Investcorp S.A. Auditors’ report to the shareholders We have audited the accompanying consolidated balance sheet of Investcorp S.A. (the Company) and its subsidiaries (the Group) as of December 31, 2001, and the related consolidated statements of income, changes in shareholders’ funds and cash flows for the year then ended. These financial statements are the responsibility of the Company’s Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2001 and the results of its operations and its cash flows for the year then ended in accordance with International Accounting Standards. Luxembourg Ernst & Young January 7, 2002 Société Anonyme Réviseurs d’entreprises Kenneth A. Hay Investcorp S.A. Consolidated balance sheet December 31, 2001 ($ thousands) Note 2001 2000 Assets Cash and short-term funds 24,151 4,215 Deposits with banks 34,014 51,268 Managed funds 4 1,529,539 1,301,167 Accounts receivable 5 328,855 197,273 Accrued interest and other assets 6 101,611 116,180 Investments 7 1,286,872 1,186,088 Fixed assets 9 33,387 35,321 Total assets 3,338,429 2,891,512 Liabilities and shareholders’ funds Liabilities Deposits from clients and Islamic financing 594,959 640,990 Accrued interest and other payables 10 146,951 115,231 Medium-term facilities 11 925,000 660,000 Long-term notes 12 752,063 639,526 Total liabilities 2,418,973 2,055,747 Shareholders’ funds Preference share capital 13 200,000 – Ordinary share capital 13 100,000 100,000 Reserves 80,304 79,079 Retained earnings 623,044 621,001 Proposed ordinary share dividend 14 36,914 30,000 Proposed preference share dividend 14 5,205 – Fair value adjustments 15 (126,011) 5,685 Total shareholders’ funds 919,456 835,765 Total liabilities and shareholders’ funds 3,338,429 2,891,512 The attached notes 1 to 27 form part of these financial statements. Abdul-Rahman Salim Al-Ateeqi Nemir A. Kirdar Chairman President and Chief Executive Officer Investcorp S.A. Consolidated statements of income and changes in shareholders’ funds For the year ended December 31, 2001 ($ thousands) Note 2001 2000 Consolidated statement of income Interest income 50,995 83,552 Income from managed funds 119,163 184,405 Gross asset-based income 170,158 267,957 Interest expense 132,843 164,156 Net asset-based income 37,315 103,801 Investment-related income 16 206,886 202,671 Provisions for investments 8 75,794 118,434 Net investment-related income 131,092 84,237 Operating income 168,407 188,038 Staff compensation and benefits 68,827 70,408 Professional fees 16,528 10,877 Travel and business development 9,843 9,130 Administration 8,850 13,123 Corporate information 1,298 1,965 Technology and communication 3,156 2,488 Premises 7,380 7,653 Other 2,403 2,355 Operating expenses 118,285 117,999 Net income before appropriation expenses 50,122 70,039 Less: Appropriation expenses incurred at parent level 2,662 3,141 Net income for the year 47,460 66,898 Consolidated statement of changes in shareholders’ funds Preference shares issued during the year 13 200,000 – Ordinary share capital 13 100,000 100,000 Legal reserve at beginning of the year 29,079 29,079 Add: Transfer from retained earnings 1,225 – Legal reserve at end of the year 17 30,304 29,079 General reserve 18 50,000 50,000 Reserves 80,304 79,079 Retained earnings at beginning of the year 621,001 584,103 Net income for the year 47,460 66,898 Less: Proposed preference share dividend 14 5,205 – Proposed ordinary share dividend 14 36,914 30,000 Preference share issue expenses 2,073 – Transfer to legal reserve 1,225 – Retained earnings at end of the year 623,044 621,001 Proposed dividends 42,119 30,000 Shareholders’ funds before fair value adjustments 1,045,467 830,080 Fair value adjustments at beginning of the year 5,685 – Movements during the year (131,696) 5,685 Fair value adjustments at end of the year 15 (126,011) 5,685 Shareholders’ funds at end of the year 919,456 835,765 The attached notes 1 to 27 form part of these financial statements. Investcorp S.A. Consolidated statement of cash flows For the year ended December 31, 2001 ($ thousands) 2001 2000 Cash flow used in operating activities Net income for the year 47,460 66,898 Adjustments to reconcile net income to net cash: Depreciation 4,458 4,542 Provisions for investments 75,794 118,434 Net cash from operating activities before changes in managed funds 127,712 189,874 Increase in managed funds other than funds with enhanced cash managers (214,245) (72,024) Net cash (used in) from operating activities after changes in managed funds (86,533) 117,850 Changes in other operating assets and liabilities (Increase) decrease in accounts receivable (131,582) 57,075 Decrease (increase) in accrued interest and other assets 14,569 (50,406) Increase in investments (291,066) (257,345) Additions to fixed assets (2,660) (8,623) Disposals of fixed assets 136 696 Decrease in deposits from banks – (10,000) Decrease in deposits from clients and Islamic financing (46,031) (117,383) Increase (decrease) in accrued interest and other payables 14,512 (59,150) Net cash used in operating activities (528,655) (327,286) Cash flow from (used in) financing activities Medium-term facilities repaid (160,000) (475,000) Medium-term facilities received 425,000 260,000 Long-term notes issued 129,878 148,738 Long-term notes redeemed (17,341) – Preference shares issued 200,000 – Preference share issue expenses (2,073) – Dividends paid (30,000) (30,000) Net cash from (used in) financing activities 545,464 (96,262) Net increase (decrease) in cash and cash equivalents 16,809 (423,548) Cash and cash equivalents at beginning of the year 246,200 669,748 Cash and cash equivalents at end of the year 263,009 246,200 16,809 (423,548) Cash and cash equivalents comprise Cash and short-term funds 24,151 4,215 Deposits with banks 34,014 51,268 Funds with enhanced cash managers 204,844 190,717 263,009 246,200 The attached notes 1 to 27 form part of these financial statements. Investcorp S.A. Notes to the consolidated financial statements December 31, 2001 1. Incorporation and activities Investcorp S.A. (the Company) is incorporated as a limited liability company in the Grand Duchy of Luxembourg and qualifies as a financial holding company. Its registered office is at 4th Floor, 68-70 boulevard de la Petrusse, L -2320 Luxembourg, P.O. Box 1361, L -1013 Luxembourg. The principal activities of the Company and its subsidiaries (the Group), are investment in, and advisory services relating to, money market operations, corporate, real estate and technology investments, and managed funds. The consolidated financial statements are prepared in U.S. dollars, this being the principal currency of the Group’s business. The Company is wholly owned by Investcorp Holdings Limited (incorporated in the Cayman Islands). Investcorp Bank E.C. (incorporated in the State of Bahrain) is the parent company of Investcorp Holdings Limited. Audited consolidated financial statements are prepared separately for Investcorp Bank E.C. and Investcorp Holdings Limited. The financial statements of the Group for the year ended December 31, 2001 were authorized for issue in accordance with the resolution of the Board of Directors on January 6, 2002. 2. Significant accounting policies The consolidated financial statements of the Company are prepared in accordance with International Accounting Standards and the Interpretations of the Standing Interpretations Committee. The International Accounting Standard – (IAS) 39: Financial Instruments – Recognition and Measurement was implemented for the year ended December 31, 2000. The following is a summary of the significant accounting policies adopted in preparing the consolidated financial statements. a) Accounting convention The consolidated financial statements are prepared under the historical cost convention as modified for the measurement at fair value of managed funds, investments, hedged long-term notes and derivatives. b) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. The results of subsidiaries are included in the consolidated statement of income from the effective date of formation or acquisition. All intercompany balances, transactions and income have been eliminated on consolidation. Subsidiary companies formed or acquired with the intention of sale in the near future are not consolidated as control is intended to be temporary. c) Managed funds Managed funds are classed as held-for-trading and are stated at market value at the balance sheet date. Gains and losses on sales and market value adjustments are taken to income. d) Accounts receivable Provisions are made against accounts receivable as soon as they are considered doubtful. e) Investments All investments are initially recognized at cost, being the fair value of the consideration given including acquisition charges associated with the investment. After initial recognition, “available-for-sale” investments are remeasured to fair value. Unrealized gains and losses arising from the remeasurement to fair value of available-for-sale investments, after adjusting for illiquidity constraints, where appropriate, are reported as a separate component of shareholders’ funds. When the investment is sold or otherwise disposed of, the cumulative gain or loss previously reported in shareholders’ funds is included in the statement of income for the period. An assessment is made for all investments at the balance sheet date to determine whether there is objective evidence that an investment may be impaired. If such evidence exists, the estimated recoverable amount of such investment is determined and any potential impairment loss is recognized in the statement of income for the period. For investments actively traded in organized financial markets, fair value is generally determined by reference to quoted market prices at the close of business on the balance sheet date. Holdings in unquoted investments that are available-for-sale are separated into two classes for the purpose of estimating fair values. These classes are corporate and technology, and real estate investments. These investment classes are valued in accordance with the valuation policies set out below: i) Corporate and technology investments These investments are valued based on the projected sale value if an exit is imminent or negotiations for sale are in progress. Alternatively, if a recent significant capitalization event involving third parties has occurred or is in progress, then the investment is valued at the valuation implied by the event. In all other circumstances fair value is based on values derived from comparable companies. ii) Real estate investments These investments, which are held through investment holding companies, are generally valued based on discounted estimated future cash flows of the underlying real estate assets. f) Fixed assets and depreciation Fixed assets are recorded at cost. The cost of fixed assets is depreciated by equal annual installments over their expected useful lives. Depreciation is charged from the date the asset is commissioned. g) Accruals for expenses and commitments Accruals are made when the Group has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. h) Borrowings Borrowings, represented by medium-term facilities and long-term notes, are recognized initially at cost, being their issue proceeds, net of direct transaction costs incurred. Subsequently, borrowings are stated at amortized cost, and any difference between net proceeds and the redemption value is recognized in the statement of income over the period of the borrowings. Hedge accounting rules are applied to borrowings that are hedged. i) Income Interest receivable and payable are recognized on a time-proportion basis taking account of the principal outstanding and the rate applicable. Income from managed funds and investments held-for-trading is recognized on the basis of changes in the market value of the underlying investments. Fees receivable and payable are recognized when earned. Realized capital gains on investments are taken to income at the time of disposal. j) Cash and cash equivalents Cash and cash equivalents consist of cash and short-term funds, deposits with banks maturing within 90 days of the balance sheet date, and funds with enhanced cash managers. k) Trade date accounting All regular way purchases and sales of financial assets are recognized on the “trade date”, i.e., the date that the entity commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. l) Foreign currencies Foreign currency transactions are recorded at rates of exchange prevailing at the value dates of the transactions. Monetary assets and liabilities in foreign currencies are retranslated at market rates of exchange prevailing at the balance sheet date. Gains and losses on translating assets and liabilities which form part of a cash flow hedge are recognized directly in shareholders’ funds until the related asset or liability is disposed of or settled, together with the gain or loss on the related and qualifying hedging instrument. Any other gains and losses are taken to income. m) Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly are not included in the consolidated balance sheet. n) Derivative financial instruments The Group enters into derivative instruments including futures, forwards, swaps, caps and options in the foreign exchange and capital markets. Derivatives are stated at fair value. The fair value of a derivative is the equivalent of the unrealized gain or loss from marking to market the derivative using prevailing market rates or internal pricing models. Derivatives with positive market values (unrealized gains) are included in other assets and derivatives with negative market values (unrealized losses) are included in other payables in the balance sheet. The resultant gains and losses from derivatives held for trading purposes are included in the statement of income. For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognized asset or liability; and (b) cash flow hedges, which hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a forecasted transaction. The Group’s criteria for a derivative financial instrument to be accounted for as a hedge include: n the hedging instrument, the related hedged item, the nature of the risk being hedged and the risk management objective and strategy must be formally documented at the inception of the hedge; n it must be clearly demonstrated that the hedge is expected to be highly effective in offsetting the changes in fair values or cash flows attributable to the hedged risk in the hedged item; n the effectiveness of the hedge must be capable of being reliably measured; and n the hedge must be assessed on an ongoing basis and determined to have actually been highly effective throughout the financial reporting period. In relation to fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument to fair value is recognized immediately in the statement of income. Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and recognized in the statement of income. In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in shareholders’ funds and the ineffective portion is recognized in the statement of income. For cash flow hedges affecting future transactions, the gains or losses which are recognized in shareholders’ funds are transferred to the statement of income in the same period in which the hedged transaction affects the statement of income. Where the hedged transaction results in the recognition of an asset or a liability, then at the time the asset or liability is recognized, the associated gains or losses that had previously been recognized in shareholders’ funds are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For hedges which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of the hedging instrument are taken directly to the statement of income for the period. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognized in shareholders’ funds is kept there until the forecasted transaction occurs. Where the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognized in equity is transferred to the statement of income. In the case of fair value hedges of interest-bearing financial instruments, any adjustment relating to the hedge is amortized over the remaining term to maturity. o) Employee benefit costs Provision is made for amounts payable in accordance with contractual and statutory obligations and other benefit plans approved by the Board of Directors. p) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and the Group intends to either settle on a net basis, or to realize the asset and settle the liability simultaneously. 3. Subsidiary companies The Company has the following significant wholly owned subsidiaries consolidated into these financial statements: Country of incorporation Investcorp International Limited England Investcorp Securities Limited England Investcorp Financial and Investment Services S.A. Switzerland Investcorp International Inc. U.S. Investcorp Trading Limited Cayman Islands Investcorp Investment Holdings Limited Cayman Islands Investcorp Funding Limited Cayman Islands Investcorp Management Services Limited Cayman Islands Global Strategy Limited Cayman Islands Investcorp A.M.P. Limited Cayman Islands Invifin S.A. Luxembourg Investcorp Ireland Financial Services Limited Ireland 4. Managed funds ($ thousands) 2001 2000 Funds with enhanced cash managers 204,844 190,717 Funds with fixed income managers 328,337 240,932 Funds with hedge fund managers 996,358 869,518 1,529,539 1,301,167 Managed funds represent funds placed for investment with external asset managers. The enhanced cash program deploys the Group’s excess short-term liquidity into highly liquid fixed income investments and targets returns of $ LIBOR plus 100 basis points. Funds with fixed income managers are invested in high investment grade instruments. The objective of the fixed income program is to outperform $ LIBOR by several percentage points. Funds with hedge fund managers are invested in stocks, derivatives, bonds and other liquid instruments with the objective of generating superior returns on a risk-adjusted basis through a portfolio having a diversified profile. The underlying assets in this program have a lower standard deviation or volatility of returns than similar traditional asset classes. 5. Accounts receivable ($ thousands) 2001 2000 Subscriptions receivable 252,514 88,803 Managed funds fees receivable 5,654 3,831 Management fees and other receivables 70,687 104,639 328,855 197,273 6. Accrued interest and other assets ($ thousands) 2001 2000 Accrued interest receivable 10,477 17,067 Prepaid expenses 13,162 7,065 Facilitated investment program 58,266 44,847 Fair value of derivatives (note 26) 12,892 15,385 Other assets 6,814 31,816 101,611 116,180 Facilitated investment program represents the amount invested in managed funds in connection with a facilitated investment program for employees and carries interest at market rates. 7. Investments These investments, held as available-for-sale, comprise the Group’s share in corporate, real estate and technology investments and are stated net of provision for any impairment. ($ thousands) 2001 2000 Investments – Short-term 439,605 357,317 Investments – Long-term 955,505 822,521 Fair value adjustments (108,238) 6,250 1,286,872 1,186,088 Short-term investments are comprised of investments for which placement is in progress at year-end and the Group’s share in corporate, real estate and technology investments that are held with the intention of resale in the short- to medium-term depending on market conditions prevailing. Long-term investments are comprised of the Group’s share in corporate, real estate and technology investments that are held with the intention of sale in the longer term. ($ thousands) 2001 2000 Short-term quoted investments 250,781 157,537 Short-term unquoted investments 188,824 199,780 439,605 357,317 Long-term unquoted investments Aspective 24,615 25,065 The first European application service provider to offer integrated front office and e-commerce applications via the Internet. Avecia 88,782 87,474 A leading worldwide manufacturer and marketer of specialty chemicals. Callahan Broadband 18,401 15,749 A company formed for the purpose of acquiring broadband fixed wireless licenses. Callahan German Cable 17,824 18,871 A company formed to pursue a strategy to benefit from the deregulation of the German Cable TV industry. Carvel 58,574 52,081 A manufacturer and distributor of ice cream and ice cream cakes in the eastern United States and California. CityReach – 17,447 A European provider of secure internet infrastructure services. Colo.com – 33,578 A provider of neutral office colocation facilities to telecom, Internet and application service providers. Gerresheimer Glas 17,523 17,128 A world leader in tubular and specialty glass packaging. Harborside 55,531 37,915 A leading operator of long-term healthcare facilities in the eastern United States. Helly Hansen 29,158 28,877 A Norwegian manufacturer of outdoor apparel. Independent Wireless One – 25,127 A wireless telecommunication services provider in the north-eastern United States. Jostens 39,965 37,862 A leading manufacturer and distributor of school affinity products. NationsRent 61,780 42,970 The fourth largest equipment rental company in the United States. Polestar 195,606 60,326 The largest independent printing group in Europe. Synthetic 64,678 58,565 A leading U.S. manufacturer and marketer of polypropylene fabrics and fibers for the home furnishing, construction, environmental and agricultural industries. TelePacific 55,320 53,054 A telecom service provider based on the west coast of the United States. Welcome Break 60,148 58,779 The second largest U.K. operator of motorway service areas, including the supply of fuel, catering, retailing and lodging services on the motorway network. Werner 23,808 21,818 A U.S. manufacturer of climbing equipment and aluminum components. Other 143,792 129,835 This represents the Group’s share of real estate investments and other corporate and technology investments of less than $10 million each. 955,505 822,521 Total investments before fair value adjustments 1,395,110 1,179,838 Fair value adjustments (note 15) (108,238) 6,250 Total investments after fair value adjustments 1,286,872 1,186,088 The Group’s management uses its best judgment in estimating the fair value of unquoted investments. The fair value estimates presented herein are not necessarily indicative of an amount that the Group would realize in a current transaction and, because of the inherent uncertainty of valuations, do not represent amounts that will be ultimately realized, since such amounts depend on future circumstances, and the differences could be material. 8. Provisions for investments The provisions for the impairment of investments, including related receivables, were as follows: ($ thousands) 2001 2000 At January 1 58,294 244,506 Charge for the year 75,794 118,434 Other movement 28,867 – Written off (75,922) (304,646) At December 31 87,033 58,294 The gross carrying value of the investments, including related receivables, against which the above provisions are carried was $148 million at December 31, 2001 (2000: $113 million). Other movement represents transfer of provision against receivables that have been capitalized during the year. 9. Fixed assets The estimated useful lives of fixed assets for the calculation of depreciation are as follows: Leasehold and buildings improvements 10-15 years Operating assets 3-10 years Leasehold and buildings Operating ($ thousands) improvements assets Total Cost At December 31, 2000 41,298 22,081 63,379 Additions during the year 2,094 566 2,660 Cost of disposals (119) (1,882) (2,001) At December 31, 2001 43,273 20,765 64,038 Depreciation At December 31, 2000 11,626 16,432 28,058 Charge for the year 2,208 2,250 4,458 Relating to disposals (30) (1,835) (1,865) At December 31, 2001 13,804 16,847 30,651 Net book amounts At December 31, 2000 29,672 5,649 35,321 At December 31, 2001 29,469 3,918 33,387 10. Accrued interest and other payables ($ thousands) 2001 2000 Accrued interest payable 15,993 6,357 Deferred income 4,429 3,810 Loan 4,499 4,251 Provision for guarantees and commitments 554 5,634 Accrued expenses and other payables 78,564 66,744 Fair value of derivatives (note 26) 42,912 28,435 146,951 115,231 11. Medium-term facilities The amounts outstanding at the year-end represent the utilized portion under the following facilities: ($ thousands) 2001 2000 Term facilities a) Two-year $75 million Murabaha which matured in July 2001 – 75,000 b) Five-year $250 million Eurodollar term facility maturing in May 2003 250,000 250,000 c) Five-year $175 million Eurodollar term facility maturing in April 2005 175,000 175,000 d) Five-year $75 million Eurodollar term facility maturing in June 2006 75,000 75,000 e) Five-year $225 million Eurodollar term facility maturing in July 2006 225,000 – Revolving facilities a) Five-year $175 million Eurodollar revolving facility maturing in April 2005 – 85,000 b) Five-year $75 million Eurodollar revolving facility maturing in June 2006 – – c) Five-year $225 million Eurodollar revolving facility maturing in July 2006 200,000 – 925,000 660,000 The facilities are the joint and several responsibility of Investcorp Bank E.C. and the Company. The Eurodollar facilities carry $ LIBOR based floating rates of interest. Consistent with the covenants contained in these facilities, at least 95% of the consolidated assets of Investcorp Bank E.C. are held through the Company or in companies that are owned directly or indirectly by the Company. Investcorp S.A. Notes to the consolidated financial statements December 31, 2001 12. Long-term notes The amounts outstanding at year-end represent the following guaranteed notes, which carry fixed rates of interest. Currency of Interest rate ($ thousands) issue Maturity per annum 2001 2000 European Bonds Euro Jun-2006 5.75% 169,855 191,215 Series A Guaranteed Senior Notes USD Oct-2005 7.29% 37,000 37,000 Series B Guaranteed Senior Notes USD Oct-2008 7.54% 143,000 143,000 Series A Guaranteed Senior Notes USD May-2009 7.50% 55,000 55,000 Series B Guaranteed Senior Notes USD May-2011 7.70% 15,000 15,000 Guaranteed Senior Notes GBP Jan-2010 7.22% 36,385 37,328 Guaranteed Senior Notes GBP Sep-2011 7.35% 29,331 – Private placement JPY Mar-2030 3.50% 266,492 160,983 752,063 639,526 The above represent amounts received from Investcorp Capital Limited, a related party, arising from its issue of long-term notes. The tenure, interest and repayment terms attached to these long-term notes are as stated above. All the above notes have been unconditionally and irrevocably guaranteed by the Company and Investcorp Bank E.C., and are their joint and several responsibility. 13. Share capital At January 1, 2001, the subscribed share capital comprised 10 million ordinary shares of $10 each, which were fully paid. Following a resolution of the shareholders at an Extraordinary meeting held on September 28, 2001, the 10 million ordinary shares of $10 each were redesignated to 100,000 ordinary shares of $1,000 each. On the same date, the subscribed share capital was increased by 200,000 Series A redeemable preference shares of $1,000 each which were issued, subscribed and fully paid. The preference shares are non-cumulative, non-participating and perpetual in nature and carry a dividend of 10% per annum up to December 31, 2006. Thereafter the annual dividend will be reset at a floating rate equal to 12 month $ LIBOR plus a margin of 4.08%. These shares take priority over the Company’s ordinary shares for the payment of dividends and the distribution of assets in the event of a liquidation or dissolution of the Company. 14. Proposed dividends The directors have proposed dividends of $5 million for preference shares and $37 million for ordinary shares relating to the year ended December 31, 2001, for formal approval at the annual general meeting. 15. Fair value adjustments Available Cash flow for sale ($ thousands) hedges investments Total Balance at January 1, 2000 (29) – (29) Net realized losses 29 – 29 Net unrealized (losses) gains (565) 6,250 5,685 Balance at December 31, 2000 (565) 6,250 5,685 Net realized losses (gains) 565 (14,799) (14,234) Net unrealized losses (17,773) (99,689) (117,462) Balance at December 31, 2001 (17,773) (108,238) (126,011) 16. Investment related income ($ thousands) 2001 2000 Acquisition income 110,758 126,448 Exit income 58,133 62,910 Managed funds fees 19,289 12,161 Management fees and other income 18,706 1,152 206,886 202,671 17. Legal reserve Luxembourg companies are required to transfer to legal reserve a minimum of 5% of the unconsolidated annual net income, after deducting any losses brought forward, until this reserve equals 10% of the nominal value of the issued share capital. This reserve, up to 10% of issued capital, may not be distributed in the form of cash dividends, or otherwise, during the life of the Company. 18. General reserve The general reserve is only distributable following a special resolution of the annual general meeting. 19. Maturity profile of assets and liabilities The maturity profile of assets and liabilities at the year-end determined on the basis of the remaining contractual maturity from that date, where applicable, was as follows: Up to 3 months to 1 year to Over ($ thousands) 3 months 1 year 5 years 5 years Total 2001 Assets Cash and short-term funds 24,151 – – – 24,151 Deposits with banks 34,014 – – – 34,014 Managed funds 1,130,560 372,742 26,237 – 1,529,539 Accounts receivable 294,385 34,470 – – 328,855 Accrued interest and other assets 12,807 59,938 22,742 6,124 101,611 Investments – 224,622 1,062,250 – 1,286,872 Fixed assets – – – 33,387 33,387 Total assets 1,495,917 691,772 1,111,229 39,511 3,338,429 Liabilities Deposits from clients and Islamic financing 564,533 – – 30,426 594,959 Accrued interest and other payables 123,759 3,868 19,324 – 146,951 Medium-term facilities – – 925,000 – 925,000 Long-term notes – – 206,855 545,208 752,063 Total liabilities 688,292 3,868 1,151,179 575,634 2,418,973 2000 Assets Cash and short-term funds 4,215 – – – 4,215 Deposits with banks 51,268 – – – 51,268 Managed funds 965,702 292,614 42,851 – 1,301,167 Accounts receivable 162,805 34,468 – – 197,273 Accrued interest and other assets 15,841 93,337 1,390 5,612 116,180 Investments – 113,408 1,072,680 – 1,186,088 Fixed assets – – – 35,321 35,321 Total assets 1,199,831 533,827 1,116,921 40,933 2,891,512 Liabilities Deposits from clients and Islamic financing 608,864 – – 32,126 640,990 Accrued interest and other payables 93,927 17,481 3,823 – 115,231 Medium-term facilities – 75,000 585,000 – 660,000 Long-term notes – – 37,000 602,526 639,526 Total liabilities 702,791 92,481 625,823 634,652 2,055,747 20. Interest rate risk management The Group closely monitors interest rate movements, and seeks to limit its exposure to such movements by managing the interest rate and maturity structure of assets and liabilities, including use of the value-at-risk methodology. To the extent that such measures are insufficient to avoid mismatches, the Group uses financial futures, swaps and other off-balance sheet financial instruments. In addition, the management regularly reviews the Group’s overall asset and liability structure. The Group’s interest rate sensitivity position at the year-end, determined on the basis of the earlier of the repricing and maturity dates, was as follows: Not exposed Up to 3 months to 1 year to Over to interest ($ thousands) 3 months 1 year 5 years 5 years rate risk Total 2001 Assets Cash and short-term funds 23,620 – – 66 465 24,151 Deposits with banks 34,014 – – – – 34,014 Managed funds 1,130,561 372,741 26,237 – – 1,529,539 Accounts receivable – – – – 328,855 328,855 Accrued interest and other assets 58,266 – – – 43,345 101,611 Investments 54,466 24,503 112,697 – 1,095,206 1,286,872 Fixed assets – – – – 33,387 33,387 Total assets 1,300,927 397,244 138,934 66 1,501,258 3,338,429 Liabilities and shareholders’ funds Deposits from clients and Islamic financing 551,484 – – – 43,475 594,959 Accrued interest and other payables 4,499 – – – 142,452 146,951 Medium-term facilities 750,000 175,000 – – – 925,000 Long-term notes – – 197,717 554,346 – 752,063 Shareholders’ funds – – – 200,000 719,456 919,456 Total liabilities and shareholders’ funds 1,305,983 175,000 197,717 754,346 905,383 3,338,429 On-balance sheet gap (5,056) 222,244 (58,783) (754,280) Off-balance sheet gap 170,892 (516,936) 65,143 280,901 Total interest rate sensitivity gap 165,836 (294,692) 6,360 (473,379) Cumulative interest rate sensitivity gap 165,836 (128,856) (122,496) (595,875) 2000 Total interest rate sensitivity gap 131,543 (8,959) (33,428) (333,613) Cumulative interest rate sensitivity gap 131,543 122,584 89,156 (244,457) The off-balance sheet gap represents the net notional amounts of off-balance sheet financial instruments, such as forward rate agreements and interest rate swaps, which are used to manage interest rate risk. Given the above interest rate sensitivity position at December 31, 2001 and assuming no management action, an immediate and sustained 1% rise in interest rates across all maturities would not have a significant effect on the Group’s income or shareholders’ funds over the next 12 months. Potentially significant variances in interest rate sensitivity may exist at dates other than the year-end. All of the Group’s interest bearing assets and liabilities carry floating rates of interest except for the following: n investments amounting to US $185 million (2000: US $266 million) which earn interest at an effective rate of 11.12% (2000: 11.52%) per annum; n deposits from clients amounting to US $96 million (2000: US $83 million) on which interest is paid at an effective rate of 6.50% (2000: 7.26%) per annum reflecting the underlying maturity structure; and n long-term notes which carry fixed rates of interest as disclosed in note 12. Investcorp S.A. Notes to the consolidated financial statements December 31, 2001 21. Concentration of assets, liabilities and off-balance sheet items 2001 2000 Off-balance Off-balance ($ thousands) Assets Liabilities sheet Assets Liabilities sheet Geographical region North America 2,026,929 258,462 259,855 1,869,385 252,330 297,291 Europe 899,540 1,233,393 2,852,251 726,552 836,581 2,007,776 Middle East 410,249 659,660 150,309 288,735 792,052 75,666 Other 1,711 267,458 – 6,840 174,784 – Total 3,338,429 2,418,973 3,262,415 2,891,512 2,055,747 2,380,733 Industry sector Banking and finance 1,693,246 2,022,650 3,213,185 1,535,747 1,644,083 2,380,733 Food processing 58,556 – – 52,003 – – Luxury merchandise 4,787 – 1,752 5,266 108 – Retail 209,104 – – 169,435 16 – Real estate 113,390 980 – 203,963 3,927 – Manufacturing and services 684,680 5,280 – 423,376 180 – Technology and telecommunications 220,497 33 – 309,749 – – Other 354,169 390,030 47,478 191,973 407,433 – Total 3,338,429 2,418,973 3,262,415 2,891,512 2,055,747 2,380,733 Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. It is the standard practice for Group companies to have policies and procedures in place to limit the amount of credit exposure to any counterparty for both on- and off-balance sheet items. These procedures and the broad geographical and industry spread of Group companies’ activities limit the Group’s exposure to any concentrations of credit risk. 22. Segmental information The Group’s major lines of businesses are corporate and technology investments, real estate investments and asset management. The Group reports its primary segmental information on these business lines. Segmental information for the years ended December 31, 2001 and 2000 is as follows: Corporate and technology Real estate Asset Corporate ($ thousands) investments investments management management Total 2001 Income Revenue 200,031 30,830 103,170 43,013 377,044 Interest expense 27,535 6,561 42,874 55,873 132,843 Operating expenses 37,674 5,080 4,446 73,747 120,947 Income from operations 134,822 19,189 55,850 (86,607) 123,254 Provisions 75,794 – – – 75,794 Net income for the year 59,028 19,189 55,850 (86,607) 47,460 Assets Segment assets 1,434,569 137,920 996,537 769,403 Total assets 3,338,429 2000 Income Revenue 225,456 33,996 145,432 65,744 470,628 Interest expense 49,000 8,391 45,191 61,574 164,156 Operating expenses 36,826 4,600 5,386 74,328 121,140 Income from operations 139,630 21,005 94,855 (70,158) 185,332 Provisions 118,434 – – – 118,434 Net income for the year 21,196 21,005 94,855 (70,158) 66,898 Assets Segment assets 1,046,908 210,414 869,815 764,375 Total assets 2,891,512 The basis of presentation of results of business lines: Operating expenses of each line of business are the direct costs of infrastructure and resources for the Unit. Support overhead costs are included under Corporate Management. Interest expense is allocated to each business segment based on its average net assets and an appropriately risk adjusted capital structure. All significant activities of the Group are performed on an integrated, worldwide basis. The Group’s clients and trading partners also operate in the international market place, and neither their domicile nor the geographical location of a transaction is necessarily related to the country in which the asset or liability underlying the transaction is located. Consequently, any segmentation of liabilities would be potentially misleading. As such, neither segmentation of liabilities nor information in respect of geographical segments has been provided. 23. Funds under management At December 31, 2001 clients’ funds managed in a fiduciary capacity, without risk or recourse to the Group, amounted to $4,560 million (2000: $3,596 million). 24. Commitments and contingent liabilities At the balance sheet date, the Group’s investment related commitments amounted to $107 million (2000: $88 million). At December 31, 2001 the Group had commitments in respect of non-cancelable operating leases amounting to $7 million (2000: $9 million) relating to leasehold premises. Of the commitments in respect of operating leases, $2 million expires within one year (2000: $2 million) and the remaining expire within four years. Guarantees issued to third parties and outstanding at the balance sheet date amounted to $92 million (2000: $63 million). The United Kingdom (U.K.) Inland Revenue Authorities have made claims with regard to personal taxation of certain employees of the U.K. subsidiaries of the Group. At this stage it is not possible to predict the outcome of these claims. However, the directors believe that amounts, if any, that may eventually become payable are unlikely to be material in relation to these financial statements. 25. Transactions with related parties In the course of the Group’s investment activities, a significant proportion of the Group’s interest income and a portion of investment-related income arise from transactions with companies over which the Group exerts significant influence and with third-party investment funds managed by the Group. Other related parties, such as shareholders, directors and officers of the Company, their families and/or companies of which they are principal owners, also enter into transactions with the Group as clients and investors. This represents a small portion of the Group’s investment and banking transactions. The terms and conditions for these transactions are approved by the management. The related party balances included in these financial statements are as follows: ($ thousands) 2001 2000 Assets Accounts receivable 92,781 70,629 Accrued interest and other assets 10,305 44,609 Investments 44,075 55,899 Liabilities Deposits from clients and Islamic financing 594,959 630,990 Accrued interest and other payables 54,206 50,185 Commitments and contingent liabilities Guarantees issued on behalf of related parties 91,800 62,835 26. Derivative financial instruments In the normal course of its business the Group utilizes derivative financial instruments to manage its exposure to fluctuations in interest and foreign exchange rates. Derivative financial instruments include financial contracts, the values of which are derived from underlying assets or interest or exchange rates. These instruments include forwards, futures, swaps and options transactions in the foreign exchange and capital markets. During the year the Group utilized currency swaps and forward contracts to manage its exposure to fluctuations in foreign exchange rates. The Group had the following significant foreign currency exposures at the year-end: 2001 2000 ($ thousands) Gross Hedged Gross Hedged Assets Euro 82,875 77,441 78,039 78,039 Pounds sterling 278,569 59,069 256,128 229,078 361,444 336,510 334,167 307,117 Liabilities Japanese yen 345,817 209,238 229,400 192,369 Pounds sterling 100,644 96,059 64,183 57,404 Euro 221,536 194,214 206,362 211,611 Kuwaiti dinar 68,065 68,228 41,882 41,370 736,062 567,739 541,827 502,754 In addition to conventional hedging strategies, the Group also utilizes dynamic hedging techniques, through specialized institutions, to manage its exposure to fluctuations in foreign exchange rates. Under this hedging technique the amount of exposure to be hedged is not determined on the absolute foreign currency exposure but is discounted based on certain factors which affect the volatility of the foreign currency being hedged. The main factors which affect the dynamic hedging decision include the following: n past history and trend of the foreign currency movements against the Group’s base currency; n probability of a significant fluctuation in the foreign currency exchange rate based on economic, political, market and other conditions; and n relative demand for the foreign currency at the time of making the hedging decision. Further, the Group utilizes interest rate swaps to manage its exposure to fluctuations in interest rates for specific transactions or a group of transactions. For interest rate swaps, counterparties exchange fixed and floating rate interest payments based on a notional value in a single currency. For cross-currency interest rate swaps, notional amounts and fixed and floating interest payments are exchanged in different currencies. Derivative transactions result, to varying degrees, in credit as well as market risks. The Group’s measure of derivative related credit risk is the cost of replacing contracts at current market rates should the counterparty default prior to the settlement date and is limited to the positive fair value of instruments that are favourable to the Group. Market risk arises as interest and foreign exchange rates fluctuate affecting the value of a contract. For risk management purposes and to control these activities, the Group has established appropriate procedures and limits approved by the Board of Directors. The table below shows the fair value of the derivative financial instruments, which are equivalent to the market values, together with the notional amounts analysed by the term to maturity. The positive and negative fair values are subject to netting arrangements. The notional amount is the value of the derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year-end and are neither indicative of the market risk nor credit risk. The total return swaps relate to the managed funds program. Notional amounts by term to maturity Positive Negative Up to 3 months to 1 year to Over ($ thousands) fair value fair value 3 months 1 year 5 years 5 years Total 2001 Derivatives held for trading Total return swaps – – 57,865 90,378 – – 148,243 Interest rate swaps 492 – – – 34,726 – 34,726 Derivatives held as fair value hedges Forward foreign exchange contracts 4,624 (25,033) – 698,602 – – 698,602 Interest rate swaps 12,299 (4,571) – – 215,143 375,911 591,054 Derivatives held as cash flow hedges Forward foreign exchange contracts 5,744 (15,105) 424,602 1,016,758 – – 1,441,360 Interest rate swaps – (9,991) – 100,000 100,000 – 200,000 Interest rate cap 1,521 – – – 50,000 – 50,000 24,680 (54,700) 482,467 1,905,738 399,869 375,911 3,163,985 2000 Derivatives held for trading Total return swaps – – – 160,477 – – 160,477 Derivatives held as fair value hedges Forward foreign exchange contracts 24,131 (18,364) 337,420 444,775 47,177 – 829,372 Interest rate swaps 3,685 (13,865) – – – 372,362 372,362 Derivatives held as cash flow hedges Forward foreign exchange contracts 24,125 (31,290) 14,424 586,486 50,347 – 651,257 Interest rate swaps – (2,745) – – 200,000 54,430 254,430 Interest rate cap 1,273 – – – – 50,000 50,000 53,214 (66,264) 351,844 1,191,738 297,524 476,792 2,317,898 The table below shows a summary of hedged items, the nature of the risk being hedged, the type of hedge, the hedging instrument and its fair value. Positive Negative Fair value Cost Risk being Type of fair value fair value Description of hedged item ($ thousands) ($ thousands) hedged hedge Hedging instrument ($ thousands) ($ thousands) 2001 Long-term notes 465,678 456,878 Currency Fair value Forward foreign exchange contracts 4,190 (24,892) Interest rate Interest rate swaps 12,299 (3,499) Long-term notes 37,686 36,385 Currency Fair value Forward foreign exchange contracts 390 (141) Coupon on long-term notes 73,623 81,688 Currency Cash flow Forward foreign exchange contracts 1,243 (9,308) Floating interest rate facilities 250,000 250,000 Interest rate Cash flow Interest rate swaps – (9,991) Interest rate Interest rate cap 1,521 – Investments 508,922 473,280 Currency Cash flow Forward foreign exchange contracts 4,501 (5,797) Deposits from clients 32,699 32,699 Currency Fair value Forward foreign exchange contracts 44 – Interest rate Fair value Interest rate swaps – (1,072) 2000 Long-term notes 351,707 362,378 Currency Fair value Forward foreign exchange contracts 7,542 – Interest rate Interest rate swaps – (10,180) Long-term notes 38,692 37,328 Currency Fair value Forward foreign exchange contracts 147 – Floating interest rate facilities 660,000 660,000 Interest rate Cash flow Interest rate swaps – (2,745) Interest rate Interest rate cap 1,273 – Investments 341,678 392,351 Currency Cash flow Forward foreign exchange contracts – (7,165) Deposits from clients 59,085 59,085 Currency Fair value Forward foreign exchange contracts – (1,922) The hedges of exposures to investments are matched to the anticipated sale date in future periods, at which time the effect of the fair value of the hedging instrument will be reflected in the statement of income. 27. Fair value of financial instruments Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Consequently, differences can arise between carrying values and the fair value estimates. Underlying the definition of fair value is the presumption that the Company is a going concern without any intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. The fair values of financial assets and liabilities, which have not been adjusted to reflect fair values, approximate their respective carrying values.
Pages to are hidden for
"Managed Service Provider Income Statement - Excel"Please download to view full document