INVESTCORP BANK B.S.C. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED) INVESTCORP BANK B.S.C. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 (UNAUDITED) Description Page REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO THE BOARD OF DIRECTORS OF INVESTCORP BANK B.S.C. .............. 2 INTERIM CONDENSED CONSOLIDATED BALANCE SHEET................................................. 3 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME………………………………………………………………………... 4 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ............ 5 INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS ........................ 6 Notes to the interim condensed Consolidated Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ....................................... 7 2. SEGMENT REPORTING..................................................................................................... 12 3. ASSETS UNDER MANAGEMENT...................................................................................... 20 4. OPERATING EXPENSES ................................................................................................... 21 5. LIQUIDITY............................................................................................................................ 22 6. RECEIVABLES AND PREPAYMENTS............................................................................... 23 7. LOANS AND ADVANCES ................................................................................................... 24 8. CO-INVESTMENTS IN HEDGE FUNDS ............................................................................ 25 9. CO-INVESTMENTS IN CORPORATE INVESTMENTS..................................................... 26 10. CO-INVESTMENTS IN REAL ESTATE .............................................................................. 30 11. PROVISION FOR IMPAIRMENT ........................................................................................ 31 12. DEPOSITS FROM CLIENTS............................................................................................... 31 13. PAYABLES AND ACCRUED EXPENSES.......................................................................... 32 14. MEDIUM-TERM DEBT ........................................................................................................ 33 15. LONG-TERM DEBT............................................................................................................. 33 16. SHARE CAPITAL................................................................................................................. 34 17. CAPITAL ADEQUACY......................................................................................................... 35 18. DERIVATIVE FINANCIAL INSTRUMENTS ........................................................................ 36 19. COMMITMENTS AND CONTINGENT LIABILITIES........................................................... 39 20. FAIR VALUE OF FINANCIAL INSTRUMENTS .................................................................. 40 21. CYCLICALITY OF ACTIVITIES........................................................................................... 42 REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO THE BOARD OF DIRECTORS OF INVESTCORP BANK B.S.C. Manama, Kingdom of Bahrain INVESTCORP BANK B.S.C. INTERIM CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2010 (UNAUDITED) December 31, $000s June 30, 2010 2010 (Audited) Note Page ASSETS Cash and short-term funds 67,662 21,342 5 22 Placements with financial institutions and other liquid assets 393,210 881,469 5 22 Positive fair value of derivatives 63,208 74,766 18 38 Receivables and prepayments 262,574 315,975 6 23 Loans and advances 250,365 247,593 7 24 Co-investments Hedge funds 601,379 537,274 8 25 Corporate investments 1,008,604 1,052,765 9 26 Real estate 200,333 216,777 10 30 Total co-investments 1,810,316 1,806,816 Premises, equipment and other assets 65,613 68,995 TOTAL ASSETS 2,912,948 3,416,956 LIABILITIES AND EQUITY LIABILITIES Deposits from clients - short-term 234,845 247,426 12 31 Negative fair value of derivatives 27,884 27,199 18 38 Payables and accrued expenses 66,897 144,342 13 32 Deposits from clients - medium-term 103,011 90,693 12 31 Medium-term debt 917,181 1,321,348 14 33 Long-term debt 587,680 591,610 15 33 TOTAL LIABILITIES 1,937,498 2,422,618 EQUITY Preference share capital 511,501 508,678 16 34 Ordinary shares par value 200,000 200,000 16 34 Reserves 594,949 596,243 Treasury shares (186,389) (161,669) Retained earnings other than unrealized fair value changes of 75,900 65,430 corporate and real estate co-investments Ordinary shareholders' equity other than unrealized fair value changes, proposed dividend and revaluation reserve 684,460 700,004 Proposed preference share dividend - 57,374 Unrealized fair value changes and revaluation reserve (220,511) (271,718) TOTAL EQUITY 975,450 994,338 TOTAL LIABILITIES AND EQUITY 2,912,948 3,416,956 _________________________ ________________________ Abdul-Rahman Salim Al-Ateeqi Nemir A. Kirdar Chairman Executive Chairman & CEO The attached notes 1 to 21 are an integral part of these interim condensed consolidated financial statements. Page 3 INVESTCORP BANK B.S.C. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2010 (UNAUDITED) INTERIM CONDENSED CONSOLIDATED STATEMENT OF INCOME 6 months 6 months $000s Jul - Dec Jul - Dec 2010 2009 Note Page FEE INCOME Management fees 44,760 48,955 Activity fees 21,087 17,725 Performance fees 5,853 13,009 Fee income (a) 71,700 79,689 2 17 ASSET BASED INCOME Investment income Corporate investments (2,873) 8,186 Hedge funds 40,607 96,388 Real estate 11,507 8,427 Treasury and other asset based income 8,459 181 Asset based income (b) 57,700 113,182 Gross operating income (a) + (b) 129,400 192,871 Provision for impairment (407) (5,989) Interest expense (28,782) (28,801) 2 17 Operating expenses (83,249) (100,683) 4 21 Net operating income before fair value changes of corporate and real 16,962 57,398 estate co-investments Fair value changes of corporate and real estate co-investments (c) 39,273 2,795 NET INCOME 56,235 60,193 Basic and fully diluted earnings per ordinary share ($) 8 8 84 TOTAL REVENUE (a)+(b)+(c) 168,673 195,666 INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 6 months 6 months $000s Jul - Dec Jul - Dec 2010 2009 NET INCOME (AS ABOVE) 56,235 60,193 Other comprehensive income Unrealized loss on available for sale investments (1,860) - Fair value movements - cashflow hedges Net realized loss recycled to statement of income 536 1,941 Net unrealized gains for the period 6,766 2,774 Other comprehensive income 5,442 4,715 TOTAL COMPREHENSIVE INCOME 61,677 64,908 The attached notes 1 to 21 are an integral part of these interim condensed consolidated financial statements. Page 4 INVESTCORP BANK B.S.C. INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTH PERIOD ENDED DECEMBER 31, 2010 (UNAUDITED) Reserves Fair value changes Revaluation Total fair value Corporate reserve on changes and Preference Ordinary investment Available premises share share Share Statutory General Total Treasury Proposed and for sale Cash flow and revaluation Total Retained * capital capital premium reserve reserve reserves shares earnings dividend real estate investments equipment $000s hedges reserve equity Balance at July 1, 2010 508,678 200,000 446,243 100,000 50,000 596,243 ( 161,669) 65,430 57,374 ( 299,919) 6 ,573 1 1,679 9,949 ( 271,718) 994,338 Total comprehensive income - - - - - - - 5 6,235 - - (1,860) 7 ,302 - 5 ,442 61,677 Transfer of realized losses to retained earnings - - - - - - - ( 6,922) - 6 ,922 - - - 6 ,922 - Transfer of unrealized gains to fair value changes - - - - - - - ( 39,273) - 3 9,273 - - - 3 9,273 - Depreciation transferred to retained earnings - - - - - - - 4 30 - - - - ( 430) ( 430) - Purchased during the period - - - - - - ( 34,971) - - - - - - - ( 34,971) Sold during the period - - - - - - 8 ,957 - - - - - - - 8 ,957 Loss on treasury shares - - ( 1,294) - - (1,294) 1 ,294 - - - - - - - - Dividends paid - - - - - - - - ( 57,374) - - - - - ( 57,374) Vesting during the period 2 ,823 - - - - - - - - - - - - - 2 ,823 Balance at December 31, 2010 511,501 200,000 444,949 100,000 50,000 594,949 ( 186,389) 75,900 - ( 253,724) 4 ,713 1 8,981 9,519 ( 220,511) 975,450 Balance at July 1, 2009 500,000 200,000 454,995 100,000 50,000 604,995 ( 150,507) 16,926 - ( 297,031) 6 ,573 3,025 10,765 ( 276,668) 894,746 Total comprehensive income - - - - - - - 6 0,193 - - - 4 ,715 - 4 ,715 64,908 Transfer of realized gain to retained earnings - - - - - - - 7 ,852 - ( 7,852) - - - ( 7,852) - Transfer of unrealized gain to fair value changes - - - - - - - ( 2,795) - 2 ,795 - - - 2 ,795 - Depreciation transferred to retained earnings - - - - - - - 2 38 - - - - ( 238) ( 238) - Purchased during the period - - - - - - ( 6,776) - - - - - - - ( 6,776) Sold during the period - - - - - - 3 ,090 - - - - - - - 3 ,090 Loss on sale of treasury shares - - ( 908) - - (908) 9 08 - - - - - - - - Preference share issuance proceeds 1 5,146 - - - - - - - - - - - - - 15,146 Share issue expenses - - ( 725) - - (725) - - - - - - - - ( 725) Non-vested preference shares issued to employees ( 12,148) - - - - - - - - - - - - - ( 12,148) Vesting during the period 1 ,735 - - - - - - - - - - - - - 1 ,735 Balance