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Introduction | Rating | Regionalisation | The Global Economy | Financial Performance | Appreciation in the Value of Core Assets | Liability Management | Community Service | Our People | Outlook

Introduction
On a global level the year 2001 was perhaps one of the worst in recent history. Weak stock markets, widespread lay-offs, and the spectre of international terrorism all contributed to a general sense of grief and anxiety. For KIPCO however, the year 2001 could be labeled as the year of accomplishments. Major achievements included the completion of the reorganisation of the Group structure, the receipt of the company's first rating report, continued improvement in profitability, and the significant increase in the share price of our core portfolio companies.

Our accomplishments are heartening, particularly in light of the environment in which they have been achieved. The most gratifying aspect of our performance is the fact that it highlights the key qualities of KIPCO's strengths, namely "clarity of strategy" and "diversification of risks".

In my last year's report, I outlined KIPCO's strategy and our progress in implementing it. Let me now give you some insight into the effect of diversification on reducing risks, improving the predictability of profits, and providing the opportunity to create a customer-focused, cost-effective distribution network.

Diversification is the common theme that ties together all the value drivers of the company. KIPCO's core assets are invested in two primary sectors - Financial Services and Media & Telecom. Within each of these sectors, there is further diversification by type of business, geography and profit cycle. For example, in the Financial Services sector, core portfolio companies operate in Commercial Banking (Burgan Bank, Jordan Kuwait Bank and Tunis International Bank), Investment Banking (United Gulf Bank, Bahrain), and Asset Management (KIPCO Asset Management Co.). In the Media & Telecom segment, core portfolio companies are engaged in the business of delivering Mobile Phone services (Wataniya Telecom) and pay-TV services (ShowTime).

Geographically speaking, Wataniya Telecom is currently operating only in Kuwait. The Commercial Banking segment Group of companies operate in Kuwait, Jordan and Tunisia. Investment Banking and Asset Management business is carried out in Kuwait through KIPCO Asset Management Company (KAMCO) while United Gulf Bank, Bahrain (UGB) operates and invests in G7 nations and the rest of Middle East and North Africa. Show Time and Gulf Insurance Comapny (GIC) operate in both the Gulf Cooperation Council (GCC)states and other countries in the Middle East and North Africa. In short, there is a fair amount of diversification in the operations of the core companies of the KIPCO Group.

As far as profit cycles in their individual businesses are concerned, the core portfolio companies fall into two categories - one category consists of companies reaching a stage where each will deliver stable profits, while the other category of companies is generally characterised as growth companies. Burgan Bank (BB), Jordan Kuwait Bank (JKB), Tunis International Bank (TIB) and Gulf Insurance Company (GIC) are core portfolio companies that have reached a stage where they will produce stable and gradually growing profits. Wataniya Telecom, UGB, ShowTime and KAMCO, on the other hand, are starting their years of dramatic increase in profitability.

The actual profits produced by some of the companies that were acquired by KIPCO (through the privatisation scheme of the government of Kuwait during 1997) highlights the ability of KIPCO to acquire companies and set up management teams focused on rapidly implementing structure, policies, processes and IT infrastructure thus ensuring that employees are empowered and customers are better serviced. This exercise, when completed, produces a swift upward move in the profit cycle of the companies. For example, when KIPCO acquired Burgan Bank in 1997, the Bank earned KD 12.1 million profit that year. For the year 2001, Burgan Bank delivered a profit of KD 20.7 million; a 71% growth in profit.

Another example would be Gulf Insurance Comapny (GIC). When KIPCO acquired it in 1997 GIC was the No. 4 insurance company in Kuwait in terms of technical profits. Today GIC produces the largest technical profits amongst all Kuwaiti insurance companies.

On the other hand, Wataniya Telecom would be an example of a KIPCO Group company that was a greenfield project and is in the growth phase of its profit cycle. Wataniya produced KD 0.2 million profit in the first year of operation in 2000. In the second year of operation that completed on December 31, 2001, the profit amounted to KD 7.5 million. The forecast for the year 2002 is materially higher than the results achieved in 2001.

This diversification by sector, by type of business within sectors, their geographic presence and the stage of their profit cycle reduces risks dramatically.

More importantly, the business sectors they operate in are aligned to two key resources - one that is available to our region i.e. financial wealth and the other which is a global trend, technology. The evolution of the multi-dimension distribution network as a consequence of the integration of the digital and physical channels of the core portfolio companies will be an important competitive advantage for the Group. This in turn will enable the KIPCO Group companies to deliver a variety of products and services to customers across the region in a setting and time that is most convenient for the customer. This we believe will create greater client satisfaction; a fundamental approach to creating businesses that deliver sustained profitability.

The Group's reoganisation was completed by June 2001. The objective of the reorganisation was to simplify KIPCO's structure so that investors, rating agencies and the financial community could easily understand the role of the different segments in the Group.

Today, KIPCO's structure consists of three clear segments - Financial Services, Media & Telecom, and Management & Advisiory Services. The real estate and industrial companies are owned by the Financial Services entities of the Group, and provide additional stability to their income streams. As far as practical, cross holdings were eliminated and logical ownership structures were maintained, keeping in mind the income profile of the entity being acquired alongside the future evolution of the underlying assets within the Group entities.

As would be expected from companies providing good corporate governance, significant time was spent in evaluating alternate structures before the final form was adopted. KIPCO's auditors, regulators of Group companies and other independent valuers participated in this exercise to ensure that all major transactions were conducted on an arms length basis. Particular attention was directed towards reducing the impact of the reorganisation transactions at the Group company level on their current year's performances.

At the KIPCO parent level, there was little profit and loss impact as the income effect of all transactions with subsidiaries and affiliates are eliminated in accordance with International Accounting Standards.

The initial rating award and the successful conclusion of the two bond issues in November and December of 2001 provides evidence of the success of this reorganisation exercise.

Rating
KIPCO received the "BBB" investment grade rating in its first evaluation from Capital Intelligence Ltd.(CI) in September 2001. In October 2001, it received a similar investment grade rating for Kuwaiti Domestic Bond issuance. We feel confident that this initial rating will improve over the medium term as a result of continued increase in profitability of the core portfolio companies, the increase in market value of our core investments and the diversity inherent in the structure of our core assets. CI cited the following key positive factors in providing the investment grade rating:

• Diversified industrial Group.
• Mature Group companies have strong and stable earnings records.
• Newer Group companies have excellent prospects for rapid growth.
• High quality management at all levels.
• Stable and diversified funding base.

Regionalisation
The regionalisation drive continues with success. GIC's Saudi operation delivered profits in excess of what was projected at the time of its acquisition. The Lebanese operations, despite a difficult market environment, are performing to expectation.

BB, JKB, and TIB continue to explore opportunities across the region. A number of transactions were evaluated but rejected, as they did not fit the investment critertia of the banks. Wataniya Telecom bid for the Tunisian license and continues to evaluate other expansion avenues arising from privatisation initiatives, a second license issuance and other opportunities.

The Global Economy
The global economy had begun slowing down as a result of significant reduction in capital investments by businesses following the meltdown of the technology sector. The events of September 11, 2001, further aggravated the situation. However, the rally of the stock market in the fourth quarter of 2001 and the solidity of the housing sector in USA provided much needed stability for USA and the world economy to emerge from this slowdown. The stock markets reflected this weak economic environment with the Nikkei 225 index losing 24%, Nasdaq 21%, while the FTSE 100 was down by 16.5% for the year.

The entry of China into the World Trade Organisation on December 11, 2001, confirms the continued integration of world economies. The success of the launch of the Euro in early 2002 provides yet another indication that regional economic blocks would be the basis on which regions, as opposed to nations, would trade with each other. The good news of these emerging trends is that it is derived from solid economics on one hand, and increased mobility of labour on the other. Both these conditions would result in lower cost of goods and services and greater choice to people in their roles as consumers or employees. This will hopefully increase the standard of living, which is the best insurance against global instability.

Our region prospered in this difficult year; Kuwait Stock Exchange (KSE) index appreciated by 27% supported by buoyant oil prices, UN War compensation payments, improved corporate results and an improving quality of management teams. Qatar, UAE and Saudi Arabia's stock exchanges also delivered positive results among the Gulf Cooperation Council (GCC) countries. The economy of Iran, a major regional player, also improved. Its Tepix index appreciated by 23.5% during 2001. Egypt, another country in the region with a large population base, continues to suffer from a sharp slowdown of its economy, principally on account of slow progress in economic reform, and difficulties in the banking sector. Again, the events of September 11, 2001 did not help matters as Egypt's peak tourist season was adversely affected.

Although some countries in our region have made significant progress in passing legislation to liberalise their economies, there continues to be difficulty in implementing these reforms. It is imperative that our region increases the speed at which policy announcements are converted to actual actions. The sooner structural adjustments begin, the lesser will be the pain (and cost) of putting them through. The continued robustness of the oil prices over the last few years, the early indication of growth in the global economy for the coming year, and the current structure of the demography of the population of our region provides us with a window of opportunity to align the structure of regional economies with those of the world.

Financial Performance
KIPCO posted a net consolidated profit of KD 7.2 million for the year 2001, up KD 1.2 million on the year 2000 figure of KD 6.0 million. The results would have been better as most KIPCO Group companies' performances were consistent with the plan despite problems on the international front. UGB however, was affected by the events of September 11, 2001 and produced a sharply reduced profit of US$ 4 million for the year 2001 versus US$ 16.7 million for the year 2000. UGB's 2002 actual results for the first quarter, are almost equal to its performance for the whole of year 2001, thus confirming the underlying asset quality of the bank.

Gross revenue increased to KD 47.4 million in 2001 as against KD 43.3 million in 2000. This increase can be attributed to the continued growth in the profits of our core operating companies, and KIPCO's ability to sell its assets at a profit.

Income from core assets (principally from affiliated companies, dividend income and net operating income of subsidiaries), totaled KD 22.1 million in 2001 compared to KD 14.2 million in 2000; an increase of 56% or KD 7.9 million.

General and administrative expenses increased by 19% (or KD 2.1 million) over 2000 to KD 13.3 million.

The increase was a result of increased costs incurred by GIC as a result of consolidation of the costs of its subsidiaries in Lebanon and Saudi Arabia. Also, KAMCO's costs increased as it ramped up staff to provide a diverse range of asset management services.

Interest expenses net of interest income remained flat at KD 12.1 million in 2001 when compared to year 2000. The principal reason for this was the effect of higher average balance at UGB and the impact of interest rate floors on some of KIPCO's medium term borrowings from commercial banks.

Following the completion of two successful bond issues in the fourth quarter of 2001, most of these loans were prepaid. Total assets grew by KD 54 million to KD 548 million in 2001 from KD 495 million in 2000; an increase of 11%, largely due to the completion of the acquisition of Wataniya Telecom.

Total liabilities increased by 13% in 2001 to KD 361 million from KD 320 million in 2000 to fund asset growth and enhance the maturity profile of our borrowings.

During 2001, approximately KD 9.7 million worth of maturing term debts were repaid as they became due. Loans and bonds amounting to KD 42.7 million were prepaid before they became due.

Shareholders' equity increased to KD 138 million in 2001 from KD 125 million in 2000, as a result of the current year's profits, and appreciation in the value of investment available for sale.

Appreciation in the Value of Core Assets
During the Year 2001, the market value of investments in our core listed subsidiaries and associated at the parent level increased by KD 51.9 million, a 35% appreciation to KD 200.5 million. This is gratifying because our core portfolio companies appreciated at a rate greater than the appreciation of the Kuwait Stock Market. Also, this gain was achieved at a time when global stock markets delivered large negative returns. We view this as the preliminary confirmation of the quality of our earnings and the management teams of the KIPCO Group companies. We are pleased to note that this trend has continued through the first quarter of 2002.

Liability Management
At the parent company level, significant progress was made during the year to extend the maturity profile, reduce the costs of our borrowing, broaden its funding base and borrow on a non-collateralised basis.

The successful completion of the largest ever five-year bond issue of KD 40 million in the Kuwait market in November 2001 within two months of the events of September 11, 2001, demonstrated the leadership role KIPCO has continued to play in the Kuwait market. The proceeds of the bond issue were used to prepay both the KD 25 million 8% bond maturing in May 2002, as well as the commercial bank medium term facilities that were expensive and collateralised. The issue was over subscribed and demand came from a broad range of investors. A second five-year bond issuance of KD 20 million, completed on December 27, 2001, offered more attractive terms than the November 2001 issue.

Community Service
KIPCO has always believed that for the Group to be a leader in the region, it has to establish leadership at home. The Group has continued to carry out significant activity in Kuwait to fulfill its responsibility as a good corporate citizen.

The Group has started a series of initiatives to help our community. Mishari Al Khair Charity was established with an annual contribution of 1% of the net profit of each Group company. The charity's objective is to be a catalyst for the society of Kuwait. It has chosen to focus on three areas that we believe are fundamental to Kuwait's long-term prosperity: education, youth welfare and health. Just as important however, are the contributions of talent and time by the KIPCO Group staff. We will seek to conceptualise ideas, identify resources, and create viable and practical programmes that are presented to the leaders of Kuwaiti society for their input and support. This collaborative approach, so successfully adopted in our business strategy, will also ensure the success of our community initiatives, and it is only through co-operation and collaboration with the government and private sectors as a whole, that we will be able to address comprehensively the many challenges in the fields of education, youth welfare and health.

Our People
We will continue to constantly invest in our people. We will seek out the best talent that is available in Kuwait and the region. We have and will provide them with right level of empowerment and accountability so that they can push beyond the limits of their talent. We will build our reward system around clear performance objectives and job satisfaction. We believe that the variety of opportunity within the KIPCO Group companies, the growth profile of the Group, our forward-looking strategy, our solid financial condition, our entrepreneurial culture, and the technology at work provide a rich environment for our staff to enrich their job experience as well as secure their financial independence.

Outlook
During 2002 we will focus on increasing the depth of various drivers of our Group's business. We will refine the Group structure to streamline smaller components that may not have the perfect fit. Increased attention will be paid to cost reduction initiatives across the Group; in particular, the aggregation of purchases of products and services to take advantage of the total purchasing volume of the Group. In the same vein, we will continue to focus on increasing synergies among Group companies. Greater emphasis will be laid on accelerating the speed of product launches. On the liabilities side, we will focus on increasing the depth and spread of our funding base.

We continue to monitor the political development of our region and hope that common sense and peace will prevail.

Looking forward, we continue to be optimistic about the ability of the KIPCO Group to become an important regional player. The real potential of our strategy will become clear in 2003 as most of our operating companies would be in a position to deliver sustainable income. The growth of income will accelerate as a result of significant increases in the Group's customer base, which will also improve cross-selling opportunities.

The years 2004-2005 will hopefully be the beginning of a new era for the Group.

Faisal Hamad Al-Ayyar
Managing Director and Chief Executive Officer