Efg-hold.gdr S Regulatory News (EFGD)

15 Nov 2006 08:00

EFG-Hermes Holdings SAE15 November 2006 9M2006 Earnings Release - 15 November 2006 Summary Overall the quarter was extremely eventful with a number of corporate milestonesachieved despite lackluster market conditions. Our market position remains verystrong in Egypt with a growing track record and market share in the UAEbeginning to have a significant impact on results. The launch of our business inthe Kingdom of Saudi Arabia is on track. Financial results continue to show strong year-on-year growth (+52.1%) whilethird quarter operating revenues declined marginally versus the second quarter(-5.5%). Regional revenue growth was particularly pleasing, providing an offsetto the slowdown in the Egyptian market. The Company remains focused on regional expansion and strengthening theoperating infrastructure as a platform for future growth. Management is pleasedwith the progress in both areas and remains optimistic regarding the generaloperating environment. At a Glance • Year-to-date operating revenues increased 52.1% against the same nine month period of 2005 to EGP653 million. • Net operating profits increased 43.2% against the same period last year to EGP 443.6 million, with net operating margins at 67.5%. • Net profit after tax and minority interest increased almost three-fold over the same period in 2005 to EGP510 million. Adjusted for EGP161.4 million of income consolidated from Banque Audi, net profit after tax (EGP348.6 million) has shown almost a two-fold increase over the same period last year, and is equivalent to bottom line profits for the full year 2005. • Successful completion of a USD506 million capital increase and substantial institutionalization of the shareholder base. • Three new funds launched. • Stake in Banque Audi increased to 25.82% thus further diversifying revenue sources. • Initiation of research coverage of EFG-Hermes by HSBC. • Receipt of the e-trading license for Egypt and the installation of FIX connections to CASE. Operating Revenues On a consolidated basis, operating revenues for the nine month period ending 30September 2006 grew 52.1% compared to the same period last year, to EGP653million. Table 1: Breakdown of Operating Revenues by Business Line Division Revenues YTD September 06 Revenue YTD September 05 Revenue YoY Growth(EGP millions) Contribution Contribution Brokerage: Egypt 271 41.47% 120 27.97% 125.50%Brokerage: UAE 39 5.93% 33 7.69% 17.27%Asset Management: Egypt 36 5.52% 45 10.49% -20.00%Asset Management: UAE 14 2.13% - - -Private Equity 58 8.81% 91 21.21% -36.81%Investment Banking: Egypt 207 31.68% 140 32.63% 47.64%Investment Banking: UAE 29 4.46% - -Total Operating Revenue 653 100% 429 100% 52.10% Sources: EFG-Hermes, Audited Financial Statements and Management Reports Total operating revenues for 3Q06 stood at EGP173 million, representing a 5.5%decline on 2Q06 despite income from regional Asset Management and InvestmentBanking beginning to kick in. This was mainly as a result of the change in thecomposition of investors trading on the Egyptian Stock Exchange towards thegenerally smaller-sized local investors and away from foreign clients.Furthermore, market conditions were not conductive to completing majorofferings, with the seasonal summer slowdown also contributing to the decline. Figure 2: Quarterly Breakdown of Revenue by Business Line To view Figure 2, please click on the link below: http://www.rns-pdf.londonstockexchange.com/rns/0878m_-2006-11-14.pdf *Including Asset Management incentive fees as follows: 2Q05 EGP15 mn, 3Q05 EGP12mn, 4Q05 EGP155 mn, 1Q06 EGP1 mn, 2Q06 EGP3 mn Source: EFG-Hermes, Audited Financial Statements and Management Reports Brokerage activities have continued to be the prime revenue contributor,accounting for slightly over 47% of total consolidated revenue. InvestmentBanking came in a close second contributing 36.14% to total consolidatedrevenue. Although total assets under management grew by EGP1.2 billion duringthe quarter, Egypt Asset Management's contribution to total consolidated revenuedropped to 5.5%, down from 10.5% in 9M 05, mainly due to poor market performanceimpacting incentive fees. However, regional Asset Management began bear fruit asthe UAE-based team began to book fixed management fees from among others, anewly launched fund for Saudi Fransi Bank. Revenue from Private Equity hasdoubled over 2Q06 but has declined by 37% compared to the same period in 2005and reflects the investment phase of new funds launched during the last quarterof 2005 and early 2006. Overall, Private Equity revenues constitute around 9% oftotal operating revenue. PERFORMANCE OF BUSINESS DIVISIONS Brokerage / Egypt Total market executions on the Cairo and Alexandria Stock Exchange (CASE) duringthe first three quarters of 2006 exceeded executions for the full year 2005 by29.4% to EGP 415.6 billion. Likewise, EFG-Hermes' total executions for the ninemonths period were in excess of full year 2005 executions, at EGP 78.8 billionversus EGP 76.4 billion for 2005. The value of average daily trading declined by 41.22% over the year quarter onquarter. In tandem, the composition of market participants has reversed. Havinghistorically been dominated by institutional investors and high net worthindividuals, by the end of 3Q 06 retail investors comprised 75.4% of averagedaily trading as opposed to 60% (including HNWI) earlier in the year.Furthermore, foreign investors' share of the market fell to 23.4% (9.9% foreignand 13.5% Arab) as opposed to an average of 32.7% during 4Q05. Figure 3: EFG-Hermes Executions and Market Share of Total Market Executions To view Figure 3, please click on the link below: http://www.rns-pdf.londonstockexchange.com/rns/0878m_-2006-11-14.pdf Sources: CASE and EFG-Hermes As a result, EFG-Hermes' Egyptian brokerage subsidiaries witnessed a decline intheir combined market share to 13% in 3Q06, against 25.8% and 26.7% in 2Q06 and3Q05 respectively. Market share for the nine month period was 19%. It should be noted that the introduction of the call centre during the latterpart of 3Q06 and the more recent soft launch of online trading are expected tomitigate the impact of the change in investor base going forward, allowing theGroup to take advantage of both wholesale and retail market conditions. Brokerage / UAE Over 3Q06, EFG-Hermes' market share improved to 3.41% on the Dubai FinancialMarket (DFM) and slipped slightly on the Abu Dhabi Securities Market (ADSM) to1.63%. Total market executions in the UAE declined 35% in 3Q06 over 2Q06 to AED187.9 billion, while total EFG-Hermes executions declined by only 14.9%, thusincreasing the firm's overall market share to 3.1%, as compared to 0.3% as atthe end of 3Q05. It is worth noting that EFG-Hermes is currently ranked number 8 among DFMbrokers, up from number 17 as at 2Q05, and number 4 for October 2006. Given theUAE markets' continued reliance on retail participation, the introduction of theUAE Contact Centre and online trading capabilities during 2006 will enableEFG-Hermes to capture greater market share going forwards. Figure 4: Progression of Volumes Executed and Market Shares To view Figure 4, please click on the link below: http://www.rns-pdf.londonstockexchange.com/rns/0878m_-2006-11-14.pdf Sources: DFM, ADSE and EFG-Hermes Online Trading The focus on online trading reflects both regional trends and EFG-Hermes'strategy to capture an increased portion of the retail market, havinghistorically been institutionally-focused. Online trading was soft launched in the UAE during 2Q06 and to date has capturedover 1000 clients. In Egypt, the firm received its online trading license at theend of September. The formal launch of online trading is scheduled for December2006. EFG-Hermes aims to provide superior service and support to users, supported bycall centres in Egypt and the UAE, and expects online trading to become a majorcash revenue generator over the next two to three years. This may, over time,warrant revisiting the idea of housing online and call centre activities inspecialized subsidiaries, rather than as part of the core brokerage business. Asset Management / Egypt 3Q06 witnessed the launch of three new funds by the Egypt Asset Managementdivision: • The launch of EFG-Hermes' first Capital Guarantee Fund, for Al Watany Bank of Egypt raised over EGP135 million. • The launch of the NSGB Money Market fund on 1 October 2006 currently in excess of EGP300 million. • The Egyptian Saudi Finance Fund, launched at the beginning of 3Q06 specialising in Islamic equities, with a fund size of EGP70 million. Figure 5: Evolution of Assets under Management (totals in EGP billion) To view Figure 5: please click on the link below: http://www.rns-pdf.londonstockexchange.com/rns/0878m_-2006-11-14.pdf Source: EFG-Hermes It is worth noting that during the nine months ending September 30th, 2006 totalincentive fees booked reached EGP 8.2 million as compared to EGP 16.9 millionduring the similar period during 2005. Asset Management / UAE 3Q06 witnessed the first quarter of revenues being booked by the regional AssetManagement Team, predominantly resulting from the management of the Middle Eastand Developing Africa (MEDA) Fund and Al Saudi Al Fransi Bank funds. The teamwas also mandated for a number of discretionary portfolios for prominent GCCinstitutions and individuals during the third quarter. As at the end of 3Q06assets under management with the regional Asset Management team reached USD385million. Investment Banking Investment Banking remains the core contributor to Group operating revenues,booking close to 32% of the Group's consolidated net revenue. Total revenuesincreased 47% over 3Q05 levels to EGP 206.2 million. The quarter witnessed twomajor deals, namely SODIC's capital increase of EGP 1 billion and TelecomEgypt's acquisition of 23.5% of Vodafone Egypt with a total deal size of EGP 5.6billion. Private Equity With the challenges of declining assets under management partially averted asthe Horus II and Horus Agri Funds closed, focus within Private Equity shifted toinvesting the funds collected. As at the end of the 3Q06 several new investmentsfor the Horus II fund were completed bringing the fund's invested portion up to60%. Research EFG-Hermes Research has maintained its standing as the most well regardedanalysis on Arab markets, with over 80 stocks and 8 economies coveredregion-wide, and further initiatives set to kick in during 4Q06, in particularin relation to Saudi and UAE coverage. Other Revenues The major component of other revenues is the EGP 161.4 million relating to theconsolidated portion of the Banque Audi investment, representing 18.5% of thetotal revenues booked by the Group during 9M06 (EGP 41 million in 1Q06, EGP 62million in 2Q06 and the remainder in 3Q06). Banque Audi's performance wasrelatively unaffected by recent events in Lebanon, owing to the diversity of itsbusiness model, both in geographical and business specific terms. Operating Expenses Operating expenses remained stable at 32.5% of revenues. In absolute termsgeneral and administrative expenses, including employee costs increased 44.4%(versus the same period last year) compared to revenue growth of 52.1%. Employee costs remain the largest single component of operating expenses andincreased slightly from 53.2% of total operating expenses for the same periodlast year, to 56.9% this year. Relative to operating revenues, fully loadedemployee costs increased marginally from 17.2% to 18.5%.This is driven by anumber of staffing investments relating to our core businesses, the ongoingregionalization including the initial staffing of Saudi Arabia and thestrengthen of our support functions. We also expanded the management incentivescheme to include 82 of our most critical employees as an important retentiontool. These investments are essential for future growth and the contribution tothe Group's bottom line will only become apparent as new business areas becomeoperational. Consultant and services fees are the second largest component of operatingexpenses. Standing at EGP 18.4 million as at the end of 9M 06, a 33.3% declineover 3Q 05, consultant and service expenses constitute 8.61% of total operatingexpenses and relates to legal, accounting, audit, licensing and deal relatedprofessional fees. Promotional and advertising expenses increased over two-fold over the sameperiod last year to reach EGP 13.4 million and 6.30% of total operating expense.The increase is directly related to the launch of several new products duringthe year including the Brokerage Call Centres in Egypt and the UAE, onlinetrading in the UAE and the pre-launch of our Saudi Arabia business. Financing Costs Financing costs at the Holding Company level have began to increase as more debtwas taken on during 1Q 06 to finance the Banque Audi deal (interest paidapproximately EGP 13 million) and the drawdown of the DEG and IFC loans began totake place during the third quarter. Having said that, if the Group's cashposition is considered mainly as a result of the recent capital increase thenthe net debt position has again turned positive. Taxes Under the new Egyptian tax laws and executive regulations, all income stemmingfrom subsidiaries other than those domiciled in the UAE and the Banque Audiinvestment are taxable to various degrees. The cumulative provision for incometax for the nine months ending 30 September 2006 is EGP 71.3 million, reflectingan effective tax rate of 11.94%. Balance Sheet Post capital increase, the Group's balance sheet has been further strengthened,with shareholder's equity and minority interest reaching EGP 7.141 billioncompared to a current market capitalizations in the vicinity of EGP 16 billion.The associated surge in cash and cash balances to EGP 3.4 billion is mainly theresult of funds from the capital increase. Net receivables resulting from operations stood at EGP 118 million, incurredmainly due to the normal course of business as brokerage activities increase inboth Egypt and the UAE. As EFG-Hermes KSA has not yet issued its opening balance sheet, all payments onbehalf of the Saudi subsidiary relating to the permanent premises and downpayments for hardware and software (amounting to EGP 54 million) are included inthe debtors and other debit figure, while all the direct expenses includingsalaries are directly expensed on to the income statement at the Holding Companylevel. The Saudi subsidiary's paid-in capital of SAR 120 million is included inthe associated company figure that also includes the increase in the Banque Audiinvestment that took place during the quarter, for a total of USD 40.6 million. Profitability Net operating profit has increased 43.2% over 9M05 to EGP 443.6 million, withmargins remaining constant at around 67.5%. Net income after tax and minorityinterest reached EGP 510 million up from EGP 358 million during 1H 06, EGP 350million for the full year of 2005 and EGP 187 million for the same period lastyear. Of the bottom line profitability, the majority relates to our core business.Adjusted for the EGP 161.4 million of revenue consolidated from Banque Audi andapproximately EGP 13 million for bridge financing the acquisition (incurredduring 1Q 06), net profit after tax and minority interest relating to our corebusiness stood at EGP 361.6 million at the end of the nine month period ending30 September 2006, with a net profit after tax and minority interest margin of51% for the core business. Challenges The key challenge remains managing growth and continuing to attract and retainkey employees to support regional expansion. Strengthening our operationalinfrastructure (Human Resources, Technology, Risk Management etc) and furtherbuilding our brand equity will continue to be critical to our future success,particularly as we build our retail oriented businesses. Going Forward We remain committed to our Mission of helping investors in the Middle East bemore successful financially. We will deliver this promise through focusing onour customers needs, a devotion to quality in everything we do and building afull service investment bank across the region. Our medium term priorities willremain: • Growing market share in core businesses • Opening new markets • Adding distribution channels • Strengthening infrastructure • Attracting and retaining key talent Disclaimer In this press release EFG-Hermes may make forward looking statements, including,for example, statements about management's expectations, strategic objectives,growth opportunities and business prospects. These forward-looking statementsare not historical facts but instead represent only EFG-Hermes' belief regardingfuture events, many of which, by their nature are inherently uncertain and arebeyond management's control and include among others, financial marketvolatility; actions and initiatives taken by current and potential competitors;general economic conditions and the effect of current, pending and futurelegislation, regulations and regulatory actions. Accordingly, the readers arecautioned not to place undue reliance on forward-looking statements, which speakonly as of the date on which they are made. EFG - Hermes Holding Company (Egyptian Joint Stock Company) Consolidated Financial Statements For the period ended September 30, 2006 & Review Report Thereon REVIEW REPORT To The Board of Directors of The EFG - Hermes Holding Company We have reviewed the accompanying consolidated statement of financial positionof EFG - Hermes Holding Company and Subsidiaries as of September 30, 2006, andthe related consolidated statements of income, changes in equity and cash flowsfor the nine months then ended. These financial statements are theresponsibility of the Company's management. Our responsibility is to issue areport on these financial statements based on our review. we conducted our review in accordance with the Egyptian Standard on Auditingapplicable to review engagements. This standard requires that we plan andperform the review to obtain moderate assurance as to whether the consolidatedfinancial statements are free of material misstatement. A review is limitedprimarily to inquiries of Company's personnel and analytical procedures appliedto financial data, and thus provides less assurance than an audit. We have notperformed an audit and, accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believethat the accompanying consolidated financial statements do not give a true andfair view in accordance with the Egyptian Accounting Standards. KPMG Hazem Hassan Cairo, October 29, 2006 EFG - Hermes Holding Company(Egyptian Joint Stock Company)Notes to the Consolidated Financial Statements For the period ended September 30, 2006 1. Purpose of Preparation The consolidated financial statements and accompanying notes wereprepared for the purpose of submitting them to the Egyptian Stock Exchange andLondon Stock Exchange as one of the requirements of local laws and GlobalDepositary shares (GDS). 2. General - EFG - Hermes Holding Company -Egyptian Joint Stock Company- was foundedin pursuance of decree No. 106 of 1984. - The company's extraordinary general meeting held on July 22, 1997resolved to adjust the company's status and convert it in pursuance to theprovisions of law No. 95/1992 and its executive regulation and amend thecompany's purpose to become participation in the companies' establishment whichissue securities or in increasing their share capitals. - The company's extraordinary meeting held on March 14, 2004 decided toadd the Custody Activity to the purpose of the company. - EFG- Hermes holding company, the parent company, owns the followingsubsidiaries: Direct ownership indirect ownership % % Financial Brokerage Group (FBG) 99.76 0.04Egyptian Fund Management Group (EFMG) 88.51 11.49Egyptian Portfolio Management Group (EPMG) 66.33 33.67Hermes Securities Brokerage 97.58 2.42Hermes Fund Management 89.95 10.05Hermes Corporate Finance 99.37 0.53EFG - Hermes Advisory Inc. 100 --EFG- Hermes Financial Management (Egypt) Ltd. 100 --EFG - Hermes for Promoting & Underwriting 99.88 --Bayonne Enterprises Ltd. -- 100EFG- Hermes Fixed Income 99 1EFG- Hermes Private Equity (Egypt) 96.3 3.7EFG- Hermes Private Equity (BVI) 65 --EFG- Hermes Brokerage - UAE Ltd. -- 90Fleming CIIC Holdings 100 --Fleming Mansour Securities -- 99.33Fleming CIIC Securities -- 96Fleming Corporate Finance -- 74.92EFG- Hermes UAE Ltd. 100 --EFG- Hermes Lebanon 100 --EFG- Hermes KSA 72.5 27.5 3. Significant Accounting Policies Applied The significant accounting policies adopted in the preparation ofthese consolidated financial statements are set out below: 3-1 Basis of Preparation of Financial Statements The financial statements were prepared in accordance with EgyptianAccounting Standards, and applicable local laws and regulations. 3-2 Basis of Consolidation The consolidated financial statements include all subsidiaries that arecontrolled by the parent company. Basis of the consolidation are as follows: - All intragroup balances and transactions are eliminated. - Minority interest, in the equity and results of the entities that arecontrolled by the parent company, is shown as a separate item in theconsolidated financial statements. - The cost of acquisition is allocated as follows: a) The fair value of the assets and liabilities acquired as of the date ofthe exchange to the extent of the parent's interest obtained in the exchange,and b) The minority's proportion of the pre-acquisition carrying amounts of theassets and liabilities of the subsidiary. c) Goodwill represents amounts arising on acquisition of subsidiaries andrepresents the difference between the cost of acquisition and the fair value ofthe net identifiable assets acquired. Goodwill is stated at cost lessaccumulated impairment losses. 3-3 Foreign Currencies Transactions - The company maintains its accounts in Egyptian Pounds. Transactionsdenominated in foreign currencies are recorded at the prevailing exchange rateat the dates of transactions. Balances of monetary assets and liabilitiesdenominated in foreign currency at the financial position date are translated atthe prevailing exchange rates. The exchange differences are recorded in theincome statement. - Assets and liabilities of financial statements for foreign companieswere translated using the prevailing exchange rates at the financial positiondate, shareholders' equity items are translated using historical rates, whilerevenues and expenses were translated using an average of the prevailing ratesduring the financial year. The resulted translation differences are includedwithin the shareholders' equity in the financial position as a special reserve-foreign currency translation differences. 3-4 Revenues Recognition - Gains (losses) resulted from sale of investments are recognized ontransaction date and measured by the difference between cost and selling priceless selling commission and expenses. - Dividend income is recognized when declared. - Deposits and bonds interest are recognized on accrual basis. - Brokerage commission resulting from purchase of and sale of securitiesoperations in favor of clients are recorded according to the accrual basis (whenthe invoice is issued). - Management fee is calculated as determined by the management contract ofeach investment fund & portfolio and recorded on accrual basis. - Incentive fee is calculated based on certain percentages of the annualreturn realized by the fund and portfolio, however these incentive fees will notbe recognized until revenue realization conditions are satisfied and there isadequate assurance of collection. 3-5 Fixed Assets Depreciation Fixed assets are recorded at the historical cost and are depreciated bythe straight line method over the estimated productive life for each type ofasset as the following: Estimated Useful Life - Buildings 33.3 Years- Office furniture, equipment & electrical appliances 2-16.67 Years- Computer equipment 3.33 - 5 Years- Transportation Means 3.33 - 4 Years 3-6 Amortization of Deferred Expenditure The cost of obtaining long term loans is capitalized and amortized overthe loan year (Note No. 19). 3-7 Treasury Bills Treasury bills are recorded at nominal value, and the issuance discount isrecorded under the item of "credit balances and other liabilities". Treasurybills are presented on the financial position net of the issuance discount 3-8 Trading Investments Trading investments are valued on the basis of prevailing market value at thefinancial position date and the revaluation differences are recorded in theincome statement. 3-9 Investments in Subsidiaries Investments in subsidiaries are recorded at cost. However, when there isimpairment in the market or computed value of the investments compared to bookvalue, the book value should be adjusted with the impairment value and chargethe impairment to the income statement. 3-10 Investment in Associates Investments in associates are accounted for using equity method. Under theequity method, the investment in an associate is initially recognized at costand the carrying amount is increased or decreased to recognize the company'sshare of the profit or loss of the associate after the date of acquisition. Thecompany's share of the profit or loss of the associate is recognized in thecompany's income statement. The company computes its share of profits or losses after adjusting for thedividends of preferred shares whether or not the dividends have been declared. 3-11 Available -for- Sale Investments - Available -for- sale investments are recorded at cost. Quoted investmentsare revalued at fair value (market value) and non quoted investments arerevalued at computed value of the investments (based on latest certifiedfinancial statements) and the valuation differences will be recorded as aspecial reserve revaluation difference of available-for- sale investments in theshareholder's equity. When selling the investments, its interest in the specialreserve will be added to the income statement. - Concerning the non active available -for- sale securities (have no marketvalue in an active market) and the fair value of which can not be determinedreliably, such investments are recognized at cost, the book value of theseinvestments is to be amended by any impairment concerning the value of theseinvestments and the impairment value is to be charged to income statement forevery investment individually. 3-12 Property Investment Property investment is recorded at cost. Any decline in the fair value(impairment) is charged to income statement. 3-13 Impairment of Assets At the financial position date, the company reviews the value of its assets todetermine if there are any indications of impairment in the values of suchassets. In case of any asset impairment indicators, the company determines thenet realizable value of such asset. When the net realizable value is less thanthe carrying amount of such asset, the reduction in the asset's value is chargedto the income statement. 3-14 Treasury Shares Treasury shares are recorded at its acquisition cost and deducted from the totalshareholders' equity in the statement of financial position. 3-15 Income Tax - Income tax on the profit or loss for the year comprises current anddeferred tax. Income tax is recognized in the income statement except to theextent that it relates to items recognized directly in equity, in which case itis recognized in equity. - Current tax is the expected tax payable on the taxable income for theyear, using tax rates enacted or substantially enacted at the balance sheetdate, and any adjustment to tax payable in respect of previous years. - Deferred tax is provided using the financial position liability method,providing for temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxationpurposes. The amount of deferred tax provided is based on the expected manner ofrealisation or settlement of the carrying amount of assets and liabilities,using tax rates enacted or substantively enacted at the financial position date. - A deferred tax asset is recognized only to the extent that it is probablethat future taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realized. 3-16 Cash Flow Statement For the purpose of preparing the Cash Flow Statement, cash and cashequivalent are represented in the cash on hand, cheques under collection,current accounts, time deposits with banks, saving certificates and treasurybills and other bills eligible for rediscounting maturing within 3 months orless from its acquisition date. 4. Financial Instruments and management of related risks: The Company's financial instruments are represented in the financialassets and liabilities. Financial assets include cash balances with banks,investments and debtors while financial liabilities include banks - overdraftand creditors. Note (No. 3) of notes to financial statements includessignificant accounting policies applied regarding basis of recognition andmeasurement of the important financial instruments and related revenues andexpenses by the company to minimize the consequences of such risks. 4/1 Market Risk: Market risk is represented in the factors which affect values, earnings andprofits of all securities negotiated in stock exchange or affect the value,earning and profit of a particular security. According to the company's investment policy, the following procedures areundertaken to reduce the effect of this risk. - Performing the necessary studies before investment decision in order toverify that investment is made in potential securities. - Diversification of investments in different sectors and industries. - Performing continuous studies required to follow up the company'sinvestments and their development. 4/2 Foreign currencies risk - The foreign currencies exchange risk represents the risk of fluctuationin exchange rates, which in turn affects the company's cash inflows and outflowsas well as the value of its assets and liabilities in foreign currencies. As atthe financial position date, the company has assets and liabilities in foreigncurrencies equivalent to LE. 5 013 392 680 and LE. 2 685 647 534 respectively.The company's net exposures in foreign currencies are as follows: Surplus/ (Deficit) LE.U.S. Dollar 2 299 939 179Euro (516 250)GBP 47 390UAE Derham 28 298 505BHD (10 164)KWD (43 948)OMR 30 434 - As disclosed in note 3-3, the company has used the prevailing exchangerates to revaluate monetary assets and liabilities at the financial positiondate. - As disclosed in note no. (20) the company has executed Currency SWAPagreements to cover its deficit and required needs of foreign currencies andmeets the risks of exchange and interest rates related thereto. 4/3 Financial Instruments' Fair Value The financial instruments' fair value do not substantially deviatedfrom their book value at the financial position date. According to thevaluation basis applied, in accounting policies to the assets and liabilities,which included in the notes to the financial statements, note No. (12, 13) ofthe notes to financial statements disclose the fair values of investments, whichare reported at cost. 5. Banks - Current Accounts The banks - current accounts item stated in the statement of financialposition includes blocked amount of LE. 10 million in the name of thesubsidiaries, Financial Brokerage Group Company and Hermes Securities BrokerageCompany represents the value of the deposit of One Day Operations settlementwhich takes place in the Egyptian Stock Exchange (LE. 5 million each). Bothcompanies are not entitled to use this amount without prior approval from MisrClearance Company. 6. Treasury Bills and Other Bills Eligible for Rediscounting 30/9/2006 31/12/2005 LE. LE.Treasury bills 91 days maturity 20 500 000 --Treasury bills 182 days maturity -- 57 800 000Treasury bills 364 days maturity -- 2 825 000Notes of Central Bank Egypt 25 000 000 -- ___________ __________ 45 500 000 60 625 000Less: Unearned income (562 365) (1 567 801) ___________ __________Net 44 937 635 59 057 199 =========== ========== 7. Other Debit Balances 30/9/2006 31/12/2005 LE. LE. Deposits with others 2 022 778 1 037 058Down payments to suppliers 14 740 587 23 500Prepaid expenses 11 402 457 5 111 344Employees' advances 2 646 903 1 537 913Accrued revenues 13 807 841 2 341 781Taxes withheld by others 29 796 714 20 670 474Commercial International InvestmentCompany (CIIC) 43 760 1 204 652Payment under purchasing investments 1 625 000 12 152 880Six of October for DevelopmentAnd Investment - Sodic 30 000 000 --Sundry debtors 8 453 968 23 888 485 ____________ ___________ 114 540 008 67 968 087Less: impairment of other debit balance (1 153 050) (1 153 050) ____________ ___________ Net 113 386 958 66 815 037 ============ =========== 8. Short Term Loans On January 3, 2006 a loan agreement has been signed with Citibank where by, thecompany is entitled to obtain short term loan with an amount of USD 150 million(the equivalent of LE. 859 Million). The purpose of the loan is to partiallyfinance the acquisition of a stake in the share capital of Audi Bank - Lebanon.The loan was due on April 12, 2006 with monthly interest rate of Libor+2. Theloan has been paid on May 12, 2006. 9. Creditors and Other Credit Balances 30/9/2006 31/12/2005 LE. L.E Tax Authority 1 285 285 103 096 753Social Insurance Association 207 141 189 058Unearned revenues 4 051 155 7 854 875Interest & commission payable 2 111 291 1 698 905Suppliers 1 360 000 1 360 000Accrued expenses 98 769 475 72 754 380Dividend payable 601 510 601 510Clients' coupons- Custody Activity 15 535 411 7 123 277Credit Suisse Securities (Europe) Limited -- 31 156 933Industry Development Center 35 559 606 --Unrealized SWAP gains 908 181 416 252Sundry creditors 12 853 963 18 067 935 ____________ ____________ Balance 173 243 018 244 319 878 ============ ============ 10. Provisions Contingent Liabilities Severance Total provision pay provision LE. LE. LE. Balance as at 1/1/2006 53 747 564 225 283 53 972 847Formed during the period 11 372 743 487 381 11 860 124Foreign currency differences -- 181 181Amounts used during the period (1 476 666) (52 219) (1 528 885) ------------- ------------ ------------Balance as at 30/9/2006 63 643 641 660 626 64 304 267 ============ ============ ============ 11. Fixed Assets Office Furniture, Equipment &Particulars Lease Hold Electrical Computer Transportation Land Buildings Improvements Appliances Equipment Means Total LE. LE. LE. LE. LE. LE. LE. Balance as of 1/1/2006 5 360 000 13 685 823 1 698 820 18 728 069 12 539 757 4 708 229 56 720 698 Additions during the period -- -- 281 755 14 350 070 5 644 249 3 172 848 23 448 922 Disposals during the period -- -- -- (378 975) -- (356 046) (735 021) ______________________________________________________________________________________________________ Total cost as of 30/9/2006 5 360 000 13 685 823 1 980 575 32 699 164 18 184 006 7 525 031 79 434 599 ______________________________________________________________________________________________________ Accumulated depreciation At the beginning of the period -- 2 751 494 1 540 909 13 080 514 7 889 694 2 580 721 27 843 332 Depreciation during the period -- 307 931 81 345 3 496 222 1 573 791 1 036 640 6 495 929 Disposals' accumulated Depreciation -- -- -- (309 377) -- (269 471) (578 848) ______________________________________________________________________________________________________Accumulated depreciation asOf 30/9/2006 -- 3 059 425 1 622 254 16 267 359 9 463 485 3 347 890 33 760 413 ______________________________________________________________________________________________________Net cost as of 30/9/2006 5 360 000 10 626 398 358 321 16 431 805 8 720 521 4 177 141 45 674 186 =======================================================================================================Net cost as of 31/12/2005 5 360 000 10 934 329 237 050 5 674 514 4 650 063 2 127 507 28 983 463 ======================================================================================================= 12. Available - for- Sale Investments 30/9/2006 31/12/2005 LE. LE. Quoted investments 13 251 428 12 117 704 Non - quoted investments 98 817 016 111 585 697 __________ __________ Balance 112 068 444 123 703 401 ========== ========== 13. Investments in Subsidiaries & Associates Ownership 30/9/2006 31/12/2005 % LE. LE. Arab Visual Company * 74.99 3 749 500 3 749 500 EFG-Hermes UAE Ltd. 100 -- 11 540 000 Bank Audi Sal (Lebanon Bank)** 25.82 3 092 582 869 -- EFG- Hermes Holding Lebanon * 100 153 713 -- EFG- Hermes KSA * 100 183 928 693 -- ____________ ___________ 3 280 414 775 15 289 500 ============ =========== * The investee companies have not started its activities and no financial statements have been issued. ** The ownership percentage is computed based on the voting ordinary shares. 14. Property Investment - The balance of property investment stated in the statement of financialposition as at September 30, 2006 with an amount of LE. 88 541 863 representsthe value of 5 894.57 square meters in Nile City Building after selling 3 424square meter. - The market value of this property investment amounted LE. 89 653 634 asof September 30, 2006. 15. Settlement Guarantee Fund The Settlement Guarantee Fund balance stated in the statement of financialposition amounting LE. 10 625 069 represents the Brokerage Companies' shares inthe Settlement Guarantee Fund. 16. European Investment Bank Contract: According to the contract signed between EFG- Hermes - Holding Company and theEuropean Investment Bank dated March 1, 2001, EFG- Hermes Holding Companypurchases investments in its name in favor of the bank in a range of 5 MillionEuro for each investment individually. The total amount of these investments islimited to 25 Million Euro and the participation of European Investment Bank islimited to 50% of total investment. This contract is valid until August 30,2013. The European Investment Bank pays the value of these investments. Theproceeds are reported as a liability on the company versus the investmentsreported as an asset. An off-setting is made between the asset and liability atthe financial position date. The company has sold the total amount of bank'sinvestments during the period. 17. Capital - The company's authorized capital amounted LE. 700 million and issued andpaid in capital amounted LE. 405 370 050 distributed on 81 074 010 shares of parvalue LE. 5 per share. - On February 2, 2006 the Company's Extraordinary General Assemblyapproved the following decisions: - Increasing the issued capital of the Company from LE. 405 370 050 toLE. 485 370 050 through a First Tranche by issuing 16 million shares at the fairvalue of LE. 115 approved by the Company's Board of Directors and validated bythe Company's auditor. This increase will be allocated to purchase a stake inthe share capital of Audi Bank - Lebanon. - Offering the First Tranche of the capital increase to qualifiedinvestors in a private placement at the fair value (to be paid in USD + $1 pershare as placement fee). This will include the waiving of the pre-emptiverights of the current shareholders in subscribing to the First Tranche. Theminimum subscription was set at $10 million; - Inviting existing shareholders to participate in the private placementeach according to his percentage of ownership according to the rules of privateplacement while waiving the minimum requirements of $10 million subscription andthe capital increase has been fully paid. - Increasing the Company's authorized capital from LE. 700 million to LE.3 200 million and the issued capital from LE. 485 370 050 to LE.1 456 110 150 through a second tranche by issuing 194 148 020 shares at the parvalue of the share (LE. 5) through a 1:2 right issue. The mentioned increase inthe issued capital has been fully paid. Accordingly, the company's issued andpaid in capital amounted to LE. 1 456 110 150 distributed on 291 222 030 shareswith par value of LE. 5 each. On May 14, 2006, the increase has been registeredin the Commercial Register. - The company's Extraordinary General Assembly approved the following inits session held on September 3, 2006: 1. Reducing the company's issued capital from LE. 1 456 110 150 to LE. 1 453949 950 through cancelling 432 040 shares of treasury shares which werepurchased more than one year ago with an amount of LE. 2 160 200 according toLaw No. 3 for 1998. 2. Increasing the company's issued capital in cash from LE.1 453 949 950 to LE. 1 939 320 000 with an increase amount of LE. 485 370 050distributed on 97 074 010 shares with par value of LE. 5 and fair value of LE.30 per share. The increase has to be fully paid upon subscription and thedifference between par and fair value is to be charged to the reserve account.The increase amount has been fully paid on September 20, 2006, to become theissued and paid capital LE. 1 939 320 000 distributed on387 864 000 shares and the increase was registered on October 8, 2006. 18. Treasury Shares The balance of Treasury Shares stated in the statement of financial positionrepresents a number of 1 121 787 shares of the company's shares which representsapproximately 0.29% of company's issued capital with total cost of LE.19 854 430. 19. Long term loans A- A loan contract has been signed on March 28, 2001 between EFG- HermesHolding Company and International Finance Corporation (IFC), this contractprovides for that EFG- Hermes Holding borrows a long term loan amounting to USD30 Million for five years ending on May 15, 2006 with two years asa grace period and annual floating interest rate over Libor based on the returnrate on equity. This loan will be used in financing the company's expansions in the Middle Eastand North Africa besides new activities. According to the loan contract thecompany has received the first installment amounting to US$ 15 Million on May15, 2001. The loan principal is payable on 7 semi annual installments amounted toUS$ 4 285 700 each starting from May 15, 2003 and interest is due semi annuallyon May 15 and November 15, the first interest was due onNovember 15, 2001. The loan contract stipulated to provide the following guarantees. - An irrevocable power of attorney from the Borrower and the borrower'ssubsidiaries to IFC enabling IFC to create at will (a) a first - ranking realestate mortgage over the land and the building owned by Financial BrokerageGroup S.A.E. (a subsidiary company 99.76 %) at 58 El Tahrir Street, Dokki -Giza, Arab Republic of Egypt and (b) a first - ranking commercial mortgage onthe tangible and intangible assets of the Borrower and Borrower's subsidiaries.Including such asset as may be acquired after the signature of this agreement. - An irrevocable and unconditional guarantee by the Egyptian guarantorsexcept Egyptian portfolio management Group Company in a form acceptable to IFCfor the benefit of IFC, payable on first demand by IFC to guarantee theBorrower's payment obligations to IFC under this agreement. - A pledge of the shares that the Borrower holds in Egyptian PortfolioManagement Group S.A.E. to IFC (with par value of LE. 1 990 000). - On March 13, 2002, the company paid an amount of US$ 4 144 630 to theIFC as a partial repayment of the loan. The company has paid an amount of US$ 1550 762 on May 15,2003, November 12,2003, May 13,2004, November 10,2004 and May12,2005 and November 14,2005. The company has paid an amount of US$ 1 550 798 onMay 10, 2006 as a last installment of the loan. - On December 28,2005, a loan agreement has been signed withInternational Finance Corporation " IFC" where by the company is entitled toobtain long term loan with an amount of US$ 20 Million to Finance Regionalexpansion of the company. The loan will be repaid on 10 equal semi Annualinstallment with US$ 2 million for each installment and the first installmentwill due on May 15,2007 and the last installment will due on November 15,2011and the interest is due on May 15, and November 15 and the first interest willdue on May 15,2007. The loan agreement provides for that the company'ssubsidiaries will guarantee the loan repayment through an irrevocableunconditional guarantee and the company has obtained the full amount of the loanat September 3, 2006 (equivalent amount of LE.114 800 000 at September 30, 2006). B- On January 4, 2002, a loan contract has been signed with the Foundation of(DEG)- DEUTSCHE INVESTITIONS- UND ENTWICKLUNGSGESELLSCHAFT MBH. The saidcontract provides for that EFG- Hermes Holding Company borrows a long term loanwith amount of EURO 15 Million with an applied annual floating interest rate.The loan principal is to be repaid on 12 semi annual installments of 1.25million EURO each. The first installment was due on May 15, 2003 and the loaninterest is due semi annually on May 15, and November15, The Company iscommitted to render some guarantees to the lender as stipulated by the contract.On July 4, 2002 the company has received an amount of EURO 10 420 000 , and EURO4 580 000 on December 24, 2002 representing the full amount of the mentionedloan. The company has paid an amount of EURO 1.25 million to DEG on May 15,2003, and November 12, 2003. The company has paid EURO 2 500 000 on May 13,2004, EURO 1 250 000 on May 12, 2005 and November 14, 2005.The company has paid EURO 1.25 million on May 10, 2006. Accordingly, the loanbalance as of September 30, 2006 amounted EURO 6.25 million (Equivalent amountof LE. 45 562 500). - On December 29,2005 a loan agreement has been signed with(DEG)- DEUTSCHE INVESTITIONS- UND ENTWICKLUNGSGESELLSCHAFT MBH whereby thecompany is entitled to obtain a long term loan with an amount of Euro 10 millionwith a variable annual interest rate. The loan's purpose is to finance theregional expansion of the company. The loan will be repaid on 10 equal semiannual installments with an amount of one million Euros per installment. Thefirst installment will due on May 15, 2008 and the last installment will due onNovember 15, 2012 and the interest is due on May 15, November 15 each year. Thefirst interest will due on November 15, 2006. The loan agreement provides for that the company's subsidiaries willguarantee the loan repayment through an irrevocable unconditional guarantee. The company has obtained the full amount of the loan at September17, 2006(equivalent amount of LE. 72 900 000 at September 30, 2006). 20. Contingent Liabilities - The company undertakes its subsidiaries - Financial Brokerage Group,Hermes Securities Brokerage against the credit facilities granted from banksand EFG- Hermes Brokerage - UAE against the letters of guarantee amounting toAED 86 Million (the equivalent amount of LE. 134 160 000) issued by the banksupon the request of Financial Brokerage Group Company (one of the subsidiaries -99.76%) in favour of Dubai and Abu Dhabi Market Authorities to guarantee thebrokerage activity of the subsidiary EFG- Hermes Brokerage Company - UAE Ltd. - The company and its subsidiaries have executed SWAP contracts with thebanks which will be settled according to specific rates for the foreigncurrencies implied in such contracts. The mentioned contracts are as follows. Transaction Transaction Amount currency Expiry DateDate28/9/2006 Selling Euro 16 250 000 Buying USD 30/10/200628/9/2006 Selling EGP 114 650 000 Buying USD 5/10/200628/9/2006 Selling EGP 467 915 313 Buying USD 17/10/2006 - Hermes Corporate Finance Company ( a subsidiary - 99.37%) issued througha bank a letter of guarantee with an amount of LE. 292 500 in favor of EgyptianElectricity Authority. The issuer bank has blocked the company's time depositwhich amounts LE. 493 707 on September 30, 2006 as a margin for this letter ofguarantee. 21. Impairment of Assets 30/9/2006 30/9/2005 LE. LE. Impairment of accounts receivable & debit accounts 480 454 9 827 823Impairment of subsidiaries current accounts 105 022 --Impairment of investment in subsidiaries 122 500 --Impairment of available -for- sale investments 5 000 3 814 813 __________ _________ 712 976 13 642 636 ========== ========= 22. Incentive Fee Revenues Due to inadequate assurance concerning the revenue recognitionconditions and collection of the incentive fee on managing investment funds andportfolios, the assets management companies (subsidiaries) deferred therecognition of Incentive Fee with an amount of LE. 5 376 267 for the periodended September 30, 2006 versus LE. 119 447 272 for the same period last year asno revenues are recognized if there are any uncertainties regarding the recoveryof the consideration due. Subsidiary's Name Amount LE. 30/9/2006 30/9/2005EFG- Hermes Financial Management (Egypt) Ltd. 3 970 301 29 708 472Egyptian Portfolio Management Group Company 1 405 966 43 661 853Hermes Fund Management Co. -- 46 076 947 __________ ___________ 5 376 267 119 447 272 ========== =========== 23. Deferred Tax Assets and Liabilities Deferred tax assets and liabilities are attributable to the following: 30/9/2006 31/12/2005Deferred Tax Assets Liabilities Assets Liabilities LE. LE. LE. LE. Fixed assets' depreciation -- (887 773) -- (385 410)Capital losses 6 790 -- 3 982 --Provisions 3 119 551 -- 3 152 614 -- _________ __________ _________ __________ Total deferred tax assets (liabilities) 3 126 341 (887 773) 3 156 596 (385 410) _________ __________ _________ __________ Net deferred tax assets 2 238 568 2 771 186 ========= ========= 24. Corresponding figures Certain corresponding figures have been reclassified to conform to the currentperiod classification. This information is provided by RNS The company news service from the London Stock Exchange