As filed with the Securities and Exchange Commission on June 30, 2005
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] 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, 2004
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
Common shares of (euro)0.08 each which registered
American Depositary Shares, each of New York Stock Exchange*
which 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, 2004, the close of the period covered by the
annual report:
38,317,100 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
- --------------------------------------------------------------------------------
Forward-Looking Statements 4
- --------------------------------------------------------------------------------
PART I 5
- --------------------------------------------------------------------------------
Item 1: IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 5
- --------------------------------------------------------------------------------
Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE 5
- --------------------------------------------------------------------------------
Item 3: KEY INFORMATION 5
- --------------------------------------------------------------------------------
Item 4: INFORMATION ON THE COMPANY 23
- --------------------------------------------------------------------------------
Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS 39
- --------------------------------------------------------------------------------
Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 60
- --------------------------------------------------------------------------------
Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 69
- --------------------------------------------------------------------------------
Item 8: FINANCIAL INFORMATION 71
- --------------------------------------------------------------------------------
Item 9: THE OFFER AND LISTING 77
- --------------------------------------------------------------------------------
Item 10: ADDITIONAL INFORMATION 79
- --------------------------------------------------------------------------------
Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 96
- --------------------------------------------------------------------------------
Item 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 99
- --------------------------------------------------------------------------------
PART II 100
- --------------------------------------------------------------------------------
Item 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 100
- --------------------------------------------------------------------------------
Item 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
- -------------------------------------------------------------------
AND USE OF PROCEEDS 100
- --------------------------------------------------------------------------------
Item 15: CONTROLS AND PROCEDURES 100
- --------------------------------------------------------------------------------
Item 16A: AUDIT COMMITTEE FINANCIAL EXPERT 100
- --------------------------------------------------------------------------------
Item 16B: CODE OF ETHICS 100
- --------------------------------------------------------------------------------
Item 16C: PRINCIPAL ACCOUNTING FEES AND SERVICES 100
- --------------------------------------------------------------------------------
Item 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 101
- --------------------------------------------------------------------------------
Item 16E: PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED
PURCHASERS 101
- --------------------------------------------------------------------------------
PART III 102
- --------------------------------------------------------------------------------
Item 17: FINANCIAL STATEMENTS 102
- --------------------------------------------------------------------------------
Item 18: FINANCIAL STATEMENTS 102
- --------------------------------------------------------------------------------
Item 19: EXHIBITS 103
- --------------------------------------------------------------------------------
2
Presentation of Financial and Other Information
We prepare our financial statements on a consolidated basis in accordance with
generally accepted accounting principles 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, 2004, 2003, 2002, 2001 and 2000, together with our U.S.
GAAP consolidated financial statements and the notes thereto as of and for the
years ended December 31, 2004, 2003 and 2002, are set forth elsewhere in this
annual report. We will also continue to prepare our annual financial statements
on a consolidated basis in accordance with U.S. GAAP. We will prepare our annual
financial statements in accordance with International Financial Reporting
Standards for the year ending December 31, 2005, at which time we will cease
producing our annual financial statements in accordance with Dutch GAAP. All of
the financial information presented in this annual report has been prepared in
accordance with U.S. GAAP.
In this annual report, we have translated euro amounts into dollars at an
exchange rate of (euro)1.00 to $1.3538, the December 31, 2004 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
24, 2005, the noon buying rate was (euro)1.00 to $1.2088.
See "Key Information -- Selected Consolidated Financial Data -- Exchange Rate
Information" for historical information regarding the exchange rate of dollars
for the euro.
3
Forward-Looking Statements
This annual report contains 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," "hope," and words of similar meaning are forward-looking. In
particular, the following are forward-looking in nature:
o statements with regard to strategy and management objectives;
o pending or potential acquisitions;
o pending or potential litigation and government investigations, including
litigation and investigations concerning specialist trading in the United
States;
o future revenue sources;
o the effects of changes or prospective changes in the regulation or
structure of the securities exchanges on which our subsidiaries operate;
and
o trends in results, performance, achievements or conditions in the markets
in which we operate including, in particular, the New York Stock Exchange.
These forward-looking statements involve risks, uncertainties and other factors,
some of which are beyond our control, which may cause our results, performance,
achievements or conditions in the markets in which we operate to differ,
possibly materially, from those expressed or implied in these forward-looking
statements. We describe certain important factors to consider in connection with
these forward-looking statements under "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. We have no obligation to update these
forward-looking statements.
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
(A) 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 refer herein to our consolidated financial
statements and the notes thereto as our U.S. GAAP consolidated financial
statements. Our U.S. GAAP consolidated financial statements have been audited by
PricewaterhouseCoopers Accountants N.V., independent auditors. The profit and
loss data contained in our U.S. GAAP consolidated financial statements for the
years ended December 31, 2004, 2003 and 2002 and the balance sheet data as of
December 31, 2004 and 2003 have been adjusted in accordance with SFAS No. 144 to
reflect the effect of discontinued operations. See note 3 to our U.S. GAAP
consolidated financial statements for further information relating to SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Selected
consolidated financial data for the years ended December 31, 2001 and 2000 have
been adjusted accordingly for comparative purposes. Further, total assets and
total liabilities as of December 31, 2003, 2002, 2001 and 2000 have been
increased as a result of the correction of an error in the presentation of cash
and cash equivalents and bank overdrafts (shown in short-term borrowings).
Further details of this restatement are included in note 2 to our U.S. GAAP
consolidated financial statements and in footnote 6 to the financial information
presented hereafter. 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, 2004 at the noon buying rate on December 31, 2004 of
(euro)1.00 = $1.3538. 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
- -----------------------------------------------------------------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
(in $ (in (euro) (in (euro) (in (euro) (in (euro) (in (euro)
millions, millions, millions, millions, millions, millions,
except per except per except per except per except per except per
share data) share data) share data) share data) share data) share data)
- -----------------------------------------------------------------------------------------------------------------------------
Consolidated Profit and Loss Account Data:
Revenues:
Specialist activities $ 96.2 (euro) 71.1 (euro) 100.8 (euro) 227.0 (euro) 233.4 (euro) 273.7
Proprietary trading/market making activities 31.7 23.4 24.7 49.6 60.0 111.3
Commission income 33.3 24.6 28.1 35.0 38.5 39.0
Net interest income from stock lending
activities 4.9 3.6 3.4 4.2 5.1 6.3
--------------------------------------------------------------------------------
Total revenues from continuing operations $ 166.1 (euro) 122.7 (euro) 157.0 (euro) 315.8 (euro) 337.0 (euro) 430.3
--------------------------------------------------------------------------------
Expenses:
Exchange, clearing and brokerage fees 29.0 21.4 23.5 33.0 23.9 21.6
Employee compensation and benefits(1) 47.0 34.7 42.3 78.7 85.9 113.7
Lease of exchange memberships 10.4 7.7 13.8 15.7 11.8 7.7
Information and communication expenses 4.1 3.0 3.4 4.9 4.6 4.4
General and administrative expenses(2) 19.6 14.5 12.0 19.7 27.4 16.6
Depreciation and amortization 10.0 7.4 9.0 10.9 20.5 16.0
Provision for NYSE/SEC investigation -- -- 45.7 -- -- --
Impairment of intangible fixed assets 11.1 8.2 49.2 -- -- --
Impairment of other assets 7.6 5.6 -- -- -- --
--------------------------------------------------------------------------------
Total expenses $ 138.8 (euro) 102.5 (euro) 198.9 (euro) 162.9 (euro) 174.1 (euro) 180.0
--------------------------------------------------------------------------------
Income/(loss) from continuing operations $ 27.3 (euro) 20.2 (euro) (41.9) (euro) 152.9 (euro) 162.9 (euro) 250.3
--------------------------------------------------------------------------------
Income/(loss) from associates -- -- -- -- (0.1) 0.2
Gain on disposal of long-term investments and
associates -- -- 0.9 -- 29.8 10.9
Interest expense, net (10.3) (7.6) (8.9) (13.0) (10.1) (6.4)
Interest expense, capital subject to
mandatory redemption, net(1) (10.7) (7.9) (2.4) -- -- --
Other income 1.8 1.3 6.1 5.1 8.3 1.7
--------------------------------------------------------------------------------
Income/(loss) from continuing operations
before income taxes(3) $ 8.1 (euro) 6.0 (euro) (46.2) (euro) 145.0 (euro) 190.8 (euro) 256.7
--------------------------------------------------------------------------------
Provision for income taxes(2) 0.8 0.6 12.2 (46.1) (48.5) (85.7)
6
---------------------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
(in $ (in (euro) (in (euro) (in (euro) (in (euro) (in (euro)
millions, millions, millions, millions, millions, millions,
except per except per except per except per except per except per
share data) share data) share data) share data) share data) share data)
---------------------------------------------------------------------------------
Minority interest(1) 3.4 2.5 -- (35.3) (35.3) (45.5)
---------------------------------------------------------------------------------
Net income/(loss) from continuing operations 12.3 9.1 (34.0) 63.6 107.0 125.5
---------------------------------------------------------------------------------
Net income/(loss) from discontinued
operations(3) (24.5) (18.1) (24.6) (33.5) (14.9) (1.3)
---------------------------------------------------------------------------------
Net income/(loss) $ (12.2) (euro) (9.0) (euro) (58.6) (euro) 30.1 (euro) 92.1 (euro) 124.2
=================================================================================
As adjusted to reflect our three-for-one
stock split that took effect on May 1,
2001:
-------------
Basic earnings per share (4) $ (0.42) (euro) (0.31) (euro) (1.55) (euro) 0.71 (euro) 2.34 (euro) 3.28
Diluted earnings per share (5) $ (0.42) (euro) (0.31) (euro) (1.55) (euro) 0.71 (euro) 2.32 (euro) 3.25
Basic earnings per share from discontinued
operations $ (0.64) (euro) (0.47) (euro) (0.65) (euro) (0.87) (euro) (0.39) (euro) (0.04)
Diluted earnings per share from discontinued
operations $ (0.64) (euro) (0.47) (euro) (0.65) (euro) (0.87) (euro) (0.39) (euro) (0.03)
- ------------------------------------------------------------------------------------------------------------------------------
2003, as 2002, as 2001, as 2000, as
2004 2004 restated(6) restated(6) restated(6) restated(6)
(in $ (in (euro) (in (euro) (in (euro) (in (euro) (in (euro)
millions) millions) millions) millions) millions) millions)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Assets:
Cash and cash equivalents (6) $ 390.2 (euro) 288.2 (euro) 383.8 (euro) 575.1 (euro) 557.9 (euro) 273.9
Cash segregated under federal and other
regulations -- -- -- -- 0.6 0.5
Securities purchased under agreements to
resell -- -- -- -- 11.3 156.4
Receivable from clearing organizations
and professional parties 36.3 26.8 69.2 364.7 729.0 120.7
Securities owned, at market value (7) 171.8 126.9 227.2 393.7 846.1 473.4
Not readily marketable financial
instruments -- -- 0.1 0.1 0.2 6.4
Loans receivable -- -- 11.9 11.9 19.7 25.8
Stock borrowed 822.2 607.3 1,445.4 1,102.1 1,685.0 1,469.6
7
As of December 31,
--------------------------------------------------------------------------------------
2003, as 2002, as 2001, as 2000, as
2004 2004 restated(6) restated(6) restated(6) restated(6)
(in $ (in (euro) (in (euro) (in (euro) (in (euro) (in (euro)
millions) millions) millions) millions) millions) millions)
---------- -------------- -------------- -------------- -------------- --------------
Memberships in exchanges:
Owned, at cost (market value of (euro)
12.3 million, (euro) 12.1 million,
(euro) 20.6 million, (euro) 28.0
million and (euro) 20.8 million
respectively) 21.3 15.7 13.3 18.1 21.5 19.2
Contributed by members, at market value 4.2 3.1 9.5 21.0 27.5 15.0
Deferred tax assets, net 7.3 5.4 6.0 -- -- --
Property and equipment, net 5.5 4.1 5.9 8.4 11.1 7.9
Goodwill, net 64.4 47.6 59.4 141.9 176.5 129.0
Other intangible assets, net 253.4 187.2 208.1 266.7 293.7 212.0
Held-for-sale assets(8) -- -- 417.7 501.1 -- --
Other assets 33.7 24.9 39.9 29.4 35.7 41.1
---------- -------------- -------------- -------------- -------------- --------------
Total assets $1,810.3 (euro)1,337.2 (euro)2,897.4 (euro)3,434.2 (euro)4,415.8 (euro)2,950.9
--------------------------------------------------------------------------------------
Liabilities and shareholders' equity:
Liabilities:
Short-term borrowings(6) 94.1 69.5 195.0 310.5 312.3 214.9
Payable to clearing organizations and
professional parties 25.2 18.6 10.0 40.2 151.9 70.3
Securities sold, not yet purchased, at market
value (7) 159.2 117.6 231.6 651.1 1,249.0 403.8
Stock loaned 802.0 592.4 1,444.1 1,126.6 1,690.6 1,446.7
Current taxes payable 16.7 12.3 7.8 20.8 19.0 39.3
Accounts payable, accrued expenses, and other
liabilities 43.3 32.0 26.0 22.3 61.8 94.6
Held-for-sale liabilities(8) -- -- 403.5 473.1 -- --
Provision for NYSE/SEC investigation -- -- 45.7 -- -- --
Deferred tax liabilities, net 8.0 5.9 2.8 11.5 17.1 10.1
Notes payable 7.3 5.4 6.9 7.3 69.6 17.5
Capital subject to mandatory redemption(1) -- -- 17.4 -- -- --
Subordinated borrowings:
Subordinated notes 180.3 133.2 149.0 197.3 180.4 74.6
Memberships in exchanges, contributed by
members, at market value 4.2 3.1 9.5 21.0 27.5 15.0
Minority interest 22.7 16.8 -- 29.2 31.6 26.7
8
------------------------------------------------------------------------------------------
2003, as 2002, as 2001, as 2000, as
2004 2004 restated(6) restated(6) restated(6) restated(6)
(in $ (in (euro) (in (euro) (in (euro) (in (euro) (in (euro)
millions) millions) millions) millions) millions) millions)
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Shareholders' equity:
Financing preferred A shares,
(euro) 0.60 (9) par value,
authorized 1,200,000 shares,
issued and outstanding 251,000,
251,000, 251,000, 241,000 and
236,000 shares, respectively 0.1 0.1 0.1 0.1 0.1 0.1
Financing preferred B shares,
(euro) 0.60 (9) par value,
authorized 1,200,000 shares,
issued and outstanding 391,304
shares 0.4 0.3 0.3 0.3 0.3 0.2
Common shares, (euro) 0.08 (9)
par value, authorized 54,000,000
shares, issued and outstanding
38,419,282, 38,419,282,
38,419,282, 37,502,455 and
37,061,811 shares 4.2 3.1 3.1 3.1 3.0 2.8
Treasury shares (3.2) (2.4) (8.1) -- -- --
Additional paid-in capital 375.8 277.6 277.1 272.3 242.8 229.9
Retained earnings 236.0 174.3 189.1 275.1 289.3 257.8
Accumulated other comprehensive
income (166.0) (122.6) (113.5) (27.6) 69.5 46.6
------------------------------------------------------------------------------------------
Total shareholders' equity $ 447.3 (euro) 330.4 (euro) 348.1 (euro) 523.3 (euro) 605.0 (euro) 537.4
------------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $1,810.3 (euro) 1,337.2 (euro) 2,897.4 (euro) 3,434.2 (euro) 4,415.8 (euro) 2,950.9
==========================================================================================
As of and for the year ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Other Financial and Operating Data:
Pre-tax return on equity (10) (4.3%) (24.1%) 10.5% 21.8% 39.1%
Percent of revenues (11)
Specialist activities: 58.0% 64.2% 71.9% 69.3% 63.6%
Proprietary trading/market making activities 19.1% 15.7% 15.7% 17.8% 25.9%
Commission income 20.0% 17.9% 11.1% 11.4% 9.1%
Net interest income from stock lending activities 2.9% 2.2% 1.3% 1.5% 1.4%
Weighted average number of common shares outstanding (12) 38,078,411 37,797,329 38,388,043 38,139,964 36,990,191
VDM Specialists
Number of common stock listings (13) 387 383 379 388 239
9
(1) We adopted SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" as from January 1, 2003 and
as of that date minority interest is presented as capital subject to
mandatory redemption in the Consolidated Statement of Financial Condition.
On December 1, 2004, VDM Specialists amended its operating agreement and
based on a review of the terms of the amended operating agreement the
Company determined that the minority members' capital was not redeemable
upon an event certain to occur and consequently that the characteristics of
these financial instruments conform to those of equity instruments.
Consequently, as from December 1, 2004, the minority members' capital of
VDM Specialists is classified as minority interest. In 2003 and for the
period January 1, 2004 - December 1, 2004, all income distributable to the
Company's minority members is recorded as interest expense and any net loss
as a reduction of interest expense. For the period December 1, 2004 through
December 31, 2004 all income distributable to the Company's minority
members, including interest on minority members' capital contributions is
presented as minority interest in the Consolidated Statement of Income.
Prior year amounts have not been reclassified, except that interest on
minority members' capital contributions previously reported in 2000, 2001
and 2002 as a component of employee compensation and benefits has been
reclassified to minority interest.
(2) Unincorporated business tax expenses are included within provision for
income taxes. For the years ended December 31, 2000 and 2001 these expenses
have been reclassified from general and administrative expenses to
provision for income taxes for consistency purposes.
(3) Discontinued operations comprise Cohen, Duffy, McGowan, LLC, Kenny & Co.,
Van der Moolen Opties Amsterdam B.V., Van der Moolen UK, Ltd. and Van der
Moolen Options USA, LLC.
(4) Calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding. See note 19 to our
U.S. GAAP consolidated financial statements.
(5) 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 19 to our U.S. GAAP consolidated
financial statements.
(6) Total assets and total liabilities at December 31, 2003, 2002, 2001 and
2000 have been increased by (euro)134.7 million, (euro)281.1 million,
(euro)265.6 million and (euro)208.4 million, respectively, as a result of
the correction of an error in the presentation of cash and cash equivalents
and bank overdrafts (shown in short-term borrowings) in prior years. Cash
and cash equivalents and bank overdrafts are recognized on a gross basis
where there is no legally enforceable right to offset the recognized
amounts and there is no intention to settle on a net basis. The Company is
a party to a cash pooling agreement with one of its bankers, in accordance
with which the Company earns or incurs interest on the net balance.
However, the Company has no legal right to offset balances under this
pooling agreement. Previously, the Company presented cash and cash
equivalents and bank overdrafts that were subject to this pooling agreement
on a net basis. Prior period balances have been restated so as to present
balances subject to the pooling agreement on a gross basis. See note 2 to
our U.S. GAAP consolidated financial statements.
(7) As of December 31, 2003, positions in ADRs and shares arising from
arbitrage activities are reflected gross in the balance sheet. Prior year
data has been adjusted accordingly.
(8) Held-for-sale assets and held-for-sale liabilities represent assets and
liabilities of Van der Moolen UK, Ltd.
(9) As a result of our having amended our articles of association 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 (euro)0.60, (euro)0.60 and (euro)0.08, respectively.
(10) Pre-tax return on equity is calculated by dividing income before income
taxes after minority interests (including from discontinued operations) by
shareholders' equity.
(11) Revenues as a percentage of revenues from continuing operations.
(12) As adjusted to reflect our three-for-one stock split that took effect on
May 1, 2001.
(13) Represents the number of common stock issues on the New York Stock Exchange
for which VDM Specialists acts as the specialist.
Exchange Rate Information
Unless otherwise stated, we present all of the financial information in this
annual report in euros. 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 British pounds sterling and Swiss francs. 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.
The following tables present information concerning the exchange rate of dollars
to the euro. Amounts are expressed in dollars per (euro)1.00 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.
10
For the year ended December 31, Rate at period end Average(1) High Low
- ---------------------------------------- ------------------ ------------ ------------ --------------
2000 0.9427 0.9238 1.0414 0.8230
2001 0.8895 0.8961 0.9594 0.8352
2002 1.0492 0.9506 1.0505 0.8565
2003 1.2595 1.1419 1.2647 1.0336
2004 1.3554 1.2494 1.3666 1.1761
- ----------------------------------------
Source: Bloomberg.
(1) Calculated by using the average of the exchange rates on the last day of
each month during the relevant period.
For the month ended Rate at period end High Low
- ---------------------------------------- ------------------ ------------ ------------ --------------
December 31, 2004 1.3554 1.3666 1.3139
January 31, 2005 1.3038 1.3582 1.2922
February 29, 2005 1.3228 1.3280 1.2732
March 31, 2005 1.2964 1.3482 1.2857
April 30, 2005 1.2873 1.3125 1.2766
May 31, 2005 1.2304 1.2990 1.2296
- ----------------------------------------
Source: Bloomberg.
The noon buying rate for the euro on June 24, 2005 was (euro)1.00 = $1.2088.
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 our 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.
(C) Reasons for the Offer and Use of Proceeds
Not applicable.
(D) Risk Factors
We have listed below factors that could have a material adverse effect on our
business, financial condition or results of operations. Additional factors 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.
11
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
and cash flows.
We derive a substantial majority of our revenues 81.2%, 78.7% and 82.9% of
total revenues in 2004, 2003 and 2002, respectively) from our New York Stock
Exchange specialist subsidiary, Van der Moolen Specialists USA, LLC, which we
refer to in this annual report as VDM Specialists or Van der Moolen Specialists.
The recent difficult global market and economic conditions have resulted in a
decline in VDM Specialists' revenues from (euro)266.7 million in 2002 to
(euro)133.1 million in 2003 and (euro)99.6 million in 2004. If conditions do not
improve or decline further, our revenues will continue to be adversely affected.
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:
o development in trading volumes with an appropriate level of volatility;
o VDM Specialists' success in being chosen to act as specialist for newly
listed companies and the potential loss of trading assignments through
acquisition or other means;
o VDM Specialists' ability to respond to regulatory and technological
changes;
o VDM Specialists' ability to respond to changing demands in the marketplace;
and
o the effect of alternative trading systems and other "third market"
execution venues on the volume of trading through specialists on the New
York Stock Exchange.
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 or other membership
requirements, in ways that may adversely affect our ability to generate revenues
from our New York Stock Exchange activities or raise our cost of doing so.
Similar changes may adversely affect our ability to generate revenues, operating
profit and cash flows 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.
In February 2004 and again in August 2004, the New York Stock Exchange proposed
to expand its Direct+ (R) trading system to eliminate its current limits on the
size, timing and types of orders that may be executed electronically through the
Direct+ (R) system, and thereby create a hybrid market intended to incorporate a
number of new trade execution options while preserving the option of access to
auction price discovery and deep liquidity. Specifically, the New York Stock
Exchange's proposals would eliminate the 1,099-share restriction on New York
Stock Exchange Direct + (R) orders, as well as the prohibition against entering
orders for the same account within 30 seconds, and would permit market orders
and immediate-or-cancel orders to be eligible for Direct+ (R) execution. In
addition, the New York Stock Exchange's proposals contain a number of other new
features designed, according to the New York Stock Exchange's statements, to
"create a liquidity pool accessible for electronic and auction price discovery;
the opportunity for benefits associated with human judgment at the point of
sale; and accountable performance with focused communication by specialists."
The New York Stock Exchange has indicated that it already has begun the
technical work necessary to implement its proposed changes to the New York Stock
Exchange Direct+ (R) system and has estimated that, subject to approval of its
proposed changes by the SEC, a pilot or phased start of the new Direct+ (R)
system will commence sometime in 2005.
On April 6, 2005, the SEC voted to adopt Regulation NMS, which contains numerous
new rules that could have a material adverse effect on our business, results of
operations and cash flows. In particular, its distinction between "fast markets"
and others has motivated the New York Stock Exchange to modify its execution
model in ways that could, depending on how investors choose to employ the new
model, reduce our opportunities to act as counterparty to New York Stock
Exchange orderflow. The effects of these changes are difficult to predict, but
they may result in an increase in the number of orders for New York Stock
Exchange listed shares that are executed off of the New York Stock Exchange
floor, which may reduce our revenues from our New York Stock Exchange floor
activities.
12
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, operating profits and cash
flows from our activities on those exchanges.
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, operating
profit and cash flows. The loss of its specialist designation with respect to
any of these listed companies could have an adverse effect on our revenues,
operating profit and cash flows. For the years ended December 31, 2002, 2003 and
2004, transactions in our ten most actively traded specialist stocks accounted
for 26.6%, 34.0% and 33.4% of our total New York Stock Exchange specialist
revenues, respectively. For the year ended December 31, 2004, our ten most
actively traded specialist stocks were Pfizer, Eli Lilly, Hewlett-Packard,
Guidant, Walt Disney, Wyeth, Kohl's Corp., Nortel Networks, HCA, and
International Paper. 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 the specialist assignment in these listed
companies if they cease to be traded on the New York Stock Exchange as a result
of being acquired or are otherwise de-listed, which in turn can adversely affect
our revenues. This was the case, for example, in March 2004 when VDM Specialists
lost its specialist assignment for FleetBoston Financial following its merger
with Bank of America. In addition, if the New York Stock Exchange were to
determine that VDM Specialists has failed to fulfill its obligations as
specialist for a listed company, its registration as a specialist for that
listed company could be cancelled or suspended. Alternatively, a company can
request to be reassigned if it can present the New York Stock Exchange with
substantive reasons to support its request. While this process would normally
take approximately one year to complete, there is a proposal to shorten this
process to three months.
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 U.S. Securities and Exchange Commission, or the
SEC, 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, including claims that may be without merit.
We could incur significant legal expenses in defending ourselves against such
lawsuits or claims.
For example, on March 30, 2004, we announced a settlement with the New York
Stock Exchange and the SEC of charges resulting from an investigation of alleged
improper trading practices at several New York Stock Exchange specialist firms,
including VDM Specialists, without admitting or denying the charges. VDM
Specialists' portion of the settlement amounted to $57.7 million. As a result of
these charges, we have become subject to a number of related actions, including
two class action lawsuits. See "-- Risks Associated with the Industry in which
we Operate -- Employee misconduct is difficult to deter and could result in
losses" and "Financial Information -- Consolidated Statements and Other
Financial Information -- Regulatory Proceedings and Litigation". An adverse
resolution of any future lawsuits or claims against us could have an adverse
effect on our business, financial condition, results of operations and cash
flows.
Employee misconduct is difficult to deter and could result in losses.
The financial services industry has experienced a number of highly publicized
cases involving fraud, stock manipulation, insider trading or other misconduct
carried out by employees 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 concealing unauthorized or unsuccessful trading activities, which, in either
case, may result in unknown and unmanaged risks or losses. 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. It is not always possible to deter employee misconduct, and the
precautions we take to prevent and detect such misconduct may not be effective
in all cases.
As described more fully in "Financial Information -- Consolidated Statements and
Other Financial Information -- Regulatory Proceedings and Litigation", in 2004
we announced a settlement with the New York Stock Exchange and the SEC of
charges resulting from an investigation into alleged improper trading practices
by employees at several New York Stock Exchange specialist firms, including VDM
Specialists. The settlement, which was agreed on the basis of no admission or
denial, was entered into in connection with alleged violations of Section 11(b)
of the Securities Exchange Act of 1934 (the "Exchange Act"), and rules
promulgated thereunder concerning New York Stock Exchange specialist trading,
including the requirement that a specialist maintain a fair and orderly market,
and violations of Section 15(b)(4)(E) of the Exchange Act, including failure to
supervise with respect to certain transactions in which one or more of our
employees allegedly violated Section 10(b) of the Exchange Act and Rule 10b-5
thereunder. Pursuant to the settlement, we announced that VDM Specialists will
pay a total of $57.7 million in restitution to customers and civil penalties for
certain trades that occurred during the five-year period from 1999 to 2003. In
addition, we have agreed to implement additional internal compliance procedures
and retain an independent consultant to review and evaluate certain of our
existing compliance systems, policies and procedures. See "Financial Information
- -- Consolidated Statements and other Financial Information -- Regulatory
Proceedings and Litigation".
13
Immediately following this settlement, we placed on leave four specialist
traders employed by VDM Specialists, and subsequently an additional four
employees resigned. It is our understanding that these eight individuals are
subject to individual investigation by the New York Stock Exchange the SEC
and/or the office of the United States Attorney in connection with the alleged
violations discussed above. Van der Moolen Holding N.V. and VDM Specialists
expect to cooperate fully with the New York Stock Exchange and the SEC, as and
when requested, in connection with these investigations.
In addition to the investigations relating to our specialist activities on the
New York Stock Exchange, Cohen, Duffy, McGowan, LLC was the subject of an
investigation by the American Stock Exchange's Enforcement Division. The
investigation focused on charges of possible violations of American Stock
Exchange Rule 156(b) and Article V, Section 4(h), combined with possible
violations of the exchange's limit order display rule during the period between
June 3, 2002 and May 30, 2003. Further, on February 25, 2004, the American Stock
Exchange Enforcement Division commenced an investigation in relation to alleged
violations of American Stock Exchange Rule 958A, also referred to as the "firm
quote rule". In addition, Van der Moolen Options USA, LLC was the subject of an
investigation by the Department of Market Regulation of the Chicago Board
Options Exchange relating to compliance with the Chicago Board Options
Exchange's firm quote rule, and the SEC requested data from all U.S. option
exchanges, including all those on which our option units acted as specialists or
in a similar capacity, regarding the functioning and trading practices of
specialists on those exchanges. On May 11, 2004, the SEC requested financial
information and information in respect of compliance procedures of Cohen, Duffy,
McGowan, LLC. We have since disposed of our US options business and Cohen,
Duffy, McGowan, LLC has been dissolved.
The New York Stock Exchange has also commenced an inquiry into broker-dealer
stock-lending practices, focusing on transactions involving finders, including
transactions carried out by VDM Specialists' stock lending department. While we
have since closed down our stock lending operations, the outcome of this inquiry
cannot be predicted at this time, including any regulatory action that the New
York Stock Exchange might take against VDM Specialists or present and former
employees of VDM Specialists, and any employment-related litigation that might
be brought against VDM Specialists by former employees of VDM Specialists' stock
lending business. See "Financial Information -- Consolidated Statements and
other Financial Information -- Regulatory Proceedings and Litigation".
The investigations by the New York Stock Exchange and the SEC have resulted in
the initiation of a number of class action lawsuits against Van der Moolen
Holding N.V., VDM Specialists and certain of our officers and directors in the
United States District Court for the Southern District of New York, as well as
other proceedings in other courts. An action has been commenced in the United
States District Court for the Northern District of Illinois against four
national securities exchanges (the American Stock Exchange, the Chicago Board
Options Exchange, the Philadelphia Stock Exchange and the Pacific Stock
Exchange) and 35 securities brokers and/or dealers who made markets in options,
including Cohen, Duffy, McGowan, LLC and VDM Options USA, LLC. For details of
these legal proceedings, see "Financial Information - Consolidated Statements
and Other Financial Information -- Regulatory Proceedings and Litigation".
Pursuant to section 5.5 of its operating agreement with minority members, VDM
Specialists is required to advance funds for actual litigation expenses incurred
by various present and former members in connection with these litigation and
regulatory inquiries. All such advances have been recognized as expenses in the
Consolidated Statement of Income. In 2004, an amount of approximately EUR 1.3
million was recognized (2003: EUR nil). There can be no assurance that further
ligitation expenses of this nature will not arise, and such expenses could be
material.
14
While we deny the allegations of wrongdoing alleged against us in these actions,
there can be no assurance as to the ultimate outcome or timing of their
resolution, or whether further, similar actions may be brought in the future.
The range of possible resolutions of these actions could include determinations
and judgments against us or settlements that could require substantial payments
by us, including the costs of defending such actions, which could have a
material adverse effect on our financial condition, results of operations and
cash flows.
In connection with the settlement of the New York Stock Exchange and SEC
investigations discussed elsewhere herein, we are required to comply with a set
of undertakings which may be difficult to comply with.
In connection with our recent settlement with the New York Stock Exchange and
SEC, we have agreed to comply with the following undertakings:
o implementation of systems and procedures to ensure appropriate follow-up
and review with regard to information provided to VDM Specialists on a
daily basis by the New York Stock Exchange with regard to specialists'
override of the "principal inhibitor function" (principal inhibitor is a
software upgrade to the New York Stock Exchange electronic specialist book
that prevents a specialist from trading for his or her principal account
when the software detects the presence of any unexecuted customer order on
the same side of the market as the specialist's proposed principal trade),
which identifies specialist principal trades that may have been effected
while an executable agency order was reflected in the order book on the
same side of the market;
o creation of a committee, including VDM Specialists' chief compliance
officer and at least two members of senior management, specifically charged
with meeting periodically (no less frequently than monthly) to evaluate
specialist rule compliance;
o development and/or enhancement of systems and procedures to track and
maintain records identifying the individuals acting as specialist for each
security at all times throughout each trading day;
o annual certification, through the chief executive officer of VDM
Specialists, that a review of principal trading at VDM Specialists has been
conducted by the chief compliance officer of VDM Specialists for the
purpose of detecting interpositioning, trading ahead and unexecuted limit
order violations; and
o bi-annual assessment of, and reports on, the adequacy of the resources
devoted to VDM Specialists' compliance function, and devotion of adequate
funds and staffing to the appointment of an independent consultant to
review and evaluate VDM Specialists' compliance systems, policies and
procedures reasonably designed to ensure that VDM Specialists is in
compliance with federal securities laws and New York Stock Exchange rules
with regard to specialist trading.
While we believe that we are already in substantial compliance with all of the
above undertakings, we can provide no assurance that, upon review, the New York
Stock Exchange and/or the SEC will agree with our assessment. If we are, in the
future, unable to satisfy or maintain compliance with any of these undertakings
for reasons that we cannot foresee, such failure could have a material adverse
effect on our business and our regulatory compliance structure.
A failure or alleged failure to comply with applicable laws and regulations,
whether on the part of our firm or one or more of our employees, 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 regulations 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, trading
practices, capital structure requirements, and record retention requirements
governing the conduct of our directors, officers and employees. As illustrated
by the investigation carried out by the New York Stock Exchange and the SEC, the
failure or alleged failure to comply with any of the laws, rules or regulations
applicable to us 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 occurs we may be
unable to operate a portion of our business, which could adversely affect our
financial condition, results of operations and cash flows.
15
Tax law in the United States or other jurisdictions in which we operate may
change, as a result of which the effective tax rate to which we are subject may
increase.
Our operations are subject to corporation tax on their earnings, and other tax
levies, in each of the jurisdictions in which they are located. Changes in U.S.
or other tax law may result in an increase in our effective tax rate. We are
unable to predict changes in tax law that may adversely affect us.
If we lose the services of a number of qualified personnel or cannot hire
additional qualified personnel, our businesses could 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, 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, operating results
and cash flows.
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, including the fulfillment 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, LLC -- 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 them. 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, if required, 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 2005.
We may, however, need to raise additional funds to increase the capital
available to us for our inventory positions, support expansion opportunities
when they present themselves or to respond to unanticipated capital
requirements, among other things. We may be required to obtain this additional
financing on short notice as a result of rapid, unanticipated developments, such
as a steep market declines.
Fluctuations in exchange rates have in the past and could in future adversely
affect the results of our operations outside the euro region.
We publish our U.S. GAAP consolidated financial statements in euros. In 2004, 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
affect our reported results of operations and cash flows from year to year.
Exchange rate fluctuations will also affect the value (denominated in euros) of
our investments in our subsidiaries in the United States and the United Kingdom.
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.
16
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. See "Quantitative and Qualitative Disclosures About
Market Risk".
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 continue to seek appropriate acquisition
opportunities that we believe complement or expand our existing businesses.
While growth by acquisition is part of our long-term strategy, we do not know if
we will be able to identify appropriate acquisitions or be able to finance these
acquisitions successfully once identified. Furthermore, an acquisition could
require significant capital resources. Any failure to identify or finance future
acquisitions may impair our growth.
Any acquisitions that 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. For example, some of our acquisitions
completed in the last three years have not been successful for many of the
reasons listed above, causing us to dispose of the relevant acquired business at
a loss, and subjecting us to potential liability going forward arising out of
on-going legal actions. See "Financial Information - Consolidated Statements and
Other Financial Information - Regulatory Proceedings and Litigation".
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. Such decline in value, when considered with other relevant factors,
could result in the impairment of goodwill, as was the case in the fourth
quarters of 2004, 2003 and 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".
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,
including in particular those of the New York Stock Exchange, as well as the
systems of the depositary, clearing and settlement organizations with which we
contract to support those operations. 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, those of the exchanges
on which we trade or those of the aforementioned depositary, clearing and
settlement organizations, to operate at an unacceptably low speed or even fail.
Our (or their) systems may fail as a result of hardware or software failure or
power or telecommunications outages. 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 we employ 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 condition, operating results and cash flows 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 marketplace 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, operating results and cash flows and could damage our
relationships with our counterparties.
17
Risks Associated with the Industry in which we operate
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 Borsa
Italiana, the OMX Exchanges (comprising most Nordic and Baltic markets) and the
SWX Swiss Exchanges. We also trade French stocks and fixed income instruments
remotely from Amsterdam through Euronext and a number of other markets of which
we are not members through third party intermediaries. 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. We are subject to minimum net
capital requirements promulgated by the exchanges on which we operate.
Our revenues, operating results and cash flows 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 2004, 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 uncertainty over the course of the U.S.
economy, a reallocation of investors' portfolios away from equities and reduced
price volatility (in currency terms) as equity prices declined. Any one or more
of the following factors, most of which are beyond our control, could, if not
reversed, in future periods result in a continued decrease in our revenues and
operating results, as was the case in the year ended December 31, 2004 compared
with the year ended December 31, 2003:
o a sustained decline in the level of share price volatility;
o persistent changes in the characteristics of New York Stock Exchange order
entry, such as continued decreases in the average size of orders or the
concentration of trading activity at the opening or close of the market; and
o intermittent weakness in trading volumes on the exchanges where we are
active.
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 quarters of 2004 and 2003. 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".
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, VDM Specialists is required
to maintain minimum net capital equivalent to the greater of $250,000
((euro)184,665) or 2% of aggregate indebtedness 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 (the net liquid asset requirement).
Failure to maintain the required capital or net liquid assets may subject the
firm to suspension or revocation of registration by the SEC and the New York
Stock Exchange, and ultimately could require the firm's liquidation.
18
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 through acquisition. Currently, the capital requirements for our
businesses in Europe 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. However, on May 26, 2005 the
directors of the New York Stock Exchange applied to the S.E.C. to change its
rules governing the net liquid asset requirement in ways that would
substantially reduce the amounts of net liquid assets that VDM Specialists and
other New York Stock Exchange specialists are required to maintain.
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, fair and orderly
trading in that security. 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 may be 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. The
New York Stock Exchange may make their rules governing the specialist or similar
function more stringent or may implement changes, which could adversely affect
our subsidiary's trading revenues as a specialist or in performing similar
functions.
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.
Financial markets are rapidly evolving and 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 among New York Stock Exchange specialists,
the number of which has fallen from 37 as of December 31, 1996 to seven as of
March 31, 2005. Three of the top five of these specialists are owned by or
affiliated with banking groups that have significantly greater financial
resources than we do, and two of the top five are affiliated with investment
banks that act as underwriters of the initial public offerings of companies
seeking to list on the New York Stock Exchange. 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.
19
We have built our position on the New York Stock Exchange largely through
acquisition, and we have publicly indicated our desire to acquire additional
specialist firms. However, as a result of consolidation, there are now few
potential acquisition targets among the remaining specialists. In addition,
management of the New York Stock Exchange has indicated, by way of comments to
the press, that it does not favor further consolidation among specialists. As a
consequence, we may be unable to acquire additional specialist firms, which
could have the effect of reducing our future growth relative to what it might
have been if we were able to make one or more such acquisitions.
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
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 traders and lenders of securities, our subsidiaries conduct many
securities transactions 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 utilities 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.
Risks Related to our Common Shares and ADSs
Our articles of association and the laws of the Netherlands contain provisions
that may have anti-takeover effects, which could prevent a beneficial change in
control.
Our articles of association and the laws of the Netherlands contain
anti-takeover provisions. Among other things, our articles of association
provide that our supervisory board may make binding nominations for the election
of our executive 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 executive board that is subject to the
approval of the supervisory board. A proposal not made by the executive 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 executive board and subject to the approval of our
supervisory board.
20
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 absolute majority of votes cast. See "Additional Information -- Share Capital
- -- 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.
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:
o a decrease in turnover on the exchanges on which we operate, particularly
in respect of certain New York Stock Exchange specialist assignments of VDM
Specialists;
o volatility of share price movements, which at either extreme, too high or
too low, can affect revenues; and
o changes in the value of our securities positions.
Most elements of our cost structure, including the fixed component of our
salaries, lease charges, depreciation, many technology expenses and, to a
significant extent, transaction costs, 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.
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 all three members of our executive 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 executive 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. See
"Additional Information -- Enforcement of Civil Liabilities".
The share price of our common shares and ADSs has been, and may continue to be
volatile, which may impact the value of our common shares or ADSs you hold.
The share prices of our common shares and our ADSs have been volatile in the
past due, in part, to the high volatility in the securities markets in general
and more particular in shares of companies with similar operations within the
21
financial industry. In addition, there are other factors, beside our financial
results, that may impact our share price. These factors include, but are not
limited to:
o market expectations of the performance and capital adequacy of our industry
and other financial institutions in general;
o investor perception of the success and effect of our strategies; and
o potential or actual litigation or regulatory action involving our Company
and subsidaries or the industry in which we operate.
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.
22
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 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, principally engaged 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 three business
segments, VDM Specialists, European Trading, and Unallocated and Holding, which
are comprised of five 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 trader/market-maker. Acting as a counterparty to market
professionals such as banks and brokerage firms, we transact an average of over
100,000 transactions a day. Through effective risk management, we were able to
close 99% of the trading days in 2004 with a profit on trading, compared with
99% in 2003 and 96% in 2002.
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 and specialist trading on
the New York Stock Exchange, where we now operate the fourth largest specialist
in terms of number of specialist assignments. We listed our shares on Euronext
(at the time, the Amsterdam Stock Exchange) in 1986. We listed our shares in the
form of American depositary shares on the New York Stock Exchange on October 18,
2001.
On April 7, 2004, we completed the sale of our London-based fixed income market
making business (Van der Moolen UK, Ltd.). In December 2004 we completed our
withdrawal from option trading activities through the sale of VDM Options USA,
our business on the Chicago Board Options Exchange.
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:
Diversified trading operations. Through subsidiaries in the US, Germany, the
United Kingdom and the Netherlands, we trade on some of the world's leading
securities exchanges, including the New York Stock Exchange, the Deutsche Borse,
the London Stock Exchange, Euronext, the Borsa Italiana and the OMX Exchanges.
This has allowed us to develop insights into, and knowledge of, how to optimize
trading performance on each of the exchanges on which we operate. Although our
activities are concentrated on the New York Stock Exchange, we are diversified
in terms of instruments traded, since our subsidiaries 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.
23
Strong position in the specialist market on the New York Stock Exchange. As
measured by the number of common stock listings on December 31, 2004, we operate
as the fourth largest specialist on the New York Stock Exchange, with a market
share of 14.9% 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, the United Kingdom and the Netherlands. Through
our German trading subsidiary, we operate an independent equity trading firm
active in German and Swiss instruments, while our U.K. operation trades actively
in British shares. In the Netherlands, we operate an 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, as well as to expand our remote-trading
operations to other exchanges in Europe.
Experienced 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 99% of our trading days in both
2003 and 2004 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.
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 seeking to increase our revenue
beyond what we can achieve in the context of any given set of trading
conditions, we apply the same trading disciplines to new trading opportunities
as we can identify them and create the means to exploit them:
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, for example by
adding to the list of securities in which we are active or by seeking new
arbitrage opportunities in securities we currently trade. 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.
Obtain the specialist assignment for new New York Stock Exchange listings. We
will continue to strengthen our specialist marketing activities in order to
attract additional specialist assignments from companies seeking to list on the
New York Stock Exchange.
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. We began trading equities on the Borsa Italiana and
the London Stock Exchange (both British and Dutch shares through the London
Stock Exchange's Dutch Trading Service) in 2004. In May 2005, we announced our
intention to acquire Curvalue Financial Services Group, a Dutch-incorporated
broker-dealer in derivatives.
24
See "Operating and Financial Review and Prospects - Operating Results, Recent
Developments" for further details on the potential acquisition of Curvalue
Financial Services Group.
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 from 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 in recent years.
Seek cost containment opportunities. As part of our strategy we will continue to
actively seek cost containment opportunities to allow us to decrease costs and
increase our profitability in the short and long term.
Our Business
Following the sale of the last of our option trading activities in 2004, we now
categorize our business into three segments: VDM Specialists, European Trading,
and Holding and Unallocated, which are comprised of five 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. Increased 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:
o decimalization, which was rolled out for almost all New York Stock Exchange
listed securities in January, 2001;
o the number of households investing in stocks;
o changes in the amount of assets managed through retirement plans, mutual
funds, annuity and insurance products, index funds and other institutional
investment vehicles;
o the increased popularity and use of computerized trading, hedging and other
derivative strategies;
o higher equity portfolio turnover by individuals and institutional investors
as a result of lower commission rates and other transaction costs; and
o the introduction of on-line trading.
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 uncertainty regarding the course of the United
States and European economies, the reversal of the trend toward lower interest
rates at the end of 2003 (although they remain at historically low levels) and
political unrest.
The following is a discussion of our three business segments, VDM Specialists,
European Trading, and Holding and Unallocated as well as a brief description of
our U.S. options business, which was sold in December 2004.
25
VDM Specialists
VDM Specialists is our largest subsidiary and is the sole component of our VDM
Specialists business segment. It is one of the leading specialist firms on the
New York Stock Exchange, and is currently the designated specialist in respect
of 524 listed issues. For the year ended December 31, 2004, VDM Specialists, in
which we hold a 75% interest, accounted for (euro)99.6 million, or 81.2% of our
total revenues (including total revenues from discontinued operations).
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
$12.8 trillion on December 31, 2004 (domestic U.S. issues and closed end funds
only). 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 2,629 at the end of
2004 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 1,421 million
shares in 2004, which represents a compound annual growth rate of 14.7%.
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 has been 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 routing systems, including SuperDOT or Direct+(R),
although the individual size of these orders is limited. Because each specialist
firm runs the auction in its specialist stocks, it receives all New York Stock
Exchange bids and 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 may 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's role is to maintain, as
far as practicable, fair and orderly trading in its assigned stocks. This means
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:
o an auctioneer by setting opening prices for its specialist stocks and by
matching the highest bids with the lowest offers, permitting buyers and
sellers to trade directly with each other;
o a facilitator bringing together buyers and sellers who are unaware of each
other's interest in order to execute a trade which would not otherwise
occur;
o an agent for broker-dealers who wish to execute transactions as instructed
by their customers (typically, these orders are limit orders entrusted to
the specialist at prices above or below the current market price); or
o a principal using its own capital to buy or sell stocks for its own
account.
26
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 on its own initiative 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
"Business -- 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:
o some stocks are traded on multiple exchanges, such as regional exchanges,
Electronic Communication Networks and non-U.S. exchanges, and trades take
place on those exchanges; and
o 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 growth of trading volume and the increase in stock prices on the New York
Stock Exchange in the 1990s increased the demands upon specialists, and
subsequent declines have not greatly alleviated these demands. The size of
orders decreased during this same period due to smart order routing programs and
as a result, specialists are required to execute a greater number of trades in a
shorter period of time in order to fulfill their obligations. In addition,
specialists are called upon to take larger positions in their specialist stocks.
The specialist industry has experienced a period of consolidation over the past
seven to nine 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
31, 2005. These factors, in addition to the rising cost of necessary investments
in technology, have increased all specialists' capital commitments.
Business activities. As of December 31, 2004, VDM Specialists had 69
specialists, each of whom were members of the New York Stock Exchange and 48 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, pharmaceuticals and telecommunications.
As of December 31, 2004, VDM Specialists served as specialist for 387 common
stock issues, or approximately 14.9% of the common stock issues listed on the
New York Stock Exchange, including three of the 30 companies comprising the Dow
Jones Industrial Average at that date and 45 of the companies included in the
Standard & Poor's 500 Index. Of our 387 common stock specialist assignments, 9
were for Canadian issuers and 45 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 at the
New York Stock Exchange closing of March 10, 2005 in order of their respective
global market capitalizations (in $ millions):
27
Company Market Cap Company Market Cap
- ----------------------------------------------------------- ----------------------------------------------------
Pfizer $ 199,524 Kohl's Corp $ 18,424
UBS AG (GDR) 100,763 Harley Davidson 17,751
Banco de Santander (ADR) 79,940 Danaher 16,932
Eli Lilly 62,934 Telekom Austria (ADR) 16,286
E.On (ADR) 60,536 Norfolk & Southern 15,014
Hewlett-Packard. 59,918 Petrocanada 14,960
Walt Disney 57,327 Masco 14,954
Wyeth 55,503 Conagra 14,563
SAP A.G. (ADR) 51,866 Veolia Environnement (ADR) 14,123
Canon (ADR) 47,818 ACE Ltd. 12,922
Royal Bank of Canada 39,367 Nortel Networks 12,890
Manulife Financial 38,704 Starwood Hotels and Resorts 12,182
Repsol (ADR) 34,038 Kerr-McGee 11,850
Duke Energy 26,566 Coach 11,175
Guidant 24,130 McKesson 11,167
HCA 23,152 Rockwell Automation 10,537
Cendant 23,067 Textron 10,500
Hitachi (ADR) 21,889 Limited Brands 10,197
Canadian Imperial Bank of Commerce 20,823 AngloGold (ADR) 10,168
British Sky Broadcasting (ADR) 20,774 Potash Corp. of Saskatchewan 9,877
Novo Nordisk (ADR) 20,157 BOC (ADR) 9,844
Apache 19,840 Marshall & Isley 9,533
Stryker 19,629 Hellenic Telecommunications (ADR) 9,530
International Paper 18,909 Pulte Homes 9,463
Golden West Financial. 18,428 Rockwell Collins 8,532
Source: Bloomberg
During 2004, VDM Specialists was selected to act as the specialist for Aames
Investment Corp., Bill Barrett, Cabela's, Extra Space Storage, GMH Communities,
Herbalife, Homex Development, Interline Brands, Ivanhoe Mines, Kindred
Healthcare, Kite Realty, Mechel Steel, Mortgage IT Services, Ormat Technologies,
Nordic American Tankers, Perini Corp., Petroleum Geo-services, Signet, Tata
Motors and Westlake Chemical.
Like other New York Stock Exchange specialist firms, VDM Specialists is also
assigned specialist roles in so-called "special purpose products," such as
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 also engages in
proprietary trading of New York Stock Exchange - listed instruments for which it
does not act as the specialist, as well as Nasdaq- and American Stock
Exchange-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 announced the closure of its securities lending and borrowing
activities on February 11, 2005. This activity involved 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 the
borrower to sell shares short. Lending activities of this kind were carried out
on a matched principal basis. See "Financial Information - Consolidated
Statements and Other Financial Information - Regulatory Proceedings and
Litigation, Stock Lending".
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.
28
In June 2000, August 2001 and March 2002, we further bolstered our New York
Stock Exchange specialist operations through the acquisition and consolidation
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 55 individual members. Its individual members include its senior
managers and senior traders, and all individual members are active employees of
the firm. We believe this ownership structure helps align the individual
members' 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.
European Trading
We trade equities, equity options and fixed income instruments from two
subsidiaries in Amsterdam, one in London and one in Cologne. Together, these
operations accounted for (euro)23.1 million, or 18.8%, of our total revenues for
the year ended December 31, 2004. The activities of these subsidiaries may be
summarized as follows:
Primary
Location Activity 2004 Revenues Exchange Memberships
- ----------------------------- ------------ ------------ ----------------- ----------------------------
(in (euro) millions)
- ----------------------------- ------------ ------------ ----------------- ----------------------------
Van der Moolen Effecten Amsterdam Equities 8.3 Euronext, Deutsche Borse, OMX
Exchanges, London S.E., Borsa
Italiana
Deutsche Borse (Xetra and
Frankfurter Wertpapierborse),
SWX/virt-X, Eurex, Chicago
Van der Moolen Trading Cologne Equities 7.0 Mercantile Exchange
Van der Moolen Equities London Equities 5.5 London S.E.
Van der Moolen Obligaties Amsterdam Fixed Income 2.3 Euronext
Although they operate largely independently of each other on a day-to-day basis,
all three equity trading units are broadly similar, engaging primarily in
intraday proprietary trading, especially in the more liquid segments of the
markets in which they operate. They also engage in ADR arbitrage (meaning
arbitrage between shares and their corresponding ADRs). In general, they do not
trade under privileges and obligations as a specialist would, although in
certain cases, for instance when Van der Moolen Effecten makes markets in Dutch
shares on the Deutsche Borse, they may choose to take on such obligations.
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
(with the exception of the Frankfurteer Wertpapierborse) 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 OMX Exchanges without a physical presence in any of the
nations included within the OMX network. 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, 2004, the London Stock Exchange was the largest
European equity market by capitalization, followed in descending order by
Euronext, Deutsche Borse, SWX Swiss Exchanges, the Borsa Italiana and the
Spanish Stock Exchanges.
We trade fixed income instruments from our subsidiary in Amsterdam. This unit,
Van der Moolen Obligaties, makes markets in Dutch and selected French fixed
income issues traded on Euronext. Its primary activity is to provide liquidity
in these bonds to 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
2004.
29
On January 7, 2004, we reached an agreement in principle to sell Van der Moolen
UK, Ltd. which posts actionable each-way fixed income quotes on Bloomberg and
various other trading networks. The sale was completed on April 7, 2004.
Potential Acquisition of Curvalue
On May 27, 2005, we announced that we had signed a letter of intent to acquire
100% of Curvalue Financial Services Group ("Curvalue"), a Dutch-incorporated
broker-dealer in derivatives. We expect this acquisition to close in the third
quarter of 2005. The following information has been derived from publicly
available disclosures made by Curvalue. Curvalue was founded in March 1991 and
is an independent trading and broker/dealer group in Europe. It has expanded its
business model over the last 14 years to become a major player in the European
derivative markets. Curvalue has an in-house software platform, developed and
maintained by its own software engineers who have been with the company for many
years. This enables fast adaptation to new Exchanges and changes in requirements
by existing Exchanges. It also allows Curvalue to be at the forefront of placing
quotes in the market and picking up volumes. Curvalue is active on the global
equity and derivative exchanges in the following three business activities:
Options specialist
It holds 71 options specialist licenses granted by several European Exchanges
(Amsterdam, Paris, Frankfurt and Switserland). Curvalue is electronically
inputting quotes to the Options and Future markets at a predefined spread for
assigned options series throughout each trading day to guarantee liquidity in
the stock option Curvalue specializes as a Primary Market Maker ("PMM") and
Competitive Market Maker ("CMM").
Future Trading
Curvalue trades for its own account and risk in futures in Amsterdam, London,
Paris and Athens. Positions taken in the furture market are on an intraday
basis.
Brokerage
Curvalue engages in professional voice brokerage and electronic execution-only
brokerage. Voice brokerage is an access point for institutional and professional
traders.
See "Operating and Financial Review and Prospects - Operating Results, Recent
Developments" for further details on this potential acquisition.
Holding and Unallocated
We classify as "Holding and Unallocated" revenues and expenses generated by
miscellaneous activities and Holding Company activities, including hedging
certain currency exposures.
U.S. Option Business
Prior to December 2004, we were active in U.S. equity option markets through a
wholly owned subsidiary, Van der Moolen Options USA, LLC. This business was sold
in December, 2004, completing the withdrawal from these activities that began
with the closure of Cohen, Duffy, McGowan, LLC in 2003. In previous years, Van
der Moolen's U.S. option revenues were largely achieved through 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 Chicago Board Options Exchange was derived from
dealer profits, with only a small fraction generated from agency commissions.
Technology
Technology is critical to the continued success of our operations. On December
31, 2004, 12 of our 336 employees 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 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, on the
basis of New York Stock Exchange feeds, in the event that 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 trading system Van der Moolen has
chosen for Van der Moolen Effecten, as well as for Van der Moolen Equities and
Van der Moolen Trading, is produced by RTS Real-Time Systems A.G. The trading
systems used by Van der Moolen Obligaties is provided by Cognizant Technology
Solutions.
30
We have back-up disaster recovery systems, which operate as mirror images of our
primary computer systems in New York. We have a direct connection between the
primary and back-up systems that we utilize to back-up our trading systems on an
hourly basis and our trading data at the end of each day. We have stress tested
our systems to ensure that an increase in trading volume will not affect
performance. In Amsterdam, our trading systems are mirrored by back-up systems
in real-time. 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
frequent 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 the 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 specifically 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 regarding 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 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
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.
31
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 ensure 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:
o A specialist must first satisfy a customer's market buy order (an order to
buy at the prevailing market price) before buying any stock for its own
account. Similarly, a specialist must first satisfy a customer's market
sell order (an order to sell at the prevailing market price) before selling
any stock for its own account.
o A specialist must first satisfy a customer's limit order held by it before
buying or selling at the same price for its own account. A limit order is
an order either to buy only at or below a specified price, or to sell only
at or above a specified price.
o If a public buyer wants to buy at a particular price and a seller wants to
sell at the same price, the buyer and seller trade directly with each
other, and the specialist may not interfere in the transaction unless he or
she offers price improvement.
o 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 received.
o 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.
o Any transactions by the specialist for its own account must be effected in
a reasonable and orderly manner in relation to the condition of the general
market, the market in the particular stock and the adequacy of the
specialist's position to the immediate and reasonably anticipated needs of
the market.
o 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.
32
Broker-dealer regulations
As broker-dealers registered with the SEC and as members of New York Stock
Exchange, VDM Specialists is subject to overlapping schemes of regulation which
cover all aspects of their 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 transactions and procedures for the clearing and
settlement of trades.
As a registered broker-dealer, VDM Specialists is 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, VDM Specialists is subject to New York Stock Exchange
Rule 445. Rule 445 requires members of the New York Stock Exchange 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.
Minimum net capital and net liquid assets requirements
VDM Specialists 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 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 ((euro)184,665) or 2% of aggregate indebtedness computed in
accordance with SEC Rule 15c3-3, the customer reserve formula. In addition, VDM
Specialists maintains substantial additional capital, referred to as "excess net
capital". VDM Specialists had excess net capital during the year ended December
31, 2004. For VDM Specialists, the excess net capital as at December 31, 2004
amounted to $243.2 million ((euro)179.6 million).
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 (the
so-called net liquid asset 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. The New York Stock Exchange's Rule 104 minimum net
liquid asset requirements subject specialist firms that exceed 5% in any of the
New York Stock Exchange's four concentration measures to more stringent
requirements than those imposed by the SEC. Specifically, the requirements state
that the net liquid assets must be equivalent to $4.0 million ((euro)2.9
million) for each stock in the Dow Jones Industrial Average, $2.0 million
((euro)1.5 million) for each stock in the Standard & Poor's 100 Stock Price
Index, excluding stocks included in the previous classification, $1.0 million
((euro)0.7 million) for each stock in the Standard & Poor's 500 Stock Price
Index, excluding stocks included in the previous classifications, $500,000
((euro)369,991) for each common stock, excluding bond funds and stocks included
in the previous classifications, and $100,000 ((euro)73,866) 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, 2004, VDM Specialists' minimum net liquid asset requirement was
$243.0 million ((euro)179.5 million) and its actual net liquid assets were
$252.3 million ((euro)186.4 million). On May 26, 2005 the directors of the New
York Stock Exchange applied to the SEC to change its rules governing the net
liquid asset requirement in ways that would significantly reduce the amounts of
net liquid assets that VDM Specialists and other New York Stock Exchange
specialists are required to maintain.
33
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 maturing within the next six
months, if any. It also increases the SEC's minimum net capital requirement to
5% of its aggregate indebtedness. 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, 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 indebtedness for more than 15 consecutive business days.
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 the New York
Stock 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 required for permission 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.
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. Several 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, (the
Financial Markets Authority), in accordance with the 1995 Act on the Supervision
of Securities Trading, or the Dutch Securities Act. The objects of this act and
the accompanying legislation are the adequate functioning of 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
licenses.
34
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 adequate
supervision and 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 seat holders, which are securities institutions admitted by Euronext. These
provisions deal, for instance, with capital requirements such as the minimum net
assets required of a participating firm and reporting obligations to the
Financial Markets Authority.
Van der Moolen Effecten has been granted a license to offer services in or from
the Netherlands as securities intermediary in its role as a proprietary trader.
These services may be offered on Euronext and similar foreign exchanges.
Van der Moolen Effecten has been admitted, for example, by Deutsche Borse as an
exchange participant through its Xetra trading platform. These foreign
activities are regulated by Dutch law, as well as by the relevant German
regulations - the latter primarily in reference to technical aspects of trading
on the Deutsche Borse. A similar pattern of oversight, i.e. lead regulation in
the country of domicile supplemented by local regulation in the market traded,
applies wherever one of our four European subsidiaries trades on an exchange
other than its domestic market.
The Dutch central bank, in its capacity as prudential regulator for the Dutch
banking, securities and insurance industries, imposes minimum capital
requirements on Dutch broker-dealers. In Van der Moolen's case, this minimum is
(euro)730,000. Van der Moolen's Dutch businesses maintain regulatory capital in
excess of this amount.
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 so that it may implement a single trading rulebook,
which will be enforced by each of the local exchanges and regulators. This
process of harmonization is largely complete.
Cash trading. All trading of cash products on Euronext is executed though the
NSC system, which was previously in operation at the Paris and Brussels
exchanges, and was installed in Amsterdam and Portugal after the merger that
formed Euronext. 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 for liquid equities are continuous trading with or without an
animateur, which is a market making function subject to certain trading
obligations. The trading mechanisms for less liquid equities are auction trading
with or without an animateur.
Circuit breaker rules
Temporary trading halts are called on Euronext 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.
35
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, 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. Often these involve
informational privileges, discounts on transaction fees 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 revenues 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, but
not limited to:
o the strength of our capital base;
o reputation;
o our willingness to commit our own capital and trade for our own account
while conducting our specialist operations; and
o the ancillary services we offer our specialist companies, such as providing
information on the trading activity in their stocks.
As of December 31, 2004, we were the fourth largest New York Stock Exchange
specialist based on number of common stock listings, and had a market share of
14.9% of all issues listed at that date. Together, the top four New York Stock
Exchange specialist firms had a market share of 78.1% 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, 2004, based on their number of common stock listings and
market share in terms of such listings:
Number of common stock
listings as of Market share
New York Stock Exchange Specialist December 31, 2004 (%)
- --------------------------------------------------------------------------------------------------------------------
LaBranche & Co. 580 23.8
Spear, Leeds & Kellogg Specialists LP 561 22.0
Bank of America Specialist Inc. 433 17.5
VDM Specialists 387 14.9
Bear Wagner Specialists, LLC 357 13.3
- ---------------------------------------
Source: The New York Stock Exchange.
36
The competition for obtaining specialist assignments for newly listing 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 newly listed
companies. In addition, the specialist industry has recently undergone
significant consolidation. The combined companies resulting from this
consolidation have a stronger capital position than previous specialists firms.
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.
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 - 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 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 any other firm or individual that might have an interest in trading
equities 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 subsidiary in Amsterdam, Van der Moolen Obligaties, is in
competition with other firms for execution business. With the removal of the
specialist function on Euronext, our Dutch bond subsidiary negotiates, jointly
with its sole competitor AOT Bond Specialist B.V., to provide market making
services in bonds 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 and service.
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, on 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
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
than us. 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.
37
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.
However, marketing does feature significantly in our effort to attract
specialist assignments in New York Stock Exchange listed issuers, which is in
the nature of a commercial competition. 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 unit 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.
For other activities, such as clearing, fixed income market making and stock
lending, marketing presentations are made directly to 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 as of June
24, 2005.
Subsidiary Country of Incorporation Percentage Ownership
and Voting Interest
- ------------------------------------------- --------------------------------- ------------------------
VDM Specialists United States of America 75.0
Van der Moolen Effecten Specialist 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 Equities, Ltd. United Kingdom 100.0
(D) Property, Plant and Equipment
We currently lease office space in Europe in Amsterdam, Cologne and London and
in the United States in 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. Our total lease
expense is expected to be (euro)1.3 million for the year ended December 31,
2005. Our leases expire between the years 2006 and 2010.
38
Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion of our financial condition and results
of operations together with U.S. GAAP consolidated financial statements and the
notes to those statements included elsewhere in this annual report. This
discussion contains forward-looking statements about us and our industry, based
on our current expectations, assumptions, estimates and projections. 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
four locations worldwide, via five operating units, 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/market maker.
For the periods covered in this document, our business consisted of three
operating segments that we reported separately, VDM Specialists, U.S. Option
Business (the remaining component of which was sold in December, 2004), and
European Trading. These comprised principal subsidiaries located in the United
States and Europe.
We reported our remaining revenues, most of which are non-operating in
character, under Holding and Unallocated. 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, included:
VDM Specialists
o VDM Specialists, one of the leading specialist firms on the New York Stock
Exchange;
U.S. Option Business
o Van der Moolen Options USA, LLC, which activities we sold in December,
2004;
o Cohen, Duffy, McGowan, LLC, which ceased activities in December, 2003, and
in respect of which liquidation was substantially completed in 2004;
European Trading
o Van der Moolen Trading GmbH, a proprietary trader in German and Swiss
equities, equity-related options and arbitrage;
o Van der Moolen Effecten Specialist B.V., a major equity trading firm on
Euronext, the Helsinki Stock Exchange, the Borsa Italiana and the London
Stock Exchange, which engages in proprietary trading and arbitrage;
o Van der Moolen Obligaties B.V., a market maker in Euronext-listed Dutch and
French bonds, partly on commission basis;
o Van der Moolen UK Ltd, an over-the-counter market maker in fixed income
instruments, which we sold in January, 2004; and
o 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.
In our consolidated financial statements, we have reported the U.S. Option
Business and Van der Moolen UK, Ltd. as discontinued operations.
Basis of preparation of our U.S. GAAP 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 those subsidiaries. Further, as a result of the
adoption of FASB Interpretation No. 46 (R), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51" we have consolidated LOC, LLC, a
variable interest entity. Further information is provided under "Recent
Accounting Pronouncements" below. 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 subsidiaries that are not
wholly-owned are reflected in them.
39
The acquisitions and disposals which have occured over the last three financial
years have had a significant effect on our group structure, and the accounting
treatment of our various acquisitions (accounted for under the purchase method)
has had a significant effect on the comparability of our results from period to
period and is an important factor in interpreting our results. The changes is
our group structure over the past three financial years have been the following:
o In January 2002, we established Kenny & Co., a "direct access" agency
brokerage firm active on the floor of the New York Stock Exchange. We held
a 75% interest in Kenny & Co.
o On March 1, 2002, we acquired a 75% interest in New York Stock Exchange
Specialist Lyden, Dolan, Nick & Co. for total consideration of (euro)63.2
million, of which (euro)32.6 million was recorded as identifiable
intangible assets and (euro)28.9 million as goodwill. Its specialist
operations were merged into the operations of VDM Specialists at that date.
o On August 1, 2003, following the departure of two minority members, we
acquired an additional 14.543% interest in Cohen, Duffy, McGowan LLC,
raising our share in the firm from 51% to 65%, for a consideration of
(euro)0.6 million.
o On December 17, 2003, we announced that Van der Moolen Options USA, LLC had
closed its Philadelphia Stock Exchange activities. No consideration was
received from this closure.
o Also on December 17, 2003, we announced the expected closure of Cohen,
Duffy, McGowan LLC, which was substantially liquidated during 2004. No
consideration was received in connection with this closure.
o On December 18, 2003, we closed the operations of Kenny & Co. No
consideration was received in connection with its closure. This entity was
liquidated during 2004.
o The option trading activities of Van der Moolen Opties Amsterdam B.V. were
progressively wound down, beginning in 2002, and the unit was closed during
2003. No consideration was received in connection with its closure.
o On January 7, 2004, we announced the sale of our subsidiary, Van der Moolen
UK Ltd, which sale was completed on April 7, 2004. We received a total
consideration of approximately (euro)8.3 million, equivalent to the book
value of Van der Moolen UK, Ltd. as of December 31, 2003.
o In December 2004, we sold substantially all of the assets and trading
relating liabities of our subsidiary, Van der Moolen Options USA, LLC. The
consideration received approximated the carrying value of the net assets
sold and amounted to (euro)0.2 million.
Following the closure and sale of the operations of Cohen, Duffy, McGowan, LLC,
Kenny & Co, Van der Moolen Opties Amsterdam, Van der Moolen UK Ltd. and Van der
Moolen Options USA, LLC, the results of these subsidiaries have been
reclassified in our U.S. GAAP consolidated financial statements as discontinued
operations, in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". The review of our operating results set forth
below under " -- Results of Operations for the Years Ended December 31, 2003 and
2004" and " -- Results of Operations for the Years ended December 31, 2002 and
2003" reflect these reclassifications.
Determination of functional currency
Prospectively from January 1, 2004, the functional currency of Van der Moolen
Holding N.V., its finance entity Van der Moolen International B.V. and certain
of its intermediate holding companies has been changed from the euro to the U.S.
dollar. The primary economic environment in which a corporate entity operates
determines its functional currency. The change in functional currency reflects
the dominance of the Company's U.S. activities, and management's judgment that
this dominance could no longer be considered a temporary phenomenon. The
currency in which the financial statements are presented (the presentation
currency) remains the euro, given the statutory seat of Van der Moolen Holding
N.V. The change in functional currency had a positive non-cash effect on net
income of (euro)0.4 million in 2004 related to currency exchange gains.
Additionally, a tax benefit of (euro)1.2 million was recognized in net income.
Previously, this tax benefit would have been recognized in Accumulated Other
Comprehensive Income - foreign currency translation, net of tax. Shareholders'
equity on December 31, 2004 was not affected by this change.
40
As a company listed in the Netherlands, we are required to adopt International
Financial Reporting Standards ("IFRS") as of January 1, 2004, and to present our
2005 financial statements (including comparative financial information for 2004)
in accordance with IFRS. As part of the transition from Dutch Generally Accepted
Accounting Principles to IFRS, we were required to undertake a functional
currency evaluation as at January 1, 2004. We concluded that the functional
currency of Van der Moolen Holding N.V., Van der Moolen International B.V. and
certain of our intermediate holding companies under IFRS was the U.S. dollar.
Our change in functional currency for U.S. GAAP purposes therefore aligns the
designation of functional currency under both IFRS and U.S. GAAP.
Recent Accounting Pronouncements
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46 (R),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51".
FIN 46 (R) requires a company to consolidate a variable interest entity if the
company has a variable interest that gives it a majority of the expected losses
or a majority of the expected residual returns or both of the entity. FIN 46 (R)
is effective no later than the end of the first reporting period that ends after
March 15, 2004. We have determined that LOC, LLC. is such an entity. LOC is a
limited liability company; its members are members or former members or
employees of VDM Specialists. LOC's purpose is to provide a mechanism through
which its members may acquire ownership of New York Stock Exchange memberships.
Capital contributed by members and funds borrowed by LOC are used to purchase
these memberships. During the period January 1, 2004 to December 31, 2004, LOC
and its members were the beneficial owners of six New York Stock Exchange
memberships. LOC has received a loan from a commercial bank to fund the purchase
of exchange memberships; the amount outstanding at December 31, 2004 was $4.7
million ((euro)3.5 million). Van der Moolen Holding N.V. has guaranteed this
loan. The consolidation of LOC did not affect Shareholders' equity or Net income
for the year ended December 31, 2004.
In December 2004, the FASB issued a revision to SFAS No 123, "Accounting for
Stock-Based Compensation." SFAS No. 123(R), "Share Based Payment" will require
compensation costs related to share-based payment transactions to be recognized
in the financial statements over the period that an employee provides service in
exchange for the award. SFAS No. 123(R) replaces SFAS No 123 and supersedes APB
Opinion No. 25. "Accounting for Stock Issued to Employees." SFAS No. 123(R) will
be effective no later than January 1, 2006. We are currently evaluating the
effect of adoption of SFAS No. 123(R). However, because we do not currently
offer stock-based compensation, we do not expect it to have a material effect on
our financial condition, results of operations or cash flows.
Critical Accounting Policies
The notes to our U.S. GAAP 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 the valuation of
assets and liabilities and/or significant interpretation of 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
our U.S. GAAP consolidated financial statements.
Intangible assets
Our balance sheet contains significant intangible assets. These intangible
assets comprise our specialist stock lists and goodwill acquired in connection
with our acquisitions.
41
Goodwill
A critical accounting estimate is the determination of the fair value of each of
our reporting units and their goodwill under the provisions of SFAS No. 142
"Goodwill and other Intangible Assets". In determining fair value, we used
standard analytical approaches, such as the market comparison approach and the
income approach. The market comparison approach is based upon comparisons of the
subject company with similar companies engaged in an actual merger or
acquisition or with public companies whose stocks are actively traded. As part
of this process, multiples of value relative to financial variables, such as
earnings or shareholders' equity, are developed and applied to the appropriate
financial variables of the subject company to indicate its value. The income
approach involves estimating the present value of the subject company's future
cash flows by using projections of cash flows that the business is expected to
generate, and discounting these cash flows at a given rate of return. Each of
these methodologies requires the use of management estimates and assumptions,
such as growth rates for our revenues, expenses, effective tax rates, returns on
working capital and capital expenditure, among others. We also assumed a certain
discount rate and terminal growth rates in our calculations. We performed the
required impairment tests of goodwill for all reporting units during the fourth
quarter of 2004. For our 2004 goodwill impairment test of our reporting unit VDM
Specialists and our European trading activities we engaged an independent
business valuation firm to perform the required valuations. In our SFAS No. 142
test, we compared the fair values of our reporting units and the fair value of
our reporting units' goodwill - obtained based on the methods described above -
to their respective carrying values in two separate steps under SFAS No. 142
guidelines to arrive at a (euro)8.2 million impairment of goodwill related to
our European trading activities.
The determination of fair value is necessarily a subjective process. Depending
on market factors in 2005 and beyond, such as possible major changes in the New
York Stock Exchange market structure, we could be faced with further impairment
indicators affecting the carrying value of our goodwill and other intangibles at
December 31, 2004, which could result in future impairment losses.
Other intangible assets
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 based 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. Factors we
consider important which could trigger impairment include, among others, changes
to the 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. 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
associated lower profitability, in the fourth quarter of 2004 we were required
to perform an impairment test for the specialist stock lists acquired in
relation to VDM Specialists. The valuations were performed by external
independent consultants, in conformity with the rules dictated by Statement of
Financial Accounting Standard No. 144 "Accounting for the Impairment on Disposal
of Long-Lived Assets" ("SFAS No. 144"). An impairment loss, calculated as the
difference between the estimated fair value and the carrying amount of the
specialist stock lists, is recognized if the expected undiscounted cash flows
relating to the stock lists are less than the corresponding carrying value.
Following the valuations performed, we determined that there was no impairment
charge necessary for the specialist stock lists of VDM Specialists.
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 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.
As of December 31, 2004, the amount of such complex or illiquid financial
instruments was not significant.
42
Other-than-temporary impairment of exchange memberships
The determination of the fair value of exchange memberships is a critical
accounting estimate. The exchange memberships we own were originally carried at
cost, pursuant to the guidelines published by the American Institute of
Certified Public Accountants, entitled "Audit and Accounting Guide-Brokers and
Dealer in Securities". Adjustments to carrying value are made if we deem that an
"other-than-temporary" decline in value has occurred, as defined in Emerging
Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments.
In determining whether the value of the exchange memberships the Company owns
are impaired (i.e., fair market value is below cost) and whether such impairment
is temporary or other-than-temporary, we consider many factors, including, but
not limited to, information regarding recent sale and lease prices of exchange
memberships, historical trends of sales prices of memberships, the current
condition of the particular exchange's market structure, legal and regulatory
developments affecting the particular exchange's market structure, trends in new
listings on the particular exchange, general global and national economic
factors and our knowledge and judgment of the securities market as a whole and
the specialist industry in particular. For our 2004 assessment of
other-than-temporary impairment of exchange memberships, we used valuations
prepared by independent consultants.
Based on this assesment, we adjusted the carrying value (or cost basis) of our
exchange memberships to reflect a (euro)5.6 million other-than-temporary
impairment charge for the year ended December 31, 2004. On December 31, 2004,
New York Stock Exchange seats owned are carried on the balance sheet at
$1,344,000 ((euro)984,759) each, based on the prices at which seats have
recently been transacted. It is possible that future other-than-temporary
impairment charges could result from adverse changes in current market
conditions.
Pension benefits
Our balance sheet includes assets with respect to defined benefit pension plans.
The pension and post-retirement benefit costs and credits are based on actuarial
calculations carried out by an independent consultant. Inherent in these
calculations are assumptions, including discount rates, rate of salary increase
and expected return on plan assets. Changes in pension and post-retirement costs
may occur in the future as a consequence of changes in interest rates, expected
return on assets or other assumptions. For a further discussion on the
underlying assumptions, see note 15 to our consolidated financial statements.
Provisions for litigation
We recognize a provision for liabilities and probable losses that have been
incurred as of the balance sheet date and that can be reasonably estimated. A
provision is recognized when (i) the Company has a present obligation (legal or
constructive) as a result of a past event, (ii) it is probable that an outflow
of resources embodying economic benefits will be required to settle the
obligation, and (iii) a reliable estimate can be made of the amount of the
obligation. If the aforementioned criteria are not met, Financial Accounting
Standard No. 5 "Accounting for Contingencies" ("SFAS 5") requires disclosure of
the contingency when there is at least a reasonable possibility that a loss may
have been incurred. The dislosure shall indicate the nature of the contingency
and shall give an estimate of the possible loss or range of loss or state that
such an estimate cannot be made.
We are subject to litigation as set out in "Financial Information - Consolidated
Statements and other Financial Information - Regulatory Proceedings and
Litigation".
We cannot predict the outcome of this litigation, and, as a result, we have not
made any provision for this litigation in our financial statements for the year
ended December 31, 2004. We believe that we have valid defenses for all claims
asserted in the various proceedings and actions described. There can be no
assurance, however, as to the outcome or timing of the resolution of these
proceedings and actions. The range of possible resolutions, which cannot be
reliably estimated by us, could include determinations and judgments against us
or settlements that could require substantial payments by us, all of which could
have a material adverse effect on our financial condition, results of operations
and cash flows.
43
Taxation
The Group is subject to income taxes in numerous jurisdictions. Significant
judgement is required in determining the worldwide provision for income taxes.
The necessary assessments are made in consultation with the Group's external tax
advisors. The Group has undertaken transactions in respect of which the ultimate
tax determination is uncertain; such uncertainty will only be eliminated upon
the finalization of the corresponding tax returns with the relevant taxation
authorities. We recognize liabilities for taxation when it is reasonably
probable that the relevant taxation authorities will require us to pay such
taxation. When the final tax outcome of these matters is determined to be
different from the amounts that were initially recorded, such differences will
affect the provision for income taxes from continuing operations in the period
in which such determination is made.
Revenues
Our revenues are comprised of three principal components: specialist activities;
commission income; and proprietary trading/market making activities. In
addition, until its closure in February 2005, we derived a small portion of our
revenue from net interest income from stock lending activities.
o Specialist activities. Our revenues from specialist activities consist
primarily of net trading income from principal transactions in securities
for which VDM Specialists and, until December, 2004, Van der Moolen Options
USA, LLC, acted as specialists. The net gain on principal transactions
represents trading gains net of trading losses, and is 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.
o Commission income. Commission 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
attributable to the activities now organized as direct contracts with the
counterparties of Van der Moolen Obligaties.
o Proprietary trading/market making activities. Our revenues from proprietary
trading/market making activities consist primarily of net gains earned by
our subsidiaries when trading as principal in competition with other
traders and include net gains arising from arbitrage activities. Similar to
our specialist activities, net gains from our proprietary trading/market
making activities represent trading gains net of trading losses.
o 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 were carried out by VDM
Specialists. VDM Specialists no longer offers this service.
See "Information on the Company - Our Business" for further details on the
components of our revenues.
Our revenues are largely driven by the turnover and volatility of trading on the
markets in which our subsidiaries operate and the foreign exchange rates at
which some of those subsidiaries' revenues are consolidated in our financial
statements. 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. The sustained decline in share prices from 2000 to
the first quarter of 2003 led to decreases in turnover and the absolute level of
volatility, and harmed our trading results in those periods. Despite a recovery
in trading activity during 2004, continued pressure on volatility prevented a
recovery in revenue. As long as turnover remains high and volatility stays at an
acceptable level, the exposure of our income from operations to a general
downward trend in equity prices is limited.
44
Equity prices. All the equity markets in which our subsidiaries trade ended 2004
above their 2003 closing levels.
The following table provides information regarding the performance in 2003 and
2004 of various stock market indices in Europe and the United States on which
our subsidiaries operate, compared with their closing levels in 2002 and 2003,
respectively:
Increase or Decline
- ----------------------------------- -------------------------------------- --------------------------------
Country Stock Market Index 2003 2004
- ----------------------------------- -------------------------------------- -------------- ---------------
United States of America Standard & Poor's 500 Index 26% increase 9% increase
Dow Jones Industrial Average Index 25% increase 3% increase
Germany Xetra DAX 30-DAX Index 37% increase 7% increase
Switzerland SMI-Swiss Market Index 19% increase 4% increase
The Netherlands AEX-Amsterdam AEX Index 5% increase 3% increase
United Kingdom FTSE 100 Index 14% increase 8% increase
France CAC-40 Index 16% increase 7% increase
Italy Standard &Poor's MIB Index 14% increase 15% increase
- -----------------------------------
Source: Bloomberg.
Volatility and Turnover. Volatility on the markets on which we operate was
generally lower in 2004 than in 2003. Turnover on all the equity markets where
we were active in 2004 increased compared to 2003.
o The United States. In 2003, turnover on the New York Stock Exchange
declined by 6% to $9.7 trillion; average daily volume declined by 6% to
1.35 billion shares and total volume declined by 10% to 343 billion shares.
In 2004, turnover rose 20% to $11.6 trillion, average daily volume rose 5%
to 1.42 billion shares and total volume rose 4% to 358 billion shares.
o Germany and Switzerland. In 2003, the local currency value of trading on
the Deutsche Borse decreased by 7%, compared with 2002, while in 2004 it
rose by 9%. Value of trading on the SWX Swiss Exchanges decreased by 15% in
2003 and rose by 22% in 2004.
o France, Belgium, Portugal and the Netherlands. Turnover on Euronext
declined by 13% in 2003 and rose by 14% in 2004.
o The United Kingdom. The London Stock Exchange saw a 7% increase in turnover
in 2003 and a 23% increase in 2004.
o Italy: the Borsa Italiana saw turnover rise by 7% in 2003 and 2% in 2004.
The following table provides information regarding the trading activity of the
stock markets on which our subsidiaries operated in 2003 compared with 2002:
Trading activity in 2003
Equities (local currency value of equities traded)
- ------------------------------------------------------------- --------------------------------------------------
New York Stock Exchange 6% decrease London Stock Exchange 7% increase
Deutsche Borse 7% decrease SWX (Switzerland) 15% decrease
Euronext 13% decrease Borsa Italiana (Italy) 7% increase
- --------------------------------------------------------------------------
Source: Individual exchanges. Data for equity and equity-related instruments
only.
45
The following table provides information regarding the trading activity of the
stock markets on which our subsidiaries operated in 2004 compared with 2003:
Trading activity in 2004
Equities (local currency value of equities traded)
- -------------------------------------------------------- --------------------------------------------------
New York Stock Exchange 20% increase London Stock Exchange 23% increase
Deutsche Borse 9% increase SWX (Switzerland) 22% increase
Euronext 14% increase Borsa Italiana (Italy) 2% increase
- --------------------------------------------------------------------------------
Source: Individual exchanges. Data for equity and equity-related instruments
only.
Although equity prices rose fairly consistently in 2003 and the level of trading
activity on world equity markets generally improved during 2004, volatility
remained under considerable pressure. The ability of our subsidiaries to capture
revenue depends significantly on the level and volatility of market activity in
the United States and Europe, and we believe that in 2004 our traders were faced
with significantly more challenging market conditions than in 2003, when these
downward trends in trading activity first began to manifest themselves.
Expenses
Our expenses consist of eight 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; impairment of intangible fixed assets;
and impairment of other assets. For the year ended December 31, 2003, a further
category was included to reflect the expenses related to the settlement reached
with the New York Stock Exchange and the SEC described in "Financial
Information, Consolidated Statements and other Financial Information, Regulatory
Proceedings and Litigation" and "Key Information, Risk Factors, Risks Associated
with the Company".
o 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 either to the
exchanges on which our subsidiaries operate or to other service providers
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, and as a
result of currency exchange rate movements.
o Employee compensation and benefits. Our largest structural 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.
o 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.
o Information and communication. Our information and communication expenses
consist primarily of data retrieval, information services and telephone and
data lines.
o General and administrative expenses. Our general and administrative
expenses are principally comprised of 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.
o Depreciation and amortization. Depreciation and amortization includes the
depreciation of fixtures, fittings and equipment and the amortization of
intangible assets.
o Provision for the New York Stock Exchange/SEC investigation. This provision
relates to the settlement we reached with the New York Stock Exchange and
the SEC in connection with their investigation into alleged improper
trading practices at several New York Stock Exchange specialist firms,
including VDM Specialists.
46
o Impairment of intangible fixed assets. Impairment of intangible fixed
assets includes impairment charges on goodwill and other intangible assets.
o Impairment of other assets. Impairment of other assets comprises
impairments of memberships in exchanges, owned.
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 12 to our U.S. GAAP consolidated financial statements. See
"Risk Factors -Risks Associated with the Company" for potential developments
concerning our consolidated tax rate.
Recent Developments
In the first quarter of 2005, we experienced modest recovery of volumes and
volatility in U.S. equity markets, but less improvement in Europe. In this
market environment, our opportunities to trade profitably improved moderately
from the fourth quarter of 2004. However, net income declined from (euro)2.1
million for the first quarter of 2004 to a net loss of (euro)0.4 million for the
first quarter of 2005, a decline of (euro)2.5 million. Although revenues from
period-to-period decreased significantly, we were able to close 97% of our
trading days in the first quarter of 2005 with a positive trading result. On
February 11, 2005, we announced the closure of VDM Specialists' stock lending
business, described further in "Financial Information - Consolidated Statements
and Other Information - Regulatory Proceedings and Litigation".
At the annual general meeting of shareholders on April 6, 2005, shareholders
approved the declaration of a (euro) 0.22 cash dividend or its fair value
approximate equivalent in shares. As a consequence, on April 22, 2005, 1,026,195
common shares of Van der Moolen Holding N.V. were issued in respect of the
optional stock dividend. The cash outflow related to the dividend was (euro) 3.2
million. The weighted average number of common shares outstanding has not been
restrospectively adjusted for this stock dividend because not all shareholders
received a proportionate increase in their number of shares.
On May 27, 2005, we announced that we had signed a letter of intent to acquire a
100% interest in Curvalue Financial Services Group, a Dutch-incorporated
broker-dealer in derivatives. This transaction is subject to the completion of
due diligence and to regulatory approval. Assuming all necessary conditions are
satisfied, we expect this acquisition will close in the third quarter of 2005.
If the transaction proceeds, we have committed to making an initial payment of
(euro)5 million plus 3,803,509 of our common shares. In addition, the potential
consideration includes a contingent earn-out feature, consisting of two
additional payments approximately twelve and twenty-four months after the
acquisition is closed. The first of these would be a maximum of (euro)10.4
million cash plus 1,920,964 of our common shares, and the second would be a
maximum of (euro)10.4 million cash plus 1,920,964 common shares. The amounts of
these additional payments will be dependent on Curvalue achieving specified
earnings targets. See "Information on the Company - Potential Acquisition of
Curvalue."
47
Results of Operations for the Years Ended December 31, 2004 and 2003
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, 2004
and 2003.
Net
Interest
Year ended Proprietary Income
December 31, 2004 Trading/ from
% of % of market % of Stock % of
(in (euro) millions, Specialist Total Commission Total making Total Lending Total
except percentages) Activities Revenues Income Revenues Activities Revenues Activities Revenues Total
- --------------------------------------- --------- ----------- ---------- ---------- --------- ----------- -------- ------
- --------------------------------------- --------- ----------- ---------- ---------- --------- ----------- -------- ------
VDM Specialists(1) 71.1 58.0% 23.9 19.5% 1.0 0.8% 3.6 2.9% 99.6
European Trading
Van der Moolen Trading -- -- -- -- 7.0 5.7 -- -- 7.0
Van der Moolen Effecten
Specialist -- -- -- -- 8.3 6.8 -- -- 8.3
Van der Moolen Obligaties -- -- 0.7 0.5 1.6 1.3 -- -- 2.3
Van der Moolen Equities -- -- -- -- 5.5 4.5 -- -- 5.5
---------- --------- ----------- ---------- ---------- --------- ----------- -------- ------
Total revenues from
continuing operations 71.1 58.0% 24.6 20.0% 23.4 19.1% 3.6 2.9% 122.7
---------- --------- ----------- ---------- ---------- --------- ----------- -------- ------
Total revenues from
discontinued operations(2) 0.5 0.4 -- -- (0.5) (0.4) -- -- --
---------- --------- ----------- ---------- ---------- --------- ----------- -------- ------
Total revenues 71.6 58.4% 24.6 20.0% 22.9 18.7% 3.6 2.9% 122.7
========== ========= =========== ========== ========== ========= =========== ======== ======
- ------------------------------
(1) As of December 31, 2004, we owned a 75% economic interest in VDM
Specialists. The figures shown represent 100% of the corresponding revenue
amount.
(2) Comprised of revenues attributable to Van der Moolen Options USA, LLC,
Cohen, Duffy, McGowan, LLC,
Van der Moolen Opties, Van der Moolen U.K. and Kenny & Co.
48
Net
Interest
Year ended Proprietary Income
December 31, 2003 Trading/ from
% of % of market % of Stock % of % of
(in (euro) millions, Specialist Total Commission Total making Total Lending Total Other Total
except percentages) Activities Revenues Income Revenues Activities Revenues Activities Revenues Revenues Revenues Total
- --------------------------------- -------- ---------- --------- ----------- --------- ---------- -------- -------- -------- ------
VDM 100.8 59.6% 27.2 16.1% 1.7 1.0% 3.4 2.0% -- -- 133.1
Specialists(1)
European
Trading
Van der Moolen
Trading -- -- -- -- 7.5 4.4 -- -- -- -- 7.5
Van der Moolen
Effecten
Specialist -- -- -- -- 8.4 5.0 -- -- -- -- 8.4
Van der Moolen
Obligaties -- -- 0.9 0.5 2.5 1.5 -- -- -- -- 3.4
Van der Moolen
Equities -- -- -- -- 4.6 2.7 -- -- -- -- 4.6
----------- -------- ---------- --------- ----------- --------- ---------- -------- -------- -------- ------
Total revenues
from
continuing
operations 100.8 59.6% 28.1 16.6% 24.7 14.6% 3.4 2.0% -- -- 157.0
----------- -------- ---------- --------- ----------- --------- ---------- -------- -------- -------- ------
Total revenues
from
discontinued
operations(2) 2.7 1.6% -- -- 6.0 3.6% -- -- 3.4 2.0% 12.1
----------- -------- ---------- --------- ----------- --------- ---------- -------- -------- -------- ------
Total revenues 103.5 61.2% 28.1 16.6% 30.7 18.2% 3.4 2.0% 3.4 2.0% 169.1
=========== ======== ========== ========= =========== ========= ========== ======== ======== ======== ======
(1) We own a 75% economic interest in VDM Specialists. The figures shown
represent 100% of the corresponding revenue amount.
(2) Comprised of revenues attributable to Van der Moolen Options USA, LLC,
Cohen, Duffy, McGowan, LLC, Van der Moolen Opties, Van der Moolen U.K. and
Kenny & Co.
Our revenue from continuing operations decreased by (euro)34.3 million, or
21.8%, from (euro)157.0 million for the year ended December 31, 2003 to
(euro)122.7 million for the year ended December 31, 2004. This decrease in
revenue was caused primarily by a 25.2% decrease in revenue at VDM Specialists.
Revenues from our European trading operations declined 3.3% compared to 2003.
VDM Specialists accounted for 81.2% of our revenues from continuing operations
for the year ended December 31, 2004, compared with 84.8% in 2003.
o Specialist activities. Revenues from specialist activities decreased by
(euro)29.7 million, or 29.5%, falling from (euro)100.8 million for the year
ended December 31, 2003 to (euro)71.1 million for the year ended December
31, 2004. In dollar terms, revenues from specialist activities declined
17%. The decline in revenues from specialist activities was mainly caused
by market conditions, notably the low level of equity volatility during
most of the year.
o Commission income. Commission income decreased by (euro)3.5 million, or
12.5%, from (euro)28.1 million in 2003 to (euro)24.6 million in 2004. The
majority of commission revenue in both periods was attributable to VDM
Specialists, which had commissions from specialist activities of (euro)27.2
million and (euro)23.9 million in 2003 and 2004, respectively. This
decrease was largely the result of the translation effect of a weaker U.S.
dollar on our commissions earned in the United States.
o Proprietary trading/market making activities. Our revenues from proprietary
trading/market making activities decreased by (euro)1.3 million, or 5.3%,
from (euro)24.7 million for the year ended December 31, 2003 to (euro)23.4
million for the year ended December 31, 2004. This decrease reflects lower
trading revenues at our operations in Amsterdam and Cologne, primarily as a
result of reduced volatility on the European exchanges where we were
active.
o Net interest income from stock lending activities. Net interest income from
stock lending activities increased by (euro)0.2 million, or 5.9%, from
(euro)3.4 million for the year ended December 31, 2003 to (euro)3.6 million
for the year ended December 31, 2004. All of the net interest income
resulted from the activities of VDM Specialists. VDM Specialists closed its
stock lending business on February 11, 2005.
See further "Financial Information - Consolidated Statements and Other
Financial Information - Regulatory Proceedings and Litigation, VDM
Specialists, Stock Lending".
49
Expenses
Our expenses from continuing operations decreased by (euro)96.4 million, or
48.5%, from (euro)198.9 million for the year ended December 31, 2003 to
(euro)102.5 million for the year ended December 31, 2004. VDM Specialists
accounted for 62.5% of our expenses from continuing operations for the year
ended December 31, 2004, compared with 73.8% in 2003.
o Exchange, clearing and brokerage fees. Exchange, clearing and brokerage
fees decreased by (euro)2.1 million, or 8.9%, from (euro)23.5 million in
2003 to (euro)21.4 million in 2004. The decrease mainly resulted from the
lower trading activity and the translation effect of a weaker U.S. dollar
on our New York Stock Exchange-related fees.
o Employee compensation and benefits. Employee compensation and benefits
decreased by (euro)7.6 million, or 18.0%, from (euro)42.3 million in 2003
to (euro)34.7 million in 2004. Most of this decrease was due to a reduction
in staff numbers, decreased expenses related to our employee stock option
plan and the depreciation of the U.S. dollar relative to the euro. The
variable component of our personnel expenses, which comprises incentive
compensation for our personnel and is correlated with the development of
our revenues, increased to (euro)5.3 million, or to 4.3% of our total
revenues from continuing operations for the year ended December 31, 2004,
from (euro)3.6 million, or 2.3% of our total revenues from continuing
operations for the year ended December 31, 2003. This increase was
primarily due to the effect of the charge in relation to the NYSE/SEC
settlement on the incentive compensation for the year ended December 31,
2003. Non-cash expenses related to our employee stock option plan were
(euro)4.7 million and (euro)0.5 million in 2003 and 2004, respectively. The
decrease mainly reflected the effect of forfeitures in 2004, combined with
the fact that no new options have been granted since December, 2002.
o Lease of exchange memberships. Lease of exchange memberships decreased by
(euro)6.1 million, or 44.2%, from (euro)13.8 million in 2003 to (euro)7.7
million in 2004. A decrease of (euro)0.8 million relates to the
consolidation of LOC, LLC and the consequent elimination of the lease
payments made by VDM Specialists to this entity. The remainder was mainly
due to lower lease rates and a weaker U.S. dollar.
o Information and communication. Information and communication expenses
decreased by (euro)0.4 million, or 11.8%, from (euro)3.4 million in 2003 to
(euro)3.0 million in 2004. This decrease was the result of renegotiated
fees and the depreciation of the U.S. dollar relative to the euro.
o General and administrative expenses. General and administrative expenses
increased by (euro)2.5 million, or 20.8%, from (euro)12.0 million in 2003
to (euro)14.5 million in 2004. General and administrative expenses in 2004
included a benefit of (euro) 2.4 million in relation to the release of a
provision on a loan receivable as a result of this loan being fully repaid
in 2004. The increase in expenses excluding this one-off item amounted to
(euro) 4.9 million, or 40.8%, and mainly reflected increased professional
fees, including legal fees in relation to the NYSE/SEC settlement.
In 2004, VDM Specialists incurred $4.7 million ((euro) 3.8 million) in
legal fees in relation to regulatory proceedings and litigation, compared
to (euro)1.3 million in 2003.
o Depreciation and amortization. Depreciation and amortization decreased by
(euro)1.6 million, or 17.8%, from (euro)9.0 million in 2003 to (euro)7.4
million in 2004. The decrease mainly resulted from the gain on the sale of
real estate in 2004 of (euro)0.2 million which is included in the 2004
expense item and the translation effect of a weaker U.S. dollar on the euro
value of our depreciation and amortization of U.S. dollar assets.
o Provision for the New York Stock Exchange/SEC investigation. In connection
with the US$57.7 million settlement we reached with the New York Stock
Exchange and the SEC arising out of charges relating to alleged improper
trading practices, we recorded an expense of (euro)45.7 million in our
income statement for the year ended December 31, 2003. At December 31,
2004, the remaining liability to the New York Stock Exchange and the SEC of
(euro) 4.4 million was recorded as a current liability in our Statement of
Financial Condition. For a discussion of this settlement and the related
New York Stock Exchange and SEC investigations, see "Financial Information,
Consolidated Statements and other Financial Information, Regulatory
Proceedings and Litigation".
o Impairment of intangible fixed assets. We performed the annual impairment
tests on goodwill during the fourth quarter of 2004 for our different
reporting units and determined that impairments were required on goodwill
paid in relation to the acquisitions of certain of our European trading
operations in the amount of (euro)8.2 million. The impairment was based on
valuations by external independent consultants using a discount rate of 15%
and resulted from uncertain market conditions and associated estimated
lower profitability of these operations. Based upon valuations by external
independent consultants, no impairment charge on goodwill or the specialist
stock lists of VDM Specialists was considered to be necessary. See
"Operating and Financial Review and Prospects - Operating results -
Critical accounting policies, Intangible assets".
50
o Impairment of other assets. Impairment of other assets in the amount of
(euro)5.6 million is comprised of impairments of memberships in exchanges
owned, and relate entirely to New York Stock Exchange memberships. An
amount of (euro)3.4 million of this impairment charge relates to the
memberships owned by our variable interest entity LOC, LLC. A charge of
(euro)2.2 million was recognized on the seats owned by VDM Specialists. See
"Operating Results -- Overview -- Critical accounting policies --
Other-than-temporary impairment of exchange memberships".
Gain on disposal of long-term investments and associates
For the year ended December 31, 2003, we reported a gain on the disposal of
long-term investments and associates of (euro)0.9 million. No such gains were
reported for the year ended December 31, 2004.
Interest expense, net
For the year ended December 31, 2004, we reported net interest expense of
(euro)7.6 million, a 14.6% decrease compared to 2003. This decrease mainly
resulted from the repayment of debt in 2004 and the depreciation of the U.S.
dollar against the euro, partly offset by a (euro)0.2 million expense recognized
through the consolidation of LOC, LLC.
Interest expense, capital subject to mandatory redemption, net
As a result of the adoption of SFAS No. 150, our minority members' capital was
reclassified as a liability at December 31, 2003, and income distributable to
minority members was treated as interest expense as from and including the year
ended December 31, 2003. On December 1, 2004, VDM Specialists amended its
operating agreement and based on a review of the terms of the amended operating
agreement we determined that the minority members' capital was not redeemable
upon an event certain to occur. Consequently, as from December 1, 2004, the
minority members' capital was classified as minority interest in the Statement
of Financial Condition.
In 2003 and for the period January 1, 2004 through December 1, 2004, all income
distributable to our minority members is recorded as interest expense; any net
loss as a reduction of interest expense. For the period December 1, 2004 through
December 31, 2004, all income distributable to our minority members, including
interest on minority members' capital contributions is presented as minority
interest in the Consolidated Statement of Income.
The total of interest expense, capital subject to mandatory redemption, net and
minority interest amounted to a charge of (euro)5.4 million for the year ended
December 31, 2004 (December 31, 2003: (euro)2.4 million). The total amount for
the year ended December 31, 2004 includes a benefit of (euro)2.8 million in
relation to LOC, LLC (the variable interest entity consolidated following the
adoption of FIN 46 (R)). Excluding this benefit, 2004 reflects a charge of
(euro)8.2 million compared to a (euro)2.4 million charge in 2003. This increase
mainly reflects the minority members' share in the provision for the NYSE/SEC
settlement recognized in 2003, which depressed their economic interest in the
net income of VDM Specialists in 2003.
Other income
Other income mainly comprises foreign currency gains and losses. For the year
ended December 31, 2004, other income amounted to (euro)1.3 million compared to
a gain of (euro)6.1 million recognized in 2003. Other income in 2003 included a
gain of (euro)2.4 million arising from profits on the U.S. dollar put options
purchased at the start of that year, which were all exercised before the end of
that year. Currency options were not purchased in 2004. Further, other income
for 2003 included (euro)3.2 million in currency exchange gains on U.S. dollar
short positions. Other income in 2004 does not include any similar gains.
(Loss) income from continuing operations before income taxes
As a result of the foregoing factors, our income from continuing operations
before income taxes increased from a loss of (euro)46.2 million for the year
ended December 31, 2003 to a profit of (euro)6.0 million for the year ended
December 31, 2004. As described above, the comparison of (loss) income from
continuing operations before income taxes is affected by the reclassification
involving minority interest and interest expense, and capital subject to
mandatory redemption, net arising from the adoption of SFAS 150.
51
Provision for income taxes
The provision for income taxes decreased from a credit of (euro)12.2 million in
2003 to a credit of (euro)0.6 million in 2004. The provision for income taxes as
a percentage of income before taxes (for the year ended December 31, 2004, as a
percentage of income before taxes and after minority interests), decreased from
26.4% for the year ended December 31, 2003 to a benefit of 7.1% (the tax benefit
of (euro)0.6 million divided by pretax income of (euro)8.5 million) for the year
ended December 31, 2004.
The credit of (euro)0.6 million recognized in 2004 includes a tax benefit of
(euro)8.5 million. In accordance with applicable Dutch law, in particular the
Special Fiscal Regime for International Financing Activities, we have been able
to defer partially taxation on interest income received from subsidiaries within
the group through our Dutch finance entity, 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. 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. As a consequence of these developments and other factors in 2004, the
Company decided to unwind partially the internal group financing structure
applied under the Special Fiscal Regime. This was mainly achieved through the
conversion of intergroup loans advanced by our Dutch finance entity into equity,
and has resulted in a tax benefit of (euro)2.2 million, which has been
recognized in the provision for income taxes. The effective tax rate payable by
us on a consolidated basis in future years will depend on the final unwinding of
our international financing structure under the Regime (including the ultimate
taxation treatment thereof) and the effect of possible new financing structures
that we may implement. Further, the tax benefit includes a net benefit of
(euro)6.3 million mainly relating to the adjustment of amounts accrued in
previous years as a result of final tax assessments issued by the tax
authorities of the jurisdictions in which our group companies operate. For
example, in 2004 a benefit of (euro)1.9 million was recognized as a result of
the application of a decision by the EC Court of Justice of Luxembourg (the
so-called Bosal case). Further, we reached settlement with the Dutch tax
authorities in 2004 in respect of a withholding tax issue resulting in the
recognition of a benefit of (euro)3.9 million. Significant judgement is required
in determining the worldwide provision for income taxes. We consult our external
tax advisors in this determination as described in "Operating and Financial
Review and Prospects - Operating Results - Critical Accounting Policies,
taxation". Where the final outcome of tax matters is different from the amounts
that were initially recorded, such differences will affect the provision for
income taxes from continuing operations in the period in which such
determination is made.
In addition to the tax benefit discussed above, the provision for income taxes
in 2004 includes a benefit of (euro)1.2 million as a result of the functional
currency change. We refer to "Operating and Financial Review and Prospects -
Operating Results - Determination of functional currency".
If these benefits of (euro)8.5 million and (euro)1.2 million are excluded from
the determination of the consolidated effective tax rate from continuing
operations for 2004, the effective tax rate would be a charge of 107.1% of
pretax income, mainly as a result of the non-tax deductibility of impairment
charges recognized on goodwill for our European trading segment, combined with
the relative low level of pretax results and the impact of foreign taxation.
The effective tax rate for 2003 was strongly influenced by the non-tax
deductibility of that part of the New York Stock Exchange/SEC settlement that
related to civil penalties, which amounted to (euro)18.1 million.
For a further explanation of our effective tax rate reference is made to note 12
of our financial statements.
Minority interests
See "Interest expense, capital subject to mandatory redemption, net" above.
52
Net loss from discontinued operations
The net loss from discontinued operations in 2004 mainly reflects the results of
Van der Moolen Options USA, LLC, which was disposed of in 2004, and the transfer
of cumulative foreign currency exchange losses from Accumulated Other
Comprehensive Income, a component of Shareholders' Equity, to the Consolidated
Statement of Income. The results of Van der Moolen Options USA, LLC were
classified as discontinued operations under applicable accounting standards. The
net loss amounted to (euro)18.1 million in 2004 compared to a loss of (euro)24.6
million in 2003. The net loss from discontinued operations for the year ended
December 31, 2004 includes a net loss of (euro)15.9 million (2003: nil) in
relation to the aforementioned transfer of cumulative foreign exchange losses.
For the year ended December 31, 2003, the net loss from discontinued operations
included the net loss attributable to Van der Moolen Options USA, LLC as well as
the operations discontinued in 2003, including Van der Moolen UK Ltd. See Note 3
of our U.S. GAAP consolidated financial statements for an overview of the
components of this net loss.
Net (loss) income
As a result of the foregoing factors, our net result improved by (euro)49.6
million in 2004, from a loss of (euro)58.6 million for the year ended December
31, 2003 to a loss of (euro)9.0 million for the year ended December 31, 2004.
Results of Operations for the Years Ended December 31, 2003 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, 2003
and 2002.
Net
Interest
Proprie- Income
tary from
Year ended Specia- % of % of Trading/ % of Stock % of % of
December 31, 2003 list Total Com- Total market Total Len-ding Total Other Total
(in EUR millions, except Activi- Reve- mission Reve- making Reve- Activi- Reve- Reve- Reve-
percentages) ties nues Income nues Activities nues ties nues nues nues Total
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
VDM Specialists(1) 100.8 59.6 % 27.2 16.1 % 1.7 1.0 % 3.4 2.0 % -- -- 133.1
European Trading
Van der Moolen Trading -- -- -- -- 7.5 4.4 -- -- -- -- 7.5
Van der Moolen Effecten
Specialist -- -- -- -- 8.4 5.0 -- -- -- -- 8.4
Van der Moolen Obligaties -- -- 0.9 0.5 2.5 1.5 -- -- -- -- 3.4
Van der Moolen Equities -- -- -- -- 4.6 2.7 -- -- -- -- 4.6
-------- ------ -------- ------ ----------- ------ --------- ------ ------ ------ ------
Total revenues from continuing
operations 100.8 59.6 % 28.1 16.6 % 24.7 14.6 % 3.4 2.0 % -- -- 157.0
-------- ------ -------- ------ ----------- ------ --------- ------ ------ ------ ------
Total revenues from
discontinued operations(2) 2.7 1.6 % -- -- 6.0 3.6 % -- -- 3.4 2.0 % 12.1
-------- ------ -------- ------ ----------- ------ --------- ------ ------ ------ ------
Total revenues 103.5 61.2 % 28.1 16.6 % 30.7 18.2 % 3.4 2.0 % 3.4 2.0 %169.1
======== ====== ======== ====== =========== ====== ========= ====== ====== ====== ======
(1) We own a 75% economic interest in VDM Specialists. The figures shown
represent 100% of the corresponding revenue amount.
(2) Comprised of revenues attributable to Van der Moolen Options USA, LLC,
Cohen, Duffy, McGowan, LLC, Van der Moolen Opties, Van der Moolen U.K. and
Kenny & Co.
53
Proprie- Net
Year ended tary Interest
December 31, 2002 Trading/ Income
(in EUR % of Com- % of market % of from Stock % of % of
millions, except Specialist Total mission Total making Total Lending Total Other Total
percentages) Activities Revenues Income Revenues Activities Revenues Activities Revenues Revenues Revenues Total
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
VDM
Specialists(1)(2) 227.0 70.6 % 33.4 10.4 % 2.1 0.6 % 4.2 1.3 % -- -- 266.7
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
Obligaties -- -- 1.6 0.5 2.9 0.9 -- -- -- -- 4.5
Van der Moolen
Equities -- -- -- -- 8.4 2.7 -- -- -- -- 8.4
----------- --------- -------- --------- ----------- --------- ----------- --------- --------- --------- ------
Total revenues
from continuing
operations 227.0 70.6 % 35.0 10.9 % 49.6 15.4 % 4.2 1.3 % -- -- 315.8
----------- --------- -------- --------- ----------- --------- ----------- --------- --------- --------- ------
Total revenues
from discontinued
operations(3) (3.8 ) (1.2 %) -- -- 6.5 2.0 % -- -- 3.3 1.0 % 6.0
----------- --------- -------- --------- ----------- --------- ----------- --------- --------- --------- ------
Total revenues 223.2 69.4 % 35.0 10.9 % 56.1 17.4 % 4.2 1.3 % 3.3 1.0 %321.8
=========== ========= ======== ========= =========== ========= =========== ========= ========= ========= ======
- ---------------------------------------
(1) We acquired New York Stock Exchange specialists Lyden, Dolan, Nick on March
1, 2002. The results of its operations are reflected in VDM Specialists'
results as of that date.
(2) As of December 31, 2002, we owned a 75% economic interest in VDM
Specialists. The figures shown represent 100% of the corresponding revenue
amount.
(3) Comprised of revenues attributable to Van der Moolen Options USA, LLC,
Cohen, Duffy, McGowan, LLC, Van der Moolen Opties, Van der Moolen U.K. and
Kenny & Co.
Our revenues from continuing operations decreased by (euro)158.8 million, or
50.3%, from (euro)315.8 million for the year ended December 31, 2002 to
(euro)157.0 million for the year ended December 31, 2003. This decrease was
caused primarily by a 51.3% decline in revenues from our European trading
operations and a 50.1% decline at VDM Specialists. VDM Specialists accounted for
84.8% of our revenues from continuing operations for the year ended December 31,
2003, compared with 84.5% in 2002.
o Specialist activities. Revenues from specialist activities decreased by
(euro)126.2 million, or 55.6%, falling from (euro)227.0 million for the
year ended December 31, 2002 to (euro)100.8 million for the year ended
December 31, 2003. This decrease was mainly caused by market conditions,
notably the low level of equity volatility during most of the year, and
adverse changes in the value of the U.S. dollar relative to the euro,
partly offset by the full year consolidation of the acquisition of Lyden,
Dolan, Nick in 2003.
o Commission income. Commission income decreased by (euro)6.9 million, or
19.7%, from (euro)35.0 million in 2002 to (euro)28.1 million in 2003. The
majority of commission revenue in both periods was attributable to VDM
Specialists, which had commissions from specialist activities of (euro)33.4
million and (euro)27.2 million in 2002 and 2003, respectively. This decline
resulted from lower commission based activity and the depreciation of the
US dollar compared to the euro. As a result of declining revenues, the
relative contribution of commission income to total revenues of continuing
operations increased from 11.1% in 2002 to 17.9% in 2003.
o Proprietary trading/market making activities. Our revenues from proprietary
trading/market making activities decreased by (euro)24.9 million, or 50.2%,
from (euro)49.6 million for the year ended December 31, 2002 to (euro)24.7
million for the year ended December 31, 2003. This decrease reflected a
fall in turnover and volatility on most of the European exchanges where we
were active.
o Net interest income from stock lending activities. Net interest income from
stock lending activities declined by (euro)0.8 million, or 19.0%, from
(euro)4.2 million for the year ended December 31, 2002 to (euro)3.4 million
for the year ended December 31, 2003. All of the net interest income
resulted from the activities of VDM Specialists.
54
Expenses
Our expenses from continuing operations increased by (euro)36.0 million, or
22.1%, from (euro)162.9 million for the year ended December 31, 2002 to
(euro)198.9 million for the year ended December 31, 2003. VDM Specialists
accounted for 73.8% of our expenses from continuing operations for the year
ended December 31, 2003, compared with 66.7% in 2002.
o Exchange, clearing and brokerage fees. Exchange, clearing and brokerage
fees decreased by (euro)9.5 million, or 28.8%, from (euro)33.0 million in
2002 to (euro)23.5 million in 2003. The decrease resulted from reduced
trading activities, efforts to reduce these costs taken in 2002 and 2003
and depreciation of the U.S. dollar against the euro, which were partially
offset by increases in fees charged to us by certain providers of these
services.
o Employee compensation and benefits. Employee compensation and benefits
decreased by (euro)36.4 million, or 46.3%, from (euro)78.7 million in 2002
to (euro)42.3 million in 2003. Most of this decrease was due to the decline
in variable income-based incentive compensation for our traders and
management and other staff that accompanied the decline in revenue and
income levels from one period to the next. Reduction in staff numbers and
the depreciation of the U.S. dollar relative to the euro accounted for a
significant portion of this decrease as well. The variable component of our
personnel expenses, which comprises incentive compensation for our
personnel and is correlated with the development of our revenues, decreased
to (euro)3.6 million, or to 2.3% of our total revenues from continuing
operations for the year ended December 31, 2003, from (euro)32.4 million,
or 10.3% of our total revenues from continuing operations for the year
ended December 31, 2002, mainly as a result of the effect that the
provision for the New York Stock Exchange/ SEC investigation had on the
incentive compensation for our employees and management. Non-cash expenses
related to our employee stock option plan were (euro)5.5 million and
(euro)4.7 million in 2002 and 2003, respectively. At the beginning of 2003,
we closed the plan and announced that no further options would be granted.
o Lease of exchange memberships. Lease of exchange memberships decreased by
(euro)1.9 million, or 12.1%, from (euro)15.7 million in 2002 to (euro)13.8
million in 2003. This decrease was mainly due to the decline in open market
prices for purchasing seats, which affected lease rates, a reduction in the
number of New York Stock Exchange memberships leased by VDM Specialists and
the deprecation of the U.S. dollar relative to the euro.
o Information and communication. Information and communication expenses
decreased by (euro)1.5 million, or 30.6%, from (euro)4.9 million in 2002 to
(euro)3.4 million in 2003. This decrease was the result of cost saving
measures taken in 2002 and 2003 as well as the depreciation of the U.S.
dollar relative to the euro.
o General and administrative expenses. General and administrative expenses
decreased by (euro)7.7 million, or 39.1%, from (euro)19.7 million in 2002
to (euro)12.0 million in 2003. This decline was primarily caused by cost
saving measures taken in 2002 and 2003 and the depreciation of the U.S.
dollar relative to the euro, which were partially offset by increased legal
and other advisory service fees in the second half of 2003 in the amount of
(euro)1.3 million, relating mainly to the New York Stock Exchange/SEC
investigation described elsewhere herein.
o Depreciation and amortization. Depreciation and amortization decreased by
(euro)1.9 million, or 17.4%, from (euro)10.9 million in 2002 to (euro)9.0
million in 2003. The decrease resulted mainly from the depreciation of the
U.S. dollar relative to the euro.
o Provision for the New York Stock Exchange/SEC investigation. In connection
with the $57.7 million settlement we reached with the New York Stock
Exchange and the SEC arising out of charges relating to alleged improper
trading practices, we recorded a provision of (euro)45.7 million on our
income statement for the year ended December 31, 2003. For a discussion of
this settlement and the related New York Stock Exchange and SEC
investigations, see "Recent Developments" and "Financial Information,
Consolidated Statements and other Financial Information, Regulatory
Proceedings and Litigation".
o Impairment of intangible fixed assets. We performed the annual impairment
tests on goodwill during the fourth quarter of 2003 for our different
reporting units and determined that impairments were required on goodwill
paid in relation to the acquisitions of VDM Specialists and in relation to
our European Trading activities. The amounts were (euro)27.7 million and
(euro)21.5 million respectively, for a total of (euro)49.2 million. The
impairment related to VDM Specialists was based on valuations by external
independent consultants using a discount rate of 13% and resulted from
uncertain market conditions and associated estimated lower profitability of
this entity. The impairment of the goodwill related to the European Trading
operations was 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 the European Trading operations, a
discount rate of 15% was applied. Based upon valuations by external
independent consultants, no impairment charge on the specialist stock lists
of VDM Specialists was considered to be necessary. Further impairment
charges were taken in relation to the discontinued operations of Van der
Moolen Options USA, LLC and Cohen, Duffy, McGowan, LLC. See note 3 of our
U.S. GAAP consolidated financial statements.
55
Gain on disposal of long-term investments and associates
For the year ended December 31, 2003, we reported a gain on disposals of
long-term investments and associates of (euro)0.9 million. This gain related to
the sale of our approximately 1% shareholding in Tullett Plc., which was sold in
February 2003.
Interest expense, net
For the year ended December 31, 2003, we reported net interest expense of
(euro)8.9 million, a 31.5% decrease compared to 2002. This decrease mainly
resulted from the decrease in interest rates over the comparable periods as well
as the depreciation of the U.S. dollar against the euro.
Interest expense, capital subject to mandatory redemption, net
As a result of the adoption of SFAS No. 150, our minority members' capital was
reclassified as a liability as of December 31, 2003; therefore, amounts
reflected in the consolidated statement of income are treated as interest
expense as from and including the year ended December 31, 2003. Previous years'
financial data was not restated. This item reflects that portion of our income
that is attributed to the minority members of our U.S. subsidiary VDM
Specialists (excluding amortization and impairments of goodwill and other
intangible assets). In comparison with minority interest recognized in 2002, the
decrease from (euro)35.3 million to (euro)2.4 million in 2003 was caused by the
decreased income level realized by VDM Specialists in comparison with 2002,
mainly as a result of the provision for the New York Stock Exchange/SEC
investigation recognized in 2003.
Other income
Other income mainly comprises foreign currency gains and losses. For the year
ended December 31, 2003, other income included a gain of (euro)2.4 million in
relation to the U.S. dollar put options bought in 2003. See "Risk Factors -
Risks Associated with the Company".
(Loss) income from continuing operations before income taxes
As a result of the foregoing factors, our income from continuing operations
before income taxes decreased from (euro)145.0 million for the year ended
December 31, 2002 to a loss of (euro)46.2 million for the year ended December
31, 2003. As described above, the comparison of (loss) income from continuing
operations before income taxes is affected by the reclassification involving
minority interest and interest expense, capital subject to mandatory redemption,
net arising from the adoption of SFAS 150.
Provision for income taxes
The provision for income taxes decreased from a charge of (euro)46.1 million in
2002 to a credit of (euro)12.2 million in 2003. The provision for income taxes
as a percentage of income before taxes (for the year ended December 31, 2002: as
a percentage of income before taxes and less minority interests), decreased from
42.0% (charge) for the year ended December 31, 2002 to 26.4% (benefit) for the
year ended December 31, 2003. The tax benefit in the year ended December 31,
2003 has been negatively influenced by the non-tax deductibility of the New York
Stock Exchange/SEC provision that relates to civil penalties, which amounted to
(euro)18.1 million ($22.8 million).
Minority interests
See "Interest expense, capital subject to mandatory redemption, net" above.
Net loss from discontinued operations
The net loss from discontinued operations reflects the results of Van der Moolen
Options USA, LLC, Cohen, Duffy, McGowan, LLC, Van der Moolen Opties and Kenny &
Co, our operations that were discontinued in 2003, and the results of Van der
Moolen UK Ltd., which was disposed of in 2004. All of these operations are
classified as discontinued operations under applicable accounting standards. The
total net loss amounted to (euro)24.6 million in 2003 compared to a net loss of
(euro)33.5 million in 2002. See note 3 of our U.S. GAAP consolidated financial
statements for an overview of the components of this net loss.
56
Net (loss) income
As a result of the foregoing factors, our net income decreased by (euro)88.7
million in 2003, from (euro)30.1 million for the year ended December 31, 2002 to
a loss of (euro)58.6 million for the year ended December 31, 2003.
(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 from short-term borrowings. As of December 31, 2004, we
had (euro)1.3 billion in assets, (euro)288.2 million of which consisted of cash
and cash equivalents. As of December 31, 2003, we had (euro)2.9 billion in
assets, (euro)383.8 million of which consisted of cash and cash equivalents
(including cash and cash equivalents within held-for-sale assets). Out of our
assets at December 31, 2003, (euro)417.7 million were held-for-sale, of which
(euro)12.6 million consisted of cash and cash equivalents.
Cash and cash equivalents at December 31, 2004 and 2003 included (euro)69.4
million and (euro)134.7 million, respectively, which amounts are included in the
cash pool agreement we have entered into with a commercial bank. In respect to
this cash pool agreement bank overdrafts are recognized as short-term borrowings
in the amount of (euro)68.7 million and (euro)157.4 million, respectively. The
Company manages its cash position and cash flows on a netted basis.
Our subsidiary in the United States, VDM Specialists, is a registered
broker-dealer that is 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 net liquid assets. As of December 31, 2004, VDM Specialists' net
capital, as defined, was $243.2 million ((euro)179.6 million), in excess of its
net capital requirement, and VDM Specialists' net liquid assets were
approximately $9.3 million ((euro)6.8 million) in excess of net liquid assets
required. Our subsidiaries in Europe are also subject to capital requirements.
As of December 31, 2004, all entities had net capital that exceeded their
respective net capital requirement at that date.
At December 31, 2004, we had approximately (euro)31 million of freely available
cash (including disposition on security positions) at of December 31, 2003
freely available cash amounted to (euro)11 million.
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, 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 24, 2005 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):
o A loan from a corporate lender in the amount of (euro)1.7 million, of which
(euro)1.4 million is of a long-term nature, bearing interest of 6.25% per
annum. This loan is payable in annual installments with a final maturity on
January 28, 2010.
o A 5.66% term loan in the amount of (euro)22.7 million from ING Bank
Mezzanine Fonds B.V., in respect of which (euro)3.6 million remains
outstanding. The loan is repayable in annual installments, the last of
which is due on December 14, 2005.
o A (euro)5 million uncommitted overdraft facility from ING Bank N.V.
Interest on this facility is set at 1% over the bank's base lending rate.
There are no amounts outstanding under this facility.
57
o A (euro)15 million committed credit facility with ABN Amro Bank N.V.
Interest on this facility is set at 2.5% over the one-months Euribor rate.
There are no amounts outstanding under this facility. This facility matures
on December 29, 2005.
We also have uncommitted overdraft facilities to finance the trading activities
of our subsidiaries.
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
that we have issued in accordance with section 2:403 of the Dutch Civil Code.
Van der Moolen Holding N.V. has issued a guarantee with respect to the repayment
of a loan taken up by LOC, LLC, see "Other" below.
Further, Van der Moolen Holding N.V. has issued a guarantee to third parties for
a total amount of (euro)1.0 million in relation to a credit facility of
Stichting Van der Moolen Holding. No amounts are drawn under this facility.
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
((euro)14.8 million). These notes mature on December 31, 2005, bear interest at
an annual rate of 8.0% and are repayable in four equal annual installments
beginning December 31, 2002. As of June 24, 2005 an amount of $5 million
((euro)3.7 million) was still outstanding under this agreement. On August 3,
2001, VDM Specialists issued subordinated notes in the aggregate principal
amount of $130.0 million ((euro)96.0 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 ((euro)48.0
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 ((euro)48.0 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 ((euro)29.5 million). These notes mature on
March 1, 2008, bear interest at an annual rate of 7.11% and are payable in four
annual installments, the first having been paid on March 1, 2005. As of June 24,
2005 an amount of $30 million ((euro)22.2 million) was still outstanding under
this agreement. 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.
The subordinated notes, 8.00% due December 30, 2005, 7.11% due March 1, 2008,
7.54% due August 3, 2008 and 7.80% due August 3, 2011 contain certain financial,
reporting and other restrictive covenants. Financial covenants relate to, among
other things, compliance with regulatory minimum capital and net liquid asset
requirements. If VDM Specialists ceases to be in compliance with a financial
covenant, and the non-compliance is not waived by the holders of the
subordinated notes, the entire debt balance becomes repayable within a period of
six months, and cross defaults with respect to other borrowing by VDM
Specialists could be triggered.
On April 19, 2004, VDM Specialists issued junior subordinated notes in the
aggregate principal amount of $1.1 million ((euro)0.8 million) to certain of its
minority members. These notes mature on October 31, 2005 and bear interest at an
annual rate of 7%. The purpose of these notes is to enable VDM Specialists to
satisfy applicable New York Stock Exchange net capital and net liquid assets
requirements.
Historically, VDM Specialists used interest rate swaps to mitigate its exposure
to interest rate changes on certain of its subordinated notes. In June 2005, VDM
Specialists changed its policy and now hedges its exposure to interest rate
fluctuations depending on its assessment of future interest rate movements. As a
consequence, the interest rate swaps were terminated.
VDM Specialists also has subordinated liabilities amounting to $4.2 million
((euro)3.1 million) as of December 31, 2004, 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 $5.8 million ((euro)4.3 million). These guarantees, 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.
58
Other
LOC, LLC, a variable interest entity consolidated under the provisions of FIN
46(R), has entered into a loan agreement with a commercial bank in respect of
which $3.7 million is outstanding ((euro)2.7 million) as of June 24, 2005. The
loan is repayable in four annual instalments, the last of which is due on
January 13, 2009. Van der Moolen Holding N.V. has issued a guarantee in respect
of this loan. As a result of the consolidation of LOC, LLC, the loan is
recognized in the Consolidated Statement of Financial Condition at December 31,
2004 and is also included in the summary of indebtedness stated below.
Summary of indebtedness
As of June 24, 2005, the scheduled maturities of our obligations, excluding bank
overdrafts, assuming any available rollover provisions are inapplicable, were:
Less than Greater than
Total (1) 1 year (1) 1-3 years(1) 3-5 years(1) 5 years (1)
- ------------------------------------------- ----------- ------------ -------------- ------------- -------------
(in (euro) millions)
- ------------------------------------------- ----------- ------------ -------------- ------------- -------------
Indebtedness
Short-term debt - - - - -
Long-term debt 4.4 1.2 1.9 1.3 -
Subordinated liabilities(2) 125.3 15.4 56.0 34.8 19.1
Operating leases 6.4 2.8 2.0 1.6 -
- -------------------------------------------
(1) Amounts stated are principal amounts. Principal amounts in dollars are
translated into euros at the exchange rate of (euro)1.00 = $1.3648.
(2) Subordinated liabilities exclude memberships in exchanges, contributed by
members, at market value.
For the year ended December 31, 2005, we plan to contribute (euro)0.7 million to
our pension plans.
Off-balance sheet arrangements
In addition to the obligations recorded on our balance sheet, we have certain
commitments and contingencies that may result in future cash requirements. These
off-balance sheet arrangements consist of guarantees to third parties as
discussed above, which are in addition to capital commitments and operating
lease commitments. See note 23 of our U.S. GAAP consolidated financial
statements included in this annual report for further information regarding our
commitments and contingent liabilities.
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 (euro)1.1 million, (euro)1.4
million and (euro)66.0 million for the years ended December 31, 2004, 2003 and
2002, respectively. As a result of the absence of acquisitions, our capital
expenditure in 2004 was limited. Our capital expenditure in 2002 mainly
reflected the acquisition of Lyden, Dolan, Nick, as described above under "--
Basis of preparation of our U.S. GAAP consolidated financial statements --
Changes in group composition".
We currently anticipate that our available cash resources and credit facilities
will be sufficient to meet our announced acquisition and our anticipated
repayments, working capital, regulatory capital, dividend payments and capital
expenditure requirements through the end of 2005.
59
Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
We have a two-tier board structure consisting of an executive board, which
manages our business, and a supervisory board, which
supervises and advises our executive board.
(A) Directors and Senior Management
Supervisory Board
Our supervisory board must approve certain resolutions of our executive board,
which are specified in our articles of association and are set forth under "--
Executive Board" below. In addition, our supervisory board may give our
executive 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 executive 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. In our articles of
association, a limit of 12 years is placed on the total service period of
supervisory board members. 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
executive 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 or after he has served 12 years as
supervisory board member. 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". The articles of association
provide that the supervisory board members will be reimbursed and indemnified
with respect to damages due to acts or omissions in the performance of their
duty. Such reimbursement and indemnification is limited to the extent the
supervisory board member is insured or the damage is a result of acts or
omissions that may be characterized as being willful misconduct, intentionally
reckless or seriously imputable.
60
Our supervisory board consists of five members. Our supervisory board members
are:
Name Age Position Expiry of term
- --------------------------------------------------------------------------------------------------------------------
Rudolf G.C. van den Brink 57 Chairman 2006
Jan Aalberts 65 Member 2006
Marinus Arentsen 65 Member 2008
Gerrit H. de Marez Oyens 63 Member 2006
Gerard L. van den Broek 63 Member 2008
Rudolf G.C. van den Brink has served as a member of our supervisory board since
July 24, 2002. He holds a Ph.D. in Economics from the University of Amsterdam.
Mr. Van den Brink is a professor of Monetary Economics 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 den 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 Samas-Groep N.V., Oranje-Nassau
Groep B.V., Legal & General Nederland Levensverzekering Maatschappij N.V. and
Akzo Nobel N.V. Further, he is the chairman of the supervisory board of
Nederlandse Waterschapsbank N.V., Center Parcs Europe N.V., Arbo Unie B.V. and
the University of Nijenrode.
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, a venture capital fund, Stork N.V., an industrial
supplier of machine components, systems and services for various industries, and
Boskalis Westminster N.V., a dredging company.
Marinus Arentsen was elected to our supervisory board at our Annual General
Meeting of Shareholders on April 14, 2004. A registered accountant, he was
previously chief financial officer and a member of the executive board of CSM
NV, a food producer. He serves as chairman of the supervisory boards of CSM
Nederland B.V. and Klaverblad Verzekeringen U.A., an insurer, and as chairman of
Frans Maas N.V., a logistics provider. In addition, he is a member of the
supervisory boards of Zuivelcooperatie Campina, an agribusiness, Incotec
International B.V. a firm that provides services to agribusiness and Oce N.V., a
manufacturer of document management systems.
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 Vice Chairman 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 Erasmus University, Rotterdam. After
working as a member of the management team of Nederlandse Credietverzekering
Maatschappij until 1978. In 1982, he subsequently joined 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 Alan Holdings Nederland B.V., an aluminum refiner and component manufacturer.
The business address of each supervisory board member is the address of our
principal executive office in Amsterdam, the Netherlands.
61
Executive Board
Our executive 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 executive board requires prior approval of the
supervisory board for resolutions to:
(a) institute major changes in the identity or character of Van der Moolen
Holding or its business activities;
(b) 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;
(c) cooperate with the issuance of depositary receipts for shares;
(d) 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;
(e) 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;
(f) 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;
(g) 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);
(h) propose to amend our articles of association;
(i) propose to dissolve Van der Moolen Holding N.V.;
(j) file for bankruptcy or a suspension of payments;
(k) 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;
(l) effect a far-reaching change to the employment conditions of a substantial
number of our employees or those of a dependent company;
(m) propose to decrease our issued share capital;
(n) propose to merge or demerge in accordance with Dutch law; and
(o) 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.
The executive board shall furthermore require the approval of the supervisory
board and a general meeting of shareholders for resolutions of the executive
board regarding a significant change in the identity or nature of Van der Moolen
Holding N.V. or its enterprise, including:
(a) the transfer of the enterprise or practically the entire enterprise to a
third party;
(b) the conclusion or cancellation of any long-lasting co-operation by Van der
Moolen Holding N.V. or a subsidiary with any other legal person or company
or as a fully liable general partner of a limited partnership or a general
partnership, provided that such co-operation or the cancellation thereof is
of essential importance to Van der Moolen Holding N.V.; and
(c) the acquisition or disposition by Van der Moolen Holding N.V. or a
subsidiary of a participation interest in the capital of a company with a
value of at least one-third of Van der Moolen Holding N.V.'s total assets
as set forth on the balance sheet contained within its most recently
adopted annual accounts.
Our executive board must have at least two members, and our supervisory board
determines its size. Each new member of the executive board shall be appointed
for a maximum period of four years. Accordingly, unless such member of the
executive board has resigned or has been terminated in such capacity at an
earlier date, his term of office will lapse on the day of the annual general
meeting to be held in the fourth year after the year of his appointment. Our
general meeting of shareholders appoints the members of our executive board from
binding nominations made by our supervisory board. There must be at least two
nominees for each vacancy on our executive 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 executive board within 30 days
after a vacancy has occurred, the general meeting of shareholders can appoint a
replacement by an absolute majority of votes.
62
Our executive board has established rules governing its internal organization.
Our supervisory board must approve the adoption of, and any changes to, these
rules. Our executive board may, subject to approval from our supervisory board,
charge each member of the executive board with particular duties.
An executive 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 an executive
board member if the supervisory board proposes the measure. Our supervisory
board may also suspend (but not dismiss) a member of our executive board. If,
within three months after a suspension, our general meeting of shareholders has
not decided to either dismiss the executive board member or terminate the
suspension, the suspension shall terminate automatically.
Our supervisory board determines the compensation and benefits of the members of
our executive board, with due observance of the remuneration policy as adopted
by the general meeting of shareholders.
The articles of association provide that the executives will be reimbursed and
indemnified with respect to damages due to acts or omissions in the performance
of their duty. Such reimbursement and indemnification is limited to the extent
the executive is insured or the damage is a result of acts or omissions that may
be characterized as being willful misconduct, intentionally reckless or
seriously imputable.
The business address of each member of our executive board is the address of our
principal executive office in Amsterdam, the Netherlands.
The members of our executive board are:
Name Age Position
- ----------------------------------------------------------- ------------ -------------------------------------
Friedrich M. J. Bottcher 58 Chairman of the executive board
Leo J. Pruis 52 Chief financial officer
Casper F. Rondeltap 49 Member
Friedrich M. J. Bottcher has been the chairman of our executive board since
January 2000, having been a member of the executive board since January 1997.
Prior to that, he was a member of the executive boards of the Amsterdam branch
of Barclays Bank International Ltd. and Barclays Kol & Co N.V. and the executive
board of Friesch-Groningsche Hypotheekbank N.V. He was also the chairman of the
executive 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 FBS Bankiers N.V.
Leo J. Pruis is an economist and registered accountant, who has served in
financial capacities at a number of financial services firms, most recently as a
member of the executive boards of Eureko B.V. and Achmea Holding N.V. Prior to
his employment there he held general management positions with Fortis N.V. and
Credit Lyonnais Bank Nederland N.V. Mr. Pruis joined Van der Moolen on January
3, 2005, became CFO upon the departure of his predecessor on February 28, 2005
and was elected to the Executive Board at the Annual General Meeting of
Shareholders on April 6, 2005.
Casper F. Rondeltap has been a member of the management committee of VDM
Specialists since 2000. Prior to that he acted as a hoekman (specialist) on the
Amsterdam Exchanges from 1983 up to 1997 and was the Director of Investor
Relations of Van der Moolen between 1997 and 2000. He became a member of the
executive board of Van der Moolen Holding N.V. on April 9, 2003.
63
New York Stock Exchange Corporate Governance Requirements
We are subject not only to the rules of the Dutch Corporate Governance Code but
also to the New York Stock Exchange corporate governance rules and to the
provisions of the U.S. Sarbanes-Oxley Act. We are not subject to any other
corporate governance code. We comply with the corporate governance rules
applicable to foreign private issuers listed on the New York Stock Exchange. As
a foreign private issuer with ADSs listed on the New York Stock Exchange, we are
permitted to follow our home-country practices with respect to most corporate
governance matters instead of those that apply to U.S. domestic issuers,
provided that we disclose any significant ways in which our corporate governance
practices differ from those followed by listed domestic U.S. companies under the
New York Stock Exchange listing standards.
Like most public Dutch companies, we have a two-tier governance regime
consisting of a non-executive supervisory board and an executive board. As set
out in more detail above, our supervisory board oversees and controls our
executive board, whereas the executive board is responsible for the management
of the company. Members of the executive board and other officers and employees
cannot simultaneously act as members of the supervisory board. The supervisory
board has the right to submit specified resolutions of the executive board for
its approval. Certain material decisions of the executive board are in any event
subject to the approval of the supervisory board, whereas resolutions of the
executive board regarding a significant change in the identity or nature of the
company are, in addition to supervisory board approval, subject to the approval
of the general meeting of shareholders.
Both the Dutch Corporate Governance Code requirements and the New York Stock
Exchange rules require that a majority (or more) of the members of a board of
directors be independent. However, the relevant definitions of independence
differ in their details. In some cases, the Dutch requirement is stricter, such
as by requiring a longer "look back" period for former executive directors; in
others the New York Stock Exchange requirement is the stricter of the two. New
York Stock Exchange listing standards also require that the external auditor be
appointed by a company's audit committee. In accordance with Dutch law, our
external auditor is appointed by the general meeting of shareholders. Any such
appointment made is based on a nomination by the supervisory board rather than a
nomination by our audit committee. On the other hand, our audit committee has
the sole authority to make recommendations for such appointment, which in turn
is subject to confirmation by our supervisory board. The responsibility for our
corporate governance structure lies with the executive board and the supervisory
board as a whole, and is not delegated to a sub-committee of the supervisory
board. In general, we believe that our current corporate governance practices
are consistent in principle with the standards required of U.S. companies listed
on the New York Stock Exchange.
Corporate Governance Developments in the Netherlands
In 2004, the Netherlands introduced new corporate governance principles, known
as the "Tabaksblat Code", referred to herein as the "Code". Companies subject to
the Code are required either to conform to its principles and best practices or
explain why they do not. Many of the provisions of the Code are similar to
provisions contained within the Sarbanes-Oxley Act of 2002 and the rules and
regulations thereunder, with which we have already begun to comply. However,
there are other provisions of the Code from which we depart in some respects.
The Code requires that executive board members' incentive compensation have both
short and long-term components. We fulfill this requirement only partially, as
some of our employment contracts pre-date the Code. However, all such contracts
will conform to the Code at such time as they are renewed.
Companies to which the Code applies are expected to establish rules governing
all security investment activities of their supervisory board members, rather
than limiting this oversight to investments in the company. We expect to become
compliant with this requirement over the course of the remainder of 2005.
The Code recommends that the supervisory board establish separate committees for
remuneration and nomination. Given the number of our supervisory board members,
we have chosen to combine these committee functions.
Under the Code, a general meeting of shareholders is empowered to cancel binding
nominations of candidates for the executive or supervisory boards, and to
dismiss members of either board by a simple majority vote of those in
attendance, although the company may require a quorum of at least one-third of
the voting rights outstanding for such a vote to be enforced. If such a quorum
is not represented, but a majority of those in attendance votes in favor of the
proposal, a second meeting may be convened and its vote will be binding, even
without a one-third quorum. Our articles of association currently require that,
in such a situation, the supervisory board give consideration to the resolution,
but do not require that the new meeting be called. We expect to change our
articles of association to bring them into conformity with this requirement,
subject to clarification of several relevant points of Dutch law. We are
performing a similar exercise with respect to the Code's requirement that
companies specify a registration date for exercise of rights to attend and vote
at a general meeting of shareholders.
64
In 2004, we made significant efforts to strengthen our control systems in
accordance with the broadly defined requirements of the Code. However, we will
continue to work to improve our compliance procedures and processes further, to
formalize and document our internal control procedures and activities and to
improve financial oversight and control of our Group companies, all with an eye
to achieving full compliance with the internal risk management and control
requirements of the Code.
(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) receive an additional (euro)1,500 per convened and
attended meeting since April 9, 2003. Additionally, each supervisory board
member is reimbursed for expenses incurred 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. During 2004, Van der
Moolen Holding N.V. had five supervisory board members. These members received
total remuneration of (euro)0.21 million. The annual remuneration of the
chairman of the supervisory board amounted to (euro)38,478. The vice chairman
received (euro)24,959 and other members received an aggregate (euro)84,385. For
attendance at audit and nominating & remuneration committee meetings, the
Chairman received (euro)23,205 and other members of the committee received an
aggregate (euro)43,485 during 2004. All these individual amounts are inclusive
of Value Added Tax where applicable.
No loans are outstanding to members of our supervisory board.
Executive Board
The aggregate annual base salary compensation that our executive board members
received during 2004 was (euro)1.3 million. In accordance with the terms and
conditions of their employment contracts, executive board members are eligible
for a bonus. Bonus payments depend on our financial results and individual
performance. For the year ended December 31, 2004, the aggregate amount of
bonuses paid to or accrued for our executive board members was (euro)278,706.
The remuneration per executive board member is set out below:
Pension,
social
security and
Fixed salary Bonus expenses other benefits Total
- --------------------------------------------------------------------------------------------------------------
(euros)
- --------------------------------------------------------------------------------------------------------------
Friedrich M. J. Bottcher 431,100 -- 99,688 530,788
Frank F. Dorjee 328,992 134,000 82,236 545,228
James P. Cleaver, Jr.(1) 241,176 -- -- 241,176
Casper F. Rondeltap 294,330 144,706 238,381(2) 677,417
-------------- --------------- --------------- ---------------
Total (euro)1,295,598 (euro)278,706 (euro)420,305 (euro)1,994,609
============== =============== =============== ===============
(1) Mr. Cleaver retired from our executive board in December, 2004.
(2) Expenses in the amount of (euro)137,173 relate to Mr. Rondeltap's
expatriate status.
65
For the year ended December 31, 2004, we recognized expenses in the amount of
(euro)60,000 for Mr. Bottcher, (euro)39,321 for Mr. Dorjee and (euro)52,036 for
Mr. Rondeltap to provide for retirement benefits. No loans are outstanding to
members of our executive board.
Share Options Held by Members of our Executive Board
The following table provides certain information regarding our common shares and
options in respect thereof held by members of our executive board as of June 24,
2005; note that Mr. Cleaver retired from the board in December, 2004, Mr. Dorjee
resigned from the executive board effective February 28, 2005 and no options
have been granted to Mr. Pruis to date.
Total number of Options Expiration Exercise
common shares held(1) date(s) price(s) EUR (1)
Name of Holder
- ------------------------------------------------------------------------------------------------------------------------
Friedrich M.J. Bottcher --
45,000 Dec. 2005 30.18
45,000 Dec. 2006 31.45
25,000 Dec. 2007 21.00
James P. Cleaver, Jr. --
6,000 Dec. 2005 30.18
9,000 Aug. 2006 27.30
12,000 Dec. 2006 31.45
5,000 Dec. 2007 21.00
Casper F. Rondeltap --
19,000 Dec. 2005 30.18
3,000 Aug. 2006 27.30
23,000 Dec. 2006 31.45
------------------ -----------
Total -- 192,000
================== ===========
(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 18 to our U.S. GAAP
consolidated financial statements included elsewhere in this annual report and
"-- Share Ownership -- Equity Stock Option Plan" for a discussion of our
employee share option plan.
(C) Board Practices
No members of the executive board are entitled to fixed compensation.
No members of our supervisory board or executive board are entitled to any
benefits (apart from pension or similar retirement benefits as described under
"-- Compensation of our executive board") upon termination of their employment
by Van der Moolen Holding N.V.
66
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 24, 2005, the audit committee was comprised of three
members: Mr. Arentsen (chairman), Mr. van den Brink and Mr. 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 external
audit process; (V) the external auditor's qualifications, independence and
performance; and (VI) our process for monitoring compliance with laws and
regulations.
Remuneration and Nominating Committee
The remuneration and nominating committee must have at least two members. As of
June 24, 2005, the committee consisted of Mr. van den Broek (chairman) and Mr.
van den Brink.
The remuneration and nominating committee's tasks are to assist the supervisory
board: (i) to determine the terms of engagement and remuneration of the members
of the executive board (including the Chairman); and (ii) in selecting
candidates for any suggested position in the executive board and the supervisory
board.
The members of the audit committee and the remuneration and nominating committee
are all members of the supervisory board. None of the members of either
committee has any personal financial interest in any decision by a committee
and/or the supervisory board. They have no conflicts of interest arising from
cross-directorships with the executive board or from being involved in our
day-to-day business. See "Audit Committee Financial Expert" for further
information.
(D) 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, 2004,
2003 and 2002.
As of December 31,
- -------------------------------------------------------------- --------------------------------------------------
Company 2004 2003 2002
- -------------------------------------------------------------- --------------- ---------------- ---------------
Van der Moolen Holding 20 27 27
VDM Specialists 244 264 300
Cohen, Duffy, McGowan, LLC (1) -- -- 36
Van der Moolen Options USA, LLC(1)(2) -- 14 30
Van der Moolen Effecten 18 25 25
Van der Moolen Trading 27 27 27
Van der Moolen Opties Amsterdam(1) -- -- 2
Van der Moolen U.K (1) -- 25 33
Van der Moolen Equities Ltd 24 14 13
Van der Moolen Obligaties 3 3 3
Other -- 5 5
-------------- --------------- --------------
-------------- --------------- --------------
Total 336 404 501
============== =============== ==============
- -------------------------------------------
1) Cohen, Duffy, McGowan, LLC and Van der Moolen Opties Amsterdam were closed
during 2003. The sale of Van der Moolen U.K. was completed on April 7,
2004. The sale of Van der Moolen Options USA, LLC was completed in
December, 2004.
2) The decrease in the number of employees who worked for Van der Moolen
Options USA, LLC is due to the closure of our operations on the
Philadelphia Stock Exchange in 2003 and final sale of the entity in
December, 2004.
67
The following table provides information about the number of the group's
employees by function as of December 31, 2004, 2003 and 2002.
As of December 31,
- -------------------------------------------------------------------------------------------------------------------
Function 2004 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Traders 254 289 358
Administration and support 47 58 91
Operating company management 7 17 14
Holding company management and staff 16 23 21
Technology support 12 17 17
Our employees are not covered by collective bargaining agreements. We have never
experienced an employment-related work stoppage. We consider our employee
relations to be good. 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
None of the members of our supervisory or executive boards hold any common
shares or financing preferred shares of Van der Moolen Holding N.V. See "--
Compensation -- Share Options Held by Members of our Executive Board" for
information regarding the ownership of options by members of our executive
board.
Equity Stock Option Plan
We closed our employee option plan in 2003 and announced that no further options
would be granted. However, some options remain outstanding from the old plan.
That plan was established with respect to our management and employees. Under
the previous plan, members of our executive board and other specified employees
were granted an option to acquire a specified number of common shares. The
exercise price for all options issued and outstanding as of June 24, 2005 is
between (euro)16.17 and (euro)35.22. Each option is exercisable into one common
share.
On December 31, 2004, the number of unexercised outstanding options held by our
staff was 851,905, and the total number of unexercised outstanding options held
by members of our executive board as a group was 257,000.
The options we granted were immediately exercisable, with the exception of some
of the options granted to employees of Van der Moolen Equities Ltd., which may
not be exercised for a period of three years from the date of grant. The
exercise period of our options ranged from four to ten years at issuance.
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 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.
68
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 6, 2005 by:
o each shareholder whom we know to be a beneficial owner of approximately 5%
or more of our outstanding share capital;
o each holder of financing preferred A and B shares; and
o our supervisory board and executive board as a group.
Percentage of beneficial ownership is based on an aggregate of 38,959,404 shares
outstanding (excluding 102,182 common shares purchased by Van der Moolen Holding
N.V. as of that date), representing 43,134,380 votes, composed of 38,317,100
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)
- -------------------------------------------------------------------------------------------------------------------
Beneficial Owner Voting
Number of Number of interest in
financing financing outstanding
Number of preferred A preferred B share
common shares shares shares capital(2)
%
- -------------------------------------------------------------------------------------------------------------------
Fortis Utrecht N.V(3). 328,037 -- 326,087 6.4
Ducatus N.V(3) -- 251,000 43,478 5.1
PGGM 998,554 -- 10,869 2.5
ABP 749,932 -- 10,870 1.9
Shares held by our supervisory board as a -- -- -- --
group
Shares held by our executive board members
as a group -- -- -- --
Shares held by the public 36,240,577 -- -- 84.1
--------------- --------------- --------------- --------------
Total excluding shares purchased by the 38,317,100 251,000 391,304 100.0
Company
Purchased shares held by the Company(4) 102,182 -- -- --
--------------- --------------- --------------- --------------
Total(5) 38,419,282 251,000 391,304 100.0
=============== =============== =============== ==============
(1) Under Rule 13d-3 of the Exchange Act, 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 (euro)0.60
nominal 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 6, 2005.
(4) As of April 6, 2005, the total number of shares repurchased by Van der
Moolen Holding N.V. following the implementation of our share purchase
plan was 102,182. These shares do not have voting rights. See "Purchase of
Equity Securities by Issuer and Affiliated purchasers".
(5) As of June 24, 2005, the total number of purchased shares held by the
company and the number of financing preferred A shares and the number of
financing preferred B shares remained unchanged compared to April 6, 2005.
As a result of the issue of stock dividend on April 22, 2005, the total
number of common shares outstanding increased by 1,026,195.
69
None of our major shareholders has voting rights that differ from those of our
other shareholders.
As of April 6, 2005, 8,477,610 common shares were lodged with the Bank of New
York as depositary, on the basis of which it had issued an identical number of
ADSs.
(B) Related Party Transactions
On December 31, 2004 Fortis Utrecht NV held a 6.4% ownership interest in the
Company. Affiliates of this entity also act as a clearing organization for the
Company. These services are provided on an arm's length basis.
During 2004, Mr. James Cleaver, Jr, a member of the Executive Board, held a 1.0%
partnership interest in VDM Specialists. This interest was relinquished in
December 2004, when Mr. Cleaver retired. The profit share relating to this
partnership interest in VDM Specialists (including interest on capital balances)
for the year ended December 31, 2004 amounted to (euro) 0.3 million. Further,
the Group leases a seat from Mr. Cleaver, for which he received payments of
(euro) 0.2 million in 2004.
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 that they own of record or which they are the beneficial
owner and have contributed the seat for use or leased it to VDM Specialists.
During 2004, VDM Specialists paid (euro)3.3 million in respect of these seats.
See "Operating and Financial Review and Prospects - Liquidity and Capital
Resources - Our indebtedness" for guarantees issued in relation to related
parties.
(C) Interest of Experts and Counsel
Not applicable.
70
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
VDM Specialists
Specialist Trading Investigations
On March 30, 2004, we announced a settlement with the New York Stock Exchange
and the SEC of charges resulting from an investigation of trading practices at
several specialist firms, including VDM Specialists.
The settlement, which was agreed on the basis of no admission or denial, was
entered into in connection with alleged violations of Section 11(b) of the
Exchange Act, and rules promulgated under that Act concerning New York Stock
Exchange specialist trading, including the requirement that a specialist
maintain a fair and orderly market, and violations of Section 15(b)(4)(E) of the
Exchange Act, including failure to supervise with respect to certain
transactions in which one or more of our employees allegedly violated Section
10(b) of the Exchange Act including Rule 10b-5. Pursuant to the settlement, and
without admitting or denying any wrongdoing, we announced that VDM Specialists
would pay a total of $57.7 million in restitution to customers and civil
penalties for certain trades that occurred during the five year period from 1999
to 2003. Of the total agreed restitution and civil penalties, $34.9 million
represented restitution and $22.8 million represented civil penalties. The full
amount of the restitution payment was paid within ten days of the date of
settlement. We agreed with the SEC to pay the $22.8 million in civil penalties
on an installment basis, with the first installment of $10.8 million made within
ten days of the date of settlement and $2.0 million paid every three months
thereafter until all penalties have been paid in full. At December 31, 2004, the
remainder due was $6.0 million ((euro)4.4 million). This amount is shown under
accounts payable, accrued expenses and other liabilities in our Consolidated
Statement of Financial Condition. It is our understanding that the four other
largest New York Stock Exchange specialist firms also settled the investigation
concerning their specialist trading activities during the 1999 to 2003 period.
The SEC, New York Stock Exchange and the Department of Justice continue to
investigate the conduct of certain present and former employees of VDM
Specialists. On April 12, 2005, seven former employees of VDM Specialists were
indicted for securities fraud and conspiracy to commit securities fraud. Also on
April 12, 2005, the SEC commenced civil proceedings against these seven former
employees of VDM Specialists, as well as another employee of VDM Specialists who
was not indicted. The NYSE has also brought charges against these former
employees of VDM Specialists.
In re New York Stock Exchange Specialists Securities Litigation
In the fourth quarter of 2003, four putative class action suits were filed with
the U. S. District Court for the Southern District of New York against VDM
Specialists and other New York Stock Exchange specialist firms. On March 11,
2004, a similar suit, which was brought by an individual plaintiff who was not
alleging to represent a class, was filed in the U.S. District Court for the
Southern District of New York. One of the class action suits and the individual
suit also name the New York Stock Exchange and Van der Moolen Holding N.V. as
defendants. Each of these five suits was filed on behalf of plaintiffs who
allege that the defendants violated U.S. federal securities law by conducting
improper trading activity to the detriment of pending customer orders.
The suits were filed on the grounds of the trading violations that were the
subject of the New York Stock Exchange and SEC investigation mentioned above.
The suits claim unspecified restitution and damages. On May 27, 2004, the U.S.
District Court for the Southern District of New York entered an order
consolidating the four class action suits and the individual action, appointing
lead plaintiffs, and directing that a consolidated amended complaint be filed
within 45 days, absent an agreement by the parties concerning the preliminary
schedule.
The co-lead plaintiff filed an amended consolidated complaint on September 16,
2004 (In re NYSE Specialists Securities Litigation, No. 03-8264 (S.D.N.Y.)). On
November 16, 2004, Van der Moolen Holding N.V., VDM Specialists and the other
New York Stock Exchange specialist firms moved to dismiss the amended
consolidated complaint. Plaintiffs' opposition to the motion was filed on
January 26, 2005, and the defendants' reply was filed on March 8, 2005. The
Court heard oral argument on the motion to dismiss on April 13, 2005. Neither
VDM Specialists nor we have answered the complaints. Plaintiffs have also moved
to modify the stay of discovery provided by the Private Securities Litigation
Reform Act of 1995, and the defendants have opposed that motion. On November 17,
2004, the Court heard oral argument, but has not ruled on the motion to modify
the stay. The outcome or a range of outcomes of this litigation cannot be
predicted at this time.
71
In re Van der Moolen Holding N.V. Securities Litigation
On October 20, 2003, a plaintiff, who purported to represent holders of our
ADRs, filed a class action suit on their behalf in the U.S. District Court for
the Southern District of New York against Van der Moolen Holding N.V. and the
members of our executive board during the relevant periods. The plaintiff
alleges that Van der Moolen Holding N.V. violated U.S. federal securities law
through an alleged failure to disclose in a timely and public manner details of
the New York Stock Exchange and SEC investigation into improper New York Stock
Exchange specialist trading activity. The plaintiff is seeking unspecified
restitution and damages.
On April 14, 2004, the Court entered an order designating co-lead plaintiffs.
Co-lead plaintiffs filed an amended complaint on July 9, 2004. On September 14,
2004, co-lead plaintiffs filed a Second Amended and Consolidated Class Action
Complaint (In re Van der Moolen Holding N.V. Securities Litigation, No. 03-8284
(S.D.N.Y.)). VDM Specialists was also named a defendant in the Second Amended
and Consolidated Class Action Complaint. Van der Moolen Holding N.V., VDM
Specialists and the individual defendants moved to dismiss the complaint on
November 22, 2004. Plaintiffs responded to that motion on January 22, 2005, and
the defendants filed memoranda in reply on February 22, 2005. Oral argument on
the motion to dismiss occurred on March 30, 2005. None of the defendants to this
action have answered the Second Amended and Consolidated Class Action Complaint.
The outcome or a range of outcomes of this litigation cannot be predicted at
this time.
Posner
On December 4, 2003, Michael Posner, a plaintiff claiming to sue on behalf of
the general public of the state of California filed a lawsuit against VDM
Specialists, its chief executive officer and other New York Stock Exchange
specialist firms in the Superior Court of the State of California, County of Los
Angeles. The complaint alleges that the defendants violated the California
Business and Professional Code by engaging in improper trading activity that
amounted to unfair business practices. The suit claims unspecified restitution
and damages. On February 27, 2004, the defendants served with process removed
the action to the U.S. District Court for the Central District of California. On
May 10, 2004, the action was transferred to the U.S. District Court for the
Southern District of New York. On December 1, 2004 plaintiff consented to
dismiss this action, and a notice of dismissal was entered by the Court on
December 20, 2004.
Other
In December 2003, an NASD arbitration proceeding, entitled Margaret Ann Furman
Individually and for Ashley B. Furman, and for the Estate of Samuel E. Furman v.
Robert Fagenson, Fagenson & Co., Inc. and VDM Specialists (NASD Case No.
03-08145) was commenced by a former customer of Fagenson & Company and VDM
Specialists (approximately September 1, 2001 to March 30, 2002), alleging
unsuitability, breach of contract, violation of fiduciary duties, common law
fraud and deceit and gross negligence. The claimant seeks compensatory damages
of approximately $ 1,450,000, plus reimbursement of commissions, punitive
damages, costs and attorneys' fees. VDM Specialists believes it has meritorious
defenses to the asserted claims. It is too early to predict the probable outcome
or range of outcomes of this arbitration, or to reasonable estimate any
potential loss associated with this matter.
On February 22, 2005, the New York Stock Exchange advised VDM Specialists that
it is conducting an investigation into the possibility that (i) employees of VDM
Specialists submitted or caused to be submitted, misleading or inaccurate Floor
Official approvals during the period from September 2002 through August 2003,
and (ii) VDM Specialists and/or certain supervisory employees may have failed to
discharge their responsibility in supervising the firm's floor employees. The
outcome or a range of outcomes of this investigation cannot be predicted at this
time.
In 2004, VDM Specialists incurred (euro)3.8 million in legal fees in relation to
regulatory proceedings and litigation (2003: (euro)1.3 million).
72
Pursuant to Section 5.5 of its operating agreement with minority members,
VDM Specialists is required to advance funds for actual litigation expenses
incurred by various present and former members in connection with these
litigation and regulatory inquiries. All such advances have been recognized as
expenses in the Consolidated Statement of Income. In 2004, an amount of
approximately EUR 1.3 million was recognized (2003: EUR nil). There can be no
assurance that further litigation expenses of this nature will not arise, and
such expenses could be material.
Stock Lending
In late 2004, the New York Stock Exchange requested documents and interviews
with certain employees of VDM Specialists' stock lending department. On January
14, 2005, VDM Specialists terminated two senior members of its stock lending
department for violations of the firm's policies and their terms of employment.
On February 11, 2005, we disclosed that the New York Stock Exchange was
conducting an inquiry into broker-dealer stock lending practices, focusing on
transactions involving finders, including transactions carried out by VDM
Specialists' stock lending department. Also on February 11, 2005, based on the
existence of this New York Stock Exchange inquiry and the results of VDM
Specialists' own internal inquiry, Van der Moolen Holding N.V. announced that
VDM Specialists was closing its stock lending business.
At the time when VDM Specialists closed its stock lending business, New York
Stock Exchange rules did not expressly bar the payment of reasonable fees to
legitimate finders of securities in connection with a member firm's stock
lending activity, although certain broker-dealers had adopted policies
prohibiting such payments. The outcome or range of outcomes of the New York
Stock Exchange's inquiry into VDM Specialists' stock lending business cannot be
predicted at this time, including any regulatory action that the New York Stock
Exchange might take against VDM Specialists or present and former employees of
VDM Specialists, and any employment-related litigation that might be brought
against VDM Specialists by former employees of VDM Specialists' stock lending
business.
The audit committee has reviewed the findings of the internal inquiries
described above, and in the light of these findings and the steps taken by
management is satisfied that appropriate remedial action has been taken.
The stock lending activities of VDM Specialists contributed (euro)0.6 million to
2004 net income (2003: (euro)0.6 million).
U.S. Option Business
Cohen, Duffy, McGowan, LLC has been informed by the American Stock Exchange's
Market Regulation Department that the exchange's Enforcement Division has
initiated an investigation that may result in disciplinary actions. The
investigation is focused on charges of possible violations of American Stock
Exchange Rule 156(b) and Article V, Section 4(h), combined with possible
violations of the exchange's limit order display rule during the period between
June 3, 2002 and May 30, 2003. Further, on February 25, 2004, the American Stock
Exchange Enforcement Division started an investigation in relation to alleged
violations of the firm quote rule (American Stock Exchange Rule 958A). Further,
the Department of Market Regulation of the Chicago Board Options Exchange
requested written information from Van der Moolen Options USA, LLC relating to
compliance with the Chicago Board Options Exchange's firm quote rule. On January
28, 2004, the SEC requested data from all U.S. option exchanges, including all
those on which our option units acted as specialists or in a similar capacity,
regarding the functioning and trading practices of specialists on those
exchanges. It is possible that these requests have been lodged in advance of
additional investigations into trading practices by the Chicago Board Options
Exchange or the SEC. On May 11, 2004, the SEC requested financial information
and information in respect of the compliance procedures of Cohen, Duffy,
McGowan, LLC. Cohen, Duffy, McGowan, LLC was closed in December 2003 and we
disposed of Van der Moolen Options USA, LLC in December 2004.
Last Atlantis Capital et al. vs Chicago Board Options Exchange et al.
On January 20, 2004, five entities who allege that they are purchasers and
sellers of options commenced an action in the U.S. District Court for the
Northern District of Illinois against four national securities exchanges (the
American Stock Exchange, the Chicago Board Options Exchange, the Philadelphia
Stock Exchange and the Pacific Stock Exchange) and 35 securities dealers who
made markets in options, including Cohen, Duffy, McGowan, LLC and Van der Moolen
Options USA, LLC, as well as Van der Moolen Holding N.V. Plaintiffs allege that
our subsidiaries conspired with other defendants by allegedly failing to execute
orders, cancelling orders and refusing to cancel orders for the purchase and
sale of options. Plaintiffs allege violations of federal antitrust laws
(Sections 1 of the Sherman Act and 4 and 16 of the Clayton Act), and securities
laws (Section 10(b) of the Exchange Act and rule 10b-5 thereunder), breach of
contract, common law fraud, breach of fiduciary duty, violations of an Illinois
consumer fraud and deceptive business practices statute and tortuous
interference with business. Injunctive relief and damages (including punitive
damages) in an unspecified amount are sought. Cohen Duffy McGowan, LLC, Van der
Moolen Options USA, LLC and Van der Moolen Holding were never served with the
process in this action, and although named in the caption of the Complaint,
there are no specific allegations in the complaint against either Van der Moolen
Holding N.V. or Van der Moolen Options USA, LLC. Motions to dismiss were filed
with the Court on June 14, 2004, and are pending. On March 30, 2005 the court
granted the motion to dismiss. On May 9, 2005, the court denied the plaintiffs'
motion for reconsideration except with respect to the federal securities count
as to which the court gave plaintiffs leave to replead with particularity. No
amended complaint has been served on either Cohen, Duffy, McGowan, LLC or Van
der Moolen Options USA, LLC or on Van der Moolen Holding N.V. On January 28,
2005, counsel for plaintiffs in this action filed a virtually identical
complaint with the U.S. District Court for the Southern District of Illinois.
The new complaint has not been served on either Cohen Duffy McGowan, LLC or Van
der Moolen Options USA, LLC, or on Van der Moolen Holding N.V.
73
On February 11, 2005, the Chicago Board Options Exchange sent a notice informing
Van der Moolen Options USA, LLC that it had initiated an inquiry to determine
whether Van der Moolen Options USA, LLC, in its capacity as Designated Primary
Market-Maker on the Chicago Board Options Exchange or through its designee
members, inter-positioned or traded ahead its principal account ahead of orders
Van der Moolen Options USA, LLC represented as agent during the period from at
least January 1999 through December 2004 in violation of Chicago Board of
Options Exchange or SEC rules. The outcome of this investigation cannot be
predicted at this time.
On January 26, 2004, the Chicago Board Options Exchange requested information
related to Van der Moolen Options USA, LLC's order handling practices, in
particular procedures relating to firm quotes and unexecuted orders that were
marketable upon receipt. On June 15, 2004, Van der Moolen Options USA, LLC,
neither admitting nor denying the alleged violations, settled this matter with
the Chicago Board Options Exchange. Pursuant to the terms of the settlement, Van
der Moolen Options USA, LLC made a payment in the amount of $20,000 to the
Chicago Board Options Exchange.
On September 8, 2004, the Chicago Board Options Exchange advised Van der Moolen
Options USA, LLC that it had commenced an investigation into Van der Moolen
Options USA, LLC's limit order practices, and on December 29, 2004, the Chicago
Board Options Exchange advised Van der Moolen Options USA, LLC that it had
commenced an investigation into the way that Van der Moolen Options USA, LLC had
calculated its debt-equity ratio. Further on April 22, 2005 the Chicago Board
Options Exchange advised that it started an investigation into possible quoting
violations of Exchange Rules 8.7 and 8.85 by Van der Moolen Options USA, LLC for
the Expiration Cycles from December 2003 through January 2005. Also, on December
21, 2004, the Philadelphia Stock Exchange advised Van der Moolen Options USA,
LLC that it is conducting an investigation and fact-finding effort related to
the order handling and trading activity by Van der Moolen Options USA, LLC for
the period of February 2003 through September 2004, regarding compliance with
Philadelphia Stock Exchange Rule 1082 ("Firm Quotations").
The outcome or range of outcome of these investigations in respect of our US
Option business cannot be predicted at this time.
We believe that the claims asserted against us by the plaintiffs in the pending
proceedings described under the paragraphs VDM Specialist and U.S. Option
Business are without merit, and we deny all allegations of wrongdoing. With
respect to the regulatory investigations described above, we believe that we
have conducted our business operations in compliance with regulatory
requirements and market practices. There can be no assurance, however, as to the
outcome or timing of the resolution of these proceedings and investigations. The
range of possible resolutions could include determiniations and judgments
against us or settlements that could require substantial payments by us that
could have a material adverse effect on our financial condition, results of
operations and cash flows.
74
Dividends and Dividend Policy
Our general meeting of shareholders has the discretion to determine whether we
will pay dividends on our common shares, following any setting aside of funds by
our executive 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 of our common shares 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 executive board and approval of
the supervisory board. While our executive 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 our payment of dividends 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.
The table below sets forth certain information regarding the dividends declared
payable in respect of our common shares to the holders of record on December 31
of the years indicated, and has been adjusted to reflect the 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 in cash or the approximately
equivalent value in common shares.
Year ended December 31, Dividends per common share Total dividends on our common
shares
- ---------------------------------------- --------------------------------------------------------------------
(euro) $ ((euro) millions) ($ millions)
- ---------------------------------------- -------------- ----------------- ----------------- ------------
2000 1.50(1) 2.03(1) 56.0 75.8
2001 1.10(2) 1.49(2) 41.4 56.0
2002 0.72(1) 0.97(1) 27.7 37.5
2003 -- -- -- --
2004 0.22(2) 0.30(2) 8.4 11.4
- ----------------------------------------
(1) Paid in cash only.
(2) Paid in cash or, alternatively, in the form of common shares.
In 2001 and 2004, 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. The
stock dividend for 2004 was set at a discount of 4.5% compared to the cash
dividend. Accordingly, we issued 784,973 and 1,026,195 common shares in partial
fulfillment of the dividends declared in respect of the years ended December 31,
2001 and 2004, respectively. No such facility was made available to shareholders
for the dividends in respect of 2002 or 2000.
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, 2000,
2001, 2002 and 2004, we paid 40.1%, 41.0%, 40.4% and 41.9%, 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. For 2003 we paid no such dividend,
having recorded a loss for the year. The payment of any future dividends will be
recommended, based on net income from ordinary activities less minority
interest, by our executive board in light of the conditions then existing,
including our financial performance, liquidity position, capital position,
future financing requirements and other factors.
75
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 those shares, which normally reflect
market interest rates.
The following tables set forth certain information regarding the dividends
declared on our financing preferred A and B shares to the holders with respect
to the years indicated. The dividends for each of the years below were paid in
the immediately following year. Dividends on financing preferred A and B shares
were paid from net income except in respect of 2003, when they were distributed
from retained earnings (after declaration of such a dividend in February 2004)
as a result of the net loss incurred in 2003 under Dutch GAAP. In the event of a
net loss under Dutch GAAP for a year, a dividend is only distributable on
financing preferred shares in respect of that year either upon declaration by
the Company or in a subsequent year, when the Company reports a sufficient net
profit under Dutch GAAP.
Year ended December 31, Dividends per financing Total dividends on
preferred A share financing preferred A share
- --------------------------------------- ----------------------------- -------------------------------
(euro) $ (in (euro) (in $
millions) millions)
- --------------------------------------- ------------- ----------- ------------ -------------
2000 2.48 3.36 0.6 0.8
2001 2.71 3.67 0.6 0.8
2002 2.63 3.56 0.6 0.8
2003 2.71 3.67 0.6 0.8
2004 2.71 3.67 0.6 0.8
Year ended December 31, Dividends per financing Total dividends on
preferred B share financing preferred B share
- --------------------------------------- ----------------------------- -------------------------------
(euro) $ (in (euro) (in $
millions) millions)
- --------------------------------------- ------------- ----------- ------------ -------------
2000 5.76 7.80 2.3 3.1
2001 5.76 7.80 2.3 3.1
2002 5.76 7.80 2.3 3.1
2003 5.76 7.80 2.3 3.1
2004 5.76 7.80 2.3 3.1
(B) Significant Changes
For a discussion of significant changes in our business or financial condition
since December 31, 2004, 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 where relevant for the
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 and our ADSs on the New York Stock Exchange as provided by
Bloomberg:
Euronext Amsterdam New York Stock Exchange (1)
- --------------------------------------- ----------------------------- -------------------------------
Period High Low High Low
- --------------------------------------- ----------------------------- -------------------------------
(in euros per share) (in dollars per share)
2000 35.17 14.17 -- --
2001 42.17 15.00 30.24 22.75
2002 36.25 15.70 32.25 15.64
2003 21.70 5.51 22.04 6.70
2004 8.14 4.34 9.95 5.68
(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:
Euronext New York Stock Exchange(1)
- ------------------------------------------- --------------------------- ------------------------------
Period High Low High Low
- ------------------------------------------- ---------- ------------ ------------ -------------
(in euros per share) (in dollars per share)
- ------------------------------------------- ---------- ------------ ------------ -------------
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
Fourth quarter 24.00 15.70 23.68 15.64
2003
First quarter 21.70 7.55 22.04 8.72
Second quarter 14.25 7.85 16.68 8.67
Third quarter 13.54 8.76 15.27 10.18
Fourth quarter 9.65 5.51 11.18 6.70
2004
First quarter 8.14 6.10 9.95 7.67
Second quarter 7.94 5.63 9.60 6.90
Third quarter 6.04 4.51 7.29 5.68
Fourth quarter 5.79 4.34 7.81 5.74
2005
First quarter 6.57 4.96 8.27 6.41
- -----------------------------------------------
(33) Trading in our ADSs on the NYSE commenced on October 18, 2001.
77
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 euros per share) (in dollars per share)
December 31, 2004 5.79 4.50 7.81 5.99
January 31, 2005 5.90 4.96 7.63 6.41
February 28, 2005 6.57 5.27 8.27 6.21
March 31, 2005 6.05 5.33 7.96 7.00
April 30, 2005 5.69 3.88 7.40 5.21
May 31, 2005 4.25 3.76 5.31 4.75
On June 24, 2005, the closing price of the common shares on Euronext was
(euro)3.83 and the closing price of the ADSs on the New York Stock Exchange was
$4.67.
(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 AMX 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 objectives, 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. 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.
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 the Netherlands Central Securities
Depositary ("Euroclear Netherlands"), 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 Euroclear Netherlands. A participant in the
collective deposit of a securities institution admitted to Euroclear Netherlands
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, a 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 executive 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 that 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 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.
79
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.
If new financing preferred shares are issued, Van der Moolen Holding N.V. shall,
if necessary, arrange for provisions to the effect that the voting rights on
such shares are based on the fair value of the capital contribution made on such
shares in relation to the price of our common shares on Euronext.
Preferred shares
Effective May 1, 2001, we amended our articles to provide for the future
issuance of preferred shares to a 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. Van der Moolen Holding N.V. has
guaranteed the repayment to ING Bank of any amounts advanced to the Stichting
under this facility.
The Stichting is managed by an executive 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:
o a current or former managing director, supervisory director or employee of
us or of any of our subsidiaries;
o a relative of one of our managing directors or supervisory directors or
those of any of our subsidiaries;
o 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
o a managing director or employee of any banking institution with which we
maintain a significant relationship.
The executive 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.
80
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 executive 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 executive
board. The resolution of a general meeting of shareholders to delegate this
power determines the maximum number of shares to be issued. Our executive
board's authority to issue shares is limited to our authorized share capital.
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% 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 executive board. If our executive 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 general meeting on April 6, 2005 our executive board has been delegated
to issue ordinary shares and rights to purchase ordinary shares, and to exclude
or restrict pre-emptive rights, with the approval of the Supervisory Board. This
authorization is applicable to ordinary shares and is limited to 10% of the
issued capital plus an additional 10% of the issued capital in connection with
or in the occasion of mergers and acquisitions for a period of 15 months from
the date of the meeting. Further the executive board was given the authority for
a period of fifteen months, commencing April 6, 2005 to issue preferred shares
and rights to purchase such shares, and to exclude or restrict pre-emptive
rights, with the approval of the Supervisory Board. This authorization extends
to all current and future preferred shares in our authorized capital.
Acquisition by us of shares in our own capital
We may acquire our own shares if and to the extent that:
o a general meeting of shareholders has authorized our executive board to
acquire the shares;
o 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
o 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.
81
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 6, 2005, our executive 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:
o 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
o our executive 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
(euro)0.08, entitles the holder to one vote, each of our financing preferred
shares or preferred shares, par value (euro)0.60, entitles the holder to 7.5
votes.
However, if new financing preferred shares are issued, Van der Moolen Holding
N.V. shall, if necessary, arrange for provisions to the effect that the voting
rights on such shares are based on the fair value of the capital contribution
made on such shares in relation to the price of our common shares listed on
Euronext. Shareholders holding existing financing preferred shares may decide
that in a general meeting of shareholders the number of voting rights are
determined according to the principle referred to in the previous sentence.
The executive 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 Euroclear Netherlands
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 executive 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 to do so is made by our executive 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 executive 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 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 --
Limitation of Liability and Indemnification Matters".
82
Dividends
Annual dividends may only be paid out of profits as shown in the adopted annual
financial statements under Dutch GAAP. 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 executive board then decides whether
and how much of the remaining profit they will reserve. Any profits remaining
will be paid as a dividend on our common shares. With the approval of our
supervisory board and subject to Dutch law, our executive board can resolve to
pay an interim dividend. A general meeting of shareholders may, upon the
proposal of our executive 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.
If in any financial year the profit under Dutch GAAP is not adequate to make the
dividend payments - or part thereof - in respect to our preferred or financing
preferred shares, the dividend shall be reduced proportionally and the deficit
shall be paid out in a subsequent financial year, provided there is sufficient
profit under Dutch GAAP. At its discretion, with supervisory board approval, our
executive board can elect to pay a dividend on our preferred or financing
preferred shares out of retained profits in a year when the profits under Dutch
GAAP are not adequate to make the payment.
We can make distributions to common shareholders at the charge of one or more of
our reserves except for the share premium reserves A, B, C, D and E. These
distributions to common shareholders cannot be made to the extent that not all
dividends on the preferred shares or financing preferred shares due under our
articles of association have been paid.
Purchasers of common shares or ADSs representing such shares in the offering
will be entitled to the full dividend, when declared. Any dividends that are not
claimed within five years of their declaration revert to us.
Shares held by the Company in its own capital shall not be taken into account
when determining the distribution of profits.
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 executive board, subject to
the approval of our supervisory board.
Our articles of association were last amended by notarial deed with effect from
June 16, 2004 pursuant to a resolution passed at our annual general meeting of
shareholders held on April 14, 2004.
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 Netherlands' Act on Disclosure of Holdings in Listed Companies (the "major
Holdings Act") applies to any person who, directly or indirectly, acquires or
disposes of an interest in the voting rights and/or the capital of a public
limited company incorporated under the laws of the Netherlands with an official
listing on a stock exchange within the European Economic Area, as a result of
which acquisition or disposal the percentage of voting rights or capital
interest acquires or disposed of reaches, exceeds or falls below 5%, 10%, 25%,
50% or 66 2/3%. With respect of Van der Moolen Holding N.V., the major Holdings
Act would require any person whose interest in the voting rights and/or capital
of Van der Moolen Holding N.V. reached, exceed or fell below those percentage
interest, whether through ownership of bearer common shares, registered common
shares, financing preferred shares, preferred shares or ADSs, to notify in
writing both Van der Moolen Holding N.V. and the Netherlands' Financial Markets
Authority immediately after the acquisition or disposal of the triggering
interest in Van der Moolen Holding N.V.'s share capital.
83
Upon Van der Moolen Holding N.V.'s receipt of the notification, the information
will be disclosed, as notified, forthwith to the public by means of an
advertisement in a newspaper distributed throughout the Netherlands.
Non-compliance with the obligations of the Major Holdings Act can lead to
criminal prosecution. In addition a civil court can issue orders against any
person who fails to notify or incorrectly notifies the Financial Markets
Authority or Van der Moolen Holding N.V., in accordance with the Major Holdings
Act, including suspension of the voting right of the shares.
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
licensed securities institutions which are subsidiaries of Van der Moolen
Holding N.V., is prohibited unless a declaration of no objection has been
obtained from the Financial Markets Authority. The Financial Markets Authority
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.
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
Pursuant to the terms of the Amended and Restated Operating Agreement as last
amended on January 3, 2005 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 in VDM Specialists is 75%.
VDM Specialists is managed by a management committee that must have at least
three members. The management committee is currently composed of a
representative of our wholly owned subsidiary, Mill Bridge IV, LLC, and four
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, LLC.
There are supermajority voting requirements (a supermajority vote is the lesser
of (i) such number of members of the management committee as own not less than
80% of the profit and loss percentages of all members or (ii) Mill Bridge IV,
LLC and 50% by number of the members of the management committee other than Mill
Bridge IV, LLC) 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, LLC) 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 a supermajority vote.
84
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.
Holders of ADSs will in general be treated as owners of our common shares
represented by such, as ADSs will in general be identified for Dutch tax
purposes with a common share in us.
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";
(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 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 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.
85
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
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 notional 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%.
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 belong to the specific
class of shares 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,
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 comparable with his position in similar
shares before such combination of transactions, including the sole acquisition
of one or more dividend coupons and the establishment of short- term rights of
enjoyment on ADSs and/or common shares, while the transferor retains the
ownership of the ADSs and/or common shares. 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.
86
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 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 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 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.
87
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".
Entities that are resident of a member nation of the European Union and that
qualify for the application of the E.U. Parent-Subsidiary Directive are eligible
for an exemption on dividend withholding tax provided certain requirements are
met.
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.
A protocol amending the US/NL Income Tax Treaty is generally effective for
dividend payments made or credited after February 1, 2005. Under the protocol,
dividend distributions made to U.S. resident shareholders owning more than 80%
of our voting power may be exempt from withholding tax provided certain other
conditions are met.
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:
o is the beneficial owner of the dividends paid on the common shares or ADSs;
o is resident in the United States according to the US/NL Income Tax Treaty;
o is not restricted in claiming the benefits of the US/NL Income Tax Treaty
under article 26 of the US/NL Income Tax Treaty ("limitation of benefits");
o 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;
o 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
o 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 and in timely fashion. This 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 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 Dutch
tax authorities within three years after the end of the calendar year in which
the withholding tax was levied. Such a 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.
88
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. Under this service, 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 Dutch 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.
On 23 November 2004, the European Free Trade Association Court of Justice (EFTA
Court) issued its decision in the so-called Fokus Bank case. The EFTA Court
decided that Norwegian tax rules that treat outbound dividend payments to
foreign shareholders less favourably than dividend payments to domestic
shareholders constitute a forbidden restriction on the free movement of capital.
It may be expected that the European Court of Justice will come to an identical
decision in a similar case if asked to interpret the freedom of capital as laid
down in the European Community Treaty.
In this respect we mention that a case is currently pending at the European
Court of Justice regarding the compatibility of France's dividend withholding
tax on outbound dividends with the European Community Treaty. The freedom of
capital generally does not apply only to capital movements between European
Union member states but also to capital movements to and from third countries,
such as the U.S. Although the Dutch tax system is different from Norway's, the
decision of the EFTA Court may have significant implications for certain
non-resident shareholders that receive dividends that are subject to Dutch
dividend withholding tax, or that have received such dividends in the past three
years. In particular, the following non-resident shareholders may be affected
and may as a result be entitled to refund of Dutch dividend withholding tax.
o Legal entities that could have invoked the participation exemption with
respect to the dividends received in case they would have been a resident
of the Netherlands for tax purposes. In general, the participation
exemption applies in case of shareholdings of 5% or more. In case of a
shareholding of less than 5% the participation exemption may be applicable
if the shares are not held as a mere portfolio investment. In case of legal
entities resident in the Netherlands, in effect no Dutch dividend
withholding tax is due with respect to dividends on shareholdings that
apply for the participation exemption.
o Natural persons where the shares do not belong to the assets of a business
enterprise or do not belong to a substantial interest. In case such a
natural person would have been a resident of the Netherlands, the dividend
as such would not be subject to individual income tax. In stead, the
individual would be taxed on deemed income, calculated at 4% of his net
equity, whereas the dividend tax withheld would have been credited in full
against the individual income tax due.
The freedom of capital movements to and from third countries is generally
subject to stand-still provisions in the European Community Treaty, but based on
case law of the European Court of Justice it may be held that these provisions
do not apply in the specific case of claiming a refund of Dutch dividend
withholding tax.
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
89
(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.
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.
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.
The Dutch government has announced that it intends to abolish the Dutch capital
tax as per January 1, 2006.
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:
o a citizen or resident of the United States for U.S. federal income tax
purposes;
o 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;
o an estate whose income is subject to U.S. federal income tax regardless of
its source; or
o 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. This summary does not
address the U.S. federal income tax consequences to partners, shareholders and
beneficiaries of a holder of common shares or ADSs. 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).
90
This summary only applies to U.S. Holders that will hold common shares or ADSs
as capital assets. This summary is based upon:
o interpretations of 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);
o current U.S. Internal Revenue Service practice and applicable U.S. court
decisions; and
o 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:
o investors that own (directly or indirectly) 10% or more of our voting
stock;
o banks, thrifts or other financial institutions;
o insurance companies;
o small business investment companies;
o S corporations;
o mutual funds;
o real estate investment trusts;
o regulated investment companies;
o investors liable for the alternative minimum tax;
o individual retirement accounts and other tax-deferred accounts;
o tax-exempt organizations;
o dealers in securities or currencies;
o investors that will hold common shares or ADSs as part of straddles,
hedging transactions, synthetic securities or conversion transactions for
U.S. federal income tax purposes or as part of some other integrated
investment;
o investors whose functional currency is not the U.S. dollar
o certain former citizens or residents of the United States; or
o shareholders, partners or other beneficiaries of a U.S. holder.
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. These actions could also affect the ability of
non-corporate U.S. Holders to claim reduced tax rates for "qualified dividend
income," as discussed below under " -- Qualified Dividend Income." Accordingly,
the analysis of the creditability of Dutch taxes and the availability of the
reduced tax rate for qualified dividend income, as described below could be
affected by parties to whom the ADSs are pre-released.
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.
91
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.
Qualified Dividend Income
A maximum U.S. federal income tax rate of 15% applies to "qualified dividend
income" received by individuals (as well as certain trusts and estates) in
taxable years beginning after December 31, 2002 and before January 1, 2009,
provided that certain holding period requirements are met. "Qualified dividend
income" includes dividends paid on shares of "qualified foreign corporations"
if, among other things: (i) the shares of the foreign corporation are readily
tradable on an established securities market in the United States or (ii) the
foreign corporation is eligible with respect to substantially all of its income
for the benefits of a comprehensive income tax treaty with the U.S. which
contains an exchange of information program (a "qualifying treaty"). ADSs are
readily tradable on the New York Stock Exchange. In addition, the US/NL Income
Tax Treaty is a qualifying treaty. Accordingly, we currently believe that
dividends paid by us with respect to our ADSs or ordinary shares should
constitute "qualified dividend income" for U.S. federal income tax purposes,
provided that the holding period requirements are satisfied and none of the
other special exceptions applies. However, if we were to be treated as a PFIC,
our dividends would not constitute "qualified dividend income." See "-- Passive
Foreign Investment Company Considerations."
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.
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. In addition, foreign tax credits allowable with
respect to specific classes of income cannot exceed the U.S. federal income
taxes otherwise payable with respect to each such class of income. Our dividends
generally will be treated as foreign-source "passive income" or, in the case of
certain U.S. Holders, "financial services income." for foreign tax credit
purposes. U.S. holders should note that the "financial services income" category
will be eliminated with respect to taxable years beginning after December 31,
2006, and the foreign tax credit limitation categories will be limited to
"passive category income" and "general category income." Finally, non-corporate
U.S. holders will be subject to special limitations on their ability to use
foreign tax credits in respect of Dutch taxes imposed on qualified dividend
income that we pay. U.S. Holders of common shares or ADSs should consult their
tax advisors regarding their ability to use foreign tax credits in respect of
Dutch taxes imposed on the dividends we pay.
92
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:
o have not held the shares for at least 16 days in the 31-day period
beginning on the date which is 15 days before the ex-dividend date; or
o 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. U.S. holders that are individuals are generally subject
to a reduced rate on long-term capital gains. The deductibility of capital
losses by U.S. holders is subject to limitations.
Passive Foreign Investment Company Considerations A foreign corporation will be
a PFIC in any taxable year if:
o at least 75% of its gross income is "passive income"; or
o 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. Moreover, there is some uncertainty regarding
how the PFIC rules apply to a foreign corporation that owns an interest in an
entity that is treated as a partnership for U.S. federal income tax purposes.
VDM Specialists is a partnership for U.S. federal income tax purposes. Although
we believe that our status as a PFIC should depend on the nature of VDM
Specialists' income and assets and on this basis we do not believe we should be
treated as a PFIC, it is possible that the U.S. Internal Revenue Service could
disagree with this position. In addition, a significant amount of VDM
Specialists' assets consisted of borrowed stock which VDM Specialists loans as
part of its specialist activities. Under certain proposed Treasury regulations,
the income earned from our stock lending activities would not be treated as
passive income. The proposed regulations are proposed to be effective for
taxable years beginning after September 30, 1993. On the basis of the proposed
regulations, we do not believe that the borrowed stock should be treated as
assets that produce, or are held for the production of, passive income or that
the income earned from the stock lending activity should be treated as passive
income. However, there is no assurance that the proposed regulations will be
finalized, and if they are finalized, that they will be finalized in the form
proposed.
93
Thus, although we believe that we are not a PFIC there can be no assurance that
we are not considered a PFIC or that we will not be considered a PFIC in the
future. 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. For
example, if we were to be treated as a PFIC for any taxable year, our dividends
would not constitute "qualified dividend income." See "-- Qualified Dividend
Income" above.
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 trade, 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.
Disclosure Requirements for U.S. Holders Experiencing Significant Book-Tax
Differences
If you 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.
94
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,
2002, 2003 and 2004 (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 SEC'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 SEC 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 SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms.
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
SEC.
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.
95
Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our risk management activities are based at each of our operating subsidiaries,
with central oversight, analysis and risk policy formation based at our
Amsterdam headquarters. Our risk management department establishes, in
consultation with our executive 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:
o market risk;
o currency risk;
o liquidity risk;
o credit and settlement risk; and
o compliance, 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, option 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, with regard to our New York Stock Exchange specialist
activities, our policy towards overnight risk is necessarily applied in a more
flexible manner 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:
o Our traders, other than those performing specialist functions, work within
limits established by the executive board in consultation with local
management and the risk management department and the trader's supervisor.
o 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.
o Our independent risk control unit monitors positions overnight and, where
possible, intra-day, and reports directly to the members of our executive
board on a daily basis (New York Stock Exchange data is transmitted the
next day after the opening of the market). The independence of this
department from the trading desk helps shield it from being influenced by
traders who may be tempted to exceed their limits.
o Our bond activity carries risks resulting from the changing
creditworthiness of bond issuers. This unit accepts risk in some six
hundred Euronext-traded Dutch bonds and selected French bonds, which we
contain by trading out of it quickly or hedging with other bonds of the
same issuer. This unit limits its exposure to individual issues, issuers
and industry categories.
o The diversity of our business also helps to reduce our overall exposure to
market risk. At any given time, we are long or short in 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.
o Position books are analyzed 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. The following discussion provides greater detail about our VAR
model and stress tests.
96
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, 2003 and 2004.
Van der Moolen Holdings VAR
Levels
- --------------------------------------------------------------------------------------------------------------------
2003 2004
- --------------------------------------------------------------------------------------------------------------------
(in (euro) millions)
High 5.0 2.0
Low 1.0 0.4
Average 3.0 1.2
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, 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 the next day. Our 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.
We believe that with an average of over 100,000 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.
97
Currency Risk
The Group is affected by a number of currency risks:
o the risks of currency gains or losses on monetary assets and liabilities
denominated in currencies other than the functional currency of the entity
concerned;
o the effect of exchange rate fluctuations on the translation of the income
statements and balance sheets of entities for the purpose of presenting
consolidated financial statements in euros; and
o the risk arising from trading positions denominated in any currency other
than the functional currency of the trading unit holding those trading
positions.
As described in "Operating and Financial Review and Prospects - Operating
Results - Determination of functional currency", with effect January 1, 2004,
Van der Moolen Holding N.V., its financing entity and its intermediate holding
companies have adopted the U.S. dollar as their functional currency.
The following considerations will continue to determine our policy towards
currency risks:
o mitigate the effect of currency fluctuations that will result in volatility
in our net income, as reported under IFRS;
o hedge cash in- and outflows in various currencies to mitigate their
possible translation effect on our liquidity position; and
o changes in valuation that result from translation into our presentation
currency will, in principle, not be hedged.
In addition to these considerations, a number of our operating units run
currency exposure risks in the normal course of their trading activities. These
exposures are hedged when acquired.
In early 2003, we departed from our normal practice and purchased U.S. dollar
put options with maturities in 2003 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 costs. We have not undertaken
similar transactions in 2004 or 2005.
In 2005, the Company sold $58.1 million against (euro) 44.8 million to mitigate
its exposure to exchange rate fluctuations that are recognized under
International Financial Reporting Standards (IFRS) through the income statement,
mainly as a result of the recognition of the preferred financing shares as
monetary liabilities under IFRS. Since these preferred financing shares are
treated as a component of shareholders' equity under U.S. GAAP, this transaction
may result in additional volatility in respect of foreign currency gains and
losses reported in our Consolidated Statement of Income under U.S. GAAP.
Liquidity Risk
Liquidity risk relates to our capacity to finance security positions and
liquidity requirements of exchanges and clearing utilities. Our financial
resources, relative to our capital employed, and the liquid nature of most of
the instruments traded, limit this risk. In addition, we maintain credit
facilities with commercial banks.
See "Operating and Financial Review and Prospects -- Liquidity and Capital
Resources -- Our indebtedness".
The Group budgets cash flows on a rolling twelve month basis. Cash flow and
available cash positions are ascertained daily, and when appropriate, these
budgets are adjusted accordingly.
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. Other trading
transactions are substantially collateralized financing transactions.
98
Compliance, Legal and Operational Risk
The activities of Van der Moolen and its subsidiaries, and the business segments
in which they are active, are under significant regulatory and legal obligations
in both the United States and Europe, imposed by (local) governments and
securities regulators. The legal and regulatory obligations under which our
subsidiaries operate relate, among other things, to their financial reporting,
their trading activities, capital requirements and the supervision of their
employees. Failure to fulfill legal or regulatory obligations can lead to fines,
censure or disqualification of management and/or staff and other measures that
could have negative consequences for our activities and financial performance.
Certain violations could result in them losing their trading permissions. If
that were to occur, we would lose our ability to carry out a portion of our
existing activities, which could have a material effect on our financial
position, net profit and cash flows. In relation to these risks, reference is
made to "Risk Factors - Risks Associated with the Industry in which we operate -
A failure or alleged failure to comply with applicable laws and regulations,
whether on the part of our firm or one or more of our employees, could result in
substantial fines and other penalties" and "Financial Information - Consolidated
Statements and Other Financial Information - Regulatory Proceedings and
Litigation".
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 take 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.
99
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
As of the end of the period covered by this annual report, an evalution 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-15(e) under the Exchange Act). Based on this
evalution, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of such date, our disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Company
in reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Our management necessarily applied
its judgement in assessing the costs and benefits of such controls and
procedures, which by their nature can provide only reasonable assurance
regarding management's control objectives.
There have been no significant changes in our internal controls over
financial reporting during the period covered by this annual report that have
materially affected, or are reasonably likely to affect, our internal control
over financial reporting.
However, based on an examination of our accounting policies we noted and
remedied a weakness with regards to controls over accounting for the netting
effect of certain cash balances and overdrafts held at banks. As discussed in
Note 2 to our U.S. GAAP financial statements included elsewhere herein, certain
information as of and for the years ended December 31, 2002 and 2003 contained
therein has been restated for the correction of an error resulting from this
weakness prior to it being remedied. This restatement had no impact on our
shareholders equity or income statement.
Item 16A: AUDIT COMMITTEE FINANCIAL EXPERT
Our supervisory board has determined that Marinus Arentsen, who serves on our
audit committee, is an independent "audit committee financial expert" as defined
by the SEC. Mr. Arentsen, who is a registered accountant in The Netherlands, has
served as a senior financial officer of several corporations, most recently as
chief financial officer and member of the executive board of CSM N.V.
Item 16B: CODE OF ETHICS
We have adopted a code of ethics applicable to our managing directors, executive
officers and other employees, as required by the Sarbanes-Oxley Act of 2002 and
the Tabaksblat Code. A copy of the code of ethics has been made available
through our website located at www.vandermoolen.com.
Item 16C: PRINCIPAL ACCOUNTING FEES AND SERVICES
PricewaterhouseCoopers Accountants N.V. have served as our independent public
accountant for the years ended December 31, 2004 and 2003. The following table
presents the aggregate fees for professional audit services and other services
rendered by PricewaterhouseCoopers Accountants N.V. and its affiliated firms
(together "PricewaterhouseCoopers") for the years ended December 31, 2004 and
2003. The fees for professional audit services and other services rendered by
PricewaterhouseCoopers are subject to pre-approval by our audit committee. For
the fees in relation to the year ended December 31, 2004, all fees for audit
services have been pre-approved by our audit committee.
100
2004(1) 2003(1)
- -------------------------------------------------------------------------------------------- ----------------
((euro) thousands)
- -------------------------------------------------------------------------------------------- ----------------
Audit fees 1,068 817
Audit-related fees 411 65
Tax fees - 380
--------------- ---------------
Total 1,479 1,262
=============== ===============
(1) All fee amounts are exclusive of value added tax.
Audit Fees
Audit fees primarily relate to the audit of our annual financial statements
issued under local GAAP following our statutory and regulatory requirements, our
U.S. GAAP consolidated financial statements included elsewhere in this annual
report, and services related to statutory and regulatory filings of our
subsidiaries.
Audit-related fees
Audit-related fees consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of our
financial statements or that are traditionally performed by the external
auditor. These fees also include consultations concerning financial accounting
and reporting standards such as IFRS, the Sarbanes-Oxley Act project and
employee benefit plan audits.
Tax fees
During the year ended December 31, 2003, we paid (euro)380,000 of fees in
connection with tax advice provided by PricewaterhouseCoopers. In 2003, we hired
a tax advisory firm that is independent of PricewaterhouseCoopers for the
purpose of providing tax advice.
Item 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E: PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
In 2003 we purchased 882,182 issued and outstanding common shares of Van der
Moolen Holding N.V. The common shares were purchased pursuant to a plan, which
we announced on February 19, 2003, and 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 which have been distributed pursuant to our equity
stock option plan. In 2004 no further common shares were purchased under the
Plan. In connection with a new hedging policy we apply to our employee stock
option plan, on April 22, 2004 we sold 780,000 of our own shares for an
aggregate amount of approximately (euro)5.6 million. As of June 24, 2005 we hold
102,182 common shares in treasury. At the general meeting on April 6, 2005 our
executive board was given the authority, subject to the approval of the
Supervisory Board, for a period of fifteen months, commencing April 6, 2005, to
buy financing preferred shares, preferred shares and common shares, either on a
Stock Exchange or elsewhere, within the limits set by law and the Articles of
Association, with respect to ordinary shares for a price between the par value
of the shares and an amount equal to 110% of the average of the highest market
prices per share on each of the ten trading days prior to the purchase, as
reported by the Officiele Prijscourant of Euronext Amsterdam N.V. and with
respect to the financing preferred shares and the preferred shares for a price
between the par value of such and an amount to 110% of the paid in capital of
such shares.
101
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 Accountants N.V. thereon, are filed as part of
this annual report:
Index to U.S. GAAP Consolidated Financial Statements
Pages
Report of Independent Auditors F-1
- ------------------------------------------------------------------------------------------------------------------
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December 31, 2004 and 2003 F-2
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 F-3
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002 F-4
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F-5
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
2004, 2003 and 2002 F-6
- ------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-9
- ------------------------------------------------------------------------------------------------------------------
102
Item 19: EXHIBITS
The following instruments and documents are included as exhibits to this annual
report.
- -------------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
4.2***+ Amended and Restated Operating Agreement of VDM Specialists dated February 2, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.3***+ First Amendment dated April 1, 2004 to the Amended and Restated Operating Agreement of VDM Specialists
dated February 2, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.4***+ Second Amendment dated May 1, 2004 to the Amended and Restated Operating Agreement of VDM Specialists
dated February 2, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.5*+ Amended and Restated Operating Agreement of VDM Specialists dated December 1, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.6*+ First Amendment dated December 30, 2004 to the Amended and Restated
Operating Agreement of VDM Specialists dated December 1, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.7*+ Second Amendment dated January 3, 2005 to the Amended and Restated
Operating Agreement of VDM Specialists dated December 1, 2004.
- -------------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
13.1* 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.
- -------------------------------------------------------------------------------------------------------------------
13.2* 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.
*** Incorporated by reference to the Company's Annual Report on Form 20-F (SEC
File No. 001-16731) filed with the Securities and Exchange Commission on
June 25, 2004.
+ Confidential treatment has been requested. Confidential materials have been
redacted and separately filed with the Securities and Exchange Commission.
- -------------------------------------------------------------------------------------------------------------------
103
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 Executive
Board
By: /s/ Leo J. Pruis
Name: Leo J. Pruis
Title: Chief Financial Officer,
Member of the Executive
Board
By: /s/ Casper F. Rondeltap
Name: C.F. Rondeltap
Title: Member of the Executive Board
Date: June 30, 2005
104
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of Independent Auditors F-1
- ------------------------------------------------------------------------------------------------------------------
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December 31, 2004 and 2003 F-2
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 F-3
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002 F-4
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F-5
- ------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
2004, 2003 and 2002 F-6
- ------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements F-9
- ------------------------------------------------------------------------------------------------------------------
105
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Van der Moolen Holding N.V.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of cash flows and of
changes in shareholders' equity present fairly, in all material respects, the
financial position of Van der Moolen Holding N.V. and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Company restated the
financial statements at December 31, 2003 and 2002.
PricewaterhouseCoopers Accountants N.V.
Amsterdam, The Netherlands
June 30, 2005
F-1
Van der Moolen Holding N.V.
Consolidated Statements of Financial Condition
(in EUR millions, except per share data)
As of December 31,
-------------------------
2003
as
2004 restated
-------- ----------
ASSETS
Cash and cash equivalents EUR 288.2 EUR 383.8
Receivable from clearing organizations and professional parties 26.8 69.2
Securities owned, at market value 126.9 227.2
Not readily marketable financial instruments - 0.1
Loans receivable - 11.9
Stock borrowed 607.3 1,445.4
Memberships in exchanges:
Owned, at cost (market value of EUR 12.3 and EUR 12.1,
respectively) 15.7 13.3
Contributed by members, at market value 3.1 9.5
Deferred tax assets, net 5.4 6.0
Property and equipment, net 4.1 5.9
Goodwill, net 47.6 59.4
Other intangible assets, net 187.2 208.1
Held-for-sale assets - 417.7
Other assets 24.9 39.9
-------- ----------
Total assets EUR 1,337.2 EUR 2,897.4
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short-term borrowings EUR 69.5 EUR 195.0
Payable to clearing organizations and professional parties 18.6 10.0
Securities sold, not yet purchased, at market value 117.6 231.6
Stock loaned 592.4 1,444.1
Current taxes payable 12.3 7.8
Accounts payable, accrued expenses, and other liabilities 32.0 26.0
Held-for-sale liabilities - 403.5
Provision for NYSE/SEC investigation - 45.7
Deferred tax liabilities, net 5.9 2.8
Notes payable 5.4 6.9
Capital subject to mandatory redemption - 17.4
Subordinated borrowings:
Subordinated notes 133.2 149.0
Memberships in exchanges, contributed by members, at market
value 3.1 9.5
Minority interest
Shareholders' equity: 16.8 -
Financing Preferred A shares, EUR 0.60 par value, authorized
1,200,000 shares, issued and outstanding 251,000 shares 0.1 0.1
Financing Preferred B shares, EUR 0.60 par value, authorized
1,200,000 shares, issued and outstanding 391,304 shares 0.3 0.3
Common shares, EUR 0.08 par value, authorized 54,000,000
shares, issued and outstanding 38,419,282 shares 3.1 3.1
Treasury stock, 102,182 and 882,182 shares (2.4) (8.1)
Additional paid-in capital 277.6 277.1
Retained earnings 174.3 189.1
Accumulated other comprehensive income (122.6) (113.5)
-------- ----------
Total shareholders' equity EUR 330.4 EUR 348.1
-------- ----------
Total liabilities and shareholders' equity EUR 1,337.2 EUR 2,897.4
======== ==========
The accompanying notes are an integral part of these financial statements
F-2
Van der Moolen Holding N.V.
Consolidated Statements of Income
(in EUR millions, except per share data)
Year Ended December 31,
------------------------------------------
2004 2003 2002
----------- ----------- -----------
Revenues
Specialist activities EUR 71.1 EUR 100.8 EUR 227.0
Proprietary trading/market making activities 23.4 24.7 49.6
Commission income 24.6 28.1 35.0
Net interest income from stock lending activities 3.6 3.4 4.2
----------- ----------- -----------
Total revenues EUR 122.7 EUR 157.0 EUR 315.8
----------- ----------- -----------
Expenses:
Exchange, clearing and brokerage fees 21.4 23.5 33.0
Employee compensation and benefits 34.7 42.3 78.7
Lease of exchange memberships 7.7 13.8 15.7
Information and communication 3.0 3.4 4.9
General and administrative expenses 14.5 12.0 19.7
Depreciation and amortization 7.4 9.0 10.9
Provision for NYSE/SEC investigation - 45.7 -
Impairment of intangible fixed assets 8.2 49.2 -
Impairment of other assets 5.6 - -
----------- ----------- -----------
Total expenses EUR 102.5 EUR 198.9 EUR 162.9
----------- ----------- -----------
Loss/(income) from continuing operations EUR 20.2 EUR (41.9)EUR 152.9
----------- ----------- -----------
Gain on disposal of long-term investments and associates - 0.9 -
Interest expense, net (7.6) (8.9) (13.0)
Interest expense, capital subject to mandatory redemption, net (7.9) (2.4) -
Other income 1.3 6.1 5.1
----------- ----------- -----------
Income/(loss) from continuing operations before income taxes EUR 6.0 EUR (46.2)EUR 145.0
Provision for income taxes 0.6 12.2 (46.1)
Minority interest 2.5 - (35.3)
----------- ----------- -----------
Net income/(loss) from continuing operations EUR 9.1 EUR (34.0)EUR 63.6
----------- ----------- -----------
Loss from discontinued operations before income taxes (22.7) (37.7) (59.1)
Provision for income taxes relating to discontinued operations 4.6 13.1 21.4
Minority interest - - 4.2
----------- ----------- -----------
Net loss from discontinued operations EUR (18.1) EUR (24.6)EUR (33.5)
----------- ----------- -----------
Net (loss)/income EUR (9.0) EUR (58.6)EUR 30.1
----------- ----------- -----------
Financing preferred shares dividends (2.9) - (2.9)
Net (loss)/ income attributable to common shareholders EUR (11.9) EUR (58.6)EUR 27.2
Weighted average number of common shares outstanding 38,078,411 37,797,329 38,388,043
Basic earnings per share from continuing operations EUR 0.16 EUR (0.90)EUR 1.58
Diluted earnings per share from continuing operations EUR 0.16 EUR (0.90)EUR 1.58
Basic earnings per share from discontinued operations EUR (0.47) EUR (0.65)EUR (0.87)
Diluted earnings per share from discontinued operations EUR (0.47) EUR (0.65)EUR (0.87)
Basic earnings per share EUR (0.31) EUR (1.55)EUR 0.71
Diluted earnings per share EUR (0.31) EUR (1.55)EUR 0.71
The accompanying notes are an integral part of these financial statements
F-3
Van der Moolen Holding N.V.
Consolidated Statements of Comprehensive Income
(in EUR millions)
Year Ended December 31,
------------------------------------
2004 2003 2002
--------- --------- ------------
Net (loss)/ income EUR (9.0)EUR (58.6)EUR 30.1
Other comprehensive income:
Foreign currency translation, net of tax (24.9) (85.9) (97.1)
Transfer of cumulative foreign currency translation
to discontinued operations, net of tax 15.9 - -
--------- --------- ------------
Comprehensive (loss)/ income EUR (18.0)EUR (144.5)EUR (67.0)
========= ========= ============
Foreign currency translation includes taxation in the amount of EUR nil,
EUR 5.8 million and EUR 6.9 million for the years ended December 31, 2004, 2003
and 2002, respectively. For the year ended December 31, 2004, foreign currency
translation, net of tax, in the amount of EUR nil related to long-term financing
advances (2003: EUR (52.4) million and 2002: EUR (62.2) million).
Cumulative foreign currency translation differences of EUR 18.9 million
attributable to a foreign operation that is sold, liquidated or substantially
liquidated have been charged to the Consolidated Statement of Income for the
year ended December 31, 2004 in accordance with SFAS 52, net of related taxation
(benefit of EUR 3.0 million). The net charge of EUR 15.9 million is included in
Net loss from discontinued operations.
The accompanying notes are an integral part of these financial statements.
F-4
Van der Moolen Holding N.V.
Consolidated Statements of Cash Flows
(in EUR millions)
Year Ended December 31,
----------------------------------------
2003 2002
2004 as restated as restated
----------------------------------------
Cash flows from operating activities:
Net (loss)/income EUR (9.0) EUR (58.6) EUR 30.1
Adjustments of non-cash items to reconcile net
(loss) income to net cash used in operating activities:
Depreciation and amortization 7.4 9.9 12.0
Impairment of intangible fixed assets 8.2 71.2 33.7
Impairment of other assets 5.6 1.6 -
Release of provision on loan receivable (2.4) - -
Provision for NYSE/SEC investigation (42.2) 45.7 -
Amortization of deferred gain on swaps (3.2) (2.0) -
Deferred tax (benefit) expense, net and non-cash
tax effects 7.3 (13.1) (3.3)
Compensation expense related to stock-based
compensation 0.5 4.7 5.5
Pensions (0.3) (0.1) 0.8
Gain on disposal of long-term investments and
associates - (0.9) (0.4)
Other (0.2) - -
Currency translation differences discontinued
operations, net of tax 15.9 - -
Interest expense, capital subject to mandatory
redemption 7.9 1.9 -
Minority interest (2.5) - 31.1
Change in assets and liabilities net of effects
from purchase or sale ofsubsidiaries:
Cash segregated under federal and other
regulations - - 0.6
Receivable from clearing organizations and
professional parties 42.4 304.6 333.2
Securities owned, net 100.3 147.7 274.2
Stock borrowed 838.1 (343.3) 582.9
Other assets 17.9 (24.7) 13.3
Not readily marketable financial instruments 0.1 - 0.1
Payable to clearing organizations and
professional parties (114.0) (30.8) (82.7)
Securities sold, not yet purchased 8.6 (424.4) (442.7)
Stock loaned (851.7) 317.5 (564.0)
Current taxes payable (0.9) (5.4) 1.1
Accounts payable, accrued expenses and other
liabilities (6.6) (5.2) (36.1)
---------- --------------------------
Net cash (used in) provided by operating activities EUR 27.2 EUR (3.7) EUR 189.4
---------- --------------------------
Cash flows from investing activities:
Purchase of property and equipment, net - (1.4) (2.2)
Payment for purchase of subsidiaries, net of cash
acquired - - (63.8)
Divestment of Group companies, less cash balances
held 1.6 - -
Securities purchased under agreements to resell,
net - - 11.3
Disposals of investments, net 0.3 2.9 1.9
Repayment on loans receivable 14.3 - 7.8
Sale of exchange memberships 0.3 0.3 -
---------- --------------------------
Net cash provided by (used in) investing activities EUR 16.5 EUR 1.8 EUR (45.0)
---------- --------------------------
Cash flows from financing activities:
Capital subject to mandatory redemption,
distributions net of capital contributions (3.7) (9.1) -
Minority interest, distributions net of capital
contributions (0.5) - (27.8)
Securities purchased under agreements to resell,
net - 62.5 (244.9)
Securities sold under agreements to repurchase,
net - (51.8) 275.1
Net (decrease) increase in short-term borrowings (125.5) (128.5) 12.3
(Payments) proceeds of notes payable, net (5.0) (0.4) (62.3)
Proceeds of subordinated notes 0.9 - 46.2
Payments of subordinated notes (7.1) (7.2) (8.0)
(Loss)/ proceeds from termination of interest
rate swaps (0.2) 13.6 -
Issuance of shares - - 2.7
Sale / (purchase) of treasury shares 5.6 (8.1) -
Dividend paid (2.9) (30.2) (22.7)
Other financing activities, net - - (0.2)
---------- ---------- ------------
Net cash (used in) provided by financing
activities EUR (138.4) EUR (159.2) EUR (29.6)
---------- ---------- ------------
Effects of exchange rate differences (13.5) (58.6) (56.6)
---------- ---------- ------------
Net change in cash and cash equivalents EUR (108.2) EUR (219.7) EUR 58.2
Cash and cash equivalents at beginning of the
year including held-for-sale assets 396.4 616.1 557.9
---------- ---------- ------------
Cash and cash equivalents at end of the year
including held-for-sale assets EUR 288.2 EUR 396.4 EUR 616.1
Cash and cash equivalents at end of the year
included in held-for-sale assets - (12.6) (41.0)
---------- ---------- ------------
Cash and cash equivalents at end of the year EUR 288.2 EUR 383.8 EUR 575.1
========== ========== ============
Supplemental information:
Cash paid for
Interest (excluding interest on capital subject to
mandatory redemption) EUR 30.6 EUR 30.9 EUR 38.3
Income taxes EUR 4.0 EUR 17.3 EUR 23.6
The accompanying notes are an integral part of these financial statements
F-5
Van der Moolen Holding N.V.
Consolidated Statements of Changes in Shareholders' Equity
As of December 31, 2004
(in thousands of EUR , except per share data)
Capital stock
-----------------------------------
Accumulated
Financing Common Treasury Additional Other Total
preferred Paid-in Retained Comprehensive Shareholders'
Shares Amounts Shares Amounts Shares Amounts Capital Earnings Income Equity
---------------------------------------------------------------------------------------------------------------
Balance at Jan. 1,
2004 642,304 EUR385 38,419,282 EUR 3,074 882,182 EUR (8,070) EUR277,075 EUR189,148 EUR(113,497) EUR 348,115
Dividend on financing
preferred A shares of
EUR 2.70 per share - - - - - - - (680) - (680)
Dividend on financing
preferred
B shares of 5.52% - - - - - - - (2,255) - (2,255)
Net loss - - - - - - - (8,954) - (8,954)
Dividend on financing
preferred
A shares of EUR 2.70
per share - - - - - - - (680) - (680)
Dividend on financing
preferred
B shares of 5.52% - - - - - - - (2,255) - (2,255)
Sale of Treasury
shares - - - - (780,000) 5,639 - - - 5,639
Foreign currency
translation
adjustments - - - - - - - - (24,934) (24,934)
Transfer of cumulative
foreign currency
translation to
discontinued
operations, net of
tax - - - - - - - - 15,878 15,878
Stock options
compensation expense - - - - - - 532 - - 532
---------------------------------------------------------------------------------------------------------------
Balance at Dec. 31,
2004 642,304 EUR385 38,419,282 EUR3,074 102,182 EUR (2,431) EUR277,607 EUR174,324 EUR(122,553) EUR330,406
===============================================================================================================
The accompanying notes are an integral part of these financial statements
F-6
Van der Moolen Holding N.V.
Consolidated Statements of Changes in Shareholders' Equity
As of December 31, 2003
(in thousands of EUR , except per share data)
Capital stock
-----------------------------------
Accumulated
Financing Common Treasury Additional Other Total
preferred Paid-in Retained Comprehensive Shareholders'
Shares Amounts Shares Amounts Shares Amounts Capital Earnings Income Equity
---------------------------------------------------------------------------------------------------------------
Balance at Jan. 1,
2003 642,304 EUR385 38,419,282 EUR 3,074 - EUR - EUR 272,367 EUR275,092 EUR (27,612) EUR 523,306
Net loss - - - - - - - (58,638) - (58,638)
Dividends on common
shares of EUR 0.72
per share - - - - - - - (27,277) - (27,277)
Purchase of common
shares (Treasury
shares) - - - - 882,182 (8,070) - - - (8,070)
Foreign currency
translation
adjustments - - - - - - - - (85,885) (85,885)
Stock options
compensation expense - - - - - - 4,708 - - 4,708
Other - - - - - - - (29) - (29)
---------------------------------------------------------------------------------------------------------------
Balance at Dec. 31,
2003 642,304 EUR385 38,419,282 EUR 3,074 882,182 EUR (8,070)EUR 277,075EUR 189,148 EUR (113,497)EUR 348,115
===============================================================================================================
The accompanying notes are an integral part of these financial statements.
F-7
Van der Moolen Holding N.V.
Consolidated Statements of Changes in Shareholders' Equity
As of December 31, 2002
(in thousands of EUR , except per share data)
Capital stock
--------------------------------- Accumulated
Financing Additional Other Total
preferred Common Paid-in Retained Comprehensive Shareholders'
Shares Amounts Shares Amounts Capital Earnings Income Equity
-------------------------------------------------------------------------------------------
Balance at Jan. 1, 2002 632,304 EUR 379 37,502,455 EUR3,000 EUR242,832 EUR289,294 EUR 69,512 EUR 605,017
Net Income - - - - - 30,068 - 30,068
Dividends on financing preferred A shares
of EUR 2.70 per share - - - - - (660) - (660)
Dividends on financing preferred B shares
of 5.52% - - - - - (2,255) - (2,255)
Dividends on common shares of EUR 1.10
per share - - - - - (19,784) - (19,784)
Issuance of financing preferred A shares 10,000 6 - - 568 - - 574
Issuance of stock dividend - - 784,973 63 21,508 (21,571) - -
Issuance of common shares through exercise
of stock options - - 131,854 11 2,140 - - 2,151
Foreign currency translation adjustments - - - - - - (97,124) (97,124)
Stock options compensation expense - - - - 5,500 - - 5,500
Other - - - - (181) - - (181)
-------------------------------------------------------------------------------------------
Balance at Dec. 31, 2002 642,304 EUR 385 38,419,282 EUR 3,074 EUR272,367 EUR275,092 EUR (27,612)EUR 523,306
===========================================================================================
The accompanying notes are an integral part of these financial statements.
F-8
Van der Moolen Holding N.V.
Notes to Consolidated Financial Statements
(in EUR millions, except per share data)
1. Organization and Nature of Business
Van der Moolen Holding N.V. and subsidiaries (collectively the "Company") is a
specialist, market maker and proprietary trader in securities markets on the New
York Stock Exchange ("NYSE"), Euronext, London Stock Exchange, Deutsche Borse,
Swiss Exchanges, Borsa Italiana and the London International Financial Futures
and Options Exchange. The Company trades equities, equity options, equity index
options and bonds. Van der Moolen Holding N.V. is headquartered in Amsterdam.
2. Significant Accounting Policies
Basis of Presentation
The accounting and reporting principles of the Company conform with generally
accepted accounting principles in the United States of America ("U.S. GAAP").
All amounts included in these financial statements are stated in millions of
euros, unless otherwise indicated.
The following is a summary of the significant accounting policies of the
Company.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities as of December 31, 2004, and the reported
amounts of revenues and expenses during the year then ended. Actual results
could differ from these estimates.
Restatement
Total assets and total liabilities at December 31, 2003 have been increased by
EUR 134.7 million and EUR 134.7 million respectively, as a result of the
correction of an error in the presentation of cash and cash equivalents and bank
overdrafts (shown in short-term borrowings) in prior years. Cash and cash
equivalents and bank overdrafts are recognized on a gross basis when there is no
legally enforceable right to offset the recognized amounts and there is no
intention to settle on a net basis. The Company is a party to a cash pooling
agreement with one of its bankers, in accordance with which the Company earns or
incurs interest on the net balance. However, the Company has no legal right to
offset balances under this pooling agreement. Previously, the Company presented
cash and cash equivalents and bank overdrafts that were subject to this pooling
agreement on a net basis. Prior period balances have been restated so as to
present balances subject to the pooling agreement on a gross basis.
The following table illustrates the account balances that have been restated in
the Consolidated Statement of Financial Condition as of December 31, 2003, and
the Consolidated Statement of Cash Flows for the year ended December 31, 2003.
(in EUR millions) As previously reported Restated amount
- -------------------------------------------------------------------------------------------
Cash and cash equivalents 249.1 383.8
- -------------------------------------------------------------------------------------------
Short-term borrowings 60.3 195.0
- -------------------------------------------------------------------------------------------
Net increase (decrease) in short-term
borrowings (included in Consolidated Statement
of Cash Flows) 18.9 (128.5)
- -------------------------------------------------------------------------------------------
Cash and cash equivalents (included in Consolidated
Statement of Cash Flows) 249.1 383.8
- -------------------------------------------------------------------------------------------
F-9
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The following table illustrates the account balances that have been restated in
the Consolidated Statement of Cash Flows for the year ended December 31, 2002.
(in EUR millions) As previously reported Restated amount
- -------------------------------------------------------------------------------------------
Net increase/decrease in short-term borrowings
(included in Consolidated Statement of Cash
Flows) (4.2) 12.3
- -------------------------------------------------------------------------------------------
Cash and cash equivalents (included in
Consolidated Statement of Cash Flows) 293.0 575.1
- -------------------------------------------------------------------------------------------
The restatement has no effect on shareholders' equity at December 31, 2003 and
2002. Furthermore, the restatement has no effect on the Consolidated Statements
of Income for the three years ended December 31, 2004.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned and majority-owned subsidiaries. Equity investments with a 20%
to 50% ownership interest are accounted for using the equity method of
accounting and are reported in other assets. The Company's proportional share of
earnings and losses related to these investments is included in Income from
associates. All significant intercompany accounts and transactions have been
eliminated upon consolidation.
Foreign Currency Translation
With prospective effect from January 1, 2004, the functional currency of
Van der Moolen Holding N.V., its finance entity Van der Moolen International
B.V. and certain of its intermediate holding companies has been changed to the
U.S. dollar. Previously, Van der Moolen Holding N.V. and Van der Moolen
International B.V. applied the Euro as their functional currency. The change in
functional currency had a positive non-cash effect on net income of EUR 0.4
million in 2004 related to currency exchange gains. Additionally, a tax benefit
of EUR 1.2 million was recognized in the income statement as a component of
provision for income taxes - continuing operations. Previously, this tax benefit
would have been recognized within Accumulated Other Comprehensive Income -
foreign currency translation, net of tax. The primary economic environment in
which a corporate entity operates determines its functional currency. The change
reflects the dominance of the Company's U.S. activities, and management's
judgment that this dominance can no longer be considered a temporary phenomenon.
The currency in which the financial statements are presented, the presentation
currency, remains the euro, given the statutory seat of Van der Moolen Holding
N.V. Shareholders' equity at December 31, 2004 was not affected by this change.
Monetary assets and liabilities in foreign currencies are translated into the
functional currency at the exchange rate prevailing on the Balance Sheet date.
Foreign currency transactions in currencies other than the functional currency
are accounted for at the exchange rate prevailing on the date of the
transactions; gains and losses arising from the settlement of such transactions
and from the translation of monetary assets and liabilities are recognized in
Other income in the Consolidated Statement of Income.
Non-monetary assets and liabilities in currencies other than the functional
currency resulting from transactions measured at cost are translated using the
exchange rate prevailing on the date of the transaction.
For purposes of presentation, the financial statements of Group companies with a
functional currency other than the euro are translated into euros. Assets and
liabilities are translated using the exchange rate prevailing at the Balance
Sheet date. Income and expense items are translated using the average rates of
exchange for the periods involved. Translation adjustments are charged or
credited to Accumulated Other Comprehensive Income, which is included in
Shareholders' Equity.
F-10
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Currency translation gains or losses on long-term financing advances to foreign
subsidiaries, net of taxation, are charged or credited to Accumulated Other
Comprehensive Income.
Cumulative translation adjustments attributable to a foreign operation that is
sold, liquidated or substantially liquidated are removed from Accumulated Other
Comprehensive Income and are reported as part of the gain or loss on the sale or
liquidation of the entity in the period in which the sale or liquidation occurs.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
short-term maturities. The carrying amounts of such cash equivalents approximate
their fair value due to the short-term nature of these instruments. Cash and
cash equivalents include large balances that are used for purposes of
collateralizing positions and collateralizing bank overdrafts subject to a cash
pooling agreement with a commercial bank, and large balances that must be held
for regulatory or exchange requirements. Refer to note 25 for details of Net
Liquid Asset Requirements.
Securities Purchased under Agreement to Resell and Securities Sold under
Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are accounted for as collateralized financing
transactions and are recorded at amounts at which the securities were acquired
or sold plus accrued interest. The Company minimizes the credit risk associated
with these transactions by monitoring its aggregate credit exposure to each
counterparty and by monitoring collateral value and requiring the counterparty
to deposit additional collateral when deemed necessary. The market value of
securities received for securities purchased under agreement to resell at
December 31, 2003 approximated 97.8% of cash paid. The market value of
securities delivered for securities sold under agreements to repurchase at
December 31, 2003 approximated 101.8% of cash received.
At December 31, 2003, the market value of the collateral received by the Company
under these agreements amounted to EUR 178.5 million. All the Securities
Purchased under Agreement to Resell and Securities Sold under Agreements to
Repurchase were generated by Van der Moolen UK Limited and they are presented in
Held-for-sale assets and Held-for-sale liabilities, respectively, in the
Consolidated Statement of Financial Condition for the year ended December 31,
2003. At December 31, 2004, these balances are nil. Note 3 provides details of
the major classes of assets and liabilities in Held-for-sale assets and
Held-for-sale liabilities as presented in the Consolidated Statement of
Financial Conditions at December 31, 2003.
Securities Owned and Sold, Not Yet Purchased
Securities owned and sold, not yet purchased, represent trading assets and
liabilities, respectively. Trading assets and liabilities include securities
held or sold, not yet purchased in anticipation of market movements. Trading
liabilities include obligations to deliver securities not yet purchased. Trading
positions are carried at market value and recorded on a trade date basis. The
Company recognizes changes in the market value of trading positions as they
occur.
Trading securities are valued using quoted market prices, including quotes from
dealers in those securities when available. If quoted market prices are not
available, the fair value is estimated using quoted prices of instruments with
similar characteristics.
Loans Receivable
Loans receivable are reported at the principal amount outstanding, adjusted for
any allowances. Interest on loans is accrued at the contractual rate and
credited to income based on the principal amount outstanding.
Stock Borrowed and Stock Loaned
Stock borrowed and stock loaned for which cash is deposited or received are
treated as a collateralized financing transactions and are recorded at contract
amount. Stock borrowed transactions require the Company to deposit cash
collateral with the lender. With respect to stock loaned, the Company receives
collateral in cash in an amount generally in excess of the market value of the
stock loaned. The Company monitors the market value of stock borrowed and loaned
on a daily basis, with additional collateral obtained or refunded as necessary.
Income or expense on stock borrowed and stock loaned transactions is recognized
over the life of the transaction. Revenue and expenses from these activites are
recorded on a net basis as Net interest income from stock lending activities.
F-11
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
At December 31, 2004, the Company had stock borrowed from three counterparties
representing approximately 58% of the total stock borrowed recorded on the
Consolidated Statement of Financial Condition.
At December 31, 2004, the market value of stock received by the Company that can
be sold or repledged totaled EUR 587.1 million. Such collateral is generally
obtained under resale and securities borrowing agreements. Of this collateral,
EUR 564.2 million has been repledged, generally as collateral under stock loan
agreements or to cover short sales and consists primarily of common stocks.
Exchange Memberships
Exchange memberships owned by the Company are originally carried at cost,
pursuant to the American Institute of Certified Public Accountants' ("AICPA")
Audit and Accounting Guide-Brokers and Dealer in Securities. Adjustments to
carrying value are made if the Company deems that an "other-than-temporary"
decline in value, as defined in Emerging Issues Task Force ("EITF") Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments, has occurred.
In determining whether the value of the exchange memberships the Company owns
are impaired (i.e., fair market value is below cost) and whether such impairment
is temporary or other-than-temporary, the Company consider many factors,
including, but not limited to, information regarding recent sale and lease
prices of exchange memberships, historical trends of sale and lease prices of
memberships and their duration and the Company's knowledge and judgment of the
specialist industry and the securities market as a whole.
As a result of the analysis of the above-mentioned factors, the Company adjusted
the carrying value (or cost basis) of its exchange memberships owned to reflect
a EUR 5.6 million other-than-temporary impairment charge for the year ended
December 31, 2004. On December 31, 2004, New York Stock Exchange seats owned are
carried on the balance sheet at $1,344,000 (EUR 984,759) each, based on the
prices of recent seat transactions.
Additionally, four exchange memberships have been contributed for use by the
Company by members of the Company's subsidiary VDM Specialists (December 31,
2003: eight seats). These memberships are subordinated to claims of the general
creditors of VDM Specialists and are carried at market value with corresponding
amounts recorded as subordinated liabilities. These market values are determined
on the basis of prices published by the New York Stock Exchange on the relevant
dates. The Company is required to pay annual fees in relation to these exchange
memberships. An amount of EUR 1.0 million has been charged to Interest expense
in the Consolidated Statement of Income.
The Company leases additional memberships from affiliated and non-affiliated
parties and makes lease payments to these parties at prevailing market rates.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line method over the estimated useful
lives, which range from two to forty years. Maintenance and repairs are expensed
as incurred.
The estimated useful lives of property and equipment are as follows:
Real Estate 40 years
Leasehold Improvements, Office Equipment,
Furniture and Fixtures 2-10 years
Company Cars 3-5 years
F-12
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
All leases entered into by the Company qualify as operating leases. Payments
made under operating leases are charged to income on a straight-line basis over
the periods of the leases.
Goodwill and Other Intangible Assets
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. With the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002 and
for acquisitions subsequent to January 1, 2001, 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 at least annually as well or
when events and circumstances indicate impairment testing may be necessary. The
Company has defined all its operational subsidiaries as being separate reporting
units for purposes of SFAS No. 142. Goodwill is allocated to the reporting units
at the date of acquisition.
The impairment test involves a two-step process;
Step 1: The fair value of the Company's 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 the Company's 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.
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 based upon analysis of historical
turnover characteristics of the specialist stocks. The Company periodically
evaluates 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. In accordance with the rules dictated by
Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", an impairment loss, calculated as
the difference between the estimated fair value and the carrying amount of the
intangible asset, is recognized if the expected undiscounted cash flows relating
to the intangible assets are less than the corresponding carrying value.
Pension Benefits
The Company's defined benefit plans are accounted for in accordance with SFAS
No. 87, "Employers' Accounting for Pensions". Unrecognized net actuarial gains
and losses are amortised over the average remaining service period of active
plan participants in accordance with the corridor approach described in
paragraph 32 of SFAS 87.
For defined contribution plans, the Company pays contributions on a mandatory,
contractual or voluntary basis. The Company has no further payment obligations
once the contributions have been paid. The contributions are recognized as
employee benefit expense when they are due. Prepaid contributions are recognized
as an asset to the extent that a cash refund or a reduction in future payments
is available.
F-13
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Other Assets
Other assets include investments accounted for under the equity method and other
receivables.
Short-term Borrowings
Short-term borrowings comprise bank overdrafts with financial institutions and
clearing organizations. These borrowings are interest bearing at prevailing
market rates.
Minority Interest
Minority interest in the Consolidated Statement of Financial Condition is
comprised of the share in the capital of the Company's majority owned
subsidiaries held by minority partners. These minority interests mainly relate
to VDM Specialists. In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial instruments with Characteristics of Both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Company has determined that its minority members' capital in VDM
Specialists, which has the same characteristics and rights as members' equity
contributed by the Company, was a mandatorily redeemable financial instrument as
defined by SFAS No. 150 because the capital was redeemable upon the death of a
minority interest holder, an event certain to occur. The Company adopted SFAS
No. 150 as from January 1, 2003, and until December 1, 2004, presented its
minority members capital in VDM Specialists as Capital subject to mandatory
redemption in the Consolidated Statement of Financial Condition.
On December 1, 2004, VDM Specialists amended its operating agreement and based
on a review of the terms of the amended operating agreement, the Company
determined that the minority members' capital was not redeemable upon an event
certain to occur, and consequently that the characteristics of these financial
instruments conform to those of equity instruments. Consequently, from December
1, 2004, the minority members' capital is classified as Minority interest in the
Consolidated Statement of Financial Condition.
In 2003 and for the period January 1, 2004 - December 1, 2004, all income
distributable to the Company's minority members is recorded as interest expense;
any net loss as a reduction of interest expense. For the period December 1, 2004
- - December 31, 2004, all income distributable to VDM Specialists' minority
members, including interest on minority members' capital contributions, is
presented as minority interest in the Consolidated Statement of Income.
Specialist Activities
Revenues from specialist activities consist primarily of net trading income from
principal transactions in securities for which the Company acts as specialist.
The net gain on principal transactions represents trading gains net of trading
losses and are earned by the Company when it acts as principal buying and
selling its specialist stocks. These revenues are primarily affected by the
total number of specialist stocks for which the Company acts as specialist, as
well as changes in share volume and fluctuations in the price of the specialist
stocks.
Securities transactions in regular-way trades are recorded on the trade date.
The profit and loss arising from all securities transactions entered into for
the account and risk of the Company are recorded on a trade date basis.
Proprietary trading/ market making activities
Revenues from proprietary trading/market making activities consist primarily of
net trading income earned by the Company when trading as principal in
competition with other traders. Similar to specialist activities, net trading
income from proprietary trading/market making activities represents trading
gains net of trading losses. The profit and loss arising from all transactions
entered into for the account and risk of the Company are recorded on a trade
date basis. A proprietary trader/market maker trades for its own account at its
own risk, similar to a specialist, and thus performs a similar function of
providing liquidity to the market. However, in contrast to a specialist, this
function is fulfilled in competition with others, and the activities do not in
principle generate any commissions.
F-14
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Commission Income
Commission income is recognized on settlement date basis, which is not
significantly different from trade date. Commission income mainly arises from
the specialist activities performed by VDM Specialists on the New York Stock
Exchange.
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 service to other market participants that may require such stocks
in order to assure delivery of stock to their own counterparties. Interest
income earned was EUR 16.6 million, EUR 16.5 million and EUR 23.9 million for
the years ended December 31, 2004, 2003 and 2002, respectively. Interest expense
was EUR 13.0 million, EUR 13.1 million and EUR 19.7 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
Other Income
Other income is mainly comprised of foreign currency gains and losses (2004:
gain of EUR 1.2 million; 2003: gain of EUR 2.4 million including net gains and
losses arising on foreign currency option contracts; 2002: nil).
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109.
"Accounting for Income Taxes" ("SFAS 109"), which requires the recognition of
tax benefits or expenses on the temporary differences between the financial
reporting and tax bases of its assets and liabilities. The Company's deferred
tax assets and liabilities are presented separately on the face of the balance
sheet. Currently enacted tax rates are used to determine deferred tax assets and
liabilities.
Stock Based Compensation
The Company adopted SFAS No. 123, "Accounting for Stock-based Compensation"
("SFAS 123") in the year ended December 31, 1999. Under SFAS 123, a stock
compensation expense is calculated using the fair value method, and is
recognized in the Consolidated Statement of Income over the period that the
benefit vests. The related expense has been included in Employee compensation
and benefits in the Consolidated Statement of Income with a corresponding
contribution to Additional Paid-in Capital.
Earnings Per Share
Earnings per share ("EPS") is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Basic EPS is
calculated by dividing net earnings attributable to common shareholders by the
weighted average number of common shares outstanding (excluding treasury stock).
Diluted EPS includes the determinants of basic EPS and, in addition, reflects
the dilutive effect of the common shares deliverable pursuant to stock options
and warrants.
F-15
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Derivative Financial Instruments
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") as amended. SFAS 133
establishes accounting and reporting standards for derivative instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the Consolidated Statements of Financial Condition and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative instrument depends on its intended use and the resulting
designation. If a derivative is designated as a qualifying fair value hedge, all
changes in the fair value of the derivative and changes in the fair value of the
hedged item that relate to the hedged risk are recognized in earnings. The
Company has interest rate swaps that qualify as fair value hedges of interest
bearing borrowings. These interest rate swaps are accounted for under the
short-cut method. Gains and losses from the early termination of interest rate
swaps that qualify as fair value hedges are deferred over the remaining term of
the related debt. If the derivative is designated as a qualifying cash flow
hedge, the effective portion of the change in the fair value of the derivative
is recorded in Accumulated Other Comprehensive Income and recognized in the
Consolidated Statements of Income when the hedged item affects earnings. The
ineffective portion of cash flow hedges is immediately recognized in the
Consolidated Statements of Income.
Derivative financial instruments used for trading purposes are carried at market
value. If market prices are not readily available, fair value is calculated
using an appropriate valuation technique. Market value for exchange-traded
derivatives, principally futures and certain options, is based on quoted market
prices. The fair values of over-the-counter ('OTC') derivative instruments,
principally forwards and OTC options, are based on pricing models intended to
approximate the amounts that would be received from or paid to a third party in
settlement of the contracts. The gains or losses on derivatives used for trading
purposes are included in revenues from specialist and proprietary trading
activities.
During 2003, the Company purchased foreign currency option contracts to reduce
the Company's exposure to foreign currency fluctuations. These contracts are
carried at market value. Gains and losses on purchased foreign currency option
contracts are recognized in the Consolidated Statements of Income as Other
Income.
New Accounting Pronouncements
In December 2003, the FASB issued FASB Interpretation ("FIN") No. 46 (R),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51".
FIN 46 (R) requires a company to consolidate a variable interest entity ("VIE")
if the company has a variable interest that gives it a majority of the expected
losses or a majority of the expected residual returns or both of the entity. FIN
46 (R) is effective no later than the end of the first reporting period that
ends after March 15, 2004. The Company has determined that a company named LOC,
LLC ("LOC") is such a variable interest entity. LOC is a limited liability
company; its members are members or former members or employees of VDM
Specialists. LOC's purpose is to provide a mechanism through which its members
may acquire ownership of a New York Stock Exchange membership. Capital
contributed by members and funds borrowed by LOC are used to purchase these
memberships. During the period January 1, 2004 to December 31, 2004, LOC and its
members were the beneficial owners of six New York Stock Exchange memberships.
LOC has a loan from a commercial bank to fund the purchase of exchange
memberships; the amount outstanding at December 31, 2004 was $4.7 million.
Van der Moolen Holding N.V. has guaranteed the repayment of this loan. The
impact of the consolidation of LOC on the Consolidated Statement of Financial
Condition at December 31, 2004 and the Consolidated Statement of Income for the
year then ended is shown in the tables below. The consolidation of LOC did not
affect Shareholders' equity at December 31, 2004 or Net income for the year then
ended.
F-16
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
December 31, 2004
- ----------------------------------------------------------------------
(in EUR millions)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Cash and cash equivalents EUR 0.7
- ----------------------------------------------------------------------
Memberships in exchanges owned 5.9
- ----------------------------------------------------------------------
Total LOC assets EUR 6.6
- -----------------------------------------------------=================
- ----------------------------------------------------------------------
Notes payable EUR 3.4
- ----------------------------------------------------------------------
Accounts payable, accrued expenses and other
liabilities 0.1
- ----------------------------------------------------------------------
Minority interest 3.1
- ----------------------------------------------------------------------
Total LOC liabilities and minority interest EUR 6.6
- -----------------------------------------------------=================
- ----------------------------------------------------------------------
Year ended
December 31, 2004
- ----------------------------------------------------------------------
(in EUR millions)
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
Revenues EUR -
- ----------------------------------------------------------------------
Lease of exchange memberships (0.8)
- ----------------------------------------------------------------------
General and administrative expenses 0.1
- ----------------------------------------------------------------------
Impairment of memberships in exchanges, owned (other
assets) 3.4
- ----------------------------------------------------------------------
Total expenses EUR 2.7
- -----------------------------------------------------=================
Income from operations (2.7)
- ----------------------------------------------------------------------
Interest expense, net (0.2)
- ----------------------------------------------------------------------
Other income 0.1
- ----------------------------------------------------------------------
Minority interest 2.8
- ----------------------------------------------------------------------
Net income/(loss) from continuing operations EUR -
attributable to LOC
- -----------------------------------------------------=================
In December 2004, the FASB issued a revision to SFAS No. 123, SFAS No. 123(R),
"Share Based Payment." SFAS No. 123(R) will require compensation costs related
to share-based payment transactions to be recognized in the financial statements
over the period that an employee provides service in exchange for the award.
SFAS No. 123 (R) replaces SFAS No. 123 and supersedes APB No. 25. SFAS No.
123(R) will be effective for the Company no later than January 1, 2006.
Management is currently evaluating the effect of the adoption of SFAS No.
123(R), but does not expect adoption to have a material effect on the Company's
financial condition, results of operations or cash flows.
3. Significant Acquisitions and Dispositions
Acquisitions
During the year 2002, the Company expanded its specialist activities and
proprietary trading activities in the United States of America through an
acquisition. This acquisition was accounted for using the purchase method and
was a cash transaction. The basis of the individual assets and liabilities
acquired is the fair value at the date of acquisition. Any purchase price in
excess of the fair value of assets and liabilities acquired is recorded as
goodwill. The Company's share of operating results of the acquired company is
included in the Consolidated Statement of Income from the effective date of the
acquisition.
On March 1, 2002 the Company acquired a 75% interest in NYSE specialist Lyden,
Dolan, Nick & Co., LLC for a total aggregate consideration of $54.7 million
(EUR 63.2 million) of which $28.2 million (EUR 32.6 million) was recorded as
identifiable intangible assets and $25.0 million (EUR 28.9 million) as
goodwill. Also on March 1, 2002, Lyden, Dolan, Nick was merged into VDM
Specialists.
F-17
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The unaudited proforma information for the Company as if each acquisition had
occurred on January 1 of each year prior to the year of acquisition, is as
follows:
Year ended
December 31,
-------------
(in EUR millions, except per share data) 2002
-------------
Total revenues from continuing operations EUR 320.8
Net income from continuing operations EUR 49.3
Earnings per share from continuing operations EUR 1.21
-------------
On August 1, 2003, following the departure of two minority members, the Company
acquired an additional 14.543% interest in Cohen, Duffy, McGowan, LLC for a
consideration of $0.6 million (EUR 0.6 million). The balance sheet and
results of this entity were already consolidated as a consequence of the
acquisition made in 2001.
Dispositions
In October 2002, the Company disposed of its ownership interest in Midwest
Partners, LLC for a consideration of EUR 2.0 million, resulting in a gain of EUR
0.4 million. This gain was recorded as a gain on disposal of long-term
investments and associates in the Consolidated Statement of Income for the year
ended December 31, 2002.
In the first quarter of 2003, the Company sold its 1% interest in Tullet Plc.
for a net profit of EUR 0.9 million. This gain is recorded as a gain on disposal
of long-term investments and associates in the Consolidated Statement of Income
for the year ended December 31, 2003.
Discontinued operations
On December 17, 2003, the closure of Cohen, Duffy, McGowan, LLC was announced
and operations ceased by December 31, 2003. This closure resulted in impairments
on intangible and other assets of EUR 19.3 million. The liquidation of this
entity was substantially completed in 2004.
The Amsterdam-based option trading activities executed by Van der Moolen Opties
Amsterdam B.V. were discontinued in 2003.
In December 2003, the Company ended the activities of Kenny & Co, LLC;
liquidation was substantially completed in 2004.
On January 7, 2004, the Company reached agreement in principle to sell all
shares in Van der Moolen UK, Limited to a third party and the sale was completed
on April 7, 2004 following approval by the relevant regulatory authorities. The
subsidiary was sold for a consideration equal to its book value as of December
31, 2003, being EUR 8.3 million. Further, an intercompany loan of EUR 5.9
million was repaid on April 13, 2004. The assets and liabilities of Van der
Moolen UK, Limited are presented as Held-for-sale assets and Held-for-sale
liabilities, respectively, in the December 31, 2003 Statement of Financial
Condition.
In December 2004, the Company sold the Chicago Board Option Exchange activities
of VDM Options USA, LLC. The activities of this entity on the Philadelphia Stock
Exchange were discontinued in December 2003. The sale of assets and liabilities
of VDM Options USA, LLC was at their carrying amount.
The results of all discontinued operations have been separately presented on the
face of the Statements of Income.
F-18
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The major classes of assets and liabilities relating to these discontinued
operations included in the Statements of Financial Condition as of December 31,
2004 and December 31, 2003 are stated in the table below:
--------------------------------------------------------------
December 31,
--------------------------------------------------------------
2004 2003
--------------------------------------------------------------
(in EUR millions)
Other Other
Held-for-sale discontinued Held-for-sale discontinued
operations operations
Cash and cash equivalents EUR - EUR 1.3 EUR 12.6 EUR 0.2
Securities purchased under agreements to resell - - 182.4 -
Receivable from clearing organizations and professional
parties - - 24.3 39.0
Securities owned, at market value - 0.1 197.0 46.5
Memberships in exchanges owned - - 0.4
Property and equipment, net - - 0.5 -
Other assets - 0.4 0.9 0.3
--------------------------------------------------------------
Total assets EUR - EUR 1.8 EUR 417.7 EUR 86.4
--------------------------------------------------------------
Short -term borrowings EUR - EUR - EUR 1.1 EUR 1.8
Securities sold under agreements to repurchase - - 223.3 -
Payable to clearing organizations and professional parties - - 28.4 -
Securities sold, not yet purchased, at market value - - 150.3 79.4
Current taxes payable - - - -
Accounts payable, accrued expenses, and other liabilities - 1.1 0.4 0.7
Minority interest - - - -
--------------------------------------------------------------
Total liabilities EUR - EUR 1.1 EUR 403.5 EUR 81.9
-------------------------------------------------------------
F-19
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
A breakdown of the results of discontinued operations is given below:
Year Ended December 31,
------------------------------------
2004 2003 2002
------------------------------------
(in EUR millions)
Total revenues EUR - EUR 12.1EUR 6.0
Expenses:
Exchange, clearing and brokerage fee 0.7 5.9 9.8
Employee compensation and benefits 1.7 10.5 12.6
Lease of exchange memberships 0.2 0.9 2.6
Information and communication 0.1 1.9 1.7
General and administrative expenses 0.3 4.4 3.3
Depreciation and amortization - 0.9 1.2
Impairment of intangible fixed assets - 22.0 33.7
Impairment of other assets - 1.6 -
------------------------------------
Total expenses EUR 3.0 EUR 48.1EUR 64.9
------------------------------------
------------------------------------
Loss from operations EUR (3.0) EUR (36.0) EUR (58.9)
Income/ (loss) from associates - - 0.3
Gain on disposal of long-term investments and
associates - - 0.4
Interest expense, net (0.8) (1.6) (1.0)
Interest income, capital subject to mandatory
redemption, net - 0.5 -
Other expense (18.9) (0.6) 0.1
------------------------------------
Loss from discontinued operations before income taxes EUR (22.7) EUR (37.7) EUR (59.1)
Provision for income taxes 4.6 13.1 21.4
Minority interest - - 4.2
------------------------------------
Net loss from discontinued operations EUR (18.1) EUR (24.6) EUR (33.5)
------------------------------------
Other expense of EUR 18.9 million for the year ended December 31, 2004 is
comprised of cumulative currency translation differences recognized in the
Income Statement in relation to foreign operations that were sold, liquidated or
substantially liquidated during the year.
Losses incurred from discontinued operations in 2003 include the impairment of
specialist assignments of EUR 7.4 million (2002: nil); impairment of goodwill of
EUR 14.6 million (2002: EUR 33.7 million); and the impairment of exchange
memberships of EUR 1.6 million (2002: nil).
F-20
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
4. Receivable From and Payable to Clearing Organizations and Professional
Parties
Amounts receivable from and payable to clearing organizations and professional
parties at December 31, 2004 and 2003, consist of the following:
------------------------------------------------
December 31,
2004 2003
------------------------------------------------
(in EUR millions)
Receivable Payable Receivable Payable
---------- ------- ---------- -------
Deposits EUR 1.7 EUR - EUR 1.4 EUR -
Securities failed-to-deliver/receive 4.9 9.1 13.5 3.3
Commissions receivable 2.4 - 2.2 -
Payable to clearing organizations and
professional parties - 9.5 - 35.1
Receivable from clearing organizations
and professional parties 17.8 - 76.4 -
------------------------------------------------
EUR 26.8 EUR 18.6 EUR 93.5 EUR 38.4
Included in held-for-sale assets and
liabilities - - (24.3) (28.4)
------------------------------------------------
EUR 26.8 EUR 18.6 EUR 69.2 EUR 10.0
================================================
Amounts receivable and payable for securities transactions that have not reached
their contractual settlement date are recorded net in the Statement of Financial
Condition.
5. Concentrations of Credit Risk / Financial Instruments
As of December 31, 2004, substantially all of the Company's financial
instruments owned, financial instruments sold, not yet purchased, and receivable
from and payable to clearing organizations and professional parties are amounts
held by or due to its clearing organizations or other professional parties. The
Company monitors the credit worthiness of the clearing organizations and other
professional parties to mitigate the Company's exposure to credit risk. As of
December 31, 2004, cash equivalents in the amount of EUR 261.8 million were held
at two financial institutions (December 31, 2003: EUR 372.2 million).
In the normal course of business, the Company's broker-dealer activities
involve the execution, settlement, and financing of various broker-dealer
transactions. These activities may expose the Company to settlement risk in the
event the other broker or professional party is unable to fulfill its contracted
obligations and the Company has to purchase or sell the financial instruments
underlying the contract at a loss.
F-21
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
6. Securities Owned and Securities Sold, Not Yet Purchased
Marketable securities owned and sold, not yet purchased, consist of trading
securities at market values, as follows:
----------------------------------------
December 31,
----------------------------------------
2004 2003
----------------------------------------
(in EUR millions)
Sold, Not Sold, Not
Yet Yet
Owned Purchased Owned Purchased
Bonds EUR 23.0 EUR 3.8 EUR 231.6 EUR 161.2
Common and preferred shares 103.5 113.8 163.0 203.5
Options and warrants 0.4 - 29.6 17.2
----------------------------------------
EUR 126.9 EUR 117.6 EUR 424.2 EUR 381.9
Included in held-for-sale
assets and liabilities - - (197.0) (150.3)
----------------------------------------
EUR 126.9 EUR 117.6 EUR 227.2 EUR 231.6
========================================
The agreements with the Company's clearing organizations permit the
Company's securities and financial instruments to be pledged to clearing
organizations, depositories and other financial institutions for the purpose of
financing the Company's trading activities.
The Company has sold securities that it does not currently own and will
therefore be obligated to purchase such securities at a future date. The Company
has recorded these obligations in the Consolidated Statement of Financial
Condition at market value and will incur a loss if the market value of the
securities increases subsequent to December 31, 2004.
Positions owned and positions sold, not yet purchased in American Depositary
Receipts (ADRs) and the corresponding shares held for arbitrage purposes are
recognized on a gross basis as assets (2004: EUR 83.0 million; 2003: EUR 122.3
million) and liabilities (2004: EUR 83.0 million; 2003: EUR 122.3 million,
respectively). ADRs purchased or sold as part of arbitrage activities are valued
at the quoted market prices of the home market of the underlying shares. ADRs
are convertible into the underlying shares subject to a conversion charge.
Conversion costs are accrued in the Consolidated Statement of Financial
Condition.
7. Loans Receivable
A provision of EUR 2.4 million, recognized in prior years, for the
non-recoverability of loans receivable was released as a credit to General &
Administrative expenses in 2004. All loans were repaid in 2004.
8. Goodwill and Other Intangible Assets
For the years ended December 31, 2004 and 2003, the carrying value of
goodwill amounted to EUR 47.6 million and EUR 59.4 million, respectively. As a
result of the implementation of SFAS No. 142 "Goodwill and Other Intangible
Assets", goodwill is no longer amortized with effect from financial years
beginning after December 15, 2001. As a result of the impairment test performed
on goodwill, an impairment charge of EUR 8.2 million was recognized in the
Consolidated Statement of Income for 2004 (December 31, 2003: EUR 63.8 million;
December 31, 2002: EUR 33.7 million).
F-22
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The impairment charge on goodwill can be specified as follows:
Year Ended December 31,
- ----------------------------------------------------------------------
2004 2003 2002
- ----------------------------------------------------------------------
(in EUR millions)
- ----------------------------------------------------------------------
VDM Specialists EUR - EUR 27.7 EUR -
- ----------------------------------------------------------------------
European trading 8.2 21.5 -
- ----------------------------------------------------------------------
Total continuing operations EUR 8.2 EUR 49.2 EUR -
- ----------------------------------------------------------------------
U.S. Option business (included
in Net loss from discontinued
operations) - 14.6 33.7
- ----------------------------------------------------------------------
Total EUR 8.2 63.8 33.7
- -----------------------------------===================================
The Company performed its annual impairment tests of goodwill during the
fourth quarter of 2004 for all its reporting units. In determining the
discounted value of future cash flows of VDM Specialists, valuations by external
independent consultants were used, and a discount rate of 12% was applied. Based
on the valuations performed, it was determined that there was no impairment
charge necessary for goodwill associated with VDM Specialists. External
independent consultants have also been used for the purpose of impairment
testing of the goodwill associated with the European entities for which a
discount rate of 15% was applied. See "Significant Accounting Policies -
Goodwill and Other Intangible assets" for further information related to the
impairment of goodwill.
The movements in goodwill for the years ended December 31, 2004 and 2003 are
as follows:
-----------------------
2004 2003
-----------------------
(in EUR millions)
Balance at January 1 EUR 59.4 EUR 141.9
Impairment (8.2) (63.8)
Translation differences (3.6) (18.7)
-----------------------
Balance at December 31 EUR 47.6 EUR 59.4
=======================
The carrying amount of goodwill as of December 31, 2004 includes an amount
of EUR 45.8 million that is deductible for tax purposes; this amount relates
only to VDM Specialists. The remainder of the goodwill balance of EUR 1.8
million relates to European trading activities and is not tax deductible.
As a result of uncertain market conditions and the associated lower
profitability, the Company was required to perform an impairment test during the
fourth quarter of 2004 for the specialist stock lists acquired in relation to
VDM Specialists. The valuations were performed by external independent
consultants, in conformity with the rules dictated by Statement of Financial
Accounting Standard No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". An impairment loss, calculated as the difference between the
estimated fair value and the carrying amount of the specialist stock lists, is
recognized if the expected undiscounted cash flows relating to the stock lists
are less than the corresponding carrying value. Based on the valuations
performed, it was determined that there was no impairment charge necessary for
the specialist stock lists of VDM Specialists.
At year-end 2003, due to the closure of the operations of Cohen, Duffy,
McGowan, LLC, an impairment charge of EUR 7.4 million on its specialist stock
list was recognized in the Consolidated Statement of Income as part of Net loss
from discontinued operations.
F-23
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The carrying value of Other intangibles, net can be specified as follows:
--------------------
December 31,
--------------------
2004 2003
--------------------
(in EUR millions)
Specialist stock lists EUR 214.0 EUR 231.3
Accumulated amortization (26.8) (23.2)
--------------------
EUR 187.2 EUR 208.1
====================
The above amounts are determined using the underlying dollar amounts
translated into euros using year-end closing rates. The cost price of the
specialist stock lists as at December 31, 2004 translated at historical exchange
rates was EUR 293.0 million (December 31, 2003: EUR 293.0 million). At year-end
2004 and 2003, all specialist stock lists capitalized on the balance sheet
relate to the Company's specialist franchise on the New York Stock Exchange, VDM
Specialists.
For the year ended December 31, 2004, amortization of the specialist stock
lists was EUR 5.9 million (2003: EUR 6.7 million of which EUR 0.2 million
related to discontinued operations; 2002: EUR 7.5 million of which EUR 0.3
million related to discontinued operations). The estimated amortization expense
for specialist stock lists for each of the next five years is EUR 5.4 million
per year, determined at the U.S. dollar closing rate of December 31, 2004. The
weighted average remaining useful life of the specialist stock lists is 35 years
as of December 31, 2004.
9. Exchange memberships
For the year ended December 31, 2004, the Company recognized an
other-than-temporary impairment loss of EUR 5.6 million on the value of its New
York Stock Exchange memberships.
In 2003, the Company recognized a loss of EUR 0.9 million on the value of its
exchange memberships on the American Stock Exchange and EUR 0.7 million in
relation to its exchange memberships on the Philadelphia Stock Exchange in the
Consolidated Statement of Income as part of Net loss from discontinued
operations. The Company recognized these 2003 impairment charges following the
restructuring and closure of its option activities on these exchanges in
December 2003.
10. Other Assets
Other assets at December 31, 2004 and 2003 is comprised of the following:
--------------------
December 31,
--------------------
2004 2003
--------------------
(in EUR millions)
Income taxes (see note 12) EUR 11.4 EUR 23.6
Prepaid pension costs (see note 15) 7.4 7.1
Fair value of interest rate swap (see note 14) 0.6 -
Other 5.5 10.1
--------------------
EUR 24.9 EUR 40.8
Included in held-for-sale assets - (0.9)
--------------------
EUR 24.9 EUR 39.9
====================
Other assets as at December 31, 2004 include receivables from minority
partners and employees in VDM Specialists of EUR 0.1 million (2003: EUR 0.5
million). These receivables are short-term in nature and carry fixed interest
rates varying between 5.00% and 5.75%.
F-24
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
11. Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities at December 31,
2004 and 2003 is comprised of the following:
----------------------
December 31,
----------------------
2004 2003
----------------------
(in EUR millions)
Other taxes and social security contributions EUR 0.3 EUR 0.2
Dividends on financing preferred shares 2.9 -
Fair value of interest rate swap (see note 14) - 0.4
Accrued bonuses 1.0 1.4
NYSE/SEC settlement 4.4 -
Capital payable to former partners of VDM
Specialists 6.6 -
Other accrued liabilities 16.8 24.4
----------------------
EUR 32.0 EUR 26.4
Included in held-for-sale liabilities - (0.4)
----------------------
EUR 32.0 EUR 26.0
======================
Regarding the liability for capital payable to former partners of VDM
Specialists, interest is payable based on the interest rate applicable to
investments in cash and cash-equivalents.
Included in Other accrued liabilities is a deferred gain of EUR 7.4 million
(2003: EUR 11.4 million) relating to the termination of the swaps that were
designated as fair value hedges of some of the Company's subordinated
borrowings. This gain is being credited to interest expense over the remaining
lives of the related subordinated borrowings.
In 2004, the Company paid EUR 1.3 million (2003: EUR 2.2 million) in
relation to severance payments that partly relate to discontinued operations.
12. Income Taxes
Provision for income taxes consists of the following (bracketed amounts are
tax benefits):
---------------------------------------
Year Ended December 31,
---------------------------------------
2004 2003 2002
---------------------------------------
(in EUR millions)
Current income taxes
Arising in the Netherlands (domestic) EUR 1.0 EUR 0.4 EUR 4.8
Arising outside the Netherlands (foreign) (5.3) (12.5) 23.2
Deferred income taxes
Arising in the Netherlands (domestic) (8.1) - (0.3)
Arising outside the Netherlands (foreign) 10.2 (13.2) (3.0)
Transfer from Accumulated Other Comprehensive Income (3.0) - -
---------------------------------------
Total provision for income taxes EUR (5.2) EUR (25.3) EUR 24.7
Relating to discontinued operations (4.6) (13.1) (21.4)
---------------------------------------
Provision for income taxes from continuing operations EUR (0.6) EUR (12.2) EUR 46.1
=======================================
F-25
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Taxes are calculated for each individual entity in the Company and are based
on the local tax rates. Pretax income from continuing operations is determined
by adjusting Income/ (loss) from continuing operations before income taxes with
the amount recognized as minority interest. The provision for income taxes
includes the taxation expense arising on the Company's share (excluding the
share of minority members) of the taxable profits of the U.S. Limited Liability
Corporations ("LLCs") that are considered transparent for U.S. tax purposes. The
minority members in these LLCs are liable for taxation arising on their share of
the LLCs' taxable profits. Income/ (loss) from continuing operations before
income taxes includes the fully consolidated results of these LLCs, and
consequently the minority interest relating to them reported in the Consolidated
Statement of Income represents the share of income before income taxes
attributable to minority members. Pretax income from continuing operations can
be allocated as follows:
--------------------------
Year Ended December 31,
--------------------------
2004 2003 2002
--------------------------
(in EUR millions)
Income arising in the Netherlands before tax EUR 0.2 EUR 17.0 EUR 29.7
Income/ (loss) arising outside the
Netherlands before tax and
after minority interest 8.3 (63.2) 80.0
---------------------------
Total income/(loss) before taxes and after
minority interest from continuing
operations EUR 8.5 EUR (46.2) EUR 109.7
===========================
Deferred tax assets comprise:
-------------------
December 31,
-------------------
2004 2003
-------------------
(in EUR millions)
Deferred tax assets
Tax losses carried forward EUR 12.8 EUR 7.2
Unrealized currency exchange losses 5.2 -
Intangible assets 4.5 12.2
NYSE/SEC provision - 8.9
Other 0.8 -
Offset of deferred tax liability items (17.9) (19.4)
-------------------
EUR 5.4 EUR 8.9
Valuation allowance - (2.9)
-------------------
Total deferred tax assets EUR 5.4 EUR 6.0
===================
A deferred tax asset arising from the carry forward of taxable losses in the
amount of EUR 2.9 million was subject to a 100% valuation allowance at December
31, 2003 and related to held-for-sale assets. The tax losses carried forward of
EUR 12.8 million mainly relate to carry forward losses for local and federal
taxation in the United States. These tax jurisdictions have a carry forward term
with a maximum of 20 years. The tax losses carried forward by the Company have a
remaining carry forward of approximately 19 years.
F-26
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Deferred tax liabilities comprise:
----------------
December 31,
----------------
2004 2003
----------------
(in EUR millions)
Deferred tax liabilities
Employee benefit plan assets EUR 2.4 EUR 2.8
Intangible fixed assets 21.4 19.4
Offset of deferred tax asset items (17.9) (19.4)
----------------
Total deferred tax liabilities EUR 5.9 EUR 2.8
================
Deferred tax liabilities are offset against deferred tax assets if the
requirements of SFAS 109 are met. An amount of approximately EUR 5.9 million of
the deferred tax assets as included in the net balance as of December 31, 2004
will reverse within one year. Deferred tax liabilities used for offsetting
purposes at December 31, 2004 and 2003 mainly relate to the difference between
amortization periods used for tax purposes and those used for accounting for the
Company's intangible assets in the United States. An amount of EUR 23.8 million
of total deferred tax liabilities as of December 31, 2004 will reverse after 5
years.
Income tax
The statutory tax rate in the Netherlands is 34.5%. A reconciliation between
the statutory tax rate in the Netherlands and the consolidated effective tax
rate for the years ended December 31, 2004, 2003 and 2002 from continuing
operations is presented in the table below:
--------------------------------------
2004 2003 2002
--------------------------------------
Expense / (benefit)
- ------------------------------------------------------------------------------------------
Statutory tax rate in the Netherlands 34.5% (34.5%) 34.5%
- ------------------------------------------------------------------------------------------
Result of the group's finance entity - (12.7%) (5.5%)
- ------------------------------------------------------------------------------------------
Non taxable income (6.6%) (1.7%) (2.2%)
- ------------------------------------------------------------------------------------------
Non-tax deductible costs 40.2% 18.7% 2.7%
- ------------------------------------------------------------------------------------------
Effect of foreign taxation 46.5% 5.2% 12.1%
- ------------------------------------------------------------------------------------------
Adjustment of prior year accruals (100.0%) - -
- ------------------------------------------------------------------------------------------
Tax benefits previously reported in accumulated
other
comprehensive income (14.1%) - -
- ------------------------------------------------------------------------------------------
Other (7.6%) (1.4%) 0.4%
- ------------------------------------------------------------------------------------------
(7.1%) (26.4%) 42.0%
- ----------------------------------------------------======================================
The percentages shown in the above table are strongly influenced by the
level of pretax results.
In 2004, the impact of the Group's Dutch finance entity on the consolidated
effective tax rate was nil, because as a result of the partial unwinding of its
financing activities the entity's income was taxed at the full rate of Dutch
corporate taxation. In previous years, the income of this finance entity
attracted a reduced rate of corporate taxation. The activities of this finance
entity have been reduced in anticipation of the end of a special fiscal regime
applicable to the finance entity on December 31, 2007. This partial unwinding of
financing activities also resulted in the recognition of a tax benefit of EUR
2.2 million, which is included in the total tax benefit of EUR 8.5 million
described below. The positive impact of the finance entity in 2003 and 2002
reflects the Dutch fiscal regime then applicable to this Dutch entity.
The impact of non-tax deductible costs on the 2004 consolidated effective
tax rate mainly relates to the non-tax deductible goodwill impairment charge
relating to European trading activities, and to the non-tax deductible stock
option expense recognized in the Consolidated Statement of Income. The impact of
non-tax deductible costs in 2003 mainly relates to the non-tax deductible
component of the NYSE/SEC settlement recognized in 2003 in the amount of EUR
18.1 million, and to the non-tax deductible stock option expense.
F-27
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The majority of foreign pretax income is generated in the United States,
specifically in the New York district. The applicable tax rate in this tax
jurisdiction taking into account local taxation is approximately 47%. The impact
of foreign taxation in 2004 reflects the aggregate impact of relatively higher
tax-deductible losses in low taxed jurisdictions and taxable income in high tax
jurisdictions.
The provision for income taxes in 2004 includes a tax benefit of EUR 8.5
million. This tax benefit includes a non-recurring benefit of EUR 2.2 million
arising as a consequence of the partial unwinding of the financing activities of
the group's finance entity as described above. The non-recurring remainder of
EUR 6.3 million principally arises as a result of the adjustment of amounts
accrued in previous years as a result of final tax assessments issued by the tax
authorities of the jurisdictions in which the group operates, the reassessment
of applicable tax rates and management's assessment of residual tax liabilities.
As described in note 2 "Significant Accounting Policies - Foreign Currency
Translation", the functional currency of Van der Moolen Holding N.V. and its
finance entity was changed to the U.S. dollar with effect from January 1, 2004.
For tax purposes, however, these entities have retained the euro as their
measurement currency. The provision for income taxes in 2004 includes a benefit
of EUR 1.2 million in relation to the change in functional currency. Had these
entities not changed functional currency, this benefit would have been reported
in Accumulated Other Comprehensive Income, a component of Shareholders' equity.
13. Notes payable
Notes payable at December 31, 2004 and 2003, including their final maturity
date, are listed as follows:
---------------------
December 31,
---------------------
2004 2003
---------------------
(in EUR millions)
---------------------
- ----------------------------------------------------------------------
Notes payable, 5.10%, due March 25, 2004 - 4.5
- ----------------------------------------------------------------------
Notes payable, 6.25%, due Jan. 28, 2010 2.0 2.4
- ----------------------------------------------------------------------
Notes payable LOC, LLC 3.4 -
- ----------------------------------------------------------------------
5.4 6.9
- -------------------------------------------------=====================
As of December 31, 2004 and 2003, an amount of EUR 1.7 million and EUR 2.0
million, respectively, is repayable after one year, of which EUR 0.5 million and
EUR 0.8 million is due after more than five years.
Notes payable in relation to LOC, LLC were repaid in January 2005 as a
result of a refinancing. A new loan was advanced by a commercial bank, and is
repayable in four installments, with a final maturity date of January 13, 2009.
This new loan bears interest at a rate per annum equal to the Federal Funds
Effective Rate increased by 250 basis points.
F-28
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
14. Subordinated Notes
The subordinated notes at December 31, 2004 and 2003, including their final
maturity date, are listed as follows:
-------------------
December 31,
-------------------
2004 2003
-------------------
(in EUR millions)
Subordinated notes, 5.66%, due Dec. 14, 2005 3.6 6.8
Subordinated notes, 8.00%, due Dec. 30, 2005 3.7 7.9
Subordinated notes, 7.54%, due August 3, 2008 47.6 51.5
Subordinated notes, 7.80%, due August 3, 2011 47.6 51.5
Subordinated notes, 7.11%, due March 1, 2008 29.3 31.7
Subordinated notes, 7.00% payable to minority
members of VDM Specialists on October 31, 2005 0.8 -
-------------------
Subordinated notes, principal amounts outstanding 132.6 149.4
Fair value adjustment arising on qualifying fair
value hedge 0.6 (0.4)
-------------------
133.2 149.0
===================
Subordinated Notes as recognized in the Consolidated Statement of Financial
Condition decreased by EUR 15.8 million from EUR 149.0 million at December 31,
2003 to EUR 133.2 million at December 31, 2004. This decrease reflects
repayments of EUR 7.1 million and a decrease due to currency translation effects
of EUR 10.6 million, partly offset by proceeds of EUR 0.9 million and a change
in the fair value of qualifying fair value hedges of EUR 1.0 million.
Subordinated borrowings, excluding the 5.66% loan due December 14, 2005, are
subordinated to claims of general creditors of the Company's subsidiary VDM
Specialists. These subordinated borrowings are available in computing net
capital under the SEC's uniform net capital rule applicable to VDM Specialists.
To the extent that such notes are required for VDM Specialists' continued
compliance with minimum net capital requirements, they may not be repaid.
The following table presents the contractual repayment schedules for the
subordinated notes:
5.66% 8.00% 7.11% 7.54% 7.80% 7.00%
(in EUR Subordinated Subordinated Subordinated Subordinated Subordinated Subordinated
millions) Note Note Note Note Note Note Total
2005 3.6 3.7 7.3 0.8 15.4
2006 7.3 15.9 23.2
2007 7.3 15.9 9.5 32.7
2008 7.4 15.8 9.5 32.7
2009 9.5 9.5
2010 9.5 9.5
2011 9.6 9.6
--------------------------------------------------------------------------------------
Total 3.6 3.7 29.3 47.6 47.6 0.8 132.6
The subordinated notes 8.00% due December 30, 2005, 7.11% due March 1, 2008,
7.54% due August 3, 2008 and the 7.80% due August 3, 2011 contain certain
financial, reporting and other restrictive covenants. Financial covenants relate
to, amongst others, compliance with regulatory minimum capital and net liquid
asset requirements, Tangible Net Worth and Debt to Total Capitalization. If VDM
Specialists ceases to be in compliance with a financial covenant, and the
non-compliance is not waived by the holders of the subordinated notes, the
entire debt balance becomes repayable within a period of 6 months.
F-29
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
In connection with its subordinated borrowings, the Company entered into
interest rate swap agreements to convert all its fixed rate subordinated notes
excluding the 5.66% note due December 14, 2005, the 8.00% note due December 30,
2005 and the 7.00% notes due October 31, 2005 into floating rate obligations
based on U.S. London Interbank Offer Rate.
During the year ended December 31, 2004, the Company paid EUR 0.2 million in
relation to the termination of its interest rate swap agreements (2003: received
EUR 13.6 million) that were designated as fair value hedges of its subordinated
notes. The Company subsequently entered into new interest rate swap agreements.
The gains and losses on the termination of these interest rate swaps are
amortized over the remaining life of the related subordinated notes. At December
31, 2004, the fair value of the interest rate swaps is EUR 0.6 million (December
31, 2003: EUR 0.4 million negative), which is also reflected as an adjustment to
the carrying value of subordinated notes in accordance with the requirement of
SFAS 133. The weighted average effective interest rate for the year ended
December 31, 2004 on these subordinated borrowings after hedging activities is
3.8% (2003: 3.9%). This percentage includes the net payments/benefits of the
interest rate swaps and the amortization of the deferred gain on the terminated
swaps.
15. Pension and Other Postretirement Benefit Plans
The Company has employee pension plans in Germany, the United States and the
Netherlands. The German subsidiary has a defined contribution plan in place for
management team members as well as certain employees. The annual contribution
under this plan during the years ended December 31, 2004, 2003 and 2002 was EUR
28,893, EUR 36,198, and EUR 40,143, respectively. In the United States, the
Company sponsors a 401(k) plan covering all eligible full-time employees. Under
certain circumstances prescribed by law, the Company may be required to make
contributions to this plan. There were no contributions made to the plan during
the year ended December 31, 2004 (for the years ended December 31, 2003 and 2002
the contribution was EUR 33,678 and EUR 595,251, respectively). In the
Netherlands, both contributory and non-contributory defined-benefit pension
plans exist, covering substantially all employees, including members of the
executive board. Plan benefits are based on years of service and compensation
levels at the time of retirement. The Dutch plan is a defined benefit final
average pay plan. These pension plans and their respective costs are determined
using the projected unit credit method in accordance with U.S. GAAP as defined
by SFAS No. 87, "Employers'Accounting for Pensions".
The Company uses a December 31 measurement date for its plans.
The change in the projected benefit obligations is as follows:
--------------------------
2004 2003
--------------------------
(in EUR millions)
Projected benefit obligation at January 1 EUR (18.3) EUR (14.0)
Service cost (0.3) (0.4)
Interest cost (0.9) (0.8)
Prior service cost - -
Actuarial gains/(losses) (0.2) (3.8)
Benefits paid 0.7 0.7
---------- ----------
Projected benefit obligation at December 31 EUR (19.0) EUR (18.3)
========== ==========
The change in plan assets is as follows:
------------------------
2004 2003
------------------------
(in EUR millions)
Fair value of plan assets at January 1 EUR 21.6 EUR 19.0
Actual return on plan assets 0.3 2.8
Employer contributions 0.6 0.5
Benefits paid (0.7) (0.7)
--------- --------
Fair value of plan assets at December 31 EUR 21.8 EUR 21.6
========= ========
F-30
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The funded status of all defined benefit pension plans based on the
projected benefit obligation is as follows:
-------------------------
December 31,
-------------------------
2004 2003
-------------------------
(in EUR millions)
Funded status EUR 2.8 EUR 3.3
Unrecognized net transition cost - -
Unrecognized net actuarial loss (gain) 4.6 3.8
-------- --------
Prepaid benefit cost EUR 7.4 EUR 7.1
======== ========
Components of net periodic pension cost for all defined benefit plans
recorded under employee compensation and benefits in the consolidated statements
of income are as follows:
--------------------------------
2004 2003 2002
--------------------------------
(in EUR millions)
Service cost EUR (0.3) EUR (0.4) EUR (0.4)
Interest cost (0.9) (0.8) (0.9)
Expected return on plan assets 1.0 1.1 1.5
Amortization of transition cost - 0.6 0.6
Prior service cost - - (0.5)
Amortization of gains/(losses) (0.1) - -
Other costs (0.2) (0.1) (0.2)
------ ------- --------
Net periodic pension (cost)/benefit EUR (0.5) EUR 0.4 EUR 0.1
====== ======= ========
Weighted average actuarial assumptions for the Company's defined benefit
pension plans are as follows:
-------------------------------
December 31,
-------------------------------
2004 2003 2002
-------------------------------
Discount rate 4.75% 5.00% 5.50%
Rate of compensation increase 1.50% 2.00% 3.00%
Expected rate of return on plan assets 4.00% 5.00% 5.50%
Rate of benefit increase 3.00% 3.50% 3.50%
The Company's Dutch collective schemes are insured with insurance companies
in the Netherlands. The insurance companies guarantee a rate of return of
approximately 4% on the actuarial reserve. The actual rate of return on
investments normally exceeds the guaranteed rate of return described above; the
excess is called interest profit and the Company is entitled to a share of the
interest profit. The actual rate of return on investments is based on the yield
on certain state debentures in the Netherlands. Because of the nature of these
insurance contracts, there are no separate asset and investment policies.
The accumulated benefit obligation amounts to EUR 18.7 million as of
December 31, 2004 (December 31, 2003: EUR 17.6 million).
The Company expects to contribute EUR 0.7 million to its pension plans in
the Netherlands in the year ending December 31, 2005.
F-31
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
---------------------------
Pension benefits
---------------------------
(in EUR millions)
---------------------------
2005 EUR 0.7
2006 0.9
2007 0.9
2008 0.9
2009 0.8
Years 2010-2014 4.3
16. Shareholders' Equity
The authorized share capital at December 31, 2003 was 54,000,000 shares with
a par value of EUR 0.08 and 1,200,000 cumulative financing preferred A shares,
1,200,000 cumulative financing preferred B shares, 1,200,000 cumulative
financing preferred C shares, 1,200,000 cumulative financing preferred D shares
and 1,200,000 cumulative financing preferred E shares with a par value of EUR
0.60 per share, of which 38,419,282 common shares, 251,000 financing preferred A
shares and 391,304 financing preferred B shares have been issued. Additionally,
authorized share capital includes 13,200,000 preferred shares with a par value
of EUR 0.60, none of which have been issued.
As of December 31, 2004, the Company had repurchased 102,182 common shares
for an amount of EUR 2.4 million to cover its obligations under the stock option
plan (December 31, 2003: 882,182 shares for an amount of EUR 8.1 million). These
shares carry no voting or dividend rights.
The cumulative financing preferred A shares have a cumulative dividend that
is calculated on the basis of a percentage equal to the average effective yield
on three government bonds, the remaining term of which to the extent possible
equals 10 years, increased by 100 basis points to be rounded up to whole cents.
The profit basis of the cumulative financing preferred A shares is equal to the
issuance rate of the cumulative financing preferred A shares issued on January
16, 1997, being EUR 40.21 per share.
The cumulative financing preferred B shares have a cumulative dividend that
is calculated on the basis of a percentage equal to the calculated average, over
the last five stock exchange days prior to the day of payment, of the effective
yield on government bonds with a (remaining) term of 6 to 7 years and 7 to 8
years (as calculated by the Centraal Bureau voor de Statistiek and published in
the Officiele Prijscourant of Euronext Amsterdam) increased by 175 basis points,
rounded up to whole cents, and being distributed in cash. The profit basis is
equal to the issuance rate of EUR 104.37 per share.
On May 1, 2001, Van der Moolen Holding N.V. amended its articles of
association to provide for the future issuance of preferred shares to a
foundation called Stichting Van der Moolen Holding ("Stichting"). The
Stichting's object is to safeguard the interests of Van der Moolen Holding N.V.
and its subsidiaries in the event of, for instance, a hostile takeover, by
acquiring and managing the preferred shares of Van der Moolen Holding N.V. and
by exercising the rights attaching to those shares, in particular the voting
rights.
Van der Moolen Holding N.V. entered into an agreement with the Stichting
pursuant to which the Stichting 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 common and cumulative
financing preferred shares of Van der Moolen Holding N.V. outstanding.
See Note 26 "Subsequent events" for details in respect of dividends declared
over the year 2004.
F-32
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
17. Related Party Transactions
On December 31, 2004 Fortis Utrecht NV held a 6.4% ownership interest in the
Company (December 31, 2003: 7.4%). Affiliates of this entity also act as a
clearing organization for the Company. These services are provided on an arm's
length basis.
During 2004 and 2003, Mr. James Cleaver, Jr, a member of the Executive
Board, held a 1.0% partnership interest in VDM Specialists. This interest was
relinquished in December 2004, when Mr. Cleaver retired. The profit share
relating to this partnership interest in VDM Specialists (including interest on
capital balances) for the years ended December 31, 2004 and 2003 amounted to EUR
0.3 million and EUR 0.1 million, respectively. Further, the Group leases a seat
from Mr. Cleaver, for which he received payments of EUR 0.2 million in 2004
(2003: EUR 0.3 million).
The Company is required to pay minority members of VDM Specialists a fee
relating to exchange memberships contributed for use. This fee is based on the
market value of the exchange memberships and amounted to EUR 1.0 million during
2004, EUR 2.8 million during 2003 and EUR 4.9 million during 2002. These amounts
are included in Interest expense.
The Company further leases additional exchange memberships from certain
employees and minority members of VDM Specialists through operational lease
agreements. The leases are based on NYSE published lease rates at the date of
the renewal and amounted to EUR 2.3 million, EUR 2.5 million in 2003 and EUR 2.0
million in 2002. These amounts are included in Lease of exchange memberships.
See Note 14 "Subordinated Notes" for subordinated borrowings granted by
minority members of VDM Specialists.
See Note 23 "Commitments and Contingent Liabilities" for guarantees issued
in relation to related parties.
18. Stock Option Plans
On December 1, 1996, the stock option plan became effective after adoption
by the Supervisory Board of the Company. At the beginning of 2003, the Company
closed the plan and announced that no further options would be granted. The
stock option plan provided for the grant of incentive stock options to certain
directors and employees. Each option is exercisable into one common share.
The Company has stock option plans in the Netherlands, the United Kingdom,
the United States and Germany. In 2001 and 2002, stock options were granted
under each plan with an exercise price equal to or higher than the market value
of the underlying stock. These options granted were immediately exercisable,
with the exception of the options granted to employees of Van der Moolen
Equities Ltd, which may not be exercised for a period of three years from the
date of grant. Also, the Company has granted certain options in the past, which
could not be exercised for a period of up to four years from the date of grant.
The exercise period of the options at the date of the grant ranges from four to
ten years.
If employees cease to be employed by the Company, their unexercised options
are generally cancelled. Furthermore, any options exercised are subject to a
forfeiture period of three years during which the relevant employee must remain
employed with the Company or forfeit 80% of any benefits derived from the
exercise of the options, less taxation if any. Any exceptions to this policy
must be approved by the Executive Board.
New shares may be issued or shares may be repurchased to meet the
obligations arising from the exercise of employee options. In 2002, granting of
new employee options was limited to a maximum of 1% of the issued share capital
on the date of the grant (prior years: 2%).
F-33
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The following table summarizes the option activity for the year ended
December 31, 2004:
Weighted
Average Weighted
Weighted Remaining Average
Average Contractual Range of Fair Value
Exercise Life in Exercise at
Options Price Years Prices Grant Date
---------------------------------------------------------------
Outstanding at January 1, 2004 236,125 EUR 16.61 1.35 EUR 16.17-20.95 EUR 4.76
Outstanding at January 1, 2004 310,375 EUR 21.07 3.96 EUR 21.00-24.79 EUR 7.11
Outstanding at January 1, 2004 1,302,580 EUR 30.98 2.24 EUR 27.30-35.22 EUR 7.28
Expired (213,625) EUR 16.65 - EUR 16.17-20.80 EUR 4.77
Expired (177,630) EUR 33.81 - EUR 33.81 EUR 6.89
Forfeited (60,170) EUR 21.13 2.96 EUR 21.00-24.79 EUR 7.10
Forfeited (288,750) EUR 29.82 1.50 EUR 27.30-35.22 EUR 7.26
---------------------------------------------------------------
Outstanding at December 31, 2004 22,500 EUR 16.17 4.92 EUR 16.17 EUR 4.63
Outstanding at December 31, 2004 250,205 EUR 21.06 2.96 EUR 21.00-24.79 EUR 7.12
Outstanding at December 31, 2004 836,200 EUR 30.78 1.42 EUR 27.30-35.22 EUR 7.37
---------------------------------------------------------------
Total outstanding at December
31, 2004 1,108,905 EUR 28.29 1.84 EUR 16.17-35.22 EUR 7.26
===============================================================
Exercisable options 1,086,030 EUR 28.44 1.82 EUR 16.17-35.22 EUR 7.26
===============================================================
The following table summarizes the option activity for the year ended
December 31, 2003:
Weighted
Average Weighted
Weighted Remaining Average
Average Contractual Range of Fair Value
Exercise Life in Exercise at
Options Price Years Prices Grant Date
---------------------------------------------------------------
Outstanding at January 1, 2003 350,575 EUR 17.09 1.89 EUR 16.17-20.95 EUR 4.17
Outstanding at January 1, 2003 358,750 EUR 21.06 4.96 EUR 21.00-24.79 EUR 7.12
Outstanding at January 1, 2003 1,599,280 EUR 31.17 3.22 EUR 27.30-35.22 EUR 7.32
Expired (110,250) EUR 18.16 - EUR 18.11-18.17 EUR 4.61
Forfeited (52,575) EUR 20.61 3.72 EUR 16.17-21.00 EUR 6.93
Forfeited (296,700) EUR 31.99 2.13 EUR 27.30-35.22 EUR 7.49
---------------------------------------------------------------
Outstanding at December 31, 2003 236,125 EUR 16.61 1.35 EUR 16.17-20.95 EUR 4.76
Outstanding at December 31, 2003 310,375 EUR 21.07 3.96 EUR 21.00-24.79 EUR 7.11
Outstanding at December 31,
2003 1,302,580 EUR 30.98 2.24 EUR 27.30-35.22 EUR 7.28
---------------------------------------------------------------
Total outstanding at December
31, 2003 1,849,080 EUR 27.48 2.41 EUR 16.17-35.22 EUR 6.93
================================================================
Exercisable options 1,789,955 EUR 27.51 2.38 EUR 16.17-35.22 EUR 6.91
================================================================
F-34
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The following table summarizes the option activity for the year ended
December 31, 2002:
- -0-
*T
Weighted
Average Weighted
Weighted Remaining Average
Average Contractual Range of Fair Value
Exercise Life in Exercise at
Options Price Years Prices Grant Date
---------------------------------------------------------------
Outstanding at January 1, 2002 21,929 EUR 7.15 0.48 EUR 6.63-8.62 EUR 1.85
Outstanding at January 1, 2002 458,700 EUR 17.26 2.71 EUR 16.17-20.95 EUR 4.70
Outstanding at January 1, 2002 1,646,251 EUR 31.17 4.19 EUR 27.30-35.22 EUR 7.32
Granted 358,750 EUR 21.06 4.96 EUR 21.00-24.79 EUR 7.12
Exercised (21,929) EUR 7.15 0.23 EUR 6.63-8.62 EUR 1.85
Exercised (106,925) EUR 17.80 1.76 EUR 16.17-20.95 EUR 4.66
Exercised (3,000) EUR 30.18 3.58 EUR 27.30-35.22 EUR 7.89
Forfeited (1,200) EUR 18.11 1.58 EUR 16.17-20.95 EUR 4.12
Forfeited (43,971) EUR 31.35 2.82 EUR 27.30-35.22 EUR 7.40
---------------------------------------------------------------
Outstanding at December 31, 2002 350,575 EUR 17.09 1.89 EUR 16.17-20.95 EUR 4.17
Outstanding at December 31, 2002 358,750 EUR 21.06 4.96 EUR 21.00-24.79 EUR 7.12
Outstanding at December 31,
2002 1,599,280 EUR 31.17 3.22 EUR 27.30-35.22 EUR 7.32
---------------------------------------------------------------
Total outstanding at December
31, 2002 2,308,605 EUR 27.46 3.29 EUR 16.17-35.22 EUR 6.89
===============================================================
Exercisable options 2,221,605 EUR 27.46 3.26 EUR 16.17-35.22 EUR 6.86
===============================================================
The premium paid by Messrs Bottcher and Dorjee, members of the Executive
Board, for options granted to them in 2002 of EUR 86,000 each has, with the
approval of the Remuneration Committee, been repaid to them, in conformity with
the new employment contracts they obtained in 2003. This is in line with the
Company's former policy to grant options free of payments to employees. For the
years ended December 31, 2004, 2003 and 2002, the Company recognized a stock
option expense of EUR 0.5 million, EUR 4.7 million and EUR 5.5 million,
respectively.
The fair value of the options granted is calculated on the date of the grant
using the Black-Scholes option-pricing model. No stock options were granted
during 2003 and 2004. The weighted average assumptions used for grants made in
2002 are as follows:
------------
2002
------------
Dividend yield 3.5%
Expected volatility 50%
Risk-free interest rate 3.60%
Expected option life 3 years
------------
19. Earnings (loss) Per Share
Basic earnings (loss) per share is calculated by dividing the net income
(loss) attributable to common shares outstanding by the weighted average number
of common shares outstanding for the period (excluding treasury stock). Diluted
earnings (loss) per share is computed using the same method as basic earnings
(loss) per share, but reflects the potential dilution that could occur if other
equity instruments were converted or exercised into common shares.
For purposes of calculating (diluted) earnings (loss) per share, net income
(loss) attributable to common shares is adjusted for the dividend on financing
preferred shares. During the years under review, the Company had one category of
dilutive potential common shares: shares issuable on exercise of share options
granted to employees.
F-35
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
For the share options granted to employees, a calculation is performed to
determine the number of shares that could have been issued at market price
(determined as the average annual share price of the Company's shares). This
calculation serves to determine the "unpurchased shares" to be added to the
ordinary shares outstanding for the purposes of computing the dilution. For the
year ended December 31, 2004 and 2003, all the share options granted to
employees were out-of-the-money and hence there was no dilution during these
years.
------------------------------------------
Year ended December 31,
------------------------------------------
2004 2003 2002
------------------------------------------
(in EUR millions, except per share data)
Basic Earnings (loss) per Share:
Net (loss)/income EUR (9.0)EUR (58.6)EUR 30.1
Less: Financing preferred shares dividends (2.9) - (2.9)
----------- ----------- -----------
Net (loss)/income attributable to common shareholders EUR (11.9)EUR (58.6)EUR 27.2
=========== =========== ===========
Weighted average number of common shares in issue 38,078,411 37,797,329 38,388,043
Basic (loss)/earnings per share EUR (0.31)EUR (1.55)EUR 0.71
Of which related to discontinued operations EUR (0.47)EUR (0.65)EUR (0.87)
Basic earnings/(loss) per share from continuing operations EUR 0.16 EUR (0.90)EUR 1.58
Diluted Earnings (loss) per Share:
Net (loss)/income attributable to common shareholders EUR (11.9)EUR (58.6)EUR 27.2
Weighted average number of common shares in issue 38,078,411 37,797,329 38,388,043
Dilutive effect of stock options - - 137,847
----------- ----------- -----------
Diluted weighted average number of common shares outstanding 38,078,411 37,797,329 38,525,890
=========== =========== ===========
Diluted (loss)/earnings per share EUR (0.31)EUR (1.55)EUR 0.71
Of which related to discontinued operations EUR (0.47)EUR (0.65)EUR (0.87)
Diluted earnings/(loss) per share from continuing operations EUR 0.16 EUR (0.90)EUR 1.58
20. Segmental Information
In 2004, the Company has three main segments: VDM Specialists, European
Trading and Holding and Unallocated. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
The Company evaluates performance based on the income from operations before
amortization and impairment of intangible assets, tax and finance charges by
segments and by the underlying business units comprising these segments.
Financial information is reviewed by each subsidiary on a monthly basis. In
2004, 2003 and 2002, the only subsidiary representing more than 10% of the
revenues of the Company was VDM Specialists.
F-36
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The following table summarizes segment information for the year ended
December 31, 2004 (excluding discontinued operations, which is presented in Note
3):
--------------------------------------------
VDM European Holding and
Specialists Trading unallocated Total
--------------------------------------------
(in EUR millions)
--------------------------------------------
Revenues
Specialist activities EUR 71.1 EUR - EUR - EUR 71.1
Proprietary trading/ market making activities 1.0 22.4 - 23.4
Commissions 23.9 0.7 - 24.6
Net income from stocklending activities 3.6 - - 3.6
--------------------------------------------
Total EUR 99.6 EUR 23.1 EUR - EUR 122.7
============================================
Corporate costs (excluding amortization and
impairment of intangible fixed assets) EUR 56.0 EUR 21.3 EUR 5.5 EUR 82.8
Amortization and impairment of intangible fixed
assets 1) 5.9 8.2 - 14.1
Impairment of other assets 2.2 - 3.4 5.6
Income/ (loss) from continuing operations 35.5 (6.4) (8.9) 20.2
Segment assets (excluding held-for-sale assets) 1,093.9 157.7 83.8 1,335.4
Segment goodwill 45.8 1.8 - 47.6
Segment other intangibles 187.2 - - 187.2
Additions to long-lived assets 0.3 0.5 0.3 1.1
1) Impairment of intangible assets amounting to EUR 8.2 million relates to
European Trading.
The following table summarizes segment information for the year ended
December 31, 2003 (excluding discontinued operations, which is detailed in Note
3):
--------------------------------------------
VDM European Holding and
Specialists Trading unallocated Total
--------------------------------------------
(in EUR millions)
--------------------------------------------
Revenues
Specialist activities EUR 100.8 EUR - EUR - EUR 100.8
Proprietary trading/ market making activities 1.7 23.0 - 24.7
Commissions 27.2 0.9 - 28.1
Net income from stock lending activities 3.4 - - 3.4
--------------------------------------------
Total EUR 133.1 EUR 23.9 EUR - EUR 157.0
============================================
Corporate costs (excluding amortization and
impairment of intangible fixed assets) 1) EUR 112.6 EUR 20.1 EUR 10.6 EUR 143.3
Amortization and impairment of intangible fixed
assets 2) 34.1 21.5 - 55.6
Loss from continuing operations (13.6) (17.7) (10.6) (41.9)
Segment assets (excluding held-for-sale assets) 2,011.3 206.9 175.1 2,393.3
Segment goodwill 49.4 10.0 - 59.4
Segment other intangibles 208.1 - - 208.1
Additions to long-lived assets 1.0 0.4 0.4 1.8
1) Corporate costs of VDM Specialists include EUR 45.7 million in respect of
the NYSE/SEC settlement; See Note 24.
2) Impairment of intangible assets amounting to EUR 27.7 million relate to VDM
Specialists and EUR 21.5 million relates to European Trading.
F-37
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The following table summarizes segment information for the year ended
December 31, 2002 (excluding discontinued operations, which is detailed in Note
3):
--------------------------------------------
VDM European Holding and
Specialists Trading unallocated Total
--------------------------------------------
(in EUR millions)
--------------------------------------------
Revenues
Specialist activities EUR 227.0 EUR - EUR - EUR 227.0
Proprietary trading / market making activities 2.1 47.5 - 49.6
Commissions 33.4 1.6 - 35.0
Net income from stock lending activities 4.2 - - 4.2
--------------------------------------------
Total EUR 266.7 EUR 49.1 EUR - EUR 315.8
============================================
Corporate costs (excluding amortization and
impairment of intangible fixed assets) EUR 101.3 EUR 37.0 EUR 17.3 EUR 155.6
Amortization of intangible fixed assets 7.3 - - 7.3
Income/ (loss) from continuing operations 158.1 12.1 (17.3) 152.9
Segment assets (excluding held-for-sale assets) 1,807.8 348.7 231.2 2,387.7
Segment goodwill 92.9 31.4 - 124.3
Segment other intangibles 257.6 - - 257.6
Additions to long-lived assets 40.8 0.8 1.2 42.8
Enterprise Wide Disclosures
Revenues from continuing operations attributed to the Company's country of
domicile (the Netherlands) and to the other countries in which the Company's
subsidiaries operate are as follows:
-------------------------------------------
2004 2003 2002
-------------------------------------------
(in EUR millions)
-------------------------------------------
United States EUR 99.6 EUR 133.1 EUR 266.7
The Netherlands 10.6 11.8 29.7
Germany 7.0 7.5 11.0
United Kingdom 5.5 4.6 8.4
-------------------------------------------
Total revenues EUR 122.7 EUR 157.0 EUR 315.8
===========================================
The Company's assets mainly comprise assets in the United States of America.
21. Fair Value of Financial Instruments
The following section summarizes the methods and assumptions used by the
Company, by financial instrument, in estimating fair value:
Assets and liabilities for which fair value approximates carrying value: The
fair values of certain financial assets and liabilities carried at cost,
including cash and cash equivalents, receivables and payables from and to
clearing organizations and other professional parties and accounts payable,
accrued expenses and other liabilities. The fair value of these assets and
liabilities approximate market value due to their short-term nature.
F-38
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Securities and trading liabilities: Fair values of trading assets,
securities available for sale and trading liabilities are the amounts recognized
in the consolidated balance sheets, which are based on market prices, where
available. If quoted prices are not available, fair values are determined based
on quoted market prices of comparable instruments.
Stock borrowed and loaned: Stock borrowed and loaned is stated at contract
value, which approximates market value.
Notes receivable: Notes receivable are net of specific provisions for
impairment. The carrying value approximates fair value.
Short-term borrowings and notes payable: The carrying value of short-term
borrowings and notes payable approximates market value due to the fact that
interest rates are comparable with market rates.
Subordinated notes: The subordinated notes bear market rates of interest,
taking into account interest rate swaps in place, and their carrying amounts are
reasonable estimates of their fair value.
22. Derivatives and Risk Management
The Company enters into interest rate and foreign exchange derivative
contracts in connection with its balance sheet management activities, which
involve the management of interest rate and foreign exchange rate risk, and
trading activities. These derivative contracts involve, to varying degrees,
credit risk and market risk. Market risk is the risk that a change in the level
of one or more market factors, such as interest rates, indices, volatilities,
correlations, or other factors will result in losses for a specified position or
portfolio. Credit risk represents the loss that the Company would incur if a
counterparty fails to perform its contractual obligation to the Company. In
managing derivative credit risk, both the current exposure, which is the
replacement cost of contracts on the measurement date, as well as an estimate of
the potential change in value of contracts over their remaining lives are
considered. Where applicable, to minimize credit risk, the Company enters into
legally enforceable netting arrangements, which reduce risk by permitting the
settlement and netting of transactions with the same counterparty upon
occurrence of certain events. All option trading is conducted on recognized
exchanges. With respect to the Company's option trading activities, the
Company's clearing brokers, through industry clearing organizations, act as the
counterparty and therefore bear the risk of delivery to and from counterparties.
Derivative contracts are reported on a net-by-counterparty basis on the
Company's Consolidated Statements of Financial Condition where it is determined
a legal right of setoff exists under an enforceable netting agreement.
The majority of the Company's derivatives are entered into for trading
purposes and the accounting treatment was not materially affected by the
adoption of SFAS 133 as of January 1, 2001.
Derivatives designated as hedges for accounting purposes must be considered
to be highly effective at reducing the risk associated with the exposure being
hedged. Each derivative must be designated as a hedge, with documentation of the
risk management objective and strategy for the hedge, including identification
of the hedging instrument, the hedged item and the risk exposure, and how
effectiveness is to be assessed both prospectively and retrospectively.
The Company's qualifying fair value hedges relate to interest rate swaps
used to modify exposure to interest rate risk by converting fixed rate debt into
a floating rate. All changes in the fair value of the derivative and changes in
the fair value of the hedged item have been included in earnings consistent with
the classification of the hedged transaction, in Net interest expense. The fair
value of interest rate swaps designated as qualifying fair value hedges,
determined in accordance with the Company's netting policy, was EUR 0.6 million
at December 31, 2004 (December 31, 2003: EUR 0.4 million negative).
F-39
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
The Company is affected by a number of currency risks:
o the risks of currency gains or losses on monetary assets and liabilities
denominated in currencies other than the functional currency of the entity
concerned;
o the impact of exchange rate fluctuations on the translation of the income
statements and balance sheets of entities for the purpose of presenting
consolidated financial statements in euros; and
o the risk arising from trading positions denominated in any currency other
than the functional currency of the trading unit holding those trading
positions.
As described in Note 2, under Foreign Currency Translation, with effect January
1, 2004, Van der Moolen Holding N.V., its finance entity and its intermediate
holding companies have adopted the U.S. dollar as their functional currency.
The following considerations will continue to determine our policy towards
currency risks:
o mitigate the effect of currency fluctuations that will result in volatility
in our net income, as reported under International Financial Reporting
Standards;
o hedge cash in- and outflows in various currencies to mitigate their
possible translation effect on our liquidity position; and
o changes in valuation that result from translation into our presentation
currency will, in principle, not be hedged.
In addition, a number of our operating units run currency exposure risks in
the normal course of their trading activities. These exposures are hedged when
acquired.
Market risk is the risk that price changes could affect the value of the
equity, option or bond positions that arise from normal trading activity. Market
risk increases when markets move sharply and volatility increases. The
management of market risk is primarily based at each of the Company's operating
units, with central oversight, analysis and formation of risk policy based at
the Company's headquarters. Except for VDM Specialists, the central risk control
department establishes, in consultation with the Management Board and the
management of the operating units, specific maximum risk levels to which the
operating units must adhere, monitors compliance with those limits and reports
the risk profile of the group directly to the Management Board on a daily basis.
With respect to VDM Specialists, the first line of responsibility for risk
management is with staff who are present on the floor of the New York Stock
Exchange throughout trading hours.
Liquidity risk relates to the Company's capacity to finance security
positions and liquidity requirements of exchanges and clearing organizations.
The Company's financial resources, relative to its capital employed, and the
liquid nature of most of the instruments traded, limit this risk. In addition,
the Company maintains credit lines with commercial banks. The Group budgets cash
flows on a rolling twelve-month basis. Cash flow and unrestricted cash positions
are ascertained daily and when appropriate, these budgets are adjusted
accordingly.
Credit risk that could result from counterparties defaulting is limited for
the Company's operations that operate on regulated exchanges, since the
settlement risk is essentially transferred to recognized clearing organizations.
Excess cash and cash equivalents are invested in short-term money market
instruments. The Company minimizes the related credit risk by following strict
policies governing its choice of counterparties.
The activities of the Company and its business segments in which it is
active are subject to significant regulatory and legal obligations in both the
U.S. and Europe imposed by (local) government and securities regulators. These
legal and regulatory obligations relate, among other things, to financial
reporting, trading activities, capital requirements and the supervision of the
Company's employees. Failure to fulfill legal or regulatory obligations can lead
to fines, censure or disqualification of management and/or staff and other
measures that could have negative consequences for the Company's activities and
financial performance. Certain violations could result in the loss of trading
permissions. In the latter eventuality, the Company would lose the ability to
carry out a portion of its existing activities, which could have a material
effect on its financial condition, results of operations and cash flows.
F-40
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
23. Commitments and Contingent Liabilities
Regulatory Proceedings and Litigation
VDM Specialists
Specialist Trading Investigations
On March 30, 2004, we announced a settlement with the New York Stock
Exchange and the SEC of charges resulting from an investigation of trading
practices at several specialist firms, including VDM Specialists.
The settlement, which was agreed on the basis of no admission or denial, was
entered into in connection with alleged violations of Section 11(b) of the
Exchange Act, and rules promulgated under that Act concerning New York Stock
Exchange specialist trading, including the requirement that a specialist
maintain a fair and orderly market, and violations of Section 15(b)(4)(E) of the
Exchange Act, including failure to supervise with respect to certain
transactions in which one or more of our employees allegedly violated Section
10(b) of the Exchange Act including Rule 10b-5. Pursuant to the settlement, and
without admitting or denying any wrongdoing, we announced that VDM Specialists
would pay a total of $57.7 million in restitution to customers and civil
penalties for certain trades that occurred during the five year period from 1999
to 2003. Of the total agreed restitution and civil penalties, $34.9 million
represented restitution and $22.8 million represented civil penalties. The
full amount of the restitution payment was paid within ten days of the date of
settlement. We agreed with the SEC to pay the $22.8 million in civil
penalties on an installment basis, with the first installment of $10.8
million made within ten days of the date of settlement and $2.0 million paid
every three months thereafter until all penalties have been paid in full. At
December 31, 2004, the remainder due was $6.0 million (EUR 4.4 million).
This amount is shown under accounts payable, accrued expenses and other
liabilities in our Consolidated Statement of Financial Condition. It is our
understanding that the four other largest New York Stock Exchange specialist
firms also settled the investigation concerning their specialist trading
activities during the 1999 to 2003 period. The SEC, New York Stock Exchange and
the Department of Justice continue to investigate the conduct of certain present
and former employees of VDM Specialists. On April 12, 2005, seven former
employees of VDM Specialists were indicted for securities fraud and conspiracy
to commit securities fraud. Also on April 12, 2005, the SEC commenced civil
proceedings against these seven former employees of VDM Specialists, as well as
another employee of VDM Specialists who was not indicted. The NYSE has also
brought charges against these former employees of VDM Specialists.
In re New York Stock Exchange Specialists Securities Litigation
In the fourth quarter of 2003, four putative class action suits were filed
with the U. S. District Court for the Southern District of New York against VDM
Specialists and other New York Stock Exchange specialist firms. On March 11,
2004, a similar suit, which was brought by an individual plaintiff who was not
alleging to represent a class, was filed in the U.S. District Court for the
Southern District of New York. One of the class action suits and the individual
suit also name the New York Stock Exchange and Van der Moolen Holding N.V. as
defendants. Each of these five suits was filed on behalf of plaintiffs who
allege that the defendants violated U.S. federal securities law by conducting
improper trading activity to the detriment of pending customer orders.
The suits were filed on the grounds of the trading violations that were the
subject of the New York Stock Exchange and SEC investigation mentioned above.
The suits claim unspecified restitution and damages. On May 27, 2004, the U.S.
District Court for the Southern District of New York entered an order
consolidating the four class action suits and the individual action, appointing
lead plaintiffs, and directing that a consolidated amended complaint be filed
within 45 days, absent an agreement by the parties concerning the preliminary
schedule.
The co-lead plaintiff filed an amended consolidated complaint on September
16, 2004 (In re NYSE Specialists Securities Litigation, No. 03-8264 (S.D.N.Y.)).
On November 16, 2004, Van der Moolen Holding N.V., VDM Specialists and the other
New York Stock Exchange specialist firms moved to dismiss the amended
consolidated complaint. Plaintiffs' opposition to the motion was filed on
January 26, 2005, and the defendants' reply was filed on March 8, 2005. The
Court heard oral argument on the motion to dismiss on April 13, 2005. Neither
VDM Specialists nor we have answered the complaints. Plaintiffs have also moved
to modify the stay of discovery provided by the Private Securities Litigation
Reform Act of 1995, and the defendants have opposed that motion. On November 17,
2004, the Court heard oral argument, but has not ruled on the motion to modify
the stay. The outcome or a range of outcomes of this litigation cannot be
predicted at this time.
F-41
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
In re Van der Moolen Holding N.V. Securities Litigation
On October 20, 2003, a plaintiff, who purported to represent holders of our
ADRs, filed a class action suit on their behalf in the U.S. District Court for
the Southern District of New York against Van der Moolen Holding N.V. and the
members of our executive board during the relevant periods. The plaintiff
alleges that Van der Moolen Holding N.V. violated U.S. federal securities law
through an alleged failure to disclose in a timely and public manner details of
the New York Stock Exchange and SEC investigation into improper New York Stock
Exchange specialist trading activity. The plaintiff is seeking unspecified
restitution and damages.
On April 14, 2004, the Court entered an order designating co-lead
plaintiffs. Co-lead plaintiffs filed an amended complaint on July 9, 2004. On
September 14, 2004, co-lead plaintiffs filed a Second Amended and Consolidated
Class Action Complaint (In re Van der Moolen Holding N.V. Securities Litigation,
No. 03-8284 (S.D.N.Y.)). VDM Specialists was also named a defendant in the
Second Amended and Consolidated Class Action Complaint. Van der Moolen Holding
N.V., VDM Specialists and the individual defendants moved to dismiss the
complaint on November 22, 2004. Plaintiffs responded to that motion on January
22, 2005, and the defendants filed memoranda in reply on February 22, 2005. Oral
argument on the motion to dismiss occurred on March 30, 2005. None of the
defendants to this action have answered the Second Amended and Consolidated
Class Action Complaint. The outcome or a range of outcomes of this litigation
cannot be predicted at this time.
Posner
On December 4, 2003, Michael Posner, a plaintiff claiming to sue on behalf
of the general public of the state of California filed a lawsuit against VDM
Specialists, its chief executive officer and other New York Stock Exchange
specialist firms in the Superior Court of the State of California, County of Los
Angeles. The complaint alleges that the defendants violated the California
Business and Professional Code by engaging in improper trading activity that
amounted to unfair business practices. The suit claims unspecified restitution
and damages. On February 27, 2004, the defendants served with process removed
the action to the U.S. District Court for the Central District of California. On
May 10, 2004, the action was transferred to the U.S. District Court for the
Southern District of New York. On December 1, 2004 plaintiff consented to
dismiss this action, and a notice of dismissal was entered by the Court on
December 20, 2004.
Other
In December 2003, an NASD arbitration proceeding, entitled Margaret Ann
Furman Individually and for Ashley B. Furman, and for the Estate of Samuel E.
Furman v. Robert Fagenson, Fagenson & Co., Inc. and VDM Specialists (NASD Case
No. 03-08145) was commenced by a former customer of Fagenson & Company and VDM
Specialists (approximately September 1, 2001 to March 30, 2002), alleging
unsuitability, breach of contract, violation of fiduciary duties, common law
fraud and deceit and gross negligence. The claimant seeks compensatory damages
of approximately USD $1,450,000, plus reimbursement of commissions, punitive
damages, costs and attorneys' fees. VDM Specialists believes it has meritorious
defenses to the asserted claims. It is too early to predict the probable outcome
or range of outcomes of this arbitration, or to reasonable estimate any
potential loss associated with this matter.
On February 22, 2005, the New York Stock Exchange advised VDM Specialists
that it is conducting an investigation into the possibility that (i) employees
of VDM Specialists submitted or caused to be submitted, misleading or inaccurate
Floor Official approvals during the period from September 2002 through August
2003, and (ii) VDM Specialists and/or certain supervisory employees may have
failed to discharge their responsibility in supervising the firm's floor
employees. The outcome or a range of outcomes of this investigation cannot be
predicted at this time.
In 2004, VDM Specialists incurred EUR 3.8 million in legal fees in relation
to regulatory proceedings and litigation (2003: EUR 1.3 million).
Pursuant to Section 5.5 of its operating agreement with minority members, VDM
Specialists is required to advance funds for actual litigation expenses incurred
by various present and former members in connection with these litigation and
regulatory inquiries. All such advances have been recognized as expenses in the
Consolidated Statement of Income. In 2004, an expense of approximately EUR 1.3
million was recognized (2003: nil).
F-42
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Stock Lending
In late 2004, the New York Stock Exchange requested documents and interviews
with certain employees of VDM Specialists' stock lending department. On January
14, 2005, VDM Specialists terminated two senior members of its stock lending
department for violations of the firm's policies and their terms of employment.
On February 11, 2005, we disclosed that the New York Stock Exchange was
conducting an inquiry into broker-dealer stock lending practices, focusing on
transactions involving finders, including transactions carried out by VDM
Specialists' stock lending department. Also on February 11, 2005, based on the
existence of this New York Stock Exchange inquiry and the results of VDM
Specialists' own internal inquiry, Van der Moolen Holding N.V. announced that
VDM Specialists was closing its stock lending business.
At the time when VDM Specialists closed its stock lending business, New York
Stock Exchange rules did not expressly bar the payment of reasonable fees to
legitimate finders of securities in connection with a member firm's stock
lending activity, although certain broker-dealers had adopted policies
prohibiting such payments. The outcome or range of outcomes of the New York
Stock Exchange's inquiry into VDM Specialists' stock lending business cannot be
predicted at this time, including any regulatory action that the New York Stock
Exchange might take against VDM Specialists or present and former employees of
VDM Specialists, and any employment-related litigation that might be brought
against VDM Specialists by former employees of VDM Specialists' stock lending
business.
The audit committee has reviewed the findings of the internal inquiries
described above, and in the light of these findings and the steps taken by
management is satisfied that appropriate remedial action has been taken.
The stock lending activities of VDM Specialists contributed EUR 0.6 million
to 2004 net income (2003: EUR 0.6 million).
U.S. Option Business
Cohen, Duffy, McGowan, LLC has been informed by the American Stock
Exchange's Market Regulation Department that the exchange's Enforcement Division
has initiated an investigation that may result in disciplinary actions. The
investigation is focused on charges of possible violations of American Stock
Exchange Rule 156(b) and Article V, Section 4(h), combined with possible
violations of the exchange's limit order display rule during the period between
June 3, 2002 and May 30, 2003. Further, on February 25, 2004, the American Stock
Exchange Enforcement Division started an investigation in relation to alleged
violations of the firm quote rule (American Stock Exchange Rule 958A). Further,
the Department of Market Regulation of the Chicago Board Options Exchange
requested written information from Van der Moolen Options USA, LLC relating to
compliance with the Chicago Board Options Exchange's firm quote rule. On January
28, 2004, the SEC requested data from all U.S. option exchanges, including all
those on which our option units acted as specialists or in a similar capacity,
regarding the functioning and trading practices of specialists on those
exchanges. It is possible that these requests have been lodged in advance of
additional investigations into trading practices by the Chicago Board Options
Exchange or the SEC. On May 11, 2004, the SEC requested financial information
and information in respect of the compliance procedures of Cohen, Duffy,
McGowan, LLC. Cohen, Duffy, McGowan, LLC was closed in December 2003 and we
disposed of Van der Moolen Options USA, LLC in December 2004.
Last Atlantis Capital et al. vs Chicago Board Options Exchange et
al.
On January 20, 2004, five entities who allege that they are purchasers and
sellers of options commenced an action in the U.S. District Court for the
Northern District of Illinois against four national securities exchanges (the
American Stock Exchange, the Chicago Board Options Exchange, the Philadelphia
Stock Exchange and the Pacific Stock Exchange) and 35 securities dealers who
made markets in options, including Cohen, Duffy, McGowan, LLC and Van der Moolen
Options USA, LLC, as well as Van der Moolen Holding N.V. Plaintiffs allege that
our subsidiaries conspired with other defendants by allegedly failing to execute
orders, cancelling orders and refusing to cancel orders for the purchase and
sale of options. Plaintiffs allege violations of federal antitrust laws
(Sections 1 of the Sherman Act and 4 and 16 of the Clayton Act), and securities
laws (Section 10(b) of the Exchange Act and rule 10b-5 thereunder), breach of
contract, common law fraud, breach of fiduciary duty, violations of an Illinois
consumer fraud and deceptive business practices statute and tortuous
interference with business. Injunctive relief and damages (including punitive
damages) in an unspecified amount are sought. Cohen Duffy McGowan, LLC, Van der
Moolen Options USA, LLC and Van der Moolen Holding were never served with the
process in this action, and although named in the caption of the Complaint,
there are no specific allegations in the complaint against either Van der Moolen
Holding N.V. or Van der Moolen Options USA, LLC. Motions to dismiss were filed
with the Court on June 14, 2004, and are pending. On March 30, 2005 the court
granted the motion to dismiss. On May 9, 2005, the court denied the plaintiffs'
motion for reconsideration except with respect to the federal securities count
as to which the court gave plaintiffs leave to replead with particularity. No
amended complaint has been served on either Cohen, Duffy, McGowan, LLC or Van
der Moolen Options USA, LLC or on Van der Moolen Holding N.V. On January 28,
2005, counsel for plaintiffs in this action filed a virtually identical
complaint with the U.S. District Court for the Southern District of Illinois.
The new complaint has not been served on either Cohen Duffy McGowan, LLC or Van
der Moolen Options USA, LLC, or on Van der Moolen Holding N.V.
F-43
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
On February 11, 2005, the Chicago Board Options Exchange sent a notice
informing Van der Moolen Options USA, LLC that it had initiated an inquiry to
determine whether Van der Moolen Options USA, LLC, in its capacity as Designated
Primary Market-Maker on the Chicago Board Options Exchange or through its
designee members, inter-positioned or traded ahead its principal account ahead
of orders Van der Moolen Options USA, LLC represented as agent during the period
from at least January 1999 through December 2004 in violation of Chicago Board
of Options Exchange or SEC rules. The outcome of this investigation cannot be
predicted at this time.
On January 26, 2004, the Chicago Board Options Exchange requested
information related to Van der Moolen Options USA, LLC's order handling
practices, in particular procedures relating to firm quotes and unexecuted
orders that were marketable upon receipt. On June 15, 2004, Van der Moolen
Options USA, LLC, neither admitting nor denying the alleged violations, settled
this matter with the Chicago Board Options Exchange. Pursuant to the terms of
the settlement, Van der Moolen Options USA, LLC made a payment in the amount of
$20,000 to the Chicago Board Options Exchange.
On September 8, 2004, the Chicago Board Options Exchange advised Van der
Moolen Options USA, LLC that it had commenced an investigation into Van der
Moolen Options USA, LLC's limit order practices, and on December 29, 2004, the
Chicago Board Options Exchange advised Van der Moolen Options USA, LLC that it
had commenced an investigation into the way that Van der Moolen Options USA, LLC
had calculated its debt-equity ratio. Further on April 22, 2005 the Chicago
Board Options Exchange advised that it started an investigation into possible
quoting violations of Exchange Rules 8.7 and 8.85 by Van der Moolen Options USA,
LLC for the Expiration Cycles from December 2003 through January 2005. Also, on
December 21, 2004, the Philadelphia Stock Exchange advised Van der Moolen
Options USA, LLC that it is conducting an investigation and fact-finding effort
related to the order handling and trading activity by Van der Moolen Options
USA, LLC for the period of February 2003 through September 2004, regarding
compliance with Philadelphia Stock Exchange Rule 1082 ("Firm Quotations").
The outcome or range of outcome of these investigations in respect of our US
Option business cannot be predicted at this time.
We believe that the claims asserted against us by the plaintiffs in the
pending proceedings described under the paragraphs VDM Specialist and U.S.
Option Business are without merit, and we deny all allegations of wrongdoing.
With respect to the regulatory investigations described above, we believe that
we have conducted our business operations in compliance with regulatory
requirements and market practices. There can be no assurance, however, as to the
outcome or timing of the resolution of these proceedings and investigations. The
range of possible resolutions could include determiniations and judgments
against us or settlements that could require substantial payments by us that
could have a material adverse effect on our financial condition, results of
operations and cash flows.
F-44
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Credit facilities
On December 31, 2004, the Company had access to total credit lines of EUR
20.0 million, of which EUR 15.0 million is committed until December 29, 2005. At
December 31, 2004, no amounts were drawn under these facilities. In 2004, the
Company paid EUR 0.1 million (2003: EUR 0.2 million) in relation to commitment
fees on credit facilities (most of which were cancelled in 2004).
Other commitments and contingencies
Van der Moolen Holding N.V. has issued a guarantee to a third party for a
total amount of EUR 3.4 million (2003: EUR 3.8 million). These guarantees have
been issued in relation to loans granted to LOC LLC, partners of which are
(former) members and an employee of VDM Specialists in order to enable them to
acquire seats on the New York Stock Exchange.
Van der Moolen Holding N.V. has issued a guarantee to third parties for a
total amount of EUR 1.0 million in relation to a credit facility of Stichting
Van der Moolen Holding. No amounts were drawn under this facility on December
31, 2004 (2003: nil).
Van der Moolen Holding N.V. is liable for the liabilities of its wholly
owned Dutch subsidiaries, which arise from legal acts by these subsidiaries,
pursuant to the statements that have been issued in accordance with section
2:403 of the Dutch Civil Code.
VDM Specialists has issued so-called 325(e) guarantees to the New York Stock
Exchange in the total amount of EUR 4.3 million (2003: EUR 5.6 million).
Further, VDM Specialist USA, LLC has an outstanding guarantee of a member's
loan for the purchase of a New York Stock Exchange seat in the amount of EUR 0.2
million (2003: EUR 0.6 million). This guarantee expired in January 2005.
In the ordinary course of its business, the Company indemnifies certain
service providers, such as clearing and custody agents, trustees and
administrators against specified potential losses in connection with their
acting as an agent of, or providing services to, the Company or its affiliates.
In addition, the Company is a member of payment, clearing and settlement
networks as well as securities exchanges that may require the Company to meet
the obligations of such networks and exchanges in the event of member defaults.
The Company is unable to develop an estimate of the maximum payout under these
guarantees and indemnifications. However, management believes that it is
unlikely the Company will have to make material payments under these
arrangements, and no liabilities related to these guarantees and
indemnifications have been recognized in the Consolidated Statement of Financial
Condition as of December 31, 2004.
The Company and its subsidiaries have obligations under operating leases
with initial non-cancelable terms in excess of one year. Minimum rental
commitments under non-cancelable leases for 2005 and the succeeding four years
and thereafter are as follows:
Year (in EUR millions)
2005 EUR 1.3
2006 1.2
2007 0.8
2008 0.8
2009 0.8
Later years (final expiry date September 30, 2010) 0.5
----------------
Total minimum lease payments EUR 5.4
================
F-45
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Certain leases contain renewal options and escalation clauses. Rental
expense for the year ended December 31, 2004 from continuing operations amounted
to EUR 1.3 million (2003: EUR 1.2 million; 2002: EUR 1.5 million).
24. Net Capital Requirements
VDM Specialists is subject to the SEC Uniform Net Capital Rule (SEC Rule
15c3-1), which specifies minimum net capital requirements. At December 31, 2004,
VDM Specialists' net capital, as defined in SEC Rule 15c3-1, was EUR 178.4
million, which was EUR 178.2 million in excess of its net capital requirement.
The Company is also subject to capital requirements with respect to its
subsidiaries in the Netherlands. The net capital requirements at December 31,
2004 for Van der Moolen Effecten Specialist and Van der Moolen Obligaties are
EUR 0.73 million and EUR 0.73 million, respectively. For each of these
companies, the net capital at December 31, 2004 exceeds requirements.
Van der Moolen Equities Limited has a net capital requirement at December
31, 2004 of EUR 0.73 million. The net capital at December 31, 2004 exceeds the
requirement.
The Company's German subsidiary, Van der Moolen Trading has a net capital
requirement at December 31, 2004 of EUR 6.8 million. Van der Moolen Trading's
net capital at December 31, 2004 exceeds the requirement.
25. Net Liquid Assets Requirements
VDM Specialists is subject to New York Stock Exchange Rule 104.22, which
specify minimum net liquid assets requirements. As of December 31, 2004, VDM
Specialists' minimum net liquid asset requirement was EUR 178.0 million and its
actual net liquid assets were EUR 184.9 million. In order to meet its net liquid
asset requirement, VDM Specialists holds substantial cash balances which are
included in cash and cash equivalents in the Consolidated Statement of Financial
Condition.
26. Subsequent Events
On February 11, 2005, the Company announced the closure of the stocklending
activities of VDM Specialists. These activities contributed approximately EUR
0.6 million to net income for the year ended December 31, 2004.
At the Annual General Meeting of shareholders on April 6, 2005,
shareholders approved the declaration of a EUR 0.22 cash dividend or its
approximate equivalent in shares. On April 22, 2005, 1,026,195 common shares of
Van der Moolen Holding N.V. were issued in respect of the optional stock
dividend. The cash outflow related to the dividend was EUR 3.2 million.
On May 27, 2005, the Company announced that it had signed a letter of
intent to acquire a 100% interest in Curvalue Financial Services Group, a
Dutch-incorporated broker-dealer in derivatives. This transaction is subject to
the completion of due diligence and to regulatory approval. Assuming all
necessary conditions are satisfied, the Company expects this acquisition will
close in the third quarter of 2005. If the transaction proceeds, the Company has
committed to making an initial payment of EUR 5 million plus 3,803,509 of its
common shares. In addition, the consideration for the potential acquisition
includes a contingent earn-out feature, potentially consisting of two additional
payments approximately twelve and twenty-four months after the acquisition is
closed. The first of these would be a maximum of EUR 10.4 million cash plus
1,920,964 Van der Moolen Holding N.V. common shares, and the second would be a
maximum of EUR 10.4 million cash plus 1,920,964 Van der Moolen Holding N.V.
common shares. The amounts of these additional payments will be dependent on
Curvalue achieving specified earnings targets.
F-46
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
27. Parent Only Financial Statements
This note presents Schedule I information for the parent company only, using the
equity method of accounting for consolidated subsidiaries. Parent only financial
information is required if the restricted net assets (as defined in Rule 4-08(e)
of Regulation S-X) of consolidated subsidiaries exceed 25% of total consolidated
net assets. The restricted net assets of VDM Specialists exceed this percentage
as a result of the net liquid asset requirement described in note 25. The
restricted net assets of VDM Specialists amount to EUR 178.0 million at December
31, 2004, being 53.9% of consolidated net assets. There is no further specific
restriction on the capacity of VDM Specialists to make profit distributions. The
distribution of dividends by Van der Moolen Holding N.V., the parent company,
out of retained earnings is restricted by Dutch Law. At December 31, 2004,
freely distributable retained earnings amounted to EUR 18.3 million.
Van der Moolen Holding N.V. Parent Only Statements of Financial
Condition
As of December 31,
- ---------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------
ASSETS (in EUR million)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Cash and cash equivalents EUR 12.3 EUR 3.2
- ---------------------------------------------------------------------------
Receivable from group companies 3.7 4.2
- ---------------------------------------------------------------------------
Loans receivable - 11.9
- ---------------------------------------------------------------------------
Property and equipment, net 0.8 1.0
- ---------------------------------------------------------------------------
Investments in subsidiaries using the equity
method 373.5 441.0
- ---------------------------------------------------------------------------
Other assets 9.7 13.2
- ---------------------------------------------------------------------------
Total assets EUR 400.0 EUR 474.5
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
- --------------------------------------------------------------------------------
Short-term borrowings EUR 45.4 EUR 102.4
- --------------------------------------------------------------------------------
Payable to Group Companies 11.2 1.5
- --------------------------------------------------------------------------------
Current taxes payable 0.2 1.9
- --------------------------------------------------------------------------------
Accounts payable, accrued expenses, and other
liabilities 4.8 4.1
- --------------------------------------------------------------------------------
Deferred tax liabilities, net 2.4 2.8
- --------------------------------------------------------------------------------
Notes payable 2.0 6.9
- --------------------------------------------------------------------------------
Subordinated borrowings:
- --------------------------------------------------------------------------------
Subordinated notes 3.6 6.8
- --------------------------------------------------------------------------------
Shareholders' equity:
- --------------------------------------------------------------------------------
Financing Preferred A shares, EUR 0.60
par value, authorized 1,200,000 shares,
issued and outstanding
251,000 shares 0.1 0.1
- --------------------------------------------------------------------------------
Financing Preferred B shares, EUR 0.60 par value,
authorized 1,200,000 shares,
issued and outstanding
391,304 shares 0.3 0.3
- --------------------------------------------------------------------------------
Common shares, EUR 0.08 par value, authorized
54,000,000 shares, issued and outstanding
38,419,282
shares 3.1 3.1
- --------------------------------------------------------------------------------
Treasury stock, 102,182 and 882,182 shares (2.4) (8.1)
- --------------------------------------------------------------------------------
Additional paid-in capital 277.6 277.1
- --------------------------------------------------------------------------------
Retained earnings 174.3 189.1
- --------------------------------------------------------------------------------
Accumulated other comprehensive income (122.6) (113.5)
- --------------------------------------------------------------------------------
Total shareholders' equity EUR 330.4 EUR 348.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity EUR 400.0 EUR 474.5
- --------------------------------------------------------------------------------
F-47
The maturities of short-term borrowings, payable to Group companies, notes
payable and subordinated notes is as follows:
Payable to 5.66%
Short-term Group Subordinated
(in EUR millions) borrowings companies Notes payable Note Total
2005 45.4 1.7 0.3 3.6 51.0
2006 0.3 0.3
2007 0.3 0.3
2008 0.3 0.3
2009 9.5 0.3 9.8
2010 0.5 0.5
----------- ----------- -------------- ------------ ---------
Total 45.4 11.2 2.0 3.6 62.2
See note 23 for disclosure of the parent company's commitments and contingent
liabilities.
Cash dividend paid to the parent by consolidated subsidiaries were EUR 61.3
million, EUR 108.1 million and EUR 4.7 million during the years ended December
31, 2004, 2003 and 2002 respectively.
Van der Moolen Holding N.V. Parent Only Statements of Income
Year Ended December 31,
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------
(in EUR million)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Revenues EUR - EUR - EUR -
- -------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------
Employee compensation and benefits 2.3 5.3 7.6
- -------------------------------------------------------------------------------------------
Information and communication 0.3 0.4 0.6
- -------------------------------------------------------------------------------------------
General and administrative expenses 2.0 0.4 4.6
- -------------------------------------------------------------------------------------------
Depreciation 0.4 0.5 0.4
- -------------------------------------------------------------------------------------------
Recharged expenses (2.6) - (2.4)
- -------------------------------------------------------------------------------------------
Total expenses EUR 2.4 EUR 6.6 EUR 10.8
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Loss from operations EUR (2.4) EUR (6.6) EUR (10.8)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Gain on disposal of long-term investments
and associates - 0.9 -
- -------------------------------------------------------------------------------------------
Interest expense, net (2.2) (2.7) (2.7)
- -------------------------------------------------------------------------------------------
Other (expense)/income (4.1) 5.6 3.5
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Loss before income taxes EUR (8.7) EUR (2.8) EUR (10.0)
- -------------------------------------------------------------------------------------------
Provision for income taxes 6.9 1.3 4.1
- -------------------------------------------------------------------------------------------
Income/ (loss) from Group companies after
income taxes using the equity method (7.2) (57.1) 36.0
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Net (loss)/ income EUR (9.0) EUR (58.6) EUR 30.1
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Financing preferred shares dividends (2.9) - (2.9)
- -------------------------------------------------------------------------------------------
Net (loss)/ income attributable to common
shareholders EUR (11.9) EUR (58.6) EUR 27.2
- -------------------------------------------------------------------------------------------
F-48
Van der Moolen Holding N.V. - Notes to Consolidated Financial Statements
Van der Moolen Holding N.V. Parent Only Statements of Cash Flow
Year Ended December 31,
- -------------------------------------------------------------------------------------------
2004 2003 2002
- -------------------------------------------------------------------------------------------
(in EUR million)
- -------------------------------------------------------------------------------------------
Cash flows from operating activities:
- -------------------------------------------------------------------------------------------
Net (loss)/income EUR (9.0) EUR (58.6) EUR 30.1
- -------------------------------------------------------------------------------------------
Adjustments of non-cash items to reconcile net (loss) income to net cash used in
operating activities:
- -------------------------------------------------------------------------------------------
Loss / (income) from Group companies using the
equity method 7.2 57.1 (36.0)
- -------------------------------------------------------------------------------------------
Depreciation 0.4 0.5 0.4
- -------------------------------------------------------------------------------------------
Release of provision on loan receivable (2.4) - -
- -------------------------------------------------------------------------------------------
Deferred tax (benefit) expense, net and
non-cash tax effects (4.5) - (0.3)
- -------------------------------------------------------------------------------------------
Compensation expense related to stock-based
compensation 0.3 3.2 5.5
- -------------------------------------------------------------------------------------------
Pensions (0.3) (0.1) 0.8
- -------------------------------------------------------------------------------------------
Gain on disposal of long-term
investments and associates - (0.9) -
- -------------------------------------------------------------------------------------------
Other 4.0 - 2.2
- -------------------------------------------------------------------------------------------
Change in assets and liabilities net of effects from purchase or sale of
subsidiaries:
- -------------------------------------------------------------------------------------------
Receivable from Group Companies 0.5 (1.0) 2.0
- -------------------------------------------------------------------------------------------
Other assets 6.4 (6.0) 4.7
- -------------------------------------------------------------------------------------------
Payable to Group Companies 9.7 (15.5) 21.6
- -------------------------------------------------------------------------------------------
Accounts payable, accrued expenses and
other liabilities (2.2) 1.1 (4.3)
- -------------------------------------------------------------------------------------------
Net cash provided (used in) by operating
activities EUR 10.1 EUR (20.2) EUR 26.7
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Cash flows from investing activities:
- -------------------------------------------------------------------------------------------
Purchase of property and equipment, net (0.2) (0.2) (0.9)
- -------------------------------------------------------------------------------------------
Investment in Group Companies (17.9) (16.8) (30.4)
- -------------------------------------------------------------------------------------------
Dividends received from Group Companies 61.3 108.1 4.7
- -------------------------------------------------------------------------------------------
Disposals of investments, net - 2.9 0.2
- -------------------------------------------------------------------------------------------
Repayment of loans receivable 14.3 - -
- -------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities EUR 57.5 EUR 94.0 EUR (26.4)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Cash flows from financing activities:
- -------------------------------------------------------------------------------------------
Net (decrease) increase in short-term
borrowings (53.9) (35.4) 60.7
- -------------------------------------------------------------------------------------------
(Payments) proceeds of notes payable, net (4.9) (0.4) (62.3)
- -------------------------------------------------------------------------------------------
Payments of subordinated notes (3.2) (3.2) (3.2)
- -------------------------------------------------------------------------------------------
Issuance of shares - - 2.7
- -------------------------------------------------------------------------------------------
Sale / (purchase) of treasury shares 5.6 (8.1) -
- -------------------------------------------------------------------------------------------
Dividend paid (2.9) (30.2) (22.7)
- -------------------------------------------------------------------------------------------
Other financing activities, net - - (0.2)
- -------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities EUR (59.3) EUR (77.3) EUR (25.0)
- -------------------------------------------------------------------------------------------
Effects of exchange rate differences 0.8 (0.1) -
- -------------------------------------------------------------------------------------------
Net change in cash and cash equivalents EUR 9.1 EUR (3.6) EUR (24.7)
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of
the year 3.2 6.8 31.5
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the
year EUR 12.3 EUR 3.2 EUR 6.8
- -------------------------------------------------------------------------------------------
Supplemental information:
- -------------------------------------------------------------------------------------------
Cash paid for
- -------------------------------------------------------------------------------------------
Interest EUR 2.6 EUR 2.9 EUR 1.8
- -------------------------------------------------------------------------------------------
Income taxes EUR - EUR - EUR -
- -------------------------------------------------------------------------------------------
F-49
Exhibit Index
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.
- -------------------------------------------------------------------------------------------------------------------
4.2***+ Amended and Restated Operating Agreement of VDM Specialists dated February 2, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.3***+ First Amendment dated April 1, 2004 to the Amended and Restated Operating Agreement of VDM Specialists
dated February 2, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.4***+ Second Amendment dated May 1, 2004 to the Amended and Restated Operating Agreement of VDM Specialists
dated February 2, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.5*+ Amended and Restated Operating Agreement of VDM Specialists dated December 1, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.6*+ First Amendment dated December 30, 2004 to the Amended and Restated
Operating Agreement of VDM Specialists dated December 1, 2004.
- -------------------------------------------------------------------------------------------------------------------
4.7*+ Second Amendment dated January 3, 2005 to the Amended and Restated
Operating Agreement of VDM Specialists dated December 1, 2004.
- -------------------------------------------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------------------------------------------
13.1* 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.
- -------------------------------------------------------------------------------------------------------------------
13.2* 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.
*** Incorporated by reference to the Company's Annual Report on Form 20-F (SEC
File No. 001-16731) filed with the Securities and Exchange Commission on
June 25, 2004.
+ Confidential treatment has been requested. Confidential materials have been
redacted and separately filed with the Securities and Exchange Commission.
- -------------------------------------------------------------------------------------------------------------------