decrease in our revenues and income before income taxes and minority
interests, as was the case in the year ended December 31, 2002
compared with the year ended December 31, 2001 as well as the in the
first quarter of 2003 compared to the same period in 2002:
- -- national and international economic, political and market conditions beyond
our control;
- -- adverse changes in the economy and the securities markets resulting in long
term, sustained declines in price levels of securities;
- -- a sustained decline in share prices, which has in the past led to decreases
in volume and volatility;
- -- a decline in the number and size of new equity offerings;
- -- adverse changes in the regulatory environment; and
- -- a reduction in purchases of securities by individual investors, whether
directly or through mutual funds.
16
In addition, sustained decreases in profitability, when considered
with other relevant factors, could result in the impairment of
goodwill, as was the case in the fourth quarter of 2002. The amount of
such impairment was charged to income from operations in the period in
which it was determined that the impairment had occurred. See
"Operating and Financial Review and Prospects -- Operating Results --
Overview -- Recent Accounting Pronouncements".
Our quarterly results may fluctuate significantly and the market
price of our common shares and ADSs could decrease.
Our revenues may fluctuate significantly based on factors relating
to the securities markets. These factors include:
- -- a decrease in turnover on the exchanges on which we operate, as was the
case during the years ended December 31, 2001 and 2002 and the first
quarter of 2003, particularly in respect of certain New York Stock Exchange
specialist assignments of VDM Specialists;
- -- volatility of share price movements, which at either extreme, too high or
too low, can affect revenues; and
- -- changes in the value of our securities positions.
Some elements of our cost structure, including the fixed component
of our salaries, lease charges, depreciation and many technology
expenses, do not decline if we experience quarterly reductions in our
revenues. As a result, if market conditions cause our revenues to
decline, we may be unable to adjust these elements of our cost
structure on a timely basis and we could suffer losses.
If our operating results fall below the expectations of securities
analysts and investors, the market price of our common shares and ADSs
could decrease.
Alternative trading systems could reduce the volume of trading on
exchanges and therefore reduce the revenue from our trading activities
on these exchanges.
Alternative trading systems could reduce the levels of trading of
exchange-listed securities executed on a securities exchange, such as
the New York Stock Exchange. This, in turn, could have an adverse
effect on our revenues. Over the past few years, a number of
alternative trading systems, including electronic communications
networks or ECNs, have emerged which compete with the conventional
markets by increasing the volume of trading in exchange-listed
securities that occurs off the exchange in over-the-counter markets.
In the future, similar new systems may continue to be developed and
placed in operation and existing systems may increase their share of
transactions.
Market fragmentation may reduce market liquidity.
When two or more markets trade the same security, the effect is
that liquidity is spread over those markets. If the proliferation of
competing markets is not accompanied by the development of electronic
connections allowing orders to move and settle between them, the
market for certain securities fragments, resulting in separate pools
of liquidity. This results in markets becoming less liquid than they
would otherwise be, which could negatively affect revenues earned from
any individual market on which we trade, although it may also open
arbitrage opportunities to us where we have trading access to both
markets.
We run operational risks trading securities and derivatives,
including the risk that counterparties may fail to pay us.
All trades executed by our subsidiaries involve a counterparty
from whom we buy or to whom we sell. With each trade there is a risk
that our subsidiaries may be unable to deliver the securities sold or
pay for the securities purchased. Their counterparties are similarly
exposed to us on the other side of the transaction. Failure by our
subsidiaries to fulfill their contractual obligations could result in
significant interest costs and related expenses. If the failure
17
persisted, our subsidiaries could lose their registration on the
marketplace on which they are trading. Furthermore, due to the failure
of one of our counterparties to complete a trade, our subsidiaries
could incur significant expenses trying to enforce the contract and
could have to forgo alternative trading opportunities as a result of
having committed capital to a failed trade.
In addition, as a trader and lender of securities, many securities
transactions are conducted by our subsidiaries as principal with
counterparties located in numerous jurisdictions. The securities
exchanges on which our subsidiaries are active, the relevant national
regulators and the associated clearing houses and custodians monitor
the credit standing of most of the counterparties with which our
subsidiaries conduct business. However, our counterparties may default
on their obligations, notwithstanding these regulatory controls and
monitoring procedures.
Future New York Stock Exchange initiatives may lower the revenues
from our VDM Specialists business segment.
The New York Stock Exchange may, on its own initiative or in
response to regulatory or legislative requirements, change aspects of
its trading procedures, or of its capital, trade reporting, compliance
and other membership requirements, in ways that may adversely affect
our ability to generate revenues from our New York Stock Exchange
activities or raise the cost to us of doing so. Similar changes may
adversely affect our ability to generate revenues and operating profit
from our activities on any other exchange as well. Such changes may be
imposed without compensation or right of appeal, and the effects of
any such changes proposed may not be easily forecast or even, after
their imposition, determined.
We cannot be certain that any changes to New York Stock Exchange
practice, or changes to the practice on other exchanges where we are
active, will not have a negative effect on our ability to earn
revenues and operating profits from our activities on those exchanges.
We are subject to minimum net capital requirements promulgated by
the exchanges on which we operate.
Each exchange on which we operate maintains its own set of net
capital requirements with which our subsidiaries must comply. In
particular, if our subsidiaries fail to comply with certain minimum
net capital requirements, they may be subject to penalties and fines.
For example, each of our broker-dealer subsidiaries in the United
States is required to maintain minimum net capital equivalent to the
greater of $250,000 (EUR238,436) or 2% of aggregate debit items
computed in accordance with SEC Rule 15c3-3. In addition, the New York
Stock Exchange requires members who are specialists, such as our
subsidiary, VDM Specialists, to maintain a minimum regulatory capital
dollar amount to establish that they can meet, with their own liquid
assets, their position requirements. It is possible that one or more
of our subsidiaries may be unable successfully to meet its respective
net capital requirements.
The application of minimum net liquid asset requirements may
hinder our ability to make acquisitions.
The New York Stock Exchange requires any new specialist entity
that results from a merger, acquisition, consolidation or other
combination of specialist assets to maintain net liquid assets
equivalent to the greater of either the aggregate net liquid assets of
the specialist entities prior to their combination or the capital
requirements prescribed under New York Stock Exchange Rule 104, which
are described in "Information on the Company -- Regulation -- The
United States -- Minimum Net Capital Requirements". If we were unable
to meet any new net liquid asset or net capital requirements from
internally generated funds, we would be required to seek external
sources of funding in order to finance the acquisition of another New
York Stock Exchange specialist firm. If we were unable to obtain such
funds on favorable terms, we would be unable to make such an
acquisition, which could hinder our ability to grow our U.S.
specialist business in the manner and timeframe we envision.
Currently, the capital requirements for the other businesses we pursue
in Europe and the United States are not as demanding as the
requirements placed on New York Stock Exchange specialists, but these
rules are subject to change. We cannot predict the effect any such
changes may have.
18
An increase in net liquid asset requirements resulting from an
acquisition may prevent us from meeting our financial obligations.
All of our operating subsidiaries are regulated by relevant
national authorities and the securities exchanges on which they
operate. For example, VDM Specialists is a broker-dealer and a
specialist regulated by the Securities and Exchange Commission and the
New York Stock Exchange. The regulations of these organizations
include strict rules regarding capital requirements, as well as
approval requirements for withdrawals of capital from, and in some
cases, other distributions by, broker-dealers and specialists. If VDM
Specialists acquires additional companies, it is subject to additional
net liquid asset requirements, as a result of which its ability to
make available excess cash to us or other group companies for general
corporate purposes would be limited. These and the other regulations
to which our subsidiaries are subject could also prevent us from
obtaining funds necessary to satisfy our obligations to pay interest
on or repay our indebtedness.
The regulatory environment in which we operate may change, which
could adversely affect our operations and our international expansion
plans.
The regulatory environment in which our businesses operate is
subject to change. Additional legislation and regulation, changes in
the rules of the exchanges on which we operate, actions taken by other
government agencies or self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules may
adversely affect our manner of operation and profitability. We cannot
predict the effect any such changes may have.
In addition to the Netherlands and the United States, we currently
have operations in the United Kingdom and Germany, and trade remotely
on the Helsinki Stock Exchange and the SWX Swiss Exchanges. We also
trade French stocks remotely from Amsterdam through Euronext. We
intend to expand our operations to other countries in the future. To
continue expanding our services internationally, we will have to
comply with the regulatory controls of each country in which we
conduct business. The securities industry in all developed countries
is heavily regulated. The varying compliance, capital and other
requirements of these different regulatory jurisdictions and other
factors may limit our ability to expand internationally.
The failure by us or our employees to comply with applicable laws
and regulations could result in substantial fines and other penalties.
Our businesses and the securities industries in which they operate
are subject to an extensive range of laws, rules and regulation in the
United States and Europe that are promulgated by various governmental
agencies and self-regulatory organizations. The laws, rules and
regulations with which our businesses must comply include those
relating to financial reporting requirements, trade practices, capital
structure requirements, and record retention requirements governing
the conduct of our directors, officers and employees. Failure to
comply with any of these laws, rules or regulations could result in
censure, fine, the issuance of cease-and-desist orders or the
suspension or disqualification of our directors, officers or
employees, and other adverse consequences, which could have an adverse
effect on our business. It could also result in the suspension or
disqualification of whichever of our subsidiaries commits the
violation by the SEC or other relevant regulatory authority or in that
subsidiary's suspension or disqualification as a member of the
securities exchange on which it operates. If this occurred, we would
be unable to operate a portion of our business, which could
potentially be significant.
Employee misconduct is difficult to deter and could result in
losses.
There have been a number of highly publicized cases involving
fraud, stock manipulation, insider trading or other misconduct by
employees in the financial services industry in recent years, and we
run the risk that misconduct by one of our employees could occur.
Misconduct by employees could include binding us to transactions that
exceed authorized limits or present unacceptable risks, or hiding from
us unauthorized or unsuccessful trading activities, which, in either
case, may result in unknown and unmanaged risks or losses.
19
Employee misconduct could also involve the improper use or disclosure of
confidential information, which could result in regulatory sanctions and serious
reputational or financial harm, although as a firm, the only confidential
information in our possession is that regarding our own activities. It is not
always possible to deter employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all cases.
The impact of the terrorist attack in the United States and
continued hostilities by U.S. forces outside the United States could
continue to destabilize world financial markets and adversely affect
our trading results, exchange rates and the trading prices of our
common shares and ADSs.
Our revenues and operating profit depend on the volume and
volatility of trading on the U.S. and European securities markets on
which we operate, particularly the New York Stock Exchange. Since the
terrorist attacks in the United States on September 11, 2001, trading
on the markets where our subsidiaries operate has generally been
volatile. The stock exchange indices in the United States and Europe
have generally remained below the levels seen prior to September 11,
2001.
The United States continues to be engaged in military operations.
This, as well as concern about further terrorist attacks in the United
States and abroad, has contributed to continued market uncertainty in
both the United States and Europe and the possibility in the future of
further disruption to trading on worldwide securities markets. Were
this to occur, it is likely that our business, financial condition
and/or operating results, the liquidity and trading prices (and the
stability of such prices) of our common shares and ADSs, and the
exchange rate of the euro against the dollar (in which the substantial
proportion of our revenues, as well as the ADSs, are denominated)
would be adversely affected.
Risks Related to our Common Shares and ADSs
Our articles of association and the laws of the Netherlands may
have anti-takeover provisions, which could prevent a beneficial change
in control.
Our articles of association and the laws of the Netherlands may
have anti-takeover provisions. Among other things, our articles of
association provide that our supervisory board may make binding
nominations for the election of our management board members and
supervisory board members, and only a shareholders' resolution
approved by a two-thirds majority of the votes cast and representing
more than half of our outstanding common shares can set the
nominations aside. Furthermore, our articles of association provide
that resolutions by the general meeting of shareholders may be adopted
by an absolute majority, which means a majority of all votes cast
(unless the articles of association or Dutch law dictate a larger
majority), so long as the resolution is adopted upon a proposal by the
management board that is subject to the approval of the supervisory
board. A proposal not made by the management board may only be adopted
by an absolute majority at a general meeting at which more than half
of the issued share capital is represented. A resolution to amend the
articles of association may only be adopted by a general meeting of
shareholders following a proposal by our management board and subject
to the approval of our supervisory board.
Our articles of association provide for the future issuance of
preferred shares to an unaffiliated foundation called Stichting Van
der Moolen Holding. The Stichting's object is to safeguard our
interests and those of our subsidiaries in such a way that the
interest of Van der Moolen Holding N.V. and all other concerned
parties are safeguarded and that the continuity and independence of
Van der Moolen Holding N.V. may be enforced to the maximum extent
possible by acquiring and managing our preferred shares and by
exercising the rights attaching to those shares, in particular the
voting rights. We have entered into an agreement with the Stichting
pursuant to which it has been granted a call option to acquire a
sufficient number of preferred shares such that the Stichting could
have voting rights equal to the total voting rights of the holders of
our common and financing preferred shares taken together. Accordingly,
the Stichting would be able to block or control all votes requiring an
20
absolute majority of votes cast. See "Additional Information -- Memorandum and
Articles of Association -- Preferred shares".
These and other provisions in our articles of association may have
the effect of delaying, deterring or preventing a change in control
that might otherwise be in the best interests of our shareholders, or
may prevent us from offering our shareholders the opportunity to sell
their common shares or ADSs at a premium over market prices that might
otherwise prevail.
You may have difficulty protecting your rights as a shareholder
and enforcing civil liabilities because we are a Dutch limited
liability company.
We are incorporated under the laws of the Netherlands, and the
members of our supervisory board and two of the four members of our
management board are residents of jurisdictions outside the United
States. As a result, it may not be possible for you to effect service
of process within the United States upon us or these persons, or to
enforce against us or these persons in courts in the United States,
judgments of these courts predicated upon the civil liability
provisions of United States securities laws. In addition, it is not
clear whether a Dutch court would impose civil liability on us,
members of our supervisory board or members of our management board in
an original action based solely upon the federal securities laws of
the United States brought in a court of competent jurisdiction in the
Netherlands. Dutch law, furthermore, does not recognize a
shareholder's right to bring a derivative action on behalf of a
company.
If you hold our ADSs, you will not be able to exercise certain
shareholder rights.
ADS holders are not treated as shareholders and will not be able
to exercise some shareholder rights. The Bank of New York is the
holder of common shares underlying the ADSs. An ADS holder has those
rights as set forth in a deposit agreement among us, The Bank of New
York and the ADS holders dated October 17, 2001. These rights are
different from those of holders of our common shares, including with
respect to the receipt of information, the receipt of dividends or
other distributions and the exercise of voting rights. In particular,
an ADS holder must instruct The Bank of New York to vote the common
shares underlying the ADSs, but only if we ask The Bank of New York to
ask for the ADS holder's instructions. As a result, it may be more
difficult for you to exercise those rights. In addition, there are
fees and expenses related to the issuance and cancellation of the
ADSs.
21
Item 4: INFORMATION ON THE COMPANY
(A) History and Development of the Company
We were incorporated under the name Van der Moolen & Co. on July
1, 1892. Our business was originally organized in the form of a
general partnership. On December 10, 1986, our business was
contributed to a newly incorporated limited liability company
(naamloze vennootschap) by a deed executed before Steven Perrick,
civil law notary. The statement of no objection of the Minister of
Justice in respect of our deed of incorporation was issued on December
8, 1986 under number N.V. 312.008.
Our corporate seat is in Amsterdam, the Netherlands, and we have
our principal office at Keizersgracht 307, 1016 ED Amsterdam, the
Netherlands and our telephone number is +31 20 535 6789.
For a description of our principal capital expenditures and
divestitures, please see "Operating and Financial Review and Prospects
- -- Liquidity and Capital Resources -- Capital Expenditure".
(B) Business Overview
Our Company
We are a securities trading firm that principally engages in the
trading of equities, equity options, equity index options and bonds on
some of the leading securities exchanges in both the United States and
Europe. Operating four business segments: VDM Specialists; U.S. Option
Business; European Trading; and Other, which are comprised of ten
principal subsidiaries, we function as a low cost liquidity provider,
providing liquidity in different time zones on exchange floors and
electronic trading systems through our role as specialist or
proprietary traders. Acting as a counterparty to market professionals
such as banks and brokerage firms, we transact an average of over
75,000 transactions a day. Through effective risk management and
adherence by our traders to disciplined trading policies, we were able
to close 96% of the trading days in 2002 with a profit on trading,
compared with 88% in 2001 and 98% in 2000.
We were founded in 1892 as a hoekman (specialist or jobber) on the
Amsterdam Stock Exchange. We remained exclusively a hoekman for Dutch
equities and bonds until 1978, when we began trading options on
Amsterdam's newly-formed options exchange. Since that time, we have
continued to expand through the acquisition of businesses that either
strengthened our operations in the markets in which we were already
present or allowed us to enter additional geographic or product
markets, such as options trading in London and Germany, specialist
trading on the New York Stock Exchange, where we now operate the fifth
largest specialist in terms of number of specialist assignments, and
equity options trading on the American Stock Exchange through our
subsidiary Cohen, Duffy, McGowan. We listed our shares on Euronext (at
the time, the Amsterdam Stock Exchange) in 1986, and our shares have
been included in the principal Dutch equity benchmark, the AEX Index,
since March 4, 2002. We listed our shares in the form of American
depositary shares on the New York Stock Exchange on October 18, 2001.
On March 1, 2002 we acquired the New York Stock Exchange
specialist firm, Lyden, Dolan, Nick. In 2002 we also initiated remote
access trading in French shares from Amsterdam and substantially
reduced our option trading activities in Amsterdam.
Our Key Strengths
We believe that our historical and future success as a securities
trading firm in the United States and Europe is and will continue to
be based on the following factors:
22
Diversified trading operations. Through subsidiaries in the United
States, Germany, the Netherlands and the United Kingdom, we trade on
some of the world's leading securities exchanges, including the New
York Stock Exchange, the American Stock Exchange, the Deutsche Borse,
the London Stock Exchange, Euronext and the Helsinki Stock Exchange.
This has allowed us to diversify our revenue streams and develop
invaluable insights into, and knowledge of, how to optimize trading
performance on each of the exchanges on which we operate. We are
diversified in terms of instruments traded, since our subsidiaries
either trade equities, equity-related options or fixed income
instruments in a number of markets. We are also able to leverage off
of experiences in one market when considering how best to enter a new
market or trade a new product. Furthermore, by operating on multiple
exchanges, we are able to provide many dual-listed issuers with a
comprehensive view of the trading activity in their securities and
support an orderly trading market.
Strong position in the specialist market on the New York Stock
Exchange. As measured by the number of common stock listings on
December 31, 2002, we operate as the fourth largest specialist on the
New York Stock Exchange, with a market share of approximately 15.1% of
the issues listed on the exchange at that date. Our specialist book
includes three components of the Dow Jones Industrial Average index,
eight components of the Standard & Poor's 100 Index and 42 components
of the Standard & Poor's 500 Index. As a specialist on the exchange,
we are assigned to conduct the auction in the specialist stocks we
represent. This unique position, together with the fact that we act as
specialist for some of the exchange's more volatile and high volume
stocks, has been central to our ability to generate revenue and
profit. We expect to benefit from our high quality portfolio of
specialist stocks, as we expect many of the companies for which we act
as specialist to grow and the volume of their shares traded to
increase.
Trading operations in Germany and the Netherlands. Through our
German trading subsidiary, we operate an independent German equity
trading firm. In the Netherlands, we operate a major independent
equity trading firm with a long established presence on Euronext. By
leveraging the expertise we have developed in these markets, we have
been able to increase the number and types of securities that we trade
in these markets, as well as to expand our remote-trading operations
to other exchanges in Europe.
Disciplined and successful team of traders. We devote substantial
resources to training and retaining our skilled and experienced team
of traders. We seek to instill our traders with our disciplined
trading and risk management policies. We believe that the adherence of
our traders to these policies is largely responsible for our having
been able to close 88% and 96% of our trading days in 2001 and 2002,
respectively, with a positive trading result. We believe this results
from our strong corporate culture, fosters employee retention and
enhances our ability to attract new talent.
Strong capital base. We believe that the strength of our balance
sheet provides us with significant flexibility to expand our
operations and manage any future capital expenditure requirements.
This means we have significant resources available to us to perform
our obligations as specialist for an issuer's stock.
Our Strategy
The main driver of our strategy is our ability to capitalize on
high levels of volume and volatility on the exchanges on which we
operate in order to grow our revenues and profits in line with our
stated risk preferences and in the long term interests of our
shareholders. In the current environment where neither volumes nor
volatility are high, we intend to compensate by employing the
following strategies:
Expand our existing trading activities in markets in which we
currently operate. Our strategy is to expand our existing trading
activities in the markets in which we currently operate by selectively
hiring additional skilled traders and through the strategic
acquisition of complementary businesses, if market conditions allow us
to do so. For example, on March 1, 2002 we acquired New York Stock
Exchange specialists Lyden, Dolan, Nick in order to increase the size
of our specialist book, number of traders and market share of
exchange-listed securities. During 2002 we further strengthened our
23
marketing to attract additional specialist assignments from companies
seeking to list on the New York Stock Exchange. We will continue to
seek appropriate opportunities to increase our market share of the
products traded by our United States and European operations.
Trade new financial instruments in the markets in which we
currently operate. We intend to increase our revenues and
profitability by identifying new trading opportunities in the markets
in which we currently operate. This will allow us to use our existing
trading infrastructure and, where possible, traders to trade new
instruments. Where we identify a trading opportunity that we believe
we can exploit but for which we lack the in-house expertise, we will
consider acquiring a team of traders with the relevant experience.
Enter markets in which we do not operate. We intend to enter new
markets in which we do not currently trade, either by trading remotely
from a location at which we already trade, through the acquisition of
a local trading firm or by hiring a team of traders and joining the
relevant exchange as a member. We believe that we are well positioned
to leverage our trading expertise to enter new markets successfully,
and we are actively reviewing opportunities in a number of European
countries.
Increase capital employed by our traders. We may selectively
increase the amount of capital available to our traders, while
maintaining our disciplined trading and risk management policies. We
believe this will increase our revenues by allowing our traders to
execute larger buy and sell orders at more competitive prices, as well
as to engage in larger arbitrage transactions. We will also continue
to seek to retain our highly skilled workforce and attract new traders
through competitive remuneration packages. In addition, we will
continue to expend capital in order to maintain the quality of our
technological infrastructure. This will allow us to improve our back
office capabilities, which should reduce both administrative and trade
failure costs.
Employ new trading techniques. We intend to capture additional
revenues by using the specialized experience and knowledge base we
have developed trading on multiple exchanges in the United States and
Europe to develop new trading techniques involving instruments we
currently trade, as well as instruments we have not traded in the
past. For example, we actively seek inter-market arbitrage
opportunities, and our arbitrage activities have increased
significantly over the past two years.
Our Business
We categorize our business into four segments: VDM Specialists;
U.S. Option Business; European Trading; and Other, which are comprised
of ten principal subsidiaries located in the United States and Europe.
Our subsidiaries function on a largely autonomous basis, subject to
our centrally established and monitored risk management policies and
financial oversight. This structure allows us to incentivize the
management and traders at our subsidiaries based on the operating
performance of activities under their direct control, while providing
a unified structure and risk profile to the group as a whole.
Our subsidiaries generate revenues primarily by executing trades,
either as agent or principal. They are compensated for agency services
by commission charges, while their principal activities generate
revenues from the difference between purchase and sale prices earned
trading numerous times against counterparties over the course of a
trading day. Accordingly, our revenues are largely driven by the
turnover and volatility of trading on the markets in which our
subsidiaries operate. Increasing turnover results in additional
opportunities for our subsidiaries to trade, while increased
volatility typically provides them with more opportunities to change
their quotes or posted prices, thereby capturing trading interest.
Both turnover and volatility have been affected in recent years in the
United States and Europe by a variety of factors, including:
- -- the number of households investing in stocks;
24
- -- changes in the amount of assets managed through retirement plans, mutual
funds, annuity and insurance products, index funds and other institutional
investment vehicles;
- -- the increased popularity and use of computerized trading, hedging and other
derivative strategies;
- -- an increase in IPOs and spin-offs and an increase in listings of foreign
companies in 1999 and 2000, followed by a decrease in these activities in
2001 and 2002;
- -- higher equity portfolio turnover by individuals and institutional investors
as a result of lower commission rates and other transaction costs;
- -- the introduction of on-line trading; and
- -- trading in smaller price increments.
These factors have, in turn, been influenced by low interest rates
and low levels of inflation in the United States and Europe and, more
recently, by market turbulence caused by the general slowdown of the
United States and European economies and political unrest.
The following is a discussion of the our four business segments:
VDM Specialists; U.S. Option Business; European Trading; and Other.
VDM Specialists
VDM Specialists is our largest subsidiary. It is one of the
leading specialist firms on the New York Stock Exchange in terms of
profitability, capital devoted to specialist services, revenue and
number of specialist assignments, according to data provided by the
New York Stock Exchange. For the year ended December 31, 2002, VDM
Specialists, in which we hold a 75% interest, accounted for EUR 266.7
million, or 82.9%, of our total revenues.
Specialist activities
Market background. The New York Stock Exchange is currently the
largest securities market in the world in terms of capitalization and
trading volume. The market capitalization of all shares listed on the
New York Stock Exchange increased from approximately $9.4 trillion at
December 31, 1997 to approximately $13.4 trillion at December 31,
2002. During that period, the number of common stocks listed on the
New York Stock Exchange decreased from 2,870 at the end of 1997 to
2,578 at the end of 2002 as a result of de-listings and mergers
offsetting new listings and spin-offs. The U.S. market for equity
securities has experienced dramatic growth in trading volumes, as
evidenced by the increase in average daily trading volume on the New
York Stock Exchange from 91.2 million shares in 1984 to 1,441 million
shares in 2002, which represented a compound annual growth rate of
17.6%.
All trading of securities on the New York Stock Exchange is
conducted through a continuous auction process in which open bids to
buy and open offers to sell are made by New York Stock Exchange
members, acting as principals for their own accounts or as agents for
institutions or individual investors. Buy and sell orders meet
directly on the trading floor through this auction process, and prices
are determined by the interplay of supply and demand. The auction
process for each security is managed by one specialist for that
security. The specialist is a member broker-dealer who is granted the
exclusive role to conduct the auction in order to maintain a fair and
orderly market in its specialist stocks.
Specialist firms conduct their auctions at specific trading posts
located on the floor of the New York Stock Exchange. While New York
Stock Exchange specialists receive orders for trades from brokers on
the floor of the New York Stock Exchange, the vast majority of orders
are routed through the New York Stock Exchange's electronic order flow
system, SuperDOT, although the individual size of these orders is
limited. Because each specialist firm runs the auction in its
specialist stocks, it knows of all New York Stock Exchange bids and
25
offers in its specialist stocks on the New York Stock Exchange floor
and through SuperDOT and thereby gathers orders to price its stocks
appropriately. The commercial attraction of acting as a specialist on
the New York Stock Exchange is that it results in a guaranteed flow of
orders to the specialist firm against which it can trade.
Specialist firms compete for the right to act as specialists for
stocks through an allocation process organized by the New York Stock
Exchange. As part of this process, the New York Stock Exchange's
allocation committee selects three to five potential specialist firms
that it deems suitable for the stock, based on criteria specified by
the listing company. The listing company may choose to have the
committee select a specialist on its behalf or it may choose to
interview each specialist firm identified by the allocation committee
and select the winning firm itself.
When assigned a particular stock, the specialist firm accepts
specific obligations. The specialist firm's role is to maintain, as
far as practicable, trading in the stock that will be fair and
orderly. This implies that trading in the assigned share will have
reasonable depth and price continuity, so that, under normal
circumstances, a customer can buy or sell a stock in a manner
consistent with market conditions. A specialist firm helps market
participants achieve price improvement on their trades because the
best bids and offers are discovered through the auction process. In
any given transaction, the specialist firm may act as:
- -- an auctioneer by setting opening prices for its specialist stocks and by
matching the highest bids with the lowest offers, permitting buyers and
sellers to trade directly with each other;
- -- a facilitator bringing together buyers and sellers who are unaware of each
other in order to execute a trade which would not otherwise occur;
- -- an agent for broker-dealers who wish to execute transactions as instructed
by their customers (typically, these orders are limit orders entrusted to
the specialist at prices above or below the current market price); or
- -- a principal using its own capital to buy or sell stocks for its own
account.
The specialist firm's decision to buy or sell shares of its
specialist stocks as principal for its own account may be based on
obligation or inclination. For example, the specialist firm may be
obliged to buy or sell its specialist stock to counter short-term
imbalances in the prevailing market, thus helping to maintain a fair
and orderly market in that stock. At other times, the specialist firm
may be inclined to buy or sell the stock as principal based on its
perception of attractive opportunities to make profitable trades. The
specialist firm may trade at its election so long as the trade will
not interfere with a fair and orderly market and the specialist
complies with New York Stock Exchange rules governing the trading of
its specialist stocks.
In actively-traded stocks, the specialist firm continually buys and sells its
specialist stocks at varying prices throughout each trading day. The specialist
firm's goal and expectation is to profit from differences between the prices at
which it buys and sells these stocks through the use of its own capital. In
addition, specialists may receive commissions for handling transactions in a
security as agent. In fulfilling its specialist obligations, however, the
specialist firm may, at times, be obliged to trade against the market, which is
likely to result in unprofitable trades. In addition, the specialist firm's
trading practices are subject to a number of restrictions, as described in
"Information on the Company -- Regulation -- The United States".
The majority of trades and dollar volume in New York Stock
Exchange-listed stocks takes place on the New York Stock Exchange.
Trades in New York Stock Exchange-listed stocks are also generally
effected as follows:
- -- some stocks are traded on multiple exchanges, such as regional exchanges
and non-U.S. exchanges, and trades take place on those exchanges; and
26
- -- both New York Stock Exchange members and non-members may trade New York
Stock Exchange-listed stocks off the New York Stock Exchange in the
over-the-counter market.
The accelerating growth of trading volume and the increase in
stock prices on the New York Stock Exchange in the 1990s has increased
the demands upon specialists. In order to fulfill their obligations,
specialists are required to execute a greater number of trades in a
shorter period of time with greater price volatility. In addition,
specialists are called upon to take larger positions in their
specialist stocks. These factors, in addition to the demands of
technology investment, have increased specialists' capital
requirements. Consequently, the specialist industry has experienced a
period of consolidation over the past five years, with the number of
specialist firms on the New York Stock Exchange having declined from
37 as of December 31, 1996 to seven as of March 1, 2003.
Business activities. As of December 31, 2002, VDM Specialists had
72 specialists, each of whom were members of the New York Stock
Exchange and 59 of whom were partners of the firm. These specialists
act on behalf of listed companies that operate in a variety of
industries, including financial services, media, oil and gas, retail,
technology, pharmaceutical and telecommunications. As of December 31,
2002, VDM Specialists served as specialist for 379 common stock
issues, or approximately 14.7% of the common stock issues listed on
the New York Stock Exchange, including three of the 30 companies
comprising the Dow Jones Industrial Average and 45 of the companies
included in the Standard & Poor's 500 Index. Of our 379 common stock
specialist assignments, 16 were for Canadian issuers and 46 were for
other non-U.S. issuers.
The following is a list of the 50 largest listed companies, by
common stock capitalization, for which VDM Specialists had the
specialist assignment as of February 28, 2003 in order of their
respective global market capitalizations (in $ millions):
Company Market Cap Company Market Cap
- -------------------------------- ---------- -------------------------------- ------------
Pfizer $254,675 Masco $12,207
Eli Lilly 88,520 Stryker 11,624
Wyeth 86,773 Vivendi Environment 10,995
UBS (GDR) 61,887 ACE Ltd. 11,037
Walt Disney Co. 47,823 McKesson 11,035
SAP (ADR) 46,857 Danaher 10,688
Banco Santander Central Hispano
(ADR) 38,906 Intimate Brands 9,731
FleetBoston Financial 37,574 Golden West Financial 9,701
Hewlett-Packard 35,263 The Limited 9,292
Canon (ADR) 32,220 SunGard Data Systems 9,182
E.On (ADR) 34,123 Norfolk Southern 9,068
Duke Energy 31,398 Newell Rubbermaid 8,937
International Paper 26,404 MBIA 7,991
Hitachi (ADR) 24,083 Fiat (ADR) 7,636
Kohl's 23,467 Apache Corp. 7,628
Starwood Hotels and Resorts
Cox Communications 22,701 Worldwide 7,544
Hellenic Telecommunications
HCA 21,894 (ADR) 7,520
British Sky Broadcasting Group
(ADR) 21,012 BOC Group (ADR) 7,471
Cendant 19,483 Textron 7,089
27
Harley-Davidson 16,401 Marshall & Ilsley 6,454
Repsol YPF (ADR) 16,018 Kerr-McGee 6,127
Nortel Networks 14,462 SPX 5,859
Novo Nordisk (ADR) 13,854 Family Dollar Stores 5,715
ConAgra Foods 12,743 Tiffany & Co. 5,192
Guidant 12,629 Darden Restaurants 4,427
Source: Bloomberg.
During 2002, VDM Specialists was selected to act as the specialist
for Action Performance Co., CHC Helicopter Corp., Christopher &
Banks, Harmony Gold Mining, Hurricane Hydrocarbons, Natural Resource
Partners, Nautilus Group, Pengrowth Energy Trust, R&G Financial,
Select Medical Corp., Sunoco Logistics, Trizec Properties, Valmont
Industries, Wellchoice and Wimm-Bill-Dann Foods. As a result of the
acquisition of New York Stock Exchange specialists Lyden, Dolan, Nick
in March 2002, we added the common stock of 79 additional companies to
VDM Specialists' specialist book.
Like other New York Stock Exchange specialist firms, VDM
Specialists is also assigned specialist roles in listed corporate
bonds. This activity is minor compared to its New York Stock Exchange
equity business.
Proprietary trading activities
In its "upstairs" trading activities, VDM Specialists trades for
its own account in shares for which it is not the specialist, as well
as Nasdaq and Amex traded securities. Shares are selected for this
trading activity based on its judgment of volume, volatility and how
profitable such trading could be.
Other activities
VDM Specialists also engages in securities lending and borrowing.
This activity involves borrowing shares primarily from custodians and
lending them primarily to other broker-dealers for purposes of
accomplishing a delivery that would otherwise fail or to allow
counterparties to sell shares short. Lending activities of this kind
are carried out on a matched principal basis, in accordance with
applicable U.S. legal and accounting standards. While VDM Specialists
is exposed to the risk of these loans, the loans are secured by
readily marketable securities in amounts and on terms consistent with
industry practice. Exposure on these loans is marked to market and
collateral is adjusted accordingly on a daily basis, and VDM
Specialists regularly monitors counterparty quality.
We established VDM Specialists in July 1999 by integrating the
operations of our three majority owned New York Stock Exchange
specialists, Surnamer, Weissman & Co. LLC, Einhorn & Co. LLC and
Lawrence, O'Donnell, Marcus LLC. We began to acquire interests in
these companies in April 1997, April 1998 and October 1998,
respectively. In June 2000, August 2001 and March 2002, we further
bolstered our New York Stock Exchange specialist operations through
the acquisition and combination of: Fagenson, Frankel & Streicher LLC;
Scavone, McKenna, Cloud; Stern & Kennedy; and Lyden, Dolan, Nick into
VDM Specialists. VDM Specialists is owned by us (75%) and by 66
individual members. Its individual members include its senior managers
and senior traders. We believe this ownership structure helps align
their economic interests with those of the Van der Moolen group, and
fosters continued loyalty and retention. VDM Specialists operates from
offices located in New York City.
28
U.S. Option Business
We are active in U.S. equity option markets through two
subsidiaries, Van der Moolen Options USA, a 100%-owned subsidiary that
is a member of the Philadelphia Stock Exchange and the Chicago Board
Option Exchange, and Cohen, Duffy, McGowan, a 51%-owned subsidiary
that is active on the American Stock Exchange. For the year ended
December 31, 2002, Van der Moolen Options USA contributed no revenues,
while Cohen, Duffy, McGowan realized negative trading revenues of
EUR2.9 million. Both Van der Moolen Options USA and Cohen, Duffy,
McGowan operate on floor-based, open-outcry markets. In floor-based
options trading, traders compete directly with each other for orders
and there is no central limit order book. Price formation is
accomplished by individual traders competing to fill interest that
reaches the floor from investors or by trading with each other.
All three of these markets offer a specialist-like trading
function. Assigned primary market makers for options on the
Philadelphia Stock Exchange and the American Stock Exchange are in
fact known as "specialists", while they are called "designated primary
market makers" on the Chicago Board Options Exchange. The firms that
perform specialist-like functions in all three markets are selected
through allocation processes run by the individual exchanges.
Specialist or designated primary market maker assignments on the
Philadelphia Stock Exchange, American Stock Exchange and the Chicago
Board Options Exchange involve exclusive assignments to particular
options series, which require the holder of that assignment to manage
the auction process and use its own capital to initiate trading when
it has halted. Van der Moolen Options USA and Cohen, Duffy, McGowan
generally pursue specialist-like assignments because they provide a
natural flow of orders against which they can trade.
Van der Moolen's U.S. options revenues are comprised of arbitrage
between options, between options and the underlying shares, and
competitive trading against orders that reach the floor. The
preponderance of its specialist option trading revenue on the
exchanges where it operates is derived from dealer profits, with only
a small fraction generated from agency commissions.
Van der Moolen Options USA was formed in April 1999, while Cohen,
Duffy, McGowan was founded in 1972.
European Trading
We trade equities, equity options and fixed income instruments
from three subsidiaries in Amsterdam, two in London and one in
Cologne. Together, these operations accounted for EUR54.7 million, or
17.0%, of our total revenues for the year ended December 31, 2002. The
activities of these six subsidiaries may be summarized as follows:
Primary 2002 Revenues Exchange
Location Activity (EUR Memberships
millions)
- --------------------------------------------------------------------------------
Van der Moolen Amsterdam Equities 25.2 Euronext, Deutsche Borse,
Effecten Helsinki S.E.
- --------------------------------------------------------------------------------
Van der Moolen Cologne Equities 11.0 Deutsche Borse, SWX, Eurex
Trading
- --------------------------------------------------------------------------------
Van der Moolen London Equities 8.4 London S.E., Euronext,
Equities Euronext.life
- --------------------------------------------------------------------------------
Van der Moolen UK London Fixed 5.9 London S.E., SWX, over-the-
Income counter
- --------------------------------------------------------------------------------
Van der Moolen Amsterdam Fixed 4.5 Euronext
Obligaties Income
- --------------------------------------------------------------------------------
Van der Moolen Amsterdam Equity (0.3)Euronext.liffe
Opties options
- --------------------------------------------------------------------------------
Although they operate largely independently of each other, all
three equity trading units are broadly similar, engaged primarily in
intraday proprietary trading, especially in the more liquid segments
of the markets in which they operate, and ADR arbitrage. In general,
they do not trade under privileges and obligations as a specialist
would, although in certain cases, as for instance when Van der Moolen
Effecten makes markets in Dutch shares on the Deutsche Borse, they may
29
choose to take on such obligations. All three of these subsidiaries
were profitable in 2002.
The liquid segments of the markets where these subsidiaries are
active are order-driven markets, which means they lack an official
liquidity provider, and all orders entered into the markets' central
limit order books interact freely with each other. All the European
equity markets on which our subsidiaries trade are fully electronic,
without physical trading floors, and our subsidiaries make use of this
feature to trade in some markets remotely - as, for example, when Van
der Moolen Effecten trades on the Helsinki Stock Exchange without a
physical presence in Finland. All three equity trading subsidiaries
earn their revenues primarily by trading as principals in the central
limit order books of the exchanges where they are active, although
arbitrage between shares traded on multiple markets, either within
Europe or between Europe and the United States, is also an important
activity.
For the year ended December 31, 2002, the London Stock Exchange
was the largest European equity market by capitalization, followed in
descending order by Euronext, Deutsche Borse, SWX Swiss Exchanges, the
Milan Stock Exchange and the Madrid Stock Exchange. Among Europe's
option exchanges, Euronext.liffe was the largest, measured by number
of contracts traded, followed by Eurex, the combined German/Swiss
derivatives exchange.
We trade fixed income instruments from subsidiaries in Amsterdam
and London. The Amsterdam unit, Van der Moolen Obligaties, makes
markets in Dutch fixed income issues traded on Euronext. Its primary
activity is to provide liquidity in these bonds to Dutch banks and
brokers so they can fill retail orders in them. Van der Moolen
Obligaties' revenues are partly derived from commissions and partly
from gains on principal transactions, and this subsidiary was
profitable in 2002. Van der Moolen UK posts actionable each-way quotes
on Bloomberg and various other trading networks. Prices are offered in
less-than-wholesale sizes on euro-denominated sovereign and Eurobond
debt, Pfandbriefe and U.S. Treasuries. Its primary mission is to
assist inventory-management at wholesale trading firms. In November,
2002, it also became a market maker on the LSE, and will extend its
offering to Sterling-denominated paper, providing a service similar to
that performed by our Amsterdam bond desk. Launched in May 2001, this
subsidiary has yet to achieve profitability.
Van der Moolen Opties trades equity options on Euronext.liffe.
During 2002, Dutch option trading on Euronext.liffe was transformed
from an open-outcry structure to a fully electronic trading activity.
This transformation made our former role in Amsterdam economically
unfeasible, and this subsidiary was substantially scaled back. Our
European option activity is now restricted to two traders on
Euronext.liffe, supplied with very restricted working capital, who
provide us with information on the market, and some use of Eurex and
Euronext.liffe in connection with warrant trading. We have set aside,
for the time being, our earlier initiative to trade options
electronically in Amsterdam.
Other
We classify as "Other" the operations of Kenny & Co., which
engages in direct access brokerage activities on the New York Stock
Exchange. The operations of Kenny & Co are not material to the
operation of our business.
Technology
Technology is critical to the continued success of our operations.
Of our 501 employees at December 31, 2002, 17 were dedicated to the
development and maintenance of our technology.
Our primary systems vary from subsidiary to subsidiary, as they
must conform to local market infrastructure as well as the individual
subsidiary's requirements. Therefore, the primary responsibility for
overseeing the integrity of these systems rests with each of our
30
subsidiaries, although we coordinate and oversee the integration of
these systems throughout the group. In New York, VDM Specialists'
primary systems are comprised of the New York Stock Exchange-supplied
specialist trading terminals and position reporting system terminals.
The New York Stock Exchange terminals are located on the trading floor
and in VDM Specialists' offices, and allow it to monitor its trading
profits and losses as well as its positions. VDM Specialists has also
developed software that allows it to monitor profits, losses and
trading positions in the event that the New York Stock
Exchange-provided systems fail. Similar reporting systems have been
constructed based on data feeds from the clearing banks that work with
our other subsidiaries. Together, these systems allow our subsidiaries
to monitor, on a real-time basis, their profits and losses along with
their trading positions on all of the exchanges on which they trade.
The system Van der Moolen has chosen for Amsterdam, as well as for Van
der Moolen Equities and Van der Moolen Trading, is produced by RTS
Real-Time Systems A.G. Van der Moolen Options USA has developed its
own "front end" software of this type. Van der Moolen U.K. Bond's
activities use software from a number of providers to price
transactions, execute them and process them.
We have back-up disaster recovery systems, which operate as mirror
images of our primary computer systems. We have a direct connection
between the primary and back-up systems that we utilize to back-up all
data on an hourly basis. We regularly stress test our systems to
ensure that an increase in trading volume will not affect performance.
We have not experienced any material system failure to date.
Regulation
Our businesses and the securities industries in which they operate
are subject to an extensive range of laws, rules and regulations in
the United States and Europe that are promulgated by various
governmental and quasi-governmental agencies and self-regulatory
organizations. The laws, rules and regulations with which we must
comply include those relating to financial reporting requirements,
trade practices, capital structure requirements, record retention
requirements and the conduct of our directors, officers and employees.
Failure to comply with any of these laws, rules or regulations could
result in censure, fine, loss of required registrations or licenses,
loss of the assignment to act as a specialist or market maker in a
particular security, the issuance of cease-and-desist orders or the
suspension or disqualification of our directors, officers or
employees, and other adverse consequences, which could have an adverse
effect on our business.
The regulatory environment in which our businesses operate is
subject to regular change. Additional legislation and regulations,
changes in rules promulgated by the exchanges on which we operate,
other government agencies or self regulatory organizations, or changes
in interpretation or enforcement of existing laws and rules may
adversely affect the manner of operation and profitability of our
operations. We cannot predict the effect any such changes may have.
Both regulations applicable to us and regulations of general
application could have a material adverse effect on our business,
financial condition and operating results.
The United States
Rules governing our specialist activities on the New York Stock
Exchange
As a New York Stock Exchange specialist firm, VDM Specialists is
under constant review by the New York Stock Exchange on all aspects of
its operations and financial condition. It is also subject to
stringent rules mandated and approved by the SEC, and enforced by the
New York Stock Exchange and the SEC.
Under the New York Stock Exchange rules, a specialist has a duty
to maintain, as far as practicable, a fair and orderly market in its
specialist stocks. In order to fulfill its obligations, the specialist
must at times trade for its own account, even when doing so may
adversely affect the specialist's profitability. In addition, under
some circumstances, the specialist is prohibited from making trades as
principal in its specialist stocks. As part of the price discovery
mechanism implemented by the New York Stock Exchange, every specialist
31
transaction is published immediately on the tape and is broadcast to
the general public. The New York Stock Exchange's Market Surveillance
Division examines specialists' trading in all stocks, every trading
day, including specialists' decisions to trade or to not trade as
principal. The specialist's obligations are briefly described below.
Requirement to trade as principal. A specialist must buy and sell
securities as principal when necessary to minimize an actual or
reasonably anticipated short-term imbalance between supply and demand
in the auction market. The specialist must effect these transactions
when their absence could result in an unreasonable lack of continuity
and/or depth in their specialist stocks. The specialist is not
expected to act as a barrier in a rising market or a support in a
falling market, but must use its own judgment to try to keep such
price increases and declines equitable and consistent with market
conditions.
A specialist must assure that the stocks assigned to it trade in
an orderly fashion, and this may require making firm and continuous
two-sided quotations that accurately reflect market conditions where
third party orders are absent from the order book. In making these
quotations, the specialist's transactions are calculated to contribute
to the maintenance of price continuity with reasonable depth. The
following discussion is intended to illustrate how a specialist acts
as principal to maintain price continuity:
The most recent sale in a listed stock was $50.00. The best public
bid (to buy) on the specialist's book is $49.75 and the best public
offer (to sell) on the book is $50.25. A broker who wants to buy 100
shares at the market without a specialist would purchase at $50.25,
the offer price. Similarly, a broker seeking to sell 100 shares
without a specialist would receive $49.75, the bid price. The
specialist, who is expected to provide reasonable price continuity, in
this case might narrow the quote spread by offering or bidding for
stock for its own account. In this instance, the broker who wants to
buy 100 shares might buy at $50.12 from the specialist, as opposed to
buying the same amount of shares from the best offer of $50.25,
thereby providing price improvement to the ultimate customer. In the
next trade, a broker willing to sell 100 shares might sell to the
specialist at $50.00, as opposed to selling to the best available bid
of $49.75, again providing price improvement for the customer.
Trading restrictions. In trading for its own account, the
specialist must avoid initiating a market-destabilizing transaction.
All purchases and sales must be reasonably necessary to permit the
specialist to maintain, as far as practicable, a fair and orderly
market in its specialist stocks. In addition, the specialist must
comply with the following trading requirements:
- -- A specialist must first satisfy a customer's market buy order (an order to
buy at the prevailing market price) before buying any stock for its own
account. Similarly, a specialist must first satisfy a customer's market
sell order (an order to sell at the prevailing market price) before selling
any stock for its own account.
- -- A specialist must first satisfy a customer's limit order held by it before
buying or selling at the same price for its own account. A limit order is
an order either to buy only at or below a specified price, or to sell only
at or above a specified price.
- -- If a public buyer wants to buy at a particular price and a seller wants to
sell at the same price, the buyer and seller trade directly with each
other, and the specialist may not interfere in the transaction.
- -- The specialist does not charge commissions for trades that are matched by
the Automated Order Routing System within five minutes from the time the
order is taken.
- -- Except in some circumstances in less active markets, the specialist may
not, without permission from a New York Stock Exchange official, initiate
"destabilizing trades" as defined in the New York Stock Exchange Rules for
its own account which cause the stock price to rise or fall.
32
- -- Any transactions by the specialist for its own account must be effected in
a reasonable and orderly manner in relation to the condition of the general
market, the market in the particular stock and the adequacy of the
specialist's position to the immediate and reasonably anticipated needs of
the market.
- -- The specialist cannot be in a control relationship with any of its listed
companies. This means a specialist may not acquire more than 10% of any
equity security in which the specialist is registered. Further, a
specialist must report holdings of such securities of 5% or more of the
outstanding issue, and the New York Stock Exchange may require the firm to
divest itself of such holdings. A specialist may not hold any position as
an officer or director or receive payments or loans or engage in business
transactions with any of the listed companies in respect of which it acts
as specialist.
The American Stock Exchange, the Chicago Board Options Exchange
and the Philadelphia Stock Exchange have regulations and surveillance
systems broadly similar to those of the New York Stock Exchange.
Broker-dealer regulations
As broker-dealers registered with the SEC and in each of the 50
states and as members of various self regulatory organizations, VDM
Specialists, Van der Moolen Options USA, Cohen, Duffy, McGowan and
Kenny & Co. are subject to overlapping schemes of regulation which
cover all aspects of their securities businesses. These regulations
relate to a variety of matters, including capital requirements,
record-keeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with
securities laws and rules of the self regulatory organizations, the
prevention of improper trading on "material non-public" information,
employee-related securities exchanges and in the OTC markets,
procedures for the clearing and settlement of trades, and in the case
of Kenny and Co. only, the use and safekeeping of customers' funds and
securities.
As registered broker-dealers, each of VDM Specialists, Cohen,
Duffy, McGowan, Van der Moolen Options USA and Kenny and Co. are
subject to the Bank Secrecy Act (as amended by the USA Patriot Act of
2001, also known as the "Patriot Act"). The Patriot Act was enacted
following the terrorist attacks in the United States and is intended
to help combat money laundering through U.S. financial institutions.
While the provisions of the Patriot Act do not apply to all of our
subsidiaries or to all aspects of their business, some registered
broker-dealers may be subject to certain additional disclosure and
client oversight requirements. In addition, the SEC approved New York
Stock Exchange Rule 445. Rule 445 requires members of the NYSE, such
as VDM Specialists, to comply with applicable provisions of the
Patriot Act, as well as with certain additional requirements imposed
by Rule 445 itself. These principally comprise additional oversight
procedures to ensure compliance with the anti-money laundering program
requirements of the Patriot Act.
CFTC requirements
As registered futures commission merchants, Van der Moolen Options
USA and Cohen, Duffy, McGowan are subject to the capital and other
requirements of the Commodity Futures Trading Commission under the
U.S. Commodity Exchange Act of 1936. These requirements include the
provision of certain disclosure documents, prohibitions against
trading ahead of customers and other fraudulent trading practices,
provisions as to the handling of customer funds and reporting and
record keeping requirements.
Minimum net capital and net liquid assets requirements
Each of VDM Specialists, Van der Moolen Options USA, Cohen, Duffy,
McGowan and Kenny & Co. is subject to SEC Rule 15c3-1, sometimes
called the "net capital rule", under the Securities Exchange Act of
1934, as amended, which establishes minimum net capital requirements.
The net capital rule is designed to ensure the general financial
integrity and liquidity of a broker-dealer. In general, a
broker-dealer's net capital is defined as its net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain
33
mandatory deductions that result from excluding assets that are not
readily convertible into cash and from valuing conservatively its
liquid assets. Among these deductions are adjustments, which are
commonly called "haircuts", which reflect the possibility of a decline
in the market value of securities prior to disposal.
VDM Specialists is required to maintain minimum net capital
equivalent to the greater of $250,000 (EUR238,436) or 2% of aggregate
debit items computed in accordance with SEC Rule 15c3-3, the customer
reserve formula. Van der Moolen Options USA and Cohen, Duffy, McGowan
are both required to maintain minimum net capital equivalent to the
greater of $100,000 (EUR95,374) or 6.66% of aggregate indebtedness
items computed pursuant to SEC Rule 15c3-3. In addition, each such
subsidiary maintains substantial additional capital, referred to as
"excess net capital". All of our subsidiaries in the United States had
excess net capital during the year 2002. For VDM Specialists, the
excess net capital as at December 31, 2002 amounted to $251.9 million
(EUR240.2 million). For Van der Moolen Options USA, this amount was
$4.0 million (EUR3.8 million) and for Cohen, Duffy, McGowan, under the
requirements of the American Stock Exchange, this amount was $2.6
million (EUR2.5 million) as at December 31, 2002.
The New York Stock Exchange also requires members who are
specialists to maintain a minimum regulatory capital dollar amount to
establish that they can meet, with their own net liquid assets, their
position requirement. Currently, the New York Stock Exchange requires
that VDM Specialists, as well as other large New York Stock Exchange
specialist firms, maintain minimum net liquid assets at a level in
excess of the SEC regulatory requirement. On October 30, 2000, certain
changes to the New York Stock Exchange's Rule 104 minimum net liquid
asset requirements became effective. These changes subject specialist
firms that exceed 5% in any of the New York Stock Exchange's four
concentration measures to more stringent requirements. Specifically,
the requirements state that the net liquid assets must be equivalent
to $4.0 million (EUR3.8 million) for each stock in the Dow Jones
Industrial Average, $2.0 million (EUR1.9 million) for each stock in
the S&P 100 Stock Price Index, excluding stocks included in the
previous classification, $1.0 million (EUR1.0 million) for each stock
in the S&P 500 Stock Price Index, excluding stocks included in the
previous classifications, $500,000 (EUR476,872) for each common stock,
excluding bond funds and stocks included in the previous
classifications, and $100,000 (EUR95,374) for each security, excluding
warrants and stocks not included in any of the above classifications.
In addition, the New York Stock Exchange requires any new specialist
entities that result from a merger, acquisition, consolidation or
other combination of specialist assets to maintain net liquid assets
equivalent to the greater of either the aggregate net liquid assets of
the specialist entities prior to their combination or the new capital
requirements prescribed under Rule 104. As of December 31, 2002, VDM
Specialists' minimum net liquid asset requirement was $243.0 million
(EUR231.8 million) and its actual net liquid assets were $250.8
million (EUR239.2 million).
As a member of the New York Stock Exchange, VDM Specialists is
also subject to the New York Stock Exchange's Early Warning and
Expansion-Contraction Capital Requirements. The New York Stock
Exchange's Early Warning Net Capital calculation requires firms to
take an additional capital deduction equal to all capital withdrawals,
including subordinated debt maturity within the next six months, if
any. It also increases the Securities and Exchange Commission's
minimum net capital requirement to 5% of its aggregate debit items.
Accordingly, a firm must immediately notify the New York Stock
Exchange if its net capital should fall below the Early Warning level.
If this condition continues for more than 15 consecutive business
days, then the firm is not permitted to expand its business.
Additionally, a firm must contract or reduce its business if its Early
Warning net capital falls below 4% of aggregate debit items for more
than 15 consecutive business days.
Kenny & Co. is a registered broker-dealer with the SEC and a
member of the New York Stock Exchange and has regulatory requirements
for net capital only. On December 31, 2002, its net capital
requirement was $10,144 (EUR9,675) and it had net excess capital
exceeding this requirement of $2.9 million (EUR2.8 million).
Failure to maintain the required net capital or net liquid assets
may subject a firm to suspension or revocation of registration by the
SEC and suspension or expulsion by the NASD, the New York Stock
34
Exchange and other regulatory bodies, and ultimately could require the
firm's liquidation. The net capital rule prohibits payments of
dividends, prepayment of subordinated indebtedness and the making of
any unsecured advance or loan to a stockholder, employee or affiliate
if such payment could reduce the firm's net capital below certain
required levels (which are higher than the minimum levels to continue
operations). The net capital rule also provides that the SEC may
restrict for up to 20 business days any withdrawal of equity capital,
or unsecured loans or advances to stockholders, employees or
affiliates, if such capital withdrawal, together with all other net
capital withdrawals during a 30-day period, exceeds 30% of excess net
capital and the SEC concludes that the capital withdrawal may be
detrimental to the financial integrity of the firm.
A change in the net capital rule, or in the applicable capital
requirements of the New York Stock Exchange or of other self
regulatory organizations, the imposition of new rules or requirements
or any unusually large charges against net capital could limit our
operations, which require the intensive use of capital, and also could
restrict our ability to withdraw capital from our broker-dealer
subsidiaries. This in turn could limit our ability to pay dividends
and repay debt. A significant operating loss or any unusually large
charge against net capital could adversely affect our ability to
expand or even maintain our present level of business.
Circuit breaker rules
Our New York Stock Exchange operations are also subject to its
circuit breaker rules that are intended to halt trading in all New
York Stock Exchange-listed stocks in the event of a severe market
decline. The circuit breaker rules impose temporary halts in trading
when the Dow Jones Industrial Average drops a certain number of points
below its close on the previous trading day. Circuit breaker levels
are set quarterly at 10%, 20% and 30% of the Dow Jones Industrial
Average closing values of the previous month, rounded to the nearest
50 points.
Europe
The first level of securities regulation for countries that are
members of the European Union is the European Union's Investment
Services Directive of 1993, or the Directive. This applies in all the
European countries in which we currently operate except Switzerland.
This legislation broadly outlines the regulatory framework required of
each European Union member state, including requirements that certain
activities, such as insider trading, be prohibited by national
legislation and that other activities, such as minimum capital
requirements, be mandated. Details of the implementing national
legislation are in certain cases specified by the Directive. One
important feature of the Directive is the so-called "European
Passport", which requires mutual recognition of regulated status
within the European Union. This allows a firm established and
regulated in one European Union country to conduct limited and
specified investment business in other European Union countries
without having to qualify separately under the local regulatory
regime. Various of our European subsidiaries make use of this
"passport", as for instance when Van der Moolen Effecten trades in
Germany.
The Netherlands
Licenses
All our subsidiaries that are incorporated under Dutch law and
active in securities trading are licensed by the Autoriteit Financiele
Markten, or the Authority for the Financial Markets, in accordance
with the 1995 Act on the Supervision of the Securities Trade, or the
Dutch Securities Act. The objects of this Act and the accompanying
legislation are the adequate functioning of the securities markets and
the protection of the positions of investors in such markets. These
licenses allow the offering of services as a securities intermediary
in or from the Netherlands. The specific types of services permitted
are set out in the license.
Our Dutch licensed subsidiaries are subject to a number of
requirements pursuant to the Dutch Securities Act. These requirements
address (i) expertise and integrity, (ii) financial guarantees,
whether or not on a consolidated basis, (iii) management and principal
place of business, (iv) safeguards for the adequate supervision and
35
compliance with the provisions of, or based on, the Dutch Securities
Act and (v) information to be made available to the public.
Furthermore, the Rules and Regulations of Euronext contain various
requirements for Seatholders, which are securities institutions
admitted by Euronext. These provisions deal, for instance, with
capital requirements such as the minimum net assets required for a
participating firm and reporting obligations to the Authority for the
Financial Markets.
Van der Moolen Effecten is granted a license to offer services in
or from the Netherlands as securities intermediary in its role as a
market maker. These services may be offered on Euronext and similar
foreign exchanges.
Van der Moolen Effecten has been admitted by Deutsche Borse as an
exchange participant on the Deutsche Borse through Xetra. These
foreign activities are regulated by Dutch law, as well as by the
relevant German regulations, which primarily deal with the technical
aspects of trading on the Deutsche Borse.
Regulations of Euronext exchanges
Euronext was formed through the merger of three exchanges in 2000,
and the addition of a fourth in 2002. The members of what, prior to
the mergers, were the exchanges in Paris, Brussels, Portugal and
Amsterdam remained members of the relevant exchange and automatically
became members of the other three exchanges. As a result, each member
has access to the entire integrated trading platform of Euronext.
Euronext intends that, so far as is possible, the membership
capacities and requirements of each of the exchanges will be
harmonized in due course. Subject to local regulations and
legislation, Euronext intends to harmonize its trading rules such that
it may implement a single trading rulebook, which will be enforced by
each of the local exchanges and regulators. Much of this process is
already complete.
Cash trading. All trading of cash products on Euronext is executed
though the NSC system that was previously in operation at Euronext
Paris and Euronext Brussels, and has now been installed in Amsterdam
and Portugal. The NSC trading platform supports two principal
equity-trading mechanisms so that each share traded on Euronext is
traded in a way that Euronext believes optimizes liquidity and price
discovery. The trading mechanisms comprise continuous trading with and
without an animateur, which is a market making function subject to
certain trading obligations, in respect of liquid equities and auction
trading with and without an animateur in respect of less liquid
equities.
Derivatives trading. Currently, derivatives trading on all
Euronext.liffe markets operate through screen-based systems. Options
trading in Amsterdam migrated to one of these platforms during 2002.
Over time, it is expected that Euronext.liffe will seek to harmonize
its derivative contract specifications (including contract size and
expiration cycles) following international conventions, and eventually
to create a single electronic platform to replace its current two.
Circuit breaker rules
Temporary trading halts are called on Euronext Amsterdam for
individual securities when their prices move by more than a certain
percentage or a certain euro amount determined separately for each
share. There is also a circuit breaker for the market as a whole,
which is triggered by downward movements of the AEX Index compared to
its opening level of more than 5%. Implementation of common trading
rules for the merged Euronext markets is expected further to elaborate
the circuit breaker rules of the Netherlands.
Competition
Different trading rules and market structures on the exchanges
where our businesses are active affect the dynamics of how we interact
with our counterparties, and changes to either the rules or the
structures may affect our competitive position. Firm-specific
influences on our ability to capture trading opportunities by offering
competitive prices include our trade-financing and settlement costs,
36
the skills of our traders, the modernity of our trading software and
the sophistication of our analytic techniques. As a business where
revenue capture depends almost entirely on price competitiveness,
security trading demands close attention to costs. This is largely
manifested in the pursuit of economies of scale and scope.
Certain exchanges designate professional trading firms to carry
out specific trading functions within their trading structure.
Typically, these involve informational privileges or the right to
charge a commission for specific trading services performed, in return
for meeting obligations imposed by the exchange, for example, payment
of fees or a requirement to offer a continuous market of a certain
minimum size at a maximum "bid/ask spread". Where an exchange offers
such a trading structure, we may choose to compete directly with other
trading firms to obtain these privileges. In this instance, the
competition is not for revenue capture as such, but for the
opportunity to capture revenue through normal trading activities. The
nature of this competition varies across exchanges.
VDM Specialists
We obtain new specialist assignments on the New York Stock
Exchange by participating in an allocation process. As part of this
process, the New York Stock Exchange's allocation committee selects
three to five potential specialist firms suitable for the stock, based
partly on criteria specified by the listing company. The listing
company may elect to have the committee select a specialist on its
behalf. Alternatively, it may elect to interview each specialist firm
identified by the allocation committee and select the winning firm
itself. We compete with other specialist firms based on a number of
factors, including:
- -- the strength of our capital base;
- -- reputation;
- -- our willingness to commit our own capital and trade for our own account
while conducting our specialist operations; and
- -- the ancillary services we offer our specialist companies, such as providing
information on the trading activities in their stocks.
As of December 31, 2002, we were the fourth largest New York Stock
Exchange specialist based on number of common stock listings, and had
a market share of 14.7% of all issues listed at that date. Together,
the top four New York Stock Exchange specialist firms had a market
share of 76.6% of all issues listed at that date.
The following is a list of the top five New York Stock Exchange
specialist firms as of December 31, 2002, based on their number of
common stock listings and market share in terms of such listings, as
adjusted to reflect any previously announced acquisitions of New York
Stock Exchange specialists which had not closed as of that date:
Number of common
stock listings as
of December 31, Market share
New York Stock Exchange Specialist 2002 (%)
- -------------------------------------------------- ------------------ -------------
LaBranche & Co. 587 22.8
Spear, Leeds & Kellogg Specialists LLC 577 22.4
Fleet Meehan Inc. 430 16.7
VDM Specialists, LLC 379 14.7
Bear Wagner Specialists, LLC 343 13.3
Source: The New York Stock Exchange, Van der Moolen Holding N.V.
37
The competition for obtaining specialist assignments for newly
listed companies on the New York Stock Exchange is intense. We expect
competition to continue and to intensify in the future. Some of our
competitors may have significantly greater financial resources than we
have and may also have greater name recognition. These competitors may
be able to respond more quickly to new or evolving opportunities and
listed company requirements. They may also be able to undertake more
extensive promotional activities to attract new listing companies. In
addition, the specialist industry has recently been consolidating. The
combined companies resulting from the consolidation may have a
stronger capital position. Consolidation may continue to intensify the
competition in our industry. We cannot be sure that we will be able to
compete effectively with our current or future competitors. We also
cannot be sure that the competitive pressures we face will not have an
adverse effect on our business, financial condition and/or operating
results.
U.S. Option Business
The subsidiaries comprising our U.S. Option Business compete with
a large number of trading firms, some of which are independent trading
firms broadly similar to them, but in some cases having greater
capital, such as Timber Hill LLC or Susquehanna International Group.
Other competitors are subsidiaries of major broker-dealers, such as
the Bear Stearns Companies Inc. or Morgan Stanley, Inc. Competition is
both for trading assignments, as determined by the exchanges, and for
execution. Option specialist or similar assignments on U.S. option
exchanges are allocated by the exchange and are not awarded by the
companies representing the underlying securities; hence, there is no
competition for them at the underlying company level. Winning
additional assignments is determined by reputation and competent
performance of specialist duties on existing assignments.
European Trading
Our European operations do not hold any specialist privileges or
similar privileged trading status in any of the markets in which they
operate. A few activities - notably our role as market maker in Dutch
equities traded on Deutsche Borse and our role as market maker in
fixed income instruments on the London Stock Exchange - do involve
trading under specific obligations. These positions were obtained by
application to the relevant exchanges and are equally available to any
other eligible firm that chooses to apply for them. Accordingly, there
is no competition for these privileges.
Our European equity and option trading activities are largely free
from competition, since they do not pursue customer business. They do,
however, compete with other firms for profitable trading
opportunities, and in this sense they are in competition with all
other firms or individuals that might have an interest in trading an
instrument at the same moment that they do. Trading orders from the
proprietary trading desks of major firms such as Goldman Sachs Group
Inc., Merrill Lynch & Co., Deutsche Bank A.G. or ABN AMRO N.V., and
orders that these and other banks or brokerage firms submit on behalf
of their clients, whether institutions, hedge funds or private
individuals, all compete with Van der Moolen's orders to execute at a
specific price.
To compete effectively, our European operations maintain the best
trading technology they can obtain, so that their orders reach the
relevant markets as quickly as possible. Further, by maintaining
strict cost disciplines over all aspects of these businesses, we
increase our opportunities to trade relative to firms with less strict
cost disciplines, since a price at which it may be profitable for us
to trade at may not be profitable for other firms with a higher cost
structure.
Our bond trading subsidiaries in London and Amsterdam are in
competition with other firms for execution business. With the removal
of the specialist function on Euronext, our Dutch bond subsidiary, Van
der Moolen Obligaties, negotiates, jointly with its sole competitor
AOT Bond Specialist B.V., to provide market making services in bonds
38
to Dutch banks and brokerage firms on a commission basis. Van der
Moolen Obligaties competes with AOT Bond Specialist for these firms'
business largely on the basis of price. We believe that our
London-based bond market making activities are unique in Europe, as
there is currently no similar market maker for bonds in
less-than-wholesale quantities. Van der Moolen U.K.'s primary
competition in trading bonds is from inter-dealer brokers such as the
Prebon Group, Ltd. or ICAP plc., which do not participate in
transactions as principals. Competition is based largely on price and
ease of execution.
Other
Kenny & Co., our "direct access" brokerage firm, competes with all
brokers and broker-dealers active on the New York Stock Exchange, but
especially with independent floor brokers. Competition is based
largely on service and execution quality, although pricing may
sometimes be a factor at the margin.
Recent trend towards electronic communications networks
Technological advances have contributed to increased trading
through alternative trading systems, such as electronic communications
networks, or ECNs, and crossing systems. ECNs are electronic systems
with communications facilities that allow electronic routing, matching
and execution of multiple orders from different firms and, in some
cases, directly from investors, without human intervention. In the
United States, ECNs have captured a significant share of Nasdaq
transactions. However, the repeal in 1999 of New York Stock Exchange
Rule 390, which forbade New York Stock Exchange members from trading
in shares listed on the New York Stock Exchange prior to April 26,
1979 off a regulated market, for example, an ECN, has given ECNs
greater latitude to compete for transactions in New York Stock
Exchange-listed stocks. Trades not matched in-system are executed
through traditional market mechanisms, with ECNs functioning in that
case more as transmitters of orders to organized exchanges rather than
as marketplaces for those orders. Alternative trading systems may be
developed, organized and operated by large brokerage houses and
investment banks with greater capital, better access to technology and
direct access to investors. As a result, these parties may be well
positioned to direct trading to these networks. Alternative trading
methods could account for a growing percentage of the trading volume
of New York Stock Exchange-listed stocks. The New York Stock Exchange
has introduced various electronic order execution mechanisms to
counter this threat to its business.
ECNs have not penetrated deeply into European equity markets,
largely because European market structures do not encourage their
development. All major European markets operate electronic central
limit order books that are very similar to ECNs, making it difficult
for ECNs to compete with them either on the basis of transaction costs
or speed.
Marketing and Customer Service
For the overwhelming majority of our activities, marketing is
restricted to posting competitive prices on recognized exchanges for
financial instruments. Direct marketing contact with our
counterparties is very limited, and as a result of trading rules in
some of the markets in which we operate, we are in many cases unaware
of the identity of our trading counterparties at the time of
execution.
The most important exception to this is competition for New York
Stock Exchange specialist assignments. When an issuer chooses to list
its shares on the New York Stock Exchange, it may choose its
specialist from among the various specialist firms that would like to
trade its shares. This decision is largely based on the various firms'
service history, an analysis of which is provided to the issuer by the
New York Stock Exchange. Consequently, our specialist in the United
States, VDM Specialists, makes substantial efforts to maintain and
enhance its reputation for providing specialist services of the
highest quality. However, issuers require more from their specialists
than simply that they perform the specialist function well. In
particular, many rely heavily on their specialists for market
intelligence. VDM Specialists employs a number of analysts and client
39
service professionals to assist companies in this area, and with our
worldwide trading reach, we believe that we offer issuers a uniquely
attractive service package.
Specialist assignments in other markets are essentially determined
by the exchanges themselves and, other than lobbying the exchange's
management, no marketing is involved.
Because it operates largely outside of recognized exchanges, our
U.K. bond operation must market its services in order to attract
orders. Marketing initiatives consist largely of visiting potential
users of its services and convincing them of the advantages of working
with this subsidiary, but may also extend to advertising. For other
activities, such as execution brokerage, clearing and stock lending,
marketing presentations are made directly to their potential
customers.
(C) Organizational Structure
The following table sets forth the name and jurisdiction of
incorporation of, and our ownership and voting interest in, our
principal subsidiaries at June 11, 2003.
Percentage
Country of Ownership and
Subsidiary Incorporation Voting Interest
- ----------------------------------------- ---------------------- -------------------
United States of
VDM Specialists, LLC America 75.0
United States of
Van der Moolen Options USA, LLC America 100.0
United States of
Cohen, Duffy, McGowan & Co., LLC America 51.0
United States of
Kenny & Co. LLC America 75.0
Van der Moolen Effecten Specialist B.V. Netherlands 100.0
Van der Moolen Opties Amsterdam B.V. Netherlands 100.0
Van der Moolen Obligaties B.V. Netherlands 100.0
Van der Moolen Trading GmbH Germany 100.0
Van der Moolen UK, Ltd. United Kingdom 100.0
Van der Moolen Equities, Ltd. United Kingdom 100.0
(D) Property, Plants and Equipment
We currently lease office space in Europe in Amsterdam, Cologne,
Frankfurt and London and in the United States in Chicago and New York.
Our headquarters are located at Keizersgracht 307, Amsterdam, where we
lease approximately 23,952 square feet, which is partly sublet to
third parties. Our other principal offices are located in New York,
where VDM Specialists leases approximately 23,450 square feet and
Philadelphia, where Van der Moolen Options USA leases approximately
6,698 square feet. Our total lease liability is expected to be EUR1.9
million for the year ended December 31, 2003. Our leases expire
between March 2004 and June 2010.
40
Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial
condition and results of operations together with the U.S. GAAP
financial statements and the notes to such statements included
elsewhere in this annual report. This discussion contains
forward-looking statements based on our current expectations,
assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, as more
fully described in the "Risk Factors" section and elsewhere in this
annual report.
(A) Operating Results
Overview
We are a transatlantic securities trading firm that principally
engages in the trading of equities, equity options, equity index
options and bonds on some of the leading securities exchanges in the
United States and Europe. Operating from six locations worldwide, we
function as an "all systems" trader, providing liquidity in different
markets on exchange floors and electronic trading systems through our
role as specialist or proprietary trader.
We operate our business through four segments: VDM Specialists;
U.S. Option Business; European Trading; and Other, which are comprised
of our business through ten principal subsidiaries located in the
United States and Europe. Our subsidiaries function on a largely
autonomous basis, subject to our centrally established and monitored
risk management policies and financial oversight. Our principal
subsidiaries, categorized by business segment, include:
VDM Specialists
- -- VDM Specialists, LLC, one of the leading specialist firms on the New York
Stock Exchange;
U.S. Option Business
- -- Van der Moolen Options USA, LLC, a specialist and proprietary trader in
equity-related options on the Chicago Board Options Exchange and the
Philadelphia Stock Exchange;
- -- Cohen, Duffy, McGowan & Co., LLC, a specialist and proprietary trader for
equity options that trade on the American Stock Exchange;
European Trading
- -- Van der Moolen Trading GmbH, a proprietary trader in German and Swiss
equities, equity-related options and arbitrage;
- -- Van der Moolen Effecten Specialist B.V., a major equity trading firm on
Euronext Amsterdam, which engages in proprietary trading and arbitrage;
- -- Van der Moolen Opties Amsterdam B.V., a proprietary trader in
equity-related options on Euronext Amsterdam;
- -- Van der Moolen Obligaties B.V., a market maker in Euronext Amsterdam-listed
bonds, partly on commission basis;
41
- -- Van der Moolen Equities, Ltd., a proprietary trader in large- and
mid-capitalization British shares and arbitrageur of London-listed shares
or ADSs and ADSs on London-listed shares or foreign shares traded in other
markets;
- -- Van der Moolen UK, Ltd., a market maker in less-than-wholesale size
government and selected corporate bonds; and
Other
- -- Kenny & Co., LLC, a "direct access" broker providing New York Stock
Exchange agency execution services, which we established in January 2002.
Basis of preparation of the consolidated financial statements;
Changes in group composition
The consolidated financial statements from which the financial
information discussed below has been extracted have been prepared in
accordance with U.S. GAAP. We have fully consolidated the financial
statements of all subsidiary companies in which effective control is
exercised by virtue of ownership of a majority of the voting rights of
such subsidiaries. All significant inter-company account balances and
transactions have been eliminated in our consolidated financial
statements, and the minority interests of owners of shares in our
non-wholly owned subsidiaries have been reflected in them.
The acquisition of interests in the businesses discussed below
were accounted for under the purchase method. The accounting treatment
of these acquisitions has had a significant effect on the
comparability of our results from period to period and is an important
factor in interpreting our results. These changes included the
following:
- -- On June 1, 2000, we acquired New York Stock Exchange specialist Fagenson,
Frankel & Streicher LLC for EUR84.4 million, of which EUR75.4 million was
recorded as identifiable intangible assets and goodwill. Fagenson was
merged into the operations of VDM Specialists at that date.
- -- On July 11, 2001, we acquired a 51% interest in Cohen, Duffy, McGowan, a
specialist and proprietary trader that trades equity options on the
American Stock Exchange, as well as a 24.9% interest in a subsidiary owned
by Cohen, Duffy, McGowan's parent company, for total aggregate
consideration of EUR69.5 million, of which EUR11.5 million was recorded as
identifiable intangible assets and EUR41.1 million as goodwill. We began to
consolidate the results of operations of Cohen, Duffy, McGowan from its
date of acquisition.
- -- On August 1, 2001, we acquired a 75% interest in New York Stock Exchange
specialists Scavone, McKenna, Cloud and Stern & Kennedy for total
consideration of EUR86.6 million, of which EUR65.8 million was recorded as
identifiable intangible assets and EUR10.1 million as goodwill. Both of
these specialist operations were merged into the operations of VDM
Specialists at that date.
- -- In January 2002, we established Kenny & Co., a "direct access" agency
brokerage firm active on the floor of the New York Stock Exchange. We hold
a 75% interest in Kenny & Co.
- -- On March 1, 2002, we acquired a 75% interest in New York Stock Exchange
Specialist Lyden, Dolan, Nick & Co. for total consideration of EUR63.2
million, of which EUR32.6 million was recorded as identifiable intangible
assets and EUR28.9 million as goodwill. Its specialist operations were
merged into the operations of VDM Specialists at that date.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires that a liability for costs associated with an exit or
disposal activity be recognized and measured initially at its fair
value in the period in which the liability is incurred.
42
Previously a liability for an exit cost was required to be recognized at
the date of an entity's commitment to an exit plan, however, this does not, by
itself, create a present obligation to others that meets the definition of a
liability. SFAS 146 applies to any exit or disposal activities that are
initiated after December 31, 2002. We do not believe the adoption of SFAS 146
will have a material impact on our results of operations or financial condition.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that a liability be recorded in the guarantor's
balance sheet at the inception of certain guarantees, for the fair
value of the obligation assumed, and expands disclosures to be made by
a guarantor in its financial statements. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002, irrespective
of the guarantor's fiscal year-end. The disclosure requirements of FIN
45 will be effective for consolidated financial statements for 2003.
Management does not believe the adoption of FIN 45 will have a
material impact on its results of operations or financial condition.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51", ("FIN 46"). FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June
15, 2003. The disclosure requirements of FIN 46 will be effective for
our financial statements for 2003, regardless of the date on which the
variable interest entity was created. Management does not believe the
adoption of FIN 46 will have a material impact on its results of
operations or financial condition.
Critical accounting policies
The Notes to our consolidated financial statements contained
elsewhere in this annual report contain a summary of our significant
accounting policies, including a discussion of recently-issued
accounting pronouncements. Many of our accounting policies require
significant judgment regarding valuation of assets and liabilities
and/or significant interpretation of the specific accounting guidance,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently
uncertain. The following is a summary of our more judgmental and
complex accounting policies. Additional information about these
policies can be found in Note 2 to the Consolidated Financial
Statements.
Intangible assets
Our balance sheet contains significant intangible assets. These
intangible assets are comprised of our specialist stock lists and
goodwill acquired in connection with our various acquisitions.
Goodwill arising from business combinations accounted for under
the purchase method was amortized on a straight-line basis over 15
years until December 31, 2001. Effective January 1, 2002, goodwill and
intangible assets with an indefinite useful life are no longer
amortized, goodwill is tested for impairment at the reporting unit
level (which is generally an operating segment or one reporting level
below) at least annually, and intangible assets deemed to have an
indefinite life are tested for impairment as well. Had this standard
not been adopted, we would have recognized EUR15.0 million of
amortization expense related to goodwill in our Consolidated Statement
of Income for the year ended December 31, 2002.
The impairment test involves a two-step process:
43
Step 1: The fair value of our reporting units is compared to the
carrying value, including goodwill, of each of those units. For each
reporting unit where the carrying value, including goodwill, exceeds
the unit's fair value, the review moves on to step 2. If a unit's fair
value exceeds the carrying value, no further work is performed and no
impairment charge is necessary.
Step 2: The fair value of each reporting unit is allocated to its
identifiable tangible and non-goodwill intangible assets and
liabilities. This will derive an implied fair value for the reporting
unit's goodwill. The implied fair value of the reporting unit's
goodwill is then compared with the carrying amount of the reporting
unit's goodwill. If the carrying amount of the reporting unit's
goodwill is greater than the implied fair value of its goodwill, an
impairment loss must be recognized for the excess amount.
We performed the required impairment tests of goodwill during the
fourth quarter of 2002 for our different reporting units and
determined impairments on goodwill paid in relation to the acquisition
of VDM Options USA, LLC and Cohen, Duffy, McGowan, LLC of EUR13.5
million and EUR20.2 million, respectively. These impairments are the
result of uncertain market conditions and the associated estimated
lower profitability of the entities involved. In determining the
discounted value of future cash flows of VDM Options USA, LLC and
Cohen, Duffy, McGowan, LLC, valuations by external independent
consultants have been used, and a discount rate of 15% was applied.
The impairment expenses have been recognized in the Consolidated
Statement of Income of the year ended December 31, 2002.
Other intangible assets consist of specialist stock lists acquired
in connection with certain business combinations and are amortized on
a straight-line basis over 40 years. The fair value of the specialist
stock lists at the date of acquisition used for purchase price
allocation and the determination of the useful lives were determined
based on independent appraisals. The useful lives are determined upon
analysis of historical turnover characteristics of the specialist
stocks. We periodically evaluate whether events and circumstances have
occurred that indicate the remaining estimated useful life may warrant
revision or that the remaining balance may not be recoverable. When
factors indicate that intangible assets should be evaluated for
possible impairment, we use an estimate of undiscounted projected cash
flows over the remaining life in order to measure whether the assets
are recoverable. As a result of uncertain market conditions and the
associated lower profitability, we were required to perform the
impairment tests that took place during the fourth quarter of 2002, as
dictated by Statement of Financial Accounting Standard No. 144
"Accounting for the Impairment on Disposal of Long-Lived Assets" and
determined that there was no impairment charge necessary.
We assess the impairment of intangible fixed assets (such as our
specialist stock list and goodwill) whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors we consider important which could trigger impairment include,
among others, changes to our specialist function on the New York Stock
Exchange, the loss of significant stocks for which we act as
specialist and a significant decrease of our market capitalization.
Securities owned and securities sold, not yet purchased
Securities owned and securities sold, not yet purchased are
recognized at market value and unrealized gains and losses are
reflected in revenues.
Fair value estimates
Where liquid markets exist, fair value is based on quoted market
prices. However, for certain complex or illiquid financial
instruments, if applicable, we use projections, estimates and models
to determine fair value. Certain financial instruments, including
over-the-counter, or "OTC", derivative instruments, are valued using
pricing models that consider, among other factors, contractual and
market prices, correlations, time value, credit, yield curve,
volatility factors and/or prepayment rates of the underlying
positions. The use of different pricing models and assumptions could
produce different estimates of fair value. We believe the assumptions
and estimates we have used are reasonable and supportable in the
existing market environment.
44
Revenues
All of our principal securities transactions and the related
revenues and expenses are recorded on a trade date basis, except for
commission income that has been recognized on settlement date, which
is not significantly different from trade date.
Revenues
Our revenues are comprised of four principal components:
specialist activities; commission income; proprietary trading
activities; and net interest income from stock lending activities..
- -- Specialist activities. Our revenues from specialist activities consist
primarily of net trading income from principal transactions in securities
for which VDM Specialists, Van der Moolen Options USA, Cohen Duffy McGowan
and, until October 2001, Van der Moolen Effecten and Van der Moolen
Obligaties, acted as specialist. The net gain on principal transactions
represents trading gains net of trading losses, and are earned by these
subsidiaries when they act as principal buying and selling their specialist
stocks. These revenues are primarily affected by the total number of
specialist stocks for which our subsidiaries act as specialist, as well as
changes in turnover and fluctuations in the price of the specialist stocks.
Turnover in our stocks has historically been driven by general trends in
trading volume, as well as other factors affecting exchange-listed
companies, including merger and acquisition activity, stock splits,
frequency and content of company news releases, increased analyst coverage
and investor sentiment.
- -- Commission income. Commissions income consists of commissions earned when
our subsidiaries act as agent to match buyers and sellers for limit orders
executed by them on behalf of brokers after a specified period of time, and
for execution of counterparties' trades in certain other circumstances as
mandated by the relevant exchange or, in the case of Van der Moolen
Obligaties, by contact with the execution agents. Generally, our
subsidiaries do not earn commissions when they match market orders.
Commission revenue in the United States is primarily affected by share
volume of the trades executed by our subsidiaries as agent, while in Europe
it is affected by the value of securities transacted. Most commission
revenue is attributable to VDM Specialists' activities, with the remainder
being attributable to the activities now organized as direct contracts with
the counterparties of Van der Moolen Obligaties.
- -- Proprietary trading activities. Our revenues from proprietary trading
activities consist primarily of net gains earned by our subsidiaries when
trading as principal in competition with other traders and include net
gains following arbitrage activities. Similar to our specialist activities,
net gains from our proprietary trading activities represent trading gains
net of trading losses.
- -- Net interest income from stock lending activities. Net interest income from
stock lending activities represents interest earned net of interest paid in
connection with the stock lending activities that are carried out by VDM
Specialists. VDM Specialists engages in stock lending and borrowing as a
fee-based service to other market participants that may require such loans
in order to assure delivery of stock to their own counterparties. These
activities give rise to large and rapidly changing balance sheet positions
(assets of EUR1,469.6 million, EUR1,685.0 million and EUR1,102.1 million
and liabilities of EUR1,446.7 million, EUR1,690.6 million and EUR1,126.6
million as of December 31, 2000, 2001 and 2002, respectively). However, we
believe we are able to limit our exposure to the economic risk from these
stock lending activities because they are typically secured by collateral
with a value in excess of 100% of the value of the underlying contract, so
the risk is limited to mark-to-market variations. Gross revenues from stock
lending consist of the interest earned on a contractually agreed portion of
the collateral, a contractually determined portion of which is rebated to
the beneficial owner of the shares. In our statement of income we present
the revenues from this activity net of rebates payable to the beneficial
owner of the shares, because we believe that a non-netted presentation
would give an inaccurate picture of our operating condition.
45
Our revenues are largely driven by the turnover and volatility of
trading on the markets in which our subsidiaries operate. Increased
market turnover translates into more opportunities to trade larger
positions in shorter time frames, while increased volatility results
in more opportunities to make a gain on short-term positions. However,
extremely high levels of volatility can make the achievement of
consistent trading gains very difficult. A sustained decline in share
prices has recently led to decreases in turnover and volatility and
has harmed our trading results in those periods. As long as turnover
remains high and volatility stays at an acceptable level, the exposure
of our results of operations to a general downward trend in equity
prices is limited.
Equity prices. All the equity markets in which our subsidiaries
trade ended 2002 below their 2001 closing levels. The trend of
increasing share prices ended in Spring 2000 as investor sentiment
towards technology-oriented companies faded and led to a decline of
general market indices for the remainder of the year and into 2001 and
2002.
The following table provides information regarding the performance
in 2001 and 2002 of various stock market indices in Europe and the
United States on which our subsidiaries operate, compared with their
closing levels in 2000 and 2001, respectively:
Increase or Decline
----------------------------
Country Stock Market Index 2001 2002
- ------------------------- ---------------------------- ------------ --------------
United States of America Standard & Poor's 500 Index 13% decline 23% decline
Dow Jones Industrial Average
Index 7% decline 17% decline
Germany Xetra DAX 30-DAX Index 20% decline 44% decline
Switzerland SMI-Swiss Market Index 21% decline 28% decline
The Netherlands AEX-Amsterdam AEX Index 20% decline 36% decline
United Kingdom FTSE 100 Index 16% decline 24% decline
France CAC-40 Index 22% decline 34% decline
Source: Bloomberg.
Volatility and Turnover. While there were several dramatic, highly
volatile trading days in 2001 and 2002, volatility on the markets on
which we operate was generally lower than the peak reached in the
spring of 2000. Turnover on most equity markets where we were active
in 2002 declined from the high levels of previous years. This decline
was the result of a continuation of negative trends already in
evidence since 2000, including withdrawal of private individuals from
the markets and a weak economic and political background for equity
investment.
- -- The United States. Turnover on the New York Stock Exchange declined by 5.0%
to $10.5 trillion in 2001 compared with 2000, although average daily
volumes (i.e., the number of shares traded) rose 19.2% to 1.24 billion and
total volume for the year rose 17.1% to 307.5 billion shares. In 2002,
turnover declined by 2% compared to 2001, to $10.3 trillion, while average
daily volume rose 16.1% to 1.44 billion shares and total volume increased
by 25% to 383 billions shares.
46
- -- Germany and Switzerland. In 2001, the local currency value of trading on
the Deutsche Borse decreased by 17%, compared with 2000, as a result of
decreasing retail order flow and decreasing prices. Value of trading on the
SWX Swiss Exchanges decreased during 2001 by 6%. In 2002, turnover on both
markets again decreased: by 15% on the Deutsche Borse and 6% on the SWX.
- -- The Netherlands. The switch to Euronext's NSC platform broke the data
series for the Dutch market, and Euronext now publishes consolidated
trading statistics that do not break out national data. After an estimated
zero change in turnover in 2001, turnover on Euronext declined by 8% in
2002.
- -- The United Kingdom. The London Stock Exchange saw a 23% increase in the
value of trading through its order book in 2001, and a 3% increase in 2002.
Volume developments on the derivative exchanges where we operate
were mixed.
- -- Germany and Switzerland. Equity-related contract volumes on Eurex increased
by 60.0% in 2001 compared with 2000, reflecting strong growth in index
trading and relatively modest increases in individual equity options. In
2002, contract volumes on Eurex increased by a further 34% compared to
2001. However, much of this reported increase consisted of direct crosses
cleared through the mechanism of the exchange, rather than traded through
the exchange as such.
- -- The Netherlands. The Euronext merger, and Euronext's subsequent acquisition
of Liffe, has broken the data series for Dutch options, and Euronext no
longer breaks down contract volumes by national activity. A comparison
between 2001 and 2000 is unavailable, while the 16% increase in contracts
traded that Euronext.liffe reported for 2002 concerns all five component
national markets.
- -- The United States. In 2001, contract volumes on the American Stock Exchange
decreased by 1% compared to 2000, contract volumes on the Philadelphia
Stock Exchange increased by 33% and contract volumes on the Chicago Board
Options Exchange declined by 10%. Contract volumes declined by 9%, 12% and
13%, respectively, in 2002.
- -- The United Kingdom. The acquisition of Liffe by Euronext has interrupted
data series for this market, which is now reported in conjunction with data
for the other Euronext option markets (see "-- The Netherlands" above).
The following table provides information regarding the trading
activity of the stock markets on which our subsidiaries operated in
2001 compared with 2000:
Trading activity in 2001
Equities (local currency value of equities Options (number of options contracts
traded) traded)
- -------------------------------------------- -----------------------------------------
New York Stock Exchange 5% decrease Euronext.liffe n.a.
17% Eurex (Germany and
Deutsche Borse decrease Switzerland) 60% increase
Euronext Amsterdam no change
23% Chicago Board Options
London Stock Exchange increase Exchange 10% decrease
SWX (Switzerland) 6% decrease PHLX (Philadelphia) 33% increase
American Stock Exchange
(New York) 1% decrease
Source: Individual exchanges. Data for equity and equity-related instruments only.
Euronext equity data estimated.
The following table provides information regarding the trading
activity of the stock markets on which our subsidiaries operated in
2002 compared with 2001:
47
Trading activity in 2002
Equities (local currency value of equities Options (number of options contracts
traded) traded)
- -------------------------------------------- -------------------------------------------
New York Stock Exchange 2% decrease Euronext.liffe 16% increase
15% Eurex (Germany and
Deutsche Borse decrease Switzerland) 34% increase
Euronext 8% decrease
Chicago Board Options
London Stock Exchange 3% increase Exchange 13% decrease
SWX (Switzerland) 6% decrease PHLX (Philadelphia) 12% decrease
American Stock Exchange
(New York) 9% decrease
Source: Individual exchanges. Data for equity and equity-related instruments only.
Even though the New York Stock Exchange broke its one-day trading
record several times in 2002, world equity and equity-related markets
generally remained under considerable pressure in 2002, as a result of
which individual and institutional investors decreased their exposure
to equities and the number of new equity issuances has declined
sharply. In addition, takeover activity declined sharply as well. The
ability of our subsidiaries to capture revenue depends significantly
on the level of market activity in the United States and Europe, and
we believe that, in 2002, our traders were faced with significantly
more challenging market conditions than in recent years.
Expenses
Our expenses consist of seven principal components: exchange,
clearing and brokerage fees; employee compensation and benefits; lease
of exchange memberships; information and communication expenses;
general and administrative expenses; depreciation and amortization;
and impairment of intangible fixed assets.
- -- Exchange, clearing and brokerage fees. Exchange, clearing and brokerage
fees represent exchange fees paid to securities exchanges of which one or
more of our subsidiaries is a member, transaction fees paid to the
exchanges on which our subsidiaries operate and execution fees paid to
third parties, primarily for executing trades in listed securities. The
aggregate fees we pay fluctuate with our level of trading activity, but
they may also change as a result of the rates that third parties charge us
or the way those charges are calculated.
- -- Employee compensation and benefits. Our largest expense is employee
compensation and benefits that primarily consist of salaries, wages, social
security or similar contributions, and profitability-based (partly
discretionary) compensation. Profitability-based compensation includes
compensation and benefits paid to managing directors, trading professionals
and other employees of each of our subsidiaries based on the employee's
overall performance and the profitability of the relevant subsidiary.
Because a large proportion of our compensation is profitability-based, we
can manage this expense to accommodate fluctuations in our revenues.
- -- Lease of exchange memberships. Lease of exchange memberships comprises
lease payments paid to related and third parties for seats on the New York
Stock Exchange and on other exchanges where we operate. Prior to 2001, the
cost of lease of exchange memberships was included in information and
communication expenses. For the year ended December 31, 2002 and
subsequently, these costs are shown on a stand-alone basis, and for
purposes of comparison, all historical financial data has been restated.
- -- Information and communication. Our information and communication expenses
consist primarily of data retrieval, information services and telephone and
data lines.
48
- -- General and administrative expenses. Our general and administrative
expenses principally comprised professional fees, rent and occupancy
expense and equipment rental expense. Professional fees primarily consist
of fees paid to consultants, legal fees, audit fees, fees for tax advice
and other professional fees. Rent and occupancy expense consists primarily
of rental payments on office leases and related occupancy costs, such as
utilities. Equipment rental expense primarily consists of rental payments
on equipment leases. Prior to 2001, unincorporated business tax expenses
were included in general and administrative expenses. For the year ended
December 31, 2001 and subsequently, these expenses have been reallocated to
provision for income taxes, and for purposes of comparison, all historical
financial data has been restated.
- -- Depreciation and amortization. Depreciation and amortization includes the
depreciation of fixtures, fittings and equipment and the amortization of
intangible assets.
- -- Impairment of intangible fixed assets: Impairment of intangible fixed
assets includes impairment charges on goodwill and other intangible assets.
Taxation
Our income tax expense consists of current and deferred income
taxes arising from within and outside of the Netherlands. Taxes are
calculated for each individual subsidiary in the group. The effective
tax rate differs from the theoretical amount that would arise on the
basic tax rate of the Netherlands as described in Note 11 to our
audited consolidated financial statements. See "Risk Factors -Risks
Associated with the Company" for recent developments concerning our
consolidated tax rate.
Recent Developments
In the first quarter of 2003, most exchanges continued to
experience lower turnover, largely as a result of price weakness.
Intraday volatility returned to low levels seen in the first half of
2002. End investors - both private individuals and institutions - were
largely on the sidelines, as a result of which professional traders
accounted for a disproportionate share of trading activity. In this
market environment, our opportunities to trade profitably were
limited. As a result, we had net income of EUR4.0 million for the
three months ended March 31, 2003. This net income included a gain of
approximately EUR0.9 million in relation to the sale of our interest
in Tullet Plc. In the first quarter of 2002, we realized net income of
EUR13.5 million, a decline of EUR9.5 million, or 70%. Although
revenues decreased significantly, we were able to close 98% of our
trading days with a positive trading result. Furthermore, we have
implemented cost reduction programs in light of the current
macro-economic environment.
In early 2003, we purchased a series of U.S. dollar put options in
order to create a "stop loss" on the translation exposure arising on
our U.S. dollar denominated net income in 2003. As a result, we expect
that any further appreciation of the euro against the U.S. dollar will
have a limited effect on our net income for 2003. See "Quantitative
and Qualitative Disclosures About Market Risk".
As of June 11, 2003 we had purchased 732,182 of our common shares
under a stock purchase plan for an aggregate consideration of EUR6.7
million. Further reference is made to the section below, entitled "--
Issuer Purchases of Equity Securities".
The New York Stock Exchange has commenced an investigation of
trading practices at several specialist firms, including VDM
Specialists. See "Financial Information - Consolidated Statements and
Other Financial Information -- Regulatory Proceedings and Litigation".
49
Results of Operations for the Years Ended December 31, 2001 and 2002
Revenues
The following tables provide information about our revenue
composition and contribution of our principal business segments
(presented on a subsidiary by subsidiary basis), to our total revenues
for the years ended December 31, 2002 and 2001.
Net
interest
income
Year ended % of % of Proprietary % of from stock % of % of
December Specialist total Commission total trading total lending total Other total
31, 2002 activities revenues income revenues activities revenues activities revenues revenues revenuesTotal
----------- --------- ------------------------------ --------- ----------- --------- --------- ---------------
(EUR millions)
VDM
Specialists
(1)(2) 227.0 70.6 % 33.4 10.4% 2.1 0.6 % 4.2 1.3 % _ _266.7
U.S. Option
Business
Cohen,
Duffy,
McGowan(2) (2.9 ) (0.9 ) _ _ _ _ _ _ _ _ (2.9)
Van der
Moolen
Options USA (0.9 ) (0.3 ) _ _ 0.9 0.3 _ _ _ _ 0.0
European
Trading
Van der
Moolen
Trading _ _ _ _ 11.0 3.4 _ _ _ _ 11.0
Van der
Moolen
Effecten
Specialist _ _ _ _ 25.2 7.8 _ _ _ _ 25.2
Van der
Moolen
Opties _ _ _ _ (0.3 ) 0.0 _ _ _ _ (0.3 )
Van der
Moolen
Obligaties _ _ 1.6 0.5 2.9 0.9 _ _ _ _ 4.5
Van der
Moolen
Equities _ _ _ _ 8.4 2.6 _ _ _ _ 8.4
Van der
Moolen U.K. _ _ _ _ 5.9 1.8 _ _ _ _ 5.9
Other
Kenny & Co _ _ _ _ _ _ _ _ 3.3 1.0% 3.3
--------------------------------------------------------------------------------------------------------------
Total 223.2 69.4 % 35.0 10.9% 56.1 17.4 % 4.2 1.3 % 3.3 1.0%321.8
==============================================================================================================
Notes:
(1) We acquired New York Stock Exchange specialists Lyden, Dolan, Nick on March
1, 2002. Results of operations are reflected in VDM Specialists' results as
of such date.
(2) As of December 31, 2002 we owned a 75.0% and 51.0% economic interest in VDM
Specialists and Cohen, Duffy, McGowan, respectively. The figures shown do
not take into account the amounts payable to the minority interest holders
in these companies.
50
Net
interest
income
% of % of Proprietary % of from stock % of
Year ended December 31, Specialist total Commission total trading total lending total
2001 activities revenues income revenues activities revenues activities revenues Total
----------- --------- ------------------------------ --------- ----------- --------- ------
(EUR millions)
VDM Specialists (1)(2) 222.4 66.6 % 30.8 9.2% 4.1 1.2 % 5.1 1.5 %262.4
U.S. Option Business
Cohen, Duffy, McGowan
(2)(3) (10.4 ) (3.1 ) _ _ _ _ _ _ (10.4 )
Van der Moolen Options USA 2.4 0.7 _ _ 6.7 2.0 _ _ 9.1
European Trading
Van der Moolen Trading _ _ _ _ 29.1 8.7 _ _ 29.1
Van der Moolen Effecten
Specialist 8.8 2.6 5.2 1.6 18.6 5.6 _ _ 32.6
Van der Moolen Opties _ _ _ _ (3.5 ) (1.0 ) _ _ (3.5 )
Van der Moolen Obligaties 2.4 0.7 2.5 0.7 _ _ _ _ 4.9
Van der Moolen Equities (4) _ _ _ _ 8.0 2.4 _ _ 8.0
Van der Moolen U.K(4). _ _ _ _ 2.0 0.6 _ _ 2.0
-------------------------------------------------------------------------------------------
Total 225.6 67.5 % 38.5 11.5% 65.0 19.5 % 5.1 1.5 %334.2
===========================================================================================
Notes:
1. We acquired New York Stock Exchange specialists Scavone, McKenna, Cloud and
Stern and Kennedy on August 1, 2001. Results of operations are reflected in
VDM Specialists' results as of such date.
2. As of December 31, 2001 we owned a 75.0% and 51.0% economic interest in VDM
Specialists and Cohen, Duffy, McGowan, respectively. The figures shown do
not take into account the amounts payable to the minority interest holders
in these companies.
3. We acquired Cohen, Duffy, McGowan on July 11, 2001 and its results of
operations are reflected as of that date.
4. Revenues of Van der Moolen Equities formed part of Van der Moolen UK in the
year ended December 31, 2001. For purposes of comparison the amounts have
been separated.
Our revenues decreased by EUR12.4 million, or 3.7%, from EUR334.2
million for the year ended December 31, 2001 to EUR321.8 million for
the year ended December 31, 2002. This decrease was caused primarily
by a 25.2% decline in revenues in our European trading operations,
partially offset by a 1.6% increase at VDM Specialists. VDM
Specialists accounted for 82.9% of our revenues for the year ended
December 31, 2002, compared with 78.5% of our revenues in 2001.
- -- Specialist activities. Principal revenues from specialist activities
decreased by EUR2.4 million, or 1.1%, falling from EUR225.6 million for the
year ended December 31, 2001 to EUR223.2 million for the year ended
December 31, 2002. During the period, revenues derived from specialist
activities at VDM Specialists increased by 2.1% from EUR222.4 million to
EUR227.0 million. This increase was mainly caused by the consolidation for
ten months of the operations of Lyden, Dolan, Nick which we acquired on
March 1, 2002, a full year's consolidation of the acquisitions of Scavone
and Stern & Kennedy made on August 1, 2001, which was almost fully offset
by a 4% decrease in revenues attributable to the depreciation of the dollar
against the euro and an organic decline in revenues. The organic decline in
revenues was primarily due to erosion of margins resulting from reduced
final investor activity. Revenues attributable to the specialist activities
of Van der Moolen Options USA decreased by EUR3.3 million from a gain of
EUR2.4 million in 2001 to a loss of EUR0.9 million in 2002. This decline
reflected poor trading conditions as well as deliberate curtailment of the
scope of this firm's trading activities.
51
Our subsidiary, Cohen, Duffy, McGowan realized a trading loss of
EUR2.9 million in 2002, compared with negative revenues of EUR10.4
million for the period between our purchase of a 51% interest in this
firm on July 11, 2001 and the end of 2001. This loss was largely the
result of unfavorable trading conditions in the U.S. markets, as well
as deliberate curtailment of the activities of this unit.
As a result of the termination of the hoekman function on Euronext
Amsterdam in October 2001, revenue from specialist activities realized
through our European trading entities was zero in 2002, compared to
EUR11.2 million in 2001.
- -- Commission income. Commissions from specialist activities decreased by
EUR3.5 million, or 9.1%, from EUR38.5 million to EUR35.0 million in 2001
and 2002, respectively. The majority of commission revenue in both periods
was attributable to VDM Specialists, which had commissions from specialist
activities of EUR30.8 million and EUR33.4 million in 2001 and 2002,
respectively. As a result of changes to Amsterdam's trading structure,
neither Van der Moolen Effecten nor Van der Moolen Obligaties any longer
participates in specialist activities. Notwithstanding the results of 2002
compared to 2001, and apart from the system change in Amsterdam, the
relative importance to our results of operations of commission revenues has
been decreasing for a number of years, and we expect this trend will
continue in future periods. Van der Moolen Obligaties has been able to
replace specialist commissions by contracting directly with its
counterparties, but Van der Moolen Effecten will henceforth receive no
commission revenue. Van der Moolen Effecten and Van der Moolen Obligaties
together contributed EUR7.7 million in commission revenues in 2001. Van der
Moolen Obligaties realized EUR1.6 million in commission income during 2002.
- -- Proprietary trading activities. Our revenues from proprietary trading
activities decreased by EUR8.9 million, or 13.7%, from EUR65.0 million for
the year ended December 31, 2001 to EUR56.1 million for the year ended
December 31, 2002. This decrease reflected a fall in turnover on most of
the European exchanges where we were active and especially a sharp
reduction in the trading activity carried out through our German
operations.
- -- Net interest income from stock lending activities. Net interest income from
stock lending activities declined by EUR0.9 million, or 17.6%, from EUR5.1
million for the year ended December 31, 2001 to EUR4.2 million for the year
ended December 31, 2002. All of the net interest income resulted from the
activities of VDM Specialists, which experienced a decline in demand for
stock lending activities as a result of continuing market volatility during
2002.
- -- Other revenues. Other revenues of EUR3.3 million comprise revenues from the
direct-access brokerage activities of Kenny & Co, LLC, which were started
in January 2002.
52
Expenses
Our expenses increased by EUR26.2 million, or 12.8%, from EUR204.1
million for the year ended December 31, 2001 to EUR230.3 million for
the year ended December 31, 2002. VDM Specialists accounted for 48.3%
of our expenses for the year ended December 31, 2002, compared with
52.6% in 2001.
- -- Exchange, clearing and brokerage fees. Exchange, clearing and brokerage
fees increased by EUR9.9 million, or 30.1%, from EUR32.9 million in 2001 to
EUR42.8 million in 2002. The increase partially reflected the expansion of
the scope of our business through acquisitions made in the United States
during the course of 2001 and 2002, the start up of our UK Bonds
operations, increases in fees on several of the exchanges where we trade
and increased arbitrage activity compared to 2001.
- -- Employee compensation and benefits. Employee compensation and benefits
decreased by EUR4.5 million, or 4.6%, from EUR98.3 million in 2001 to
EUR93.8 million in 2002. The substantial majority of this decrease was due
to the decline in revenue-based incentive compensation accrued on behalf of
our traders that accompanied the decline in revenue and income levels from
one period to the next. The decrease was partially offset by the addition
of new employees following the start up of our UK Bonds operations in 2001,
the acquisition of Cohen, Duffy, McGowan in July 2001, the acquisition of
Scavone and Stern & Kennedy in August 2001, and the acquisition of Lyden,
Dolan, Nick in March 2002. The variable component of our personnel
expenses, which comprises bonus payments to our personnel and is correlated
with the development of our revenues, decreased to EUR33.9 million, or to
10.5% of our total revenues for the year ended December 31, 2002, from
EUR43.0 million, or 12.9% of our total revenues for the year ended December
31, 2001. Non-cash expenses related to our employee stock option plan were
EUR5.0 million and EUR5.5 million in 2001 and 2002, respectively.
- -- Lease of exchange memberships. Lease of exchange memberships increased by
EUR4.1 million, or 28.9%, from EUR14.2 million in 2001 to EUR18.3 million
in 2002. This increase was mainly due to the increase in the number of New
York Stock Exchange memberships leased by VDM Specialists from related and
third parties. The increase in the number of New York Stock Exchange
memberships was mainly due to acquisitions made in 2001 and 2002.
- -- Information and communication. Information and communication expenses
increased by EUR0.5 million, or 8.2%, from EUR6.1 million in 2001 to EUR6.6
million in 2002. This increase was the result of additional communication,
data retrieval and information services utilized due to the growth of our
business.
- -- General and administrative expenses. General and administrative expenses
decreased by EUR6.8 million, or 22.7%, from EUR29.9 million in 2001 to
EUR23.1 million in 2002. The main reason for this decline relates to the
expenses recognized in 2001 in relation to the listing of our ADSs on the
New York Stock Exchange in October 2001.
- -- Depreciation and amortization. Depreciation and amortization decreased by
EUR10.7 million, or 47.1%, from EUR22.7 million in 2001 to EUR12.0 million
in 2002. The decrease primarily resulted from the application of SFAS 142
under which goodwill is no longer amortized but is subject to impairment
testing. Amortization recognized in 2001 also included an amount of EUR3.0
million in relation to the write-off of Sputz AG, an equity investment that
was sold during 2001.
- -- Impairment of intangible fixed assets. We performed the required impairment
tests of Goodwill during the fourth quarter of 2002 for its different
reporting units and determined that impairments on goodwill paid in
relation to the acquisition of VDM Options USA, LLC and Cohen, Duffy,
McGowan, LLC of EUR13.5 million and EUR20.2 million, respectively, were
required. These impairments of EUR33.7 million in total are the result of
uncertain market conditions and the associated estimated lower
profitability of the entities involved. In determining the discounted value
of future cash flows of VDM Options USA, LLC and Cohen, Duffy, McGowan,
LLC, valuations by external independent consultants have been used, and a
discount rate of 15% was applied.
53
Income from associates
Our income from associates increased from a loss of EUR0.1 million
in 2001 to income of EUR0.3 million in 2002.
Gain on disposal of long-term investments and associates
For the year ended December 31, 2001, we reported a gain on
disposals of long-term investments and associates of EUR29.8 million.
This gain related to the sale of our 1.8% shareholding in Euronext NV,
which was disposed of in July 2001. The gain on disposal amounting to
EUR0.4 million as reflected in our income statement for 2002 relates
to the sale of our interest in Midwest Partners, LLC.
Income before income taxes and minority interest
As a result of the foregoing factors, our income before income
taxes and minority interests decreased by 47.0% during the period,
from EUR157.2 million for the year ended December 31, 2001 to EUR83.3
million for the year ended December 31, 2002.
Provision for income taxes
Provision for income taxes decreased by 37.9% during the period,
from EUR39.8 million in 2001 to EUR24.7 million in 2002. The provision
for income taxes as a percentage of income before taxes and minority
interests less minority interests, increased from 30.2% for the year
ended December 31, 2001 to 45.1% for the year ended December 31, 2002.
The relatively high tax rate mainly relates to foreign taxation. We
faced fiscal losses in low tax jurisdictions versus taxable profits in
high tax jurisdictions (the United States) during 2002. Further, the
tax rate realized in the year ended December 31, 2001 was strongly
influenced by the non-taxable gain on the sale of our shareholding in
Euronext N.V.
Minority interest
Minority interest reflects that portion of our income before
income taxes and minority interests that is contributed to the
minority shareholders of our United States subsidiaries, VDM
Specialists and Cohen, Duffy, McGowan, almost all of whom are active
traders in these businesses. Income related to minority interest
increased by EUR3.2 million, or 12.6%, during the period from EUR25.3
million for the year ended December 31, 2001 to EUR28.5 million for
the year ended December 31, 2002. This was mainly due to the
improvement in the results of our 51%-owned subsidiary, Cohen, Duffy,
McGowan and the acquisition of full ownership of VDM Options USA
during 2001.
Net income
As a result of the foregoing factors, our net income decreased by
EUR62.0 million, or 67.3%, in 2002, declining from EUR92.1 million for
the year ended December 31, 2001 to EUR30.1 million for the year ended
December 31, 2002.
Results of Operations for the Years Ended December 31, 2000 and
2001
Revenues
The following tables provide information about our revenue
composition and contribution of our principal subsidiaries to our
total revenues for the years ended December 31, 2001 and 2000.
54
Net
interest
income
% of % of Proprietary % of from stock % of
Year ended December 31, Specialist total Commission total trading total lending total
2001 activities revenues income revenuesactivities revenues activities revenues Total
----------- --------- ------------------------------ --------- ----------- --------- ------
(EUR millions)
VDM Specialists (1)(2) 222.4 66.6 % 30.8 9.2% 4.1 1.2 % 5.1 1.5 %262.4
U.S. Option Business
Cohen, Duffy, McGowan
(2)(3) (10.4) (3.1) _ _ _ _ _ _ (10.4)
Van der Moolen Options USA 2.4 0.7 _ _ 6.7 2.0 _ _ 9.1
European Trading
Van der Moolen Trading _ _ _ _ 29.1 8.7 _ _ 29.1
Van der Moolen Effecten
Specialist 8.8 2.6 5.2 1.6 18.6 5.6 _ _ 32.6
Van der Moolen Opties _ _ _ _ (3.5) (1.0) _ _ (3.5)
Van der Moolen Obligaties 2.4 0.7 2.5 0.7 _ _ _ _ 4.9
Van der Moolen Equities (4) _ _ _ _ 8.0 2.4 _ _ 8.0
Van der Moolen U.K(4). _ _ _ _ 2.0 0.6 _ _ 2.0
-------------------------------------------------------------------------------------------
Total 225.6 67.5 % 38.5 11.5% 65.0 19.5 % 5.1 1.5 %334.2
===========================================================================================
1) We acquired New York Stock Exchange specialists Scavone, McKenna, Cloud and
Stern and Kennedy on August 1, 2001. Results of operations are reflected in
VDM Specialists' results as of such date.
2) As of December 31, 2001 we owned a 75.0% and 51.0% economic interest in VDM
Specialists and Cohen, Duffy, McGowan, respectively. The figures shown do
not take into account the amounts payable to the minority interest holders
in these companies.
3) We acquired Cohen, Duffy, McGowan on July 11, 2001 and its results of
operations are reflected as of that date.
4) Revenues of Van der Moolen Equities formed part of Van der Moolen UK in the
year ended December 31, 2001. For purposes of comparison the amounts have
been separated.
55
Net
interest
income
% of % of Proprietary % of from stock % of
Year ended December 31, Specialist total Commission total trading total lending total
2000 activities revenues income revenues activities revenues activities revenues Total
----------- --------- ------------------------------ --------- ----------- --------- -------
(EUR millions)
VDM Specialists (1) 248.0 55.0 % 29.6 6.6% 6.0 1.3 % 6.3 1.4 % 289.9
U.S. Option Business
Van der Moolen Options
USA
(1) 8.1 1.8 _ _ 7.9 1.8 _ _ 16.0
European Trading
Van der Moolen Trading _ _ _ _ 73.9 16.4 _ _ 73.9
Van der Moolen Effecten
Specialist 23.1 5.1 7.0 1.6 24.7 5.4 _ _ 54.8
Van der Moolen Opties _ _ _ _ 4.5 1.0 _ _ 4.5
Van der Moolen
Obligaties 2.6 0.6 2.4 0.5 _ _ _ _ 5.0
Van der Moolen U.K. (2) _ _ _ _ 6.7 1.5 _ _ 6.7
--------------------------------------------------------------------------------------------
Total 281.8 62.5 % 39.0 8.7% 123.7 27.4 % 6.3 1.4 % 450.8
============================================================================================
Notes:
1) As of December 31, 2000 we owned a 75.0% and 83.0% economic interest in VDM
Specialists and VDM Options USA, respectively. The figures shown do not
take into account the amounts payable to the minority interest holders in
these companies.
2) Revenues of Van der Moolen UK in the year ended December 31, 2000,
represented equity trading revenues
Our revenues decreased by EUR116.6 million, or 25.9%, from
EUR450.8 million for the year ended December 31, 2000 to EUR334.2
million for the year ended December 31, 2001. This decrease was caused
primarily by 9.5%, 60.6% and 40.5% declines in revenues at VDM
Specialists, Van der Moolen Trading and Van der Moolen Effecten,
respectively, as well as the EUR10.4 million trading loss at Cohen,
Duffy, McGowan. VDM Specialists accounted for 78.5% of our revenues
for the year ended December 31, 2001, compared with 64.3% of our
revenues in 2000.
- -- Specialist activities. Principal trading by our specialist operations
decreased by EUR56.2 million, or 19.9%, falling from EUR281.8 million for
the year ended December 31, 2000 to EUR225.6 million for the year ended
December 31, 2001. During the period, revenues derived from specialist
activities at VDM Specialists decreased by 10.3% from EUR248.0 million to
EUR222.4 million. This decrease was caused by a 23.9% decline in organic
revenues, which was partially offset by a 9.6% increase in revenues
attributable to the full year consolidation of the operations of Fagenson,
Frankel & Streicher, which we acquired in June 2000, the consolidation of
the operations of Scavone and Stern & Kennedy which we acquired on August
1, 2001, and a 4.0% increase in revenues attributable to currency gains
resulting primarily from the appreciation of the dollar against the euro.
The decline in organic revenues was primarily due to the loss of VDM
Specialists' appointment as specialist for Time Warner, which resulted from
Time Warner's merger with AOL. The decline was also caused by the sharp
price declines in technology stocks in the United States during the period,
for which VDM Specialists acted as specialist. Revenues attributable to the
specialist activities of Van der Moolen Options USA decreased by EUR5.8
million, or 70.7%, from EUR8.2 million in 2000 to EUR2.4 million in 2001.
This decline reflected a significant decrease in volatility on U.S. option
exchanges, in particular during the second quarter of 2001.
56
Our subsidiary Cohen, Duffy, McGowan, which we acquired on July
11, 2001, realized a trading loss of EUR10.4 million between July 11,
its date of acquisition, and December 31, 2001. This loss was largely
the result of unfavorable trading conditions in the U.S. markets, and
was exacerbated by the effect of the events of September 11, 2001 on
the activities of the American Stock Exchange. At our European
specialist operations, particularly Van der Moolen Effecten, revenues
decreased by EUR14.1 million, or 61.6%, from EUR22.9 million for the
year ended December 31, 2000 to EUR8.8 million for the year ended
December 31, 2001. This decrease reflected reduced trading volumes on
Euronext Amsterdam, particularly by retail investors and the
elimination of the specialist function on Euronext Amsterdam in
October 2001.
- -- Commission income. Commission income decreased by EUR0.5 million, or 1.3%,
from EUR39.0 million to EUR38.5 million in 2000 and 2001, respectively. The
majority of commission revenue in both periods was attributable to VDM
Specialists, which had commissions from specialist activities of EUR29.6
million and EUR30.8 million in 2000 and 2001, respectively. The remaining
commissions were attributable to Van der Moolen Effecten and Van der Moolen
Obligaties, which together decreased by EUR1.7 million, from EUR9.4 million
in 2000 to EUR7.7 million in 2001. Notwithstanding the results of 2001
compared to 2000, the relative importance to our results of operations of
commission revenues has been decreasing for a number of years, and we
expect this trend will continue in future periods. This expectation is due
in part to the elimination of the specialist function on Euronext Amsterdam
in October 2001, as a result of which Van der Moolen Effecten and Van der
Moolen Obligaties lost the opportunity to capture commission revenues from
specialist activities. Van der Moolen Obligaties has been able to replace
specialist commissions by contracting directly with its counterparties, but
Van der Moolen Effecten will henceforth receive no commission revenue.
- -- Proprietary trading activities. Our revenues from proprietary trading
activities decreased by EUR58.7 million, or 47.5%, from EUR123.7 million
for the year ended December 31, 2000 to EUR65.0 million for the year ended
December 31, 2001. This was principally the result of a EUR44.8 million, or
60.6%, decline in revenues in Germany attributable to Van der Moolen
Trading's proprietary trading activities, which fell from EUR73.9 million
in 2000 to EUR29.1 million in 2001. This decrease reflected a fall in
trading volume on the German exchanges. In the Netherlands, revenues from
Van der Moolen Effecten's proprietary trading operations decreased by
EUR6.2 million, or 25.0%, from EUR24.8 million in 2000 to EUR18.6 million
in 2001, primarily as a result of decreased trading volumes on the
exchanges on which it operates. Over the period, revenues attributable to
Van der Moolen U.K.'s operations increased from EUR6.7 million to EUR10.0
million as a result of starting up market making activities in
less-than-wholesale size bonds, realizing EUR2.0 million revenues from the
start up date until December 31, 2001. Van der Moolen Opties in the
Netherlands realized a trading loss of EUR3.5 million during 2001, a
decrease of EUR8.0 million compared to 2000. This resulted from weak
trading conditions in the Dutch option market, as well as the disruption
associated with the beginning of the transition from open-outcry to
screen-based trading in the fourth quarter of the year.
- -- Net interest income from stock lending activities. Net interest income from
stock lending activities declined by EUR1.2 million, or 19.0%, from EUR6.3
million for the year ended December 31, 2000 to EUR5.1 million for the year
ended December 31, 2001. All of the net interest income resulted from the
activities of VDM Specialists, which experienced a decline in demand for
stock lending activities as a result of continuing market volatility during
2001.
57
Expenses
Our expenses increased by EUR0.7 million, or 0.3%, from EUR203.4
million for the year ended December 31, 2000 to EUR204.1 million for
the year ended December 31, 2001. VDM Specialists, accounted for 52.6%
of our expenses for the year ended December 31, 2001, compared with
48.1% in 2000.
- -- Exchange, clearing and brokerage fees. Exchange, clearing and brokerage
fees increased by EUR4.4 million, or 15.4%, from EUR28.5 million in 2000 to
EUR32.9 million in 2001. The increase primarily reflected the expansion of
the scope of our business through acquisitions made in the United States
during the course of 2000 and 2001, the creation of a bond trading
operation in the United Kingdom and increased arbitrage activity compared
to 2000.
- -- Employee compensation and benefits. Employee compensation and benefits
decreased by EUR25.5 million, or 20.6%, from EUR123.8 million in 2000 to
EUR98.3 million in 2001. The substantial majority of this decrease was due
to the decline in revenue-based incentive compensation accrued on behalf of
our traders at VDM Specialists, Van der Moolen Trading and Van der Moolen
Effecten that accompanied the decline in revenues from one period to the
next. The decrease was partially offset by the addition of new employees
following the acquisition of Fagenson, Frankel & Streicher by VDM
Specialists in June 2000, the acquisition of Cohen, Duffy, McGowan in July
2001, the acquisition of Scavone and Stern & Kennedy in August 2001, and
the commencement of bond trading activity in the United Kingdom. The
variable component of our personnel expenses, which comprises bonus
payments to our personnel and is correlated with the development of our
revenues, decreased to EUR43.0 million, or to 12.9% of our total revenues
for the year ended December 31, 2001, from EUR87.0 million, or 19.3% of our
total revenues for the year ended December 31, 2000. Non-cash expenses
related to our employee stock option plan were EUR4.0 million and EUR5.0
million in 2000 and 2001, respectively.
- -- Lease of exchange memberships. The cost of leasing exchange memberships
increased by EUR5.2 million, or 57.8%, from EUR9.0 million in 2000 to
EUR14.2 million in 2001. This increase was mainly due to the increase in
the number of New York Stock Exchange memberships leased by VDM Specialists
from related and third parties, as well as an increase in the average
annual leasing cost of a membership. The increase in the number of New York
Stock Exchange memberships was mainly due to acquisitions made in 2000 and
2001. In addition, the increase in the lease of exchange memberships
reflected the cost of leases of American Stock Exchange memberships as a
result of the acquisition of Cohen, Duffy, McGowan.
- -- Information and communication. Information and communication expenses
increased by EUR0.8 million, or 15.1%, from EUR5.3 million in 2000 to
EUR6.1 million in 2001. This increase was the result of additional
communication, data retrieval and information services utilized due to the
growth of our business. It was also the result of the rising cost of our
electronic trading infrastructure in Europe, especially as a result of the
creation of remote equity trading activities in London and Amsterdam, and
investment in back office systems in Amsterdam.
- -- General and administrative expenses. General and administrative expenses
increased by EUR10.7 million, or 55.7%, from EUR19.2 million in 2000 to
EUR29.9 million in 2001, principally as a result of our three acquisitions
in 2001, the acquisitions of Fagenson, Frankel & Streicher in June 2000,
costs related to the commencement of bond trading in the United Kingdom and
expenses related to the listing of our ADSs on the New York Stock Exchange
in October 2001.
58
- -- Depreciation and amortization. Depreciation and amortization increased by
EUR5.1 million, or 29.0%, from EUR17.6 million in 2000 to EUR22.7 million
in 2001. Our expenses for 2001 included a write-off of goodwill amounting
to EUR3.0 million following the sale of Sputz AG, an equity investment that
was sold during 2001. The remaining increase primarily resulted from the
amortization of specialist stocklists resulting from the acquisitions we
made in 2000 and 2001 and of goodwill following the acquisition made in
2000.
Income from associates
Our income from associates declined from income of EUR0.2 million
in 2000 to a loss of EUR0.1 million in 2001.
Gain on disposal of long-term investments and associates
For the year ended December 31, 2001, gain on disposal of
long-term investments and associates was EUR29.8 million, compared
with EUR10.9 million for the same period in 2000. The gain in 2001
reflected the sale of our 1.8% interest in Euronext Amsterdam. The
gain in 2000 reflected the sale of our 5.0% interest in Kas Associatie
and our interest in the London Stock Exchange Plc.
Income before income taxes and minority interest
As a result of the foregoing factors, our income before income
taxes and minority interests decreased by 38.0% during the period,
from EUR253.6 million for the year ended December 31, 2000 to EUR157.2
million for the year ended December 31, 2001.
Provision for income taxes
Provision for income taxes decreased by 53.7% during the period,
from EUR86.0 million in 2000 to EUR39.8 million in 2001. The provision
for income taxes as a percentage of income before taxes and minority
interests less minority interests, decreased from 40.9% for the year
ended December 31, 2000 to 30.2% for the year ended December 31, 2001.
This decrease was a result of non-taxable revenues following the sale
of our 1.8% investment in Euronext Amsterdam, the decline in German
income tax from 45.0% in 2000 to 40.0% in 2001 and our having used our
Dutch finance vehicle in a tax efficient manner in connection with
financing undertaken by the group.
Minority interest
Minority interest reflects that portion of our income before
income taxes and minority interests that is contributed to the
minority shareholders of our United States subsidiaries, VDM
Specialists and Cohen, Duffy, McGowan, almost all of whom are active
traders in these businesses. Prior to the fourth quarter of 2001, it
also included the 17% interest in Van der Moolen Options USA that was
held by active partners in that firm, which we purchased from them
during the fourth quarter. See "-- Basis of preparation of the
consolidated financial statements; Changes in group composition".
Income related to minority interest decreased by EUR18.1 million, or
41.7%, during the period from EUR43.4 million for the year ended
December 31, 2000 to EUR25.3 million for the year ended December 31,
2001. This was mainly due to the decrease of results of VDM
Specialists and the pretax loss realized by our 51%-owned subsidiary,
Cohen, Duffy, McGowan.
Net income
As a result of the foregoing factors, our net income decreased by
EUR32.1 million, or 25.8%, in 2001, declining from EUR124.2 million
for the year ended December 31, 2000 to EUR92.1 million for the year
ended December 31, 2001.
(B) Liquidity and Capital Resources
We have financed our businesses primarily through capital
contributions from our shareholders, the members or shareholders of
our subsidiaries, the issuance of subordinated debt and short-term
borrowings. As of December 31, 2002, we had EUR3.0 billion in assets,
EUR334.0 million of which consisted of cash and cash equivalents. As
59
of December 31, 2001, we had EUR4.1 billion in assets, EUR292.3
million of which consisted of cash and cash equivalents.
Our subsidiaries in the United States, VDM Specialists, Van der Moolen Options
USA and Cohen, Duffy, McGowan are registered broker-dealers that are subject to
a variety of regulatory requirements intended to ensure the general financial
soundness and liquidity of broker-dealers and the maintenance of minimum levels
of net capital, as defined in SEC Rule 15c3-1, as well as in the case of VDM
Specialists, net liquid assets. As of December 31, 2002, VDM Specialists', Van
der Moolen Options USA's and Cohen, Duffy, McGowan's net capital, as defined,
was $251.9 million (EUR240.2 million), $4.0 million (EUR3.8 million) and $8.6
million (EUR8.2 million), respectively, in excess of their respective net
capital requirements, and VDM Specialists' net liquid assets were approximately
$7.8 million (EUR7.4 million) in excess of net liquid assets required. See
"Information on the Company -- Regulation -- The United States". Cohen, Duffy,
McGowan is also subject to the requirements of the American Stock Exchange. Its
excess net capital under the American Stock Exchange requirements as of December
31, 2002 was $2.6 million (EUR2.5 million).
Our subsidiary Kenny & Co. is also subject to net capital
requirements and, as of December 31, 2002, had net capital that
exceeded its net capital requirement at that date.
Our subsidiaries in Europe are also subject to capital
requirements. As of December 31, 2002, all entities had net capital
that exceeded their respective net capital requirement at that date.
New York Stock Exchange Rule 326(c), which is applicable to VDM
Specialists, also prohibits a broker-dealer from repaying subordinated
borrowings, paying cash dividends, making loans to any parent,
affiliates or employees, or otherwise entering into transactions which
would result in a reduction of its total net capital to less than 150%
of its required minimum capital. Moreover, broker-dealers, including
VDM Specialists and Van der Moolen Options USA, are required to notify
the SEC prior to repaying subordinated borrowings, paying dividends
and making loans to any parent, affiliate or employee, or otherwise
entering into transactions which, if executed, would result in a
reduction of 30% or more of their excess net capital (net capital less
minimum requirement). The SEC has the ability to prohibit or restrict
such transactions if the result is detrimental to the financial
integrity of the broker-dealer.
Our indebtedness
Van der Moolen Holding N.V.
As of June 11, 2003 we had the following loan agreements. Under
most of these agreements, we are liable jointly and severally with
some or all of our subsidiaries (other than VDM Specialists).
- -- Four term loans from four corporate lenders in the aggregate amount of
EUR26.4 million, of which EUR6.9 million is of a long-term nature. Interest
rates on these loans range from 2.81% to 6.25% per annum, and maturities
range from June 12, 2003 to January 28, 2010.
- -- A multi-purpose revolving floating interest rate facility for up to a
maximum of EUR75.0 million from ING Bank N.V. No amounts are outstanding
under this facility.
- -- A multi-purpose revolving floating interest rate facility for up to a
maximum of EUR11.4 million from ING Bank N.V. An amount of EUR 11 million
is outstanding under this facility, bearing an annual interest rate of
2.749% and maturing on June 26, 2003.
- -- A multi-purpose revolving floating interest rate facility for up to a
maximum of EUR50.0 million from Fortis Bank N.V. An amount of EUR8.0
million is outstanding under this facility, bearing an interest rate of
2.67% per annum and maturing on June 12, 2003.
60
- -- A multi-purpose revolving floating interest rate facility for up to a
maximum of EUR15.0 million from Delta Lloyd Bank N.V. No amounts are
outstanding under this facility.
- -- A 5.66% term loan in the amount of EUR22.7 million from ING Bank Mezzanine
Fonds B.V., in respect of which EUR10.0 million remains outstanding. The
loan is repayable in annual installments, the last of which is due on
December 14, 2005.
Van der Moolen Holding N.V. and its Dutch subsidiaries also have
several uncommitted overdraft facilities to finance their respective
trading activities.
We have also provided an irrevocable and unconditional guarantee
in the maximum amount of $30.0 million (EUR28.6 million) in respect of
the payment of all liabilities of Van der Moolen U.K. Limited incurred
in connection with the conduct of its business. In addition, Van der
Moolen U.K. Limited clears and settles its trades in the United
Kingdom through two banks. We have agreed to provide a guarantee in
respect of Van der Moolen U.K.'s obligations under these arrangements
in an aggregate amount not to exceed $5.0 million (EUR4.7 million) at
any one time.
We are also liable for the liabilities of our wholly owned Dutch
subsidiaries, which arise out of legal acts by these subsidiaries,
pursuant to the statement, which we have issued in accordance with
section 2:403 of the Dutch Civil Code. Additionally, Van der Moolen
Holding N.V. has extended financial support for a minimum period of
one year to one of its 100%-owned foreign subsidiaries.
Furthermore, Van der Moolen Holding N.V. has issued guarantees to
third parties for a total amount of $10 million (EUR9.5 million).
These guarantees are issued in relation to loans granted to members of
VDM Specialists, LLC in order to enable them to acquire seats on the
New York Stock Exchange.
VDM Specialists
VDM Specialists has entered into a subordinated note purchase
agreement pursuant to which notes were issued in the aggregate
principal amount of $20.0 million (EUR19.1 million). These notes
mature on December 31, 2005 and bear interest at an annual rate of
8.0% and are repayable in four equal annual installments beginning
December 31, 2002. As of December 31, 2002 an amount of $15.0 million
(EUR14.3 million) is still outstanding under this agreement. On August
3, 2001, VDM Specialists issued subordinated notes in the aggregate
principal amount of $130.0 million (EUR124.0 million). A portion of
the proceeds of this issuance was used to retire part of VDM
Specialists' then-outstanding subordinated notes. Of the $130.0
million issued, $65.0 million (EUR62.0 million) matures on August 3,
2008, bears interest at an annual rate of 7.54% and is payable in
three installments beginning on August 3, 2006, and $65.0 million
(EUR62.0 million) matures on August 3, 2011, bears interest at an
annual rate of 7.80% and is payable in five annual installments
beginning on August 3, 2007. The purpose of this debt is to enable VDM
Specialists to satisfy applicable New York Stock Exchange net capital
and net liquid assets requirements.
On March 1, 2002, VDM Specialists issued subordinated notes in the
aggregate principal amount of $40.0 million (EUR38.1 million). These
notes mature on March 1, 2008, bear interest at an annual rate of
7.11% and are payable in four annual installments beginning on March
1, 2005. The purpose of this debt is to enable VDM Specialists to
satisfy New York Stock Exchange net capital and net liquid assets
requirements following the acquisition of Lyden, Dolan, Nick.
In May and June 2003, VDM Specialists sold three of its four
interest rate swaps for proceeds totalling $19.1 million. Two of the
swaps matured in 2008 and the remaining swap matured in 2011. VDM
Specialists may enter into replacement swaps or purchase similar
instruments in the future depending on interest rate conditions and
asset/liability management considerations.
61
In connection with the $15 million outstanding under the
subordinated note purchase agreement described above, VDM Specialists
entered into an interest rate swap agreement to convert its fixed rate
subordinated borrowings into a floating rate obligation based on the
U.S. dollar London Inter-Bank Offer Rate.
VDM Specialists also has subordinated liabilities amounting to
$22.0 million (EUR21.0million) as of December 31, 2002, that are
related to exchange memberships contributed at market value by the
members of VDM Specialists.
VDM Specialists has issued 325(e) guarantees to the New York Stock
Exchange in the total amount of $ 5.6 million (EUR5.3 million). Such
guarantee, in the amount of $ 0.1 million each, shall be available for
amounts due to the New York Stock Exchange and losses due to other
members or member organizations arising directly from the closing out
of securities contracts under New York Stock Exchange rules.
VDM Specialists has issued guarantees to third parties in the
amount of $ 1.0 million (EUR0.9 million) in relation to rental
agreements for New York Stock Exchange seats.
Summary of indebtedness
As of June 11, 2003, the scheduled maturities of our obligations,
assuming any available rollover provisions were inapplicable, were:
1<3 3<5
Total <1 year years years
(1) (1) (1) (1) >5 years (1)
------ ------- -------- -------- ---------------
(EUR millions)
Indebtedness
Long-term debt EUR6.9 EUR4.8 EUR0.6 EUR0.6 EUR0.9
Subordinated liabilities
(2) 186.4 8.0 35.4 72.8 70.3
Operating leases 11.8 1.9 3.8 2.9 3.2
Notes:
(1) Amounts stated are principal amounts. Principal amounts in dollars are
translated into euro at the exchange rate of EUR1.00 = $1.0485.
(2) Subordinated liabilities exclude memberships in exchanges, contributed by
members, at market value.
Capital Expenditure
We have financed, and expect to continue to finance, our capital
expenditure requirements primarily through the issuance of new share
capital in the form of common shares and financing preferred shares,
as well as from external financing and working capital. Our capital
expenditure was EUR66.0 million, EUR159.0 million and EUR89.1 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
Our capital expenditure in 2002 mainly reflected the acquisition of
Lyden, Dolan, Nick, while in 2001 it mainly reflected the acquisitions
of our interests in Cohen, Duffy, McGowan, Scavone and Stern &
Kennedy. Capital expenditure in 2000 reflected our acquisition of
Fagenson, as described above under "-- Basis of preparation of the
consolidated financial statements; Changes in group composition".
We currently anticipate that our available cash resources and
credit facilities will be sufficient to meet our anticipated working
capital, regulatory capital, dividend payments and capital expenditure
requirements through the end of 2003. We may, however, need to raise
additional funds, among other things to increase the capital available
to us for our inventory positions, support more rapid expansion or
respond to unanticipated capital requirements.
62
Issuer Purchases of Equity Securities
The following table sets forth information relating to the
purchase by us of 732,182 issued and outstanding common shares of Van
der Moolen Holding N.V. as of June 11, 2003. The common shares were
purchased pursuant to a plan, which we announced on February 19, 2003,
which we refer to as the Plan. The Plan has no specific expiry date.
The maximum number of common shares that may be purchased under the
Plan corresponds to the number of outstanding options in respect of
our common shares distributed pursuant to our equity stock option
plan. The maximum number of common shares that may yet be purchased
under the Plan as of June 11, 2003 is 1,398,423.
Maximum
number of Maximum
common number of
Number of shares common
Total common that may shares that
number of Average shares be may yet be
Period ended common price paid purchased purchased purchased
shares per common as part of under the under the
purchased share the Plan Plan Plan
- ----------------- ----------- ----------- ----------- ----------- -------------
February 28, 2003 41,717 11.88 41,717 2,304,305 2,262,588
March 31, 2003 425,783 8.96 425,783 2,157,105 1,689,605
April 30, 2003 179,917 9.21 179,917 2,157,105 1,509,688
May 31, 2003 84,765 8.94 84,765 2,130,605 1,398,423
June 11, 2003 - - - 2,130,605 1,398,423
----------- ----------- -----------
Total as of June
11, 2003 732,182 9.19 732,182 2,130,605 1,398,423
=========== =========== =========== =========== =============
63
Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
We have a two-tier board structure consisting of a management
board (directie, which manages our business, and a supervisory board
(raad van commissarissen), which supervises and advises our management
board.
(A) Directors and Senior Management
Supervisory Board
Our supervisory board must approve certain resolutions of our
management board, which are specified in our articles of association
and are set forth under "Management Board" below. In addition, our
supervisory board may give our management board written notice of
other corporate actions that it wishes to approve. In fulfilling their
duties, all members of our supervisory board must serve our best
interests.
Our articles of association provide that our supervisory board
must have at least three members. Under Dutch law, supervisory board
members cannot serve as members of our management board.
Our supervisory board members are appointed by the general meeting
of shareholders for terms ending on the date of the general meeting of
shareholders that is held in the fourth year after the date of their
appointment. Our supervisory board members retire according to a
rotation plan that the supervisory board establishes, and they may be
reappointed. Our general meeting of shareholders appoints the members
of our supervisory board from binding nominations made by our
supervisory board. There must be at least two nominees for each
vacancy on our supervisory board. The general meeting of shareholders
can override these binding nominations by a vote of two-thirds of the
votes cast. This vote must represent more than one-half of our issued
share capital outstanding at the time of the vote. If our supervisory
board does not nominate anyone for a specific position on the
supervisory board within 30 days after a vacancy has occurred, our
general meeting of shareholders can appoint a replacement by an
absolute majority of votes.
Our supervisory board appoints its own chairman and a deputy
chairman. Passing supervisory board decisions requires an absolute
majority of the votes cast at a meeting of our supervisory board in
which the majority of its members is present or represented. An
absolute majority means a majority of the votes cast at such a
meeting. The chairman of our supervisory board, two of its members and
our management board may request a meeting of our supervisory board.
A supervisory board member must retire at the annual general
meeting of shareholders in the year in which he turns 72. A
supervisory board member can be suspended or dismissed at any time by
a resolution of our general meeting of shareholders passed by
two-thirds of the votes cast. This vote must represent more than
one-half of our issued share capital outstanding at the time of the
vote. A simple majority of votes can suspend or dismiss a supervisory
board member if the supervisory board proposes the measure. Within
three months after a suspension, our general meeting of shareholders
must either dismiss the supervisory director or terminate the
suspension.
The general meeting of shareholders determines the supervisory
board members' compensation. We pay our supervisory board members in
cash and will reimburse them for their expenses. See "--
Compensation".
Our supervisory board consists of five members. Our supervisory
board members are:
Name Age Position Expiry of term
- ----------------------------------------- --------- ----------- -----------------
Syb Bergsma 66 Chairman 2004
Jan Aalberts 63 Member 2006
Gerrit H. de Marez Oyens 61 Member 2006
64
Name Age Position Expiry of term
- ----------------------------------------- --------- ----------- -----------------
Gerard L. van den Broek 61 Member 2004
Rudolf G.C. van der Brink 55 Member 2006
Syb Bergsma has served as a member of our supervisory board since
September 27, 1996. He holds a Ph.D. in Economics from the University
of Amsterdam. Mr. Bergsma has been a professor of financial management
at the University of Amsterdam since January 1997. Prior to that, he
was executive vice president for financial affairs at Akzo Nobel N.V.,
a chemical and pharmaceutical manufacturer. He is also a member of the
supervisory boards of ASM Lithography Holding N.V., a semiconductor
equipment manufacturer, European Assets Trust N.V., a closed-end
mutual fund business, UPM Holding B.V., a venture capital fund, and
Generali Verzekeringsgroep N.V., a property/casualty and life insurer.
He serves on the advisory board of Ernst & Young N.V.
Jan Aalberts has served as a member of our supervisory board since
April 9, 1998. He is president and chief executive officer of Aalberts
Industries N.V., a machine components manufacturer. He has been a
member of supervisory boards of several companies in the Netherlands,
and is currently a member of the supervisory board of NeSBIC Stork
N.V., an industrial supplier of machine components, systems and
services for various industries, and Boskalis Westminster N.V., a
dredging company.
Gerrit H. de Marez Oyens has served as a member of our supervisory
board since April 9, 1998. He was secretary general of the
International Federation of Stock Exchanges in Paris from 1990 to
February 2001. He holds a degree in law from the University of Leiden.
From 1975 to 1990, Mr. de Marez Oyens worked for Amsterdam Exchanges
N.V., becoming secretary general in 1984. Mr. De Marez Oyens is
chairman of the supervisory board of Bank Oyens & Van Eeghen N.V. in
Amsterdam and member of the supervisory board of the Amsterdam Power
Exchange Spot Market B.V. in Amsterdam.
Gerard L. van den Broek has been a member of our supervisory board
since April 3, 1996. He holds a degree in law from the Erasmus
University of Rotterdam. After working as a member of the management
team of Nederlandse Credietverzekering Maatschappij until 1978, he
subsequently joined in 1982 Spencer Stuart Management Consultants, a
management consultancy and executive recruiting firm, where he was a
partner until May 2001. He also serves on the supervisory board of
Alusuisse Holdings Nederland B.V., an aluminum refiner and component
manufacturer.
Rudolph G.C. van der Brink has been a member of our supervisory
board since July 24, 2002. He holds a Ph.D. in Economics from the
University of Amsterdam. Mr. Van der Brink is a professor of Monetary
Economy and Financial Institutions at the University of Amsterdam and
is chief economic advisor to the management board of ABN AMRO Bank
N.V. From 1976 to 2002, Mr. Van der Brink worked for ABN AMRO Bank
N.V., becoming a member of the Executive Board in 1997. He is also a
member of the supervisory boards of Polynorm N.V., Samas-Groep N.V.,
Oranje-Nassau Groep B.V., Legal & General Nederland Levensverzekering
Maatschappij N.V. and Nederlandse Waterschapsbank N.V. Furthermore, he
is the chairman of the supervisory board of Center Parcs Europe N.V.,
Arbo Unie B.V. and University of Nijenrode.
The business address of each supervisory board member is the
address of our principal executive office in Amsterdam, the
Netherlands.
65
Management Board
Our management board manages our general affairs and business
under the supervision of our supervisory board, and is authorized to
represent us. Under our articles of association, the management board
requires prior approval of the supervisory board for resolutions to:
(a) issue and acquire shares and debt instruments issued by us or debt
instruments issued by a limited partnership or a general partnership of
which we are the fully liable general partner;
(b) cooperate with the issuance of depositary receipts for shares;
(c) apply for the listing or withdrawal of the listing of the instruments
referred to in (a) and (b) above on the official list of any stock
exchange;
(d) enter into or terminate a continuing co-operation with another legal person
or company or as a fully liable partner in a limited partnership or a
general partnership, if such co-operation or the termination thereof is of
far-reaching significance to us;
(e) acquire, or materially increase or decrease the value of, a participation
in the share capital of another company where the value of such
participation equals or exceeds one-tenth of our issued share capital and
reserves (as stated on our balance sheet and the explanatory notes
thereto), or cause a dependent company to do the same;
(f) enter into any investment requiring an amount equal to or exceeding
one-tenth of our issued share capital and reserves (as stated on our
balance sheet and the explanatory notes thereto);
(g) propose to amend our articles of association;
(h) propose to dissolve Van der Moolen Holding N.V.;
(i) file for bankruptcy or a suspension of payments;
(j) terminate the employment of a substantial number of our employees or those
of a dependent company at the same time or within a short period of time;
(k) effect a far-reaching change to the employment conditions of a substantial
number of our employees or those of a dependent company;
(l) propose to decrease our issued share capital;
(m) propose to merge or demerge in accordance with Dutch law; and
(n) issue shares of a company in which we participate to third parties, or
restrict or exclude the pre-emptive rights of the existing shareholders of
that company in connection with such issuance.
Under Dutch law, in certain circumstances, management board actions may require
the approval of the general meeting of shareholders. See "Additional Information
- -- Memorandum and Articles of Association".
Our management board must have two or more members. Our
supervisory board determines the size of our management board. Our
general meeting of shareholders appoints the members of our management
board from binding nominations made by our supervisory board. There
must be at least two nominees for each vacancy on our management
board. The general meeting of shareholders can override these binding
nominations by a vote of two-thirds of the votes cast. This vote must
represent more than one-half of our issued share capital outstanding
at the time of the vote. If our supervisory board does not nominate
anyone for a specific position on the management board within 30 days
after a vacancy has occurred, our general meeting of shareholders can
appoint a replacement by an absolute majority of votes.
66
Our management board shall establish rules governing its internal
organization. Our supervisory board must approve the adoption of, and
any changes to, these rules. Our management board may, subject to
approval from our supervisory board, charge each member of the
management board with particular duties.
A management board member can be suspended or dismissed by a
resolution of two-thirds of the votes cast at a shareholders' meeting.
This vote must represent more than one-half of our issued share
capital outstanding at the time of the vote. An absolute majority of
votes can suspend or dismiss a management board member if the
supervisory board proposes the measure. Our supervisory board may also
suspend (but not dismiss) a member of our management board. If, within
three months after a suspension, our general meeting of shareholders
has not decided to either dismiss the management board member or
terminate the suspension, the suspension shall terminate
automatically.
Our supervisory board determines the compensation and benefits of
the members of our management board.
The business address of each member of our management board is the
address of our principal executive office in Amsterdam, the
Netherlands.
The members of our management board are:
Name Age Position
- ------------------------------------------- ------- ---------------------------------
Friedrich M. J. Bottcher 56 Chairman of the management board
Frank F. Dorjee 42 Chief financial officer
James P. Cleaver, Jr. 68 Member
Casper F. Rondeltap. 47 Member
Friedrich M. J. Bottcher has been the chairman of our management
board since January 2000, having been a member of the management board
since January 1997. Prior to that, he was a member of the management
boards of the Amsterdam branch of Barclays Bank International Ltd. and
Barclays Kol & Co N.V. and the management board of Friesch-Groningsche
Hypotheekbank N.V. He was also the chairman of the management board of
CVB Bank N.V. until October 1992. From 1992 to 1996, Mr. Bottcher was
deputy chairman of SNS Bank Nederland N.V. He currently serves as a
member of the supervisory board of Financiele Diensten Amsterdam B.V.
Frank F. Dorjee joined us on October 15, 2000, was appointed chief
financial officer on January 1, 2001 and became a managing director
with effect from April 11, 2001. He holds masters degrees from the
University of Amsterdam in business economics, tax economics and tax
law. He is a certified public accountant and became a partner of KPMG
Accountants NV in 1995. He currently serves as a non-executive member
of the board of Prebon Group, Ltd.
James P. Cleaver Jr. was the managing partner of the New York
Stock Exchange specialist Lawrence, O'Donnell, Marcus LLC, which we
acquired in 1998. He was appointed chairman of the management
committee of VDM Specialists when it was formed through the merger of
Lawrence, O'Donnell, Marcus with other New York Stock Exchange
specialist firms we acquired and holds a 1% partnership interest in
VDM Specialists. He became a managing director of Van der Moolen
Holding N.V. on April 10, 2002.
Casper F. Rondeltap has been a member of the management committee
of VDM Specialists since 2000. Prior to that he acted as a specialist
on the Amsterdam Exchanges from 1983 up to 1997 and was the Director
of Investors Relations of Van der Moolen during 1997 up to 2000. He
became a member of the Management Board of Van der Moolen Holding N.V.
on April 9, 2003.
67
(B) Compensation
Supervisory Board
Each of our supervisory board members receives a yearly fee and
supervisory committee members (including members of the audit
committee and the remuneration & nominating committee) will receive an
additional EUR1,500 per convened and attended meeting as from April 9, 2003.
Additionally, each supervisory board member is reimbursed for expenses
in connection with attendance at, and travel to and from, supervisory
board meetings. In accordance with the employment agreements to which
some of our supervisory board members are a party, compensation must
be paid to the organizations for which our supervisory board members
work, rather than to the members themselves. The total amount paid to
our supervisory board during 2002, including to their employers, as
the case may be, and as reported to the Dutch tax authorities, was
approximately EUR0.14 million.
No loans are outstanding to members of our supervisory board.
Management Board
The aggregate annual base salary compensation that our management
board members received during 2002 was EUR1.0 million. The members of
our management board are eligible to participate in our Equity Stock
Option Plan. In accordance with the terms and conditions of their
employment contracts, management board members are eligible for a
bonus. Bonus payments depend on our financial results and individual
performance. For the year ended December 31, 2002, the aggregate
amount of bonuses paid to or accrued for our management board members
was EUR1.4 million. Furthermore, Mr. Cleaver received EUR2.1 million
compensation following his partnership interest in VDM Specialists.
This amount was paid during the year 2002.
For the year ended December 31, 2002, we set aside EUR76,522 for
Mr. Bottcher and EUR37,821 for Mr. Dorjee to provide for retirement
benefits. No loans are outstanding to members of our management board.
Share Options Held by Members of our Management Board
The following table provides certain information regarding our
common shares and options in respect thereof held by members of our
management board as of June 11, 2003.
Total number
of common Options Expiration Exercise
Name of Holder shares held(1) date(s) price(s)(1)
- ---------------------------- ------------ ----------- ----------- -----------------
Friedrich M.J. Bottcher -- 45,000 2003 18.17
45,000 2004 16.17
45,000 2005 30.18
45,000 2006 31.45
25,000 2007 21.00
Frank F. Dorjee -- 7,650 2004 33.81
40,000 2005 35.22
25,000 2007 21.00
James P. Cleaver, Jr. -- 4,800 2004 16.17
6,000 2005 30.18
9,000 2006 27.30
12,000 2006 31.45
68
Total number
of common Options Expiration Exercise
Name of Holder shares held(1) date(s) price(s)(1)
- ---------------------------- ------------ ----------- ----------- -----------------
5,000 2007 21.00
Casper F. Rondeltap. -- 19,000 2005 30.18
3,000 2006 27.30
23,000 2006 31.45
------------ -----------
Total -- 359,450
============ ===========
Note:
(1) Exercise prices have been adjusted for the three-for-one share split that
occurred on May 1, 2001. Each option is exercisable into one common share.
None of the members of our supervisory board hold any options in
respect of our shares. For further information regarding stock
options, including the accounting impact and vesting of these options,
see note 19 to our consolidated financial statements included
elsewhere in this annual report. See "-- Share Ownership -- Equity
Stock Option Plan" for a discussion of our employee share option plan.
(C) Board Practices
Both Mr. Bottcher and Mr. Dorjee have entered into employment
contracts with Van der Moolen Holding N.V. whereby, under certain
circumstances, they each receive fixed compensation in the event their
employment terminates. Friedrich Bottcher is entitled to EUR1,181,719
in the event his termination results from a change in control of Van
der Moolen Holding N.V. and EUR945,375 in the event his termination
results from a dispute with the supervisory board. Frank Dorjee is
entitled to receive EUR328,990 in the event his termination results
from a change in control of Van der Moolen Holding N.V.
No other members of our supervisory board or management board are
entitled to any benefits (apart from pension or similar retirement
benefits as described under "-- Compensation -- Management Board")
upon termination of their employment by Van der Moolen Holding N.V.
Audit Committee
In accordance with the charter established by the supervisory
board of Van der Moolen Holding N.V., the audit committee must be
comprised of at least two members. As of June 11, 2003, the audit
committee was comprised of three members: Dolf van den Brink
(chairman); Syb Bergsma; and Gerrit de Marez Oyens.
The audit committee's tasks as set out in the charter are to
assist the supervisory board in fulfilling its responsibilities to
oversee: (i) the integrity of our financial statements; (ii) the
reporting process; (iii) the system of internal business controls and
risk management; (iv) the internal and external audit process; (v) the
internal and external auditor's qualifications, independence and
performance; and (vi) our process for monitoring compliance with laws
and regulations.
Remuneration & Nominating Committee
The remuneration & nominating committee must have at least two members. As
of June 11, 2003, the committee consisted of Syb Bergsma (chairman) and Gerrit
van den Broek. The remuneration & nominating committee's tasks are to assist the
supervisory board: (i) to determine the terms of engagement and remuneration of
the members of the management board (including the Chairman); and (ii) in
selecting candidates for any suggested position in the management board and the
supervisory board.
69
The members of the audit committee and the remuneration &
nominating committee are all members of the supervisory board. None of
the members of either committee has any personal financial interest,
other than as shareholder, in any decision by a committee and/or the
supervisory board. They have no conflicts of interest arising from
cross-directorships with the management board nor from being involved
in our day-to-day business.
Employees
The following table provides information about the number of
employees who worked for us and each of our principal subsidiaries as
of December 31, 2000, 2001 and 2002.
As of December 31,
-----------------------------------
Company 2000 2001 2002
- --------------------------------------------------- ----- ----------- ---------------
Van der Moolen Holding 27 26 27
VDM Specialists 212 288 300
Cohen, Duffy, McGowan -- 37 36
Van der Moolen Options USA 50 50 30
Van der Moolen Effecten 34 27 25
Van der Moolen Trading 30 28 27
Van der Moolen Opties Amsterdam 19 9 2
Van der Moolen U.K (1) 10 40 33
Van der Moolen Equities Ltd(1) -- -- 13
Van der Moolen Obligaties 4 3 3
Other -- -- 5
----- ----------- ---------------
Total 386 508 501
===== =========== ===============
Note:
1) The UK activities have been split during the year ended December 31, 2002.
Prior year data has not been adjusted.
The following table provides information about the number of the
group's employees by function as of December 31, 2000, 2001 and 2002.
As of December 31,
----------------------------------------
Function 2000 2001 2002
- -------------------------------------------- ----------- ----------- --------------
Traders 271 361 358
Administration and support 68 96 91
Operating company management 17 18 14
Holding company management and staff 16 17 21
Technology support 14 16 17
Our employees are not covered by a collective bargaining
agreement. We have never experienced an employment-related work
stoppage. We consider our employee relations to be good. However, in
March 2003, nine traders working at the trading desk of Van der Moolen
70
Effecten Specialist in Amsterdam left the firm. However, management
believes that their departure will not have a material affect on our
business, financial condition or operating results. See "Risk Factors
- - Risks Associated with the Company - If we lose the services of a
number of qualified personnel or cannot hire additional qualified
personnel, our businesses will be harmed".
(E) Share Ownership
With the exception of Gerard L. van den Broek, who holds 47,922
common shares, none of the members of our supervisory board or
management board hold any common shares or financing preferred shares
of Van der Moolen Holding N.V. See "-- Compensation -- Share Options
Held by Members of our Management Board" for information regarding the
ownership of options by members of our management board.
Equity Stock Option Plan
We have established a stock option plan with respect to our
management and employees. Under this plan, members of our management
board and other specified employees may be granted an option to
acquire a specified number of common shares. The exercise price for
all options issued and outstanding as of June 11, 2003 is between
EUR16.17 and EUR35.22. Each option is exercisable into one common
share.
On December 31, 2002, the number of unexercised outstanding
options held by our staff was 1,949,155. The total number of
unexercised outstanding options held by members of our management
board as a group on December 31, 2002 (including options held by Mr.
Rondeltap) was, on the same basis, 359,450.
The options we grant at present are immediately exercisable, with
the exception of some of the options granted to employees of Van der
Moolen U.K., which may not be exercised for a period of three years
from the date of grant. The exercise period of our options ranges from
four to ten years.
If employees cease to be employed by us, their unexercised options
are cancelled. Furthermore, any options exercised are subject to a
forfeiture period of three years during which the relevant employee
must remain employed with us or forfeit 80% of any benefits derived
from the exercise of the options.
New common shares may be issued or common shares may be
repurchased to meet the obligations arising from the exercise of
employee options. In 2002, the grant of new employee options was
limited to a maximum of 1% of our issued share capital on the date of
the grant, as compared to 2% in prior years.
In 2002, we granted options in respect of our common shares free
of payment, with the exception of options granted to Mr. Bottcher and
Mr. Dorjee, members of the management board. Share options granted to
each of these board members were granted for an option premium payable
to Van der Moolen Holding N.V. of EUR86,000. Share options granted to
Mr. Cleaver were granted free of payment. In previous years, all share
options were granted free of payment.
71
Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
(A) Major Shareholders
The following table sets forth certain information concerning the
beneficial ownership of our outstanding share capital, which is
comprised of our common shares, financing preferred A shares and
financing preferred B shares as of April 25, 2003 by:
- -- each shareholder who is known by us to beneficially own approximately 5% or
more of our outstanding share capital;
- -- each holder of financing preferred A and B shares; and
- -- our supervisory board and management board as a group.
Percentage of beneficial ownership is based on an aggregate of
38,431,304 shares outstanding (excluding 630,282 common shares
purchased by Van der Moolen Holding N.V. as of that date),
representing 42,606,280 votes, composed of 37,789,000 common shares,
251,000 financing preferred A shares and 391,304 financing preferred B
shares. The totals underlying these percentages comprise, for each
individual shareholder, both the total number of shares outstanding
and the number of shares underlying options held by the individual
shareholder.
Shares beneficially owned (1)
-----------------------------------------------
Voting
interest in
Number of Number of outstanding
Number of financing financing share
common preferred preferred capital (2)
Beneficial Owner shares A shares B shares (%)
- --------------------------------------- ----------- ---------- ---------- -------------
Fortis Utrecht N.V (3). 683,037 -- 326,087 7.3
Ducatus N.V (3) -- 251,000 43,478 5.2
PGGM (4). 998,554 -- 10,869 2.5
ABP (4). 804,150 -- 10,870 2.1
Shares held by our supervisory board
members as a group 47,922 -- -- 0.1
Shares held by our management board
members as a group -- -- -- --
Shares held by the public 35,255,337 -- -- 82.8
----------- ---------- ---------- -------------
Total excluding shares purchased by the
Company 37,789,000 251,000 391,304 100
Purchased shares held by the Company (5) 630,282 -- -- N/a
----------- ---------- ----------
Total (6) 38,419,282 251,000 391,304
=========== ========== ==========
72
Notes:
(1) Under Rule 13d-3 of the United States Securities Exchange Act of 1934, as
amended, more than one person may be deemed to beneficially own certain
common shares (if, for example, persons share the power to vote or the
power to dispose of the common shares). In addition, a person is deemed to
beneficially own common shares if the person has the right to acquire the
common shares (for example, upon exercise of an option) within 60 days of
the date as of which the information is provided. As a result, the
percentage of outstanding common shares of any person as shown in this
table does not necessarily reflect the person's actual ownership or voting
power with respect to the number of common shares actually outstanding.
These numbers include options held by shareholders because options are
exercisable on grant.
(2) Holders of our common shares, financing preferred A shares and financing
preferred B shares vote as a single class on all matters requiring a
shareholder vote. Each common share carries one vote and each financing
preferred A share and each financing preferred B share of EUR0.60 nominal
value each, carries 7.5 votes.
(3) Common share ownership interests for these shareholders are not publicly
available. Accordingly, the number is estimated by us, in part based on
notifications shareholders were required to make pursuant to Dutch law when
they reach a threshold interest of 5% and again at 10%. Our estimates are
based on information available to us as of April 25, 2003.
(4) All financing preferred B shares previously held by NIB Capital N.V. were
transferred to PGGM and ABP on November 15, 2002.
(5) As of April 25, 2003, the total number of treasury shares owned by Van der
Moolen Holding N.V. following the implementation of our share purchase plan
was 630,282. These shares do not have voting rights. See "Operating and
Financial Review and Prospects - Issuer Purchases of Equity Securities".
(6) As of June 11, 2003, the total number of common shares and the number of
financing preferred A shares and the number of financing preferred B shares
remained unchanged compared to April 25, 2003. The number of shares
purchased by us as of that date was 732,182.
None of our major shareholders has voting rights which differ from
those of our other shareholders.
As of April 25, 2003, 6,782,143 common shares were lodged on the
basis of which 6,782,143 ADSs were issued.
(B) Related Party Transactions
Between January 1, 2002 and June 11, 2003 (the latest practicable
date), members of our supervisory and management boards have not
entered into any transactions involving our shares.
VDM Specialists makes payments to certain of its members and
employees, including the members of its management committee, in
respect of seats in the New York Stock Exchange which they own of
record or of which they are the beneficial owner contributed for use
or leased to VDM Specialists. During 2002, VDM Specialists paid EUR6.9
million in respect of these seats.
Van der Moolen Holding N.V. has issued guarantees to third parties for a
total amount of EUR9.5 million ($ 10 million). These guarantees are issued in
relation to loans granted to members of VDM Specialists in order to acquire
seats on the New York Stock Exchange.
(C) Interest of Experts and Counsel
Not applicable.
73
Item 8: FINANCIAL INFORMATION
(A) Consolidated Statements and Other Financial Information
Reference is made to Item 18 for a list of all financial
statements filed as part of this annual report.
Regulatory Proceedings and Litigation
The New York Stock Exchange has commenced an investigation of
trading practices at several specialist firms, including VDM
Specialists. In a press release the New York Stock Exchange has stated
that its investigation focuses on possible violations of a
specialist's "negative obligation." This is the requirement to provide
an opportunity for public orders to be executed against each other
within the current market and without undue dealer intervention. VDM
Specialists has fully cooperated, and will continue to fully
cooperate, with the New York Stock Exchange.
As a result of the liquidation of the Amsterdam Stock Exchange
Association, or the Association, the predecessor of the former
Amsterdam Exchanges N.V., we may have liability in connection with an
ongoing lawsuit, known as the "Begaclaim", against the Association,
which was transferred to the former members of the Association in
connection with its dissolution. All former members of the Association
who received assets as liquidation payments could be liable for the
payment of the amounts being claimed by the plaintiff. The maximum
exposure of Van der Moolen Holding N.V. is estimated to be EUR18.9
million (plus accrued statutory interest). On April 4, 2001, the
district court in The Hague dismissed the claim against the
Association. However, the plaintiff has appealed against this
judgment. Although we believe that this appeal will be found to be
without merit, there can be no assurance that it will not be decided
in favor of the plaintiff and that, if successful, any judgment would
not have a material adverse effect on our results of operations.
Other than the foregoing matters, neither we nor any of our
subsidiaries is party to any regulatory proceeding, material
litigation, claim or arbitration, and no such proceeding is known by
us to be pending or threatened which would have a material adverse
effect on our financial condition.
Dividends and Dividend Policy
Our general meeting of shareholders has the discretion to
determine whether we will pay (stock) dividends on our common shares
in the future following any setting aside of funds by our management
board with the prior approval of our supervisory board. Dividends may
be paid out of retained earnings that have not been appropriated to
statutory reserves or paid to holders of our financing preferred
shares and preferred shares. Shareholders may be given the option of
receiving the dividend in cash, in common shares, or in a combination
of cash and common shares following a proposal by the management board
and approval of the supervisory board. While our management board may,
with the approval of the supervisory board, determine that an interim
dividend shall be paid, payouts in past years have been in the form of
a single annual dividend. Dividends may be subject to a deduction of
Dutch withholding tax. See "Additional Information -- Taxation". Any
dividends that are not claimed within five years of their declaration
revert to us.
The principal source of funds for the payment of dividends by us
has been, and will continue to be, interest, dividends, if any, loan
repayments and other inter-company cash flows received from our
subsidiaries. The determination of each subsidiary's ability to pay
dividends is made independently in accordance with the law of the
jurisdiction in which it is incorporated. Earnings of our subsidiaries
may not be distributed to our shareholders until received as dividends
by us and subject to applicable Dutch law. No assurance can be given
that we will have sufficient earnings to pay any cash dividends in any
future period.
74
The table below sets forth certain information regarding the
dividends declared payable in respect of our common shares to the
holders of record at December 31, of the years indicated and has been
adjusted to reflect our three-for-one share split that took effect on
May 1, 2001. The dividends for each of the years below were paid in
the immediately following year.
Dividends per common Total dividends paid on
Year ended December 31, share our common shares
- ------------------------------ ------------------------ --------------------------
(EUR
EUR $ millions) ($ millions)
----------- ----------- ----------- -------------
1998 0.91(1) 0.95(1) 30.7 29.3
1999 0.92(2) 0.96(2) 32.3 33.9
2000 1.50(3) 1.57(3) 56.0 58.7
2001 1.10(4) 1.15(4) 41.4 43.4
2002 0.72(5) 0.75(5) 27.7 29.0
Notes:
(1) EUR0.91 ($0.95) in cash or, alternatively, EUR0.30 ($0.31) in cash and
EUR0.61 ($0.64) in common shares.
(2) EUR0.92 ($0.96) in cash or, alternatively, EUR0.33 ($0.35) in cash and
EUR0.59 ($0.061) in common shares.
(3) Paid in cash only.
(4) Paid in cash or, alternatively, in the form of common shares.
(5) Paid in cash only.
In 1998, 1999 and 2001 holders of our common shares elected to
receive a portion of the dividend declared in respect of that year in
the form of common shares. Accordingly, we issued 651,456, 909,903 and
784,973 common shares in respect of the dividends declared in respect
of each of the years ended December 31, 1998, 1999 and 2001,
respectively. The number of common shares indicated is adjusted to
reflect our three-for-one stock split that took effect on May 1, 2001.
We have had a policy of paying at least 40% of our net income from
ordinary activities before impairment charges and less minority
interest, calculated in accordance with Dutch GAAP, to our holders of
common shares in the form of dividends, subject to, among other
things, our liquidity and capital position and our expected financing
requirements. For the years ended December 31, 1998, 1999, 2000, 2001
and 2002, we paid 48.1%, 42.8%, 40.1% 41.0% and 40.4%, respectively,
of our net income from ordinary activities less minority interest
(excluding impairment of intangible fixed assets), calculated in
accordance with Dutch GAAP, to our common shareholders in the form of
dividends. The payment of any future dividends will be recommended,
based on net income from ordinary activities less minority interest,
by our management board in light of the conditions then existing,
including our financial performance, liquidity position, capital
position, future financing requirements and other factors.
Dividends on Financing Preferred Shares
We currently have 251,000 financing preferred A shares and 391,304
financing preferred B shares outstanding. Our financing preferred
shares are finance shares, which we may issue to raise capital. We pay
dividends on our financing preferred shares. The dividend is
calculated on the basis of the basic yield applicable to the relevant
class of financing preferred shares as described in the terms and
conditions attaching to such shares, which normally reflect market
interest rates.
75
The following tables set forth certain information regarding the
dividends declared on our financing preferred A and B shares to the
holders of record at December 31, of the years indicated. The
dividends for each of the years below were paid in the immediately
following year.
Dividends per financing Total dividends paid on
Year ended December 31, preferred A share financing preferred A share
- ------------------------------- ------------------------- ---------------------------
(EUR
EUR $ millions) ($ millions)
----------- ------------ ---------- ---------------
1998 2.70 2.83 0.6 0.6
1999 2.70 2.83 0.6 0.6
2000 2.48 2.60 0.6 0.6
2001 2.71 2.84 0.6 0.6
2002 2.63 2.76 0.6 0.6
Dividends per financing Total dividends paid on
Year ended December 31, preferred B share financing preferred B share
- ------------------------------- ------------------------- ---------------------------
(EUR
EUR $ millions) ($ millions)
----------- ------------ ---------- ---------------
1998 0.14 0.15 0.06 0.06
1999 5.76 6.04 2.3 2.4
2000 5.76 6.04 2.3 2.4
2001 5.76 6.04 2.3 2.4
2002 5.76 6.04 2.3 2.4
(B) Significant Changes
For a discussion of significant changes in our business or
financial condition since December 31, 2002, see "Operating and
Financial Review and Prospects -- Recent Developments".
76
Item 9: THE OFFER AND LISTING
(A) Offer and Listing Details
The tables below set forth, for the periods indicated, the high
and low closing prices of our common shares and ADSs, adjusted for our
three-for-one share split that took effect on May 1, 2001.
The following table sets out annual high and low closing prices of
our common shares on Euronext Amsterdam and our ADSs on the New York
Stock Exchange as provided by Bloomberg:
New York Stock Exchange
Euronext Amsterdam (1)
------------------------ --------------------------
Period High Low High Low
- ------------------------------ ----------- ----------- ----------- -------------
(in euro per share) (in dollars per share)
------------------------ --------------------------
1998 44.17 9.15 -- --
1999 24.17 14.17 -- --
2000 35.17 14.17 -- --
2001 42.17 15.00 30.24 22.75
2002 36.25 15.70 32.25 15.64
Note:
(1) Trading in the ADSs on the New York Stock Exchange commenced on October 18,
2001.
The following table sets out quarterly high and low closing prices
of our common shares on Euronext and our ADSs on the New York Stock
Exchange as provided by Bloomberg:
New York Stock Exchange
Euronext (1)
------------------------ --------------------------
Period High Low High Low
- ------------------------------ ----------- ----------- ----------- -------------
(in euro per share) (in dollars per share)
------------------------ --------------------------
2000
First quarter 17.50 14.17 -- --
Second quarter 21.58 14.70 -- --
Third quarter 30.83 18.85 -- --
Fourth quarter 35.17 26.33 -- --
2001
First quarter 42.17 27.73 -- --
Second quarter 39.75 28.95 -- --
Third quarter 32.35 15.00 -- --
Fourth quarter 34.00 19.50 30.24 22.75
2002
First quarter 36.25 30.60 32.35 26.92
Second quarter 34.49 18.75 30.35 19.29
Third quarter 24.59 16.75 23.75 16.56
77
New York Stock Exchange
Euronext (1)
------------------------ --------------------------
Period High Low High Low
- ------------------------------ ----------- ----------- ----------- -------------
(in euro per share) (in dollars per share)
------------------------ --------------------------
Fourth quarter 24.00 15.70 23.68 15.64
2003
First quarter 21.70 7.55 22.04 8.72
Note:
(1) Trading in the ADSs on the NYSE commenced on October 18, 2001.
The following table sets out monthly high and low closing prices
of our common shares on Euronext and our ADSs on the New York Stock
Exchange provided by Bloomberg:
Euronext New York Stock Exchange
------------------------- ---------------------------
Month ended High Low High Low
- ------------------------------- ----------- ------------ ---------- ---------------
(in euro per share) (in dollars per share)
December 31, 2002 23.75 19.40 23.33 20.53
January 31, 2003 21.70 15.11 22.04 16.6
February 28, 2003 16.60 11.55 17.92 12.95
March 31, 2003 12.38 7.55 13.50 8.72
April 30, 2003 10.72 7.85 11.35 8.67
May 31, 2003 10.61 8.42 12.50 9.80
On June 11, 2003, the closing price of the common shares on
Euronext was EUR12.50 and the closing price of the ADSs on the New
York Stock Exchange was $14.80.
(B) Plan of Distribution
Not applicable.
(C) Markets
Our common shares are listed on Euronext under the symbol "MOO"
and are included in the Next 150 Index and in the AEX Index of
Euronext. Our ADSs are listed on the New York Stock Exchange under the
symbol "VDM".
(D) Selling Shareholders
Not applicable.
(E) Dilution
Not applicable.
(F) Expenses of the Issuer
Not applicable.
78
Item 10: ADDITIONAL INFORMATION
(A) Share Capital
Not applicable.
(B) Memorandum and Articles of Association
We are registered in the trade register of the Chamber of Commerce
and Industry for Amsterdam under number 33000644.
Our objects, which are set out in Article 3 of our articles of
association, include participating in, having control over, managing
and financing other enterprises and companies.
Description of Shares and Key Provisions of our Articles of
Association
Set out below is a summary of material information concerning our
shares, which are our common shares together with our financing
preferred shares and our preferred shares, and related material
provisions of our articles of association and of Book 2 of the Dutch
Civil Code (het Burgerlijk Wetboek). This summary is qualified in its
entirety by reference to our articles of association and to Dutch law.
Common shares
Our common shares may be issued in bearer or registered form and
will be in bearer form unless the shareholder indicates otherwise in
writing. Only bearer common shares can trade on Euronext Amsterdam.
Bearer common shares
All of our bearer common shares will be embodied in a single
global share certificate which will not be exchanged for single or
multiple physical securities and which we will deposit with
(Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V.), also
called NECIGEF, for safekeeping on behalf of the parties entitled to
the common shares in bearer form. The common shares represented by the
single global share certificate may only be transferred through the
book-entry system maintained by NECIGEF. A participant in the
collective deposit (verzameldepot) of a securities institution
admitted to NECIGEF may, at his or her own expense, require conversion
of one or more of his or her bearer common shares into common shares
in registered form.
Registered common shares
We enter holders of issued and outstanding registered common
shares in the register of shareholders. We do not issue share
certificates for registered common shares. However, the shareholder
may request an extract from the shareholders' register regarding the
common shares registered in his or her name. We are required to
provide this free of charge. Dutch law requires that transfers of
registered common shares be recorded in a written instrument to which
we are a party or which is served on us, or that the transfer be
acknowledged by us. There are currently no holders of common shares
entered in the register.
Financing preferred shares
We are authorized to issue financing preferred shares to raise
capital. Financing preferred shares can be issued in bearer or
registered form at the option of the management board, subject to the
approval of the supervisory board. Financing preferred shares, if and
when issued, will rank above common shares with respect to dividend
and liquidation proceeds. Financing preferred shares have dividends
which reflect market interest rates.
The terms and conditions, including dividend percentage and profit
basis, applicable to the financing preferred shares of a specific
class are included in the resolution regarding a first issuance of
79
financing preferred shares of such class. The issuance of 216,000
financing preferred A shares occurred on January 15, 1997, the
issuance of 20,000 financing preferred A shares occurred on December
20, 2000, the issuance of 5,000 financing preferred A shares occurred
on August 1, 2001, the issuance of 10,000 financing preferred A shares
occurred on October 1, 2002 and the issuance of 391,304 financing
preferred B shares occurred on December 15, 1998. All resolutions in
respect of the financing preferred shares are deposited at our office
in Amsterdam, the Netherlands.
Our financing preferred shares are not convertible into common
shares. They are not listed on any exchange, and we have no intention
to list our financing preferred shares. Except as described above and
in "-- Description of Shares and Key Provisions of our Articles of
Association -- Dividends", there are no redemptive or other material
rights attaching to our financing preferred shares.
Preferred shares
Effective May 1, 2001, we amended our articles to provide for the
future issuance of preferred shares to an unaffiliated foundation
called Stichting Van der Moolen Holding. The Stichting's object is to
safeguard our interests and those of our subsidiaries in such a way
that the interest of Van der Moolen Holding N.V. and all other
concerned parties are safeguarded and that the continuity and
independence of Van der Moolen Holding N.V. may be enforced to the
maximum extent possible in the event of, for instance, a hostile
takeover, by acquiring and managing our preferred shares and by
exercising the rights attaching to those shares, in particular, the
voting rights. On July 12, 2001, we entered into an agreement with the
Stichting pursuant to which it has been granted a call option right
allowing it to acquire up to the number of preferred shares of which
the aggregate par value is equal to the aggregate par value of the
total number of our common shares, financing preferred A shares,
financing preferred B shares, financing preferred C shares, financing
preferred D shares and financing preferred E shares outstanding at the
time of the exercise of the right. Assuming the Stichting exercises
its right in respect of the maximum number of preferred shares that
could be issued pursuant to the preceding sentence, such exercise
would result in the Stichting having voting rights equal to 50 per
cent. of the total voting power of all of our issued and outstanding
shares. Accordingly, the Stichting would be able to block or control
all shareholder votes.
The Stichting may exercise its right to acquire the maximum number
of shares at any time or may exercise its right in respect of blocks
of preferred shares on more than one occasion. The preferred shares
will be issued against payment by the Stichting of an amount equal to
at least 25 per cent of the aggregate par value of the preferred
shares to be issued. After the issuance of any preferred shares, we
will meet with the Stichting at least two times a year to discuss
whether it remains necessary for the Stichting to continue to hold the
preferred shares. If we agree with the Stichting that it is no longer
necessary, we will repurchase or cancel the preferred shares. In
addition, at its discretion, the Stichting may require us to
repurchase or cancel the preferred shares at any time after two years
from the date of their original issuance.
The Stichting has entered into a standard standby facility with
ING Bank which allows the Stichting to draw down the necessary
financial resources in the event it decides to exercise the call
option.
The Stichting is managed by a management board comprised of five
members, only one of whom may be selected by our supervisory board.
Each of the remaining four members must be an individual who is not:
- -- a current or former managing director, supervisory director or employee of
us or of any of our subsidiaries;
- -- a relative of one of our managing directors or supervisory directors or
those of any of our subsidiaries;
- -- permanent adviser of ours or a former permanent adviser of ours, provided
that this restriction will only apply for the first three years after the
termination of the relationship; or
80
- -- a managing director or employee of any banking institution with which we
maintain a significant relationship.
The management board of the Stichting consists of the following
persons: Mr H. Langman (chairman); Mr R.W.J.M. Bonnier; Prof. R.A.H.
van der Meer; Mr J.C.T. van der Wielen; and currently, one vacant
position.
There are currently no preferred shares issued and outstanding.
Our preferred shares are not convertible into common shares.
Issue of shares and pre-emptive rights
Upon a proposal of the management board and subject to approval of
the supervisory board, our general meeting of shareholders has the
authority to decide on any further issuance of shares or rights to
subscribe for shares and on the terms and conditions thereof.
A general meeting of shareholders may delegate this power to the
management board. The resolution of a general meeting of shareholders
to delegate this power determines the maximum number of shares to be
issued. Our management board's authority to issue shares is limited to
our authorized share capital. On April 9, 2003, our management board
was authorized for a period of 15 months to issue shares until July 9,
2004. This authorization may at any time be extended for periods of up
to five years. The application of this power by our management board
is subject to the approval of our supervisory board.
Our shares cannot be issued below par. Our common shares and
financing preferred shares must be fully paid-up upon issue. Our
preferred shares may be issued on a "partly paid" basis, but not at
less than 25 per cent. of the aggregate par value of the preferred
shares to be issued.
As a general matter, each holder of common shares has pre-emptive
rights to subscribe for any common shares that we issue and has
pre-emptive rights to subscribe if we make a grant of rights to
subscribe for common shares. Holders of our financing preferred shares
and preferred shares do not have pre-emptive rights with respect to
our common shares. Pre-emptive rights to which each holder of our
common shares is entitled are in proportion to its percentage
ownership interest in our outstanding common shares. Pre-emptive
rights do not apply to common shares issued for a non-cash
contribution, to common shares issued to our employees or if we issue
common shares to a person who exercises a previously-acquired right to
subscribe for common shares.
Holders of our financing preferred shares and of our preferred
shares are not entitled to exercise pre-emptive rights with respect to
any future issuances of our financing preferred shares or preferred
shares, as the case may be.
By following the procedures as described above for further
issuances of shares, a general meeting of shareholders may restrict or
exclude any pre-emptive rights, and it may delegate this power to our
management board. If our management board has been delegated the
authority to issue shares, it can limit or exclude any pre-emptive
rights as long as a general meeting of shareholders has granted it
that power and our supervisory board approves. At our annual general
meeting on April 9, 2003, our shareholders delegated to our management
board the authority to exclude or restrict pre-emptive rights for a
period of 15 months from the date of the meeting.
Acquisition by us of shares in our own capital
We may acquire our own shares if and to the extent that:
- -- a general meeting of shareholders has authorized our management board to
acquire the shares;
81
- -- our shareholders' equity, after deduction of the price of acquisition, is
not less than the sum of the issued and called up portion of the share
capital and the reserves that provisions of Dutch law or our articles of
association require us to maintain; and
- -- the aggregate par value of the shares to be acquired, together with the
shares in our share capital that we already hold directly, indirectly or as
pledgee, does not equal more than one-tenth of the aggregate par value of
our total issued share capital.
We may not acquire our own shares if they have not been fully
paid-up, and any acquisition of our own shares is subject to the prior
approval of our supervisory board. The authorization by a general
meeting of shareholders may be for a term of up to 18 months. We and
our subsidiaries may not vote shares which we or they hold.
At the annual general meeting on April 9, 2003, our management
board was given the authority described above to acquire shares in our
capital for a period of 15 months from the date of the meeting.
Capital reduction
If our supervisory board approves and Dutch law permits, a general
meeting of shareholders can reduce our issued share capital by
cancellation of shares or reduction of the nominal value of shares.
Voting rights and shareholders' meetings
We must hold annual general meetings of shareholders within six
months of the end of our financial year. The annual general meeting is
held, among other things, to adopt our annual accounts. We must hold
extraordinary general meetings of shareholders whenever:
- -- one or more shareholders together representing at least one-tenth of our
outstanding share capital request it in writing, listing the topics to be
discussed; and
- -- our management board or our supervisory board deems necessary.
General meetings of shareholders shall be held in the municipality
of Amsterdam.
Each shareholder can attend general meetings in person or by
proxy, address the meeting and vote. Under Dutch law, voting rights
are related to the nominal value of shares. Accordingly, as each of
our common shares, par value EUR0.08, entitles the holder to one vote,
each of our financing preferred shares or preferred shares, par value
EUR0.60, entitles the holder to 7.5 votes.
The management board must be notified in writing of a registered
shareholder's intention to attend a general meeting of shareholders.
The holders of bearer common shares can vote if an affiliated
institution of NECIGEF sends a written statement as to their
shareholdings to our offices. Resolutions are passed by absolute
majority of votes cast unless stated otherwise in Dutch law and our
articles of association. Unless a proposal to a general meeting of
shareholders is made by our management board (subject to the approval
of the supervisory board), a resolution can only be adopted by a
general meeting of shareholders if more than half of the issued share
capital is represented at the meeting.
A general meeting of shareholders can amend our articles of
association or dissolve us only if the proposal thereto is made by our
management board (subject to the approval of the supervisory board).
Dutch law and our articles of association do not impose any
limitations on non-Dutch ownership or voting of our common shares.
Annual accounts
We have a calendar financial year. Within four months after the
end of our financial year, our management board must draw up the
annual accounts and a report concerning the course of business with
respect to that financial year. Dutch law allows for an extension of
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this period by a general meeting of shareholders for a maximum of six
months. The annual accounts and report are submitted to our
supervisory board. Our supervisory board shall have the annual
accounts audited. The annual accounts and report, together with the
auditor's report and the report from our supervisory board, are
submitted to the annual general meeting of shareholders for
inspection, and with respect to the annual accounts, adoption. See
also "Directors, Senior Management and Employees".
Dividends
Annual dividends may only be paid out of profits as shown in the
adopted annual financial statements. We may not make distributions if
the distribution would reduce our shareholders' equity below certain
reserves required by Dutch law or our articles of association. The
profits must first be used to set up and maintain reserves required by
Dutch law and must then be set off against certain financial losses.
The preferred shares will be paid their dividends, first, followed by
the financing preferred shares. The dividends on our financing
preferred shares and our preferred shares reflect market interest
rates. With supervisory board approval, our management board then
decides whether and how much of the remaining profit they will
reserve. Any profits remaining will be paid as a dividend on the
common shares. With the approval of our supervisory board and subject
to Dutch law, our management board can resolve to pay an interim
dividend. A general meeting of shareholders may, upon the proposal of
our management board and subject to approval of our supervisory board,
resolve a dividend payment to be made in full or in part in the form
of shares.
We can make distributions to shareholders at the charge of one or
more of our reserves except for the share premium reserves A, B, C, D
and E.
Purchasers of common shares or ADSs representing such shares in
the offering will be entitled to the full dividend for the financial
year 2002 and subsequent financial years. Any dividends that are not
claimed within five years of their declaration revert to us.
Amendment of our articles of association and liquidation rights
A general meeting of shareholders may only resolve to amend our
articles of association or to dissolve us on the proposal of our
management board, subject to the approval of our supervisory board.
Our articles of association were last amended by notarial deed
with effect from May 1, 2001 pursuant to a resolution passed at our
annual general meeting of shareholders held on April 11, 2001.
If we are dissolved and liquidated, after we pay all debts and
liquidation expenses, the holders of preferred shares have first
rights to payment of any dividends not fully paid to them in previous
years and of the amount paid per preferred share. Subsequently, the
holders of financing preferred shares have rights to payment of any
dividends not fully paid to them in previous years and of the basic
yield applicable to the relevant class of financing preferred shares
as described in the terms and conditions attaching to such shares.
Finally, any remaining assets will be distributed to the holders of
common shares.
Should the balance be insufficient to pay the full amounts to
holders of preferred shares and the holders of financing preferred
shares, such payments shall be made in proportion to the amounts to be
paid out on the preferred shares and the financing preferred shares.
Obligations of Shareholders to Disclose Holdings
The 1996 Act on Disclosure of Holdings in Listed Companies (Wet
melding zeggenschap in ter beurze genoteerde vennootschappen 1996,
also called the Disclosure of Holdings Act) provides that any person
who, directly or indirectly, acquires or disposes of an interest,
including an ADS, in the capital and/or the voting rights of a Dutch
limited liability company listed on an official stock exchange in the
European Economic Area must forthwith notify us and the Authority for
the Financial Markets of the Netherlands if this changes the
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percentage of capital interest or voting rights they hold to a
different range. The percentage ranges referred to in the Disclosure
of Holdings Act are 0% to 5%; 5% to 10%; 10% to 25%; 25% to 50%; 50%
to 66 2/3%; and over 66 2/3%.
Failure to comply with these disclosure obligations is an economic
offense and can lead to criminal prosecution as well as to
administrative penalties being imposed. In addition, a civil court can
impose the following measures against any person who fails to properly
notify us or the Authority for the Financial Markets of the
Netherlands of those holdings:
- -- a court order requiring the person violating the Disclosure of Holdings Act
to make disclosure in accordance with the Disclosure of Holdings Act;
- -- suspension of voting rights in respect of such person's shares for a period
of up to three years as determined by the court;
- -- nullification of a resolution adopted by a general meeting of shareholders,
if it is determined that the resolution would not have been adopted but for
the exercise of the voting rights of the person who was obliged to notify,
or suspension of a resolution until such time as a general meeting of
shareholders has had an opportunity to make such a determination; and
- -- an order to the person violating the Disclosure of Holdings Act to refrain,
during a period of up to five years as determined by the court, from
acquiring shares and/or voting rights.
Regulations under the 1995 Supervision of the Securities Trading
Act (Wet toezicht effectenverkeer 1995) regarding insider trading
create an additional notification duty for shareholders holding,
directly or indirectly, a capital interest of more than 25% in a
listed company. Such shareholders must notify the Securities Board of
the Netherlands of any and all transactions that they carry out,
directly or indirectly, in our securities. If a more than 25%
shareholder is a legal entity and not an individual, the obligation is
extended to the managing and supervisory board members of the legal
entity.
As of January 1, 2000, the Authority for the Financial Markets of
the Netherlands can also impose administrative penalties (bestuurlijke
boetes en dwangsommen) in the event of a violation of the Disclosure
of Holdings Act and of the insider trading rules. Violation of insider
trading rules can also lead to criminal sanctions.
Section 16 Dutch Securities Act
Section 16(1) of the Dutch Securities Act prohibits, except as
provided below, a party from holding or acquiring, or increasing a
qualifying shareholding, which is a direct or indirect interest (such
as through the ADSs) in, or direct or indirect exercise of voting
rights of, more than 5% of the issued share capital of a securities
institution to which a license has been issued pursuant to section
7(4) or (6) of the Dutch Securities Act. The exercise of any control
connected with a qualifying shareholding in a securities institution,
including the licensed securities institution subsidiaries of Van der
Moolen Holding N.V., is prohibited unless a declaration of no
objection has been obtained from the Authority for the Financial
Markets. The Authority for the Financial Markets will, upon request,
issue a declaration of no objection in respect of a transaction or act
as referred to in Section 16(1) within 13 weeks of its receipt of the
application, unless it judges that the transaction would or could
affect the securities institution concerned in a manner that is
incompatible with the sound or prudent management of the securities
institution. Restrictions may be imposed on, and conditions attached
to, a declaration of no objection issued. Purchasers of our common
shares and/or ADSs in the offering, as well as any subsequent
transferees, will be required to comply with the provisions described
above.
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We, as well as our intermediate holding companies, have been
granted declarations of no objection pursuant to Section 16 of the
Dutch Securities Act in connection with the holding of our interests
in our securities institution subsidiaries. Further, our major
shareholders and The Bank of New York have been granted declarations
of no objection
(C) Material Contracts
VDM Specialists, LLC
Pursuant to the terms of the Amended and Restated Operating
Agreement as amended last January 2, 2003 governing the operation of
VDM Specialists, distributions to, and voting by, the members of VDM
Specialists are made in proportion to each member's profit and loss
percentage at the time of such distribution or vote. Through our
wholly owned subsidiary, Mill Bridge IV, LLC, our profit and loss
percentage is 75%.
VDM Specialists is managed by a management committee that must
have at least three members. The management committee is currently
composed of our wholly owned subsidiary, Mill Bridge IV, and six
individual members. As a general matter, a vote of the majority of the
profit and loss percentage of the members of the management committee
is required for action by the committee. A quorum for any meeting
consists of members of the committee holding a majority of the profit
and loss percentage, but in no event fewer than three members,
including two members other than Mill Bridge IV. There are
supermajority voting requirements in order for the management
committee to take certain corporate actions, including matters that
would affect the profit and loss allocations of members, the election
of any member (other than Mill Bridge IV) to serve on the committee
and a change in the number of members on the committee. In addition,
certain corporate actions, such as the dissolution of the company, the
sale of all or substantially all of its assets, a public offering of
the company and an amendment to the operating agreement, require the
approval of members of the company holding an aggregate profit and
loss percentage of at least 80%.
Membership interests in VDM Specialists may not be transferred
without the prior written consent of the management committee,
although members may elect to terminate their memberships in VDM
Specialists by giving at least 90 days' prior written notice.
(D) Exchange Controls
There are no legislative or other legal provisions currently in
force in the Netherlands or arising under our articles of association
restricting transfers to holders of our securities not resident in the
Netherlands. Cash dividends payable in euro on our shares may be
officially transferred from the Netherlands and converted into any
other convertible currency.
There are no limitations, either under the laws of the Netherlands
or our articles of association, on the right of non-residents of the
Netherlands to hold or vote our shares.
(E) Taxation
Certain Dutch Tax Consequences for Holders of Common Shares or
ADSs
We will describe the principal tax consequences that will
generally apply in the case of an investment in the common shares or
ADSs under Dutch tax laws in force and in effect as of the date
hereof. This description is subject to changes in Dutch law including
changes that could have retroactive effect. No assurance can be given
that authorities or courts in the Netherlands will agree with the
description below. Not every potential tax consequence of such
investment under the laws of the Netherlands will be addressed.
Therefore we advise to consult your tax advisor before taking any
actions.
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Dutch taxation of resident shareholders
The description of certain Dutch taxes set out in this section "--
Dutch taxation of resident shareholders" is only intended for the
following investors:
(1) individuals who are resident or deemed to be resident in the Netherlands
and, with respect to personal income taxation, individuals who opt to be
taxed as a resident of the Netherlands for purposes of Dutch taxation and
who invest in the common shares or ADSs ("Dutch Individuals"), excluding
individuals:
(a) who derive benefits from the common shares or ADSs that are taxable as
benefits from miscellaneous "activities" (resultaat uit overige
werkzaamheden);
(b) for whom the common shares or ADSs or any payment connected therewith
may constitute employment income; or
(c) who have a substantial interest, or a deemed substantial interest, in
us; and
(2) corporate entities (including associations which are taxed as corporate
entities) that are resident or deemed to be resident in the Netherlands for
purposes of Dutch taxation and who invest in the common shares or ADSs
("Dutch Corporate Entities"), excluding:
(a) corporate entities that are not subject to Dutch corporate income tax;
(b) pension funds (pensioenfondsen) and other entities that are exempt
from Dutch corporate income tax;
(c) corporate entities that hold common shares or ADSs, the benefits
derived from which are exempt under the participation exemption (as
laid down in the Dutch Corporate Income Tax Act 1969); and
(d) investment institutions (beleggingsinstellingen) as defined in the
Dutch Corporate Income Tax Act 1969.
Generally, an individual who holds common shares or ADSs will have
a substantial interest if he or she holds, alone or together with his
or her partner, whether directly or indirectly, the ownership of, or
certain other rights over, shares representing 5% or more or our total
issued and outstanding capital (or the issued and outstanding capital
of any class of shares), or rights to acquire shares, whether or not
already issued, that represent at any time 5% or more of our total
issued and outstanding capital (or the issued and outstanding capital
of any class of shares) or the ownership of certain profit
participating certificates that relate to 5% or more of our annual
profit and/or to 5% or more of our liquidation proceeds. A holder of
common shares or ADSs will also have a substantial interest in us if
certain relatives (including foster children) of that holder or of his
or her partner have a substantial interest in us. If a holder of
common shares or ADSs does not have a substantial interest a deemed
substantial interest will be present if (part of) a substantial
interest has been disposed of, or is deemed to have been disposed of,
on a non-recognition basis.
Personal and corporate income tax
Dutch individuals not engaged or deemed to be engaged in an
enterprise. Generally, a Dutch individual who holds the common shares
or ADSs that are not attributable to an enterprise from which he
derives profits as an entrepreneur (ondernemer) or pursuant to a
co-entitlement to the net worth of such enterprise other than as an
entrepreneur or a shareholder (a "Dutch Private Individual"), will be
subject to a fictitious yield tax. Irrespective of the actual income
or capital gains, the annual taxable benefit of all the assets and
liabilities of a Dutch individual that are taxed under such regime
including, as the case may be, the common shares and ADSs, is set at a
fixed percentage. This percentage is 4% of the average fair market
value of these assets and liabilities at the beginning and at the end
of every year (minus a tax-free amount). The tax rate applicable under
the fictitious yield tax is 30%.
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Dutch individuals engaged or deemed to be engaged in an enterprise
and Dutch Corporate Entities. Any benefits derived or deemed to be
derived from the common shares or ADSs (including any capital gains
realized on the disposal thereof) that are attributable to an
enterprise from which a Dutch Individual derives profits, whether as
an entrepreneur or pursuant to a co-entitlement to the net worth of
such enterprise (other than as an entrepreneur or a shareholder), are
generally subject to income tax in its hands. Any benefits derived or
deemed to be derived from the common shares or ADSs (including any
capital gains realized on the disposal thereof) that are held by a
Dutch Corporate Entity are generally subject to corporate income tax
in its hands.
Withholding tax
Dividends we distribute are generally subject to a withholding tax
imposed by the Netherlands at a rate of 25%. The concept "dividends we
distribute" used in this section includes, but is not limited to:
(1) distributions in cash or in kind, deemed and constructive distributions,
and repayments of paid-in capital not recognized for Dutch dividend
withholding tax purposes;
(2) liquidation proceeds, proceeds of redemption of the common shares or ADSs
or, as a rule, consideration for the repurchase of the common shares or
ADSs by us in excess of the average paid-in capital per share recognized
for Dutch dividend withholding tax purposes;
(3) the par value of common shares or ADSs issued to a holder of the common
shares or ADSs or an increase of the par value of common shares or ADSs, as
the case may be, to the extent that it does not appear that a contribution,
recognized for Dutch dividend withholding tax purposes, has been made or
will be made; and
(4) partial repayment of paid-in capital, recognized for Dutch dividend
withholding tax purposes, if and to the extent that there are net profits
(zuivere winst), unless:
(a) a general meeting of our shareholders has resolved in advance to make
such repayment; and
(b) the par value of the common shares or ADSs concerned has been reduced
by an equal amount by way of an amendment of the articles of
association.
Dutch Individuals and Dutch Corporate Entities can generally
credit the withholding tax against their income tax or corporate
income tax liability and are generally entitled to a refund of
dividend withholding taxes exceeding their aggregate income tax or
corporate income tax liability.
With retroactive effect as from April 27, 2001, provisions against
dividend stripping were introduced in Dutch tax law. In the case of
dividend stripping, dividend withholding tax cannot be credited or
refunded. Dividend stripping is deemed to be present if the recipient
of a dividend is not the beneficial owner thereof and is entitled to a
larger reduction or refund of dividend withholding tax than the
beneficial owner of the dividends. Under the new anti dividend
stripping provisions, a recipient of dividends will not be considered
the beneficial owner thereof if as a consequence of a combination of
transactions a person other than the recipient wholly or partly
benefits from the dividends, whereby such person retains, whether
directly or indirectly, an interest in the shares on which the
dividends were paid. The provisions apply to the transfer of the
common shares, ADSs and dividend coupons and also to transactions that
have been entered into in the anonymity of a regulated stock market.
If you are a Dutch individual or Dutch Corporate Entity, we are
not required to withhold dividend tax from a dividend we distribute to
you to the extent that the temporary special distribution tax,
discussed below in the section "-- Dutch taxation of non-resident
shareholders -- Distribution tax" applies to the distribution.
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Gift and inheritance taxes
A liability to gift tax will arise in the Netherlands with respect
to an acquisition of the common shares or ADSs by way of a gift by an
individual who is resident in the Netherlands or a corporate entity
that is established in the Netherlands. A liability to inheritance tax
will arise in the Netherlands with respect to an acquisition or deemed
acquisition of the common shares or ADSs by way of an inheritance or
bequest on the death of an individual who is resident in the
Netherlands.
For purposes of Dutch gift and inheritance taxes, an individual
who holds Dutch nationality will, inter alia, be deemed to be resident
in the Netherlands if he has been resident in the Netherlands at any
time during the ten years preceding the date of the gift or his death.
For purposes of Dutch gift tax, an individual not holding Dutch
nationality will be deemed to be resident in the Netherlands if he has
been resident in the Netherlands at any time during the 12 months
preceding the date of the gift.
Dutch taxation of non-resident shareholders
This section describes certain Dutch tax consequences for a holder
of the common shares or ADSs who is neither resident nor deemed to be
resident in the Netherlands (a "Non-Resident Shareholder"). This
section does not describe the tax consequences for Non-Resident
Shareholders that hold the common shares or ADSs as a participation
under the participation exemption as laid down in the Dutch Corporate
Income Tax Act 1969.
Taxes on income and capital gains
A Non-Resident Shareholder will not be subject to any Dutch taxes
on income or capital gains in respect of dividends we distribute
(other than withholding tax described below) or in respect of any gain
realized on the disposal of common shares or ADSs, provided that:
(1) such Non-Resident Shareholder does not derive profits from an enterprise,
whether as an entrepreneur (ondernemer) or pursuant to a co-entitlement to
the net worth of such enterprise (other than as an entrepreneur or a
shareholder) which enterprise is, in whole or in part, carried on through a
permanent establishment or a permanent representative in the Netherlands
and to which enterprise or part of an enterprise, as the case may be, the
shares or ADSs are attributable;
(2) such Non-Resident Shareholder does not have a substantial interest or a
deemed substantial interest in us, or, if such holder does have such an
interest, it forms part of the assets of an enterprise;
(3) if such Non-Resident Shareholder is an individual, the benefits derived
from the shares or ADSs are not taxable in the hands of such holder as a
benefit from miscellaneous activities (resultaat uit overige werkzaamheden)
in the Netherlands;
(4) such Non-Resident Shareholder is not entitled to a share in the profits of
an enterprise effectively managed in the Netherlands, other than by way of
the holding of securities or through an employment contract, to which
enterprise the common shares or ADSs or payments in respect of the common
shares or ADSs are attributable;
(5) such Non-Resident Shareholder does not carry out and has not carried out
employment activities in the Netherlands with which the holding of or
income derived from the common shares or ADSs is connected; and
(6) if the Non-Resident Shareholder is an individual, he or she does not opt to
be taxed as a resident of the Netherlands for purposes of Dutch taxation.
See the section "-- Dutch taxation of resident shareholders" for a
description of the circumstances under which your common shares and
ADSs form part of a substantial interest or may be deemed to form part
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of a substantial interest in our company. We hereby note that both
non-resident individuals and non-resident corporate entities can hold
a substantial interest.
Withholding tax
Dividends we distribute are generally subject to a withholding tax
imposed by the Netherlands at a rate of 25%. Reference is made to the
section "-- Dutch taxation of resident shareholders -- Withholding
tax" for a description of the concept "dividends distributed by us".
If you are a Non-Resident Shareholder who is a resident in the
Netherlands Antilles or Aruba under the provisions of the Tax
Convention of the Kingdom of the Netherlands, or who is a resident in
a country that has concluded a double taxation convention with the
Netherlands under the provisions of that convention, we are not
required to withhold dividend tax from a dividend we distribute to you
to the extent that the temporary special distribution tax discussed
below in the section "-- Distribution tax" applies to the
distribution.
If a holder of common shares or ADSs, whether an individual or an
entity, is resident in a country other than the Netherlands and if a
treaty for the avoidance of double taxation with respect to taxes on
income is in effect between the Netherlands and that country, and the
holder is a qualifying resident for purposes of such treaty, such
holder may, depending on the terms of that particular treaty, qualify
for full or partial relief at source or for a refund (in whole or in
part) of the Netherlands dividend withholding tax.
Residents of the United States that qualify for, and comply with
the procedures for claiming benefits under, the income tax convention
between the Netherlands and the United States (the "US/NL Income Tax
Treaty") generally are eligible for a reduction of the Netherlands
withholding tax on dividend income to 15%, which rate may under
various specified conditions be reduced to 5% if the beneficial owner
is a company which holds directly at least 10% of our voting power.
The US/NL Income Tax Treaty provides, subject to certain conditions,
for a complete exemption or refund for dividends received by exempt
pension trusts and exempt organizations, as defined therein.
Subject to compliance with the procedures for claiming benefits, a
holder of common shares or ADSs will qualify for benefits under the
US/NL Income Tax Treaty (an "eligible U.S. holder"), if the holder:
- -- is the beneficial owner of the dividends paid on the common shares or ADSs;
- -- is resident in the United States according to the US/NL Income Tax Treaty;
- -- is entitled to the benefits of the US/NL Income Tax Treaty within the
meaning of article 26 of the US/NL Income Tax Treaty;
- -- does not carry on business in the Netherlands through a permanent
establishment of which the common shares or ADSs form part of the business
property;
- -- does not perform independent personal services from a fixed base in the
Netherlands to which the holding of the common shares or ADSs pertains; and
- -- is an individual, an exempt pension trust or exempt organization as defined
in the US/NL Income Tax Treaty, an estate or trust whose income is subject
to U.S. taxation as the income of a resident, either in its hands or in the
hands of its beneficiaries or a corporation that is not excluded from
treaty benefits under the limitation on benefits provision of the US/NL
Income Tax Treaty.
Eligible U.S. holders (other than an exempt pension trust or an
exempt organization) of common shares or ADSs may generally claim the
benefits of a reduced withholding rate at source, provided that a
completed and signed Form IB 92 USA is properly filed with us in
duplicate in timely fashion. Such form must include the bank affidavit
appertaining to it, which has been completed and signed by a
qualifying bank (banks that are bank members of the New York Stock
Exchange, the American Stock Exchange and the Federal Reserve System
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generally qualify). Eligible U.S. holders who fail to satisfy these
requirements may claim a refund of the tax withheld in excess of the
applicable reduced withholding rate by filing, in duplicate, a
completed and signed Form IB 92 USA, including the completed and
signed bank affidavit as described above, directly with the
Netherlands tax authorities within three years after the end of the
calendar year in which the withholding tax was levied. Such claim must
include material substantiating (i) the payment of the dividend and
the imposition of the withholding tax, and (ii) the payment by us of
the withholding tax to be refunded. In order to claim a further
reduction of the dividend withholding tax to 5%, compliance with
certain other procedures may be required. Qualifying exempt
organizations are not eligible for relief at source and must claim a
refund of the tax withheld by using Form IB 95 USA and complying with
certain other formalities. Qualifying exempt pension trusts may
generally be eligible for relief at source upon the proper and timely
filing of Form IB 96 USA, in duplicate, including a completed and
signed bank affidavit as described above, and including U.S. Internal
Revenue Service Form 6166 with respect to the relevant year, and
complying with certain other requirements.
For holders of the ADSs we have obtained from the Dutch Ministry
of Finance a Special Arrangement that includes the approval to use the
Elective Dividend Services offered by the Depository Trust Company.
Hereunder, during the first year following the dividend payment date,
holders of the ADSs meeting the requirements for tax treaty relief,
other than qualifying exempt organizations as mentioned in the
paragraph above, will be able to claim a refund (in whole or in part)
of the Netherlands dividend withholding tax through the Bank of New
York, as paying agent for the ADSs.
In the section "-- Dutch taxation of resident shareholders --
Withholding tax", certain legislation is discussed that was introduced
with retroactive effect from April 27, 2001. This legislation may also
be applied to deny relief from Dutch dividend withholding tax under
double taxation conventions.
Gift and inheritance taxes
No liability for gift or inheritance taxes will arise in the
Netherlands with respect to an acquisition of the common shares or
ADSs by way of a gift by, or on the death of, a Non-Resident
Shareholder, unless:
(1) such Non-Resident Shareholder at the time of the gift has or at the time of
his death had an enterprise or an interest in an enterprise that is or was,
in whole or in part, carried on through a permanent establishment or a
permanent representative in the Netherlands and to which enterprise or part
of an enterprise, as the case may be, the common shares or ADSs are or were
attributable; or
(2) in the case of a gift of the common shares or ADSs by an individual who at
the time of the gift was a Non-Resident Shareholder, such individual dies
within 180 days after the date of the gift while (at the time of his death)
being resident or deemed to be resident in the Netherlands.
For purposes of Dutch gift and inheritance tax, an individual who
holds Dutch nationality will, inter alia, be deemed to be resident in
the Netherlands if he has been resident in the Netherlands at any time
during the ten years preceding the date of the gift or his death. For
purposes of Dutch gift tax, an individual not holding Dutch
nationality will be deemed to be resident in the Netherlands if he has
been resident in the Netherlands at any time during the 12 months
preceding the date of the gift.
Furthermore, in exceptional circumstances the deceased or the
donor will be deemed to be a resident in the Netherlands for purposes
of Dutch gift and inheritance taxes if the heirs jointly, or the
recipient of the gift, as the case may be, elect the deceased or the
donor, as the case may be, to be treated as a resident of the
Netherlands for purposes of Dutch gift and inheritance taxes.
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Other taxes and duties
No Dutch registration tax, transfer tax, stamp duty or any other
similar documentary tax or duty will be payable in the Netherlands by
the investors in respect of or in connection with the subscription,
issue, placement, allotment or delivery of the common shares or ADSs.
Distribution tax
We will be subject to a temporary special distribution tax at a
rate of 20% to the extent that any dividends are distributed on the
common shares or ADSs during the period from January 1, 2001 up to and
including December 31, 2005, that are classified as "excessive". For
purposes of this distribution tax, dividends are considered to be
"excessive", if in any calendar year during the above-mentioned
period, the total amount of dividends we distribute exceeds the
highest of the following three amounts:
1) 4% of our market capitalization at the beginning of the relevant calendar
year;
2) twice the amount of the average annual profit distribution (exclusive of
extraordinary distributions) by reference to the three calendar years
immediately preceding January 1, 2001; and
3) our adjusted consolidated commercial result for the preceding book year.
See the section "-- Dutch taxation of resident shareholders --
Withholding tax" for a discussion of the concept, "dividends we
distribute".
The temporary special distribution tax is not levied to the extent
that profit distributions during the period January 1, 2001 up to and
including December 31, 2005 aggregated are in excess of the balance of
the assets, liabilities and provisions, calculated on the basis of the
fair market value, reduced by the paid-in capital at the end of the
book year that ended prior to January 1, 2001.
The distribution tax due is reduced pro rata to the extent that
our common shares and ADSs were held, at the time of the distribution
of the "excessive" dividends, during an uninterrupted period of three
years, by individuals or entities (other than investment institutions
(beleggingsinstellingen) as defined in the Dutch Corporate Income Tax
Act 1969) holding at least 5% of our nominal paid-in capital, provided
such shareholding is held by shareholders resident in the Netherlands,
the Netherlands Antilles or Aruba, or in a country that has concluded
a double taxation convention with the Netherlands. In that regard,
shares that have been held since September 14, 1999 are deemed to have
been held during an uninterrupted period of three years. As the
distribution tax is payable by us, this reduction will inure
indirectly to all ordinary shareholders, and not only to the
shareholders whose shareholdings caused the reduction to apply.
Capital Tax
Dutch capital tax will be payable by us at a rate of 0.55% of any
contribution made to us in respect of the common shares or ADSs,
unless an exemption applies.
Value Added Tax
No Dutch value added tax will arise in respect of payments in
consideration for the acquisition or the disposition of shares in
respect of payments by us under common shares or ADSs.
United States Federal Income Taxation for Holders of Common Shares
or ADSs
The following is a summary of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of common
shares or ADSs. This summary applies to you only if you are a
beneficial owner of common shares or ADSs and you are:
- -- a citizen or resident of the United States for U.S. federal income tax
purposes;
- -- a corporation, or other entity treated as a corporation, created or
organized under the laws of the United States or any State within the
United States; or
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- -- an estate whose income is subject to U.S. federal income tax regardless of
its source.
- -- a trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons
have the authority to control all of its substantive decisions (each a
"U.S. Holder").
If a partnership (including any entity that is treated as a
partnership for U.S. federal tax purposes) is a beneficial owner of
common shares or ADSs, the treatment of a partner in the partnership
will generally depend upon the status of the partner and upon the
activities of the partnership. A beneficial owner of common shares or
ADSs that is a partnership, and partners in such a partnership, should
consult their tax advisors about the U.S. federal income tax
consequences of holding and disposing of common shares or ADSs.
An individual may, subject to certain exceptions, be deemed to be
a resident of the United States by reason of being present in the
United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in
the current calendar year (counting for such purposes all of the days
present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the
second preceding year).
This summary only applies to U.S. Holders that will hold common
shares or ADSs as capital assets. This summary is based upon:
- -- the current tax laws of the United States, including the Internal Revenue
Code of 1986, as amended, regulations issued thereunder, and rulings and
decisions currently in effect (or in some cases proposed);
- -- current U.S. Internal Revenue Service practice and applicable U.S. court
decisions; and
- -- the income tax treaty between the United States and the Netherlands,
all of which are subject to change. Any such change may be applied
retroactively and may adversely affect the U.S. federal income tax
consequences described herein.
The following summary is of a general nature and does not address
all U.S. federal income tax consequences that may be relevant to you
in light of your particular situation. For example, this summary does
not apply to:
- -- investors that own (directly or indirectly) 10% or more of our voting
stock;
- -- banks;
- -- insurance companies;
- -- investors liable for the alternative minimum tax;
- -- individual retirement accounts and other tax-deferred accounts;
- -- tax-exempt organizations;
- -- dealers in securities or currencies;
- -- investors that will hold common shares or ADSs as part of straddles,
hedging transactions or conversion transactions for U.S. federal income tax
purposes or as part of some other integrated investment; or
- -- investors whose functional currency is not the U.S. dollar.
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This summary assumes that we are not a passive foreign investment
company, or "PFIC", for U.S. federal income tax purposes, which we
believe to be the case. Our possible status as a PFIC must be
determined annually and therefore may be subject to change. If we were
to be a PFIC in any year, special and possibly materially adverse,
consequences would result for you. See "Passive Foreign Investment
Company Considerations" below.
This summary is based in part upon representations of the
depositary and assumes that each obligation provided for in, or
otherwise contemplated by, the Deposit Agreement and any related
agreement will be performed in accordance with its respective terms.
The U.S. Treasury has expressed concerns that parties to whom ADRs are
pre-released may be taking actions that are inconsistent with the
claiming, by U.S. holders of ADRs, of foreign tax credits for U.S.
federal income tax purposes. Accordingly, the analysis of the
creditability of Dutch taxes described below could be affected by
future actions that may be taken by the U.S. Treasury.
The summary of U.S. federal income tax consequences set out below
is for general information only. You should consult your own tax
advisers as to the particular tax consequences to you of acquiring,
owning and disposing of the common shares and ADSs, including your
eligibility for benefits under the US/NL Income Tax Treaty, and the
applicability and effect of state, local, foreign and other tax laws
and possible changes in tax law.
U.S. Holders of ADSs
For U.S. federal income tax purposes, an owner of ADSs evidenced
by ADRs will be treated as the owner of the corresponding number of
underlying shares held by the depositary, and references to common
shares in the following discussion refer also to ADSs representing the
shares.
Taxation of Dividends
Subject to the PFIC rules discussed below, distributions paid out
of our current or accumulated earnings and profits (as determined for
U.S. federal income tax purposes), including the amount of any Dutch
tax withheld by us from a payment of dividends, will generally be
taxable to you as foreign source dividend income, and will not be
eligible for the dividends received deduction allowed to corporations.
Distributions that exceed our current and accumulated earnings and
profits will be treated as a non-taxable return of capital to the
extent of your basis in the common shares and thereafter as capital
gain.
Foreign currency dividends
For U.S. federal income tax purposes, the amount of any dividend
paid in euro will equal the fair market value of the euro on the date
the dividend is received by you (in the case of common shares) or the
depositary (in the case of ADSs), based on the exchange rate in effect
on that date. If you convert dividends received in euro into U.S.
dollars on the day they are received, you generally will not be
required to recognize foreign currency gain or loss in respect of this
dividend income.
Effect of Dutch withholding taxes
As discussed in "Taxation -- Certain Dutch Tax Consequences for
Holders of Common Shares or ADSs", under current law dividends that we
pay to you are subject to a 25% Dutch withholding tax. If you are
eligible for benefits under the US/NL Income Tax Treaty and you have
complied with the procedures for claiming these benefits, the amount
of this tax will be reduced to a maximum of 15% either by a reduction
in withholding or by refund. You will be subject to U.S. federal
income tax on the sum of the cash dividend and the amount of Dutch
taxes withheld by us from the dividend. As a result, the amount of
dividend income you must include in gross income for U.S. federal
income tax purposes will be greater than the amount of the cash
dividend that you actually receive.
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Subject to statutory and regulatory limitations, you will
generally be entitled either to elect a credit against your U.S.
federal income tax liability, or take a deduction in computing your
U.S. federal taxable income, for the amount of Dutch withholding tax
imposed on dividends that we pay to you. If you are eligible for
benefits under the US/NL Income Tax Treaty, you will not be entitled
to a foreign tax credit for the amount of any Dutch taxes withheld in
excess of the 15% maximum rate and with respect to which you can
obtain a refund from the Dutch tax authorities. For purposes of
computing allowable foreign tax credits for U.S. federal income tax
purposes, these dividends will generally be treated as "passive
income" or, in the case of holders that are predominantly engaged in
the active conduct of a banking, insurance, financing or similar
business for U.S. federal income tax purposes, "financial services
income." In some cases, you may be unable to claim foreign tax
credits, but will instead be allowed deductions, for these Dutch
withholding taxes if you:
- -- have not held the shares for at least 16 days in the 30-day period
beginning on the date which is 15 days before the ex-dividend date; or
- -- hold the shares in arrangements in which your expected profit, after
non-U.S. taxes, is insubstantial.
- -- are under an obligation (whether pursuant to a short sale or otherwise) to
make payments with respect to positions of substantially similar or related
property.
In general, we must remit all amounts withheld as Dutch dividend
withholding tax to the Dutch tax authorities. However, under certain
circumstances, we may be entitled to retain a portion of the amount
withheld, and any such portion will likely not qualify as a creditable
tax for U.S. foreign tax credit purposes. We will provide to you upon
request the information that is required for you to determine the
portion of the amount withheld that is ineligible for the foreign tax
credit.
For Dutch tax purposes, increases in the par value of the common
shares or ADSs may be treated as dividends subject to withholding tax,
but ordinarily would not be treated as taxable events for U.S. federal
income tax purposes. As a result, any Dutch withholding tax imposed in
this case may be treated as imposed on income in the "general
limitations basket" for purposes of the foreign tax credit limitation
discussed above. You may not be able to utilize U.S. foreign tax
credits in respect of these Dutch taxes if you do not have sufficient
foreign source general limitation income from other sources.
Exchange of ADSs for Common Shares
You will not recognize taxable gain or loss if you exchange ADSs
for your proportionate interest in common shares. Your tax basis in
withdrawn common shares will be the same as your tax basis in the ADSs
surrendered, and your holding period for the common shares will
include the holding period of the ADSs.
Taxation of Capital Gains
Subject to the PFIC rules discussed below, upon a sale or other
disposition of common shares or ADSs, other than an exchange of ADSs
for common shares, you will generally recognize capital gain or loss
for U.S. federal income tax purposes equal to the difference between
the amount realized and your adjusted tax basis in the common shares
or ADSs. This capital gain or loss will be long-term capital gain or
loss if your holding period in the common shares or ADSs exceeds one
year. If you are an individual, the maximum long-term capital gains
rate is 20%, which may be further reduced to 18% if you have held the
common shares or ADSs for more than five years. Any gain or loss will
generally be U.S. source, except that losses will be treated as
foreign source to the extent you received dividends that were treated
as financial services income during the 24-month period prior to the
sale.
Passive Foreign Investment Company Considerations
A foreign corporation will be a PFIC in any taxable year if:
- -- at least 75% of its gross income is "passive income"; or
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- -- at least 50% of the average value of its assets is attributable to assets
that produce passive income or are held for the production of passive
income.
We do not believe that we should be treated as a PFIC. Although
gain from the sale or exchange of securities is generally passive
income, gains from trading by our subsidiaries in their specialist
stocks should be treated as active income under a special exception
for dealers in securities. Although neither the U.S. Internal Revenue
Service nor the courts have expressly stated that a specialist firm
like VDM Specialists should be treated as a dealer in this particular
context, they have treated specialist firms as dealers for other U.S.
federal income tax purposes. Our possible status as a PFIC must be
determined annually and therefore may change. This determination will
depend in part on the proportion of securities that we and our
subsidiaries are considered to hold and trade as part of our
specialist activities.
There can be no assurance that we will not be considered a PFIC
for any taxable year. If we were treated as a PFIC for any taxable
year during which you held common shares or ADSs, certain adverse
consequences could apply to you.
If we were to be treated as a PFIC for any taxable year, and you
do not mark your common shares or ADSs to market, as described below,
gain recognized by you on a sale or other disposition of common shares
or ADSs would be allocated ratably over your holding period for the
common shares or ADSs. The amounts allocated to the taxable year of
the sale or other exchange and to any year before we became a PFIC
would be taxed as ordinary income. The amount allocated to each other
taxable year would be subject to tax at the highest rate in effect for
individuals or corporations, as appropriate, and an interest charge
would be imposed on the amount allocated to such taxable year.
Further, any distribution in respect of common shares or ADSs in
excess of 125% of the average annual distributions on common shares or
ADSs received by you from us in the preceding three years or your
holding period, whichever is shorter, would be subject to taxation and
an interest charge in the manner described above.
Alternatively, if we were to be treated as a PFIC and the common
shares or ADSs are regularly traded on a "qualified exchange," you may
make a mark-to-market election with respect to your common shares or
ADSs. The New York Stock Exchange, on which the ADSs are expected to
be traded, is a qualified exchange for U.S. federal income tax
purposes.
If you make a mark-to-market election you generally will be
required to include each year as ordinary income the excess, if any,
of the fair market value of the common shares or ADSs at the end of
the taxable year over their adjusted basis, and will be permitted an
ordinary loss in respect of the excess, if any, of the adjusted basis
of the common shares or ADSs over their fair market value at the end
of the taxable year (but only to the extent of the net amount of
previously included income as a result of the mark-to-market
election). If you make a mark-to-market election, your basis in the
common shares or ADSs will be adjusted to reflect any such income or
loss amounts. Any gain recognized on the sale or other disposition of
common shares or ADSs will be treated as ordinary income.
You should consult your tax advisors concerning the consequences
to you if we were to be treated as a PFIC.
Backup Withholding and Information Reporting
Payments of dividends and other proceeds with respect to shares by
U.S. persons will be reported to you and to the IRS as may be required
under applicable regulations. Backup withholding may apply to these
payments if you fail to provide an accurate taxpayer identification
number or certification of foreign or other exempt status or fail to
report all interest and dividends required to be shown on your U.S.
federal income tax returns. Some holders (such as corporations) are
not subject to backup withholding. You should consult your tax advisor
as to your qualification for an exemption from backup withholding and
the procedure for obtaining an exemption.
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Disclosure Requirements for U.S. Holders Recognizing Significant
Losses or Experiencing Significant Book-Tax Differences
If you claim significant losses in respect of a common shares or
ADSs (generally $2 million or more for individuals and partnerships
with one or more noncorporate partners, and $10 million or more for
corporations and partnerships consisting solely of corporate
partners), report any item or items of income, gain, expense, or loss
in respect of common shares or ADSs for tax purposes in an amount that
differs from the amount reported for book purposes by more than $10
million on a gross basis in any taxable year, or claim a tax credit
exceeding $250,000 with respect to common shares or ADSs that you have
held for less than 46 days, you may be subject to certain disclosure
requirements for "reportable transactions." You should consult your
own tax advisors concerning any possible disclosure obligation with
respect to common shares or ADSs.
THE PRECEDING DISCUSSION IS ONLY A SUMMARY OF CERTAIN OF THE TAX
IMPLICATIONS OF AN INVESTMENT IN COMMON SHARES OR ADSs BY A U.S.
HOLDER. PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX
ADVISORS PRIOR TO INVESTING TO DETERMINE THE TAX IMPLICATIONS OF SUCH
INVESTMENT IN LIGHT OF EACH SUCH INVESTOR'S PARTICULAR CIRCUMSTANCES.
(F) Dividends and Paying Agents
Not applicable.
(G) Statements by Experts
Not applicable.
(H) Documents on Display
We furnish The Bank of New York, as the depositary with respect to
the ADSs representing our ordinary shares, with our annual reports in
English, which, in the case of our Form 20-F annual report, will
include annual audited consolidated financial statements prepared in
conformity with U.S. GAAP. We also furnish the depositary with our
interim reports to shareholders in English, which include unaudited
interim consolidated financial statements prepared in conformity with
Dutch GAAP, and all other materials we distribute to our shareholders.
Upon receipt thereof, and if we request in writing, the depositary
will promptly mail such reports to all record holders of the ADSs
registered on the books of the depositary. We also will furnish to the
depositary all notices of shareholders' meetings and other reports and
communications that are made generally available to our shareholders.
If we request in writing, the depositary will mail such notices,
reports and communications received by it from us to all record
holders of ADSs promptly after receipt. We will send annual reports,
interim reports, all notices of shareholder meetings and other reports
and communications that are generally available to our shareholders to
any holder of common shares or ADSs upon request.
We will also make this annual report, our articles of association
(in English and in Dutch), and our financial statements for the years
ended December 31, 2000, 2001 and 2002 (as part of our annual reports)
available for collection free of charge at our head office located at
Keizersgracht 307, 1016 ED Amsterdam, the Netherlands.
You may read and copy all or any portion of this annual report or
any reports, statements or other information we file at the Securities
and Exchange Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional office of the Securities and Exchange Commission located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents, upon payment of a duplicating
fee, by writing to the Securities and Exchange Commission. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms.
96
We are subject to the reporting requirements of the Exchange Act
applicable to foreign private issuers. In connection with the Exchange
Act, we will file reports, including annual reports on Form 20-F, and
other information with the Securities and Exchange Commission.
Although the rules of the New York Stock Exchange will require us
to solicit proxies from our shareholders, we will not be subject to
the proxy solicitation requirements of Section 14 of the Exchange Act,
and our officers, directors and 10% beneficial owners will not be
subject to the beneficial ownership reporting requirements or the
short-swing profits recovery rules of Section 16 of the Exchange Act.
(I) Subsidiary Information
Not applicable.
97
Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our risk management activities are based at each of our operating
subsidiaries, with central overnight, analysis and risk policy
formation based at our Amsterdam headquarters. Our risk management
department establishes, in consultation with our management board,
specific maximum risk levels to which our traders must adhere,
monitors compliance with those limits and reports directly to the
management board, on a daily basis, the risk profile of the group.
Analytic software similar to that employed by our risk management
department also informs traders directly of their risk positions,
allowing them to adjust their positions before a violation might
occur.
We believe that five categories of risk are applicable to our business:
- -- market risk;
- -- currency risk;
- -- liquidity risk;
- -- credit and settlement risk; and
- -- legal and operational risk.
We believe that the management of these risks is of fundamental
importance to our current and future success.
Market Risk
Market risk concerns the risk of price changes to equity, options
and bond positions taken onto our books as part of our normal trading
activity. We distinguish between intra-day and overnight market-risk.
We are exposed to intra-day risk when markets are open, and therefore
we can, in principle, cover such risk directly. Overnight risk arises
on positions held when markets are closed, and reflects the
possibility that adverse market developments occurring overnight could
affect prices before the markets open the next day. At our
subsidiaries that do not perform specialist functions, our risk
management policy is based on the premise that, where possible,
overnight risk should be avoided. Accordingly, our traders who do not
perform specialist functions try to minimize the amount of inventory
overnight. This policy towards overnight risk is inconsistent with
specialist obligations on the New York Stock Exchange and certain
other markets, as specialist traders are normally required to trade in
any amount necessary to maintain an orderly market at any time during
the trading day. Therefore, our policy towards overnight risk does not
apply to these specialist activities. Even so, risk managers present
on the floor of the exchange monitor the activities of our specialists
throughout each trading day. We manage our exposure to market risk on
the following basis:
- -- Our traders, other than those performing specialist functions, work within
limits established by the management board in consultation with the risk
management department and the trader's supervisor. For options activities,
these limits are defined in terms of delta, gamma, rho, theta and vega,
which are mathematical descriptors of various sensitivities options have to
movements in the underlying security to which they relate, the level of
interest rates, the passage of time and the level of volatility, as well as
size of book, so that both the value and the characteristics of exposure
are all the subject of risk management.
- -- In setting limits, the liquidity of the underlying instrument and any
related options is a determining factor, since the risk attached to holding
illiquid positions is inherently higher than that of holding positions that
can readily be unwound.
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- -- Our independent risk control unit monitors positions overnight and, where
possible, intra-day, and reports directly to the members of our management
board on a daily basis. The independence of this department from direct
line reporting to the trading desk helps shield it from being influenced by
traders who may be tempted to exceed their limits.
- -- Options positions are analyzed daily to determine their theoretical value
as compared to their market price.
- -- The U.K. bond activity and the Dutch bond activity carry risks resulting
from the changing creditworthiness of bond issuers. Both units restrict
their activities to the most liquid instruments of "investment grade"
borrowers, which provides significant protection against this risk.
- -- The diversity of our business also helps to reduce our overall exposure to
market risk. At any given time, we are long or short a wide variety of
instruments that are traded in a number of different markets in Europe and
the United States. Although in accordance with our Value at Risk ("VAR")
practice we do not emphasize the extent to which this reduces the risks of
our activities, we believe that it does make a considerable contribution.
- -- Position books are analyzed daily with VAR models and stress tests, which
give estimates of the potential risk of losses in "normal" and "extreme"
market conditions, respectively. Senior management is apprised of these
results in detail on a daily basis. The following discussion provides
greater detail about our VAR model and stress tests.
We rely partly on a VAR model to help us to measure our market
risk. VAR measures, as a statistical probability, the potential loss
in value to those securities that we hold. Typically our calculation
horizon is one day; we look at risk on an overnight basis, although we
may run a VAR calculation on an intra-day basis in specific
circumstances, for example, when market conditions change rapidly or
volatility is unusually high. For the VAR numbers set out in the table
below, a one day time horizon and a 97.7% confidence level are used.
This means that for slightly more than two days out of a 100 it is
statistically probable that the potential loss in fair value will
exceed the VAR amount shown in the table below. Our VAR model is a
historical model that uses the last 90 days of information. This is a
substantially shorter period than the VAR data used by many other
firms. We believe that this short period is appropriate for a market
maker and specialist which typically holds only very short-term
positions, since the data series employed will more closely reflect
current market circumstances. VAR calculations are performed for each
trading book and an aggregate calculation is performed for all of our
businesses. In calculating the aggregated VAR, our model takes account
of correlations between derivatives and their underlying securities,
but correlations between other instruments (for example, the equities
of two different issuers) are not considered. An exception is made for
index derivatives, which may be correlated with our inventory
positions in their component underlying equities.
The following table sets forth our high, low and average VARs for
the years ended December 31, 2001 and 2002.
Van der Moolen Holdings
VAR Levels
------------------------
2001 2002
-------------- ---------
(EUR millions)
High 16.0 9.0
Low 5.5 2.0
Average 10.5 5.5
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VAR risk models are subject to a number of uncertainties and
limitations. Our VAR model, like all such models, involves a number of
assumptions and approximations. While management believes that these
assumptions and approximations are reasonable, there is no uniform
industry methodology for estimating VAR and different assumptions
and/or approximations could produce materially different VAR
estimates. Given its reliance on historical data, an inherent
limitation of any VAR model is that past changes in market risk
factors may not produce accurate predictions of future market risk.
Further, the use of options pricing models in connection with VAR
analysis brings into the analysis all the limitations of such models,
most notably their difficulties in pricing longer-dated instruments.
As a result, management does not rely on VAR models alone in its
risk management. The output of the VAR model is supplemented with
various "stress" tests, largely to analyze our risks during more
extreme market conditions. "Stress" modeling consists largely of
substituting historical extremes of volatility, correlations and other
relevant parameters for the 90-day data used in the standard VAR
calculations. We generally apply these models only to our trading
books and not to the firm as a whole. "Stress tests" are essentially
ad hoc supplements to more routine VAR analyses, but we attempt to
systematize them. Further, since "stress" is largely dependent on the
trading behavior and financing of our particular business operations,
our risk managers seek to develop tests that specifically address the
identified risks to our businesses. While we recognize that there are
limits to the predictive power of VAR analysis, we believe that by
supplementing it with "stress" analyses, we are able to obtain an
appropriate picture of our risk profile at any given time.
At our subsidiaries in Europe and at Van der Moolen Options USA
and Cohen, Duffy, McGowan in the United States, position data is
entered into the model in real time, while New York Stock Exchange
data is transmitted the next day after the opening of the market due
to New York Stock Exchange confidentiality requirements. Risk
management on the New York Stock Exchange is the responsibility of
employees of VDM Specialists who are physically present on the floor
of the exchange throughout the trading day; overnight positions are
transmitted to Amsterdam for further analysis. Derivative trading
books are analyzed for sensitivity to option price determinants, such
as delta, gamma, theta and vega, and position limits are also placed
on exposure to these. Our U.K. bond trading book monitors exposure to
specific issuers as well as to broad categories of issuers, such as
telecommunications, utilities and banks, and places position limits on
its exposure to them. With the creation of new fixed income-related
activities in 2001, our group-wide yield curve exposure has increased,
and consequently we have added this functionality to our risk
monitoring systems to allow them to analyze this exposure and to
establish trading limits for it.
We believe that with an average of over 75,000 transactions per
day, diversified across a broad range of issuers, products, exchanges
and trading systems in various markets in Europe and the United
States, we are able to achieve a balanced risk profile.
Currency Risk
We are affected by three types of currency risk. The first is the
effect of translation gains or losses on our results of operations.
This results from expressing our financial statements in euros when
the majority of the revenues and expenses of our subsidiaries are
denominated in U.S. dollars. If the U.S. dollar depreciates relative
to the euro, our net income as reported in euros will be
proportionately less than it would otherwise have been. Secondly, we
are exposed to currency risk when, in the course of preparing our
balance sheet, we translate into euros assets and liabilities
denominated in currencies other than the euro. If the euro depreciates
relative to those currencies, the translated value of those assets and
liabilities will be affected, and the net effect is charged or
credited to shareholders' equity. Finally, we are also exposed to
currency risk from trading positions denominated in any currency other
than the euro and from earnings arising from group companies operating
100
outside the Euro-zone. In order to manage and address these various
currency risks, we employ the following policies:
- -- Foreign currency exposure on security positions held on the books of our
various subsidiaries is hedged immediately into the local currency of the
subsidiary.
- -- Foreign currency exposure arising from financial fixed assets, such as
foreign equity participations, is generally not hedged. Negative changes in
the value of these assets resulting from currency movements are charged
directly to shareholders' equity and consequently do not affect our
operating earnings.
- -- Foreign currency receivables, such as dividend payments from participations
and payments on inter-company debt, are generally hedged when realized.
In early 2003, we departed from our normal practice and purchased
U.S. dollar put options in order to create a "stop loss" on the
translation exposure arising on our U.S. dollar denominated net income
in 2003 at a strike price of $1.075 per euro net of hedging costs.
This means in practice that the impact of a further appreciation of
the euro against the U.S. dollar above $1.075 per euro will have a
limited effect on net income in 2003.
Liquidity Risk
Liquidity risk relates to our ability to finance our security
positions. If we were unable to finance our security positions, our
financial condition would be adversely affected. However, we believe
our financial resources, relative to our capital employed, and the
liquid nature of most of the instruments we trade, limits this risk.
In addition, we maintain credit facilities with commercial banks.
Credit and Settlement Risk
For our businesses that trade on exchanges, the credit risk that
could result from counterparties defaulting is limited, and their
settlement risks are essentially transferred to recognized clearing
organizations. The exception to this is the market making debt
business of Van der Moolen U.K., which trades outside of exchange
frameworks. Van der Moolen U.K.'s exposure to counterparties is
monitored closely and is subject to limits. Minimum standards for the
credit quality of its counterparties have been established, and the
credit quality of its counterparties is monitored on a continuing
basis. Other than stock lending and borrowing, loans to third parties
are generally restricted to group companies or to participations over
which we exercise significant management control.
Legal and Operational Risk
For those of our businesses that trade solely on exchanges, legal
and operational risks are reduced by the exchanges themselves, which
establish standard conditions of trade designed precisely for this
purpose. In addition, the use of third parties' trading systems and
clearing structures effectively transfers such risks to those parties.
Van der Moolen U.K.'s bond market making business runs notable
operational risks, since it does not generally execute through
exchanges, and will settle its trades itself. The risk that its trades
could fail, either through its inability to deliver cash or securities
or a similar failure on the part of its counterparties, is reduced by
the trade matching functionality of the Bloomberg ((TM)) system
through which most of its business is transacted, by the
trade-reporting system of EuroMTS and by use of a computerized
settlement system provided by MIS Capital Banking Systems Ltd.
However, we believe that maintaining a high quality operations staff
and monitoring all transactions from execution to final settlement is
this business's best protections against operational risk.
101
All of our operations are vulnerable to operational risks that can
result from damage to our own facilities, the facilities of the
exchanges on which we operate and to communications and other
infrastructure. Where possible, our own facilities and systems and
those of the exchanges and infrastructure providers have multiple
back-up systems, which reduces the risk that we would be prevented by
damage to any one facility or system from being able to carry out our
business. However, the attack on the World Trade Center on September
11, 2001 revealed that even these precautions may not always be
sufficient to maintain the continuity of our business. While this
event has caused us to review our back up facilities and procedures,
and as a result we took relevant emergency-preparedness measures, the
possibility of such disruption of our business can never be completely
eliminated.
Item 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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PART II
Item 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
Item 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
Other than as set out herein (including the financial statements
and the notes thereto), there have been no material modifications in
the rights of our security holders and there are no specific assets
securing any class of our securities.
Item 15: CONTROLS AND PROCEDURES
Within the 90-day period prior to the filling of this Annual
Report, an evaluation was carried out under the supervision and with
the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934).
Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant
changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of
their most recent evaluation.
Item 16: RESERVED
103
PART III
Item 17: FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this item.
Item 18: FINANCIAL STATEMENTS
The following financial statements and related schedules, together
with the report of PricewaterhouseCoopers N.V. thereon, are filed as
part of this annual report:
Index to U.S. GAAP Consolidated Financial Statements
Page
Report of Independent Accountants F-1
Audited Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December 31, 2002 and
2001 F-2
Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000 F-3
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-9
Index to Dutch GAAP Financial Statements
Summary of Significant Accounting Differences Between Dutch GAAP and
U.S. GAAP A-1
Selected Dutch GAAP Financial Data A-3
104
Item 19: EXHIBITS
The following instruments and documents are included as exhibits
to this annual report.
Exhibit Number Description
- ---------------- --------------------------------------------------------------------
1.1** Articles of Association of the Company.
2.1** Deposit Agreement among the Company, The Bank of New York, as
depositary, and the owners and beneficial owners from time to time
of American Depositary Receipts evidencing American Depositary
Shares each representing one common share of the Company.
2.2** Form of American Depositary Receipt.
4.1** Amended and Restated Operating Agreement of VDM Specialists, LLC.
8* Subsidiaries of the registrant.
12.1* Certification of the Chief Executive Officer pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
12.2* Certification of the Chief Financial Officer pursuant to section 302
of the Sarbanes-Oxley Act of 2002.
12.3* Certification of the Chief Executive Officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002.
12.4* Certification of the Chief Financial Officer pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002.
* Filed herewith.
** Incorporated by reference to the Company's Registration Statement on Form
20-F (SEC File No. 333-1-16731) filed with the Securities and Exchange
Commission on October 15, 2001.
105
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
VAN DER MOOLEN HOLDING N.V.
By: /s/ Friedrich M.J. Bottcher
--------------------------------
Name: Friedrich M.J. Bottcher
Title: Chairman of the Management Board
By: /s/ Frank F. Dorjee
--------------------------------
Name: Frank F. Dorjee
Title: Chief Financial Officer, Member of the
Management Board
By: /s/ James P. Cleaver, Jr.
--------------------------------
Name: J.P. Cleaver, Jr.
Title: Member of the Management Board
By: /s/ Casper F. Rondeltap
--------------------------------
Name: C.F. Rondeltap
Title: Member of the Management Board
Date: June 27, 2003
106