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Introduction | Financial Performance | Profit & Loss Account | Appreciation in the Value of Core Assets | Operating Review | Product and Service Innovation | Regionalisation | The Regional Economy
Liability Management | KIPCO and the Community | Our People | Dividend | Outlook

Introduction
I am pleased to report that 2002 was another successful year for KIPCO and its shareholders. We achieved important progress in executing our Group strategy, making significant advances in new product development, regional expansion and the harnessing of technology. Despite adverse global economic conditions, we achieved our 11th consecutive year of profitability and saw significant increases in the market value of our core portfolio companies. This performance reflects the clarity of our strategy and our adherence to the underlying principles of diversification of risk, achieving a good match in our asset and liability profile and maintaining a solid equity base. KIPCO's popularity among investors remained clear with its shares being the most actively traded on the Kuwait stock market for the sixth year in a row.

At the parent company level, significant progress was made during the year to extend and diversify the maturity profile, reduce the costs of our borrowing and borrow on a non-collateralised basis. Today KIPCO has no borrowing from the Kuwaiti banking sector. The total bonds issued by KIPCO approximates 30% of the total KD bonds outstanding. This confirms its leadership role in the development of the Kuwait bond market.

Financial Performance
As an investment holding company, KIPCO creates shareholder value in two ways. The first is reflected in the company's net profit for the year. The second is the increasing market value of the core listed KIPCO Group companies, which in accordance with our accounting policies, is not reflected within the profit and loss account.

In combination, these figures demonstrate that 2002 was another year of increasing prosperity for our shareholders.

Profit & Loss Account
Despite the pressures of the international climate, the majority of KIPCO's Group companies achieved improved financial performances for the year ended 31 December 2002. Unfortunately, Burgan Bank encountered a one-time problem in its provisioning for loan losses and consequently produced a sharply reduced profit of KD 12.8 million versus KD 20.7 million in 2001. As a result, KIPCO posted a net consolidated profit of KD 6.4 million for 2002, down KD 0.8 million on the 2001 figure of KD 7.2 million.

Gross revenue was KD 40.1 million (2001: KD 47.4 million). This reduction can be attributed to a fall in our share in income from our core assets as well as lower income from sale of securities.

Income from core assets - principally from affiliated companies, dividend income and net operating income of subsidiaries - totaled KD 20 million in 2002 compared to KD 22.1 million in 2001, a drop of 10% or KD 2.1 million. This reduction is the result of the sharp fall in our share of income from Burgan Bank of KD 4.8 million, offset by increased profit contribution from our other subsidiary and affiliated companies and dividend income.

General and Administrative expenses increased by only 2% in 2002, versus 19% in 2001, to KD 13.5 million. This minor increase was the result of savings achieved through the implementation of Group purchasing initiatives; these were offset by increased salary and benefit costs in United Gulf Bank and its subsidiary KAMCO, due to additional investment in management team and staff to provide the diverse range of services.

Interest expenses net of interest income dropped by 23% to KD 9.2 million in 2002 (2001: KD 12.1 million). The principal reason for this was the effect of a lower average balance at KIPCO and the lower average interest rate paid on account of declining interest rate environment and increasing bond issuance at current market rate. The proceeds of the bond issue was used to prepay more expensive debt. Total assets grew by KD 8 million to KD 579 million in 2002 from KD 571 million in 2001, an increase of 1%. Total liabilities also increased by 1% to KD 389 million from KD 326 million in 2001. The rise in liabilities was necessary to fund the growth of assets and increase the maturity profile of our borrowings.

During 2002, approximately KD 46 million of maturing term debts were repaid as they became due. The company continued with its efforts to broaden its funding base.

Shareholders' equity increased to KD 140 million in 2002 from KD 136 million in 2001, as a result of the current year's profits, offset by increased investment revaluation reserves.

Appreciation in the Value of Core Assets
During 2002, the market value of investments in our core listed subsidiaries and associated companies increased by 32% to KD 267 million, a rise of KD 65 million. This followed an increase of 35% (KD 51.4 million) in 2001. The compounded growth over the past 24 months therefore equates to 34%, a total increase of KD 117 million or 111 Kuwaiti fils book value per share. This appreciation in the market value does not tell the full story of value creation as it does not include the effectof the control premium.

During 2002, the market value of investments in our core listed subsidiaries and associated companies increased by 32% to KD 267 million, a rise of KD 65 million. This followed an increase of 35% (KD 51.4 million) in 2001. The compounded growth over the past 24 months therefore equates to 34%, a total increase of KD 117 million or 111 Kuwaiti fils book value per share. This appreciation in the market value does not tell the full story of value creation as it does not include the effectof the control premium.

Among the KIPCO businesses to have seen market value increases in 2002 Wataniya Telecom, United Gulf Bank and Gulf Insurance Company stood out as notable successes.

Operating Review
KIPCO's structure consists of three clear segments: Financial Services, Technology & Media and Management Services. The Group's real estate and industrial companies are owned by its Financial Services entities, providing additional stability to their income streams.

As far as profit cycles are concerned, KIPCO's core portfolio companies fall into two categories: companies reaching a stage where they will deliver stable or gradually increasing profits, or companies which are generally characterised as growth businesses. Burgan Bank, Gulf Insurance Company (GIC), Jordan Kuwait Bank and Tunis International Bank fall into the former category, while Wataniya Telecom, United Gulf Bank (UGB), KAMCO, United Real Estate Company and Showtime have entered phases of dramatically increasing profitability.

With the exception of Burgan Bank, all KIPCO Group companies bettered their 2001 financial results. Particular successes include Wataniya Telecom, United Gulf Bank and Gulf Insurance Company.

Wataniya Telecom
Although the year proved extremely challenging for many mobile telecom operators, both globally and regionally, Wataniya achieved another exceptional year. The company delivered significant increases in revenue, profit, customers and operating cash flow. It achieved the strongest growth of KIPCO's core portfolio companies with a 170% rise in net profit over 2001.

Mobile penetration reached 54% of the population in Kuwait, the second highest GSM penetration in the Arab world. Wataniya increased its GSM customer base in Kuwait from 388,000 to 615,800 and its market share to over 50%.

The Company's revenue increased to KD 85.5 million from KD 54 million last year - a 58% year-on-year growth. Wataniya exceeded its 2002 business plan objectives and is well positioned to achieve continued success.

Reflecting the Company's management focus on cost control and the efficient deployment of resources, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), grew 149% to KD 32.3 million and net profit increased by 170% to KD 20.3 million.

United Gulf Bank
Against a difficult industry backdrop, United Gulf Bank produced a markedly improved performance with a 140% growth in net profit over the previous year, albeit from a low base.

Against a difficult industry backdrop, United Gulf Bank produced a markedly improved performance with a 140% growth in net profit over the previous year, albeit from a low base.

The quality of UGB's asset base as well as its diversity enabled it to deliver a pleasing performance for 2002. Net profits surged to $9.6 million from $4 million in 2001 on the back of a solid $10 million (79%) growth in Net Income before provisions. Fee income jumped 47% percent to $16 million (2001: $10.9 million), of which $ 14.9 million came from the asset and wealth management and corporate finance activities of its subsidiary KAMCO.

Strong support also came from the portfolio of its core investments. UGB's affiliated companies contributed an increased amount of $12.8 million to its gross income, 23 percent more than $ 10.4 million achieved in 2001. The bank charged $10.5 million as provisions in 2002 to its profit and loss on this account compared to $4.3 million charged in 2001. The bank has now, to a very large extent, marked down its investments in its US non-trading / private equities. Consequently,it is fully prepared for any further downside but will book a rich upside, if it materialises.

UGB, at the end of the year, is well positioned to deliver significantly improved results for 2003 and the coming years as a result of continued strengthening of the quantum, quality and reliability of the subsidiaries and affiliates income stream as well as the diversified profile of its other investments.

Gulf Insurance Company
The global insurance industry continued to be negatively impacted by the events of September 11th 2001. Steep price hikes and difficult terms have become the norm and many types of risk have become uninsurable, with reinsurers adopting extremely conservative stances.

In this macro-economic environment, Gulf Insurance Company produced another solid performance. Technical profits increased to KD 2.3 million in 2002 from KD 2.1 m in 2001. On this criterion, GIC has for the third year maintained its number one position among Kuwaiti insurance companies. Net profit increased by 24% to KD 5 million, with effective cost control playing an important part in the continued growth of profitability. In 2000, the percentage of general and administrative cost to total premium stood at 17.17%, the highest among the four Kuwaiti insurance companies; today it stands at 12.9 %, the lowest among all insurance companies in Kuwait ? An impressive testament to the ability of the management team.

Burgan Bank
Burgan Bank posted good operating results with 2002 operating income rising 10.5% to KD 47.5 million (2001: KD 43 million), principally due to increased fees and commissions. Total fees and commission earned during 2002 amounted to KD 16.8 million compared to KD 10.2 million for 2001, an improvement of 65% or KD 6.6 million over 2001.

Operating expenses increased by 25% to KD 19.5 million, mainly as a result of continuing technology investments and staff training. Burgan Bank posted total profits of KD 28 million before the provisions of KD 14.7 million. Net profit after provisions, the share of Kuwait Foundation for the Advancement of Sciences and the National Manpower Support tax, stood at KD 12.8 million.

Product and Service Innovation
A fundamental element of KIPCO's strategy is an absolute commitment to customer satisfaction. The Group strives to exceed customers? Expectations by providing outstanding service and maintaining a product pipeline that anticipates customer demand. In 2002, this commitment was evidenced through a string of product launches, including a range of regional firsts and several award winners.

KAMCO increased its output of equity research reports on Kuwaiti companies by over 130% versus 2001, enabling both institutional and retail investors to make more informed investment decisions. For the first time reports were published in both Arabic and English. KAMCO also increased the distribution channels for its research, contributing reports to leading newspapers and websites in the region and reaching international investors through the Bloomberg network. KAMCO's first high yield fund was well received by risk-averse investors who were attracted by the potential for superior returns versus bank deposits.

Burgan Bank's accomplishments as a leader in technology driven banking were recognised by Global Finance magazine's award for Best Internet Bank for Corporate and Consumer clients in Kuwait, and for Best Website Design in the Middle East. For the fourth consecutive year, the Bank won the Quality Recognition Award for its excellence in US Dollar Funds Transfers from JP Morgan Chase Bank - New York. It was also selected for JP Morgan Chase Bank's Five-Year (1997-2001) Quality Recognition Award for service excellence in the areas of funds transfers and trade finance processing.

Regionalisation
Another core component of KIPCO's Group strategy is regionalisation, through which we drive our businesses to expand their served markets into neighbouring territories.

GIC saw increased profit contributions from the businesses it acquired in Saudi Arabia and Lebanon in 2000 and worked towards integrating the latter with another Lebanese insurer of similar size. GIC's regional expansion has not only paved the way for increasing international profit contributions in coming years but has also helped insulate it from increasing competition in the saturated Kuwaiti market, which saw two new Islamic insurance businesses open during 2002.

Wataniya took the first steps in its regional expansion with the acquisition in November of a 50% equity investment and joint management control of Tunisiana, the second licensed GSM mobile communications operator in Tunisia.

Burgan Bank, United Gulf Bank, Jordan Kuwait Bank and Tunis International Bank evaluated a number of commercial opportunities across the region as part of their own expansion plans. The latter three banks also partnered in creating the new Algeria Gulf Bank which was licensed in September and will become operational in the fourth quarter of 2003.

The Regional Economy
The Middle East and North Africa prospered in a difficult year. The Kuwait Stock Exchange (KSE) index appreciated by 38.96%, supported by buoyant oil prices, UN War compensation payments, improved corporate results and enhanced management talent. Qatar and Oman delivered good results, with gains of 36.81% and 26.16% respectively, while the UAE and Saudi Arabia posted modest gains. The economy of Iran, a major regional player, also improved, with its Tepix index appreciating by a solid 41.91 %. Egypt, the other country in the region with a large population base, continues to suffer a sharp slow down of its economy, principally on account of slow progress in reforming its economy and difficulties in the banking sector. Despite this, the Egypt stock market delivered a positive performance of 4.20% after a lackluster 2001 performance.

While some countries in the 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 of putting them through. The continued robustness of oil prices over the last few years, the early indication of growth in the global economy for the coming year and the region's demographics provide us with a window of opportunity to align the structure of economies of our region with those of the world.

Liability Management
At the parent company level, significant progress was made during the year to extend and diversify the maturity profile, reduce the costs of our borrowing and borrow on a non-collateralised basis. Today KIPCO has no borrowing from the Kuwaiti banking sector. The total bonds issued by KIPCO approximates 30% of the total KD bonds outstanding. This confirms its leadership role in the development of the Kuwait bond market.

At the parent company level, significant progress was made during the year to extend and diversify the maturity profile, reduce the costs of our borrowing and borrow on a non-collateralised basis. Today KIPCO has no borrowing from the Kuwaiti banking sector. The total bonds issued by KIPCO approximates 30% of the total KD bonds outstanding. This confirms its leadership role in the development of the Kuwait bond market.

This strategy of an improved liability mix of short and long term funding resulted in a 23% reduction in net borrowing costs for the year. Also, this pro-active approach has partially mitigated yield curve risk from future interest rate increases. New sources of funding increased the depth of the borrowing profile. The collateralised borrowing reflect medium term debt that was put on in the early years at very attractive rates. This type of debt structure will be replaced with clean borrowing as the loans mature.

Another achievement for 2002 was the continued upgrading of Liability Management Reporting Systems to reflect ongoing changes in borrowing profile.

KIPCO and the Community
We have always believed that in order 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 KIPCO Group has started a series of initiatives to help our community. The Mishari Al Khair Charity was established in 1999 and is funded through an annual contribution of 1% of the net profit of each Group company. The charity's objective is to be a catalyst for positive developments in Kuwait society and its energies are focused on three areas which we believe are fundamental to the country's long-term prosperity: education, youth development and health.

Over the past several years, the people of Kuwait have benefited from several new facilities constructed by the privatesector under the Government's Build Operate & Transfer (BOT) scheme. These facilities have been built to world class standards, with great efficiency and at reasonable cost without support from the state coffers. KIPCO Group is proud to be behind two major BOT schemes - the Marina Mall and the Airport Mall and Multi Storey Car Park ? Which were opened and warmly received by the public in 2002. These projects demonstrate the success with which private enterprise, the state and the people of Kuwait can partner for mutual advantage.

Our People
KIPCO's very encouraging performance in 2002 reflects the hard work of our staff right across the KIPCO family. We were delighted to see important progress in almost all of our businesses and to celebrate some particular successes. To achieve this level of performance in the face of difficult markets is a notable achievement and I would like to thank everyone for their contribution.

In 2003 and subsequent years, we will maintain our commitment to investing in our people. We will seek out the best talent from Kuwait and the region and provide employees with empowerment and accountability so they can fully achieve their potential.

We believe that the variety of opportunity within KIPCO, the growth profile of the Group, its forward-looking strategy, solid financial condition, entrepreneurial culture and technological resources provide a rich environment for staff to enrich their job experience as well as secure their financial independence.

Dividend
A cash dividend of 10 Kuwaiti Fils per share has been proposed by the Board of Directors. We expect this to be the beginning of a trend for the coming years.

Outlook
Our challenge for 2003 is to drive our business to ever greater levels of prosperity and success. With the conflict in Iraq now over, we can hopefully look forward to far greater confidence and certainty in the international community.

We will complete KIPCO's successful bond issue program with a launch of a KD 14 million bond in the first half of 2003. Thereafter, we will focus on increasing the depth and breadth of our funding base. Other Group companies will enter the market as they complete their rating exercise. Those non listed Group companies which are achieving higher level of revenue and profitability will, during the year, diversify their shareholder base by inviting strategic shareholders through private placement and other routes. This will further strengthen these companies as they will have more relationships and resources.

During 2003, we will define the road map that the KIPCO Group companies will establish for corporate governance. We view such governance not as an additional oversight function but as a forum where ideas, plans and projects get the combined wisdom of all the members of that body.

Within KIPCO we place a great premium on the open and honest sharing of views. In 2003, we will make additional resources available to communicate more effectively with our key constituents - customers, investors, employees, government and public.

Looking forward, we continue to feel more confident 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.

Faisal Hamad Al-Ayyar
Managing Director and Chief Executive Officer