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K U W A I T F I N A N C I A L C E N T R E – S A K / A n n u a l R e p o r t 2 0 0 2
His Highness the Amir of The Crown Prince and
the State of Kuwait, Prime Minister,
Sheikh Jaber Al-Ahmed Sheikh Saad Al-Abdullah
Al-Jaber Al-Sabah Al-Salem Al-Sabah
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TABLE OF CONTENTS
Page
Board of Directors 3
Executive Committee 3
Audit Committee 3
Management Team 3
Directors’ Report 4
Auditors’ Report and Financial Statements 13
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BOARD OF DIRECTORS
Diraar Yusuf Alghanim Chairman
Jassem M.O. Al-Mousa Vice Chairman
Bader M. Al-Sa’ad Managing Director
Faisal A. Al-Jallal Director
Sulaiman H. Al-Dalali Director
Sheikh Abdullah Salem Al-Sabah Director
Khaled M.O. Al-Mousa Director
EXECUTIVE COMMITTEE
Jassem M.O. Al- Mousa Vice Chairman
Sulaiman H. Al-Dalali Director
Sheikh Abdullah Salem Al-Sabah Director
AUDIT COMMITTEE
Diraar Yosuf Alganim Chairman
Jassem M.O. Al-Mousa Vice Chairman
Sulaiman H. Al-Dalali Director
MANAGEMENT TEAM
Bader M. Al-Sa’ad Managing Director & General Manager
Ali H. Khalil Executive Vice President
Gopal Menon Executive Vice President - Investments
Ghada Aleissa Senior Vice President - Marketing
Sami E. Al-Hassawi Senior Vice President - Domestic Investments
Balwant Bains Senior Vice President - Business Risk and Compliance
Khaled A. Chowdhury Vice President - Financial Management
Rasha A. Al-Hamad Vice President - Private Banking
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Directors’ Report
Dear Shareholders, We benefited substantially from the change in investors’
The year 2002 was marked by a sluggish global economy, sentiments, and by offering our clients the right products
resulting in further declines in interest rates and equity we succeeded in increasing our assets under management
values in the international markets. These difficult by 47% during the course of the year from KD 240 million
conditions internationally created favorable investment to KD 355 million. As a result, our fee income grew by
conditions in Kuwait; investors have reallocated funds 13% to reach KD 2.2 million in 2002. The growth in fees
from fixed income instruments, bank deposits and is a direct outcome of the strategic enhancement of our fee
international markets into Kuwaiti equities and real estate. generating activities, which relies on our innovation in
The Kuwaiti markets continued to grow despite downword product and deal structuring.
trends in international market with the benchmark KIC
index registering a 24% growth and the local real estate
valuations climbing up by approximately 20%. The S&P Markaz Fees (KD Thou.)
index, in contrast, declined by 23.4% during the year.
2,260
2,009
250
KIC
Index
200 793
150
100 2000 2001 2002
S&P 500 Rebased Index
50
0 We ended the year in 2002 with 9 fils in earnings per
Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02
share; which, although lower by 2 fils than in 2001, is
commendable under the adverse international market
conditions that prevailed in 2002.
Our asset allocation proved to be robust and provided us Markaz EPS (fils)
with a natural protection against the acute market
fluctuations; our losses on exposure in international 11
markets were offset by the gains on investments in local 9
market. Despite the unfavorable overall market conditions, 8
we outperformed our composite benchmark, sustaining
less than 0.2% in net losses on our aggregate financial
investments.
2000 2001 2002
Asset Allocation
Real Estate Domestic
Fixed Income 3%
19% Equities
43% We have been proactive in complying with international
rules and regulations aimed at strengthening corporate
governance. We have established a compliance unit to
review the best practices within our industry, implement
them, and properly monitor them at Markaz. By
enhancing our policies and procedures, we strive to
Private further protect our clients, our shareholders, and
Equities International
Equities contribute to the orderly functioning of Kuwaitís capital
17%
18% and financial market.
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Our Outlook for 2003 empowered and encouraged them to come up with
creative ideas catering to the needs of our clients, and
generating long term recurring fees to Markaz. The
Major unsettling events are taking place in the region. following is a sample of our achievements:
Regardless of the short-term outcome, we remain
optimistic in the long-term and believe that the aftermath • We have closed the first open ended real estate
will create a stable geo-political environment. Stability investment fund ever offered in Kuwait,
will breed optimism, encouraging cross border investment
and trade, creating unique investment banking • We will be the first to offer an Options trading
opportunities. The recent boom in the Kuwaiti stock and vehicle on local equities in the Middle East region,
real estate markets is a likely preview of what the region is and
likely to undergo once stability is reached.
• We have issued a unique liquid Shari’a compliant
financing issue.
The economic landscape of Kuwait is undergoing major
transformation due to the demographics, which is a major
In 2003, we shall continue to focus on our core activity,
driving force for the local economy. Young Kuwaitis are
and enhance the scalability of our operation. We are
reaching the consumption and working age, setting new
working on strengthening our internal process to achieve
trends in shopping, housing, entertainment, and working
a sustainable growth that would enable us to provide to all
habits. From these trends, emerge new demands,
our prospective clients, the same consistent quality of
imposing a change in the way business is conducted in
service that we have been offering to our current clients.
Kuwait. The challenge that we face at Markaz is three fold:
first, to identify the emerging investment needs of the
young Kuwaitis and provide them with products that meet Our Core Activities
their requirements; second, to identify the companies that
can meet such trends and new demands, and assist them
in meeting their financing needs; and third, to provide the Investment Management
qualified young Kuwaitis with a challenging working Markaz currently manages a total of eighteen funds: one
environment. money market fund, fourteen open-ended equities and
hedge funds, one private equity fund-of-funds, and two
real estate funds. This provides Markaz a global asset
140 allocation capability along four major asset classes:
Demographics
120
1. Domestic Investments
Kuwaiti Population '000
100 2. International Investments
80 3. Private Equities
60
4. Real Estate Investments
40
In 2002, we increased our assets under management by
20 KD 114 million to reach KD 355 million on 31 December
2002, yielding a net increase of 47%. The most substantial
-
<5 10-14 20-24 30- 34 40- 44 50- 54 60-64 70- 74
growth has been in our domestic equities and real estate
Age Categories funds. The overall expansion of our assets was fuelled by:
Potential Future Target Market Current Target Market • Growth in our domestic equities, which increased
by 41% over last year.
• Growth in our real estate advisory services marked
In 1997, we committed to become a full service Kuwaiti
by successful launch of the Markaz US Industrial
investment and finance company; and we succeeded in
Realty Investment Unit I, and the booking of new
reaching our target through a culture of strong business
clients’ assets, which added KD 50 million to our
ethics, creativity, innovation, team-work, and excellence
assets under management.
in client service. More importantly, we succeeded because
we made every member of our staff responsible, as part of • Continuing growth of funds managed by our
a team, for the formulation and execution of our plan. We Private Equities Department.
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400
A ssets Under M anagement MIDAF Return vs. Market Index (Since Inception)
350
KD M illio n
300
45%
250
35%
200 25%
Midaf Fund
150 15%
KIC Index
5%
100
-5%
50 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02
-
2000 2001 2002
Do mestic Equities Internatio nal Equities
P rivate Equities Real Estate
Managed Portfolios
The clients’ Portfolio Accounts increased by 37.2 % during
the twelve-month period ending 31 December, 2002, and
Domestic Equities our Domestic Equities Department succeeded in providing
The Kuwaiti stock market is enjoying a consecutive bull our clients with relative out-performance, on a par with
market year. The decline in interest rates and the anemic those achieved for the Funds.
international markets have incited Kuwaiti investors to
increase their allocation to Kuwait stocks and real estate. International Investments
As a result, the Kuwait Stock Market has increased by 24%
2002 was widely expected to be the year of global
in value, and trading value has increased by 87%, to reach
economic recovery and positive performance for stock
an average value traded of KD 26 million in 2002 versus
markets; and a rebound in the US economy was expected
KD 14 million in 2001. These favorable conditions,
to lead the world out of recession. Instead, a short
combined with our ability to outperform the market for the
economic bounce gave way to another dip resulting in
sixth year in a row, have attracted additional investors’
violent swings in international equity markets. Eventually,
money to our funds and contributed substantially to our
the major markets completed a disappointing third year
investment gains.
making it the worst bear market since the Great
Depression.
Investment Funds
Our domestic equities funds, MUMTAZ and Markaz Our policy relating to our investments and that of our
Investment Development Fund (MIDAF), continue to lead clients is to achieve a higher return than the related
the market in returns and size. The KIC index increased by indices, while adhering to a low risk profile and an
24%, whereas, the Mumtaz Fund posted a gain of 30.6% investment style of defensive growth. Towards that end,
and MIDAF posted a gain of 27.5%; reinforcing Markaz’ our International Investment department was prepared for
position as one of the best performing fund managers in the high volatility in the market, and pursued a dynamic
the Kuwaiti market. asset allocation approach enabling it to minimize the
adverse impact from the market on our portfolio and that
of our clients.
Mumtaz Return Vs. Market Index (Since Inception)
Markaz Portfolio
155%
During the year, we have altered our asset allocation and
Mumtaz Fund reduced our exposure to Growth Equities from 47% to
115%
44% of our total investments, and increased our allocation
75% to defensive investments, whether equities or hedge funds
35%
KIC Index
from 47% to 53%. Geographic allocation was also
-5% revised in line with our investment strategy; we reduced
Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 our exposures to the US by 10%, Japan by 2% and
increased our exposure to global markets and Europe by
9% and 2% respectively.
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International Funds We believe that the uncertainty and the resulting risk
We introduced Al-Markaz European Equities Hedge Class aversion, which had caused the economy to stall, should
(MEEH) to our family of investment funds. MEEH is a soon recede ensuing a return to above-trend growth during
hedge fund designed to exploit the opportunities present the second half of 2003. The accompanying risk appetite
in European markets. We also invested in a global multi- and the improved outlook for growth should provide
manager hedge fund, advised by Olympia Capital support for higher risk assets.
Management, Paris for diversification reasons.
In light of the above scenario, we will be adopting a
As at the end of 2002, our International Investments defensive position for our investments in the short-to-
department managed twelve mutual funds covering medium term and turn to growth-oriented themes once we
international markets; of which nine invests in sense the evidence of market recovery.
international equities and are part of Markaz International
Investment Fund (MIIF), and three hedge funds which are We intend to leverage our favorable track record in asset
part of Markaz Alternative Investment Fund (MAIF). allocation by introducing a new investment product in
2003, the Markaz Master Portfolio Program (MMAPP),
Performance in Review which will be offered to our private institutional and high
net-worth clients. MMAPP will invest in a portfolio of
We compare our performance with two benchmarks; one
global securities and financial products through a dynamic
is the Weighted Index to measure the performance of our
asset allocation process. Going forward, we expect this to
asset selection and the second is the Asset Allocation
be our flagship product of investment advisory services,
Index to measure the performance of our asset allocation.
which will provide the right vehicle for clients who wish
Our funds were down by an average 17.26% for the year,
to invest globally and benefit from our view of the markets
substantially outperforming the Weighted Index and the
and our asset allocation.
Asset Allocation Index, which were down by 23.03%, and
24.69% respectively.
Private Equities
Investment Advisory Services 2002 was the year when the major institutional investors
In 2002, our capabilities in investment advisory services in private equity revised their plans; the dismay in public
and asset allocation were clearly recognized when we markets and its adverse effect on valuations and exit
increased our assets under management by 20%, despite potential for the private companies brought about opposite
the dismal performance of the international markets. reactions by investors. While some pension plans and
institutions, for a variety of reasons including portfolio
repositioning or regulatory constraints, reduced their
Our investment advisory services took a big leap in 2002
allocation to private equities and sometimes went so far as
when we were awarded a major institutional account to
to divest part or all of their portfolios; we have seen others
manage. As with all our advisory accounts, we structured
especially in Europe, have, on the contrary, increased their
the investment portfolio in accordance with the client’s
allocation to the asset class, the argument being that
objectives and constraints. We actively managed the asset
historically, private equity has always generated the best
allocation through the year, and succeeded in minimizing
returns by investing in down markets and divesting when
the volatility and in ending the year with favorable returns.
markets turned around.
Market Outlook and Strategy
At Markaz, at the end of 2001, we decided not to allocate
Consensus 2003 growth forecasts have been cut sharply further to the asset class during 2002, instead to take the
by experts, but the probability of a global double-dip is time to pro-actively manage the existing portfolio, and
low. The cut in US Federal Reserve interest rate and the observe the market trends. We believe we have taken the
expected tax cuts in the US have alleviated fears of right decision, as 2002 turned out to be one of the most
deflation, but some uncertainties still remain in the form of difficult years for private equity in terms of both fund
geopolitical risks and their impact on the US budget raising and investments.
deficit. In Europe, growth is likely to be subdued, which
will result in easing of the monetary policy in 2003.
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We remain vigilant but also committed to the asset class, The Markaz/Hamilton Lane Technology Fund, L.P
and disciplined in our approach and our selection criteria, Our Technology Fund-of-Funds held a first closing in
and as such we believe that, for 2003, we should look to November 2000, at which time it made its first investment.
invest in those opportunities that plan to take advantage of To date, the fund has committed to 8 top tier funds,
the market dislocations for the generation of high returns. extremely well-diversified in terms of stage of
development (from seed to late-stage) and technology sub-
Our portfolio, initiated in 1997 consists of 42 Funds, well sectors.
diversified in terms of geography and sector focus. The
portfolio is 60% invested and we expect the cash During the year, we have not committed to any new funds
payments to still exceed distributions at this early phase of for a variety of reasons, including the fact that most
the portfolio lifecycle. venture firms still carry a heavy burden of
unrealized/troubled portfolios that needed their attention,
company valuations’ decline continued, and as a result, a
Real Estate Internet
4%
lot of venture firms, considered to be ‘household names’
7%
have taken unprecedented measures such as reducing
their staff, their fees and the size of their funds.
Nevertheless, we believe that we should remain vigilant
and disciplined in our selection, by focusing on top tier
managers who are capable of generating attractive returns.
Technology
Diversified Simultaneously, Hamilton Lane Investment Management
36%
53%
Ltd, the Managing General Partner of the Fund remains
Private Equity : Sector Distribution
focused on pro-actively managing and monitoring the
existing portfolio by maintaining continuous dialogue with
the managers.
Private Equity Investment Management
Given the fact that we have not committed to any funds in
2002, our clients’ assets remained flat after having Real Estate Investment Management Services
achieved an annual compounded growth rate of 28% in Our real estate activity dates back to 1978, when Markaz
the past four years. This is in line with our commitment to sponsored its first real estate investment fund in the United
always align our interest with that of our clients, and not States. Markaz through its fully owned subsidiary, Mar-
offer any investment opportunity in which we do not invest Gulf Management Company Inc., which is based in Los
ourselves. Our assets under management represent a Angeles, California, currently manages over US Dollars
mixture of institutional and sophisticated high net-worth 250 million in real estate assets, which are located in
individuals who have the same commitment to the asset seven states. The assets consist of bulk distribution
class and the long-term investment horizon as Markaz. warehouses, suburban office buildings, and development
land. Our Kuwait Real Estate unit manages KD 24 million
Commitments Under Management (in thousands $) in assets (US Dollars 80 million) consisting of apartments
and central business district office properties.
91,724
84,964
69,792
Our impeccable track record, whether in asset acquisition,
disposition, zoning and entitlement, financial and tax
structuring, stems from a team of real estate and legal
professionals that has been working together continuously
33,022 for the past 15 years. Our record in fair dealing, timely
29,170
closing on transactions, and proper management has given
us the credibility, and hence, the advantage in accessing
investment opportunities.
1998 1999 2000 2001 2002
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Real Estate Under Management (in thousands $) Corporate Finance
The capital market in 2002 was marked by low interest
261,142 rates, and a strong appreciation in the value of financial
assets. The primary market for equity issues remained
dormant during 2002, as the level of interest rates relative
to the cost of capital offered little incentive for public
companies to increase their capital for expansion, and
instead, they reverted to debt and the sale of non-strategic
68,600 68,760 financial assets to meet their financing needs.
The Bond market was at its peak driven by the strong
2000 2001 2002 demand for fixed income instruments by the emerging
money market funds and by institutions that were looking
to enhance their investment yields. Kuwaiti companies
took this opportunity to refinance their bank debt through
The US Real Estate Market the issuance of bonds.
The difficult conditions for equities have not impacted the
value of real estate in the US; despite the increase in Primary Issues
vacancy and the declining rental rates. The large spread
As we had planned, we targeted our efforts in 2002 on
between the capitalization rates of US properties and the
generating business from middle size companies, and we
mortgage rates, which currently stands at 4%, has created
were awarded four mandates to manage debt issues, of
a strong demand for real estate by investors chasing yields.
which, one was executed last year and three will be
executed in the first quarter of 2003.
At Markaz, we realize that this spread is unlikely to be
sustained, and have taken this opportunity to structure
We continue to apply our structuring capabilities to add
funds with the sole objective of offering the maximum
value to our clients, providing them with the lowest cost of
yield to our investors. With that in mind, we established
debt, and providing the investors with fairly priced and
in 2002 Markaz US Industrial Realty Investment Unit - I,
quality instruments to invest in. Such issues include a US
which invested in distribution warehouses in the US. The
Dollar denominated issue, which will be placed in the
Fund, which has total assets of USD 150 million, has a
GCC countries, a tradable Sharia’a compliant fixed
tenure of seven years and is distributing to its shareholder
income instrument, and a BOT project secured issue.
10% in dividends per annum on monthly basis.
The Kuwaiti Real Estate Market Outlook for 2003
In Kuwait, the property market has benefited substantially
from the decline in interest rate, and on average, values The capital market in Kuwait has reached a level of
have increased by over 20% in 2002. With bank deposit liquidity, depth, and regulation that makes it the best
rates as low as 2 %, investors are scrambling for alternative engine for economic expansion, enabling it to provide the
investments that provide them with higher yields. financing required for the success of a privatization
program, and qualifies it to be the major catalyst for the
integration of the GCC capital markets.
Having sensed this opportunity, we established Markaz
Real Estate Fund (MREF), the first open ended real estate
fund to ever be established in Kuwait. The objective of the We are proud to be a contributor to the development of
Fund is to offer Sharia’a compliant investors with a steady our capital market. During this year, Markaz, along with
stream of income on a monthly basis. MREF, which has a the Kuwait Stock Exchange (KSE) and the Kuwait Clearing
capital of KD 24 million, has acquired assets from the Company (KCC), will be creating a vehicle to trade
Kuwait Investment Authority and other real estate regulated Equity Options on Kuwaiti stocks, offering these
companies in Kuwait. The assets consist of office, retail, new instruments to institutional and individual investors,
and residential properties located in various markets in and providing them with a cost effective tool to hedge and
Kuwait. manage their risk exposure, making KSE the first exchange
in the Middle East to offer such instruments.
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We are strong believers that political stability will be
achieved, which will create strong pressure towards GCC
market integration; however, privatization in Kuwait is
expected to lag behind some of the other GCC countries,
where privatization of utilities and infrastructure projects
are well under way. At Markaz, we are betting on the
vibrancy of the private sector, and on the entrepreneurial
spirit of the Kuwaiti investor; which has transcended the
delay in reforms in Kuwait, whether it is privatization or
amendment of commercial laws. We will continue to
focus on providing small to mid size companies access to
the capital market, and on assisting companies to execute
their cross border expansion plans, and access to capital
in Kuwait and in the GCC region.
The Board of Directors
23 March 2003
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Kuwait Financial Centre K.S.C.
P.O. Box 23444, Safat 13095, Kuwait
Tel : +(965) 241-2131
Fax : +(965) 242-5828
www.markaz.com
info@markaz.com
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FINANCIAL STATEMENTS AND AUDITORS’ REPORT
FOR THE YEAR ENDED 31 DECEMBER 2002
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Page
Auditors’ report 13
Balance sheet as at 31 December 2002 14
Statement of profit and loss for the year ended 31 December 2002 15
Statement of changes in shareholders’ equity for the year ended 31 December 2002 16
Statement of cash flows for the year ended 31 December 2002 17
Notes to the financial statements 18 to 28
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AUDITORS’ REPORT TO THE SHAREHOLDERS
For the year ended 31 December 2002
We have audited the accompanying balance sheet of Kuwait Financial Centre (A Kuwaiti Closed Shareholding Company) as
at 31 December 2002, and the related statements of profit and loss, changes in shareholders’ equity and cash flows for the
year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of 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 by management, 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 financial statements present fairly, in all material respects, the financial position of Kuwait Financial
Centre – SAK (Closed) as at 31 December 2002, and the results of its operations, the changes in its shareholders’ equity and
its cash flows for the year then ended in accordance with International Accounting Standards.
Furthermore, in our opinion proper books of account have been kept by the company and the financial statements, together
with the contents of the report of the board of directors relating to these financial statements, are in accordance therewith.
We further report that we obtained all the information and explanations that we required for the purpose of our audit and
that the financial statements incorporate all information that is required by the Commercial Companies Law of 1960, as
amended, and by the company’s articles of association, that an inventory was duly carried out and that, to the best of our
knowledge and belief, no violations of the law nor of the articles of association have occurred during the year ended 31
December 2002 that might have had a material effect on the business of the company or on its financial position.
We further report that, during the course of our audit we have not become aware of any material violations of the provisions
of Law 32 of 1968, as amended, concerning currency, the Central Bank of Kuwait and the organisation of banking business,
and its related directives during the year ended 31 December 2002.
Anwar Y. Al-Qatami, F.C.C.A. Waleed A. Al Osaimi
(Licence No. 50-A) (Licence No. 68-A)
of Grant Thornton – Anwar Al-Qatami & Co. of Ernst & Young
23 March 2003
Kuwait
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BALANCE SHEET
For the year ended 31 December 2002
2002 2001
NOTE KD '000 KD '000
ASSETS
Bank balances and cash 449 916
Time deposits 5 200 1,596
Due from bank 6 4,731 -
Securities held for trading 12,009 10,573
Accounts receivable and other assets 2,081 1,776
Murabaha receivable 7 500 -
Loans to customers 8 7,512 6,055
Available for sale investments 9 36,159 34,885
Amount due under Ijara finance leases 191 340
Land under development 1,073 1,020
Investment in land 36 49
Fixed assets 67 99
Total assets 65,008 57,309
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Due to banks 17 13
Accounts payable and other liabilities 2,273 1,653
Dividends payable 163 139
Short-term borrowings 10 9,927 4,059
12,380 5,864
Shareholders’ equity
Share capital 11 39,668 39,668
Treasury shares 12 (939) (3,000)
Share premium 7,451 7,451
Legal reserve 13 2,147 1,775
Voluntary reserve 1,924 1,552
Reserve of profit on sale of treasury shares 550 54
Cumulative changes in fair value 14 (4,030) (1,715)
Retained profits 5,857 5,660
52,628 51,445
Total liabilities and shareholders’ equity 65,008 57,309
Diraar Yusuf Alghanim Bader M. Al-Saad
Chairman Managing Director
The notes set out on pages 18 to 28 form an integral part of these financial statements.
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S TAT E M E N T O F P R O F I T A N D L O S S
For the year ended 31 December 2002
2002 2001
NOTE KD '000 KD '000
OPERATING INCOME
Interest income on time deposits 53 46
Interest income on loans and bonds 570 696
Dividend income 463 873
Management fees and commission 2,260 2,009
Profit on sale of securities held for trading 231 404
Change in fair value of securities held for trading 1,939 1,402
Profit on sale of available for sale investments 870 1,267
Impairment in value of available for sale investments (1,414) (583)
Profit on sale of land - 12
Foreign exchange gain/(loss) 99 (156)
Provision released/(charged) for guarantees and loans to customers 10 (51)
Other income 129 -
5,210 5,919
EXPENSES AND OTHER CHARGES
General and administrative expenses 15 1,261 1,258
Finance costs 225 299
1,486 1,557
Profit before extraordinary income 3,724 4,362
Extraordinary income 16 - 58
Profit for the year before contribution to Kuwait Foundation
for the Advancement of Sciences (KFAS), directors’ remuneration
and National Manpower Support Tax 3,724 4,420
Contribution to KFAS (34) (80)
Directors’ remuneration (70) (70)
National Manpower Support Tax (81) (94)
Net profit for the year 3,539 4,176
EARNINGS PER SHARE 17 9 Fils 11 Fils
The notes set out on pages 18 to 28 form an integral part of these financial statements.
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S TAT E M E N T O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y
For the year ended 31 December 2002
12:25 PM
Page 16
Reserve of
profit on sale Cumulative
F I N A N C I A L
Share Treasury Share Legal Voluntary of treasury changes in Retained
capital shares premium reserve reserve shares fair value profits Total
KD '000 KD '000 KD '000 KD '000 KD '000 KD '000 KD '000 KD '000 KD '000
Balances at 31 December 2000 39,668 (2,454) (7,451) (1,333) 1,110 - - 4,558 51,666
C E N T R E
Net profit for the year - - - - - - - 4,176 4,176
–
Transfer to reserves - - - 442 442 - - (884) -
Dividends - - - - - - - (2,275) (2,275)
Purchase of treasury shares - (1,879) - - - - - - (1,879)
S A K
Sale of treasury shares - 1,333 - - - - - - 1,333
/
Profit on sale of treasury shares - - - - - 54 - 85 139
Movement during the year (Note 14) - - - - - - (1,715) - (1,715)
Balances at 31 December 2001 39,668 (3,000) 7,451 1,775 1,552 54 (1,715) 5,660 51,445
A n n u a l
Net profit for the year - - - - - - - 3,539 3,539
Transfer to reserves - - - 372 372 - - (744) -
Dividends - - - - - - - (2,598) (2,598)
Sale of treasury shares - 2,061 - - - - - - 2,061
Profit on sale of treasury shares - - - - - 496 - - 496
R e p o r t
Movement during the year (Note 14) - - - - - - (2,315) - (2,315)
Balances at 31 December 2002 39,668 (939) 7,451 2,147 1,924 550 (4,030) 5,857 52,628
2 0 0 2
The notes set out on pages 18 to 28 form an integral part of these financial statements.
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For the year ended 31 December 2002
2002 2001
NOTE KD '000 KD '000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before extraordinary income 3,724 4,362
Adjustments for:
Depreciation of fixed assets 49 69
Profit on sale of available for sale investments (870) (1,267)
Impairment in value of available for sale investments 1,414 583
Change in fair value of securities held for trading (1,939) (1,402)
Provision (released)/charged for guarantees and loans to customers (10) 51
Profit on sale of land - (12)
Dividend income (463) (873)
Interest income (123) (264)
Change in fair value of investment in land 13 -
Operating profit before changes in operating assets and liabilities 1,795 1,247
Changes in operating assets and liabilities:
Securities held for trading 503 (5,393)
Accounts receivable and other assets (291) (1,097)
Murabaha receivable (500) -
Loans to customers (1,447) (3,882)
Accounts payable and other liabilities 435 486
Cash inflow/(outflow) before extraordinary income 495 (8,639)
Compensation claim received from United Nations - 58
Net cash generated from/(used in) operating activities 495 (8,581)
CASH FLOWS FROM INVESTING ACTIVITIES
Due from bank (4,731) -
Acquisition of fixed assets (17) (87)
Proceeds from sale of available for sale investments 8,473 20,817
Acquisition of available for sale investments (12,606) (11,406)
Decrease/(increase) in Ijara finance leases 149 (105)
Land under development (53) 12
Dividend received 463 873
Interest received 109 250
Net cash (used in)/generated from investing activities (8,213) 10,354
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury shares - (1,879)
Proceeds from sale of treasury shares 2,557 1,472
Dividends paid (2,574) (2,224)
Increase in short-term borrowings 5,868 2,429
Net cash generated from/(used in) financing activities 5,851 (202)
Net (decrease)/increase in cash and cash equivalents (1,867) 1,571
Cash and cash equivalents at beginning of the year 2,499 928
Cash and cash equivalents at end of the year 18 632 2,499
The notes set out on pages 18 to 28 form an integral part of these financial statements.
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N O T E S T O T H E F I N A N C I A L S TAT E M E N T S
For the year ended 31 December 2002
1 INCORPORATION AND ACTIVITIES
Kuwait Financial Centre – SAK (Closed) was incorporated in 1974 in accordance with the Commercial Companies Law in
the State of Kuwait. The company was listed on the Kuwait Stock Exchange on 7 April 1997 and is governed under the
directives of the Central Bank of Kuwait. The principal activities of the company are the granting of loans, money exchange
and investment in property, shares and equity shareholdings. Its registered office is PO Box 23444, Safat 13095, State of
Kuwait.
At 31 December 2002, the company had 58 employees (48 employees at 31 December 2001).
The financial statements for the year ended 31 December 2002 were authorised for issue by the company’s board of directors
on 23 March 2003
2 SIGNIFICANT ACCOUNTING POLICIES
Preparation of financial statements
The financial statements are prepared in accordance with International Accounting Standards.
Investment securities
The company classifies investment securities under the following headings:
I Securities held for trading
ii. Available for sale investments
All investments are initially recognised at cost, being the fair value of the consideration given including acquisition charges
associated with the investment. After initial recognition, securities held for trading and available for sale investments are re-
measured at fair value, unless fair value cannot be reliably measured.
For investments traded in organised financial markets, fair value is determined by reference to stock exchange quoted market
bid prices at the close of business on the balance sheet date.
For investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to
an earnings multiple, or an industry specific earnings multiple or a value based on a similar publicly traded company, or is
based on the expected cash flows of the investment or the underlying net asset base of the investment. Fair value estimates
take into account liquidity constraints and assessment for any impairment.
Valuation gains and losses arising from a re-measurement to fair value for securities held for trading are taken to the statement
of profit and loss.
Valuation gains and losses arising from a re-measurement to fair value for available for sale investments are taken to the
statement of changes in shareholders’ equity, until the related investments are disposed of or impaired, at which time they
are transferred to the statement of profit and loss.
Trade and settlement date accounting
All "regular way" purchases and sales of financial assets are recognised on the trade date, i.e. the date that the entity commits
to purchase/sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of
assets within the time frame generally established by regulation or convention in the market place.
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For the year ended 31 December 2002
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment properties
Investment in properties are initially recorded at cost. After initial recognition, investment properties are re-measured and
carried at fair value on an individual basis based on an annual external valuation by an independent real estate assessor. Any
gain or loss arising from a re-measurement at fair value is included in the statement of profit and loss.
Loans and provisions
Loans originated by the company by providing money directly to the borrower are stated at amortised cost in addition to any
expenses incurred in granting the loan. Provisions for credit risk are established to meet any decline in value.
Resale agreement
Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in
the balance sheet, as the company does not obtain control over the assets. Amounts paid under these agreements are
included in due from banks or loans and advances to customers, as appropriate. The difference between purchase and resale
price is treated as interest income and accrued over the life of the reverse repo agreement.
Murabaha receivables
Murabaha is an Islamic transaction involving the purchase and immediate sale of asset at cost plus an agreed profit. The
amount due is settled on a deferred payment basis. Where the credit risk of the transaction is attributable to a bank, the
amount due is classified as a murabaha investment. Where the credit risk is attributable to a party other than a bank, the
amount due is classified as a murabaha receivable.
Murabaha receivables which arise from the company’s financing of long-term transactions on an Islamic basis are classified
as murabaha receivables originated by the company and are carried at the principal amount less impairment. Third party
expenses such as legal fees, incurred in granting a murabaha are treated as part of the cost of the transaction.
All Murabaha receivables are recognized when the legal right to control the use of the underlying asset is transferred to the
customer.
Impairment of financial assets
A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. An assessment is made
at each balance sheet date to determine whether there is objective evidence that a specific financial asset, or a group of
similar assets, may be impaired. If such evidence exists, the estimated recoverable amount of that asset is determined based
on the net present value of future cash flows, discounted at original interest rates and any impairment loss is recognised in
the statement of profit and loss.
The provision for impairment of loans and advances also covers losses where there is objective evidence that probable losses
are present in components of the loans and advances portfolio at the balance sheet date. These have been estimated based
on the historical patterns of losses in each component, the credit ratings allocated to the borrowers and reflecting the current
economic environment in which the borrowers operate.
A loss is recognised in income when a financial asset is impaired.
Related party transactions
Related parties consist of directors, executive officers, their close family members and companies of which they are principal
owners. All related party transactions are conducted on an arm’s length basis and are approved by management.
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For the year ended 31 December 2002
Investment in joint ventures
The company accounts for joint ventures, defined as a contractual arrangement to undertake an economic activity which is
subject to joint control, by including in the company’s financial statements its share of assets, liabilities, revenues and
expenses.
Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation and any impairment in value. The company depreciates its fixed
assets using the straight-line method at rates sufficient to write off the assets over their estimated useful economic lives.
Treasury shares
Treasury shares are stated at cost and are not entitled to cash dividends that the company may distribute. Gains or losses
resulting from the company trading in treasury shares are taken directly to shareholders’ equity under "reserve of profit on
sale of treasury shares".
Should the reserve of profit on sale of treasury shares fall short of any losses from the sale of treasury shares, the difference
is charged to retained profits, subsequent to this, should profits arise from sale of treasury shares an amount is transferred to
retained profits equal to the loss previously charged to this account.
Income recognition
Interest income is recognised on a time proportion basis taking account of the principal outstanding and the rate applicable.
Murabaha income is recognised on a time proportion basis so as to yield a constant periodic rate of return based on the net
balance outstanding. Profits and losses on securities held for trading are recognised as and when they are realised. Dividend
income is recognised when the right to receive payment is established. Portfolio management fees is recognised when
earned.
Foreign currencies
Foreign currency transactions are recorded in Kuwaiti Dinars at rates prevailing at the date of the transaction. Monetary assets
and liabilities denominated in foreign currencies are retranslated into Kuwaiti Dinars at mid-market rates at the balance sheet
date. The resultant gains and losses are accounted for in the statement of profit and loss.
Fiduciary assets
Assets held in a trust or fiduciary capacity are not treated as assets of the company and accordingly they are not included in
these financial statements.
Cash and cash equivalents
Cash and cash equivalents as stated in the statement of cash flows comprise bank and cash balances, time deposits and due
to banks.
3 FINANCIAL INSTRUMENTS
Credit risk
Financial assets, which potentially subject the company to concentrations of credit risk, consist principally of bank balances,
time deposits, accounts receivable, and loans to customers. The company’s bank balances and time deposits are placed with
high credit quality financial institutions whilst accounts receivable and loans to customers are presented net of provision for
doubtful debts.
Fair values
Except for long-term equity participations the carrying amounts of financial assets and liabilities at 31 December 2002 and
2001 approximated their fair values.
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For the year ended 31 December 2002
4 INVESTMENT IN JOINT VENTURE
The joint venture is engaged in developing residential real estate in Kuwait. The following represents a summary of the
company’s 66.667% interest in the joint venture which are included in these financial statements:
2002 2001
KD '000 KD '000
Assets (including net investment in land of KD1,073 thousand) 2,228 1,998
Liabilities 1,153 717
Revenue 29 27
5 TIME DEPOSITS
The company’s time deposits yield interest at an average rate of 2.25% per annum (3.21% per annum in 2001) and mature
within one month from the date of deposit.
6 DUE FROM BANK
This represents the value of units purchased from a fund managed by Burgan Bank. These units were purchased from facilities
granted by Burgan Bank and the units were sold on credit with an yield of 4.5% per annum with the agreement to settle the
units’ value and all expected profits by Burgan Bank.
7 MURABAHA RECEIVABLE
This represents a receivable arising from a Murabaha transaction with the principal amount and profit thereon being
recoverable over a 5 year period from the date of the transaction and a profit rate over the period of 6.4% per annum. The
Murabaha transaction is with a financial institution regulated by the Central Bank of Kuwait.
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For the year ended 31 December 2002
8 LOANS TO CUSTOMERS
2002 2001
KD '000 KD '000
Commercial loans 5,038 5,585
Personal loans 4,211 2,220
9,249 7,805
Provision (1,737) (1,750)
7,512 6,055
Specific provision against doubtful receivables is in accordance with Central Bank of Kuwait instructions. The company has
also taken a general provision of 2% on the balance of regular facilities for which no specific provisions are made.
Commercial loans include loans to related parties in the amount of KD4,267 thousand (KD4,817 thousand in 2001). The
interest rate on loans to customers ranges from 3.125% to 13.724% per annum (4.77% to 13.72% per annum in 2001) for
commercial loans and 5.250% to 6.250% per annum (4.3% to 6.3% per annum in 2001) for personal loans. All loans are
denominated in Kuwaiti Dinars and U.S. Dollars. Commercial loans are fully secured by charges over property and the
related parties portfolios under the company’s management.
9 AVAILABLE FOR SALE INVESTMENTS
2002 2001
KD '000 KD '000
Quoted securities and managed funds 19,698 20,488
Equity participations 12,255 12,070
Fixed interest securities 4,206 2,327
36,159 34,885
Equity participations are acquired with the intention of capital appreciation over a medium to long-term time frame. The
nature of these investments is such that a reasonable estimate of fair value can only be determined when the individual
investments underlying the participations are realised or upon the disposal of the direct equity participations. Management
is unable to determine the expected realisable values of these investments and the timing of disposals in this connection and
is therefore unable to estimate fair values. The values that may eventually be realised may differ materially from the carrying
value of these investments. However, management is not aware of any circumstances that would indicate any further
impairment in the value of these investments at the balance sheet date.
The interest on fixed interest securities range from 6.25% to 8.125% peranum (6.25% to 8.125% peranum in 2001)
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For the year ended 31 December 2002
10 S H O R T- T E R M B O R R O W I N G S
Short-term borrowings are due to local banks and are repayable within one month from the date of borrowing. The loans are
denominated in Sterling Pounds, U.S. Dollars and Euro and bear an average interest rate of 4.14% per annum (3.75% per
annum in 2001).
11 SHARE CAPITAL
2002 2001
KD '000 KD '000
Authorised share capital of 400,000,000 shares at a nominal value of 100
Kuwaiti Fils each 40,000 40,000
Issued and fully paid-up share capital of 396,678,000 shares at a nominal
value of 100 Kuwaiti Fils each 39,668 39,668
12 TREASURY SHARES
At 31 December 2002 the company held 8,000,000 (25,560,000 at 31 December 2001) of its treasury shares equivalent to
2.02% (6.44% in 2001) of the shares issued. The market value at the same date was KD1,232 thousand (KD3,118 thousand
in 2001). Reserves equivalent to the cost of treasury shares have been earmarked as non-distributable.
13 LEGAL RESERVE
Distribution of the legal reserve is limited to the amount required to enable the payment of a dividend of 5% of paid-up share
capital to be made in years when retained profits are not sufficient for the distribution of a dividend of that amount.
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For the year ended 31 December 2002
14 CUMULATIVE CHANGES IN FAIR VALUE
2002 2001
KD '000 KD '000
Balance at 1 January (1,715) -
Net unrealised losses (3,929) (2,298)
Impairment in value 1,414 583
Net realised gains 200 -
Net movement (2,315) (1,715)
Balance at 31 December (4,030) (1,715)
15 GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses include the following charges:
2002 2001
KD '000 KD '000
Staff costs 840 719
Depreciation 49 69
16 EXTRAORDINARY INCOME
This item represents the full and final compensation amount received in 2001 from the United Nations for losses suffered as
a result of the Iraqi invasion and occupation of the State of Kuwait.
17 EARNINGS PER SHARE
Earnings per share was calculated based on the weighted average number of shares in issue during the year of 382,221,288
shares (2001 : 369,985,397 shares) excluding treasury shares.
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For the year ended 31 December 2002
18 CASH AND CASH EQUIVALENTS
Cash and cash equivalents included in the statement of cash flows are comprised as follows:
2002 2001
KD '000 KD '000
Bank balances and cash 449 916
Time deposits 200 1,596
Due to banks (17) (13)
632 2,499
19 PROPOSED DIVIDENDS
Subject to the requisite consent of the relevant authorities and approval from the general assembly, the board of directors
propose to:
a. Distribute a cash dividend of 6 Fils for each share held (7 Fils in 2001) amounting to KD 2,332 thousand (KD2,598
thousand in 2001) to the shareholders of record as of the date of the general assembly excluding treasury shares.
b. Pay directors non-executive remuneration of KD70 thousand (KD70 thousand in 2001). This is below the maximum
amount provided for by the Commercial Companies Law.
Proposed appropriations at 31 December 2001 were subsequently approved by the general assembly.
20 S E G M E N TA L A NA LY S I S
The company operates primarily in one area of business activity, investment and accordingly its primary basis for segmental
reporting is by geographical segment.
The company operates in two main geographical segments: Inside Kuwait and outside Kuwait. The geographical analysis is
as follows:
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For the year ended 31 December 2002
Inside Outside
Kuwait Kuwait Total
KD '000 KD '000 KD '000
31 December 2002
Operating income/(loss) 5,943 (733) 5,210
Net profit/(loss) 4,355 (816) 3,539
Total assets 39,028 25,980 65,008
Total liabilities (12,217) (163) (12,380)
Net assets employed 26,811 25,817 52,628
31 December 2001
Operating income/(loss) 6,924 (1,005) 5,919
Net profit/(loss) 5,418 (1,242) 4,176
Total assets 29,687 27,622 57,309
Total liabilities (5,712) (152) (5,864)
Net assets employed 23,975 27,470 51,445
21 R E - P R I C I N G M AT U R I T Y A NA LY S I S O F A S S E T S A N D L I A B I L I T I E S
Interest rate risk is the sensitivity of the company’s financial condition to future movements in interest rates. The company
would be exposed to interest rate risk as a result of mismatches or "gaps" in the amounts of interest sensitive assets and
liabilities that mature or re-price in a given period. However, as the majority of company’s assets and liabilities are either
non-interest sensitive or frequently re-price, the company has no significant exposure to interest rate risk.
The company’s re-pricing maturity profile, based on the contractual re-pricing or maturity dates of assets and liabilities,
whichever dates are earlier, is as follows:
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For the year ended 31 December 2002
21 R E - P R I C I N G M AT U R I T Y A N A LY S I S O F A S S E T S A N D L I A B I L I T I E S (CONTINUED)
Not exposed
Up to 1-3 3-12 Over to interest
1 month months months 1 year rate risk Total
KD'000 KD'000 KD'000 KD'000 KD'000 KD'000
At 31 December 2002
ASSETS
Bank balances and cash 47 - - - 402 449
Time deposits 185 15 - - - 200
Due from bank - - 4,731 - - 4,731
Securities held for trading - - - - 12,009 12,009
Accounts receivable and other assets - - - - 2,081 2,081
Murabaha receivable - - - 500 - 500
Loans to customers - 49 6,557 906 - 7,512
Available for sale investments - - 891 3,315 31,953 36,159
Amount due under Ijara finance leases - - 191 - - 191
Land under development - - - - 1,073 1,073
Investment in land - - - - 36 36
Fixed assets - - - - 67 67
232 64 12,370 4,721 47,621 65,008
LIABILITIES
Due to banks 17 - - - - 17
Accounts payable and other liabilities - - - - 2,273 2,273
Dividends payable - - - - 163 163
Short-term borrowings 4,127 1,198 4,602 - - 9,927
4,144 1,198 4,602 - 2,436 12,380
Total interest rate sensitivity gap (3,912) (1,134) 7,768 4,721 45,185 52,628
Cumulative interest rate sensitivity gap (3,912) (5,046) 2,722 7,443 52,628 -
At 31 December 2001
ASSETS
Bank balances and cash 23 - - - 893 916
Time deposits 1,596 - - - - 1,596
Securities held for trading - - - - 10,573 10,573
Accounts receivable and other assets - - - - 1,776 1,776
Loans to customers 8 - 4,270 1,777 - 6,055
Available for sale investments 1,827 - - 500 32,558 34,885
Amount due under Ijara finance leases - - 340 - - 340
Land under development - - - - 1,020 1,020
Investment in land - - - - 49 49
Fixed assets - - - - 99 99
3,454 - 4,610 2,277 46,968 57,309
LIABILITIES
Due to banks 13 - - - - 13
Accounts payable and other liabilities - - - - 1,653 1,653
Dividends payable - - - - 139 139
Short-term borrowings 4,059 - - - - 4,059
4,072 - - - 1,792 5,864
Total interest rate sensitivity gap (618) - 4,610 2,277 45,176 51,445
Cumulative interest rate sensitivity gap (618) (618) 3,992 6,269 51,445 -
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For the year ended 31 December 2002
22 FOREIGN EXCHANGE
At 31 December the net open foreign exchange positions were as follows:
2002 2001
KD '000 KD '000
US Dollars 15,080 18,094
Euro 3,798 3,444
Sterling pounds 885 675
Egyptian pounds 778 598
UAE Dirhams 435 436
Other 561 113
21,537 23,360
23 CONTINGENT LIABILITIES AND COMMITMENTS
2002 2001
KD '000 KD '000
Letter of guarantee on behalf of a related party 1,203 1,160
Commitments for purchase of investments 12,775 16,986
13,978 18,146
24 FIDUCIARY ASSETS
The company holds investment portfolios and traveller cheques on behalf of clients that are not reflected in the balance sheet.
The total amounts of client portfolios and traveller cheques held by the company at 31 December 2002 were KD96,074
thousand (KD70,085 thousand at 31 December 2001) and KD17 thousand (KD498 thousand at 31 December 2001)
respectively.
25 C O M PA R AT I V E A M O U N T S
Certain comparative amounts have been reclassified to conform to the current year’s presentation.
28