Annual Report 2003

Orascom Construction Industries

Annual Report 2003

Weill Cornell Medical College, Doha, Qatar

T (202) 3026930 F (202) 3030506 / 3440201

www.orascomci.com

Annual Report 2003

Orascom Construction Industries 160 26th July Street PO Box 1911 Agouza, Cairo Egypt

solid expansion in a dynamic region

contents Business Segments and Activities

Highlights

1

Auditor’s Report

31

Letter to Shareholders

2

Consolidated Income Statement

33

Construction

6

Consolidated Balance Sheet

34

Cement

10

Consolidated Statement of Changes in Equity

36

Concessions

14

Consolidated Cash Flow Statement

38

Other businesses

15

Notes to the Consolidated Financial Statements

40

Corporate Governance

16

Management and Corporate Information

55

Management’s Discussion and Analysis

20

Business Segments and Activities

57

Orascom Construction Industries (OCI) focuses on three high growth business activities – construction services, cement manufacturing and infrastructure concessions. Our Construction Group provides engineering, procurement and construction services on industrial, commercial, infrastructure and railway projects for public and private customers in the Middle East and North Africa. Our Cement Group owns and operates cement production plants in Egypt and Algeria. Our Concessions Group participates as an equity investor in long-term infrastructure concessions including port operations, industrial parks and natural gas distribution systems.

Construction Group

Cement Group

OCI Construction Activities Regional engineering, procurement and construction services

Egyptian Cement Company (53.7%) Cement manufacturer

Contrack International Inc. (45%) Construction services on US government-financed projects

Algerian Cement Company (100%) Cement manufacturer

OCI Algeria (100%) Engineering, procurement and construction services in Algeria Cementech Limited (100%) Specialized engineering, procurement and construction services on cement plants Orascom Road Construction (90%) Asphalt and concrete paving

Concessions Group

Other Building Materials

Suez Industrial Development Company (59%) Industrial park developer

Ready Mix Egypt (100%) Ready-to-use concrete

Egyptian Container Handling Company (50%) Stevedoring services at Adabiya port – Sokhna Port Development Company (70%) Stevedoring services at Sokhna port – Egyptian Maritime Services (90%) Inland and intermodal transportation services

National Bag Company (75%) Cement, building materials and agriculture bags

Nile Valley Gas Company (20%) Natural gas distribution in southern half of Egypt Auto Gas Company (20%) Natural gas vehicle refueling stations Egyptian Company for Tunnels (12%) Maintenance of subway systems

Mehsas National Bag Company (50%) Cement, building materials and foodstuff bags National Steel Fabrication (50%) Steel cutting, bending, welding, and painting services United Paints & Chemicals (50%) Pre-blended dry plaster, putty, and tile adhesives – Egyptian Gypsum Company (45%) Gypsum manufacturer – MBT Egypt (50%) Construction chemicals – Den Braven Egypt (87.5%) Silicone and acrylic sealants – A-Build Egypt (50.1%) Waterproofing contractor Alico Egypt (50%) Building facade, curtain walling, and window systems National Pipe Company (40%) Concrete pipe SCIB Chemical (15%) Paints and building chemicals

highlights

Revenue

EBITDA 4,403

2003 2002 2001

637

1999

1,504

Net Earnings

369

Total Assets 558

2003 2002

364

2001

304

2000

279

1999

782

2000

2,027

1999

801

2001

2,415

2000

1,204

2003 2002

2,911

191

8,111

2003 2002

6,327

2001

5,633

2000

4,476

1999

3,842

2003

2002

2001

2000

1999

Revenue

4,403

2,911

2,415

2,027

1,504

EBITDA

1,204

801

782

637

369

Net Earnings

558

364

304

279

191

Earnings Per Share

5.56

3.60

2.84

2.70

1.98

Capital Expenditures

1,474

657

440

789

525

Total Assets

8,111

6,327

5,633

4,476

3,842

917

787

1,072

616

885

Total Debt

3,277

2,414

2,518

1,985

1,937

Minority Interest

1,146

876

783

642

516

Shareholders’ Equity

2,158

1,439

1,247

1,015

739

Cash & Cash Equivalents

Egyptian Pounds (LE) in millions except per share data

Orascom Construction Industries Annual Report 2003

01

letter to the shareholders

Onsi Sawiris Chairman

A Remarkable Year Few could have predicted the events which occurred over the past year. Even fewer could have predicted how positively some of these events would affect our company. During the first quarter, consolidated revenue jumped, net income soared and our stock price increased by 60%. By the end of June, our construction group had a record backlog, cement prices began to rebound and revenue from sources outside Egypt reached 54% of total revenue. By September, Algerian Cement Company had dispatched its first bag of cement and had captured an average daily market share of 10%. For the year, consolidated revenue was up 51% to a record LE 4.4 billion and net income rose by 53% to a record LE 558 million surpassing our expectations. Based on this outstanding performance, the Board of Directors intends to recommend a dividend of LE 1.5 per share which represents an increase of 50% over last year and a payout ratio of 26%. Operational Performance As uncertainty gave way to optimism during the year, our dedicated managers and employees continued to generate superior results by securing new business opportunities with customers throughout the region. From our home base in Egypt, our operations have grown far and wide. During the year, OCI companies delivered cement to a customer in the United States, supplied structural steel for a project in Tunisia, constructed a medical college in Qatar, and repaired damaged infrastructure in Afghanistan. Our aim under the 50-05 Action Plan launched last year had been to generate 50% of consolidated revenue from sources outside of Egypt by 2005. Perhaps we did not aim high enough. During the year, revenues from sources outside of Egypt grew by 240% and reached LE 2.3 billion, 46% of total revenue. Revenue from our Construction Group grew by 80% and reached LE 3.2 billion, contributing 65% of total revenue. As new construction opportunities emerged throughout the region, our Construction Group secured a record LE 3.3 billion in new work during the year, the majority of which was outside of Egypt and denominated in foreign currency. Our backlog of construction work totaled LE 2.4 billion at year end, a 4% increase over last year. During the year, OCI completed work on the five-star JW Marriott Hotel Mirage City located on the outskirts of Cairo and on the liquefied natural gas storage tanks and offshore marine works for the new Union Fenosa LNG plant located in Damietta. Contrack International benefited significantly from the reconstruction work undertaken in the region and was awarded a multi-year contract to provide design-build construction services for a variety of humanitarian related projects in Afghanistan. We are also immensely proud of their outstanding performance on the prestigious Weill Cornell Medical College in Qatar. Revenue from our Cement Group grew by 31% and reached LE 1.2 billion, contributing 25% of total revenue. Egyptian Cement Company benefited from a rebound in local cement prices and robust demand for cement exports in the Middle East, Africa and the United States. During the year, Egyptian Cement Company maintained an EBITDA margin of 53% and successfully exported 2.1 million tons of cement to 24 different countries. Algerian Cement Company dispatched its first bag of cement in September marking the successful launch of its early cement program. Construction work on the kiln is well ahead of schedule and is expected to be completed in February 2004.

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Orascom Construction Industries Annual Report 2003

Nassef Sawiris Chief Executive Officer

Revenue from our Concessions Group and other building materials businesses grew by 25% and reached LE 507 million, contributing 10% of total revenue. Egyptian Container Handling Company transferred the majority of its stevedoring operations from the Adabiya port to the new Sokhna port which resulted in an 72% increase in revenue over last year. The Sokhna port received a total of 176 vessels and handled more than 148 thousand container TEUs and 1.2 million tons of bulk cargo. National Steel Fabrication produced a record 30,507 tons of fabricated steel products, 44% of which was exported to customers in six different countries. National Bag Company increased net income by 80% due to strong demand, higher production and improved margins. During the year, OCI acquired a 50% stake in Algerian bag producer Groupe Mehsas through a Euro 2.15 million capital increase. The investment is expected to help ensure a stable supply of cement bags to Algerian Cement Company at a competitive cost. Business Strategies Reflecting on the past year, it is clear that our strategic decision to pursue regional growth opportunities has had the greatest financial impact on our company. Our managers and employees have proven that our successful business model in Egypt can be replicated in new markets. Our entry into the construction and cement markets in Algeria has been timely and rewarding. Algerian Cement Company should generate 25% of corporate earnings next year and income from our construction activities in Algeria may well exceed those from Egypt. Contrack International has also demonstrated their ability to undertake a diverse range of large scale projects in multiple foreign markets under difficult conditions while maintaining their standards for safety, quality and timely performance. It is also clear that our Cement Group will be the foundation of future earnings growth and provide significant and consistent cash flows for new corporate investments and dividends to shareholders. Our cement subsidiaries are widely recognized as efficient, low cost producers of high quality cement. By utilizing our construction capabilities to quickly develop new cement ventures at a significantly reduced investment cost, we have transformed our Cement Group into a leading regional producer and a respected global market competitor. We will continue to pursue a business strategy which focuses on expanding the productive capacity and geographical diversity of our cement operations. While all our business lines performed well during the year, the earnings growth from our infrastructure concessions and other building materials operations has become marginalized in comparison with our construction and cement operations. Although each of our concessions and other building materials operations has strategic value to the company as whole, this value has diminished as our operations have become more regional. Moving forward, our intention is to consolidate our business activities and divest these existing operations on favorable terms as market conditions may permit. Financial Condition To purse regional growth opportunities in the construction and cement markets, however, we must have a solid financial base. Our strong balance sheet and investment grade credit rating have enabled us to access lines of credit through regional and multinational financial institutions and obtain bid and performance bonding critical to our construction operations. Our

Orascom Construction Industries Annual Report 2003

03

our strategic decision to pursue regional growth opportunities has had the

greatest financial impact on our company

financial strength has enabled us to move quickly in response to market opportunities and marshal the resources necessary to undertake large, complex and demanding projects. And our strong cash position provides us with ample resources to fund internal growth, make selective acquisitions and pay dividends to shareholders. Our creditors have expressed their confidence in our business model and continue to support our growth. During the year, Algerian Cement Company finalized a US$ 156 million syndicated loan package arranged by Citigroup with participation from the International Finance Corporation (IFC), the European Investment Bank (EIB), Eksport Kredit Fonden (EkF) and Deutsche Investitions-und Entwicklungsgellschaft (DEG). Egyptian Cement Company completed its first corporate bond issuance totaling LE 1 billion and used the proceeds to retire its existing portfolio of medium and long-term bank loans. OCI also received shareholder approval for an LE 400 million corporate bond issuance which should be completed early next year. At year end, cash and cash equivalents stood at LE 917 million and the EBITDA interest cover ratio was 16. Corporate Governance In response to the managerial and accounting scandals in the United States and Europe, new standards for corporate governance and financial disclosure have been introduced by legislators and regulators to help restore investor confidence in the publicly traded companies listed on stock exchanges around the world. The Cairo and Alexandria Stock Exchanges have set new standards which affect our company and we have adopted new guidelines to ensure our continued compliance with all applicable laws and regulations. Under our new corporate governance guidelines, the Board of Directors has established three committees to provide oversight of audit, compensation, nominating and corporate governance issues. The Board of Directors has also published a code of business conduct and ethics which applies to all company employees including executive officers and senior financial managers. By taking these actions, the Board of Directors hopes to not only meet the corporate governance standards established by Egyptian regulators, but also those set by officials in the United States and the United Kingdom. We have always demanded that our auditors be independent, that our executives provide accurate and timely disclosure of material information to our shareholders, and that all our employees conduct their affairs professionally and ethically. As our company has grown, we have strengthened our internal controls and risk management systems to safeguard company assets and assure transparency in our financial accounts and transactions. During the year, the Board of Directors also chose to alter its composition in an effort to improve its performance. The Board of Directors accepted the resignation of Naguib Sawiris and Samih Sawiris and welcomed the appointment of three new independent non-executive members – Tarek Hatem, Alaa Sabaa and Mohamed Farouk Abdel Moneim. Dr. Tarek Hatem is a Professor of Strategic Management, International Business and Public Administration at the American University in Cairo. Mr. Alaa Sabaa is the Managing Director of Beltone Asset Management and was formerly the Managing Director of Asset Management at EFG-Hermes. Mr. Mohamed Abdel Moneim is the Chief Executive Officer of Mobica. The Board of Directors also welcomed the appointment of Karim Camel-Toueg, President of Contrack International, as an executive member. Our new members have demonstrated outstanding leadership skills in their respective fields and bring a broad range of experience and financial expertise to our Board.

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Orascom Construction Industries Annual Report 2003

our strong cash position provides us with ample resources to fund

internal growth, make selective acquisitions and pay dividends to shareholders

Future Outlook Based on an improved outlook for the local Algerian cement market, we intend to move forward with our plan to construct a second production line at Algerian Cement Company increasing total plant production capacity to 4.4 million tons of cement annually. The total investment cost of the second production line is estimated at US$ 187 million. The Algerian Investment Authority has already approved an incentive package for the second production line which includes a 10 year tax holiday from the start of operations. We are closely monitoring events in the region and looking for opportunities where we can put our technical, financial and human resources to work. In addition to our existing operations in Egypt, Algeria and Qatar, we believe that the economic and political environment in Iraq will ultimately improve over time and present our company with tremendous opportunities both as a contractor and cement producer. Preparations have been made to position manpower and equipment resources in Iraq in expectation of a lengthy reconstruction program. We intend to utilize the proceeds of our LE 400 million corporate bond issuance in the coming months to strengthen our position as a leading contractor and cement manufacturer in the region. We believe our financial strength will enable us to react quickly to new opportunities, better serve the needs of our customers and safeguard our competitive advantage in our markets. By working with our customers to build a better future, we expect to deliver sustainable long-term growth and generate attractive returns for shareholders.

Onsi Sawiris Chairman

Nassef Sawiris Chief Executive Officer

Orascom Construction Industries Annual Report 2003

05

Union Fenosa LNG Storage Tanks, Damietta, Egypt

06

Orascom Construction Industries Annual Report 2003

construction

operating with the highest service standards The OCI Construction Group provides engineering, procurement and construction services on industrial, commercial, infrastructure and railway projects for public and private customers in the Middle East and North Africa. Our Construction Group targets large, complex and demanding projects which require internationally accepted quality and safety standards. During the year, our Construction Group secured a record LE 3.3 billion in new work principally in Algeria and Afghanistan. At year end, our Construction Group was involved in 42 projects located in 11 countries worth a total value of LE 10 billion and the value of unbilled work in backlog was LE 2.4 billion, a 4% increase over last year. Our Construction Group continued to receive repeat orders from satisfied customers and secure large contracts working in partnership with other leading regional and multinational contractors.

and hydropower plant for the Egyptian Ministry of Water Resources and Irrigation. OCI was awarded several new projects including offsite utilities work for the Nubaria power plant in Egypt and the civil work on a 1200MW power plant in Kuwait.

During the year, Orascom Construction Industries (OCI) completed work on the five-star JW Marriott Hotel Mirage City, a new call centre and headquarters building for Egypt Telecom, the liquefied natural gas storage tanks and offshore jetty for the Union Fenosa LNG plant, a cement production line for Cimpor, and a new passenger terminal for the Cairo Airport Authority. OCI and its consortium partners made progress on the construction of the Nagaa Hamadi barrage

Cementech Limited provided procurement and engineering services to the F.L.Smidth/OCI consortium undertaking the construction of the first production line at Algerian Cement Company as well as procurement and erection work for a new cement plant in Libya. Working together with OCI, Cementech has built ten cement production lines in the last eight years making it one of the most experienced cement plant contractors in the world.

Contrack International (CII) completed construction work on the Weill Cornell Medical College in Qatar, infrastructure and utilities work on the Education City in Qatar, upgrade work on the American Embassy in Algeria, a water supply project in Palestine, as well as construction work on various government projects in Egypt, Qatar, Bahrain and Uzbekistan. CII was awarded a large multi year contract by the US Government to provide designbuild construction services for a variety of humanitarian related projects in Afghanistan. CII also received several contracts for construction services in Qatar, Bahrain and Iraq.

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07

case study:

Weill Cornell Medical College In April 2002, a Contrack International/Darwish joint venture signed a contract valued at US$ 71 million to perform the civil and electro-mechanical work as well as medical equipment procurement for the new Weill Cornell Medical College facilities in Doha, Qatar. The new medical college is a joint development between Cornell University of the Untied States and the Qatar Foundation for Education, Science and Community Development, a charitable foundation established by Shiekh Hamad Bin Khalfia Al-Thani, Qatar’s Emir and head of state. The Weill Cornell Medical College in Qatar is the first branch of an American medical school ever established overseas and is the centrepiece of the Qatar Foundation’s Education City, an integrated educational community providing academic excellence for the region. The new college was designed by renowned Japanese architect Arata Isozaki and consists of a two-story building split into two wings with connecting bridges at the mezzanine level. The building itself is huge, covering 33,000 square meters and spanning the length of two football fields. The north wing accommodates extensive teaching space while the south wing houses administration and faculty offices as well as research laboratories. In a central courtyard, four geodesic lecture halls rise above the ground on stilts and give the building its unique character. In the shape of an icosahedron (20 sides), a dodecahedron (12 sides) and two artistic ovoids, the lecture halls are truly an architectural marvel. All the exterior and interior walls of the building incorporate modern interpretations of Arab-Islamic geometric patterns, and the building structure includes double wall and double roof systems to insulate against the heat. To completed the project, the Contrack International team employed 2,700 workers, used 4 tower cranes and poured a total of 55,000 cubic meters of concrete, the equivalent of a 60-story high rise building. Contrack International Vice President, Imad Arrabi commented “our client wanted the building complete in just 14 months. Bearing in mind that most of the equipment and material had to be imported and that the work had to be performed to the highest quality standards, the scale of the challenge becomes clear. Our team worked around the clock to ensure the completion of this prestigious project on time.”

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Orascom Construction Industries Annual Report 2003

“My first impression is that it’s really breathtaking. It’s so gigantic and spectacular in its architectural design and its structure that it’s impossible to appreciate it from the photographs I’ve seen.” Dr Antonio M Grotto Dean of Weill Cornell Medical College, New York

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09

cement investment in

state-of-the-art technology produces quality products

The OCI Cement Group owns and operates cement manufacturing plants in Egypt and Algeria with a combined regional production capacity of 9.5 million tons of cement annually. Our cement subsidiaries are widely recognized as efficient, low cost and environmentally friendly producers of high quality cement. During the year, our cement operations benefited from a rebound in product prices and higher regional demand due to increased construction activity in the Middle East, positive economic trends in Algeria, and generally higher shipping rates and commodity prices worldwide. Egyptian Cement Company (ECC) operates four dry process production lines which have a total plant production capacity of 7.3 million tons of cement annually. ECC is the single largest cement producer in the Egyptian market and the third largest cement plant in the world. During the year, total cement consumption in Egypt decreased by 6% to 25.7 million tons, total cement dispatches from local producers increased by 3% to 29.1 million tons, and cement exports increased by 94% to 7.9 million tons. During the year, ECC sold 4.8 million tons of cement locally, a decrease of 3% from last year, and captured a 19% share of the market. ECC exported 2.1 million tons of cement, an increase of 202% over last year, to 24 different countries including the United States. While maintaining its

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Orascom Construction Industries Annual Report 2003

position as a dominant market player and the lowest cost producer in Egypt, ECC has emerged as a leading cement exporter and preferred supplier in the region. Algerian Cement Company (ACC) is the first privately owned cement company in Algeria and is the single largest foreign investment in the country outside the petrochemical industry. Construction work on its first production line capable of producing 2.2 million tons of cement annually is nearly five months ahead of schedule and is now expected to be completed in February 2004, only 22 months from the start of construction. The construction work is being undertaken at a world record pace by an F.L.Smidth/OCI consortium which has mobilized nearly 3,000 Algerian and Egyptian workers on site. Under its early cement program, ACC began producing cement by grinding imported clinker and dispatched its first bag of cement on 17 September 2003. By year end, ACC had sold 192,830 tons of cement and had captured a 10% average daily market share. ACC has established relationships with 37 distributors covering 11 out the 48 provinces in Algeria. During the year, total cement consumption in Algeria increased by 1% to 10.6 million tons, total cement dispatches from local producers decreased by 6% to 8.2 million tons, and cement imports increased by 32% to 2.4 million tons.

Egyptian Cement Company, Suez, Egypt

Orascom Construction Industries Annual Report 2003

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case study:

Algerian Cement Company “This investment will benefit Algeria’s infrastructure development and construction efforts, which are critical to the overall development of the country.” Sami Haddad IFC Regional Director

In 1998, the Algerian Government began restructuring its cement industry in preparation for a privatization program by transferring ownership of all 12 existing cement plants to 4 regional state-owned cement companies. The Algerian cement plants had a combined production capacity of 11.5 million tons annually, but dispatched only 8 million tons during the year due to chronic plant inefficiencies. Demand for cement in Algeria rose to 9 million tons in 1999, a 12% increase over 1998, with the 1 million ton deficit filled by cement imports. Having witnessed a similar progression of events in Egypt, OCI seized the opportunity to become the first private sector participant in the Algerian cement market and began negotiations with Algerian Government officials to form Algerian Cement Company (ACC) in early 2000. Realizing the uncertainties of open competition against other global cement companies in the privatization program, OCI proposed that ACC would simultaneously develop a

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Orascom Construction Industries Annual Report 2003

greenfield cement plant with a production capacity designed to reduce Algeria’s need for imported cement. OCI managers met regularly with Algerian Government officials over the next 18 months to finalize an initial framework of concessions from the Algerian Government and agree on an appropriate location for the greenfield plant. In late 2001, OCI received its final regulatory approval to proceed with the construction of the new ACC plant in M’sila, located 250 km southeast of Algiers. Within weeks, an ACC management team was formed, local contractors were hired to begin the necessary infrastructure work to deliver power, water and natural gas to the site, quotations were requested from plant equipment manufacturers, and Citibank was retained as the lead arranger for a US$ 156 million syndicated loan package needed to finance the planned US$ 260 million total investment cost. In March 2002, ACC signed contracts with an F.L.Smidth/OCI consortium to supply and construct a cement plant with a production capacity of 2.2

million tons. Construction work began immediately and progressed smoothly throughout the year. In December 2002, ACC signed a loan agreement with local and multinational lenders including the International Finance Corporation (IFC) and European Investment Bank (EIB). On 17 September 2003, ACC celebrated the successful launch of its early cement program and dispatched its first bag of cement produced from grinding imported clinker. The early cement program allows ACC to establish its product in the local market at the earliest possible date and generates positive cash flow for the company prior to the completion of the main production line. By year end, ACC had sold 192,830 tons of cement and captured a 10% average daily market share. Construction work on the main production line is expected to be completed in February 2004, nearly five months ahead of schedule and only 22 months from the start of construction.

Orascom Construction Industries Annual Report 2003

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concessions

opening doors to a better way of life The OCI Concessions Group participates as an equity investor in long-term infrastructure concessions including port operations, industrial parks and natural gas distribution systems. Our Concessions Group seeks to participate in ventures throughout the region which have the potential to utilize construction services and building materials from other OCI companies. During the year, our Concessions Group did not participate in any new ventures, but continues to pursue the development of a new fertilizer project in the Sokhna area. Egyptian Container Handling Company (ECHCO) operates the Adabiya port and newly built Sokhna port facilities located along the northwestern coast of the Gulf of Suez. During the year, ECHCO completed the transfer of the stevedoring operations for the Adabiya port to the Sokhna port. Since the Sokhna port has better facilities and infrastructure, ECHCO management choose to consolidate its operations and reoute all vessels to the new port. The Sokhna port offers four dedicated terminals for handling containers, general and roll-on roll-off (RORO) cargo, dry bulk cargo and fertilizer. During the year, ECHCO received 176 vessels and handled more than 148 thousand container TEUs and 1.2 million tons of bulk cargo, an increase of 72% and 262% over last year.

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Orascom Construction Industries Annual Report 2003

The Suez Industrial Development Company (SIDC) owns and operates an industrial park on 8.5 million square meters of land in the northwest Gulf of Suez special economic zone. SIDC currently has an inventory of approximately 4.2 million square meters of developed industrial land ready for occupancy. During the year, SIDC completed only one sale for a 25,000 square meter plot for LE 1.75 million to an Egyptian tenant which intends construct a plant for manufacturing high-voltage transmission cables. SIDC also received a LE 1.2 million contract from Egyptian Fertilizer Company to upgrade utilities and other infrastructure on its plot in preparation for their planned expansion program. The Nile Valley Gas Company (NVGC) operates natural gas transportation and distribution infrastructure in the southern half of Egypt under an exclusive 25 year franchise agreement with the Egyptian General Petroleum Company. During the year, NVGC sold a record 290 million cubic meters of natural gas, a 100% increase over last year. NVGC also connected 1,243 new households and 26 commercial users to its distribution network during the year and now has a total customer base of 17,493 households, 146 commercial users, and 9 industrial users primarily in the Beni Suef area.

other businesses innovative

partnering with the right businesses

OCI has several other investments in building materials manufacturers which produce basic and specialised products for contractors and industrial users, such as ready mix concrete, concrete blocks, paper bags, fabricated steel, gypsum, plaster, construction chemicals, architectural glass, concrete pipes, and paint. OCI works with the management of each of its building materials businesses to develop a sustainable competitive advantage in their markets by creating strong brand identities, efficient channels of distribution and manufacturing economies of scale. During the year, OCI acquired a 50% stake in Algerian bag producer Groupe Mehsas through a Euro 2.15 million capital increase. The investment is expected to help ensure a stable supply of cement bags to Algerian Cement Company (ACC) at a competitive cost. After a review of possible options including the establishment of a greenfield bag producer, formation of an Algerian subsidiary of National Bag Company (NBC), and captive in-house bag production at ACC, the investment decision was made to form a strategic partnership with Groupe Mehsas. In addition to their modern production equipment, Groupe Mehsas has a skilled labour force, a strong management team and a track record of profitability. The partnership is expected to not only generate tangible financial results, but also improve relations with the local community.

The star performer of 2003 was National Steel Fabrication (NSF). The devaluation of the Egyptian Pound early in the year reduced local production costs at NSF allowing them to be more competitive on export orders throughout the region. Higher shipping rates globally and higher demand for fabricated steel products in Asia also improved the competitiveness of NSF in the region. NSF provides a complete range of steel fabrication services including cutting, drilling, bending, welding, sand blasting and painting primarily for customers in the petroleum and construction industries. During the year, NSF produced a record 30,507 tons of fabricated steel products, 44% of which was exported to customers in six different countries. All of our other building materials businesses performed well during the year. Ready Mix Egypt sold 240,456 cubic meters of concrete, a 18% increase over last year, and supplied several major projects including the Nagaa Hammadi dam and Union Fenosa LNG plant. National Bag Company produced a record 156.2 millions bags, a 13% increase over last year. United Paints & Chemicals returned to profitability due to the outstanding performance at Egyptian Gypsum Company. National Pipe Company delivered a record quantity of concrete water and sewage pipes during the year and has a strong backlog of orders.

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Corporate Governance

Orascom Construction Industries SAE is committed to the principles of good corporate governance and has adopted corporate governance guidelines in compliance with applicable laws and stock exchange regulations. The Board of Directors (“Board”) believes that good corporate governance practices align the interests of management and shareholders thereby maximizing the profitability and long-term value of the company for shareholders.

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Orascom Construction Industries Annual Report 2003

Corporate Governance

Orascom Construction Industries SAE is committed to the principles of good corporate governance and has adopted corporate governance guidelines in compliance with applicable laws and stock exchange regulations. The Board of Directors (“Board”) believes that good corporate governance practices align the interests of management and shareholders thereby maximizing the profitability and long-term value of the company for shareholders.

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Orascom Construction Industries Annual Report 2003

Corporate Governance

Orascom Construction Industries SAE is subject to the disclosure rules and the new listing rules set by the Cairo and Alexandria Stock Exchanges (“CASE”) and approved by the Egyptian Capital Markets Authority on 18 June 2002. The Company has been in compliance with the corporate governance, financial reporting and disclosure provisions of the CASE listing rules throughout the year ended 31 December 2003. The US Securities and Exchange Commission (“SEC”) approved CASE as “designated offshore securities markets” within the meaning of rule 902(b) under Regulation S of the US Securities Act of 1933 on 16 April 2003. The Global Depositary Receipts of the Company are listed on the London Stock Exchange (“LSE”) and the Company is therefore subject to the rules of the LSE as well as the rules of the United Kingdom Listing Authority (“UKLA”) and the Financial Services Authority (“FSA”). The Company has been in compliance with its continuing obligations under the UKLA Listing Rules throughout the year ended 31 December 2003. In July 2003, the revised Combined Code on Corporate Governance (“Combined Code”) was issued and the FSA and the UKLA have determined that the revised Combined Code will apply for reporting years beginning on or after 1 November 2003. UKLA listing rules require that companies incorporated in the United Kingdom include in their annual report and accounts an additional disclosure statement in relation to how the company applies the principles in Section 1 of the Combined Code and an explanation of any non-compliance. As an overseas company with a secondary listing by the UKLA, the Company is not required to present this additional disclosure statement. The shares and global depositary receipts of the Company are not registered under the US Securities Act of 1933 and the Company is not subject to US securities laws or the rules and listing standards of the SEC or the New York Stock Exchange (“NYSE”). In July 2002, the US Government passed the SarbanesOxley Act which has introduced a number of changes to the corporate governance, disclosure and reporting requirements of US domestic and non-US registered issuers. The Sarbanes-Oxley Act codifies the view that company management should be aware of material information that is filed with regulatory authorities and released to investors, and should be held accountable for the fairness, thoroughness and accuracy of that information. In November 2003, the NYSE issued new corporate governance rules for listed companies which were approved by the SEC. The corporate governance rules issued by the NYSE allow certain exemptions for foreign private issuers and controlled companies. The Company is not required to comply with the provisions of the Sarbanes-Oxley Act or the NYSE corporate governance rules. The Board continues to monitor developments in corporate governance and the actions taken by regulators worldwide to improve financial reporting and disclosure. The Board has reviewed the recent changes in applicable securities laws and stock exchange regulations and has concluded that the Company is in compliance with all those provisions which are currently in force. In addition, the Board has chosen to make the following voluntary disclosure to assist shareholders in their evaluation of the corporate governance practices of the Company. Board of Directors At the Annual General Meeting held on 29 April 2003, shareholders approved the appointment of four new directors

and accepted the resignation of two existing directors. Naguib Sawiris and Samih Sawiris resigned as non-executive directors. Karim Camel-Toueg, President of Contrack International, was appointed as an executive director, and Alaa Sabaa, Tarek Hatem and Mohamed Farouk Abdel Moneim were appointed as nonexecutive directors. The Board now consists of nine directors. Three of the directors are non-executive. The Board maintains an orientation program for new directors. The new directors have attended the orientation program which included briefings by senior management to familiarize them with the Company’s strategic plans, financial statements and key policies and practices. The Board maintains a continuing education program for all directors to assist them in carrying out their duties and responsibilities. The Board has reviewed the status of all the non-executive directors and has determined that they are to be regarded as independent. The Board has adopted a definition of “independent” which complies with the provisions set out in the Combined Code and Section 303A.02 of the NYSE listing rules. The process and criteria used by the Board to determine the independence of each director is detailed in the Corporate Governance Guidelines of the Company. The non-executive directors are encouraged to meet privately in regular executive sessions without management participation during the year. The non-executive directors have elected Alaa Sabaa to serve as the senior independent director and lead non-management director. The Board met six times during the year. The Board has a formal schedule of matters reserved to them for decision which includes approval of the long-term strategic objectives and business plans of management, major corporate transactions including significant capital allocations and expenditures, and compensation of the chief executive officer and executive officers of Company. All board meetings during the year were attended by the full board. The directors were given appropriate documentation in advance of each board meeting. All directors have had access to the services of the company secretary and have been empowered to seek independent professional advice at the Company’s expense. Corporate Governance Guidelines The Board has adopted Corporate Governance Guidelines (“Guidelines”) to provide a framework for the effective governance of the Company in an effort to enhance long-term shareholder value. The Guidelines address several key governance issues and principles including board responsibilities, director qualifications, director responsibilities, board structure and operations, board committees, executive sessions, access to management and independent advisors, director compensation, director orientation and continuing education, management evaluation and succession, board performance evaluation, and relations with shareholders. The Guidelines are publicly available from the Company’s website www.orascomci.com and a copy may be requested by shareholders from the Company’s investor relations officers. The Board believes the Guidelines adopted generally comply with the provisions set out in the Combined Code and Section 303A of the NYSE listing rules. Board Committees The Board has established three committees to assist it in discharging its oversight responsibilities: Audit, Compensation, and Nominating and Corporate Governance. The purpose and

Orascom Construction Industries Annual Report 2003

17

Corporate Governance

responsibilities of each committee are described in their respective charters. Members of the committees meet the independence and experience requirements to the extent required under applicable securities laws and stock exchange regulations. Committee members have access to the services of the company secretary and have been empowered to seek independent professional advice at the Company’s expense. The Audit Committee consists of three independent nonexecutive directors and is chaired by Alaa Sabaa. The Board has determined that Alaa Sabaa has recent and relevant financial experience and shall be regarded as the audit committee financial expert. The Audit Committee met six times during the year. The primary purpose of the Audit Committee is to (a) to assist the Board in its oversight of (i) the integrity of the Company’s financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence, and (iv) the performance of the Company’s internal audit function and independent auditors, and (b) to prepare and publish an annual Committee report and such other reports to the extent required under any applicable securities laws and stock exchange regulations. The role and responsibilities of the Audit Committee are set out in written terms of reference, the Audit Committee Charter, and includes the appointment, compensation and retention of the independent auditor, review of the Company’s interim and annual financial statements with management and the independent auditor, and review of the Company’s internal control and risk management systems. The Compensation Committee consists of three directors and is chaired by Onsi Sawiris. The Compensation Committee met four times during the year. The primary purpose of the Compensation Committee is (a) to assist the Board in its oversight of all matters relating to director and executive officer compensation and (b) to prepare and publish an annual Committee report on director and executive compensation and such other reports to the extent required under any applicable securities laws and stock exchange regulations. The role and responsibilities of the Compensation Committee are set out in written terms of reference, the Compensation Committee Charter, and includes the review, evaluation and approval of director and executive officer compensation, incentive-compensation plans and equity-based plans. In determining the compensation of the directors and executive officers of the Company, the Compensation Committee considers the Company’s performance and relative shareholder return, the compensation level of directors and executive officers at comparable companies, and the compensation of the directors and executive officers in past years. No director is solely involved in deciding their own compensation. Executive officers do not receive additional compensation for their service as an executive director. Non-executive directors receive an annual stipend. There is no potential dilution from stock options outstanding or available for grant under the employee stock ownership plan of the Company. The Nominating and Corporate Governance Committee consists of three directors and is chaired by Onsi Sawiris. The Nominating and Corporate Governance Committee met four times during the year. The primary purpose of the Nominating and Corporate Governance Committee is to assist the Board in (a) identifying individuals qualified to become Board members and recommending to the Board the director nominees for the next annual meeting of shareholders, (b) recommending to the Board director nominees for each committee of the Board, (c)

18

Orascom Construction Industries Annual Report 2003

developing and recommending to the Board a set of corporate governance guidelines applicable to the Company, (d) overseeing the evaluation of the Board and management, and (e) preparing and publishing an annual Committee report on corporate governance and such other reports to the extent required under any applicable securities laws and stock exchange regulations. The role and responsibilities of the Nominating and Corporate Governance Committee are set out in written terms of reference, the Nominating and Corporate Governance Committee Charter, and includes determining on an annual basis the independence of each director as may be required under any applicable securities laws and stock exchange regulations, the compliance of each director and executive officer with the Company’s code of business conduct and ethics, and such other activities as the Board may assign to the committee from time to time. Internal Control and Risk Management The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company, that the process has been in place for the year under review and up to the date of approval of the annual report and accounts, that the process is regularly reviewed by the Board and accords with the Turnbell Guidance on internal control contained in the Combined Code. The Company maintains a sound system of internal controls and risk management which is embedded in its operations, is capable of responding quickly to evolving risks to the business arising from factors with the company and to changes in the business environment, and includes procedures for reporting immediately to appropriate levels of management any significant control weaknesses that are identified together with corrective action being undertaken. The Company’s system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The business of the Company is conducted by its employees, managers and executive officers, under the direction of the chief executive officer and the oversight of the Board, to enhance the long-term value of the Company for its shareholders. The Board is elected by shareholders to oversee and counsel management. The Board acknowledges that it is responsible for the Company’s system of internal controls and for reviewing its effectiveness to safeguard shareholders’ investment and the Company’s assets. The Audit Committee of the Board reviews the Company’s internal control and risk management systems, monitors the effectiveness of the Company’s internal audit function, identifies matters in respect of which it considers that action or improvement is needed, and makes recommendations to the Board as to the steps to be taken. The Audit Committee relies on periodic reports from the Company’s executive officers, senior financial managers, internal audit staff, and external auditors to obtain reasonable assurance that appropriate controls are in place and functioning effectively. The Chief Executive Officer and Chief Financial Officer are responsible for the day-to-day control of the Company’s operations and for the design of internal control and risk management systems. These executive officers are held responsible for the disclosure of all significant deficiencies and materials weaknesses in the internal control over financial reporting and any fraud, whether or not material, which involves management to the Audit Committee and external auditors.

Corporate Governance

These executive officers also are held responsible for the preparation and integrity of the Company’s published financial statements which shall fairly present in all materials respects the financial condition and results of operations of the Company.

director at the principal office of the Company. The senior independent director will notify the Board or the chairperson of the relevant committee of the Board regarding those matters that are appropriate for further action or discussion.

Code of Business Conduct and Ethics The Board has adopted a Code of Business Conduct and Ethics which contains the policies that relate to the legal and ethical standards of conduct that the directors, executive officers and employees of the Company are expected to comply with while carrying out their duties and responsibilities on behalf of the Company.

Going Concern After making enquires, the directors have formed a judgment, at the time of approving the accounts, that there is a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the accounts.

This Code is intended to focus the Board and management on areas of ethical risk, provide guidance to personnel to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and help to foster a culture of honesty and accountability. No code or policy can anticipate every situation that may arise. The Company expects each director, executive officer and employee to act with honesty and integrity, to exercise independent professional judgement and to deter wrongdoing in the conduct of all duties and responsibilities on behalf of the Company. Relations with Shareholders The Board believes that communication with shareholders, institutional investors, the financial community, the media, and other third parties is best handled by the Chief Executive Officer and designated management representatives of the Company. The Company operates a structured program of investor relations, based on formal announcements and publications relating to significant events and financial results, in compliance with applicable securities laws and stock exchange regulations. To ensure fair disclosure to all stakeholders at the same time, the Company refrains from disclosing any information specifically designated to financial analysts, financial institutions or other parties before disclosing the information to the market as a whole. Directors, executive officers and employees are required to maintain the confidentiality of information entrusted to them by the Company or its customers, except when disclosure is authorized or legally mandated. The Company has appointed Ashraf Abdel Momen and Hassan Badrawi as its main Investor Relations Officers whose responsibility is to provide information and answer queries of stock exchange officials, shareholders and institutional investors. Information about the Company including interim and full year financial results and other major announcements is also published on the Company’s website www.orascomci.com. The Chairman of the Board, Chief Executive Officer, senior independent director and other authorized directors and investor relations personnel do maintain a dialogue with representatives of institutional and other shareholders regarding long-term business strategies, financial performance and corporate governance in order to establish a mutual understanding of objectives. The annual general meeting also provides an opportunity for individual shareholders to meet and communicate with the Board to develop a better understanding of the Company’s operations and prospects. All directors are expected to attend the annual general meeting absent exceptional cause. Shareholders who wish to communicate with the Board may correspond in writing with the senior independent

Orascom Construction Industries Annual Report 2003

19

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the audited consolidated financial statements of Orascom Construction Industries SAE (OCI) for the years ended 31 December 2003, 2002 and 2001. These consolidated financial statements have been prepared in accordance with Egyptian Accounting Standards (EAS), which are not materially different from International Accounting Standards (IAS), except as indicated.

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Orascom Construction Industries Annual Report 2003

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview Orascom Construction Industries (OCI) ranks among Egypt’s largest private-sector businesses and is active in construction services, cement manufacturing and infrastructure concessions. The Company operates primarily as a construction company with the production and sale of cement as a significant segment of operations. The Company is organized into three operating groups: the Construction Group, the Cement Group, and the Concessions and Other Building Materials Group. The Company generates revenue primarily from the sale of construction services and cement. The primary expenses of the Company include direct materials used in construction, raw materials, power and fuel consumed in cement production, and labor costs. The major factors which have had, and are expected to continue to have, a significant impact on the results of operations and financial condition of the Company are: (i) the demand for construction services on large commercial, industrial and infrastructure projects in the geographical markets served; (ii) local and international cement prices; (iii) foreign currency exchange rates; and (iv) the amount of tax liability. Demand for construction services on large projects is affected by changes in the general state of economic activities, foreign direct investment flows, foreign aid flows, and government investment incentives. The timing of awards of major construction projects can result in significant fluctuations in the Company’s revenues and earnings between periods. Cement is essentially a commodity product with variable market prices affected by local and international changes in consumption and production levels as well as the degree of competitive rivalry among producers. Since the Company has and expects to continue to derive a substantial portion of its revenues and earnings from the sale of cement, higher market prices will significantly improve the financial performance of the Company. A significant proportion of the Company’s revenue is denominated in foreign currency while the majority of its operating expenses are in local currency. To a lesser extent, a proportion of the Company’s debt is in foreign currency. Significant decreases in the exchange rate of the Egyptian Pound against other currencies therefore can have a materially positive effect on the reported and actual financial performance of the Company. The Company is subject to foreign currency exchange rate risk relating to the timing of receipts from customers and payments to suppliers and lenders in foreign currencies. The Company manages its foreign exchange risk on a consolidated basis by matching its foreign currency-denominated liabilities (primarily facilities granted to OCI and ACC) with continuing sources of foreign currencies (primarily customer payments on construction contracts undertaken by OCI and its subsidiaries). The Company has been and expects to continue to be entitled to certain tax benefits under Egyptian tax law. As a benefit of listing on the Cairo & Alexandria Stock Exchange (CASE), the Company is entitled to receive a tax deduction equivalent to the average discount rate of the Central Bank of Egypt (CBE) in a given year multiplied by its paid-in capital. Other significant deductions from taxable income include 90% of interest income on Egyptian Pound deposits, 100% of investment income received from a tax-exempt entity, and 90% of investment income received from a taxable

entity. In addition, substantially all of the Company’s subsidiaries in Egypt and Algeria have received a tax holiday ranging from five to ten years, most notably the ten-year tax holiday received by ECC and ACC. The expansion plans of the Construction Group and the Cement Group are likely to have important implications for the operations of the Company. The Construction Group continues to expand into new regional markets and secured LE 3.3 billion in new work during 2003, principally in Algeria and Afghanistan. The Cement Group intends to construct a second production line at Algerian Cement Company which is expected to have a total investment cost of approximately US$187 million. Both Algeria and Afghanistan have been affected by violent civil strife, political instability and a volitile economy in the past and the reoccurrence of any of these evente in the future could have a materially adverse effect on the Company’s financial condition, results of operations and business.

Principal Accounting Policies Revenue Recognition Revenue from construction contracts is recognized in the statement of income under the percentage of completion method of accounting. Under the percentage of completion method of accounting, an estimated percentage of completion of each contract, determined by the percentage of cost incurred at the end of each accounting period (including interim accounting periods), as compared to estimated total cost of the contract, as determined by the Company’s engineers, is applied to the estimated total revenue. As compared to the completed contract method, the percentage of completion method of accounting allows for a better matching of contract costs and revenues and a more accurate allocation of revenues to the accounting periods in which they are earned. In applying the percentage of completion method, the Company does not recognize the value of contract change orders until these have been formally agreed to in writing with the customer, even if the actual work requested is commenced prior to the execution of such written change order. Revenues from non-construction activities are recorded using the accrual basis of accounting. Construction Costs Construction project costs include all direct material, equipment, labor, subcontract and indirect costs related to contract performance, such as indirect labor, maintenance, and applicable administrative costs. Materials, labor and equipment provided by subcontractors or joint ventures are included in revenues and costs when management believes that the Company is responsible for the ultimate acceptability of the project. Changes in job performance, conditions, estimated profitability and final contract settlements may result in revisions to costs and revenue and are recognized in the period in which the facts requiring such revisions become known. Provisions for estimated losses on incomplete contracts are made in the period in which such losses are determined. Claims for additional contract revenue are recognized when realization is assured and the amount can reasonably be determined. Costs and estimated earnings in excess of billings on incomplete contracts are presented as construction projects in progress in the consolidated balance sheet.

Orascom Construction Industries Annual Report 2003

21

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Construction Joint Ventures Construction projects, which are performed by joint ventures, are accounted for under the proportionate consolidation method. Under this method, the Company’s separate financial statements include its pro rata interest in the assets, liabilities, revenues and expenses of joint ventures through consolidation of these items on an item-by-item basis in the financial statements of the Company. Agreements concluded between the Company and the other partner in every joint venture stipulate that each party should be jointly responsible for the activities of that venture. Acquisition of Subsidiaries The Company acquired a majority of its investments in subsidiaries and associated companies in August and September 1998, and accounts for the acquisition of subsidiaries in accordance with the purchase method of accounting. Elimination of Profit on Intra-group Construction The Company and its subsidiaries provide construction services for other subsidiaries within the Group. In accordance with EAS and IAS, the unrealized profit in constructing the fixed assets of the subsidiaries is deducted from income and from gross fixed assets upon consolidation in the financial statements of the Company. The cumulative profit deduction is added back to income in the form of a reduction in depreciation expense over the useful life of these assets as determined by their depreciation rates.

Impact of Inflation and Interest Rate Fluctuations

Differences Between EAS and IAS Finance Leases “EAS 20” requires that, with some exceptions, all leases should be accounted for as operating leases, and therefore annual lease payments by the lessee are charged to the income statement as rent expense. “IAS 17” requires that leases which transfer substantially the benefits and risks of ownership related to the leased properties from the lessor to the lessee should be accounted for as capital leases and therefore recorded as assets of the lessee, with the lease obligations included as a liability in the balance sheet. The application of IAS 17 instead of EAS 20 by one of the Company’s subsidiaries (ECC) resulted in the increase of the consolidated net income for the year ended 31 December 2003 by LE 10.0 million, compared to LE 7.5 million in 2002.

Years Ended 31 December 2003 and 2002 Revenue The Company’s consolidated operating revenue is comprised of sales by its Construction, Cement, and Concessions and Other Building Materials Groups. In 2003, the Company’s consolidated operating revenue increased by 51.3% to LE 4,403.1 million, as compared to LE 2,910.8 million in 2002. The table below sets forth the contribution to revenue by each of the Company’s operating groups. The “adjustments” below include the elimination of intra-group transactions, of which sales of building materials to the Construction Group and the Cement Group are the most significant transactions.

During the periods under review, the consolidated results of operations and financial position of the Company have not been materially affected by inflation or interest rate fluctuations.

Seasonality The Construction Group’s activities consist principally of major construction projects, which are not generally affected by seasonal demand fluctuations. In addition, because of Egypt’s generally warm and dry climate, the Group’s activity levels are not significantly affected by weather conditions. The timing of major religious holidays, including principally Ramadan, can have a material impact on activity levels and, consequently, the allocation of revenues and earnings between accounting periods. The time of year in which religious holidays take place will vary from year to year in accordance with the lunar calendar. The Cement Group’s activity levels are driven by seasonal demand fluctuations in the general construction and residential housing sectors. As a result, the Group’s sales are normally higher in the second and third quarter of each year. Demand for the other building materials may be subject to fluctuation, while the infrastructure concessions activities are not generally affected by seasonal fluctuations.

22

Orascom Construction Industries Annual Report 2003

Year ended 31 Dec 2003 LE millions %

Year ended 31 Dec 2002 LE millions %

Revenue Construction Cement Other Adjustments

3,208.8 64.7% 1,242.1 25.1% 506.5 10.2% (554.3)

1,784.2 56.9% 946.5 30.2% 405.5 12.9% (225.4)

79.8% 31.2% 24.9%

Total

4,403.1

2,910.8

51.3%

100%

100%

2003 vs. 2002 (%)

Revenue from the Construction Group increased by 79.8% to LE 3,208.8 million in 2003, as compared to LE 1,784.2 million in 2002. This substantial growth in sales is attributable to the expansion of international construction activities by OCI Algeria, Contrack International and Cementech. Changes in the foreign exchange rates had a positive impact on revenue received from international contracts. Revenue during the year was primarily from the following major construction contracts: Union Fenosa LNG storage tanks and marine facilities, Amreyah (Cimpor) cement plant, Nagaa Hammadi dam, ACC Line 1, Fayed airbase, Weill Cornell Medical College, Education City infrastructure works, and various reconstruction projects in Afganistan. In 2003, OCI itself contributed LE 1,108.8 million to total consolidated revenue, as compared to LE 984.9 million in 2002, representing 34.6% of the Construction Group’s revenue for the year, as compared to 56.7% in 2002.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Revenue from the Cement Group increased by 31.2% to LE 1,242.1 million in 2003, as compared to LE 946.5 million in 2002. This increase is attributable to sales growth at ECC resulting from higher export sales volumes and initial sales at ACC resulting from the successful launch of its early cement program. Growth in cement sales volumes at ECC offset a decrease in local market prices during the period. ECC represented 92.7% of the Cement Group’s revenue for the year, as compared to 100% in 2002.

The cost of goods sold and services for the Concessions and Other Building Materials Group increased by 28.7% to LE 386.0 million in 2003, as compared to LE 299.9 million in 2002. The cost of goods sold and services as a percentage of revenue increased to 76.2% for the year, as compared to 74.0% during 2002. The increase was attributable principally to the increase in raw material costs for several building materials subsidiaries. In 2003, depreciation and amortization expenses decreased to LE 21.7 million, as compared to LE 26.7 million in 2002.

Revenue from the Concessions and Other Building Materials Group increased by 24.9% to LE 506.5 million in 2003, as compared to LE 405.5 million in 2002. The increase is attributable to higher stevedoring revenue at ECHCO resulting from increased traffic at the Sokhna Port as well as higher sales revenue and production volumes at NSF and NBC.

Selling, General and Administrative Expenses In 2003, selling, general and administrative expenses increased by 56.3% to LE 225.9 million, as compared to LE 144.5 million in 2002. Selling, general and administrative expenses as a percentage of revenue increased to 5.1% in 2003, as compared to 5.0% in 2002. Selling, general and administrative expenses increased in proportion with revenue during the year.

Cost of Services and Goods Sold In 2003, the Company’s consolidated cost of services and goods sold increased by 48.4% to LE 3,193.5 million, as compared to LE 2,151.4 million in 2002. The cost of services and goods sold as a percentage of revenue decreased to 72.5% in 2003, as compared to 73.9% in 2002. Depreciation and amortization expenses are a significant component of the cost of services and goods sold. In 2003, depreciation and amortization expenses increased by 25.7% to LE 254.3 million, as compared to LE 202.3 million in 2002. The table below sets forth the cost of services and goods sold by each of the Company’s operating groups. The “adjustments” below include the elimination of intra-group transactions, of which building materials supplied to the Construction Group and the Cement Group are the most significant transactions. Year ended 31 Dec 2003 LE millions %

Year ended 31 Dec 2002 LE millions %

2003 vs. 2002 (%)

Cost of Services & Goods Sold Construction Cement Other Adjustments

2,661.6 70.3% 737.6 19.5% 386.0 10.2% (591.7)

1,507.8 64.2% 539.4 23.0% 299.9 12.8% (195.7)

76.5% 36.7% 28.7%

Total

3,193.5

2,151.4

48.4%

100%

100%

The cost of services for the Construction Group increased by 76.5% to LE 2,661.6 million in 2003, as compared to LE 1,507.8 million in 2002. The cost of services as a percentage of revenue decreased to 82.9% for the year, as compared to 84.5% during 2002. This decrease is due principally to the mix of projects undertaken during the year which included a higher proportion of industrial and infrastructure contracts that have higher gross profit margins. In 2003, depreciation and amortization expenses increased to LE 76.8 million, as compared to LE 55.0 million in 2002. The cost of cement sold for the Cement Group increased by 36.7% to LE 737.6 million in 2003, as compared to LE 539.4 million in 2002. The cost of cement sold as a percentage of revenue increased to 59.4% for the year, as compared to 57.0% during 2002. This increase was attributable principally to lower average sales prices at ECC on cement products sold locally during the year. In 2003, depreciation and amortization expenses increased to LE 154.5 million, as compared to LE 130.6 million in 2002.

Income from Operations In 2003, the Company’s consolidated income from operations increased by 60.3% to LE 945.2 million, as compared to LE 589.7 million in 2002. The Company’s operating margin increased to 21.5% in 2003, as compared to 20.3% in 2002. The table below sets forth the contribution to income from operations by each of the Company’s operating groups and the operating margin for each of the operating groups. Year ended 31 Dec 2003 LE millions %

Year ended 31 Dec 2002 LE millions %

Income from Operations Construction 500.0 – Operating margin Cement 384.6 – Operating margin Other 60.6 – Operating margin

52.9% 15.6% 40.7% 31.0% 6.4% 12.0%

180.1 30.5% 10.2% 385.5 65.4% 40.7% 24.1 4.1% 5.9%

Total

100%

589.7

945.2

2003 vs. 2002 (%)

177.6% -0.2% 151.5%

100%

60.3%

Income from operations for the Construction Group increased by 177.6% to LE 500.0 million in 2003, as compared to LE 180.1 million in 2002. The operating margin for the Construction Group increased to 15.6% in 2003, as compared to 10.2% in 2002. This increase is due principally to the mix of projects undertaken during the year which included a higher proportion of industrial and infrastructure contracts that have higher gross profit margins. Income from operations for the Cement Group decreased by 0.2% to LE 384.6 million in 2003, as compared to LE 385.5 million in 2002. The operating margin for the Cement Group decreased to 31.0% in 2003, as compared to 40.7% in 2002. This decrease was attributable principally to lower cement sales prices at ECC, increased depreciation expenses at ECC resulting from the first full year of operations for their fourth production line, and pre-operating expenses at ACC associated with the start-up of operations. Income from operations for the Concessions and Other Building Materials Group increased by 151.5% to LE 60.6 million in 2003, as compared to LE 24.1 million in 2002. The operating margin for the Group increased to 12.0% in 2003, as compared to 5.9% in 2002. This increase was attributable principally to the growth of stevedoring operations at the Sokhna port by ECHCO. Orascom Construction Industries Annual Report 2003

23

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Other Income and Expenses The Company’s consolidated net other income and expenses consists of income from investments, interest income, gain on foreign exchange, interest expense, eliminated profit on intra-group construction, and other income and expenses. In 2003, consolidated net other expenses decreased by 19.6% to LE 92.3 million, as compared to LE 114.8 million in 2002. Interest income decreased by 85.0% to LE 10.0 million (2002, LE 66.7 million). Interest expense decreased by 6.7% to LE 263.4 million (2002, LE 282.4 million). Some of the Company’s interest income and interest expense result from matching borrowings and time deposits, a practice that allows OCI to lower its effective tax rate.The gain on foreign currency exchange increased by 138.0% to LE 245.1 million, as compared to LE 103.0 million in 2002. The increase is principally due to the depreciation in the Egyptian Pound, as a significant portion of revenue is in foreign currencies. In accordance with EAS and IAS, deductions totaling LE 97.9 million have been made from income for the year to eliminate the intra-group profit from construction services rendered to ACC by OCI Algeria (2002, LE 0.4 million). Income Taxes The Company’s consolidated income tax expenses in 2003 amounted to LE 28.6 million, as compared to LE 9.0 million in 2002. The increase is attributed to higher taxable income resulting from the growth of OCI and CII construction activities. Minority Interests In 2003, net income of consolidated subsidiaries allocated to minority interests amounted to LE 266.0 million, as compared to LE 102.1 million in 2002. The increase is attributable principally to the minority interests allocated on two construction projects fully consolidated by CII during the period. Net Income As a result of the foregoing, the Company’s consolidated net income increased by 53.4% to LE 558.3 million in 2003, as compared to LE 363.9 million in 2002.

Years Ended 31 December 2002 and 2001 Revenue The Company’s consolidated operating revenue is comprised of sales by its Construction, Cement, and Concessions and Other Building Materials Groups. In 2002, consolidated operating revenue increased by 20.5% to LE 2,910.8 million, as compared to LE 2,414.7 million in 2001. The table below sets forth the contribution to revenue by each of the Company’s operating groups. The “adjustments” below include the elimination of intra-group transactions, of which sales of building materials to the Construction Group and the Cement Group are the most significant transactions.

Year ended 31 Dec 2002 LE millions %

Year ended 31 Dec 2001 LE millions %

Revenue Construction Cement Other Adjustments

1,784.2 56.9% 946.5 30.2% 405.5 12.9% (225.4)

1,421.3 54.8% 822.0 31.6% 352.1 13.6% (180.7)

25.5% 15.1% 15.2%

Total

2,910.8

2,414.7

20.5%

100%

100%

2002 vs. 2001 (%)

Revenue from the Construction Group increased by 25.5% to LE 1,784.2 million in 2002, as compared to LE 1,421.3 million in 2001. The growth in sales was partially attributable to changes in the foreign exchange rate which had a positive impact on revenue received from contracts denominated in foreign currency. Revenue during the year was primarily from the following major construction contracts: Golden Pyramids complex (Heliopolis Citystars), Nile City complex, Electricite de France’s Suez and Port Said power plants projects, ACC’s cement plant in Algeria, Fayed airbase, Weill Cornell Medical College project in Qatar, and the West Bank water supply project in Palestine. In 2002, OCI itself contributed LE 984.9 million to total consolidated revenue, as compared to LE 1,034.3 million in 2001. OCI represented 56.7% of the Group’s revenue for the year, as compared to 74.1% in 2001. Revenue from the Cement Group increased by 15.1% to LE 946.5 million in 2002, as compared to LE 822.0 million in 2001. This increase was attributable to sales growth at ECC reflecting a full year of operations for the fourth production line. Growth in cement sales volumes at ECC offset a decrease in local market prices. ECC represented 100.0% of the Cement Group’s revenue during the years 2002 and 2001. Revenue from the Concessions and Other Building Materials Group increased by 15.2% to LE 405.5 million in 2002, as compared to LE 352.1 million in 2001. This increase was attributable to increased revenues at most of the companies within the Group. The divestiture of SCIB operations did not have a significant impact on the Group’s activities. Cost of Services and Goods Sold In 2002, the Company’s consolidated cost of services and goods sold increased by 29.8% to LE 2,151.4 million, as compared to LE 1,657.2 million in 2001. The cost of services and goods sold as a percentage of revenue increased to 73.9% in 2002, as compared to 68.6% in 2001. Depreciation and amortization expenses are a significant component of the cost of services and goods sold. In 2002, depreciation and amortization expenses increased by 16.2% to LE 202.3 million, as compared to LE 174.1 million in 2001. The table below sets forth the cost of services and goods sold by each of the Company’s operating groups. The “adjustments” below include the elimination of intra-group transactions, of which building materials supplied to the Construction Group and the Cement Group are the most significant transactions.

24

Orascom Construction Industries Annual Report 2003

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Year ended 31 Dec 2002 LE millions %

Year ended 31 Dec 2001 LE millions %

Cost of Services & Goods Sold Construction Cement Other Adjustments

1,507.8 64.2% 539.4 23.0% 299.9 12.8% (195.7)

1,127.3 61.8% 433.8 23.8% 262.7 14.4% (166.6)

33.7% 24.3% 14.2%

Total

2,151.4

1,657.2

29.8%

100%

100%

Year ended 31 Dec 2002 LE millions %

2002 vs. 2001 (%)

The cost of services for the Construction Group increased by 33.7% to LE1,507.8 million in 2002, as compared to LE 1,127.3 million in 2001. The cost of services as a percentage of revenue increased to 84.5% for the year, as compared to 79.3% during 2001. The increase was due principally to a lower proportion of industrial projects executed during the year. In 2002, depreciation and amortization expenses decreased to LE 55.0 million, as compared to LE 56.5 million in 2001. The cost of goods sold for the Cement Group increased by 24.3% to LE 539.4 million in 2002, as compared to LE 433.8 million in 2001. The cost of cement sold as a percentage of revenue increased to 57.0% for the year, as compared to 52.8% during 2001. The increase was attributable principally to higher depreciation during the year. In 2003, depreciation and amortization expenses increased to LE 130.6 million, as compared to LE 98.2 million in 2001. The increase was attributable principally to the start of depreciation on the fourth production line at ECC. The cost of goods sold and services for the Concessions and Other Building Materials Group increased by 14.2% to LE 299.9 million in 2002, as compared to LE 262.7 million in 2001. The cost of goods sold and services as a percentage of revenue decreased to 74.0% for the year, as compared to 74.6% during 2001. In 2002, depreciation and amortization expenses increased to LE 26.7 million, as compared to LE 16.0 million in 2001. Selling, General and Administrative Expenses In 2002, selling, general and administrative expenses increased by 46.4% to LE 144.5 million, as compared to LE 98.7 million in 2001. The increase was attributable primarily to additional corporate staff and overhead needed to support the Company’s growth in revenue and assets. Selling, general and administrative expenses as a percentage of revenue increased to 5.0% in 2002, as compared to 4.1% in 2001. Income from Operations In 2002, the Company’s consolidated income from operations decreased by 2.0% to LE 589.7million, as compared to LE 601.9 million in 2001. The Company’s operating margin decreased to 20.3% in 2002, as compared to 24.9% in 2001. The table below sets forth the contribution to income from operations by each of the Company’s operating groups and the operating margin for each of the operating groups.

Year ended 31 Dec 2001 LE millions %

2002 vs. 2001 (%)

Income from Operations Construction 180.1 – Operating margin Cement 385.5 – Operating margin Other 24.1 – Operating margin

30.5% 10.2% 65.4% 40.7% 4.1% 5.9%

199.8 33.2% -9.9% 14.3% 365.8 60.8% 5.4% 44.5% 36.3 6.0% -33.6% 28.10.1%

Total

100%

601.9

589.7

100%

-2.0%

Income from operations for the Construction Group decreased by 9.9% to LE 180.1 million in 2002, as compared to LE 199.8 million in 2001. The operating margin for the Construction Group decreased to 10.2% in 2002, as compared to 14.3% in 2001. The decrease was due principally to a lower proportion of industrial projects executed during the year. Income from operations for the Cement Group increased by 5.4% to LE 385.5 million in 2002, as compared to LE 365.8 million in 2001. The operating margin for the Cement Group decreased to 40.7% in 2002, as compared to 44.5% in 2001. The decrease was attributable principally to increased depreciation reflecting start of depreciation on the fourth production line at ECC. Income from operations for the Concessions and Other Building Materials Group decreased by 33.6% to LE 24.1 million in 2002, as compared to LE 36.3 million in 2001. The operating margin for the Group decreased to 5.9% in 2002, as compared to 10.1% in 2001. The decrease was attributable principally to pre-operating expenses at ECHCO associated with the start-up of the Sokhna port. Other Income and Expenses In 2002, the Company’s financial expenses, investment income, foreign exchange gain and other income and expenses resulted in a consolidated net expense of LE 114.8 million, as compared to LE 145.3 million in 2001. Interest income increased to LE 66.7 million (2001, LE 30.7 million), and interest expense increased to LE 282.4 million (2001, LE 178.6 million). Most of the Company’s interest income and interest expense results from matching borrowings and time deposits, a practice that allows OCI to lower its effective tax rate. Foreign exchange gains increased significantly to LE 103.0 million (2001, LE 31.6 million). Other expenses include a loss on the sale of shares of Messer Egypt and SCIB Chemicals, which amounted to LE 17.3 million (2001, gain of 10.4 million). In accordance with EAS and IAS, deductions totaling LE 0.4 million have been made from income for the year to eliminate intra-group profit from construction services rendered to ACC by OCI Algeria (2001, LE 53.2 million profit by OCI on construction performed for ECC, ECHCO and SIDC).

Orascom Construction Industries Annual Report 2003

25

Management’s Discussion and Analysis of Financial Condition and Results of Operations

At and for the year end 31 December

Provision for Income Taxes The Company’s consolidated provision for income taxes in 2002 amounted to LE 9.0 million, as compared to LE 10.6 million in 2001. Minority Interests In 2002, income allocated to minority interests amounted to LE 102.1 million, as compared to LE 142.2 million in 2001. The minority interest in profits of the subsidiaries was attributable principally to the financial performance of ECC. Net Income As a result of the foregoing, the Company’s net income increased by 19.8% to LE 363.9 million in 2002, as compared to LE 303.8 million in 2001.

Construction Backlog The Company considers as “backlog” the revenues that the Company expects to receive under contracts that have been awarded and signed. Backlog consists of uncompleted portions of engineering and construction contracts, including the Company’s proportionate share of construction joint-venture contracts. As at 31 December 2003, the Construction Group was involved in 42 projects in Eygpt, Afghanistan, Qatar, Bahrain, Kuwait, Libya, Algeria and Iraq worth a total value of LE 10.0 billion. The value of the Construction Group’s portion of the contracts under execution was LE 7.0 billion and the value of the unbilled work in backlog was LE 2.4 billion. The Construction Group secured a record LE 3.3 billion in new work during the year and their backlog at year end was 4% higher than the previous year. Construction work in backlog which will be undertaken outside of Egypt reached 60% at the end of 2003, as compared to 35% in 2002. Industrial construction work represented only 5% of total backlog at year end, with commercial construction work representing 13%, infrastructure construction work representing 42% and government construction work representing 40%.

Financial Liquidity and Condition The Company has three principal sources of short-term liquidity: (i) existing cash and cash equivalents which at 31 December 2003 totaled LE 917.4 million (of which LE 453.5 was in foreign currencies), as compared to LE 787.5 million at 31 December 2002 (of which LE 117.1 million was in foreign currencies); (ii) cash generated by operations; and (iii) short-term borrowings under credit facilities. The following table sets forth certain consolidated financial data concerning the liquidity and capital resources as at and for the years indicated.

26

Orascom Construction Industries Annual Report 2003

2003 LE millions

2002 LE millions

2001 LE Millions

Cash & Cash Equivalents Beginning of year End of year

787.5 917.4

1,072.3 787.5

615.7 1,072.3

Net increase (decrease)

129.9

(284.8)

456.6

677.0 (656.5) (305.3)

256.4 (440.4) 640.6

(284.8)

456.6

Net Cash Provided by (Used in) Operating activities Investing activities Financing activities Net provided (used)

551.8 (1,473.6) 1,051.7 129.9

Cash provided by operating activities in 2003 was LE 551.8 million, as compared to LE 677.0 million in 2002. Cash provided by operating activities was principally generated from income from operations and from increases in receivables, inventories and decrease in payables. Cash used in investing activities in 2003 was LE 1,473.6 million, as compared to LE 656.5 million in 2002. This increase was attributable principally to higher investment in plant and equipment in Algeria. Cash provided by financing activities in 2003 was LE 1,051.7 million, as compared to LE 305.3 million cash used in 2002. The increase was attributable principally to increased bank borrowing to finance the investment in the cement plant in Algeria. On 2 February 1999, the Company issued LE 280 million non-convertible bonds at an annual interest rate of 11% with a maturity date in 2006. The Company issued the bond in order to achieve a better matching of long term investments with long term liabilities. In January 2004, OCI invited the public to subscribe in the issuance of LE 400 million second bond to finance the growth of the Company in Egypt and internationally. The second bond is payable over a six year period ending in December 2010, at the annual interest rates of 13% fixed on 60% of the bonds and variable at 2% above Central Bank rate on the remaining 40%. The bond has been fully underwritten by a consortium of four Egyptian banks. In December 2002, ECC issued LE 1 billion non-convertible bonds, payable over a period ending in December 2008, at the annual interest rates of 13% fixed on 60% of the bonds and variable at 2% above the Central Bank of Egypt’s discount rate on the remaining 40%. The proceeds were used to refinance the company’s production lines.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company’s cash flow from operations has been supplemented by borrowings to enable the Company to implement its growth strategy and finance the construction of its cement plant in Algeria. The Company’s borrowings include: (i) US$ 55 million medium term loan from the International Finance Corporation (IFC), (ii) 6 million Euro from European Investment Bank, (iii) US$ 11.5 million from DEG bank, and (iv) US$ 156 million syndicated loan from a consortium of financial institutions The local affiliate of Fitch Ratings reaffirmed the A+ credit rating of OCI for the fourth consecutive year, and maintained the outlook on the Company as ‘Positive’ since last year. In January 2003, the Egyptian Government allowed market forces to revalue the Egyptian Pound against foreign currencies. The balances of the Company’s monetary assets and liabilities in foreign currencies, and the exchange rates used to revaluate these balances were as follows: At 31 December 2003 LE millions

Monetary Assets & Liabilities Assets Liabilities Net assets (liabilities)

Foreign Exchange Rates US Dollar Euro

2002 LE millions

2001 LE Millions

986.5 (1,660.0)

935.2 (962.5)

236.1 (183.0)

(673.5)

(27.3)

53.1

LE 6.18 LE 7.76

LE 5.00 LE 5.24

LE 4.55 LE 4.02

Applicable Taxes and Investment Incentives The Company is subject to an annual corporate profit tax at a rate of 40% applicable to all construction companies. Other companies in the OCI Group are subject to an annual corporate profit tax rate of 32% for industrial projects and 42% for other commercial activities. All joint stock companies incorporated under the Egyptian Investment Guarantees and Incentives Law, however, are entitled to substantial tax benefits and investment incentives. Most of the OCI Group’s major subsidiaries, whether directly held or held through Orascom Building Materials Holding Company S.A.E. (“OBMHC”), are incorporated under the Investment Guarantees and Incentives Law and are located in designated new communities. The combination of these two factors provides these entities with tax holidays of between five and ten years, depending on the circumstances, starting from the first day of the first full calendar year in which operations commenced. The benefits of these tax holidays are not passed directly on to the parent corporation.

The Investment Guarantees and Incentives Law further provides that all listed joint-stock companies are entitled to an elevated threshold for their taxable revenues, according to a formula based on an amount equivalent to the percentage of the paid in capital determined at the CBE lending and discount rate for the year subject to accountability, and to three years’ exemption from the date of registration in the Commercial Registry from stamp taxes and notarization and registration fees due on articles of incorporation of companies (required for the organization of the companies) loans and mortgage contracts. Moreover, the registration of land contracts required for establishing the companies and their activities are also exempted from the taxes and fees described above. Interest on bonds and financing debentures and other income from similar securities issued by joint stock companies are exempted from the revenues on moveable capital tax, provided the securities are sold in a public offering and they are listed on the CSE. Companies operating, or projects established, in Egypt’s “free zones” (the industrial areas around Alexandria, Suez, Port Said, Cairo, Damietta and Ismailia) are exempt from import/export laws and regulations, custom duties, sales taxes and other fees. Finally, the Investment Guarantees and Incentives Law provides that establishments operating under the law cannot be nationalized, have their assets confiscated or placed under custody and no administrative authority can interfere in their pricing or profit margin policies. Companies have the right to own the land on which they operate, apart from in free zones, regardless of the nationality or residence of their owners. Such tax holidays, exemptions and other benefits are designed to encourage the formation of industries in Egypt generally and in the designated development zones in particular. All joint-stock companies with a year-end taxable profit in excess of LE 18,000 are also subject to a further 2% “Development of State Resources Duty” on such taxable profit. OCI and its subsidiaries and affiliates are also subject to certain other taxes and duties, including social security subscriptions, import and customs duties, stamp duties and sales tax.

Dividends The declaration or payment of dividends by OCI is dependant in part on OCI’s financial condition, results of operations, prospects, cash flow, capital requirements and reserves, the level of dividends received from the subsidiaries, and the effect of any such dividend on OCI’s tax position. In May 2003, the Company paid dividends totaling LE 95.3 million (LE 1.00 per share) based on 2002 results, compared to LE 82.9 million in 2002 (LE1.05 per share). For 2003, the Board of Directors is proposing to make a cash dividend distribution of LE 142.9 million (LE 1.50 per share).

Share Capital On 1 October 2002, shareholders at an extraordinary general meeting approved a capital increase from LE 866.250 million to LE 952.875 million. OCI shares are listed on the Cairo & Alexandria Stock Exchange. OCI shares are also listed in the form of global depository receipts (GDRs) on the London Stock Exchange since September 2002. Each GDR represents two shares. At 31 December 2003, 53% of the issued and paid share capital was held by shareholders in the form of GDRs.

Orascom Construction Industries Annual Report 2003

27

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Corporate Social Responsibility

Future Outlook

In fulfillment of its social responsibility, the following are examples of the Company’s activities as a responsible corporate citizen.

Management believes that the Company’s financial results for the year ended 31 December 2003 continue to demonstrate the OCI Group’s ability to achieve sustainable growth in a challenging market environment. Management believes it is better placed than most of its competitors to capitalize on growth opportunities in the region and that it will continue to outperform its peers. By forging strategic partnerships with industry leaders, investing in modern technologies, and developing the Company’s human resources, management believes the Company will be able to maintain its competitive advantage in its core businesses and continue to record positive financial results.

OCI Foundation The OCI Foundation was formed in 2000 to invest company resources in educational programs that improve the communities in which the Company operates. Through the Onsi Sawiris Scholarship Program, the OCI Foundation has provided scholarships to 16 extraordinary Egyptian graduate and undergraduate students for studying at prestigious international universities in fields that will enhance the economic prosperity of Egypt. The cost for the year 2003 amounted to LE 1.8 million, as compared to LE 1.8 million in 2002. Community Service During the year, OCI continued performing the civil work portion on a new US$ 70 million children’s cancer hospital in Cairo without profit. United Nations Global Compact In December 2002, OCI joined the Global Compact at the invitation of United Nations Secretary General Kofi Annan. The Global Compact is an international initiative to bring companies together with UN agencies, labour and civil society to support nine principles in the areas of human rights, labour and the environment. Through the power of collective action, the Global Compact seeks to advance responsible corporate citizenship so that business can be part of the solution to the challenges of globalization. In this way, the private sector – in partnership with other social actors – can help realize a more sustainable and inclusive global economy. Today, hundreds of companies from all regions of the world as well as international labour and civil society organizations are engaged in the Global Compact. OCI is among seven companies in Egypt to join in this global initiative. OCI will participate in Global Policy Dialogues, prepare submissions to the ‘Learning Forum’, participate in regional Global Compact networks, and initiate ‘Partnership Projects’. The nine principles of the Global Compact which OCI has agreed to follow are: 1 Support and respect the protection of international human rights within our sphere of influence 2 Make sure that our corporation is not complicit in human rights abuses 3 Uphold the freedom of association and the effective recognition of the right to collective bargaining 4 The elimination of all forms of forced and compulsory labour 5 The effective abolition of child labour 6 The elimination of discrimination in respect of employment and occupation 7 Support a precautionary approach to environmental challenges 8 Undertake initiatives to promote greater environmental responsibility 9 Encourage the development and diffusion of environmentally friendly technologies

28

Orascom Construction Industries Annual Report 2003

Report of the Audit Committee of the Board of Directors

The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of the integrity of the Company’s consolidated financial statements, compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence, the performance of the Company’s internal audit function and independent auditors, and risk assessment and management. The Audit Committee manages the Company’s relationship with its independent auditors (who report directly to the Audit Committee). The Audit Committee acts under a written charter adopted and approved by the Board, and has authority to obtain advice and assistance from outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties. The Company’s management has primary responsibility for preparing the consolidated financial statements and financial reporting process, including the system of internal control. The Company’s independent auditors, KPMG (Hazem Hassan), are responsible for expressing an opinion as to whether those financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Company in accordance with Egyptian Accounting Standards, which are not materially different from International Accounting Standards. In this context, the Audit Committee hereby reports as follows: 1 The Audit Committee has reviewed and discussed the audited consolidated financial statements for the year ended 31 December 2003 with the Company’s management. 2 The Audit Committee discussed with the independent auditors the conduct of their audit in accordance with Egyptian Auditing Standards, and compliance with legal and regulatory requirements. 3 The Audit Committee has received written confirmation of the independent auditors’ independence. 4 Based on the review and discussions referred to above, the Audit Committee recommended to the Board, and the Board has approved, that the audited consolidated financial statements be included in the 2003 Annual Report for filing with the Capital Market Authority.

Audit Committee Mr Alaa Saba Dr Tarek Hatem Mr Mohamed Abdel Moneim

Orascom Construction Industries Annual Report 2003

29

Consolidated Financial Statements and Auditor’s Report

30

Orascom Construction Industries Annual Report 2003

Auditor’s Report To the Shareholders of Orascom Construction Industries Company We have audited the accompanying consolidated Balance Sheets of Orascom Construction Industries company (OCI) as of 31 December 2003, and the related consolidated Statements of Income, Changes in Shareholders’ Equity, and Cash Flows for the year then ended. The comparative financial information presented for the years 2002 and 2001 are based on the audited financial statements for those years, on which we have issued qualified audit opinion on 10 May 2003, and on 29 April 2002, respectively. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of some of the Company’s subsidiaries, which statements reflect total assets constituting 46 percent and total revenues constituting 38 percent, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the said subsidiaries, is based solely on the reports of those auditors. We conducted our audit in accordance with Egyptian Auditing Standards. 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 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 and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit and the reports of the other auditors, the consolidated financial statements referred to above together with the notes attached thereto present fairly, in all material respects, the consolidated financial position of Orascom Construction Industries company as of 31 December 2003 and the consolidated results of its operations and its cash flows for the year then ended in conformity with Egyptian accounting standards and comply with applicable Egyptian laws and regulations. Without qualifying our opinion, we draw attention to Note (9) of the notes to the financial statements. One of the Company’s subsidiaries applied International Accounting Standard No. (17) – Accounting for Capital Leases – to record its capital leases transactions, which concluded during the years 2001, 2002 and 2003 for some fixed assets, instead of applying the Egyptian Accounting Standard No. (20) to record such transactions.

KPMG Hazem Hassan Public Accountants & Consultants

Cairo, 22 April 2004

Orascom Construction Industries Annual Report 2003

31

Report of Management Responsibility for Financial Reporting Management is responsible for the preparation and integrity of the consolidated financial statements of Orascom Construction Industries. The consolidated financial statements and notes have been prepared in accordance with Egyptian Accounting Standards, which are not materially different from International Accounting Standards. As such, the consolidated financial statements include certain amounts that are estimates based upon currently available information and management’s judgment of current conditions and circumstances. Management also prepared the other information included in the annual and interim reports and is responsible for their accuracy and consistency with the consolidated financial statements. The annual consolidated financial statements have been audited by the independent accounting firm, KPMG (Hazem Hassan), which was given unrestricted access to all financial records and recorded data, including minutes of all the meetings of the Board of Directors and committees of the Board. The Company maintains a system of internal control over financial reporting, which is intended to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation of the consolidated financial statements. The system includes a documented organizational structure and division of responsibility, established policies and procedures, and the careful selection and development of staff. Internal auditors monitor the operation of the internal control system and report findings and recommendations to management and the Audit Committee of the Board of Directors. Corrective actions are taken to control deficiencies and other opportunities for improving the system as they are identified.

32

Orascom Construction Industries Annual Report 2003

The Audit Committee, which is composed of independent directors, meets periodically with management, the internal auditors and the independent auditors to review the manner in which these groups are performing their responsibilities and to carry out the Audit Committee’s oversight role with respect to auditing, internal controls and financial reporting matters. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of an internal control system may change over time. Management assessed the Company’s internal control system in relation to criteria for effective internal control over financial statement preparation. Based upon that assessment, management believes that, as of 31 December 2003, its system of internal control over financial statement preparation met those criteria.

Nassef Sawiris Chief Executive Officer

Adel Bishai Chief Financial Officer

Consolidated Income Statement years ended 31 December

2003 LE ’000

2002 LE ’000

Revenue Construction revenue Cement revenue Concessions and other building materials revenue

3,208,807 1,242,102 506,559

1,784,254 946,475 405,503

1,421,315 821,961 352,088

Elimination of Intra-group revenue

4,957,468 (544,324)

3,136,232 (225,397)

2,595,364 (180,660)

Total revenue

4,403,144

2,910,835

2,414,704

Costs Construction cost Cement cost Concessions and other building materials cost

2,661,612 737,584 386,007

1,507,811 539,418 299,873

1,127,275 433,839 262,670

3,785,203

2,347,102

1,823,784

(195,715)

(166,616)

Notes

Elimination of Intra-group cost

(591,721)

2001 LE ’000

Total cost of construction and goods sold

3,193,482

2,151,387

1,657,168

Gross profit

1,209,662

759,448

757,536

Expenses Selling, general and administrative expenses Provision for claims and doubtful debts

225,929 38,581

144,539 25,229

98,661 57,016

Income from operations

945,152

589,680

601,859

Other income (expenses) Interest income Foreign exchange gain Gain (loss) on sale of investments Income from investments Other income Interest expense Gain (loss) on sale of property and equipment Elimination of unrealized profits on intra-group construction

66,723

30,670

245,117 1,975 9,043 6,088 (263,382) (3,187) (97,895)

9,971

102,954 (17,267) 3,469 10,045 (282,361) 2,062 (425)

31,617 10,386 9,781 6,862 (178,606) (2,770) (53,213)

Net other income (expenses)

(92,270)

(114,800)

(145,273)

Income before taxes and minority interest

852,882

474,880

456,586

(28,637) (265,959)

(8,966) (102,062)

(10,611) (142,209)

558,286

363,852

303,766

5.56

3.60

2.84

Income taxes expense Minority interest Net income Earnings per share LE

(18)

The accompanying notes form an integral part of the financial statements and are to be read therewith.

Orascom Construction Industries Annual Report 2003

33

Consolidated Balance Sheet as of 31 December

2003 LE ‘000

2002 LE ‘000

917,421 585,456 137,348 470,303 32,990 8,077 159,904 501,789 68,151

787,494 480,413 113,864 416,696 47,319 – 188,968 350,552 67,545

1,072,340 374,147 37,387 312,603 132,750 – 145,204 209,229 70,944

2,881,439

2,452,851

2,354,604

(8)

86,589 404 3,610,567 1,378,012 4,952

81,960 412 2,862,359 842,661 6,494

88,166 452 2,349,758 762,723 5,211

(11)

149,536

80,696

72,343

Total long-term assets

5,230,060

3,874,582

3,278,653

Total assets

8,111,499

6,327,433

5,633,257

Notes

Assets Current assets Cash and cash equivalents Accounts receivable – customers (net) – customers holdback – other (net) – due from affiliated companies Marketable securities Construction contracts in progress Inventories Property held for resale

(3) (4) (5) (21)

(6)

Total current assets Long-term assets Investment in associated companies Investments available for sale Property, plant and equipment (net) Projects under construction Long-term receivables Other assets (net)

34

Orascom Construction Industries Annual Report 2003

(7)

2001 LE ‘000

Consolidated Balance Sheet continued

2003 LE ‘000

2002 LE ‘000

2001 LE ‘000

714,442 204,627 697,434 231,455 37,139 192,854 28,637

757,958 317,948 696,027 287,205 2,602 203,090 8,966

1,122,264 163,687 498,285 216,715 26,859 103,732 10,611

2,106,588

2,273,796

2,142,153

2,562,979 138,150

1,655,902 81,971

1,395,364 66,166

Total long-term liabilities

2,701,129

1,737,873

1,461,530

Total liabilities

4,807,717

4,011,669

3,603,683

Minority interest in subsidiary companies

1,145,553

876,293

783,069

952,875 34,493 535,017 4,874 (87,788)

825,000 23,381 403,436 4,661 (9,973)

Notes

Liabilities Current liabilities Bank overdraft and current portion of long-term loans Accounts payable – suppliers and sub-contractors – creditors, accrued liabilities and provisions – advances from customers – due to affiliated companies Billings in excess of cost and estimated earnings on incomplete contracts Income taxes payable

(12) (13) (21)

Total current liabilities Long-term liabilities Long-term loans Other long-term liabilities

(12) (14)

Shareholders’ equity Share capital Legal reserve Retained earnings Cumulative gain on translation of foreign companies Treasury stock

(15) (16)

(17)

952,875 38,737 981,344 195,564 (10,291)

Total shareholders’ equity

2,158,229

1,439,471

1,246,505

Total liabilities and shareholders’ equity

8,111,499

6,327,433

5,633,257

The accompanying notes form an integral part of the financial statements and are to be read therewith.

Chairman

Chief Executive Officer

Chief Financial Officer

Orascom Construction Industries Annual Report 2003

35

Consolidated Statement of Changes in Equity years ended 31 December

Notes

Balance at 31/12/2000

750,000

Net income for the year 2001 Employees share of subsidiaries profit distribution Minorities share of subsidiaries profit distribution Transfer to legal reserve 2000 Transfer to legal reserve 2001 Transfer to general reserve Distribution of cash dividends Issue of share dividends Employees share of profits 2000 Employees share of profits 2001 Transactions of treasury stock by OCI ESOP Limited Cumulative gain on translation of foreign companies

Treasury stock LE ‘000

Legal reserve LE ‘000

(12,441)

14,226

4,061 5,094

75,000

2,468

Balance at 31/12/2001 Net income for the year 2002 Employees share of subsidiaries profit distribution Minorities share of subsidiaries profit distribution Transfer to legal reserve Transfer to general reserve Issue of share dividends Distribution of cash dividends Employees share of profits 2001 Reduction in retained earnings of SCIB (sold during the year) Transactions of treasury stock by OCI ESOP Limited OCI shares purchased by OCI International Limited Write down of treasury stock to market value (OCI International Limited)

Share capital LE ‘000

825,000

(9,973)

23,381

11,112 127,875

(246) (90,020) 12,451

(17)

Cumulative gain on translation of foreign companies Balance at 31/12/2002 Net income for the year 2003 Employees share of subsidiaries profit distribution Minorities share of subsidiaries profit distribution Transfer to legal reserve Distribution of cash dividends Employees share of profits 2002 OCI shares sold by OCI International Limited Transactions of treasury stock by OCI ESOP Limited Cumulative gain on translation of foreign companies Balance at 31/12/2003

952,875

Orascom Construction Industries Annual Report 2003

34,493

4,244

(17)

77,569 (72)

952,875

The accompanying notes form an integral part of the financial statements and are to be read therewith.

36

(87,788)

(10,291)

38,737

Consolidated Statement of Changes in Equity continued

General reserve LE ’000

Retained earnings LE ’000

Cumulative gain on translation of foreign companies LE ’000

Total LE ’000

–

256,692

1,706

1,010,183

2,955

303,767 (11,882) 5,505 – – – (37,500) – (16,667) (12,324) 2,468 2,955

4,661

1,246,505

15,000 (15,000)

–

127,875 (127,875)

303,767 (11,882) 5,505 (4,061) (5,094) (15,000) (37,500) (60,000) (16,667) (12,324)

403,436 363,852 (18,257) 7,955 (11,112) (127,875)

363,852 (18,257) 7,955 – – – (45,375) (22,761) (2,395) (246) (90,020) –

(45,375) (22,761) (2,395)

(12,451)

–

535,017

213

213

4,874

1,439,471

190,690

558,286 (25,465) 11,071 – (95,288) (10,588) 90,020 (968) 190,690

195,564

2,158,229

558,286 (25,465) 11,071 (4,244) (95,288) (10,588) 12,451 (896)

–

981,344

Orascom Construction Industries Annual Report 2003

37

Consolidated Cash Flow Statement years ended 31 December

2003 LE ’000

2002 LE ’000

Cash flows from operating activities Net income

558,286

363,852

303,766

Adjustments to reconcile net income to net cash provided by operating activities Increase in cumulative gain on translation of foreign companies Income taxes payable Property, plant and equipment depreciation Other assets amortization Provisions for claims and doubtful debts Loss (gain) on sale of investments Loss (gain) on sale of property and equipment Share in associated companies results Goodwill amortization Prior year adjustment Foreign exchange gain (loss) Accrued distribution incentives Interest expense incurred

190,690 28,637 236,565 17,709 26,194 (1,975) 3,187 (14,755) 4,403 – 74,927 – 263,382

4,874 8,966 190,298 12,059 25,489 17,267 (2,062) (11,606) 8,964 – (8,929) – 282,361

4,661 10,611 159,628 14,458 53,504 (17,578) 179 672 6,498 5,290 (2,542) 26,397 168,821

(9,971)

(66,723)

(26,713)

824,810

707,652

(204,117) 10,520 (146,594) 31,233 (6,112) (316,592) 34,537 (9,650) (229,244) 10,506

(162,989) 278,172 (111,478) 31,835 3,749 96,319 (63,769) 35,470 (322,484) 67,400

(287,960) (115,933) (50,436) 4,521 6,303 61,106 62,719 (15,663) (137,965) 22,072

551,766

677,036

256,416

Notes

(8)

Interest income earned Income from operating activities before changes in working capital

Changes in working capital Increase in accounts receivable Decrease (increase) in due from affiliated companies Increase in inventories Decrease in cost of construction in progress Decrease (increase) in property held for resale Increase (decrease) in accounts payable Increase (decrease) in due to affiliated companies Increase (decrease) in billings in excess of cost and estimated earnings Interest expense paid Interest income collected Net cash provided by operating activities

38

Orascom Construction Industries Annual Report 2003

1,377,279

2001 LE ’000

Consolidated Cash Flow Statement continued

Notes

2003 LE ’000

2002 LE ’000

2001 LE ’000

Cash flows from investing activities Payments for the purchase of property, equipment and projects in progress Proceeds (payments) for capital leasing of fixed assets Payments for purchase of investments Payments for purchase of other assets Proceeds from sale of fixed assets Proceeds from sale of long-term investments Dividend income

(1,407,365) (545) (9,223) (76,681) 7,390 1,586 11,250

(691,285) (728) (10,836) (44,018) 31,091 46,096 13,151

(464,534) 36,978 (47,305) (337) 3,651 18,186 13,006

Net cash used in investing activities

(1,473,588)

(656,529)

(440,395)

(43,516) 830,910 2,123 89,073 269,260 (94,878)

(1,088,008) 1,032,394 (234,350) (77,816) 107,802 (45,375)

336,530 184,635 14,573 2,468 139,951 (37,500)

(1,223)

–

–

Cash flows from financing activities Increase (decrease) in bank overdraft and current portion of long-term loans Increase in long-term loans Increase (decrease) in long-term liabilities Sale (purchase) of treasury stock Increase in minority interest Cash dividends to shareholders Parent’s share of employee profit distribution in subsidiaries Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

(3)

1,051,749

(305,353)

640,657

129,927 787,494

(284,846) 1,072,340

456,678 615,662

917,421

787,494

1,072,340

The accompanying notes form an integral part of the financial statements and are to be read therewith.

Orascom Construction Industries Annual Report 2003

39

Notes to the Consolidated Financial Statements years ended 31 December 2003, 2002 and 2001

1 General The Companies Authority approved the amendment of the legal form of Orascom Company (Eng. Naguib Onsi Sawiris & Co.) – a limited partnership – to become an Egyptian joint stock company under the provisions of Companies’ law No. 159/1981 and the change of its legal name to “Orascom Construction Industries Company” – hereunder referred to as the “Company” or “OCI”. Annotation of the aforementioned changes has been effected in the Commercial Registry on 30 March 1998. The Company’s formation contract and its articles of association have been published in the Companies Gazette issue No. 658 in April 1998. The Company’s purpose is general contracting, the manufacture, supply and installation of machinery, equipment, tools, materials and supplies required for construction activities, the undertaking of infrastructure works and the engineering and technical consultation required for projects being implemented by the Company as well as the import of necessary equipment and instruments. The Company’s purpose also includes the undertaking of commercial agencies and import and export activities. As at 31December, OCI owns the following consolidated subsidiaries: Subsidiary

Contrack International, Inc. (CII)

2003 % of ownership

2002 % of ownership

2001 % of ownership

45%

45%

45%

Orascom Construction Industries Algeria (OCIA)

99.4%

99.4%

99.4%

Orascom Building Materials Holding Company (OBMH)

99.9%

99.9%

99.9%

Suez Industrial Development Company (SIDC)

59%

59%

59%

Egyptian Container Handling Company (ECHCO)

50%

50%

50%

2 Significant Accounting Policies The consolidated financial statements are prepared according to Egyptian Accounting Standards. The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below: 2.1 Basis of Preparing the Financial Statements The Company’s financial statements include the balances of its assets and liabilities as at 31 December 2003 (with comparative figures for 2002 and 2001) as well as its revenues and expenses for the year ended 31 December 2003 (with comparative figures for 2002 and 2001). OCI’s financial statements also include its pro-rata interest in the assets, liabilities, revenues and expenses of its Joint Ventures (JVs) through full or proportionate consolidation – depending on the level of control over the JV – of these items, into corresponding accounts in the Company’s financial statements on item-by-item basis, for a period of twelve months except Nagga Hammadi Project for which the financial statements were prepared for a period of 19 months starting 3 June 2002. The Company’s direct participations in the Joint Ventures and its pro-rata interest therein are as follows: Name of the Joint Venture

Pro-rata Interest

Al Ferdan Bridge Civil Works (Besix – OCI)

50%

Le Royal Meridien Hotel Project (Besix – OCI)

40%

Conrad Hotel Project (Besix – OCI)

40%

Nile City Project (Besix – OCI)

50%

Marriott Mirage Hotel Project (C.C.C. – OCI)

50%

Golden Pyramids Project (C.C.C. – OCI)

50%

Hanging Church Project (Arab Contractors – OCI)

40%

Gianaclis Project (Contrack – OCI)

40%

AUC Project (OCI – Air et Chaleur)

55%

Iemsa Project (Iemsa – OCI)

50%

Thermal Power Plant Project in Suez Gulf (S.A.E. – OCI)

50%

Thermal Power Plant Project in East Port Said (S.A.E. – OCI)

50%

Fayed Project (Contrack – OCI)

49%

Luxor Wastewater Facilities Project (Allam – OCI)

50%

Damietta LNG Project (Besix – OCI)

71%

Nagaa Hammadi Project (Vinci – Bilfinger – OCI)

33.33%

Agreements concluded between the Company and its partner in each joint venture stipulate that both parties are jointly responsible. The agreements also stipulate that the tax declaration by each partner should include each partner’s share of the taxable profits realized from the joint venture. The financial statements also include the assets, liabilities, revenues and expenses of the Company’s Yemen Branch and Jordan Branch for the periods of 1 January 2003 to 30 June 2003 and 31 March 2003 respectively, as these branches were closed at these dates. 40

Orascom Construction Industries Annual Report 2003

Notes to the Consolidated Financial Statements continued 2 Significant Accounting Policies continued 2.2 Principles of Consolidation The consolidated financial statements include all subsidiaries that are controlled by the Company. The bases of consolidation are as follows: • •

•

All material intra-group balances, transactions and unrealized profits are eliminated. Minority interest in the equity and results of the entities that are controlled by the Company is shown as a separate item in the consolidated financial statements and calculated as the minority’s proportion of the carrying amounts of the assets, liabilities and equity of the subsidiary. The cost of acquisition is allocated as follows: a) The fair value of the assets and liabilities acquired as of the date of the acquisition to the extent of the Company’s interest obtained in the acquisition. b) The excess of the cost of acquisition over the Company’s interest in the fair value of the identifiable assets and liabilities acquired as of the date of acquisition is recognized as goodwill and amortized over a period of 5 years, except for ECHCO (50% owned by OCI) and Egyptian Gypsum Company (50% owned by United Paints and Chemicals (UPC)) which are amortized over 20 years. The managements of OCI and these subsidiaries have determined that there are adequate reasons to extend the amortization of these goodwill to 20 years as allowed under Egyptian Accounting Standards. c) The excess of the Company’s interest in the fair value of the identifiable assets and liabilities at the date of acquisition over the acquisition cost is recognized as negative goodwill and amortized over a period of 5 years.

2.3 Foreign Currency Transactions OCI and some of its subsidiaries maintain their accounts in Egyptian Pounds. Transactions performed in foreign currencies are translated during the financial year at the exchange rates prevailing at the date of the transaction. The balances of monetary assets and liabilities denominated in foreign currencies are revalued at the balance sheet date at the exchange rates prevailing at that date. The revaluation differences are recorded in the income statement. Foreign exchange differences resulting from revaluation of loans in foreign currencies, which are used to finance the purchase of recently acquired machinery and equipment, are capitalized. 2.4 Translation of Foreign Entities’ Financial Statements The accounts of some of the Company’s subsidiaries are maintained in US Dollars, British Pounds and Algerian Dinars. The assets and liabilities of these entities are translated into Egyptian Pounds at the exchange rates prevailing as of the balance sheet date, and the equity accounts are translated at the historical exchange rates. The income statements’ items are translated using the average exchange rate during the period. The cumulative translation difference of the foreign consolidated companies is reported in a separate line item under the equity section. 2.5 Foreign Currency Swap Agreements Assets and liabilities resulting from foreign currency swap agreements are recognized in the balance sheet at the date of the contract. Costs of these contracts, including bank commissions and expenses, are charged to the income statement during the period in which the contract is concluded. At the balance sheet date, the related assets and liabilities in foreign currencies are revalued at the prevailing exchange rates on that date, and the revaluation differences are recorded in the income statement. The net value of the outstanding swaps is presented under other receivables or payables, as the case may be, in the balance sheet. 2.6 Revenue and Cost Recognition Revenue from construction contracts is recognized in the income statement under the percentage of completion method of accounting. Under this method, an estimated percentage of completion of each contract, determined by the percentage of cost incurred to date as compared to estimated total cost of the contract, as determined by the Company’s engineers, is applied to the estimated total revenue. Construction project costs include all direct material, equipment depreciation, labor, subcontracting and indirect costs related to contract performance, such as indirect labor, maintenance and applicable administrative costs. Materials, labor and equipment provided by subcontractors or joint ventures are included in revenue and costs when management believes that the company is responsible for the ultimate acceptability of the project. Changes in job performance, conditions, estimated profitability and final contract settlements may result in revisions to cost and revenue and are recognized in the period in which the facts requiring such revisions become known. Provisions for estimated losses on incomplete contracts are made in the period in which such losses are determined. Claims for additional contract revenue are recognized when realization is assured and the amount can reasonably be determined. Costs and estimated earnings in excess of billing on incomplete contracts are presented as construction contracts in progress in the consolidated balance sheet. Billings in excess of costs and estimated earnings on incomplete contracts are included under current liabilities in the consolidated balance sheet. Cement and other building materials revenue is recognized upon delivery and acceptance of the sold products to the related customers. Concessions revenue is recognized upon signing the property’s selling contract and, in the case of services, when the service is delivered and the invoice is issued. Income from investments is recorded when the general meeting of the related company approves its profit appropriations. Orascom Construction Industries Annual Report 2003

41

Notes to the Consolidated Financial Statements continued 2 Significant Accounting Policies continued 2.7 Inventories Inventories of raw materials, spare parts and supplies are valued at cost on the moving average basis. Work in progress is valued at accumulated cost of production. Inventories of finished goods are stated at the lower of cost and net realization value. Cost is determined by using the average cost method. 2.8 Property, Plant and Equipment Property, plant and equipment are recorded at historical cost and are depreciated by the straight line method over the estimated productive life for each type of asset as follows: Type of Asset

Years

Buildings and Construction

2 – 40

Machinery and Equipment

3 – 35

Vehicles

4 – 10

Tools and Supplies

2 – 15

Furniture and Office Equipment

3 – 10

Information Systems

3 – 20

2.9 Capital Leases Capital leases entered into by the Company or its subsidiaries are accounted for as operating leases in accordance with Egyptian Accounting Standards, except for Egyptian Cement Company (ECC) which adopted the International Accounting Standard in this regard, as explained in note 9. 2.10 Borrowing Costs The borrowing costs are charged as expenses to the income statement for the period in which the Company incurs such costs. Financing interest and charges related to bank facilities and long-term loans that are used to finance the cost of purchasing fixed assets are capitalized by charging these borrowing costs to the cost of the related fixed assets until these assets become ready for its use. 2.11 Investment in Associated Companies Investment in associated companies, classified as long-term assets in the consolidated balance sheet, over which the Company does not have control but has significant influence, are recorded using the equity method. When there is impairment in its value, the carrying amount of the investment is reduced and the impairment loss is charged to the income statement. 2.12 Investments Available for Sale Investments available for sale are recorded initially at cost. When there is impairment in value, the carrying amount of the investment is reduced and the impairment loss is charged to the income statement. 2.13 Marketable Securities Marketable securities are recorded at cost at the date of acquisiton. Such investments are revaluated at the end of each financial period at the market value. The differences in value are charged to the income statement. 2.14 Taxation Each financial period is charged by its fair share of the corporate income tax liability. Due to the nature if the Eygptian tax law and legislation, applying the principles of deferred taxes according to the International Accounting Standards “taxes on income” will not usually result in material deferred tax liabilities. However, if the application results in deferred tax assets, they will be recognized in the financial statements whenever there is a sufficient assurance that these assets will be realized in the foreseeable future. 2.15 Other Assets Goodwill and negative goodwill arising on consolidation are amortized over 5 years, except for ECHCO which is amortized over 20 years. Deferred costs of the OCI’s issued bonds were amortized over the period from the closing date of the bonds’ subscription on 2 March 1999 to 31 December 2003. Deferred costs of the ECC’s issued bonds are amortized over a period of 6 years as from the closing date of the bonds subscription on 1 December 2002. Deferred pre-operating expenses as of 1 January 2002 are amortized over the lesser of 3 years and its remaining useful life. However, starting from 1 January 2002 pre-operating expenses are expensed in the period in which they are incurred. 2.16 Treasury Stock OCI shares held by OCI ESOP Limited and other consolidated companies are recorded as treasury stock in the consolidated balance sheet at the acquisition cost less any write down to market value. Transactions relating to the treasury stock are recorded in shareholders’ equity.

42

Orascom Construction Industries Annual Report 2003

Notes to the Consolidated Financial Statements continued 2.17 Impairment of Long – Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated futurre cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be diposed of are reported at the lower of the carrying amount or fair value less costs to sell. 2.18 Cash Flow Statement The Cash Flow Statement is prepared according to the indirect method. Cash and cash equivalents are represented in cash on hand, cheques under collection, balances of banks current accounts, cash margin for letters of guarantee and time deposits with banks.

3 Cash and Cash Equivalents Description

31/12/2003 LE ‘000

Cash on hand

31/12/2002 LE ‘000

31/12/2001 LE ‘000

874

1,579

782

14,569

14,322

46,928

398,313

240,664

126,578

56,050

35,235

45,323

Banks – time deposits **

447,615

495,694

852,729

Total

917,421

787,494

1,072,340

Cheques under collection Banks – current accounts * Letters of guarantee margins

*

Banks – current accounts include blocked amounts of LE 23.4 million (2002, LE 3.1 million) (2001, LE 5.7 million) held as collateral against letters of credit and letters of guarantee related to subsidiary companies. ** Banks – time deposits include blocked deposits of LE 149.5 million held as collateral against letters of credit and short-term loans of OCI and its subsidiaries (2002, LE 205.8 million) (2001, LE 738.1 million).

4 Accounts Receivable – Customers (Net) The provision for doubtful debts amounting to LE 16.8 million is deducted from the accounts receivable – customers in the consolidated balance sheet (2002, LE 19.3 million) (2001, LE 13.5 million).

5 Accounts Receivable – Other (Net) This item, which is presented net of a provision for doubtful debts of LE 11.1 million (2002, LE 4.2 million) (2001, LE 3.3 million), consists of the following: Description

Joint Ventures receivables and other debit balances

31/12/2003 LE ‘000

31/12/2002 LE ‘000

31/12/2001 LE ‘000

199,018

152,271

202,108

Suppliers debit balances

81,794

77,719

1,100

Deposits with others

90,868

48,324

49,506

Taxes deducted at source

79,351

30,982

29,203

Prepaid expenses

29,132

16,853

15,222

3,498

9,241

–

33,389

31,469

18,554

470,303

416,696

312,603

Net receivable from currency swap agreements Deferred revenue Total

Orascom Construction Industries Annual Report 2003

43

Notes to the Consolidated Financial Statements continued 6 Inventories Description

31/12/2003 LE ‘000

31/12/2002 LE ‘000

31/12/2001 LE ‘000

Raw materials

238,505

112,506

102,374

Spare parts and fuel

123,472

129,187

62,176

Packing materials

8,775

12,931

8,591

Work in progress

65,027

49,841

7,995

Finished goods

8,695

6,370

5,311

Letters of credit

57,315

39,717

22,782

501,789

350,552

209,229

Total

7 Investment in Associated Companies This item represents the long-term investment in associated companies. All these companies are incorporated under the Egyptian laws, except Mehsas National Bag Company which is incorporated under Algerian laws. Description

Nile Valley Gas Company (20% owned by OCI)

31/12/2002 LE ‘000

31/12/2001 LE ‘000

12,311

8,646

8,328

6,868

19,108

22,915

46,151

43,534

45,676

4,134

10,420

–

Mehas National Bag Company (50% owned by OCIA) Others (net)

16,873 252

– 252

– 11,247

Total

86,589

81,960

88,166

National Pipes Company (40% owned by OBMH) Egyptian Gypsum Company (50% owned by UPC)* SCIB Chemicals (13.3% owned by UPC)

*

44

31/12/2003 LE ‘000

Includes a goodwill balance of LE 15.1 million, which is net of the related amortization for the year of LE 0.9 million.

Orascom Construction Industries Annual Report 2003

37,076

Balance at 31/12/2003

43,719 47,253

Net book value at 31/12/2002

Net book value at 31/12/2001

87,554

91,328

360,177

44,726

2,139,801

2,590,365

3,036,505

597,736

(23,321)

185,458

435,599

3,634,241

(25,749)

521,546

3,138,444

Machinery and equipment** LE ‘000

17,202

38,299

44,694

31,823

(2,012)

12,381

21,454

76,517

(5,115)

18,385

63,247

Furniture and office equipment LE ‘000

46,040

54,448

90,151

53,542

(823)

17,082

37,283

143,693

4,205

45,368

94,120

Vehicles** LE ‘000

6,164

38,143

30,080

13,872

59

6,241

7,572

43,952

74

22,036

21,842

Information systems LE ‘000

5,744

6,057

11,884

8,194

(8,047)

3,248

12,993

20,078

(15,140)

9,224

25,994

Tools and supplies LE ‘000

2,349,758

2,862,359

3,610,567

749,893

(35,064)

236,565

548,392

4,360,460

(50,381)

899,061

3,511,780

Total LE ‘000

40,097 24,994 65,091

Vehicles

Total

31/12/2003 LE ‘000

Cost

Machinery and equipment

Description

Orascom Construction Industries Annual Report 2003

(7,860)

(3,301)

(4,559)

Accumulated Depreciation 31/12/2003 LE ‘000

57,231

21,693

35,538

31/12/2003 LE ‘000

Net

** Machinery and equipment item, and vehicles item include the following assets, which have been acquired and accounted for under capital lease transactions:

The above mentioned administrative units are pledged in Bank Misr, the seller (Nile City Investment Company) is committed to cancel the pledge as soon as the above installments are settled otherwise OCI has the right for a compensation claim equal to 50% of the total amount paid.

* Additions of buildings and construction includes LE 112.9 million representing the cost of buying units in Nile City tower from Nile City Investment Company according to a contract signed on 21/12/2003. As of 31 December 2003, LE 40.1 million were paid and the remaining balance of $13.6 million of which 50% will be paid in USD and the other 50% in Egyptian Pounds at the maximum rate LE 4.5 per US Dollar. The equivalent to the first installment due on 1/1/2004 amounting to LE 18.7 million is shown in the “creditors, accured liabilities and provisions” item in the current liabilities and the equivalent of the second installment due on 1/1/2005 amounting to LE 54.0 million is shown in “other long term liabilities” item.

37,076

Net book value at 31/12/2003

Balance at 31/12/2003

(920)

12,155

Disposals accumulated depreciation

33,491

Depreciation

404,903

(2,013)

282,502

124,414

Buildings and construction* LE ‘000

Balance at 1/1/2003

–

(6,643)

Disposals

Accumulated depreciation

–

43,719

Land LE ‘000

Additions

Balance at 1/1/2003

Cost

Description

Notes to the Consolidated Financial Statements continued 8 Property, Plant and Equipment (Net)

45

Notes to the Consolidated Financial Statements continued 9 Capital Leases 9.1 ECC Capital Leases In January and December 2001 and March 2002, the Company’s subsidiary, (ECC), sold some of its machinery, equipment and trucks to two finance leasing companies and leased back these assets under the following conditions: LE ‘000

Purchase price of machinery, equipment and trucks

65,091

Total lease payments

87,045

Lease terms: 5 years Selling price at end of the lease terms: LE 6

As the leases transfer substantially all of the benefits and risks of ownership related to the leased properties from the lessors to ECC, they have been accounted for as capital leases in accordance with International Accounting Standards (IAS 17). The total amounts of the leased assets are included in property, plant and equipment in the balance sheet. The lease obligations are included in long-term liabilities in the balance sheet, with the current portion shown under current liabilities. Egyptian Accounting Standards (EAS 20) require that all leases should be accounted for as operating leases. Accordingly, the effect of applying IAS 17 instead of EAS 20 is overstating consolidated net income by LE 10.1 million as follows: 2003 LE ‘000

2002 LE ‘000

2001 LE ‘000

Interest charges

7,305

5,369

1,104

Depreciation expense

3,864

2,707

1,370

11,169

8,076

2,474

Rent expense

29,928

22,337

4,667

Overstatement of ECC net income due to application of IAS 17

18,759

14,261

2,193

8,691

6,767

1,106

10,068

7,494

1,177

Amounts charged to income statement according to IAS 17:

Total Amount chargeable to income statement according to EAS 20:

Less: Minority interest (46.33%) Overstatement of consolidated net income due to application of IAS 17

9.2 Other Leases During 2002 and 2003, OCI and other subsidiaries leased some equipment under the following conditions: LE ‘000

Total lease payments payable over 60 months at annual rent of LE 6.1 million Lease term: 20 to 60 months Estimated useful life of leased equipment: 5 years Selling price at end of lease term: LE 0.9 million Payments during 2003 to other lessors amounted to LE 5.6 million

46

Orascom Construction Industries Annual Report 2003

23,918

Notes to the Consolidated Financial Statements continued 10 Joint Ventures A summary of OCI and CII’s pro rata share in the assets, liabilities, revenues and expenses of the Joint Ventures, based on the financial statements of those Joint Ventures, are as follows: 31/12/2003 LE ‘000

Share in Net Assets Assets Liabilities

31/12/2001 LE ‘000

521,161 (384,624)

614,502 (530,821)

539,613 (365,762)

136,537

83,681

173,851

1,013,594 (929,124)

812,030 (776,187)

832,766 (804,619)

35,843

28,147

Companies Share in Net Assets

Share in Operating Results Revenue Cost

31/12/2002 LE ‘000

Companies Share in Net Profit

84,470

There is a dispute between the management of a Joint Venture and the owner of its assigned project concerning the project’s final handing over date. This dispute resulted in differences in the final account of the project. A provision was made by management of the Joint Venture to cover the difference in case of settlement of the dispute in favor of the owner.

11 Other Assets (Net) Description

31/12/2003 LE ‘000

31/12/2002 LE ‘000

31/12/2001 LE ‘000

Goodwill (net)* Deferred interest expenses Deferred cost of bond issues Pre-operating and organization expenses

14,581 104,275 19,381 11,299

18,985 17,603 24,377 19,731

50,882 – 3,668 17,793

Total

149,536

80,696

72,343

*The goodwill item consists of the follwing: Description Goodwill** LE ‘000

Amortization LE ‘000

Disposals LE ‘000

Net 31/12/2003 LE ‘000

Net 31/12/2002 LE ‘000

Net 31/12/2001 LE ‘000

CII ECC ECHCO OBMH NSF NBC UPC SCIB

6,253 (3,541) 22,320 50 12,167 (2,081) (2,471) 34,755

(6,253) 3,541 (7,567) (50) (12,167) 2,081 2,299 (7,096)

– – – – – – – (27,659)

– – 14,753 – – – (172) –

834 – 17,323 – 1,624 (278) (518) –

2,084 (1,152) 19,894 20 4,057 (694) (986) 27,659

Total

67,452

(25,212)

(27,659)

14,581

18,985

50,882

**Goodwill and negative goodwill at dates of acquisition

Orascom Construction Industries Annual Report 2003

47

Notes to the Consolidated Financial Statements continued 12 Loans The Company and its subsidiaries have obtained loan facilities from various lending institutions. As of 31 December 2003, the outstanding balances were as follows:

Company responsible for loan Orascom Construction Industries Company

Lending institution

Interest rate

Bond (due 2 March 2006)

11%

Citibank

0%

Credit Lyonnais

1% over libor

Cairo Barclays International Different banks – overdraft

12.4% Variable (average 12.3%) for the LE portion and 1% over libor for the US $ portion

EIB (due 30 October 2012)

Variable

DEG (due 15 June 2011)

3.3% over DEG rate

IFC (due 15 July 2007)

2.375% over libor

IFC (due 15 July 2009)

2.625% over libor

Bank facilities

Variable

CIB loan (due 31 December 2006)

0.5% over rate of the CIB

CIB overdraft

0.5% over rate of the CIB

Bonds (due December 2008)

13% fixed on 60% of the bonds and variable 2% over the Central Bank rate on the remaining 40%

Shareholders’ financing

Interest free

Different banks – overdraft

12%

National Bags Company

Different banks – overdraft

13%

National Steel Fabrication

Different banks – overdraft

13%

United Paint & Chemicals Company

KFW

14%

Egyptian Container Handling Company

Egyptian Cement Company

NSGB (due 15 April 2005)

Algerian Cement Company (ACC)

Alico Egypt

Bank overdraft

Variable

IFC (first installment 15 September 2005)

4.55 - 4.82%

EIB-A (first installment 15 September 2005)

3.37 - 4.07%

EIB-B (first installment 15 September 2005)

3.08 - 3.80%

CNEP (first installment 15 September 2005)

8.50%

Citibank (first installment 15 September 2005)

8.50%

National Bank of Oman (due19 September 2004) 13.95% Different banks – overdraft

13.5%

Bank facilities

Variable

Total 31/12/2003 Total 31/12/2002 Total 31/12/2001

48

Orascom Construction Industries Annual Report 2003

Notes to the Consolidated Financial Statements continued

Outstanding amount 31/12/2003 LE ‘000

Long-term portion 31/12/2003 LE ‘000

280,000

280,000

Bank overdraft & current portion 31/12/2003 LE ‘000

12,629

12,629

12,923

12,923

106,796 165,540

106,796 165,540

46,585

Promissory notes Promissory notes Time deposit LE 77.5 million Time deposit LE 165.5 million and LE 120 million promissory notes

46,585

71,106

71,106

188,585

141,438

154,577

154,577

1,782

1,782

138,667

119,667

13,611 1,000,000

Collateral given

900,000

47,147

19,000

Commercial lien on the company’s assets

13,611

Commercial lien on the company’s assets

100,000

2,763

2,763

157,413

157,413

30,042

30,042

15,700

15,700

2,205

1,600

605

15,391

14,091

1,300

23,385

Real estate and commercial lien on the company’s assets

Blocked deposits of LE 1.8 million

23,385

216,409

216,409

Pledge of ACC shares

278,240

278,240

Pledge of ACC shares

61,830

61,830

Pledge of ACC shares

204,364

204,364

Pledge of ACC shares

68,121

68,121

Pledge of ACC shares

4,223

3,169

1,054

1,668

1,668

2,866

2,866

3,277,421

2,562,979

714,442

2,413,860

1,655,902

757,958

2,517,628

1,395,364

1,122,264

Commercial lien on the company’s assets

Orascom Construction Industries Annual Report 2003

49

Notes to the Consolidated Financial Statements continued 13 Creditors, Accrued Liabilities and Provisions Description

31/12/2003 LE ‘000

31/12/2002 LE ‘000

31/12/2001 LE ‘000

Joint Ventures payables and other credit balances

153,297

256,227

189,172

Sundry creditors

183,111

211,574

117,731

Provisions for claims and probable contingent liabilities

143,259

93,403

72,444

Accrued expenses and interest

128,754

101,614

104,858

89,013

33,209

14,080

697,434

696,027

498,285

31/12/2003 LE ‘000

31/12/2002 LE ‘000

31/12/2001 LE ‘000

Taxes withheld (employees and suppliers) Total

14 Other Long-term Liabilities Description

OCI (Purchases of fixed assets – Note 8)

56,413

3,782

3,639

ECC*

35,434

51,575

59,975

OBMH subsidiaries**

32,822

26,614

2,552

CII

13,481

–

–

138,150

81,971

66,166

Total

*

Includes LE 21.3 million value of sales tax installments due on imported machinery, equipments and purchases of fixed assets. In addition, this balance also includes LE 14.1 million represents the long-term installments related to capital lease agreements. ** Includes LE 24.5 million loan to National Steel Fabrication Company from one of its shareholders.

15 Share Capital 15.1 Authorized Capital The parent Company’s authorized capital is LE 2 billion. 15.2 Issued and Paid-in Capital As at 31 December 2003, the issued and fully paid in share capital amounted to LE 952.9 million (2002, LE 952.9 million) (2001, LE 825.0 million). OCI’s shares have been listed on the Cairo & Alexandria Stock Exchange since March 1999. In September 2002, the Company also listed part of its shares (53% as at 31 December 2003) on the London Stock Exchange in the form of Global Depository Receipts (GDRs), each representing two shares. The Bank of New York was appointed to act as the depository bank.

16 Legal Reserve OCI is legally required to establish and maintain a legal reserve to which an amount equal to 5% of the annual net profits after taxation should be transferred to. However, this transfer may be discontinued if the carrying balance of this legal reserve reaches 50% – at least – of the Company’s issued capital.

50

Orascom Construction Industries Annual Report 2003

Notes to the Consolidated Financial Statements continued 17 Treasury Stock As of 31 December 2003, the treasury stock item amounting to LE 10.3 million represents the carrying cost of 449,637 OCI shares owned by OCI ESOP Limited and OCI Asia Telecommunication. OCI has a plan to provide some of its employees with stock options on its shares. According to this plan, OCI ESOP Limited, a British Virgin Island Company, purchases OCI shares equivalent to the value of options issued to the employees. The purchase is made from the stock market at the stock option price to the employees. This purchase is financed by an interest free loan granted by OCI, when the options vest, the employee has the right to exercise the options through a cashless exercise by which the employee receives the appreciation on the share value between the stock option price and the actual sale price. The remainder of the proceeds of the sale is used by OCI ESOP Limited to repay the loan due to OCI or to finance other options. On 27 June 2002, the Company purchased 3 million of its own shares, representing 3.15% of the total Company’s shares, from Egyptian Investment and Development Co. (formerly, Orascom for Investment & Development Co. – affiliated company) at a total cost of LE 90.0 million at the market value of LE 30 per share. The purchase price was deducted from the balance due from this affiliated company. On 17 July 2002, the Company sold these shares to OCI International Limited – OCII (a subsidiary company) – at the same cost. In September 2002, these shares were converted to 1.5 million Global Depository Receipts (GDRs), each representing two shares. On 27 December 2002, OCII entered into an agreement with an international financial institution to sell these GDRs for US$ 15.7 million. Pursuant to this agreement, the financial institution had 180 days to market the shares and any profits earned from the sale of these GDRs are to be split evenly between OCII and the institution. If the shares remain unsold, OCII has agreed to repurchase these shares for US$ 15.7 million. In 2002, this liability was recorded under the “Creditors, Accrued Liabilities and Provisions” item in the consolidated balance sheet. Since the Company had not surrendered the rights or lost the control over these GDRs, they were not eliminated from the financial statements. On 28 June 2003, the agreement with the international financial institution was extended to end at 28 December 2003. During the period ending 28 December 2003, the sale of all GDRs in the London Stock Exchange was completed, realizing net proceeds of the equivalent of LE 124.0 million after deducting all expenses and commissions, which were transferred by OCII to OCI. In accordance with the agreements in 2002 to settle the amounts due to OCI by the Egyptian Investment and Development Company from the proceeds of sale of the OCI shares, the balance of sale of the GDRs amounting LE 34.0 million remaining after reducing the debt by LE 90.0 million on 27 June 2002, was used to further reduce such debt.

18 Earnings Per Share Earnings per share is calculated by dividing the net income available for shareholders’ dividends, after deducting the employees’ profits share, by the weighted average number of shares outstanding during the period, as follows: Date

1 April 1998 15 October 1998 25 March 1999 5 December 1999 31 December 2000 11 December 2001 11 April 2002 1 October 2002

Means of share issuance

Number of issued shares

Initial share capital at incorporation Capital increase Capital increase 1 for 4 stock dividend 1 for 4 stock dividend 1 for 10 stock dividend 1 for 20 stock dividend 1 for 10 stock dividend

20,000,000 8,000,000 20,000,000 12,000,000 15,000,000 7,500,000 4,125,000 8,662,500

Accordingly, the weighted average number of shares, adjusted for the share dividends retroactively to 1/1/2001 and the outstanding treasury stocks at year-end, is 94,837,863 shares (2002, 91,935,561 shares) (2001, 94,941,208 shares).

Orascom Construction Industries Annual Report 2003

51

Notes to the Consolidated Financial Statements continued 19 Commitments and Contingent Liabilities Letters of guarantee issued by banks for OCI and subsidiaries’ accounts in favor of others as at 31 December 2003 were as follows: Description

Total L/G’s 31/12/2003 LE ‘000

Cash margin 31/12/2003 LE ‘000

Total L/G’s 31/12/2002 LE ‘000

Total L/G’s 31/12/2001 LE ‘000

OCI CII OBMH subsidiaries ECHCO

539,000 21,888 32,729 –

30,700 – 16,439 –

506,071 25,721 24,454 838

538,585 – 5,762 823

Total

593,617

47,139

557,084

545,170

Outstanding letters of credit as at 31 December 2003 (uncovered portion) were as follows: Description

Total L/C’s 31/12/2003 LE ‘000

Total L/C’s 31/12/2002 LE ‘000

Total L/C’s 31/12/2001 LE ‘000

OCI CII OBMH subsidiaries

15,000 51,048 30,155

15,908 41,470 123,483

66,318 31,294 13,257

Total

96,203

180,861

110,869

ECC issued bonds at a total value of LE 1 billion. OCI is committed to the bonds’ holders to maintain its ownership interest, together with any multinational company specialized in the production and marketing of cement – directly or indirectly, at not less than 51% of ECC’s issued capital. This bonds’ condition also requires that the ownership interest of the multinational company should not be less than 40% of ECC’s issued capital. As of the balance sheet date, OCI owns, directly and indirectly, 53.66% of ECC’s issued capital. As of 31 December 2003, the unpaid portion of the cost of aquisition of ECC’s new offices in Nile City towers amounted to LE 9.1 million. The Company has a commitment to cover any deficit pertaining to the financing of construction of the Algerian Cement Company’s (ACC) plant – an indirectly owned subsidiary – to a maximum of US$ 52 million. The Company also guarantees this subsidiary for US$ 4.8 million until 20 April 2006 to the benefit of a lending bank. The Company is also committed to maintain – directly or indirectly – an ownership interest of 51% at least in ACC’s capital. CII has US$ 30 million in credit facilities with US$ 3.5 million overdraft coverage available from two banks. The outstanding balances of these facilities reduce the amounts available in the credit facilities at 31 December 2003. A Shareholder of the Company personally guarantees the credit facilities. The major portion of the business of the Company’s US subsidiary (Contrack International, Inc. (CII)) involves contracting with departments and agencies of the U.S. Government. Such contracts are subject to audit and possible adjustments by the respective agencies. The U.S. Government is currently investigating the nature of the relationship between a Joint Venture, in which CII has a 40% share, and one of the contractors with whom the Joint Venture has subcontracted work in a number of projects in Egypt. Management believes that the ultimate resolution of any such audits and investigations will not have a negative impact on reported results. According to the agreement signed on 24 October 2002 between UPC (a subsidiary company) and a company purchased some of SCIB shares’ (affiliated company), UPC undertakes to bear all of taxes liabilities that may arise concerning SCIB for the period from 1 January 1997 until 30 June 2002.

52

Orascom Construction Industries Annual Report 2003

Notes to the Consolidated Financial Statements continued 19 Commitments and Contingent Liabilities continued During 2003, OCI entered into currency swap agreements with certain local banks. The swap transactions outstanding at 31 December 2003 are as follows: Date

14/1/2004

Amount

Currency

Settlement Exchange rate

Period

9.7 million

Euro

7.4035

3 months

As at 31 December 2003, the total value of this currency swap agreement was LE 75.31 million, and OCI’s obligation to close the agreement was LE 71.81 million. The net value of this agreement amounting to LE 3.5 million is included in “Accounts receivableother” (note 5) in the consolidated balance sheet in accordance with International Accounting Standard (39).

20 Financial Instruments and Related Risk Management The financial instruments of OCI and its subsidiaries are represented in the financial assets (cash, banks, investments in securities, accounts receivable and some debtors and debit accounts) and financial liabilities (banks-overdraft, short-term loans, long-term loans, suppliers and subcontractors, notes payable and some creditors and credit accounts) in the consolidated balance sheet. 20.1 Interest Rate Risk Interest rate risk is the negative effect of interest rate fluctuations on the group’s results of operations. The interest rates on the company’s borrowings are shown in note 12. 20.2 Credit Risk Credit risk is represented in the ability of customers to pay their debts. To limit this risk, OCI and its subsidiaries provide credit only to government entities, associated companies, and a large number of credit worthy private sector customers. 20.3 Foreign Exchange Risk The foreign currency risk is the risk that the value of the financial assets and liabilities and the related cash in and out flows will fluctuate due to changes in foreign currency exchange rates. The group manages this risk by matching its liabilities in foreign currencies (mainly credit facilities granted to the group) with its sources of funds in foreign currencies (mainly customer payments). As of 31 December 2003, the group has monetary assets denominated in foreign currencies amounting to LE 987 million, and liabilities in foreign currencies amounting to LE 1,660 million. The group’s net exposure in foreign currencies is as follows: Surplus (Deficit)

Foreign currency: US Dollar Euro

31/12/2003 Million

31/12/2002 Million

31/12/2001 Million

(120.4) 9.2

(27.8) 22.9

53.1 –

20.4 Fair Value Based on the valuation methods adopted by OCI and its subsidiaries for the financial assets and liabilities, the fair values of these financial instruments do not materially differ from the book values as of the date of the consolidated balance sheet.

Orascom Construction Industries Annual Report 2003

53

Notes to the Consolidated Financial Statements continued 21 Related Party Transactions OCI and its subsidiaries have entered into various commercial transactions with affiliated companies. The material intra-group transactions, balances and unrealized profits have been eliminated, while balances with non-consolidated companies and joint ventures are reported in the consolidated balance sheet under Due from and Due to affiliated companies, as follow: 21.1 Due from Affiliated Companies Description

31/12/2002 LE ‘000

31/12/2001 LE ‘000

4,634

7,507

91,230

–

21,795

21,928

National Equipment

1,719

2,319

2,328

Nile City Investment

10,363

13,721

11,615

Joint Ventures

8,969

1,072

1,955

Other companies

7,305

905

3,694

32,990

47,319

132,750

31/12/2003 LE ‘000

31/12/2002 LE ‘000

31/12/2001 LE ‘000

Joint Ventures Other companies

30,085 7,054

1,548 1,054

19,559 7,300

Total

37,139

2,602

26,859

Egyptian Company for Investment & Development Orascom Technologies

Total

31/12/2003 LE ‘000

21.2 Due to Affiliated Companies Description

22 Comparative Figures Comparative figures have been reclassified to conform to current year presentation.

23 Subsequent Event On 12 January 2004, OCI made a public offering of LE 400 million six-year non-convertible bonds, issued at the face value of LE 100 per bond, which had been approved at the extraordinary general meeting of the Shareholders on 14 October 2003. The bonds are issued in two tranches; the first constituting 60% of the total bonds issued (LE 240 million) yielding a fixed semi-annual coupon rate of 13%, and the second constituting the remaining 40% (LE 160 million) yielding a variable semi-annual coupon rate of 2% over the Egyptian Central Bank’s discount rate. This second bond issue by OCI was fully subscribed on 15 February 2004.

54

Orascom Construction Industries Annual Report 2003

Segmental Analysis unaudited years ended 31 December Operating segments

Construction LE ‘000

Cement LE ‘000

Other LE ‘000

Elimination LE ‘000

Consolidated LE ‘000

Revenue 2003 External revenue 2003 Intra-group revenue

2,945,011 263,796

1,147,502 94,600

310,631 195,928

– (554,324)

4,403,144 –

Total 2003

3,208,807

1,242,102

506,559

(554,324)

4,403,144

2002 External revenue 2002 Intra-group revenue

1,758,551 25,703

908,067 38,408

244,217 161,286

– (225,397)

2,910,835 –

Total 2002

1,784,254

946,476

405,503

(225,397)

2,910,835

2001 External revenue 2001 Intra-group revenue

1,391,517 29,798

795,998 25,963

227,189 124,899

– (180,660)

2,414,704 –

Total 2001

1,421,316

821,961

352,088

(180,660)

2,414,704

455,522 181,335 233,811

384,626 382,275 339,689

60,531 35,040 38,990

44.473 (8,970) (10,631)

945,152 589,680 601,859

8,940 56,954 24,580

497 1,943 4,306

609 7,826 1,784

– – –

10,046 66,723 30,670

70,424 124,795 97,989

174,528 135,281 70,831

18,430 22,285 9,786

– – –

263,382 282,361 178,606

4,070,801 3,209,510 2,888,046

7,388,765 4,743,796 2,986,847

1,148,660 1,038,027 807,912

(4,496,727) (2,663,900) (1,112,548)

8,111,499 6,327,433 5,633,257

2,330,418 1,944,297 1,872,872

4,973,041 2,949,027 1,737,267

447,301 532,313 347,104

(2,973,043) (1,413,968) (353,560)

4,807,717 4,011,669 3,603,683

76,787 54,956 56,142

162,917 130,195 104,905

21,709 26,696 15,985

(7,139) (9,490) (2,946)

254,274 202,357 174,086

Egypt LE ‘000

Africa* LE ‘000

Asia** LE ‘000

Other LE ‘000

Elimination LE ‘000

Consolidated LE ‘000

2,658,071 2,552,050 2,477,343

1,047,175 298,925 742

1,221,801 274,323 117,279

30,421 10,933 –

(554,324) (225,397) (180,660)

4,403,144 2,910,835 2,414,704

7,504,648 7,254,291 6,679,752

4,781,099 1,445,634 6,524

168,007 165,583 5,538

154,472 125,825 53,994

(4,496,727) (2,663,900) (1,112,548)

8,111,499 6,327,433 5,633,257

Operating profit 2003 2002 2001 Interest and dividend income 2003 2002 2001 Interest expense 2003 2002 2001 Total assets (net) 2003 2002 2001 Liabilities 2003 2002 2001 Depreciation and amortization 2003 2002 2001

Geographic segments

Revenue 2003 2002 2001 Total assets (net) 2003 2002 2001

* Africa includes primarily Algeria, Eritrea, Guinea, Libya, Nigeria, and Sudan. ** Asia includes primarily Afghanistan, Bahrain, Iraq, Kuwait, Qatar, and Yemen.

Orascom Construction Industries Annual Report 2003

55

Management and Corporate Information Board of Directors

Corporate Officers

Subsidiaries

Eng Onsi Sawiris Chairman

Mr Nassef Onsi Sawiris Director and Chief Executive Officer

Mr Karim Camel-Toueg President, CII

Mr Nassef Sawiris Director and Chief Executive Officer

Mr Adel Bishai Chief Financial Officer

Ahmad Heshmat Commercial Director, ECC

Eng Mohamed Youssef Director

Mr Sameh Loza Human Resources Director

Eng Milad Bishay General Manager, ACC

Eng Maged Abadir Director

Eng Mohamed Youssef Director and Operations Director Railway Projects

Mr Ali Abdel Naby Managing Director, NBC

Eng Osama Bishai Director Mr Karim Camel-Toueg Director Mr Alaa Sabaa1 Non-executive Director Dr Tarek Hatem1 Non-executive Director Eng Mohamed Farouk Abdel Moneim1 Non-executive Director

1

Eng Maged Abadir Director and Operations Director Civil Engineering Projects Eng Osama Bishai Director and Managing Director Construction Group Eng Philip Megally Operations Director Electro Mechanical Projects Eng Sameh Muhtadi Technical Director Engineering and Quality Systems

Members of the Audit Committee Mr Sobhi Naguib Procurement Director Ms Dania Badawi Corporate Treasurer Mr Ashraf Abdel Momen Corporate Legal Affairs Manager

Mr Ali Moussa President, UPC Eng Mohab Messiha Gabriel General Manager, NSF Capt Ossama Al Sharif President, ECHCO Dr Amr Hassaballah Managing Director, SIDC

Shareholder Information Corporate Office 160 26th July Street PO Box 1911 Agouza, Cairo Egypt Tel (202) 3026930 Fax (202) 3030506 / 3440201

Mr Ahmed Ismail Head of Internal Audit

www.orascomci.com

Mr Kevin Struve Strategic Planning Manager

Full Listing: Cairo & Alexandria Stock Exchange Reuters / Bloomberg: OCIC.CA / ORCI EY GDRs Listed: London Stock Exchange Reuters / Bloomberg: OCICq.L / ORSD LI Investor Relations Mr Hassan Badrawi Tel (202) 3015477 [email protected]

56

Orascom Construction Industries Annual Report 2003

contents Business Segments and Activities

Highlights

1

Auditor’s Report

31

Letter to Shareholders

2

Consolidated Income Statement

33

Construction

6

Consolidated Balance Sheet

34

Cement

10

Consolidated Statement of Changes in Equity

36

Concessions

14

Consolidated Cash Flow Statement

38

Other businesses

15

Notes to the Consolidated Financial Statements

40

Corporate Governance

16

Management and Corporate Information

55

Management’s Discussion and Analysis

20

Business Segments and Activities

57

Orascom Construction Industries (OCI) focuses on three high growth business activities – construction services, cement manufacturing and infrastructure concessions. Our Construction Group provides engineering, procurement and construction services on industrial, commercial, infrastructure and railway projects for public and private customers in the Middle East and North Africa. Our Cement Group owns and operates cement production plants in Egypt and Algeria. Our Concessions Group participates as an equity investor in long-term infrastructure concessions including port operations, industrial parks and natural gas distribution systems.

Construction Group

Cement Group

OCI Construction Activities Regional engineering, procurement and construction services

Egyptian Cement Company (53.7%) Cement manufacturer

Contrack International Inc. (45%) Construction services on US government-financed projects

Algerian Cement Company (100%) Cement manufacturer

OCI Algeria (100%) Engineering, procurement and construction services in Algeria Cementech Limited (100%) Specialized engineering, procurement and construction services on cement plants Orascom Road Construction (90%) Asphalt and concrete paving

Concessions Group

Other Building Materials

Suez Industrial Development Company (59%) Industrial park developer

Ready Mix Egypt (100%) Ready-to-use concrete

Egyptian Container Handling Company (50%) Stevedoring services at Adabiya port – Sokhna Port Development Company (70%) Stevedoring services at Sokhna port – Egyptian Maritime Services (90%) Inland and intermodal transportation services

National Bag Company (75%) Cement, building materials and agriculture bags

Nile Valley Gas Company (20%) Natural gas distribution in southern half of Egypt Auto Gas Company (20%) Natural gas vehicle refueling stations Egyptian Company for Tunnels (12%) Maintenance of subway systems

Mehsas National Bag Company (50%) Cement, building materials and foodstuff bags National Steel Fabrication (50%) Steel cutting, bending, welding, and painting services United Paints & Chemicals (50%) Pre-blended dry plaster, putty, and tile adhesives – Egyptian Gypsum Company (45%) Gypsum manufacturer – MBT Egypt (50%) Construction chemicals – Den Braven Egypt (87.5%) Silicone and acrylic sealants – A-Build Egypt (50.1%) Waterproofing contractor Alico Egypt (50%) Building facade, curtain walling, and window systems National Pipe Company (40%) Concrete pipe SCIB Chemical (15%) Paints and building chemicals

contents Business Segments and Activities

Highlights

1

Auditor’s Report

31

Letter to Shareholders

2

Consolidated Income Statement

33

Construction

6

Consolidated Balance Sheet

34

Cement

10

Consolidated Statement of Changes in Equity

36

Concessions

14

Consolidated Cash Flow Statement

38

Other businesses

15

Notes to the Consolidated Financial Statements

40

Corporate Governance

16

Management and Corporate Information

55

Management’s Discussion and Analysis

20

Business Segments and Activities

57

Orascom Construction Industries (OCI) focuses on three high growth business activities – construction services, cement manufacturing and infrastructure concessions. Our Construction Group provides engineering, procurement and construction services on industrial, commercial, infrastructure and railway projects for public and private customers in the Middle East and North Africa. Our Cement Group owns and operates cement production plants in Egypt and Algeria. Our Concessions Group participates as an equity investor in long-term infrastructure concessions including port operations, industrial parks and natural gas distribution systems.

Construction Group

Cement Group

OCI Construction Activities Regional engineering, procurement and construction services

Egyptian Cement Company (53.7%) Cement manufacturer

Contrack International Inc. (45%) Construction services on US government-financed projects

Algerian Cement Company (100%) Cement manufacturer

OCI Algeria (100%) Engineering, procurement and construction services in Algeria Cementech Limited (100%) Specialized engineering, procurement and construction services on cement plants Orascom Road Construction (90%) Asphalt and concrete paving

Concessions Group

Other Building Materials

Suez Industrial Development Company (59%) Industrial park developer

Ready Mix Egypt (100%) Ready-to-use concrete

Egyptian Container Handling Company (50%) Stevedoring services at Adabiya port – Sokhna Port Development Company (70%) Stevedoring services at Sokhna port – Egyptian Maritime Services (90%) Inland and intermodal transportation services

National Bag Company (75%) Cement, building materials and agriculture bags

Nile Valley Gas Company (20%) Natural gas distribution in southern half of Egypt Auto Gas Company (20%) Natural gas vehicle refueling stations Egyptian Company for Tunnels (12%) Maintenance of subway systems

Mehsas National Bag Company (50%) Cement, building materials and foodstuff bags National Steel Fabrication (50%) Steel cutting, bending, welding, and painting services United Paints & Chemicals (50%) Pre-blended dry plaster, putty, and tile adhesives – Egyptian Gypsum Company (45%) Gypsum manufacturer – MBT Egypt (50%) Construction chemicals – Den Braven Egypt (87.5%) Silicone and acrylic sealants – A-Build Egypt (50.1%) Waterproofing contractor Alico Egypt (50%) Building facade, curtain walling, and window systems National Pipe Company (40%) Concrete pipe SCIB Chemical (15%) Paints and building chemicals

Orascom Construction Industries

Annual Report 2003

Weill Cornell Medical College, Doha, Qatar

T (202) 3026930 F (202) 3030506 / 3440201

www.orascomci.com

Annual Report 2003

Orascom Construction Industries 160 26th July Street PO Box 1911 Agouza, Cairo Egypt

solid expansion in a dynamic region

contents Business Segments and Activities

Highlights

1

Auditor’s Report

31

Letter to Shareholders

2

Consolidated Income Statement

33

Construction

6

Consolidated Balance Sheet

34

Cement

10

Consolidated Statement of Changes in Equity

36

Concessions

14

Consolidated Cash Flow Statement

38

Other businesses

15

Notes to the Consolidated Financial Statements

40

Corporate Governance

16

Management and Corporate Information

55

Management’s Discussion and Analysis

20

Business Segments and Activities

57

Orascom Construction Industries (OCI) focuses on three high growth business activities – construction services, cement manufacturing and infrastructure concessions. Our Construction Group provides engineering, procurement and construction services on industrial, commercial, infrastructure and railway projects for public and private customers in the Middle East and North Africa. Our Cement Group owns and operates cement production plants in Egypt and Algeria. Our Concessions Group participates as an equity investor in long-term infrastructure concessions including port operations, industrial parks and natural gas distribution systems.

Construction Group

Cement Group

OCI Construction Activities Regional engineering, procurement and construction services

Egyptian Cement Company (53.7%) Cement manufacturer

Contrack International Inc. (45%) Construction services on US government-financed projects

Algerian Cement Company (100%) Cement manufacturer

OCI Algeria (100%) Engineering, procurement and construction services in Algeria Cementech Limited (100%) Specialized engineering, procurement and construction services on cement plants Orascom Road Construction (90%) Asphalt and concrete paving

Concessions Group

Other Building Materials

Suez Industrial Development Company (59%) Industrial park developer

Ready Mix Egypt (100%) Ready-to-use concrete

Egyptian Container Handling Company (50%) Stevedoring services at Adabiya port – Sokhna Port Development Company (70%) Stevedoring services at Sokhna port – Egyptian Maritime Services (90%) Inland and intermodal transportation services

National Bag Company (75%) Cement, building materials and agriculture bags

Nile Valley Gas Company (20%) Natural gas distribution in southern half of Egypt Auto Gas Company (20%) Natural gas vehicle refueling stations Egyptian Company for Tunnels (12%) Maintenance of subway systems

Mehsas National Bag Company (50%) Cement, building materials and foodstuff bags National Steel Fabrication (50%) Steel cutting, bending, welding, and painting services United Paints & Chemicals (50%) Pre-blended dry plaster, putty, and tile adhesives – Egyptian Gypsum Company (45%) Gypsum manufacturer – MBT Egypt (50%) Construction chemicals – Den Braven Egypt (87.5%) Silicone and acrylic sealants – A-Build Egypt (50.1%) Waterproofing contractor Alico Egypt (50%) Building facade, curtain walling, and window systems National Pipe Company (40%) Concrete pipe SCIB Chemical (15%) Paints and building chemicals