ABC arbitrage // Annual Report 2007

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(1)Balance sheet ..................................................... 15 Statement of income ....................................... 17 Statement of changes in equity ..................... 18 Consolidated cash flow statements ............. 19 Notes to the consolidated financial statements ......................................... 20 Statutory auditors’ report ............................. 41. ABC arbitrage // Annual Report 2007. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Management report ......................................... 2.

(2) The annual report and its constituent parts have been translated from the original French versions. For the purposes of interpretation, the French originals will take precedence over the English translation.. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Disclaimer.

(3) MANAGEMENT REPORT. 1. Business review We are pleased to report record earnings of €20.7 million for 2007, a 42% increase over the previous year despite the difficult market environment.. in eur million. Dec. 31, 2007 iFrS. Dec. 31, 2006 iFrS. Change %. -. -. -. 48.2. 34.3. 41%. 48.2. 34.3. 41%. (13.6). (9.8). 40%. Occupancy costs. (0.6). (0.6). nm. Other expense. (2.1). (1.6). 38%. income before tax. 31.8. 22.3. 43%. net income attributable to equity holders. 20.7. 14.6. 42%. Advisory revenues proprietary trading revenues net revenues payroll costs. (1). nm: non material. (1): Net gains on derivative f inancial instruments measured at fair value through profi t or loss (48.5M € )+ provision (0.1M € ) – minority interests ((0.4M € )).. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. net income before minority interests totalled €21.1 million. Key consolidated figures for 2007, adjusted for minority interests, are presented below..

(4) Management report. OpErATInG pErFOrMAnCE. The Group outperformed the market during the year. Gross return on equity came to 87.1% at December 31, 2007. This compares to the 12.56% gain for the CSFB/Tremont Hedge Fund Index, a benchmark in alternative investment. However, this comparison should be seen in light of the wide range of strategies and very large volume of managed assets reflected in the index. Dec. 31, 2007 iFrS. Equity at January 1, 2007. 45,063. Equity at December 31, 2007. 65,637. Average equity. 55,350. return on equity. 37.45%. Gross return on equity. 87.10%. Cac 40 index CSFB/Tremont Hedge Fund Index. 1.31% 12.56%. Return on equity = (net income/average (opening equity + closing equity)) x 100. Gross Return on equity = (proprietary trading revenues/average (opening equity + closing equity)) x 100. Equity corresponds to shareholders’ equity plus provisions for contingencies and charges adjusted for deferred taxes. This figure takes account of dividend payments (except for interim dividends) and changes in issued capital, and therefore corresponds to the capital available for investment in the market.. ABC arbitrage // Consolidated financial statements 2007. 3. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. in eur thousand.

(5) Management report. The global economy expanded in the first half of 2007, despite the initial subprime concerns in late February/early March. However, the year ended in financial turmoil as a result of the US subprime mortgage crisis and ensuing credit crunch. The crisis had some major impacts on the way the financial markets operate and this underlying structural trend led to strong volatility in the equity markets in the second half. The Group has never had any exposure to the subprime mortgage market nor to any directly correlated derivatives. Against this background, we were able to leverage our strengths to capitalise on the opportunities offered by these atypical market conditions. DIvErSIFICATIOn STrATEGY. The M&A arbitrage business had a very strong first half due to some new major deals with counterbids. However, this was followed by a much more difficult second half, with delays in completing deals, an increase in the number of failed bids and a decline in deal announcements. Interestingly, during the period we enjoyed new opportunities to apply some of our traditional arbitrage strategies. All of our strategies made a positive contribution to net income but the disparities were wider than in previous years. The balanced mix between volatility-based and other strategies, and more generally between the various arbitrage types, fuelled strong growth in business volumes and helped generate record profits for the Group in a very tense market environment.. ABC arbitrage // Consolidated financial statements 2007. 4. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. ABC arbitrage continued to expand and now operates in some forty marketplaces worldwide. The number of arbitrage positions held in the portfolio averaged more than 1,100 in 2007, almost 20% up on 2006. This diversification strategy helped us capture a large number of opportunities and significantly increase our business volumes..

(6) Management report. rISK COnTrOl. We remain fully committed to risk control and management. During the year, we continued to implement a set of strict procedures and internal controls, based on the principles of segregation of duties and measures for flagging irregularities. We tightened up our reporting requirements early in the second half to ensure greater control over the adequacy of our mathematical trading models in light of the new market conditions. Against this background, the Management Committee took the prudent decision to unwind certain positions where our internal models no longer matched market reality, or not to increase position limits even though opportunities arose in the market, due to the financing pressures experienced by some operators. We ensure that we always have sufficient cash reserves to cope with difficult market conditions such as these, with the result that we did not experience any financing or credit difficulties during this period of turmoil.. UpGrADInG SYSTEMS AnD prOCESSES. From the outset, we have leveraged our expertise in data acquisition and mining to add value. Our ongoing investments to improve our processes accounted for most of the 38% increase in other expenses in 2007. Our information systems are continuously upgraded to cater for strong growth in business volumes and staff numbers, and to ensure a highly responsive relationship with the various marketplaces. However, we have observed that during periods of market turmoil, the marketplaces have often proved unable to absorb the amount of information sent to the trading systems by market participants. This has led to disruptions in information flows or the inability to trade, generating an opportunity loss that we believe to be structural.. 2. Advisory services and third party management In early June, we created an Irish hedge fund, ABCA Arbitrage Opportunities Fund plc, seeded by ABC arbitrage, the parent of the management company, ABC arbitrage Asset Management. The group’s founder shareholders, ABC participation & gestion and the Chauderlot family, invested a further €7 million on July 31, 2007. At December 31, 2007, the fund had investment capital of €25 million. ABC arbitrage // Consolidated financial statements 2007. 5. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. provision expense was very low in 2007..

(7) Management report. The fund’s investment strategy is designed to generate returns that are independent from market trends. It is marketed solely to qualified investors and the minimum investment is €1 million. As announced, the creation of our third-party asset management business has not engendered any additional costs for the Group but on the contrary has generated additional revenues. Current market conditions are not conducive to asset raising, especially for arbitrages with market risks, as most investors are tending to postpone any decision to invest in a new hedge fund. This does not affect our goal of gradually scaling up the third-party management business by leveraging our strong track record and excellent performance.. 3. Subsidiaries and holdings. ABC arbitrage Asset Management, an authorised investment management company, incurred a loss of €12.06 million in 2007. This company manages funds on behalf of ABC arbitrage, its parent company. ABC arbitrage Asset Management was granted an extension to its restricted asset manager license in March 2007. This represents an important step forward in our goal of developing a third party asset management business, as ABC arbitrage Asset Management is no longer restricted to third party mandates but can now sponsor and manage its own offshore investment funds. ABCA Arbitrage Opportunities Fund plc, an Irish non-UCITS, was created in early June 2007. The fund made a profit of €1,001 thousand in 2007, representing an annualized return of 14.5% on the Class A units.. ABC arbitrage // Consolidated financial statements 2007. 6. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. A list of subsidiaries and holdings, together with key figures, can be found in note 3.3. to the parent company financial statements..

(8) Management report. BC Finanzberatung GmbH was liquidated on December 31, 2007, generating a surplus of €562 thousand which was recognised in the separate financial statements of ABC arbitrage but eliminated in consolidation. ABCA Global Fund had no business activity during the year other than prudent management of its own cash.. 4. Human resources 2007 was a demanding year in many respects and our success was largely due to the talent and professionalism of our people.. Our compensation policy remains unchanged. Its fundamental goals are to encourage performance through a rewarding incentive system and to foster long-term involvement and commitment through employee share ownership. We are convinced that employee share ownership is the best way to retain and motivate our key people and we therefore regularly seek renewal of our authorisations to issue share-based instruments to selected employees. Payroll costs rose almost 40% , reflecting the direct link between targets, results and performance-based compensation. The Group implements an ambitious share-based incentive program for executive officers and key employees, called “Horizon 2010”. This program sets five-year earnings targets (from 2006 to 2010 included) and the amount that vests will depend on the company’s performance over the period. The entire amount will vest if aggregate net income over the five-year period reaches €100 million. During the year, 93,122 founder share warrants were exercised at an average price of €2.63 and 682,973 stock options at an average price of €2.25. In addition, 392,555 shares vested under the stock grant plans in September 2007. A total of 2,541,888 share-based instruments have been issued to employees since 1995, representing 7.01% of the issued capital at December 31, 2007.. ABC arbitrage // Consolidated financial statements 2007. 7. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The Group employed 61 people at December 31, 2006 against 56 one year earlier. We pursue a selective recruitment policy to ensure that our core business teams have the appropriate skills..

(9) Management report. The cost of these plans – which is based on the plan’s total value on the date of grant by the Board of Directors – is deferred over the vesting period, with a corresponding amount recognised in equity. However, in the case of the stock grant plans, as the performance conditions were considered to have been achieved at December 31, 2007, their entire remaining cost was recognised in 2007 for an amount of €532 thousand. As required by article l 225 -184 of the Code de Commerce, these plans are described in detail in a special report.. “Horizon 2010” founder share warrants Depending on results through to 2010, up to 1,200,000 founder shares could be issued on exercise of the warrants, representing 3.31% of the issued capital at December 31, 2007. The plan concerns three people. For both plans, the initial exercise price was set at €4 per share but has since been adjusted to €3.40 as a result of dividend payouts since May 2006. The exercise price may not be less than €2.51 (excluding adjustments required by law), which was the share price on the grant date. “Horizon 2010” stock grants A total of 2,108,000 shares will vest on May 22, 2008 as aggregate net earnings for 2006 and 2007 exceeded €27 million. The plans concern twenty-four people. The shares will come partly from a new share issue and partly from shares acquired under the buyback programme decided by the Board of Directors in December 2007 up to a maximum amount of €5 million. On the date of the Board meeting, ABC arbitrage held 815,645 treasury shares, acquired at a cost of €4.2 million, and the new share issue will therefore represent a maximum of 3.56% of the issued capital at December 31, 2007. Stock options Up to 218,936 shares could be issued on exercise of the options, representing 0.60% of the issued capital. At December 31, 2007, the plans concerned eleven people. ABC arbitrage // Consolidated financial statements 2007. 8. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. “Horizon 2010” stock options Depending upon results through to 2010, up to 8,845,000 shares could be issued on exercise of the options, representing 24.40% of the issued capital at December 31, 2007. The plan concerns twenty-four people..

(10) Management report. Stock grants Given the returns achieved in 2006 and 2007, a total of 211,939 shares will vest on May 22, 2008, representing 0.58% of the issued capital at December 31, 2007. Under article l 225-102-1 of the Code de Commerce, we are required to report on total compensation and benefits paid to directors and executive officers of the listed company during the year. The following table shows Directors’ fees paid by Group companies to directors and executive officers in 2007: Position. Directors’ fees (€). Chairman of the Board, ABCA. 2,000. ABC participation et gestion (Jean-Michel BOnnICHOn, permanent representative). Member of the Board, ABCA. 2,000. Aubépar (Xavier CHAUDErlOT, permanent representative). Member of the Board, ABCA. 2,000. Jean-François DrOUETS. Member of the Board, ABCA. 3,000. Didier rIBADEAU DUMAS. Censor, Board of Directors ABCA. 37.45,000. Jacques CHEvAlIEr. Censor, Board of Directors ABCA. 4,500. Dominique CEOlIn. ABCA: ABC arbitrage. ABC arbitrage // Consolidated financial statements 2007. 9. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. name.

(11) Management report. Dominique Ceolin. Jean-Michel Bonnichon. Chairman of the Board, ABCA Chief Executive Officer, ABCA AM. Managing Director, ABCA Corporate Secretary, ABCA AM. 170,400. 79,020. Company car. 5,748. -. Adjustment related to paid leave and statutory bonuses. 6,412. 12,168. 16,092. 16,092. 3,618. 3,597. Gross bonuses – 2 half 2006. 250,000. 81,000. Gross bonuses – 1st half 2007. 310,000. 173,767. Position Gross salary. Incentive plan Profit-sharing plan nd. Figures in euros ABCA: ABC arbitrage ABCA AM: ABC arbitrage Asset Management. ABC arbitrage // Consolidated financial statements 2007. 10. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The following table shows total salary and benefits paid by Group companies to the executive officers in 2007:.

(12) Management report. In September 2007, Dominique Ceolin and Jean-Michel Bonnichon both received 30,000 stock grants, contingent upon the company achieving an average annual return on equity of 12% for 2005 and 2006. Eighteen other employees also received stock grants on the same basis. These stock grants vested in September 2007 as the actual return achieved was 38.54%. The Group also agreed to pay Jean-Michel Bonnichon a termination benefit of up to €180,000 depending on length of service.. In eur. Purchases. Sales. Subscriptions. 1,276,574. 7,677,957. 3,007,718. Aubépar. -. 316,303. 2,268,185. Jean-Michel Bonnichon. -. 19,791. 106,126. Dominique Ceolin. -. 352,166. 500,606. Jacques Chevalier. -. -. 1,773. Jean-François Drouets. -. -. 10. 17,695. -. 15,116. ABC participation et gestion. Dider Ribadeau Dumas. ABC arbitrage // Consolidated financial statements 2007. 11. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The following table shows a summary of the dealings in ABC arbitrage shares by the Directors and executive officers of the company in 2007..

(13) Management report. 5. Corporate governance The Board of Directors comprises four Directors. The shareholders ratified the appointment of a new corporate Director, Aubépar, represented by Xavier Chauderlot, co-founder of the ABC arbitrage group. The Board of Directors invited third parties to attend Board meetings in a consultative capacity on an occasional or regular basis. Jacques Chevalier, who stepped down as Director in December 2007, was appointed “Censor” (non-voting Director) alongside Didier Ribadeau Dumas. The percentage of issued capital held by employees under group plans is less than 3% and consequently there are no employee-elected Directors. A member of the Works Council attends Board meetings in a consultative capacity.. Dividends for the previous three years were as follows: In eur Net dividend. 2006. 2005. 2004. 0.33. 0.20. 0.60. At its meeting of September 20, 2007, based on the Company’s results for the first half of 2007 and retained earnings brought forward from prior years, the Board of Directors decided to pay an interim dividend for 2007 in a net amount of €0.17 per share. As for previous dividend payments, shareholders were given the option of receiving their dividends in cash or reinvesting them in shares. At the end of the option period, the overall dividend reinvestment rate was almost 76%. The Board of Directors will recommend a final dividend of €0.26 per share at the Annual Shareholders’ Meeting on May 28, 2008, which may be fully or partially reinvested in shares. It has been set at a level that strikes an appropriate balance between the total payout to shareholders and the funds required to meet the Group’s future needs. The subscription price for the dividend reinvestment in ABC arbitrage shares, to be announced on the day of the Annual Shareholders’ Meeting, will reflect a 10% discount to the benchmark price (average quoted price during the 20 trading days preceding the date of the Meeting, minus the final dividend), with a minimum of €5.50 per share. ABC arbitrage // Consolidated financial statements 2007. 12. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. 6. Dividend policy.

(14) Management report. The total 2007 dividend of €0.43 per share represents a net yield of 7.35% based on ABC arbitrage’s share price (€5.85) at December 31, 2007.. 7. Share performance At December 31, 2007, issued capital amounted to €580,223 divided into 36,263,914 common shares, including 1,917,740 new shares corresponding to reinvestments of the dividends paid in 2007; 776,095 shares issued on exercise of founder share warrants and/ or stock options and 392,555 shares vested. The aggregate premium on the new shares was €11.8 million. Average daily trading volume came to more than 63,800 shares, representing almost €370 thousand a day in value. The market-making agreement with Fortis remained in effect during the year.. 8. Statutory disclosures Under article L 233-13 of the Code de Commerce, the Board of Directors is required to disclose the names of shareholders whose holdings exceed the statutory disclosure thresholds at December 31, 2007.. Name. % of capital. % of voting rights. ABC participation et gestion. 24.0%. 24.1%. Aubépar. 17.9%. 17.9%. At December 31, 2007, ABC arbitrage held 196,082 treasury shares. No shareholders disclosed any change in their interests to above or below any statutory disclosure threshold during 2007. There are no collective employee share ownership plans. The free float represented 48.5% of issued capital at the year-end (the balance - excluding self holding - is held by executive management and independent members of the Board).. ABC arbitrage // Consolidated financial statements 2007. 13. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. ABC arbitrage shares closed the year at €5.85..

(15) Management report. 9. Outlook The markets are likely to remain weak and investors cautious in 2008 until liquidity and confidence have been restored and investors are able to make a rational assessment of the risks. The main risks in this type of market environment are: a rise in the failure rate of arbitrages with market risks; - drying up of deals in the financial markets (mergers & acquisitions, issuance of various products); - delays in completing deals, which could lead to carrying costs in excess of the expected profits.. We have already experienced nine months of these difficult conditions and, based on our 2007 results and early 2008 business volumes, we are confident in our ability to achieve the ambitious targets set in our “Horizon 2010” plan. The Board of Directors March 13, 2008. ABC arbitrage // Consolidated financial statements 2007. 14. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. We must therefore keep a close watch on how the crisis develops. That said, ABC arbitrage’s remarkable performance is testimony to the robustness and effectiveness of its diversified model in a climate of serious pressures in the financial markets..

(16) FINANCIAL BALANCE SHEET STATEMENTS 2007. in eur. note. Intangible assets. Dec. 31, 2007 iFrS. Dec. 31, 2006 iFrS. 36,583. 10,775. property and equipment. 3.1. 478,349. 306,962. Current financial assets. 3.2. 329,481. 357,160. 3,187,966. 573,665. 4,032,379. 1,248,562. Deferred tax assets Total non-current assets Financial assets at fair value through profit or loss. 3.4. 581,570,180. 544,204,720. Other accounts receivable. 3.6. 5,742,122. 3,735,272. 191,652. 132,768. Total current assets. 587,503,954. 548,072,760. ToTAl ASSeTS. 591,536,333. 549,321,322. Cash and cash equivalents. ABC arbitrage // Consolidated financial statements 2007. 15. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. BAlAnCE SHEET - ASSETS.

(17) Financial statements 2007. in eur. note. paid-up share capital Additional paid-in capital retained earnings Interim dividend net income. Dec. 31, 2007 iFrS. Dec. 31, 2006 iFrS. 580,223. 530,840. 42,072,409. 30,186,147. 6,612,244. 3,355,018. 4(6,007,917). (4,109,701). 20,729,129. 14,637,614. Total equity attributable to equity holders. 3.3. 63,986,087. 44,599,918. Minority interests. 2.1. 7,378,175. (138). 71,364,262. 44,599,780. 182,933. 462,933. 181,231. 178,222. 364,164. 641,155. Total equity provisions for contingencies and charges. 3.7. non-current financial liabilities non-current liabilities Financial liabilities at fair value through profit or loss. 3.4. 505,026,887. 495,514,992. Other liabilities. 3.6. 6,937,328. 3,775,587. 7,793,805. 4,691,249. 49,888. 98,559. Current liabilities. 519,807,907. 504,080,387. ToTAl eQuiTY AnD liABiliTieS. 591,536,333. 549,321,322. Taxes payable Short-term debt. ABC arbitrage // Consolidated financial statements 2007. 16. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. BAlAnCE SHEET - lIABIlITIES.

(18) Financial statements 2007. in eur. note. Dec. 31, 2007 iFrS. Dec. 31, 2006 iFrS. net gain/loss on financial instruments at fair value through profit or loss. 4.1. 48,462,128. 38,013,190. Other revenues. 4.2. 983,115. 930,823. Administrative expenses. 4.3. (3,561,083). (2,814,713). (512,396). (450,392). (13,053,516). (9,311,439). (223,473). (283,328). 32,094,775. 26,084,140. 128,090. (3,739,709). 32,222,865. 22,344,431. (13,729,725). (7,702,469). 2,614,302. (4,371). 21,107,442. 14,637,591. 20,729,129. 14,637,614. 378,313. (23). Number of ordinary shares. 36,263,914. 33,177,524. Earnings per ordinary share. 0.57. 0.44. Diluted earnings per ordinary share. 0.54. 0.41. Taxes and duties payroll costs. 4.4. Depreciation and amortisation expenses oPerATinG inCoMe provision expense. 4.5. inCoMe BeFore TAX Current taxes Deferred taxes neT inCoMe Attributable to equity holders Attributable to minority interests. 4.6. ABC arbitrage // Consolidated financial statements 2007. 17. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. STATEMEnT OF InCOME.

(19) Financial statements 2007 STATEMEnT OF CHAnGES In EQUITY BETWEEn JAnUArY 1, 2006 AnD DECEMBEr 31, 2007. At December 31, 2005. Paid-up equity share instruments capital and related reserves. elimination of treasury shares. retained Total Minority earnings equity atinteand net tributable rests income to equity holders. Total equity. 481. 22,727. (61). 6,072. 29,219. nm. 29,219. Issue of shares. 8. 1,403. -. -. 1,411. -. 1,411. Elimination of treasury shares. -. -. (17). 27. 10. -. 10. Share-based payments Appropriation of net income 2005. -. -. -. 340. 340. -. 340. 17. 2,385. -. (3,006). (604). -. (604). 2006 interim dividend. (4,110). (413). -. (413). 25. 3,672. net income for the year. -. -. -. 14,638. 14,638. nm. 14,638. At December 31, 2006. 531. 30,186. (78). 13,961. 44,600. nm. 44,600. Issue of shares. 19. 1,767. -. (6). 1,779. 7,000. 8,779. Elimination of treasury shares. -. -. (1,054). 35. (1,019). -. (1,019). Share-based payments Appropriation of net income 2006. -. -. -. 533. 533. -. 533. 17. 5,593. -. (6,778). (1,168). -. (1,168). 2007 interim dividend. 14. 4,526. -. (6,008). (1,468). -. (1,468). net income for the year. -. -. -. 20,729. 20,729. 378. 21,107. At December 31, 2007. 580. 42,072. (1,132). 22,466. 63,986. 7,378. 71,364. nm : non material. ABC arbitrage // Consolidated financial statements 2007. 18. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. in eur thousand.

(20) Financial statements 2007. in eur thousand. Dec. 31, 2007 iFrS. Dec. 31, 2006 iFrS. 21,107. 14,638. (128). 3,798. 223. 283. (2,614). 4. (486). 351. 18,102. 19,074. (23,745). (19,648). (5,643). (573). net cash used by investing activities. (393). (53). Change arising from transactions with equity holders. (857). 392. Change arising from transactions with minority interests (1). 7,000. -. 6,143. 392. 108. (233). 34. 268. 142. 34. net income net allocations to provisions net allocations to depreciation and amortisation Change in deferred taxes Others net cash provided by operations before changes in working capital Changes in working capital net cash provided by operating activities. net cash used by financing activities net change in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period. (2). (1) The net change in cash and cash equivalents arising from transactions with minority interests corresponds to the €7 million investment in ABCA Arbitrage Opportunities Fund Plc made by the Group’s founder shareholders (ABC participation & gestion and the Chauderlot family). (2) The change in net cash and cash equivalents reflects the cash flows arising from the administrative management of Group companies. Cash flows relating to operating activities and their financing appear as changes in working capital.. ABC arbitrage // Consolidated financial statements 2007. 19. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. COnSOlIDATED CASH FlOW STATEMEnTS.

(21) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2007 1. Accounting principles and policies Under European Union regulation 1606/2002 of July 19, 2002, the ABC arbitrage Group’s consolidated financial statements have been prepared in conformity with International Financial reporting Standards (IFrS) issued by the International Accounting Standards Board European Union (IASB) as adopted by the European Union. The Group has applied the new standards, amendments and interpretations adopted by the European Union that are compulsory as of January 1, 2007 including IFrS 7 – Financial Instruments: Disclosures. It has elected not to adopt those whose application is optional in 2007. The Group’s fiscal year runs from January 1 to December 31, 2007. The consolidated financial statements are presented in euros.. preparation of the financial statements required ABC arbitrage Group to make estimates and assumptions which could have an impact on the amounts at which assets, liabilities, income and expenses are stated. The estimates, and the assumptions underlying them, have been made on the basis of past experience and of other factors considered to be reasonable in the circumstances. They thus serve as the basis for the judgement made in determining the carrying amounts of assets and liabilities which could not be determined directly from other sources. The definitive amounts that will be stated in ABC arbitrage Group’s future financial statements may be different from the amounts currently estimated. These estimates and assumptions are reviewed on a continuous basis. In view of the highly specific nature of its business, the ABC arbitrage Group is probably one of the only independent firms engaged solely in arbitrage trading within a non-banking financial statement presentation.. ABC arbitrage // Consolidated financial statements 2007. 20. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The financial statements have been approved by the Board of Directors and audited by the Group’s two Statutory Auditors, Ernst & Young et Autres and Constantin Associés..

(22) notes to the consolidated financial statements 2007. Arbitrages with market risks (Suspensive clause arbitrage strategies) Unlike the case of self-liquidating arbitrage strategies, the legally binding documentation governing suspensive clause arbitrage strategies does not guarantee convergence.The various risks involved are systematically identified and hedged using appropriate instruments. A typical example of such a deal is a securities exchange offer. The arbitrage consists in the purchase of the offeree company shares combined with the simultaneous sale of the offeror’s shares. The quantities bought and sold reflect exactly the terms of the exchange offering. A suspensive clause can be that the offeror need not proceed with its offer if less than half the offeree company shares are presented for exchange.. 1.1. Fair value of financial instruments The Group does not take any speculative directional positions on financial markets. Arbitrage transactions are designed to take advantage of an unjustified price differential between two financial instruments which may converge at a given parity and within a given timeframe. The Group qualifies as “unjustified” only those differentials that can be objectively measured by a mathematical or statistical process. One of the instruments is qualified as the underlying, corresponding generally to the short position. The underlying may, for example, be the shares linked to convertible bonds or the shares of a predator. The other instrument is qualified as the derivative, corresponding generally to the long position. The derivative may, for example, be the convertible bonds linked to shares or the shares of a takeover target. The vast majority of the Group’s arbitrage positions concern equities or equity derivatives, such as warrants, put warrants and convertible bonds. The securities are recorded in the balance sheet at cost, net of brokerage fees.. ABC arbitrage // Consolidated financial statements 2007. 21. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The Group conducts two types of arbitrage strategies: Arbitrages without market risks (Self-liquidating arbitrage strategies) These are transactions that do not generate any directional risk or any event risk. positions are fully hedged and are governed by legally binding documentation which guarantees convergence on a fixed date. Exposure is limited to operational risks, such as hedging errors, calculation errors or custodian default. Examples include the purchase of a convertible bond and the simultaneous short sale of a quantity of shares corresponding to the number of shares to be obtained on conversion of the bonds..

(23) notes to the consolidated financial statements 2007. The Group also trades in swaps for which the underlyings are assets listed on regulated markets. Financial instruments are held solely for trading purposes, and are recognised in the accounts at fair value through profit or loss. The fair value of financial assets and liabilities is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.The primary basis for determining the fair value of a financial instrument is the quoted price in an active market. If the instrument is not traded on an active market, fair value is determined using valuation techniques. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.. Cash and securities receivable and deliverable are netted off for each market counterparty, provided that they represent amounts that are connected, fungible, certain, liquid and payable. The netting off of such balance sheet items results in a fairer presentation of the Group’s financial position. It has no impact on the income statement. The financial assets and liabilities held for trading purposes are recognised on the balance sheet at fair value under “Financial assets or liabilities at faire value through profit or loss”. Changes in fair value are recorded in the statement of income for the period as “Net gains or losses on financial instruments at fair value through profit or loss”. “Net gains or losses on financial instruments at fair value through profit or loss” correspond to revenues from proprietary trading activities discussed in the Group’s management report, except for provisions. It includes all expenses and costs directly related to the trading business, including: dividends; gains and losses on disposal of financial assets at fair value through profit or loss; changes in fair value of instruments held or due; securities carrying or lending costs; exchange gains and losses.. ABC arbitrage // Consolidated financial statements 2007. 22. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The market price used is usually the bid price for an asset held or a liability to be issued and the ask price for an asset to be purchased or a liability held..

(24) Notes to the consolidated financial statements 2007. 1.2. Share-based payment ABC arbitrage has granted stock options to employees. On exercise of stock options, ABC arbitrage issues new shares or sells to employees shares previously acquired by the Group. Only the gain or loss arising on the sale of these shares is recognised in the financial statements. IFRS 2 “Share-Based Payment” requires that an expense be recognised equal to the fair value of the services rendered by the employees in return for the equity instruments granted to them.. 1.3. Portfolio revenue Equity revenue is accounted when realized. Tax credits linked to equity revenue are included in “Portfolio revenue”.. 1.4. Provisions A provision is recognised when the Group has a legal or constructive obligation as a result of a past event, provided that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. When the risk occurs or the expense is incurred, the provision release does not qualify as income as it does not result in a net increase in equity. It is therefore recognised as a reduction of the expense concerned. If the actual expense is lower than the provision and the balance of the provision is no longer required, the surplus then qualifies as income and is booked under the same line item as the original provision charge.. ABC arbitrage // Consolidated financial statements 2007. 23. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Under the first-time adoption requirements set out in IFRS 1 in relation to IFRS 2, only plans concerning options granted after November 7, 2002 and not fully vested at January 1, 2005 are required to be restated. They give rise to the recognition of a payroll expense equal to the fair value of the instruments granted in return for services rendered by employees. The expense is deferred over the vesting period of the equity instruments, as the benefit is contingent upon the employee’s continued presence in the company..

(25) Notes to the consolidated financial statements 2007. 1.5. Corporate income tax Corporate income tax includes current taxes and adjustments to deferred taxes. Deferred taxes are calculated on all timing differences between the recognition of income and expenses for financial reporting and tax purposes and on consolidation adjustments. Deferred tax assets and liabilities are calculated using the liability method, at the tax rates that are expected to apply when the timing differences reverse. They are not discounted. The probability of deferred tax assets being recovered is reviewed regularly and may, where necessary, give rise to the derecognition of previously recognised deferred tax assets.. 1.6. Earnings per share. ABC arbitrage // Consolidated financial statements 2007. 24. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Diluted earnings per share is equal to net income for the year divided by the number of shares outstanding at December 31, 2007 plus the impact of all potentially dilutive instruments..

(26) Notes to the consolidated financial statements 2007. 2. Consolidation principles 2.1. Change in scope of consolidation ABCA Arbitrage Opportunities Fund Plc, an Irish non-harmonised (non-UCITS) fund was set up at the beginning of June 2007. Managed by ABC arbitrage Asset Management, the fund’s investment strategy is designed to generate returns that are independent from market trends. It is marketed solely to qualified investors and the minimum investment is €1 million. The fund was seeded by ABC arbitrage with an initial investment of €10 million on 8 June, 2007 and a further €8 million on 30 June, 2007. On August 1, 2007, a further €7 million was invested by the Group’s founder shareholders (ABC participation & gestion and the Chauderlot family). At December 31, 2007, the fund had investment capital of €25 million.. 2.2. List of consolidated companies All Group companies are 100% controlled and therefore fully consolidated.. Company. Countries. % of interest. France. Parent company. Germany. 100%. ABCA Global Fund. France. 100%. ABC arbitrage Asset Management. France. 100%. ABCA Arbitrage Opportunities Fund Plc. Ireland. 72%. ABC arbitrage BC Finanzberatung GmbH. ABC arbitrage // Consolidated financial statements 2007. 25. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. BC Finanzberatung was liquidated on December 31, 2007 following the recovery of German tax receivables during the second half of 2007. This subsidiary will no longer be consolidated as of 2008..

(27) notes to the consolidated financial statements 2007. 3. notes to the balance sheet. in eur thousand. Gross value. Accumulated depreciation. net value. Fixtures and fittings. 1,462. (1,310). 152. vehicle. 169. (53). 116. Office equipment. 962. (757). 205. Furniture. 414. (409). 5. Total at Dec 31, 2007. 3,007. (2,528). 478. Total at Dec 31, 2006. 2,684. (2,377). 307. 3.2. Other non-current financial assets At December 31, 2007, this item included €324 thousand in deposits (€308 thousand in 2006) and €5 thousand in employee advances (€50 thousand in 2006). These exceptional advances were granted in May 2004, by unanimous decision of the Board of Directors, to holders of warrants to subscribe for founders shares and holders of stock options, to enable them to exercise their warrants or options. Under no circumstances may the advances be used for any other purpose.. 3.3. Consolidated equity Capital increase resulting from exercise of options During 2007, 682,973 new ordinary shares, ranking pari passu with existing shares, were issued to holders of rights to founders’ shares and stock options’ grantees. The total issue proceeds included €11,897.02 credited to paid-up capital and €1,669,887.13 credited to additional paid-in capital.. ABC arbitrage // Consolidated financial statements 2007. 26. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. 3.1. property and equipment.

(28) notes to the consolidated financial statements 2007. Capital increase resulting from stock grants At its meeting of September 19, 2005, the Board of Directors made 399,500 stock grants to 21 grantees, contingent upon the company achieving a 12% annual return on consolidated equity for a period of two years. At its meeting of September 20, 2007, the Board noted that the average return on consolidated equity for 2005 and 2006 was more than the minimum target and that a total of 392,555 shares granted to 20 grantees had therefore vested. One grantee has left the company and 7,000 stock grant rights have therefore been forfeited. The issued capital was increased by €6,280.88 by capitalising revenue reserves.. The Annual Shareholders’ Meeting of May 30, 2007 decided to pay a final dividend for 2006 in a net amount of €0.20 per share. At its meeting of September 20, 2007, the Board of Directors decided to pay an interim dividend in respect of 2007 in a net amount of €0.17 per share. For each of these payments, shareholders had the option of receiving cash or reinvesting their dividend in shares. At the end of the two option periods, 1,044,684 and 873,056 new ordinary shares, ranking pari passu with the existing shares, were issued at a price of €5.37 and €5.20 respectively per share. The total issue proceeds included €30,683.85 credited to paid-up capital and €10,119,160.43 credited to additional paid-in capital. The new ordinary shares are fully paid. At December 31, 2007, the parent company’s share capital was represented by 36,263,914 ordinary shares with a par value of €0.016 each, all fully paid.. ABC arbitrage // Consolidated financial statements 2007. 27. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Capital increase resulting from reinvestment of dividends.

(29) notes to the consolidated financial statements 2007. Share-based payment The Board of Directors has introduced an ambitious share-based incentive program for its executive officers and key employees. The plans comprising the program set earnings targets for two to five year periods. The amount that vests each year depends on the company’s annual performance, with the entire amount vesting if aggregate net income over the five-year period reaches €100 million.. The expense related to stock option plans is recognised over the vesting period. This expense, the credit entry for which is posted to shareholders’ equity, is calculated on the basis of the overall plan value, determined at the grant date by the Board of Directors. Considering that the vesting conditions had been fulfilled at December 31, 2007, the entire remaining cost of these plans was recognised in 2007. In the absence of any market for these instruments, mathematical valuation models are used. The key data and assumptions used to estimate the fair value of these equity instruments are the share price on the grant date, estimated future dividends which will not be received by the grantees, a discount rate equal to the risk-free rate plus a credit risk premium, the probability of the profitability and continued presence conditions being met and, in the case of stock options and warrants to subscribe for founder’s shares, historical volatility and liquidity in ABC arbitrage shares. The benefit is measured at the fair value of the shares at the grant date, which may not be revised subsequently following any changes in ABC arbitrage’s share price. The ultimate cost will depend on whether the performance conditions are met and how many of the beneficiaries are still employed by the group on the vesting date. At December 31, 2007, the payroll expense amounts to €533 thousand (€340 thousand in 2006).. ABC arbitrage // Consolidated financial statements 2007. 28. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. At its meeting of May 22, 2006, the Board of Directors decided to grant: 211,939 shares to 16 grantees; 2,108,000 shares to 24 grantees; 8,845,000 stock options to 24 grantees; 1,200,000 warrants to 3 grantees. For the last two groups, the exercise price has been set at €4 and may be revised in light of future dividend payments, with a minimum of €2.514 (average share price on date of Board’s decision)..

(30) notes to the consolidated financial statements 2007. Treasury stock During 2007, ABC arbitrage sold 376,209 of its own shares. At the same time, 403,359 shares were purchased under the market-making agreement with Fortis. At December 31, 2007, ABC arbitrage held 196,082 of its own shares, acquired at a total cost of €1,125 thousand (at December 31, 2006, the company hold 25,730 of its own shares, acquired at a total cost of €78 thousand). In accordance with IFrS, treasury stock is deducted from equity.. 3.4. Financial assets/liabilities at fair value through profit or loss The Group holds financial instruments for trading purposes only. Financial assets. Financial liabilities. Securities to be received. 571,501. 229,152. Securities to be received (off-balance sheet). 109,779. 65,541. Securities to be delivered. (10,959). (634,642). Total. 975,972. (943,324). Securities to be delivered (off-balance sheet). (159,243). (138,482). Cash and cash equivalents. 70,491. (26,596). Total at December 31, 2007. 581,570. (505,027). Total at December 31, 2006. 544,205. (495,515). 43,895. ABC arbitrage // Consolidated financial statements 2007. 29. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. in eur thousand.

(31) Notes to the consolidated financial statements 2007. Details of securities to be received and delivered are provided in note 5.1. Risks. Cash reserves earn interest at variable rates indexed to benchmark market rates. Fair value of financial assets and liabilities is defined as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The primary basis for determining the fair value of a financial instrument is the quoted price in an active market. If the instrument is not traded on an active market, fair value is determined using valuation techniques.. 3.5. Guarantees given Most financial instruments recorded under “Financial assets at fair value through profit or loss” have been given as collateral to the institutions that provide the financing.. 3.6. Other receivables and payables. In EUR thousand. Other receivables. Other payables. Trade receivables/payables. 339. (337). Accrued income/expenses. 310. (695). Accrued taxes and payroll costs. 5,092. (5,905). Total at December 31, 2007. 5,742. (6,937). Total at December 31, 2006. 3,735. (3,776). A €4,394 thousand tax credit reimbursable by the Italian government was written down in full given its age (1996 through to 2001), the absence of payments during previous years and the Italian government’s block on reimbursements for all operators concerned. The Italian government has made a formal request for further information on this item. Accrued taxes and payroll costs include comprise withholding tax and dividend tax credits. They correspond mainly to corporate tax, bonuses payable to employees and amounts due to social security organizations.. ABC arbitrage // Consolidated financial statements 2007. 30. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. All receivables and payables are due within less than one year..

(32) Notes to the consolidated financial statements 2007. 3.7. Provisions for contingencies and risks In EUR thousand Total provisions at December 31, 2006 under IFRS. (462). Provisions utilised in 2007. -. Provision reversal in 2007. 280. Charge to provisions in 2007. -. Total provisions at December 31, 2007. (182). 4. Notes to the statement of income 4.1. Net gains on financial instruments at fair value through profit or loss In view of the highly specific nature of its business, the ABC arbitrage group is probably one of the only independent firms engaged solely in arbitrage trading. The Group has opted for presentation by nature as this is closer to the indicators customarily published in its management report. At December 31, 2007, “Net gains or losses on financial instruments at fair value through profit or loss” came to €48,462 thousand, an increase of almost 27% compared with €38,013 thousand at December 31, 2006. This item corresponds to revenues from proprietary trading activities discussed in the Group’s management report, except for provisions. It includes all expenses and costs directly related to the trading business.. ABC arbitrage // Consolidated financial statements 2007. 31. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The provision reversal in 2007 relates to the favourable outcome of the German subsidiary’s dispute with the tax authorities..

(33) Notes to the consolidated financial statements 2007. 4.2. Other revenue Other revenue comprises revenue from sub-letting premises and amounted to €983 thousand versus €931 thousand in 2006.. 4.3. Administrative expenses Administrative expenses principally comprise data mining and processing costs, together with administrative and communications costs. This item totalled €3,561 thousand in 2007 versus €2,815 thousand in 2006.. 4.4. Payroll costs. Payroll costs include €9,108 thousand in fixed and performance-related compensation together with statutory and discretionary profit-sharing (€6,559 thousand in 2006), payroll taxes of €3,413 thousand (€2,412 thousand in 2006) and share-based payments of €533 thousand (€340 thousand in 2006). Payroll-based taxes amounted to €409 thousand (€345 thousand in 2006). The Group does not provide any post-employment benefits (supplementary pensions or health insurance). Other long-term benefits are provided under defined contribution plans which do not give rise to a future liability as the Group’s only obligation is to make regular contribution payments. During 2007, the following amounts were paid by Group companies to the executive officers of the parent company: In EUR Directors’ fees. 398,500. Salary and other benefits. 255,168. Gross bonuses. 492,746. ABC arbitrage // Consolidated financial statements 2007. 32. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The average number of employees was 58 in 2007 versus 54 in 2006..

(34) Notes to the consolidated financial statements 2007. 4.5. Provision expense Provision expense amounted to €128 thousand in 2007 versus €3,740 thousand in 2006. The charge for the year principally concerned a €3,569 thousand impairment loss against a receivable from the Italian government and an impairment loss against various receivables from other governments, where the recovery process is likely to be long and time-consuming.. 4.6. Corporate income tax The difference between the theoretical corporate income tax charge determined by applying the standard French tax rate to pre-tax income and the actual tax charge – corresponding to an effective tax rate of 34.50% – can be explained as follows: 34.43%. Impact of differences in foreign tax rates. 0.26%. Impact of restatements on the foreign subsidiary. (0.08)%. Impact of tax credit. (0.01)%. Impact of the revenue recognition method. (0.10)%. Effective tax rate. 34.50%. ABC arbitrage elected for group tax relief with ABC arbitrage Asset Management on January 1, 2004. The tax group has signed an agreement whereby each member of the group (subsidiary and parent) recognises in its accounts the income tax that would be payable if it was taxed on a stand-alone basis. The charge is therefore calculated on their own taxable profit after deduction of any prior year losses. Any tax savings made by the tax group through the utilisation of tax losses are retained by the parent company and treated as an immediate gain in the year. The parent company will therefore incur a tax charge in the year in which the subsidiary becomes profitable.. ABC arbitrage // Consolidated financial statements 2007. 33. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Standard French tax rate.

(35) notes to the consolidated financial statements 2007. 5. Other information 5.1. risks Market risks Equities risks The Group never takes any directional arbitrage positions on the Financial markets. The only risks incurred are on suspensive clause arbitrage strategies. The risk is never related to an unfavourable movement in market prices, for example a stock market crash, but can arise from an unfavourable event related to one of the above operations. By definition, risks associated with “suspensive clause arbitrage strategies” are never related amongst the different arbitrage positions and can therefore be spread. In order to mutualism risks, the Group enters into as many transactions as possible all over the world.. Type of arbitrage (in eur thousand). Total long positions. Total short positions. Borrowed securities not yet sold or symmetrical exposure. 235,192. (235,192). Arbitrage without market risks. 598,031. (658,769). Arbitrage with market risks. 142,749. (49,363). 975,972. (943,324). Total for arbitrage transactions -. The first line corresponds to expositions to assets and liabilities that are strictly identical. They are not netted off because they concern different counterparties. The only risk on these positions is a counterparty risk;. -. The arbitrage transactions shown on the second line are defined in the “Arbitrage strategies without market risks” note (1);. -. The arbitrage transactions shown on the third line are defined in the “Arbitrage strategies with market risks” note (1).. ABC arbitrage // Consolidated financial statements 2007. 34. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The following table summarizes the positions taken on markets at December 31, 2007:.

(36) notes to the consolidated financial statements 2007. The process of market risk taking on trading activities is governed by: decision-making rules; exposure limits; delegated authorities. The risk management process is overseen by the “Market Risks Department”, which monitors the following on a day-to-day basis: existence of effective, controlled position hedges; compliance with trading limits; appropriateness of trading strategies used by the traders in light of market conditions; accuracy of potential loss calculations.. Interest rate risk Overall interest rate risk is constantly monitored. For most arbitrage transactions, the amount of the long position is the same as the amount of the short position and the risk is therefore not material. If a specific arbitrage transaction carries a material interest rate risk, this risk is systematically hedged. Currency risk The Group may hold assets and financial instruments denominated in currencies other than the portfolio’s reference currency. Exchange rate fluctuations against the reference currency may have a positive or negative influence on their value. Currency risks are systematically hedged by borrowing or investing cash surpluses in the appropriate currency. The only risk is of a secondary nature – the profit realized in a given currency may vary if it is not converted into euros. The Group regularly converts profits into euros and its exposure to currency risk is therefore marginal. Currency hedging is managed on a day-to-day basis by the traders for exposure generated by trading activities and by the “Financial Operations Department” for exposure generated by all other securities transactions. The overall hedging position is verified daily by the “Market Risks Department”.. ABC arbitrage // Consolidated financial statements 2007. 35. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The “Market Risks Department” has the power and the duty to ensure that these rules are strictly applied. If a position has to be partially or fully unwound as a result, the Management Committee sets out an action plan and timetable..

(37) notes to the consolidated financial statements 2007. Credit and counterparty risk This is the risk of a counterparty being unable to honour its contractual obligation to make a cash payment or to deliver a certain quantity of securities to the Group, due to a deterioration in its financial position. The ABC arbitrage Group deals solely with credit institutions and investment companies. All of these counterparties are subject to specific controls by the authorities in the countries in which they operate, to ensure that they are able to honour their commitments.. The Group uses a prime broker to finance its business. A proportion of the assets deposited with the prime broker are pledged as collateral. The prime broker may use this collateral for its own account but is required by law to return the assets or equivalent assets upon first demand. The risks related to the use of a prime broker are: interruption or discontinuation of financing as the prime broker has the right to amend or discontinue the financing agreement; failure by the prime broker to return the assets used due to market events; failure by the prime broker to return sums due as a result of bankruptcy; incorrect valuation of liabilities and/or assets pledged as collateral. The Group manages this counterparty risk through the use of standard master agreements (clearing and collateral agreements), close monitoring of counterparty credit ratings and diversification of its banking relationships to spread risk while weighing up the pricing benefits of larger-scale volumes.. ABC arbitrage // Consolidated financial statements 2007. 36. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. The Group’s portfolio mainly comprises listed equities. All transactions are settled against payment. The risk of default by brokers is therefore considered to be minimal as the securities are not delivered until the broker has made or received payment. The transaction is cancelled if one of the parties does not fulfil its obligations..

(38) notes to the consolidated financial statements 2007. liquidity risk This is the risk that the Group will be unable to convert its assets into cash sufficiently quickly to meet demands for repayment received from creditors. The assets of the ABC arbitrage Group consist almost exclusively of highly liquid securities quoted on organized markets and its liabilities mainly comprise debts towards banks or investment companies that are secured by the securities held as assets. Authorized financing volumes are contractually based on the assets lodged as collateral. The Group’s actual liquidity position, taking into account existing financing agreements and guarantees given to partner banks, is constantly monitored to ensure that the Group benefits from considerable flexibility in conducting its business as well as substantial cash reserves.. Operational risk. 5.2. Consequences of financial crisis The Group has never had any exposure to the subprime mortgage market nor to any directly correlated derivatives. The main risks in this type of market environment are: a rise in the failure rate of arbitrages with market risks; drying up of deals in the financial markets (mergers & acquisitions, issuance of various products); delays in completing deals, which could lead to carrying costs in excess of the expected profits.. ABC arbitrage // Consolidated financial statements 2007. 37. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Arbitrage activities are governed by written procedures, backed up by rigorous internal controls..

(39) notes to the consolidated financial statements 2007. 5.3. Segment information Revenues by business segment Note : In the following tables, positions correspond to long positions valued at the convergence price, adjusted for the value of any payments to be made or received to close out the transaction. BrEAKDOWn OF ArBITrAGE TrAnSACTIOnS BY TYpE OF rISK. Year. Average positions (value). 2007. 2006. 2007. 2006. Arbitrages without market risks. 65%. 67%. 81%. 82%. Arbitrages with market risks. 35%. 33%. 19%. 18%. 100%. 100%. 100%. 100%. Total. BrEAKDOWn OF ArBITrAGE TrAnSACTIOnS BY GEOGrApHIC ArEA. (average number of arbitrage transactions). 2007. 2006. 21%. 19%. 7%. 6%. USA. 57%. 62%. Other markets. 15%. 13%. 100%. 100%. Euro zone (excluding France) France. Total. ABC arbitrage // Consolidated financial statements 2007. 38. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Average number of arbitrage transactions.

(40) notes to the consolidated financial statements 2007. 1er half 2007. Arbitrages without market risks. Arbitrages with market risks. Total. 19%. 3%. 22%. 8%. 11%. 19%. USA. 35%. 7%. 42%. Other markets. 14%. 3%. 17%. Total. 76%. 24%. 100%. Arbitrages without market risks. Arbitrages with market risks. Total. 22%. 6%. 28%. 4%. 1%. 19%. USA. 32%. 9%. 41%. Other markets. 23%. 3%. 26%. Total. 81%. 19%. 100%. Euro zone (excluding France) France. 2nd half 2007. Euro zone (excluding France) France. 5.4. related party transactions There were no material transactions with ABC participation et gestion and Aubépar in 2007.. ABC arbitrage // Consolidated financial statements 2007. 39. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. BrEAKDOWn OF ArBITrAGE TrAnSACTIOnS BY GEOGrApHIC ArEA AnD TYpE OF rISK.

(41) ABC arbitrage // Consolidated financial statements 2007. 40. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. Notes to the consolidated financial statements 2007.

(42) STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED. DECEMBER 31, 2007. To the shareholders, In accordance with the terms of our appointment at the General Shareholders’ Meeting, we have examined the accompanying consolidated financial statements of ABC arbitrage for the year ended December 31, 2007. These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit.. We conducted our audit in accordance with the professional standards generally accepted in France. Those standards required that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made in the preparation of the financial statements, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly the assets and liabilities, financial position and results of the companies included in the consolidated group, in accordance with the International Accounting Standards and International Financial reporting Standards adopted by the European Union.. 2. Basis of opinion In accordance with Article l.823-9 of the Commercial Code requiring the auditors to explain the basis of their opinion, we report the following information: • As explained in note 1.1, the Group has determined the market price of financial instruments measured at fair value based on the bid price for assets held and liabilities to be issued and on the ask price for assets to be purchased and liabilities held. We assessed the data and assumptions used to determine these prices, reviewed the Group’s calculations and assessed the appropriateness of the related disclosures made in the notes to the financial statements.. ABC arbitrage // Consolidated financial statements 2007. 41. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. I. Opinion on the consolidated financial statements.

(43) Statutory Auditors’ report on the consolidated financial statements. • As explained in note 3.6, the Group recognised an impairment loss on an amount reported under “Other receivables”. We assessed the data and assumptions used to determine the amount of the impairment, as well as the appropriateness of the disclosures made in note 3.6. • note 5.2 describes the environment created by the financial crisis and states that the Group has no exposure to the subprime mortgage market nor to any directly correlated derivatives. We examined the control procedures used to identify potential exposures and the appropriateness of the disclosures made in note 5.2. The assessments were made in connection with our audit procedures on the consolidated financial statements, taken as a whole, and contributed to the formulation of our unqualified audit opinion expressed in the first section of this report.. We also reviewed the information about the Group given in the report of the Board of Directors in accordance with the professional standards generally accepted in France. We are satisfied that this information is fairly stated and agrees with the consolidated financial statements. paris and neuilly-sur-Seine, April 24, 2008 The Statutory Auditors COnSTAnTIn ASSOCIÉS Brigitte Drême. ErnST & YOUnG ET AUTrES Olivier Durand. ABC arbitrage // Consolidated financial statements 2007. 42. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. 3. Specific procedures and information.

(44) 43. WorldReginfo - a33be94c-51da-43c3-b8e3-c2ae0d5e1cad. ABC arbitrage // Consolidated financial statements 2007.



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