Arcapita Bank B.S.C.

(c)
CONSOLIDATED FINANCIAL STATEMENTS
30 June 2007

ARCAPITA BANK B.S.C.(c)

Table of Contents
Report of the Auditors ........................................................................................ 3 Consolidated Statement of Income..................................................................... 5 Consolidated Balance Sheet................................................................................ 6 Consolidated Statement of Changes in Equity..................................................... 7 Consolidated Statement of Cash Flows ............................................................... 9 Consolidated Statement of Sources and Uses of Charity Funds ........................ 10 Notes to the Consolidated Financial Statements............................................... 11 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. Incorporation and Activities................................................................... 11 Significant Accounting Policies ............................................................... 11 Subsidiary Companies .......................................................................... 19 Risk Management ................................................................................ 20 Due from Financial Institutions .............................................................. 29 Receivables ........................................................................................ 30 Investments ....................................................................................... 32 Other Assets ....................................................................................... 33 Due to Financial and Other Institutions ................................................... 33 Medium-term Financing Facilities ........................................................... 33 Share-Based Payment Plans.................................................................. 34 Other Liabilities ................................................................................... 35 Unrestricted Investment Accounts.......................................................... 35 Offsetting Arrangements....................................................................... 35 Share Capital and Premium................................................................... 36 Reserves ............................................................................................ 37 Related Party Transactions.................................................................... 37 Contingent Liabilities and Commitments.................................................. 38 Total Revenue..................................................................................... 39 Recurring Income ................................................................................ 39 Segment Information ........................................................................... 40 Earnings and Expenses Prohibited by Shari'ah ......................................... 43 Shari'ah Supervisory Board ................................................................... 43 Capital Management ............................................................................ 44 Social Responsibility ............................................................................ 44 Comparative Figures ............................................................................ 44

2

ARCAPITA BANK B.S.C.(c)

Consolidated Statement of Income
FOR THE 18 MONTHS ENDED 30 JUNE 2007A
18 months ended Note Corporate investments Acquisition, placement and exit income Management fees Fair value adjustments Real estate investments Acquisition, placement and exit income Management fees Fair value adjustments Asset-based investments Acquisition, placement and exit income Management fees Fair value adjustments 87,802 19,960 18,620 126,382 Recurring and other income earned TOTAL REVENUE Net funding cost Arising from financial institutions Relating to financial and other institutions Relating to unrestricted investment accounts Relating to medium-term financing facilities NET OPERATING INCOME Staff compensation and benefits General and administration expenses NET INCOME BEFORE ALLOWANCES AND FOREIGN EXCHANGE GAINS AND LOSSES Allowance for doubtful commodity Murabaha receivables Foreign exchange gains and losses NET INCOME 6c 43,973 (72,735) (15,258) (41,208) (85,228) 525,963 (144,747) (72,638) (217,385) 308,578 28,338 (42,303) (11,069) (18,424) (43,458) 268,832 (73,540) (42,101) (115,641) 153,191 6,931 (17,385) (4,938) (11,912) (27,304) 203,131 (49,034) (34,139) (83,173) 119,958 88,195 611,191 44,170 5,467 14,363 64,000 36,891 312,290 9,442 3,110 12,552 33,539 230,435 114,279 15,868 9,407 139,554 88,469 11,018 5,710 105,197 124,280 8,923 133,203 205,105 28,851 23,104 257,060 68,845 15,753 21,604 106,202 58,124 9,076 (16,059) 51,141 30 Jun 2007 US$ '000 12 months ended 31 Dec 2006 US$ '000 12 months ended 31 Dec 2005 US$ '000

(35,000) 12,101 285,679

(25,000) 9,196 137,387

(15,626) 104,332

A

The attached notes 1 to 26 form part of these consolidated financial statements.

5

ARCAPITA BANK B.S.C.(c)

Consolidated Balance Sheet
AT 30 JUNE 2007
30 Jun Note ASSETS Cash and balances with banks Due from financial institutions Receivables Investments Other assets TOTAL ASSETS 5 6 7 8 56,909 1,408,448 614,713 1,501,573 223,843 3,805,486 46,145 265,062 511,742 1,747,810 136,948 2,707,707 44,882 368,640 593,453 793,545 64,701 1,865,221 2007 US$ '000 31 Dec 2006 US$ '000 31 Dec 2005 US$ '000

LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY LIABILITIES Due to financial and other institutions Medium-term financing facilities Other liabilities Total liabilities excluding unrestricted investment accounts Unrestricted investment accounts Total liabilities including unrestricted investment accounts EQUITY Share capital and premium Reserves Proposed dividends TOTAL LIABILITIES, UNRESTRICTED INVESTMENT ACCOUNTS AND EQUITY 15 16 607,241 347,741 112,113 1,067,095 3,805,486 603,471 318,721 922,192 2,707,707 214,160 179,559 30,833 424,552 1,865,221 13 9 10 12 1,223,503 1,091,689 105,554 2,420,746 1,341,953 214,347 71,139 1,627,439 944,378 376,567 50,663 1,371,608

317,645 2,738,391

158,076 1,785,515

69,061 1,440,669

The consolidated financial statements were authorized for issue by the Board of Directors on 10 July 2007 and signed on their behalf by:

Mohammed Abdulaziz Aljomaih Chairman

Atif A. Abdulmalik Chief Executive Officer and Director

The attached notes 1 to 26 form part of these consolidated financial statements.

6

ARCAPITA BANK B.S.C.(c)

Consolidated Statement of Changes in Equity
FOR THE 18 MONTHS ENDED 30 JUNE 2007
Share Capital & Premium Bank funded Share capital US$ '000 Balance at 1 January 2006 154,167 Share premium US$ '000 59,993 employee shares US$ '000 Total share capital & premium US$ '000 214,160 Statutory US$ '000 33,700 Investment fair value US$ '000 1,007 Retained earnings US$ '000 144,852 Total reserves US$ '000 179,559
Proposed dividend

Reserves Total equity

US$ '000 30,833

US$ '000 424,552

Charitable contributions Directors’ remuneration Expenses recognized directly in equity Net income for the period

-

352,157 (31,269) 20,320 341,208 401,201

(18,186) (18,186) (18,186)

423,464 (35,158) 22,961 (18,186) 393,081 607,241

28,568 28,568 62,268

44,127 44,127 45,134

(5,714) (3,000) (8,714) 285,679 276,965 (44,127) 3,330 (28,568) (112,113) (181,478) 240,339

(5,714) (3,000) (8,714) 285,679 276,965 3,330 (112,113) (108,783) 347,741

112,113 (30,833) 81,280 112,113

(5,714) (3,000) (8,714) 285,679 276,965 423,464 (35,158) 22,961 3,330 (18,186) (30,833) 365,578 1,067,095

Net transfer to investment fair value reserve Issue of shares Repurchase of shares (treasury shares) Sale of treasury shares Share-based compensation expense Net movement in unallocated employee shares Transfer to statutory reserve Proposed dividends Dividends paid

71,307 (3,889) 2,641 70,059

Balance at 30 June 2007
*

224,226

The attached notes 1 to 26 form part of the consolidated financial statements

7

ARCAPITA BANK B.S.C.(c)

Consolidated Statement of Changes in Equity (Continued)
Share Capital & Premium Bank funded Share capital US$ '000 Balance at 1 January 2005 154,167 Share premium US$ '000 59,993 employee shares US$ '000 Total share capital & premium US$ '000 214,160 Statutory US$ '000 23,267 Investment fair value US$ '000 25,332 Retained earnings US$ '000 61,713 Total reserves US$ '000 110,312
Proposed dividend

Reserves

Total equity US$ '000 355,305

US$ '000 30,833

Charitable contributions Directors’ remuneration Expenses recognized directly in equity Net income for the year

-

59,993

-

214,160

10,433 10,433 33,700

(24,325) (24,325) 1,007

(2,087) (2,165) (4,252) 104,332 100,080 24,325 (10,433) (30,833) (16,941) 144,852

(2,087) (2,165) (4,252) 104,332 100,080 (30,833) (30,833) 179,559

30,833 (30,833) 30,833

(2,087) (2,165) (4,252) 104,332 100,080 (30,833) (30,833) 424,552

Net transfer from investment fair value Transfer to statutory reserve Proposed dividends Dividends paid

-

Balance at 31 December 2005

154,167

*

The attached notes 1 to 26 form part of these consolidated financial statements.

8

ARCAPITA BANK B.S.C.(c)

Consolidated Statement of Cash Flows
FOR THE 18 MONTHS ENDED 30 JUNE 2007
18 months ended 30 Jun 2007
D

12 months ended 31 Dec 2006 US$ '000

12 months ended 31 Dec 2005 US$ '000

US$ '000

OPERATING ACTIVITIES Net income Adjustments for non-cash items: Share-based compensation expense Allowance for doubtful commodity Murabaha receivables Changes in fair value of investments carried at fair value through statement of income Operating profit before changes in operating assets and liabilities (51,131) 272,878 (41,677) 122,485 16,059 120,391 3,330 35,000 1,775 25,000 285,679 137,387 104,332

Changes in operating assets and liabilities: Receivables Investments Due to financial and other institutions Other assets Other liabilities Net cash from/(used in) operating activities (74,446) (656,897) 1,016,817 (159,142) 46,177 445,387 31,746 (912,588) 1,087,133 (72,247) 20,476 277,005 (121,377) (332,240) 330,663 (54,081) 19,781 (36,863)

FINANCING ACTIVITIES Dividends paid Issue of shares Purchase of treasury shares Sale of treasury shares Medium-term financing facilities raised Medium-term financing facilities settled Movement in unrestricted investment accounts Net cash from financing activities (30,833) 423,464 (35,158) 22,961 1,100,000 (384,878) 248,584 1,344,140 (30,833) 423,464 (24,040) 14,852 (162,220) 89,015 310,238 (30,833) 212,074 (23,268) 24,220 182,193

Net increase in cash and cash equivalents

1,789,527

587,243

145,330

Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

413,522 2,203,049

413,522 1,000,765

268,192 413,522

Cash and cash equivalents comprise: Cash and balances with banks Due from financial institutions Offsetting arrangements due from financial institutions (Note 14) 56,909 1,408,448 737,692 2,203,049
The attached notes 1 to 26 form part of these consolidated financial statements.

46,145 265,062 689,558 1,000,765

44,882 368,640 413,522

9

ARCAPITA BANK B.S.C.(c)

Consolidated Statement of Sources and Uses of Charity Funds
FOR THE 18 MONTHS ENDED 30 JUNE 2007
18 months ended 30 Jun 2007 12 months ended 31 Dec 2006 12 months ended 31 Dec 2005

US$ '000 SOURCES OF CHARITY FUNDS Contribution by the Bank USES OF CHARITY FUNDS Charitable contributions Excess / (deficit) of sources over uses Undistributed charity funds at beginning of period UNDISTRIBUTED CHARITY FUNDS AT END OF PERIOD (Note 12)
E

US$ '000 -

US$ '000 2,087

5,714

(2,629) 3,085 2,697 5,782

(2,428) (2,428) 2,697 269

(1,030) 1,057 1,640 2,697

E

The attached notes 1 to 26 form part of these consolidated financial statements.

10

ARCAPITA BANK B.S.C.(c)

Notes to the Consolidated Financial Statements
30 JUNE 2007

1.
a)

INCORPORATION AND ACTIVITIES
Incorporation

Arcapita Bank B.S.C.(c) (the “Bank”) was incorporated in November 1996 in the Kingdom of Bahrain, where its registered office is based, under commercial registration number 36403. The Bank has been operating under an Islamic investment banking licence issued by the Central Bank of Bahrain (the “CBB”). Effective 1 July 2006 the CBB introduced a new integrated licensing framework. Under the new framework the Bank will continue its entire suite of permitted operations, but under a new Islamic wholesale banking licence. The financial year end of the Bank has been changed to 30 June by an extraordinary general meeting held on 19 February 2006. The change in the fiscal year end was made in order to facilitate the seasonal requirements of the Group’s investment and placement activities. As a result, this financial period is an 18 month period ended 30 June 2007. Accordingly, the respective comparative amounts, relating to the consolidated statement of income, consolidated statement of changes in equity, consolidated statement of cash flows, consolidated statement of sources and uses of charity funds and their related notes, are not entirely comparable to those related to the 18 month period ended 30 June 2007. The interim consolidated balance sheet and its related interim consolidated statement of income, interim consolidated statement of cash flows and interim consolidated statement of sources and uses of charity funds for the 12 months ended 31 December 2006 have been shown hereon for informational purposes. b) Activities

The activities of the Bank and its wholly owned subsidiaries (together referred to as the “Group”) include investing on own account and providing investment banking services in conformity with Islamic Shari’ah rules and principles.

2.
a)

SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation

The consolidated financial statements of the Group are prepared in accordance with Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and in conformity with the Bahrain Commercial Companies law and the Central Bank of Bahrain and Financial Institutions law. These consolidated financial statements are presented in US dollars which is the functional currency of the Group. Following is a summary of the significant accounting policies adopted in preparing the consolidated financial statements. These accounting policies are consistent with those used in the previous financial year except as noted below.

11

ARCAPITA BANK B.S.C.(c)

New and amended standards issued and adopted early The following new and amended standards are applicable for financial periods commencing on or after January 1, 2007. The Group has adopted these ahead of the required date. IFRS 7 “Financial Instruments: Disclosures”; and International Accounting Standard (IAS) 1 “Presentation of Financial Statements” (amended for Capital Disclosure). Amended standard and new interpretations Following are the relevant amended IFRS and new International Financial Reporting Interpretations Committee (“IFRIC”) interpretations which have been adopted by the Group during the period. Adoption of these revised standards and interpretations did not have any effect on the financial statements of the Group. IAS 39–Amendment – The Fair Value Option and Financial Guarantee Contracts; and IFRIC 4 – Determining whether an Arrangement contains a Lease. New standards, amendments and interpretations issued but not yet effective Following are the relevant IFRS and IFRIC interpretations that have been issued during the period, to be applied to financial statements for annual periods commencing on or after the following dates: IFRS 8 – Operating Segments, 1 January 2009; IFRIC 8 – Scope of IFRS 2, 1 May 2006; and IFRIC 11 – IFRS 2 - Group and Treasury Share Transactions, 1 March 2007. The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the financial statements in the period of initial application. b) Accounting convention The consolidated financial statements are prepared under the historical cost convention as modified for the re-measurement of investments at fair value. c) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and its subsidiaries. A subsidiary is an entity over which the Bank has power to control, which is other than fiduciary in nature. The results of all subsidiaries are included in the consolidated financial statements from the effective date of formation or acquisition. All material inter-company balances, transactions and income have been eliminated on consolidation. d) Use of estimates in preparation of the consolidated financial statements The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of financial assets and liabilities at the date of the financial statements. The use of estimates includes the determination of fair value of unquoted “fair value through statement of income”

12

ARCAPITA BANK B.S.C.(c)

investment, calculation of the expense of the employee share purchase plan and allowances for receivables, among other items. e) Revenue recognition Acquisition, placement and exit income The Group earns fees in cash or in kind, during the acquisition, placement and exit processes for rendering services including arrangement of acquisition financing, merger and acquisition advice associated with deal execution, equity underwriting, placement with clients and performance fees. Income from placement activities is recognized on receipt by the Group of signed Share Purchase Agreements (SPAs). Other fees are recognized when earned or on a percentage of completion basis, net of direct investment banking expenses. Exit income comprises capital gains on disposal of investments, representing the proceeds returned by an investment in excess of its carrying value; and performance fees representing the fee earned by the Group for exceeding pre-agreed hurdle rates. Exit income is recognized when a binding and definitive sale agreement or contract is signed. Management fees Management fees represent recurring fees earned by the Group for rendering management and administrative services to investee companies and investment holding companies through which clients participate in the Group's investment products. Management fees are recognized as and when services are rendered. Income from investee companies This comprises recurring income earned on Islamic financing facilities provided to investee companies, which are recognized on a time-apportioned basis. Recognition is suspended if the Group believes that the recovery of these amounts may be doubtful. Yield from investments This comprises recurring income earned from various real estate and asset-based investments held by the Group, which are recognized on an accrual basis. Recognition is suspended if the Group believes that the recovery of these amounts may be doubtful. Profits from financial institutions Profit from sales transactions (Murabaha) is recognized when, at the commencement of the transaction, the ultimate income is both contractually determinable and quantifiable. Such income is recognized on a time apportionment basis over the period of the contract based on the principal amounts outstanding and the profit rate agreed with counterparties.

13

ARCAPITA BANK B.S.C.(c)

f) Due from financial institutions Due from financial institutions comprises mainly commodity Murabaha receivables, which are trade transaction agreements stated at cost plus accrued profit; and investment in Mudaraba funds, which are profit sharing agreements, stated at cost. g) Receivables Receivables arise largely from subscriptions by clients to the Group's various investment products, fees earned in respect of the Group's management services, and proceeds due from investment exits that have been contracted but not yet received. Subscription receivables are recognized when the obligation is established, i.e. when a share purchase agreement has been signed. Fees are accrued as and when management services are rendered. Notes receivable, which are zero-cost funding to employee stock and investment incentive programs, are stated at cost less amounts settled. This balance is receivable on demand. Due from investee companies arise largely as a result of the Group extending Islamic financing facilities in the form of commodity Murabaha and other acceptable financing arrangements to investee companies. These are stated net of allowance for doubtful commodity Murabaha receivables, if any. Allowances are made against receivables as soon as they are considered doubtful. h) Investments Investments comprise the Group's retained share in corporate, real estate and assetbased investments. These also include investments in the venture capital fund and investments underwritten for placement with clients in the near term. Investments are classified as “fair value through statement of income”. In accordance with the requirements of AAOIFI, such investments would classify as “available for sale investments”. Initial Recognition Investments are initially recognized at cost, being the fair value of the consideration paid. Re-measurement to fair value Following initial recognition, "investments at fair value through statement of income" are re-measured to fair value. The unrealized gains and losses arising from the remeasurement to fair value are included in the consolidated statement of income and are appropriated to a fair value reserve in accordance with AAOIFI. Upon realization of these gains and losses, these are transferred to retained earnings. The determination of fair value is made for each investment individually in accordance with the valuation policies set out below.

14

ARCAPITA BANK B.S.C.(c)

Valuations Corporate and asset-based investments The Group establishes fair value by using an appropriate valuation technique. Valuation techniques include using current market price for quoted equity instruments, reference to recent arm’s length market transactions between knowledgeable willing parties, if available, and reference to recent valuation multiples of another comparable instrument that is substantially the same and which includes earnings before interest, tax, depreciation and amortization (EBITDA) multiples. Real estate investments Real estate investments are re-measured based on the capitalization of future cash streams of the underlying real estate assets using prevailing capitalization rates for similar properties in the same geographical area. i) Impairment An assessment is made, at each balance sheet date for all financial assets, other than those classified as “fair value through statement of income” assets, to determine whether there is objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flow. j) Due to financial and other institutions These include liabilities under Murabaha contracts with financial and other institutions and are carried at fair value of consideration received plus accrued profit less amounts settled. Funding cost relating to financial and other institutions is recognized on a time apportionment basis over the period of contract. k) Property and equipment These are recorded at cost and comprise land and equipment. Depreciation is provided on a straight line basis on all equipment. Land (which is deemed to have an indefinite life) is not depreciated. Property and equipment are reported under "other assets" in the consolidated balance sheet. l) Medium-term financing facilities Medium-term financing facilities are Murabaha contracts and are carried at fair value of consideration received net of transaction cost plus accrued profit less amounts settled. Funding cost relating to medium-term financing facilities is recognized on a time apportionment basis over the period of the contract.

15

ARCAPITA BANK B.S.C.(c)

m) Unrestricted investment accounts All unrestricted investment accounts are carried at fair value of consideration received plus accrued profits less amounts settled. Income to unrestricted investment account holders is allocated on the basis of their daily balances in proportion to shareholders' balances. n) 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. An underlying presumption in the definition of fair value is that the Group is a going concern without any intention or requirement to curtail materially the scale of its operations or undertake a transaction on adverse terms. Fair value adjustments arise from re-measurement to fair value of investments carried at fair value through statement of income, if any. The Group's methodology for determining fair value of investments is explained in Note 2(h) above. Fair value of other financial assets and liabilities on the balance sheet date approximate their carrying values. o) Fiduciary assets The Group's clients participate in corporate, real estate, asset-based and venture capital investments. Assets held in trust or in a fiduciary capacity in connection with these investments are not treated as assets of the Group and, accordingly, are not included in the consolidated balance sheet. p) Foreign currencies Transactions in foreign currencies are booked in US dollars using the foreign exchange rate prevailing on the transaction date. Monetary assets and liabilities in foreign currencies are translated into US dollars at the rates of exchange prevailing at the balance sheet date. Any gains or losses are taken to the consolidated statement of income and are included under "foreign exchange gains and losses". Translation gains or losses on non-monetary items carried at fair value are included in the consolidated income statement under "foreign exchange gains and losses." q) Cash and cash equivalents Cash and cash equivalents comprise cash and balances with banks and due from financial institutions with original maturities of less than three months. r) Employee end of service benefits Provision is made for amounts payable to employees as end of service benefits, in accordance with prevailing rules and regulations in the various jurisdictions in which the Group operates.

16

ARCAPITA BANK B.S.C.(c)

s) Share-based payment transactions Eligible employees are entitled to invest in shares of the employee share purchase plan in partial consideration for services rendered and are classified as equity-settled sharebased payment transactions under IFRS 2. The expense of the equity-settled share-based payment transactions are recognized in the statement of income over the vesting period with a corresponding increase in equity, based on the best estimate of the number of equity instruments expected to vest. The income statement charge or credit for a period is recorded in ‘Staff compensation and benefits’’ and represents the movement in cumulative expenses recognized as at the beginning and end of the period. The unallocated portion of shares to eligible employees funded by the Bank are shown as a deduction from equity under “Bank funded employee shares”. t) Zakat In accordance with its Articles of Association, the Bank is not required to pay Zakat on behalf of its shareholders. However, the Bank is obligated to calculate and notify, under a separate report, individual shareholders of their pro-rata share of Zakat payable. The Bank’s Shari'ah Supervisory Board approves these calculations. u) Taxation There is no tax on corporate income in the Kingdom of Bahrain. Taxation on overseas operations is provided for in accordance with the fiscal regulations of the respective countries in which the Group operates and is included in the accompanying consolidated statement of income under general and administration expense. v) Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and able to be reliably measured. w) Treasury shares Own equity instruments which are reacquired (treasury shares) are deducted from equity. No gain or loss is recognized in the income statement on purchase, sale, issue or cancellation of the Group’s own equity instruments. Consideration paid or received is recognized directly in equity.

17

ARCAPITA BANK B.S.C.(c)

x) De-recognition of financial instruments A financial asset (in whole or part) is de-recognized either when the Group has transferred substantially all the risk and rewards of ownership or when it has neither transferred nor retained substantially all the risks and rewards and when it no longer has control over the asset or a proportion of the asset. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. y) Offsetting Financial assets and financial liabilities are only offset and the net amount reported in the consolidated 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. z) Segment reporting A segment is a distinguishable component of the Group that is engaged in either providing products or services (business segment), or in providing products or services in a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

18

ARCAPITA BANK B.S.C.(c)

3.

SUBSIDIARY COMPANIES

The following are the principal subsidiaries of the Bank and are consolidated in these financial statements:
Year of Subsidiary Arcapita Inc. Its main activities are to source investment opportunities in the USA and to monitor the performance of the acquired companies on behalf of the Bank and investors. 100% 1997 United States of America Ownership incorporation Country of incorporation

Arcapita Investment Management Limited (AIML) AIML’s main activity is to maintain and manage the books of account of the investment vehicle companies. 100% 1997 Cayman Islands

Arcapita Investment Holdings Limited (AIHL) AIHL’s main purpose is to hold the Bank's share in investments. Arcapita Structured Finance Limited (ASFL) ASFL’s main activity is to structure Islamically acceptable financing facilities. Arcapita Investment Funding Limited (AIFL) AIFL is the holding company of ASFL; its main activities are to source real estate and asset-based investments and sponsor other investment banking activities. 100% 1998 Cayman Islands 100% 1998 Cayman Islands 100% 1998 Cayman Islands

Arcapita Limited Its main activities are to source investment opportunities in Europe and the UK and to monitor the performance of the acquired companies on behalf of the Bank and investors. Arcapita (Pte) Limited Its main activities are to source investment opportunities in Asia and to monitor the performance of the acquired companies on behalf of the Bank and investors. 100% 2007 Singapore 100% 2003 United Kingdom

19

ARCAPITA BANK B.S.C.(c)

4.

RISK MANAGEMENT

Risk management is an integral part of the Group’s decision-making process. It is managed through a risk management committee, comprising members of senior management drawn from all key areas of the Group, who guide and assist with overall management of the Group’s risks. Each individual within the Group is accountable for the risk exposures relating to his or her responsibilities. The Group is exposed to liquidity risk, credit risk, concentration risk, profit return, equity price and currency risk. The Group has an independent process whereby risks are identified, measured and monitored. The risk management unit is responsible for this process. The process does not include business risks such as changes in environment, technology and industry. They are monitored through the Group's strategic planning process. The head of risk management has independent access to the board of directors. a) Risk management structure Board of directors The board of directors is responsible for the overall risk management approach and for approving risk strategies and principles. Risk management committee The risk management committee has the overall responsibility for development of a risk strategy and implementing principles, frameworks, policies and limits. It is responsible for fundamental risk issues and manages and monitors relevant risk exposures. Risk management unit The risk management unit is responsible for implementing and maintaining risk related procedures to ensure an independent control process and includes monitoring the risk of exposures against limits. Treasury Treasury is responsible for funding and liquidity management and is primarily responsible for managing the liquidity risk. b) Risk management and reporting systems The risk management committee is responsible for managing and monitoring risk exposures. The risk management unit measures risk through the use of risk models and provides reports to the risk management committee. The models use probabilities based on historical experiences adjusted to reflect the economic environment. Monitoring and controlling risks are managed through limits set by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept.

20

ARCAPITA BANK B.S.C.(c)

The risk management unit presents reports to the board of directors, risk management committee and other relevant departments as required. These reports included analysis of capital adequacy, credit exposure, investment exposure, VaR and foreign currency exposures. c) Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due under normal and stress circumstances. Liquidity risk can be caused by market disruptions or credit downgrades which may impact certain sources of funding. To mitigate this risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an adequate balance of cash and cash equivalents. Further, committed credit lines have been set up to draw down in the event of a liquidity crisis. (i) Maturity analysis of assets and liabilities The table below summarizes the maturity profile of the Group’s assets and liabilities based on expected repayment arrangements. The Group's contractual undiscounted repayment obligations are disclosed in Note 4(c) (ii). The maturity profile of assets, liabilities and unrestricted investment accounts as at 30 June 2007 is as follows:
Up to 1 Total US$ '000 ASSETS Cash and balances with banks Due from financial institutions Receivables Investments Other assets 1,408,448 614,713 1,501,573 223,843 3,805,486 1,400,304 3,805 1,461,018 8,144 265,360 650,446 18,979 942,929 105,588 105,588
-

1 to 3 months US$ '000

3 to 6 months US$ '000

6 months to 1 year US$ '000

1 to 3 years US$ '000

Over 3 years US$ '000

month US$ '000

56,909

56,909

-

-

-

131,668 594,382 726,050

63,038 256,745 204,864 524,647

45,254 45,254

LIABILITIES AND UNRESTRICTED INVESTMENT ACCOUNTS Due to financial and other institutions Medium-term financing facilities Other liabilities Unrestricted investment accounts 317,645 2,738,391 253,630 317,645 777,174
-

1,223,503 1,091,689 105,554

253,630 -

356,976 102,553

272,521
-

1,407 -

214,115 3,001

124,854 1,091,689 -

1,407

217,116

1,216,543

272,521

21

ARCAPITA BANK B.S.C.(c)

The maturity profile of assets, liabilities and unrestricted investment accounts as at 31 December 2005 is as follows:
Up to 1 month US$ '000 1 to 3 months US$ '000 3 to 6 months US$ '000 6 months to 1 year US$ '000 1 to 3 years US$ '000 Over 3 years US$ '000

Total US$ '000 ASSETS Cash and balances with banks Due from financial institutions Receivables Investments Other assets 368,640 593,453 793,545 64,701 1,865,221 44,882

44,882 317,811 18,317 381,010

50,829 393,625 2,389 446,843

50,771 50,771

3,583 20,545 24,128

113,841 296,779 410,620

13,316 476,221 62,312 551,849

LIABILITIES AND UNRESTRICTED INVESTMENT ACCOUNTS Due to financial and other institutions Medium-term financing facilities Other liabilities Unrestricted investment accounts 69,061 1,440,669 292,736 69,061 518,234 85,554 149,556 139,688 254,901 376,567 50,663 48,355 53,032 90,943 20,518 212,074 2,308 944,378 292,736 400,818 32,522 58,613 119,170 40,519

(ii) Contractual undiscounted repayment obligations The contractual undiscounted repayment obligation as at 30 June 2007 is as follows:
Total US$ '000 Up to 1 month US$ '000 1 to 3 months US$ '000 3 to 6 months US$ '000 6 months to 1 year US$ '000 1 to 3 years US$ '000 Over 3 years US$ '000

Due to financial and other institutions Medium-term financing facilities Other liabilities Unrestricted investment accounts 317,645 4,531,540 317,645 1,511,892 623,732 289,780 18,666 138,069 1,949,401 1,972,825 2,135,516 105,554 1,071,434 17,259 105,554 623,732 272,521 17,259 1,407 17,259 138,069 3,731 1,945,670 -

22

ARCAPITA BANK B.S.C.(c)

The contractual undiscounted repayment obligation as at 31 December 2005 is as follows:

Up to 1 Total US$ '000 month US$ '000

1 to 3 months US$ '000

3 to 6 months US$ '000

6 months to 1 year US$ '000

1 to 3 years US$ '000

Over 3 years US$ '000

Due to financial and other institutions Medium-term financing facilities Other liabilities Unrestricted investment accounts

948,155 438,697 50,663 69,061 1,506,576

651,466 2,836 50,663 69,061 774,026

263,685 1,146 264,831

33,004 58,060 91,064

98,318 98,318

45,967 45,967

232,370 232,370

d) Credit risk Credit risk is the risk that the Group will incur a loss because its customers, clients or counterparties fail to discharge their contractual obligations. The Group manages and controls credit risk by setting limits on the amount of risks it is willing to accept from individual counterparties. Counterparty limits are established by the executive investment committee. These limits are subject to regular revision. Internal management reports monitor exposures in relation to the limits. The Group does not engage in commercial or retail banking. Its exposure to credit risk arises largely through placement of short-term funds on Murabaha contracts (Due from financial institutions) and receivables. (i) Maximum exposure to credit risk
30 Jun 2007 US$ '000 Due from financial institutions (grossed up for offsetting arrangements - Note 14) Receivables Cash and balances with banks Total credit risk exposure 31 Dec 2005 US$ '000

2,146,140 614,713 56,909 2,817,762

368,640 593,453 44,882 1,006,975

The Group has not obtained collateral of any kind. However, in placing short-term funds with financial institutions the Group performs a credit analysis of each counterparty (including consideration of external credit rating if any), sets limits and monitors such limits. An analysis of credit exposure by external credit rating of the Group’s counterparties is provided in Note 4(d) (iii).

23

ARCAPITA BANK B.S.C.(c)

(ii) Risk concentrations of the maximum exposure to credit risk Concentration of risk is managed according to counterparty. The maximum credit exposure to any counterparty as of 30 June 2007 was US$606 million (2005: US$68 million) before taking into account the impact of offsetting arrangements and US$146 million (2005: US$68 million) after netting offsetting arrangements. The following table analyzes the geographical and industrial sector concentrations of the Group's maximum exposure to credit risk.

30 Jun 2007 US$ '000 Geographic region Europe Asia and Middle East North America 1,375,186 1,170,717 271,859 2,817,762 Industry Sector Banking and financial institutions Utilities and others Manufacturing Real estate Technology Services Aviation 2,200,149 363,491 142,853 83,416 21,123 5,567 1,163 2,817,762

31 Dec 2005 US$ '000

199,767 546,263 260,945 1,006,975

413,216 329,435 174,198 85,023 246 3,299 1,558 1,006,975

(iii) Analysis of exposure to credit risk by external credit ratings The table below analyzes the Group's maximum credit exposure which are neither past due or impaired by external credit ratings of counterparties.

30 Jun 2007 Standard & Poor’s credit ratings Unrated AAA to AAA+ to ABBB+ to BBBUS$ '000 876,819 724,857 906,891 259,346 2,767,913

31 Dec 2005 US$ '000 679,838 141,564 102,114 83,459 1,006,975

The Group did not have any past due or impaired balances as at 30 June 2007 other than an amount due from a specific deal company against which an allowance of US$35.0 million (2005: nil) has been made (Note 6(c)).

24

ARCAPITA BANK B.S.C.(c)

e) Concentration risk Concentration risk arises when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentration risk indicates the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location. The distribution of assets, liabilities and unrestricted investment accounts (URIA) by geographic region and industry sector was as follows:
30 Jun 2007 Assets US$ '000 Geographic region Asia and Middle East Europe North America 1,730,677 1,385,405 689,404 3,805,486 1,357,853 1,324,290 56,248 2,738,391 837,786 420,147 607,288 1,865,221 1,100,040 301,634 38,995 1,440,669 Liabilities and URIA US$ '000 31 Dec 2005 Assets US$ '000 Liabilities and URIA US$ '000

Industry sector Banking and financial institutions Utilities and others Real estate Manufacturing Services Technology Aviation 1,462,456 1,369,756 477,291 289,426 107,016 98,378 1,163 3,805,486 1,890,519 671,019 138,934 23,412 11,800 2,707 2,738,391 413,521 398,844 328,960 176,306 283,292 218,548 45,750 1,865,221 834,665 269,760 183,918 386 9,735 135,548 6,657 1,440,669

As at 30 June 2007, the Group had significant exposures to recent acquisitions amounting to 17% of total assets. Out of these recent acquisitions, the amounts available for placement with investors and which are short-term in nature amount to 12% of total assets. f) Market risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as profit rates, foreign exchange rates and equity prices. The risk is monitored using sensitivity analysis. Profit return risk The Group is not exposed to interest rate risk on its financial assets as no interest is charged. However, the fair value of financial instruments may be affected by current market forces including interest rates.

25

ARCAPITA BANK B.S.C.(c)

The following table indicates the effective profit rates on such financial instruments:
Profit rate 30 Jun 2007 Due from financial institutions Due from investee companies Due to financial and other institutions Medium-term financing facilities Unrestricted investment accounts 4.74% 12.17% 5.76% 6.80% 6.38% 31 Dec 2005 3.70% 7.90% 4.07% 5.30% 4.45%

The Group monitors the net profit bearing liability and its sensitivity to changes in market rates against preset limits. The following table demonstrates the sensitivity, of the Group's income statement to reasonably possible changes in market profit rates, with all other variables being held constant. The sensitivity of net funding costs to changes in market profit rates has been calculated based on the 'net' profit bearing liability and the weighted average profit rates prevailing as at 30 June 2007.

Basis point change in rates (+/-)

Sensitivity of net funding costs (+/-) 30 Jun 2007 US$ '000

Basis point change in rates (+/-)

Sensitivity of net funding costs (+/-) 31 Dec 2005 US$ '000

Currency United States Dollars Pounds Sterling Euro Others 75 40 60 5 1,486 1,308 1,998 12 75 40 60 5 3,139 75 270 10

The Group currently does not hold fixed rate available for sale financial assets or associated hedges and swaps, whose value would be impacted by changes in profit rates. Therefore, changes in profit rates will not have any impact recognized directly in equity. Currency risk The majority of the Group's business is conducted in US dollars. However, certain investments and other financial assets and liabilities are in other currencies and give rise to foreign currency risk. In order to mitigate currency risk, liabilities in various relevant currencies are used to match asset exposure and Murabaha offsetting arrangements are used to mitigate any residual risks.

26

ARCAPITA BANK B.S.C.(c)

The Group had the following significant foreign currency exposures at the balance sheet date:
30 Jun 2007 Liabilities Assets US$ '000 Euro Pounds Sterling Other currencies 449,471 687,483 140,897 1,277,851 and URIA Net Assets US$ '000 239,268 103,996 6,315 349,579 31 Dec 2005 Liabilities and URIA US$ '000 (201,268) (53,747) (7,998) (263,013) Net US$ '000 38,000 50,249 (1,683) 86,566

US$ '000 US$ '000 (416,007) (690,677) (135,776) (1,242,460) 33,464 (3,194) 5,121 35,391

The table below indicates the impact of reasonably possible changes in exchange rate on the Group’s net foreign currency exposure. The impact has been calculated using the net foreign currency exposure as at the balance sheet date and calculating the impact of the change in exchange rate.

Change in exchange rates in % (+/-)

Effect on net income (+/-) 30 Jun 2007 US$ '000

Change in exchange rates in % (+/-)

Effect on net income (+/-) 31 Dec 2005 US$ '000

Currency Euro Pounds Sterling Other currencies 10 10 5 3,346 319 256 10 10 5 3,800 5,025 84

Equity price risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in the level of equity indices and the value of individual stocks. The Group's exposure to equity instruments is detailed in Note 7 to these financial statements. The majority of investments is unquoted and is classified as "Investments at fair value through income statement". Unquoted investments are valued using market based inputs such as capitalization rates for real estate investment and comparative company multiples for corporate investments.

27

ARCAPITA BANK B.S.C.(c)

The table below reflects the sensitivity of the investment portfolio to changes in these inputs. The sensitivity of real estate investments is calculated by considering the impact of reasonably expected changes in the capitalization rate. Sensitivity of corporate and asset-based investments have been calculated by considering the impact of reasonably expected changes in valuation multiples.

Change in capitalization rates (Basis points)

Effect on net income (+/-) 30 Jun 2007 US$ '000

Change in capitalization rates (Basis points)

Effect on net income (+/-) 31 Dec 2005 US$ '000

Real estate Investments

+15 -15 Change in S&P 500 in % (+/-)

(6,975) 7,301 Effect on net income (+/-) 30 Jun 2007 US$ '000

+25 -25 Change in S&P 500 in % (+/-)

(978) 1,035 Effect on net income (+/-) 31 Dec 2005 US$ '000

Corporate and asset-based investments 5% 35,488 5% 13,433

g) Operational risk Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Group cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Group is able to manage risks. Controls include effective segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes, including the use of internal audit.

28

ARCAPITA BANK B.S.C.(c)

5.

DUE FROM FINANCIAL INSTITUTIONS
Self financed 30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 Jointly financed 30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 Total 30 Jun 2007 US$ '000 31 Dec 2005 US$ '000

Commodity Murabaha Less: Deferred profits (2,028) 773,158 Investment in Mudaraba 773,158 149,789 2,341 635,290 28,958 218,851 2,341 1,408,448 28,958 368,640 (43) 149,789 (1,667) 632,949 (64) 189,893 (3,695) 1,406,107 (107) 339,682 775,186 149,832 634,616 189,957 1,409,802 339,789

Murabaha are sales on credit terms, based on the delivery of a commodity, which is the subject of the Murabaha, by the seller to the buyer and enabling it to possess and benefit from the commodity, with the understanding that the buyer will pay the agreed upon price at a certain future date inclusive of a profit margin. Mudaraba is a partnership between one party, which provides the capital (Rabulmal), and another, which possesses the necessary skills and expertise to manage such capital (Mudarib), for a pre-determined share of the profit and loss. Self financed balances represent Murabaha and Mudaraba financed exclusively by the Group, while jointly financed balances are those financed by the Group and unrestricted investment accounts. The investment in Mudaraba represents overnight investments with a major financial institution and can be withdrawn on demand without penalty. The due from financial institutions balances are offset with due to balances with the same institutions arising as a result of arrangements entered to protect the Group against foreign currency risk, as explained in Note 14.

29

ARCAPITA BANK B.S.C.(c)

6.

RECEIVABLES
30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 389,635 67,071 136,747 593,453

Receivables and prepayments (Note 6(a)) Notes receivable (Note 6(b)) Due from investee companies (Note 6(c))

297,704 137,764 179,245 614,713

a) Receivables and prepayments
30 Jun 2007 US$ '000 Subscriptions receivable Yield and management fee receivable Receivable from investee companies Prepaid and other receivable 122,930 90,312 72,121 12,341 297,704 31 Dec 2005 US$ '000 237,525 36,481 100,815 14,814 389,635

Subscriptions receivable represent amounts due from clients for participation in the Group's investment products. These are typically collected in the short-term and until collection are collateralized by the underlying investment assets which are only transferred to the client upon receipt of cash. Share purchase agreements outstanding for over six months are cancelled, the investment reinstated and the receivable representing the related income fully reversed. Management and other fees receivable represent amounts due from clients' investment holding companies for the provision of management and administrative services, or performance fees. b) Notes receivable
30 Jun 2007 US$ '000 Employee Stock Purchase Plan (Note 6(b) (i)) Investment Participation Plan (Note 6(b) (ii)) 35,266 102,498 137,764 31 Dec 2005 US$ '000 6,358 60,713 67,071

(i) Employee Stock Purchase Plan An employee stock purchase plan as detailed in Note 11, was established in 1999 whereby eligible employees are given an opportunity to acquire shares of the Bank. There were 253 eligible employees for the scheme as of 30 June 2007 (2005: 172). The Bank has issued 4,305,139 ordinary shares (2005:1,712,963) to trust entities established for this purpose. Eligible employees are provided cost free funding to acquire these shares, which is subject to settlement on an annual basis. However, contractually

30

ARCAPITA BANK B.S.C.(c)

this balance is receivable on demand. The Bank secures such funds by assignment of these shares. (ii) Investment Participation Plan Eligible employees are given the opportunity to participate in investments arranged by the Group. The participants are provided with zero cost funds from the Bank for this purpose, which are subject to settlement on an annual basis. However, contractually this balance is receivable on demand. The Bank secures such receivables by assignment of these investments. c) Due from investee companies
30 Jun 2007 US$ '000 Commodity Murabaha receivables Less: Deferred profits Allowance for doubtful commodity Murabaha receivables (Note 6 (c) (i)) Other forms of financing 222,183 (7,938) 214,245 (35,000) 179,245 31 Dec 2005 US$ '000 138,108 (3,066) 135,042 1,705 136,747

(i) Allowance for doubtful commodity Murabaha receivables
30 Jun 2007 US$ '000 Balance at beginning of period Allowance made during the period Balance at end of period 35,000 35,000 31 Dec 2005 US$ '000 -

31

ARCAPITA BANK B.S.C.(c)

7.

INVESTMENTS
30 Jun 2007 Cumulative fair value adjustment (Note 7(b)) US$ '000 16,186 10,117 18,831 45,134 Total carrying value (Note 7(a)) US$ '000 490,982 478,159 532,432 1,501,573 31 Dec 2005 Total US$ '000 402,307 271,494 119,744 793,545

Cost US$ '000 Corporate investments Real estate investments Asset-based investments 474,796 468,042 513,601 1,456,439

Planned retention Available for placement with investors

935,981 565,592 1,501,573

302,581 490,964 793,545

a) Investments by sector and region
30 Jun 2007 North America US$ '000 Corporate sectors Technology Manufacturing Healthcare Consumer goods Food Services 33,278 123,525 131,412 17,237 51,902 10,895 368,249 Real estate sectors Residential Industrial warehousing Commercial Assisted living 95,327 28,836 28,324 152,487 Asset-based sectors Utilities Other 38,661 38,661 559,397 387,871 387,871 711,035 105,900 105,900 231,141 493,771 38,661 532,432 1,501,573 63,477 56,267 119,744 793,545 50,182 134,941 15,308 200,431 109,423 15,818 125,241 254,932 134,941 44,654 43,632 478,159 82,374 49,933 77,562 61,625 271,494 35,299 58,826 28,608 122,733 68,577 182,351 131,412 45,845 51,902 10,895 490,982 159,333 108,556 26,299 44,447 43,860 19,812 402,307 Middle East & Asia US$ '000 Carrying value US$ '000 31 Dec 2005 Carrying value US$ '000

Europe US$ '000

32

ARCAPITA BANK B.S.C.(c)

b) Cumulative fair value adjustment
30 Jun 2007 US$ '000 Balance as at beginning of period Fair value adjustments Movement in net realized (gain) / loss Balance as at end of period 1,007 51,131 (7,004) 45,134 31 Dec 2005 US$ '000 25,332 (16,059) (8,266) 1,007

Where the investment is listed, its fair value is determined by reference to the published price. Unlisted investments are valued using market observable inputs as disclosed in Note 2(h).

8.

OTHER ASSETS
and equipment amounting to US$204.9 million

Other assets include property (2005:US$62.3 million).

9.

DUE TO FINANCIAL AND OTHER INSTITUTIONS
30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 458,098 486,280 944,378

Due to financial institutions Due to other institutions

807,700 415,803 1,223,503

The due to financial institutions balances are offset with due from balances with the same institutions arising as a result of arrangements entered to protect the Group against foreign exchange risk, as explained in Note 14.

10.

MEDIUM-TERM FINANCING FACILITIES
Maturity 30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 212,074 90,943 53,032 20,518 376,567

Amounts outstanding represent the following medium-term facilities:

Syndicated financing facility Arcsukuk - Multicurrency FIRSAN Euro FIRSAN A FIRSAN B

April 2012 Settled Settled Settled Settled

1,091,689 1,091,689

The syndicated financing facility carries a profit equivalent to a rate of 0.85% over the three-month US dollar LIBOR rate. The facility is not secured against the assets of the Bank. This facility has covenants relating principally to maintenance of minimum capital adequacy and leverage ratio, limitation on dividends and guarantees.

33

ARCAPITA BANK B.S.C.(c)

Sukuk represent ownership of units of equal value (bonds) and are registered in the names of the holders on the basis of their undivided ownership therein. Returns are based on the percentage of ownership, and as per the Mudaraba agreement. Arcsukuk - Multicurrency were Murabaha-backed Sukuk and carried a profit equivalent to a rate of 1.75% over three-month LIBOR for the respective currency. The sukuk was settled in full during the period. First Islamic Registered Senior Aman Notes (FIRSAN) comprising FIRSAN A and FIRSAN B were settled in full during the period. FIRSAN A carried a profit equivalent to a rate of 1.50% over LIBOR; while FIRSAN B carried a profit equivalent to a rate of 2.25% over LIBOR. First Islamic Registered Senior Aman (Euro) Notes (FIRSAN Euro) are Sukuk Al-Wakala Bel-Istithmar (Investment Agency Sukuk) and were also settled during the period. They carried a profit equivalent to a rate of 1.25% over six-month EURIBOR.

11.

SHARE-BASED PAYMENT PLANS

The expense recognized for employee services during the period is shown in the following table:
18 months 30 Jun 2007 US$ '000 Expense arising from equity-settled share-based payment transactions 3,330 12 months 31 Dec 2005 US$ '000 -

Employee share purchase plan The Arcapita employee share purchase plan was established in 1999 and modified in 2006. The plan allows employees selected by the plan administrator to purchase an allocated number of shares in trust entities which hold shares in Arcapita. Each trust share is deemed an economic equivalent of an Arcapita share. After completing six years of employment from the grant date the employee may convert 10% of the trust entity shares to Arcapita Bank shares each year. The fair value of the conversion option is estimated as the fair value of the Arcapita shares at the time of the grant date less the price paid to acquire a share in the trust. The expense of this share-based plan is then determined by estimating the number of trust shares which are expected to convert to shares in Arcapita.

34

ARCAPITA BANK B.S.C.(c)

12.

OTHER LIABILITIES
30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 42,320 2,697 5,646 50,663

Accrued expenses Undistributed charity funds Others

70,735 5,782 29,037 105,554

13.

UNRESTRICTED INVESTMENT ACCOUNTS

Unrestricted investment accounts (URIA) are funds of investors held by the Group which it can invest as it deems appropriate without restriction as to where, how and for what purpose the funds are invested. The Group calculates profit paid to the URIA based on an apportionment of the profits earned on the pool of profit bearing assets in which the URIA have participated. The Group does not charge management (Mudarib) fees or other expenses to unrestricted investment account holders.

14.

OFFSETTING ARRANGEMENTS
30 Jun 2007 US$ '000 31 Dec 2005 US$ '000 -

Due from financial institutions Due to financial institutions Net asset balance

754,060 (737,692) 16,368

The Group enters into certain offsetting arrangements in different major currencies with financial institutions in order to mitigate foreign currency risk. These arrangements are short-term in nature. For financial statement presentation purposes, each arrangement is set off against the respective reverse Murabaha and the net position is classified either as an asset or liability in the consolidated balance sheet. The net position as at 30 June 2007 represents an asset and is classified under due from financial institutions. Similarly the profits paid and received relating to these arrangements is netted off and the net is included under funding costs as appropriate. For the 18 month period ended 30 June 2007, the net funding cost on the arrangements amounted to US$1.1 million (2005: Nil).

35

ARCAPITA BANK B.S.C.(c)

15.

SHARE CAPITAL AND PREMIUM

At an extraordinary general meeting of the Bank held on 3 May 2006, the shareholders resolved to increase the authorized share capital of the Bank from 40,000,000 ordinary shares of US$10 each to 80,000,000 ordinary shares of US$10 each and increase the issued and fully paid up share capital enabling the Bank to issue further ordinary shares at a premium.
30 Jun 2007 Authorized: 80,000,000 (2005 :40,000,000) ordinary shares of US$10 each Issued and fully paid up: As at beginning of period 15,416,667 (2005: 15,416,667) ordinary shares of US$10 each Issued during period 7,130,720 (2005 : Nil ) ordinary shares of US$10 each As at end of period 22,547,387 (2005:15,416,667) ordinary shares of US$10 each Less- Treasury shares 124,758 (2005: Nil) ordinary shares of US$10 each 22,422,629 (2005: 15,416,667) ordinary shares of US$10 each 224,226 154,167 1,248 71,307 225,474 154,167 154,167 154,167 US$ '000 800,000 31 Dec 2005 US$ '000 400,000

Proposed dividends A dividend of 50% (2005: 20%) of the paid up capital of the Bank, or US$5.0 (2005: US$2.0) per share has been proposed by the Board of Directors for the 18 month period (2005: 12 months) and will be submitted for formal approval at the 2007 Annual General Meeting. Share premium Amounts collected in excess of the par value of the issued share capital during any issue of shares, net of issue expenses and share premium relating to repurchase of treasury shares are treated as share premium. This amount is not available for distribution, but can be utilized as stipulated in the Bahrain Commercial Companies Law. Bank funded employee shares Issue of shares to the employee share purchase plan is funded by the Bank on a cost free basis (Note 6(b) (i)). The unallocated shares in the employee share purchase plan are presented as a deduction from equity.

36

ARCAPITA BANK B.S.C.(c)

16.

RESERVES

Statutory reserve The Bahrain Commercial Companies Law and the Bank's Articles of Association require 10% of the net income for the year to be transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve totals 50% of the issued share capital. The reserve is not distributable, but can be utilized as security for the purpose of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and other applicable statutory regulations. Investment fair value reserve The investment fair value reserve represents unrealized revaluation gains on investments carried at fair value through statement of income. This reserve is distributable upon value realization, which takes place either at the time of actual exit or placement with the Bank's investors.

17.

RELATED PARTY TRANSACTIONS

Related parties include the Group's major shareholders, directors and key management officers, their immediate families and entities controlled, jointly controlled or significantly influenced by them; and other related parties which comprises shareholders not included under ‘Major Shareholders’, investee companies and companies that hold clients’ investments. The Group’s transactions with related parties arise from the ordinary course of business and are on terms and conditions approved by the Group’s management. Outstanding balances at period end are unsecured. Acquisition and placement income amounting to US$228 million (2005: US$64 million) was earned on the Group's transactions with such related parties. Management fees, yield from investments and income from investee companies amounting to US$152 million (2005: US$54 million), arises from investee companies in respect of the Group's management and administrative services and financing support. Expenses relating to related parties are not significant. Allowance for doubtful commodity Murabaha receivables has been made against due from investee companies as detailed in (Note 6 (c)). The related party balances included in these consolidated financial statements are as follows:

37

ARCAPITA BANK B.S.C.(c)

30 Jun 2007 Directors Major shareholders US$ '000 Assets Receivables and other assets 36,600 4,379 404,679 445,658 376,451 and key management US$ '000 Others US$ '000 Total US$ '000 31 Dec 2005 Total US$ '000

Liabilities Due to other institutions and other liabilities Unrestricted investment accounts 81,048 4,642 88,580 174,270 60,318 386 64,351 315,253 379,990 353,493

Key management personnel are those that possess significant decision making and direction setting responsibilities in each team, at different grades within the Group. Compensation of these key management personnel is as follows:
18 months 30 Jun 2007 US$ '000 Short-term employee benefits 109,767 12 months 31 Dec 2005 US$ '000 45,021

18.

CONTINGENT LIABILITIES AND COMMITMENTS

Investment commitments The Group has established Arcapita Ventures to make lead investments in growth and expansion stage technology companies in the United States. The fund is initially capped at US$200 million. The Group committed to contribute US$40 million out of which US$32 million remains on call as of 30 June 2007. The Group has also committed to fund a close ended real estate fund in Asia and it’s share of funding is SGD 200 million (US$130 million). The Group has outstanding commitment of SGD 60 million (US$39 million). Operating lease commitments The Group has entered into commercial leases for office space at its offices in Bahrain, London, Atlanta and Singapore. There are no restrictions placed upon the lessee. The future lease rentals are due as follows:
30 Jun 2007 US$ '000 Within one year After one year but not more than five years More than five years 1,656 4,459 1,287 7,402 31 Dec 2005 US$ '000 1,600 4,588 3,054 9,242

38

ARCAPITA BANK B.S.C.(c)

19.

TOTAL REVENUE
18 months 30 Jun 2007 US$ '000 12 months 31 Dec 2005 US$ '000 184,670 7,176 21,109 16,854 (16,059) 15,740 945 230,435

Acquisition and placement fees Capital gain on exits and distribution (Note 19 (a)) Management fees (Note 19(b)) Yield from investments Net gain/(loss) from fair valuation of investments (unrealized) Income from investee companies Others

285,182 122,004 64,679 56,635 51,131 31,008 552 611,191

a) Capital gain on exits and distribution The Bank exited from five (2005: six) investments during the period ended 30 June 2007. The investments were held between two to six years (2005: four to six years) and on exit earned an IRR ranging from 6% to 24% (2005: 6% to 9%). Distributions represent special dividends paid by investee companies. b) Management fees Included in management fees is US$27.9 million (2005: US$7.3 million) representing fee income earned in a trust or fiduciary capacity.

20.

RECURRING INCOME
18 months 30 Jun 2007 US$ '000 12 months 31 Dec 2005 US$ '000 15,740 16,854 945 33,539 21,109 54,648

Income from investee companies Yield from investments Others Recurring and other income Management fees

31,008 56,635 552 88,195 64,679 152,874

Recurring income represents income, which in management’s opinion, would not be impacted by the cyclical nature of the investment banking industry.

39

ARCAPITA BANK B.S.C.(c)

21.

SEGMENT INFORMATION

The primary business of the Group is to identify attractive investment opportunities for acquisition and placement with its customers. In order to manage this activity and retain strategic focus, the Group has structured its operations into four business segments: corporate, real estate, asset-based investments and more recently venture capital investments. Each business segment differs from the other in terms of risks and rates of return. Therefore, the Group considers business segments to be the primary segment for purposes of financial reporting. Corporate investments segment This segment principally handles the acquisition and placement of private equity investments. The result of the recently commenced venture capital line of business is also included in this segment. Real estate investments segment The real estate segment relates to the acquisition or development of real estate properties and placing those investments with investors. Asset-based investments segment The asset-based segment manages the acquisition and placement of infrastructure related entities. Other segmental information The business segments share services and operate from all the locations in which the Group carries out its business. Therefore, capital expenditure and depreciation cannot be allocated to business segments except through an arbitrary allocation process. The Group does not consider these items significant in evaluating the performance of business segments. Geographical segments The Group sources investments for placements with its customers from three geographical regions. These regions are North America; Europe; and the Middle East and Asia; and have therefore been identified as its three geographical segments. Income from customers disclosed below is based on the geographical location of the customer. Pooling of funding The Group sources its funding on an aggregate basis. The business segments do not raise funds on their own account. Depending on the Group’s strategic plan and the different business cycles of each business segment, funding will be provided as required. Therefore, the Group does not allocate funding liabilities to the different segments for purpose of this disclosure, since to do so would result in arbitrary allocations and hide the true nature of the Group's business.

40

ARCAPITA BANK B.S.C.(c)

The following table presents revenue, segment results and certain asset and liability information regarding the Group's business segments for the 18 month period ended 30 June 2007.

Corporate US$ '000 Segmental revenue Unallocated revenue Total revenue 284,869

Real estate US$ '000 154,978

Asset-based US$ '000 170,792

Total US$ '000 610,639 552 611,191

Segmental results Unallocated expenses Net income from operations Foreign exchange gain Net income

210,719

122,970

161,227

494,916 (221,338) 273,578 12,101 285,679

Assets and liabilities Segment assets Unallocated assets 767,141 442,693 707,001 1,916,835 1,888,651 3,805,486

Segment liabilities Unallocated liabilities

25,896

140,398

112,984

279,278 2,459,113 2,738,391

41

ARCAPITA BANK B.S.C.(c)

The following table presents revenue, segment results and certain asset and liability information regarding the Group's business segments for the 12 month period ended 31 December 2005.

Corporate US$ '000 Segmental revenue Unallocated revenue Total revenue 65,889

Real estate US$ '000 136,666

Asset-based US$ '000 26,935

Total US$ '000 229,490 945 230,435

Segmental results Unallocated expenses Net income from operations Foreign exchange losses Net income

52,644

127,368

25,145

205,157 (85,199) 119,958 (15,626) 104,332

Assets and liabilities Segment assets Unallocated assets 712,811 510,037 141,860 1,364,708 500,513 1,865,221

Segment liabilities Unallocated liabilities

141,814

223,800

12,063

377,677 1,062,992 1,440,669

42

ARCAPITA BANK B.S.C.(c)

The following table presents revenue of external customers by the geographical location of the customer. Assets for each segment are presented by geographical location of the asset.

30 Jun 2007 North America US$ '000 Total revenue 73,483 Middle East & Asia US$ '000 374,786

Europe US$ '000 162,922

Total US$ '000 611,191

Assets

689,404

1,385,405

1,730,677

3,805,486

31 Dec 2005 North America US$ '000 Total revenue 30,809 Middle East & Asia US$ '000 180,109

Europe US$ '000 19,517

Total US$ '000 230,435

Assets

607,288

420,147

837,786

1,865,221

22.

EARNINGS AND EXPENSES PROHIBITED BY SHARI'AH

The Bank receives interest from incidental deposits. These earnings are prohibited by Shari'ah, hence utilized exclusively for charitable purposes and amount to US$3,554 only for the period (2005: US$17,647 only).

23.

SHARI'AH SUPERVISORY BOARD

The Bank's Shari'ah Supervisory Board consists of four Islamic scholars who review the Group's compliance with general Shari'ah principles and specific fatwas, rulings and guidelines issued. Their review includes examination of evidence relating to the documentation and procedures adopted by the Group to ensure that its activities are conducted in accordance with Islamic Shari'ah principles.

43

ARCAPITA BANK B.S.C.(c)

24.

CAPITAL MANAGEMENT

The primary objective of the Group's capital management is to ensure that the Group complies with the capital requirements laid down by the Central Bank of Bahrain, maintains strong credit ratings and a healthy capital ratio in order to support its business and maximize shareholder value. Regulatory capital consists of Tier I capital, which comprises share capital, share premium, retained earnings (excluding current years net income) and adjustments for treasury and bank funded shares. The other component of regulatory capital, Tier II capital, consists of the net income for the financial period, investment fair value reserves, and provisions. Certain adjustments are made to these balances as prescribed by the Central Bank of Bahrain. Risk weighted assets are calculated in accordance with the prudential rules laid down by the Central Bank of Bahrain.

30 Jun 2007 US$ '000 Tier I Capital Tier II Capital Total regulatory capital 874,582 20,310 894,892

31 Dec 2005 US$ '000 386,353 453 386,806

Risk weighted assets

2,411,391

1,427,296

Capital ratio Minimum regulatory capital

37% 12%

27% 12%

25.

SOCIAL RESPONSIBILITY

The Group discharges its social responsibilities through donations to charitable causes and organizations.

26.

COMPARATIVE FIGURES

Certain of the prior year's figures have been reclassified to conform to the presentation adopted in the current period. Such reclassification did not affect previously reported net income or shareholders' equity.

44

Sign up to vote on this title
UsefulNot useful