(2) ABC arbitrage

Texte intégral

(1)WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0.

(2) ABC arbitrage. Contents. Management report. >. 3. Balance sheet. >. 5. Statement of income. >. 6. Statement of changes in equity. >. 7. Consolidated cash flow statements. >. 8. Notes to the consolidated financial statements. >. 9. Statutory auditors’ report. >. 14. This interim report and its constituent parts have been translated from the original French versions. For the purposes of interpretation, the French originals will take precedence over the English translation.. Interim report 2006 - Page 2 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. Disclaimer.

(3) ABC arbitrage. Management report. Key consolidated figures are presented below : June 30, 2006 IFRS. June 30, 2005 IFRS. Dec. 31, 2005 IFRS. Advisory revenues Proprietary trading revenues (1). 17.3. 10.6. 19.6. Net revenues. 17.3. 10.6. 19.6. Payroll costs Occupancy costs Other expenses Income before tax. (4.6) (0.3) (0.7) 11.7. (3.2) (0.4) (0.7) 6.3. (6.2) (0.7) (1.5) 11.3. 6.0. 3.7. 7.0. In EUR million. Net income. (1) Net gains on derivative financial instruments measured at fair value through profit or loss (€20.7m) + provision (€(3.4)m).. Operating performance Net income came to EUR 6 million, an increase of 61.7% compared to the first half of 2005. Net revenues rose by 62.8% to almost EUR 17.3 million, giving a gross return on equity (ratio of net revenues to average equity over the period) of 52.72% for the first six months of the year. This improvement was the result of a good performance in the first quarter followed by an even more buoyant second quarter. Volatility remained relatively low during the first quarter, in line with 2005, but increased sharply in May and June to reach twice the previous year’s average. With volatility still significantly below the level observed in the period 1999 to 2002, we were able to efficiently leverage our business specifics by continuously improving our systems and scaling up in both geographic reach and structure. In addition, the M&A arbitrage business enjoyed new momentum, driven by positive market conditions (large number of deals with counterbids) and the absence of any major failed transactions. Provision expense corresponds to the impairment loss recorded on the Group’s receivables from the Italian Government, given their age and the fact that legal proceedings will have to be initiated to secure their recovery.. Payroll costs rose significantly during the first half due to the Group’s policy of rewarding employees through incentive plans that establish a direct link between targets, results and bonuses. However, as a result of tight control over other costs, general expenses as a whole rose by only 30.2% versus 62.8% for revenues. The Group employed an average of 53 people over the first half, three more than in the same period of 2005. The Annual Shareholders’ Meeting of May 31, 2006 approved an ambitious share-based incentive program for executive officers and key employees, called Horizon 2010. We firmly believe that this type of incentive plan is the best way to ensure that our shareholders and employees share the same interests. Horizon 2010 sets five-year earnings targets and the amount that vests each year will depend on the company’s annual performance. The entire amount will vest if aggregate net income over the five-year period reaches EUR 100 million. A strict framework governs the granting of shares and a lock-up period applies, to avoid disrupting the market in ABC arbitrage shares and to protect the interests of other shareholders. The total cost of each plan is recognized over the vesting period with a corresponding amount recognized in equity. It is calculated on the basis of the plan’s total value on the date of grant by the Board of Directors. The cost for the first half of 2006 amounted to EUR 276 thousand and concerned 24 people.. Interim report 2006 - Page 3 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. General expenses.

(4) Dividend distribution The Annual Shareholders’ Meeting of May 31, 2006 approved a final net dividend of EUR 0.10 per share for 2005, with the option of reinvesting all or part of the dividend in shares ranking pari passu with existing shares at a price of €2.27. The final dividend was paid at end July 2006 and the reinvestment rate was almost 80%. The total net dividend for 2005 therefore came to EUR 0.20 per share. After the issuance of shares in payment of dividends and on exercise of stock options, the share capital at August 1, 2006 came to EUR 498,287, divided into 31,142,950 ordinary shares. The free float represented 47% of the share capital on that date. The Board of Directors have decided to pay an interim dividend of EUR 0.13 per share in respect of 2006. Shareholders have the option of reinvesting all or part of their dividend in ABC arbitrage shares at a price of EUR 2.40 per share. The interim dividend, which is not an indication of future dividends, will be payable as of November 16, 2006. The dividend reinvestment option will end at the close of business on November 30, 2006 and the dividend will be paid in shares or in cash on December 8, 2006. Outlook Our excellent first-half results reflect the strategy and policies pursued successfully by ABC arbitrage over the past few years. They demonstrate the ability of the Group and its employees to harness their energies constructively and work together to build a promising long-term future. Based on our robust, high-quality performance, we are confident in the outlook for the second half despite a new downturn in volatility.. Interim report 2006 - Page 4 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. The Board of Directors 28th September, 2006.

(5) ABC arbitrage. Balance sheet. Balance sheet - assets June 30, 2006 IFRS. Dec. 31, 2005 IFRS. 10,362. 12,030. Property and equipment. 404,954. 475,638. Current financial assets. 392,622. 418,473. In EUR. Note. Intangible assets. Deferred tax assets Total actif non-current assets Financial assets at fair value through profit or loss Other accounts receivable Cash and cash equivalents Total current assets. TOTAL ASSETS. 959,868. 578,036. 1,767,806. 1,484,176. 483,282,099. 357,814,566. 4,469,239. 7,292,736. 275,775. 301,638. 488,027,113. 365,408,940. 489,794,919. 366,893,116. June 30, 2006 IFRS. Dec. 31, 2005 IFRS. 481,256. 481,215. 22,730,425. 22,726,801. 3,291,986. 1,887,079. Balance sheet - liabilities In EUR. Note. Paid-up share capital Additional paid-in capital Retained earnings Interim dividend Net income Total equity attributable to equity holders Minority interests. -. (2,907,770). 6,003,980. 7,031,687. 32,507,647. 29,219,012. (129). (115). Provisions for contingencies and charges. 442,168. 442,168. Non-current financial liabilities. 166,183. 166,183. Non-current liabilities. 608,351. 608,351. Financial liabilities at fair value through profit or loss. 445,520,389. 332,117,971. Other liabilities. 6,271,597. 2,260,741. Taxes payable. 4,665,601. 2,653,187. 221,462. 33,968. Current liabilities. 456,679,050. 337,065,867. TOTAL EQUITY AND LIABILITIES. 489,794,919. 366,893,116. Short-term debt. Interim report 2006 - Page 5 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. Equity attributable to equity holders.

(6) ABC arbitrage. Statement of income. Statement of income June 30, 2006 IFRS. June 30, 2005 IFRS. Dec. 31, 2005 IFRS. Net gain/loss on financial instruments at fair value through profit or loss Other revenue. 20,718,989. 11,141,775. 20,842,619. 451,722. 439,717. 895,543. Administrative expenses. (1,268,053). (1,285,278). (2,673,588). Taxes and duties. Note. (190,960). (209,404). (303,280). (4,460,968). (3,117,298). (5,901,517). (139,798). (141,182). (275,420). OPERATING INCOME. 15,110,932. 6,828,329. 12,584,357. Provision expense. (3,419,878). (517,334). (1,247,749). INCOME BEFORE TAX. 11,691,054 (6,068,921). 6,310,995 (2,339,375). (4,307,232). Payroll costs Depreciation and amortisation expense. Current taxes. 11,336,608. Deferred taxes. 381,832. (258,450). 2,278. NET INCOME. 6,003,966. 3,713,171. 7,031,654. Attributable to equity holders. 6,003,980. 3,713,205. 7,031,687. (14). (34). (33). Attributable to minority interests Number of ordinary shares. 30,078,503. 27,993,194. 30,075,924. Earnings per ordinary share. 0.20. 0.13. 0.23. Diluted earnings per ordinary share. 0.20. 0.13. 0.23. Interim report 2006 - Page 6 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. In EUR.

(7) ABC arbitrage. In EUR thousand. At January 1, 2005. •. Statement of changes in equity between January 1, 2005 and June 30, 2006. Paid-up share capital. Equity instruments and related reserves. Elimination of treasury shares. Retained earnings and net income. Total equity. 448. 18,863. (95). 4,726. 23,941. Movements arising from transactions with shareholders. Issue of shares. nm. 4. -. (4). -. Elimination of treasury shares. -. -. 22. (32). (11). Appropriation of net income 2004*. -. -. -. (2.798). (2,798). Net income for the period. -. -. -. 3.713. 3,713. 448. 18.867. (73). 5.604. 24.845. Paid-up share capital. Equity instruments and related reserves. Elimination of treasury shares. Retained earnings and net income. Total equity. 481. 22,727. (61). 6,072. 29,219. nm. 4. -. -. 4. -. -. nm. 13. 13. At June 30, 2005. In EUR thousand. At January 1, 2006. •. Movements arising from transactions with shareholders. Issue of shares Elimination of treasury shares Share-based payments. -. -. -. 276. 276. Appropriation of net income 2005*. -. -. -. (3,008). (3,008). Net income for the period At June 30, 2006. -. -. -. 6,004. 6,004. 481. 22,730. (61). 9,357. 32,508. nm : non material. Interim report 2006 - Page 7 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. * Appropriations of 2004 and 2005 net income do not include the impact of dividend reinvestment in shares during July (see note 2.3.)..

(8) Consolidated cash flow statements. June 30, 2006 IFRS. June 30, 2005 IFRS. Dec. 31, 2005 IFRS. Net income. 6,004. 3,713. 7,032. Net allocations to provisions. 3,420. 448. 1,155. 140. 141. 275. (382). 258. 2. In EUR thousand. Net allocations to depreciation and amortisation Change in deferred taxes Others Net cash provided by operations before changes in working capital Changes in working capital Net cash provided by operating activities Net cash used by investing activities Issuance of shares for cash Dividends paid Increase in borrowings Net cash used by financing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period. 290. (11). 56. 9,472. 4,550. 8,521. (6,638). (3,478). (8,406). 2,834. 1,073. 115. (43). (135). (197). 4. -. 12. (3,008). (2,798). (1,823). -. -. -. (3,004). (2,798). (1,810). (213). (1,861). (1,892). 268. 2,159. 2,159. 55. 298. 268. Interim report 2006 - Page 8 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. ABC arbitrage.

(9) ABC arbitrage. Notes to the consolidated financial statements. 1. Accounting principles The summarized interim consolidated financial statements for the ABC arbitrage Group for the 6-months period ending June 30, 2006 were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. In particular, the interim financial statements were prepared and are presented in accordance with IAS 34 “Interim Financial Reporting”. As permitted by IAS 34, this condensed set of financial statements includes only selected explanatory notes. These condensed consolidated financial statements for the six months ended June 30, 2006 must be read in conjunction with the Group’s 2005 consolidated financial statements. In preparing the interim consolidated financial statements, the Group applied the same accounting principles and methods as for its year-end 2005 consolidated financial statements, which were drawn up in accordance with IFRS as adopted by the European Union and described in note 1 to the 2005 consolidated financial statements « Significant accounting principles » and note 2 « Accounting principles and policies ». Preparation of the financial statements required ABC arbitrage Group to make estimates and assumptions which could have an impact on the amounts at which assets, liabilities, income and expenses are stated. The estimates, and the assumptions underlying them, have been made on the basis of past experience and of other factors considered to be reasonable in the circumstances. They thus serve as the basis for the judgement made in determining the carrying amounts of assets and liabilities which could not be determined directly from other sources. The definitive amounts that will be stated in ABC arbitrage Group’s future financial statements may be different from the amounts currently estimated. These estimates and assumptions are reviewed on a continuous basis. As the Group’s activities are neither seasonal or cyclical in nature, its first half results were not affected by any seasonal or cyclical factors.. 2. Notes to the balance sheet – 1st half 2006 2.1. Consolidation principles. Company ABC arbitrage. Countries. Proportion of capital held directly or indirectly. France. Parent company. Germany. 100.00%. ABCA Global Fund. France. 100.00%. ABC arbitrage Asset Management. France. 99.99%. BC Finanzberatung GmbH. 2.2. Other non-current financial assets At June 30, 2006, this item included EUR 286 thousand in deposits and EUR 107 thousand in employee advances. These exceptional advances were granted in May 2004, by unanimous decision of the Management Board, to holders of warrants to subscribe for founders shares and holders of stock options, to enable them to exercise their warrants or options. Under no circumstances may the advances be used for any other purpose.. Interim report 2006 - Page 9 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. All group subsidiaries are fully consolidated..

(10) 2.3. Consolidated equity Increase in issued capital following the exercise of warrants to subscribe for founder shares During first half 2006, 2,579 new ordinary shares, ranking pari passu with existing shares, were issued to holders of rights to founders' shares. The total issue proceeds included EUR 41.26 credited to paid-up capital and EUR 3,623.50 credited to additional paid-in capital. Treasury stock During first half 2006, ABC arbitrage sold 34,070 of its own shares in compliance with COB regulation 90-04. At the same time, 29,195 shares were purchased under the market-making agreement with Fortis. At June 30, 2006, ABC arbitrage held 24,217 of its own shares, acquired at a total cost of EUR 61. Share-based payment The Board of Directors has introduced an ambitious share-based incentive program for its executive officers and key employees. The plans comprising the program set earnings targets for two to five year periods. The amount that vests each year depends on the company’s annual performance, with the entire amount vesting if aggregate net income over the five-year period reaches EUR 100 million. During fiscal year 2005, the Group granted 399,500 shares to 21 grantees on September 19, 2005 At its meeting of May 22, 2006, the Board of Directors decided to grant : - 211,939 shares to 16 grantees ; - 2,108,000 shares to 24 grantees ; - 8,845,000 stock options to 24 grantees ; - 1,200,000 warrants to 3 grantees . For the last two groups, the exercise price has been set at EUR 4 and may be revised in light of future dividend payments, with a minimum of EUR 2.514 (average share price on date of Board’s decision). The expense related to stock option plans is recognised over the vesting period. This expense, the credit entry for which is posted to shareholders’ equity, is calculated on the basis of the overall plan value, determined at the grant date by the Board of Directors. In the absence of any market for these instruments, mathematical valuation models are used. The key data and assumptions used to estimate the fair value of these equity instruments are the share price on the grant date, estimated future dividends which will not be received by the grantees, a discount rate equal to the risk-free rate plus a credit risk premium, the probability of the profitability and continued presence conditions being met and, in the case of stock options and warrants to subscribe for founder’s shares, historical volatility and liquidity in ABC arbitrage shares. The benefit is measured at the fair value of the shares at the grant date, which may not be revised subsequently following any changes in ABC arbitrage’s share price. The ultimate cost will depend on whether the performance conditions are met and how many of the beneficiaries are still employed by the group on the vesting date.. Capital increase resulting from reinvestment of dividends The Annual Shareholders’ Meeting of May 31, 2006 decided to pay a final dividend for 2005 in a net amount of EUR 0.10 per share and to offer shareholders the option of receiving the final 2005 dividend either in cash or in new shares. At June 30, 2006, equity was reduced by EUR 3,008 thousand to take account of the dividend payment. At the end of the option period (July 27, 2006), taking account of reinvested dividends and treasury shares: - cash dividends were paid in the amount of EUR 604 thousand, - 1,058,164 new ordinary shares, ranking pari passu with existing shares, were issued at a price of EUR 2.27 per share. The total issue proceeds included EUR 16,930.70 credited to paid-up capital and EUR 2,385,112.93 credited to additional paid-in capital. The 1,058,169 new ordinary shares are fully paid. At July 27, 2006, the Parent Company’s share capital was represented by 31,142,950 ordinary shares with a par value of EUR 0.016 each, all fully paid.. Interim report 2006 - Page 10 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. At June 30, 2006, the payroll expense amounts to EUR 276 thousand..

(11) 2.4. Financial assets/liabilities at fair value through profit or loss The Group holds financial instruments for trading purposes only. Details of securities to be received and delivered are provided in note 2.6. Risks. Cash reserves earn interest at variable rates indexed to benchmark market rates. Fair value of financial assets and liabilities is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The primary basis for determining the fair value of a financial instrument is the quoted price in an active market. If the instrument is not traded on an active market, fair value is determined using valuation techniques. Financial assets. Financial liabilities. Securities to be received. 479,590. 51,422. Securities to be received (recorded off-balance sheet). 133,521. 9,560. In EUR thousand. Securities to be delivered. -. (516,351). (113,324). (30,288). Cash and cash equivalents. (16,505). 40,137. Total at June 30, 2006. 483,282. (445,520). Total at December 31, 2005. 357,815. (332,118). Securities to be delivered (recorded off-balance sheet). Total 674,093 (659,964) 23,632. 2.5. Other receivables and payables All receivables and payables are due within less than one year. In EUR thousands Trade receivables/payables. Other receivables. Other payables. 285. 221. Balance of dividend payable. -. 3,008. 498. 331. 3,686. 2,711. Total at June 30, 2006. 4 ,69. 6,271. Total at December 31, 2005. 7,293. 2,261. Accrued income/expenses Accrued taxes and payroll costs. 2.6. Risks The Group's risks are the same as those described in the notes to the consolidated financial statements for the year ended December 31, 2005.. Type of arbitrage (in EUR thousands). Total long positions. Total short positions. Securities borrowed and not yet sold or symmetrical exposures. 122,402. (122,402). Arbitrages without market risks. 444,669. (480,707). Arbitrages with market risks. 107,023. (56,855). Total for arbitrage transactions. 674,093. (659,964). 2.7. Guarantees given Most financial instruments recorded under “Financial assets at fair value through profit or loss” have been given as collateral to the institutions that provide the financing.. Interim report 2006 - Page 11 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. The following table summarizes the positions taken on the markets at June 30, 2006:.

(12) 3. Notes to the statement of income – 1st half 2006 3.1. Net gains on financial instruments at fair value through profit or loss In view of the highly specific nature of its business, the ABC arbitrage group is probably one of the only independent firms engaged solely in arbitrage trading. The Group has opted for presentation by nature as this is closer to the indicators customarily published in its management report. At June 30, 2006, “Net gains or losses on financial instruments at fair value through profit or loss” came to EUR 20,719 thousand, an increase of almost 86% compared with firs half 2005 (EUR 11,142 thousand at June 30, 2005). This item corresponds to revenues from proprietary trading activities discussed in the Group’s management report, except for provisions. It includes all expenses and costs directly related to the trading business, including: dividends; gains and losses on disposal of financial assets at fair value through profit or loss; changes in fair value of instruments held or due; securities carrying or lending costs; exchange gains and losses. 3.2. Other revenue Other revenue comprises revenue from sub-letting premises and amounted to €452,000 versus €440,000 during first half 2005.. 3.3. Administrative expenses Administrative expenses principally comprise data mining and processing costs, together with administrative and communications costs. This item totalled EUR 1,268 thousand versus EUR 1,285 thousand for the first half 2005.. Payroll costs include EUR 3,119 thousand in fixed and performance-related compensation together with statutory and discretionary profit-sharing (versus EUR 2,245 in 2005), payroll taxes of EUR 1.065 thousand (versus EUR 873 thousand in 2005). Payroll-based taxes amounted to EUR 131 thousand (versus EUR 115 thousand in 2005). Share-based payments amounted to EUR 276 thousand. The Group does not provide any post-employment benefits (supplementary pensions or health insurance).. 3.5. Provision expense At 30 June, 2006, provision expense amounted to EUR 3,419 thousand, comprising additional impairment losses on receivables from the Italian government.. 3.6. Note to the statement of cash flow The change in net cash and cash equivalents reflects the cash flows arising from the administrative management of Group companies. Cash flows relating to operating activities and their financing appear as changes in working capital.. Interim report 2006 - Page 12 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. 3.4. Payroll costs At June 30, 2006, the average number of employees was 53 versus 50 for the first half 2005..

(13) 4. Segment information Revenues by business segment Arbitrage trading is the Group’s only business activity and all revenues are derived from proprietary transactions. The Group conducts two types of arbitrage strategy with different risk profiles in various geographical markets: arbitrages without market risks-self liquidating arbitrage strategies (transactions that do not generate any directional risk or any event risk ; positions are fully hedged and are governed by legally binding documentation which guarantees convergence on a fixed date) and arbitrages with market risks-suspensive clause arbitrage strategies (unlike the first category, the legally binding documentation governing suspensive clause strategies does not guarantee convergence).. Note: In the following tables, positions correspond to long positions valued at the convergence price, adjusted for the value of any payments to be made or received to close out the transaction. Breakdown of arbitrage transactions by type of risk 1st half 2006. Average number of arbitrage transactions. Average positions (value). 72%. 87%. Arbitrages without market risks Arbitrages with market risks Total. 28%. 13%. 100%. 100%. Breakdown of arbitrage transactions by geographic area 1st half 2006. Average number of arbitrage transactions. Average positions (value). 18%. 26%. 6%. 14%. 62%. 41%. Euro zone (excluding France) France USA Other markets Total. 14%. 19%. 100%. 100%. 1st half 2006 Euro zone (excluding France). Arbitrages without market risks. Arbitrages with market risks. Total. 16%. 4%. 20%. France. 34%. -. 34%. USA. 27%. 5%. 32%. Other markets. 10%. 4%. 14%. Total. 87%. 13%. 100%. Interim report 2006 - Page 13 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. Breakdown of arbitrage transactions by geographic area and type of risk.

(14) ABC arbitrage. Statutory auditors’ report on the interim consolidated financial statements for the six months ended June 30, 2006. To the shareholders, In our capacity as statutory auditors and in accordance with article L.232-7 of the Code de Commerce, we have performed a limited review of the accompanying interim consolidated financial statements of ABC arbitrage for the period from January 1 to June 30, 2006. We have also reviewed the information contained in the interim report. These financial statements are the responsibility of the Board of Directors. Our responsibility is to report our conclusions on these financial statements based on our limited review. We conducted our limited review in accordance with the standards generally accepted in France. A limited review of interim financial statements consists principally of making inquiries of persons responsible for financial and accounting matters and applying analytical and other review procedures. This type of review is substantially less in scope than an audit conducted in accordance with the professional standards generally accepted in France and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our limited review, nothing has come to our attention that causes us to believe that the interim consolidated financial statements are not presented fairly, in all material respects, in accordance with IAS 34 – Interim Financial Reporting Standard as adopted by the European Union. We also reviewed, in accordance with the standards generally accepted in France, the information given in the interim report on the interim consolidated financial statements that were the subject of our limited review. We are satisfied that this information is fairly stated and agrees with the interim consolidated financial statements.. Paris/Neuilly-sur-Seine, September 29, 2006. CONSTANTIN ASSOCIES. ERNST & YOUNG et AUTRES. Brigitte Drême. Olivier Durand. Interim report 2006 - Page 14 on 14. WorldReginfo - 37f8b815-3918-4b21-8ff8-aa30163d3fb0. The statutory auditors.

(15)