Contents PROFILE 5 KEY FIGURES 6 MISSION AND STRATEGY 7 STRUCTURE & COMPOSITION BOARDS 8 REPORT OF THE SUPERVISORY BOARD 10 CORPORATE GOVERNANCE 11

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1 Annual Report 2003

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3 Contents PROFILE 5 KEY FIGURES 6 MISSION AND STRATEGY 7 STRUCTURE & COMPOSITION BOARDS 8 REPORT OF THE SUPERVISORY BOARD 10 CORPORATE GOVERNANCE 11 REPORT OF THE BOARD OF MANAGEMENT General course of events The listing 14 Financial overview Personnel and organisation 15 Risk management 15 Outlook DIVISIONAL REPORT Real Estate 18 Financial Services 20 Infrastructure 24 Consumer Goods 26 Technology and Communications 28 FINANCIAL STATEMENTS 31 Consolidated Financial Statements 34 Company-only Financial Statements 111 Auditors report 119 SHAREHOLDERS INFORMATION Distribution of shares 120 Financial calendar 121 Dividend 121 Additional information 121 Annual report

4 Organogram Kardan N.V. Group structure KARDAN N.V. REAL ESTATE FINANCIAL SERVICES INFRASTRUCTURE CONSUMER GOODS TECHNOLOGY & COMMUNICATIONS 4 Annual report 2003

5 Profile Kardan is a dynamic investment group with an entrepreneurial outlook. It aims to create value for its shareholders by investing in businesses with high-growth potential. The Kardan Group is active in the following sectors: Core business: Real Estate, Financial Services, Infrastructure; Other: Consumer Goods, and Technology & Communications. In the mid nineties the Group expanded its activities in Central and Eastern Europe (CEE). Today Kardan Group s real estate and financial services operations in CEE comprise more than 70% of its activities and are the focus of its future growth. From 1982 until June 2003, the Group s activities were carried out through Kardan Ltd., which is incorporated under the laws of Israel. Kardan Ltd. s shares were issued to the public and were admitted to listing on the Tel-Aviv Stock Exchange (TASE) in Since July 2003, the Kardan Group carries on its activities through Kardan N.V., which is listed on the Official Segment of the Stock Market of Euronext Amsterdam N.V. and on TASE. Total assets as of 31 December 2003 amounted to USD 1,128 million, with revenues of USD 160 million. The approximate number of employees engaged by the Kardan Group was 2,900 as of 31 December Kardan is listed on Euronext Amsterdam and the Tel-Aviv Stock Exchange since 10 July Annual report

6 Key figures USD 000 USD 000 Revenues 159, ,555 Operating expenses 167, ,976 Net Result (7,170) 3,161 Cash and Cash Equivalents 133,357 47,641 Shareholders Equity 94,328 93,777 Total Assets 1,127, ,850 Solvency % (*) 27.2% 29.4% Return on Equity(**) (7.6%) 3.4% Number of employees in the Group 2,933 2,508 Per Share Data Net Result (in USD) (0.12) 0.05 Shareholders equity (in USD) Number of ordinary shares issued At year-end 62,114,336 60,643,804 Weighted average for the year 60,238,715 59,772,956 Fully diluted 60,238,715 59,834,222 (*) The percentage of shareholders equity and minority interests out of total assets (**) The percentage of the net result out of shareholders equity 6 Annual report 2003

7 Mission and strategy MISSION Kardan s mission remains constant - Value Creation. From a market value of USD 3 million in 1991, its market value has increased by more than 50 times in a decade. STRATEGY General Kardan Group is targeting high growth opportunities in order to create value for its shareholders over a mid to long-term horizon. It is currently active in the following sectors: Core business: Real Estate, Financial Services, Infrastructure. Other: Consumer Goods and High-Tech/Telecom. Each sector in the Kardan Group employs specialized managers which oversee investments and the management of investee companies. Kardan is responsible for strategic development and steering the policies of its subsidiaries, while contributing its business experience, local and international ties and financial resources. Heading each division is a manager with a rich business background in the division s area of activity, who is engaged in the day-to-day management of the division. The Group has identified opportunities in the rapidly growing economies of the CEE countries. It intends to continue to grow as a leading provider of financial services and as a leading real-estate developer in the countries it already operates in, as well as in other CEE countries. Kardan will also expand its infrastructure operations in the CEE region to become a major regional player in this sector as well. Modus Operandi The following principles are the modus operandi of Kardan s strategy: Long-term commitment supported by adequate and timely investments of capital, management time and expertise. Emphasis on growth, applying prudent risk management such as portfolio diversification, thorough due diligence prior to any transaction, and adequate reporting systems. Active and controlling role in its investments. Synergies between local management, and the international expertise of the Group s senior management. Extensive collaboration with international and local partners. Implementation of international management standards. Management Kardan believes that its senior management team is its major asset, and views its senior managers as business partners. Therefore, Kardan grants them equity rights in the companies they manage. As a result from its lean management structure, the decision making process at Kardan is quick and efficient, characterized by a team effort that integrates professionalism, experience and vision. Annual report

8 Structure & composition Boards BOARD OF MANAGEMENT Below is a profile of the Board of Management as of the date of the report. Hagai Harel (1962) Position: Chief Executive Officer Nationality: Israeli Mr. Harel has been serving as the Managing Director of GTC International B.V. and is residing in the Netherlands since During the years he served as the Chief Financial Officer of Kardan Real Estate Enterprise & Development Ltd. He also holds office in various group companies, including GTC International B.V., Globe Trade Center S.A. and others. Boudewijn Bremer (1944) Position: Director Nationality: Dutch Mr. Bremer has served for thirteen years as a managing partner of predecessor firms of PricewaterhouseCoopers. Mr. Bremer has served as a director in the following international operating companies since 1992: Rerem B.V., Fulwood B.V., Scantimber B.V., Residence Alliance B.V. and Jaffa B.V. Currently he also serves as a director in various companies within the Kardan Group, including Holdanco International Investments B.V., GTC International B.V. and TBIH Financial Services Group N.V. Yosef Grunfeld (1942) Position: Managing Director (*) Nationality: Israeli Mr. Grunfeld has been serving as the chaiman of Kardan Ltd. s board of directors since March 1997 (and as a director of Kardan Ltd. since October 1990). Currently he serves as the chairman of Talladium Ltd., Talladium Investments Ltd., KRE and Radio Kol Chai Ltd. He also serves as a director in various Kardan Group companies including UMI, Kardan Motors Ltd., Kardan Communications, Kardan Commerce and Retail Ltd., Kardan Technologies, Tahal. In addition he is involved with a number of other Israeli companies. (*) Mr. Grunfeld resigned from his position as member of the Board of Management on 27 February SUPERVISORY BOARD Below is a profile of the Supervisory Board as of the date of the report. Joseph Krant (1948) Chairman Nationality: Dutch Appointed: 16 June 2003 Mr. Krant is managing director of Catalyst Advisors B.V. Since 1968, he occupied various positions including managing director and chief executive officer of Kempen & Co and CEO of Dexia Bank Nederland. Other positions: - Member of the Supervisory Board of Wereldhave N.V. - Chairman of the Board of the Jewish Historical Museum, Amsterdam 8 Annual report 2003

9 Karnina Rechter (1953) Nationality: Israeli Appointed: 2 May 2003 Ms. Rechter is a partner in the Israeli firm Bash-Rechter, Advocates, working as an advocate and a mediator. She regularly lectures university students on mediation topics and for the past three years has authored a weekly column on legal and mediation matters in Maariv, Israel s second largest daily newspaper. Other positions: - Director of the Israeli holding company Shamait Ltd. Israel Fink (1946) Nationality: Belgian Appointed: 2 May 2003 Mr. Fink serves as sales and marketing manager and co-director of Fancy Diamonds International BVBA, a company incorporated in Belgium. Since 1970, he occupied various positions in the construction management and diamond industries Henri Marcel Philippe Alster (1950) Nationality: Belgian Appointed: 2 May 2003 Mr. Alster serves as president of American European Investment Banking, Inc., a US corporation since Between 1988 and 1994, Mr. Alster served as Head of Real Estate Investment Banking with Citicorp Investment Bank. Other positions: - Chairman of the GRI-Global Real Estate Institute Hendrik Caspar Broeksma (1945) Nationality: Dutch Appointed: 9 June 2003 Mr. Broeksma was a partner with KPMG in the Netherlands (Klynveld Kraayenhof & Co.) until 1987, and an international executive of KPMG and member of the KPMG Executive Committee between 1987 and Between 1990 and 1999 Mr. Broeksma served as a member (CFO) of the Executive Board of Royal Wessanen N.V. Other positions: - Member of the supervisory boards of Delta Lloyd Insurance N.V., Ballast Nedam N.V., Blauwhoed/ Eurowoningen B.V., Royal Auping B.V., Moving People B.V. and WOSM B.V. - Treasurer of the Stichting Democratie en Media - Member of the Curatorium Controller University of Amsterdam Avner Shnur (1948) Nationality: Israeli Appointed: 9 July 2003 As of 1986 Mr. Shnur serves as President of Astra Diamonds Manufacturers Ltd. He also serves as a director in Kardan Ltd. since August 1994 as well as in various Israeli companies within and related to the Kardan Group, including Talladium Holdings, Talladium Ltd., Kardan Technologies and Taldan Motors Ltd. Other positions: - Director of Guadalup Trading & Investments Ltd. - Director of Raitalon Ltd. Annual report

10 Report of the Supervisory Board We have the pleasure to present the annual report for the year 2003, including the annual accounts drawn up by the Board of Management and adopted by the Supervisory Board. The accounts have been audited by Ernst & Young Accountants. The auditors report is included in this annual report. We recommend that the Annual General Meeting of Shareholders (AGM) approve the annual accounts. The Board of Management proposes, with the Supervisory Board s approval, not to declare any dividends for the year, and to charge the results for the year to the reserves. Upon approval of the accounts a separate resolution will be put before the AGM discharging the management by the Board of Management and the supervision exercised by the Supervisory Board. COMPOSITION OF THE SUPERVISORY BOARD Before listing, the Supervisory Board consisted of three members: Mrs. Rechter, Mr. Fink and Mr. Alster. They were appointed on 2 May 2003 upon incorporation of the Company. Mr. Shnur and Mr. Broeksma, were appointed on 9 June 2003 with effect as of 9 July On 16 June 2003, Mr. Krant was appointed with effect as of 9 July SUPERVISORY BOARD MEETINGS Since the listing on 10 July 2003, the Supervisory Board held four meetings, mostly in the presence of the Board of Management. The following main items were discussed: quarterly and annual results, major transactions and corporate governance issues. The Supervisory Board has established an Audit Committee which met two times during the year to discuss among other issues the following topics: audit procedures, the auditors' report, the annual accounts and risk management. CORPORATE GOVERNANCE With respect to the implementation of the Dutch Corporate Governance Code within Kardan, we refer you to the specific section of the annual report on this subject on pages On 26 February 2004, Mr. Grunfeld, one of the members of the Board of Management, resigned. Mr. Grunfeld will continue to be active within Kardan Group and continue to serve as the Chairman of Kardan Ltd., the wholly owned subsidiary of Kardan in Israel. The Supervisory Board intends to nominate Mr. Alon Shlank to succeed Mr. Grunfeld on the Board of Management. This proposal shall be put before the shareholders at the AGM on 18 May IN CONCLUSION The year 2003 was an exciting year for the Company. The Company s wholly owned subsidiary Kardan Ltd. had been listed on the Tel-Aviv Stock Exchange since To highlight the international character of the Company, management decided to incorporate the Company under Dutch law, and obtain a dual listing on both Euronext Amsterdam and the Tel-Aviv Stock Exchange. It has been a challenging process, which took a lot of hard work and long hours from many people involved. We believe the listings will provide Kardan with the means to strengthen its expansion and maintain the growth rate of the past ten years. Kardan will further develop its international operations, focusing on investments in a number of sectors that it identified as having high growth potential. The Supervisory Board wishes to express its thanks to the Board of Management and the senior management team heading each sector, and all employees in its holding and group companies for their commitment over the past year. Amsterdam, 31 March 2004 Supervisory Board, J. Krant 10 Annual report 2003

11 Corporate Governance GENERAL Kardan N.V. is the parent company of the Kardan group of companies. Kardan was incorporated on 2 May Its shares have been listed and traded on the Official Segment of the Stock Market of Euronext in Amsterdam (Euronext Amsterdam) and on the Tel Aviv Stock Exchange in Israel (TASE) since 10 July The listing of the Company was the result of the successful tender and exchange offer for all outstanding ordinary shares of Kardan Ltd. traded on TASE by means of a prospectus dated 18 June The Company has it statutory seat at Amsterdam, the Netherlands. In accordance with Dutch law the Company has a two-tier structure with a Board of Management and a Supervisory Board. The Supervisory Board is a separate and independent body from the Board of Management. The Supervisory Board oversees the actions and policies of the Board of Management and the general course of Kardan s business activities; it assists and advises, in its supervisory capacity, the Board of Management in performing its managerial duties. Certain major decisions of the Board of Management require prior approval of the Supervisory Board. In accordance with the Company s Articles of Association, the general meeting appoints all members of the Supervisory Board and the Board of Management. The general meeting determines the remuneration and other conditions of employment of the members of the Supervisory Board and the Board of Management. TABAKSBLAT CODE In December 2003 the Tabaksblat Committee published its report on corporate governance for Dutch listed companies. The Company values corporate governance, especially in the light of transparency and communication with its shareholders. The Company will use 2004 to further investigate the implementation of the Code and its overall corporate governance structure. In this report the Company will report in general terms on its corporate governance structure and will give certain preliminary views with regard to the Code. THE BOARD OF MANAGEMENT The Board of Management is responsible for the management of the Company. The members of the Board of Management have collective powers and responsibilities. The Board of Management consists of such number of members as may be determined by the Supervisory Board. At present there are two members of the Board of Management; their profiles can be found on page 8. Each member of the Board of Management is appointed for a period of three years, but may offer himself for re-election following the expiry of his term of office. Information regarding the remuneration of the members of the Board of Management can be found on page 105 of the notes to the financial statements. No members of the Board of Management serve as members of a supervisory board of another listed company. THE SUPERVISORY BOARD The Supervisory Board advises the Board of Management and is responsible for supervising the policies pursued by the Board of Management and the general course of affairs and business of the Company. The Board of Management provides the Supervisory Board with all information the Supervisory Board needs to fulfil its tasks in conformity with the provisions of the Articles of Association of the Company. Certain major decisions of the Board of Management require the approval of the Supervisory Board. In fulfilling their duties, members of the Supervisory Board are to serve the Company s interests. Adoption of resolutions of the Supervisory Board requires an absolute majority of the votes cast. A chairman, elected from the members of the Supervisory Board, currently Mr. Krant, chairs the Supervisory Board. Annual report

12 The Supervisory Board determines the number of members of the Supervisory Board, provided that there shall always be at least three members. Currently the Supervisory Board consists of six members. Each member of the Supervisory Board must resign no later than six years after he has been appointed, but may offer himself for re-election following the expiry of his term of office. Three members of the Supervisory Board of the Company can be regarded as independent under the criteria laid down in the Tabaksblat Code. These are Mr. Krant, Mr. Fink and Mr. Broeksma. The other members are not independent under such criteria, and are related by blood or marriage to shareholders that hold more than ten percent of the shares in the Company. It is expected that the Company will not adopt the recommendations laid down in the Tabaksblat Code in this respect. The Company believes that the specific shareholdings structure of the Company and the extensive provisions on conflict of interest in its Articles of Association - which will be envisaged to become part of the Articles of Association after the general meeting in May 2004 adopts these amendments - establish good grounds that allows it to deviate from the Code on this point, without jeopardizing the proper corporate governance system. In 2003 two members of the Supervisory Board, Mr. Krant and Mr. Broeksma, held one other Supervisory Board position with a Dutch listed company. Information on the remuneration of the members of the Supervisory Board can be found in the notes to the financial statements on page 105. The remuneration of a Supervisory Board member is not dependent on the results of the Company. Shares or rights to shares are not granted to Supervisory Board members as remuneration. THE AUDIT COMMITTEE The Supervisory Board has elected, from its members, three persons to form the Audit Committee, without derogating anything from its primary responsibilities. The Audit Committee has a general task to evaluate and advice the Supervisory Board on matters concerning the financial administrative control, the financial reporting and the internal and external audit. In line with the Tabaksblat Code the Audit Committee consists of at least one financial expert. Also, the chair of the Supervisory Board does not chair the Audit Committee. VOTING RIGHTS AND SHAREHOLDERS MEETINGS Each shareholder has the right to attend General Meetings of Shareholders, either in person or represented by proxy, to address the Shareholders meetings and to exercise voting rights, subject to the provisions of the Articles of Association of the Company. Each share carries one vote. The Company has only one class of shares, being common shares with a nominal value of EUR 0.20 each. Unless otherwise required by the Articles of Association or Dutch law, resolutions of the General Meeting of Shareholders require the approval of an absolute majority of the votes validly cast. Unless provided otherwise by Dutch law or the Articles of Association, there are no quorum requirements. General Meetings of Shareholders are held at least once a year, to discuss the report of the Board of Management, the report of the Supervisory Board, to adopt the financial statements, to appoint the external auditor, to adopt any proposal concerning dividends or other proposals, to appoint members of the Supervisory Board and the Board of Management, and to regard any other matters proposed by the Supervisory Board, the Board of Management or the shareholders in accordance with the Articles of Association of the Company and Dutch law. Pursuant to both Dutch law and the Articles of Association, and as a separate agenda point, the General Meeting discusses the discharge of members of the Board of Management and the Supervisory Board from their responsibilities for the performance of their respective duties in the preceding financial year. This discharge only covers the matters that are known to the Company and the Shareholders when the resolution is adopted. 12 Annual report 2003

13 Extraordinary General Meetings of Shareholders may be held as often as the Board of Management or the Supervisory Board deems necessary, and must be held upon the written request of holders of at least 10% of the total outstanding share capital to the Board of Management or the Supervisory Board specifying in detail the business to be dealt with. If the Board of Management or the Supervisory Board fails to call and hold a meeting within six weeks of its receipt of this request, the requesting shareholder(s) may call a meeting. There are no specific protection tools in place to protect the Company against an unsolicited attempt to take over control of the Company. Annual report

14 Report of the Board of Management GENERAL COURSE OF EVENTS 2003 The year 2003 has been a very exciting year for Kardan. The main highlights being the listing of Kardan N.V. on Euronext Amsterdam in July 2003 and a further growth of the Company s core operations. THE LISTING Dutch companies have operated Kardan s real estate and financial services activities for approximately 10 years. Following Kardan s expansion of activities in those sectors in Europe, a listing on Euronext Amsterdam was the next logical step for the Group. In July 2003, the Company successfully obtained a listing for its shares on the Official Segment of the Stock Market of Euronext Amsterdam N.V. (Euronext Amsterdam) and on the of Tel-Aviv Stock Exchange (TASE), after the successful Tender Offer for all Kardan Ltd. s outstanding ordinary shares period. The Company made an exchange purchase offer to the holders of all the Kardan Ltd. s shares by means of a prospectus and tender offer. The exchange purchase offer was completed successfully with a positive response of approximately 96.7% of the shareholders. The shares of Kardan N.V. are now listed for trading on both Euronext Amsterdam and the TASE. The listing highlights the international orientation of the Company s activities and advances its business goals. The Company s strategy is to further develop its international operations, which will involve additional investments, new ventures, and new relationships with financial and strategic institutions. The listing on Euronext Amsterdam opens new horizons for the Company, with greater accessibility to the European business community, additional flexibility in structuring transactions, and greater visibility in the financial markets. OPERATIONAL OVERVIEW An overview of 2003 main events and the further expansion of the activities are outlined per segment in the divisional reports on pages FINANCIAL DEVELOPMENTS 2003 Due to the fact that the Company took over the entire activities of Kardan Ltd. the following financial overview reflects the economic substance of the Group and does not distinguish between the period that the Group was under the control of Kardan Ltd. and the period after the successful tender offer. The total revenues for the full year amounted to USD million. This represents an increase of 12% compared to 2002 (USD million), mainly as a result of further expansion of the financial services activities. General and administrative expenses in the reported period amounted to USD 22.5 million compared to USD 21.9 million in The positive effects from the overall restructuring of Kardan were offset by the costs related to the listing on Euronext. Financing expenses came in at USD 6.3 million in 2003 as compared to an income of approximately USD 6.2 million in the prior year. Most of the difference is derived from hedging transactions in 2002, from which Kardan exited successfully in 2002, and from revaluation of USD linked loans. The total operational result in 2003 amounted to USD 5.4 million, compared to USD 0.5 million for Core operations (real estate, financial services and infrastructure) showed an operational profit of USD 13.3 million in 2003 (2002: USD 5.7 million), while non-core operations showed an operational loss of USD 8.5 million (2002: USD 3.6 million loss). This operational loss was mainly the result of write-offs in Kardan s Communications and Technology portfolio during the first half of Annual report 2003

15 Net loss in 2003 amounted to USD 7.2 million (net profit in 2002 USD 3.2 million). Compared to the first half of 2003 in which Kardan incurred a loss, the Group substantially improved its results in the second half of the year. Net profit for the second half was USD 3.7 million. The result over the full year represents a net loss per share of USD 0.12, compared to a net profit per share of USD 0.05 in Total assets as of 31 December 2003 amounted to USD 1,128 million as compared to USD 371 million at the prior year-end. The increase is the result of the first-time consolidation of the real estate group as of 31 December 2003, the expansion of the financial services activities during the year, and an increase in Kardan s indirect shareholdings in the financial services group. Shareholders equity as of 31 December 2003 amounted to USD 94 million, approximately the same level as at year-end Although Kardan incurred a net loss over the year 2003, shareholders equity remained stable as a result of the issuance of shares and options during the second half of the year. In November, Kardan raised approximately USD 23 million through the issuance of debentures and share options in a private placement to institutional investors in Israel. Total net cash flows in 2003 amounted to USD 86 million compared to USD 27 million in This increase is primarily the result of the first-time consolidation of the real estate companies and from the issuance of debentures. PERSONNEL AND ORGANISATION Consisting of various companies in many countries, the human resource policy within the Group is shaped locally, reflecting the local laws, culture and employment conditions. As of 31 December 2003, the number of employees engaged by Kardan N.V. and its consolidated companies amounted to approximately 2,900. The average number of employees in 2003 was 2,933, compared with 2,805 in Within the Kardan Group various bonus and incentive schemes are in place, including options granted to key employees. RISK MANAGEMENT General The risk management policy of Kardan is an integral part of its strategic policy. In every aspect of its operations, Kardan s risk management policy is aimed at ensuring sustainable growth and focuses on a long-term view of its activities. Kardan Group s business strategy involves deliberate growth, particularly in the fields of financial services, real estate and infrastructure. In its nature as an investment company, Kardan s growth is fuelled by acquisitions. Because acquisitions always involve an element of risk, in general an extremely intensive and extensive due diligence is carried out before an acquisition decision is made. This limits the risks considerably. Making well-considered choices and spreading activities over various markets are used to try and make risks as manageable as possible. Kardan is actively involved in the management of its investments. Kardan's management team formulates the overall strategy of each sector, and provides the various sectors with managerial depth and experience, international ties and assistance in raising capital. The risks to which Kardan is exposed, can be broken down into financial, operational and market-related ones. Preventive measures have been adopted to limit or prevent these risks. Market Kardan currently has over 70% of its activities in Central and Eastern Europe. Kardan Group s business strategy is based on its assessments of economic and market trends in the CEE countries. The economic and Annual report

16 market trends in these countries are subject to volatility, and not always easy to predict. The success and growth of Kardan Group s businesses in CEE depends on continued economic growth, and the development of the real estate and financial services markets, in the countries in which it operates, in particular the commercial real estate market in Poland, Hungary, The Czech Republic, Romania and Serbia and the markets for insurance and pension products in Bulgaria, Romania, Serbia, Croatia and Slovakia. Some of these countries have recently been granted an EU membership. For some of these countries, an EU membership is currently proposed. Another portion of Kardan Group s operations are conducted in Israel, particularly in the fields of consumer goods, communications and real estate. The Israeli economy has been suffering a slowdown, caused in part by the worldwide slowdown in technology industries, as well as by the economic strain resulting, among others, from hostilities with the Palestinian population. Operational Operational risks are those risks to which the Group is exposed based on its operations. These risks differ from one company to the next. Kardan is an early investor in the real estate, financial services and infrastructure segments in the CEE countries. Although the insurance and pension fund management sectors in those countries are heavily regulated, the economic environment is not yet stable or not well developed. Due to the entrepreneurial structure of Kardan, Kardan is able to react quickly to changes. Kardan Group s activities are managed by lean management staffs that are highly skilled and experienced in the markets in which Kardan Group operates. Accordingly, Kardan Group depends on the services of a small number of key executives. Hence Kardan Group has adopted incentive-based compensation policies designed to reduce the possiblity of changes in management staff. For Kardan s legal disputes please refer to pages in the notes to the financial statements. Financial The financial risks are currency, interest rate and credit risks. Kardan has installed internal guidelines governing exposure to these risks. Kardan Group s businesses earn their income, and pay expenses, in a variety of currencies, including USD, EUR, NIS and various CEE currencies. Where possible, receipts in foreign currencies are used by the group companies for payments in the same currency as much as possible. In some cases, Kardan Group enters into hedging transactions to mitigate the effects of exchange rate fluctuations on its operations. Kardan attempts to match the investments, the source of finance and the revenue streams in the predominant foreign currency, in order to minimize foreign exchange risk. Kardan depends, to certain extent, on long term debt financing and has substantial loans with floating interest rates. It also has some loans outstanding which are linked to the inflation rate in Israel. Outlook 2004 Kardan is a significant player in the CEE countries in the Real Estate and the Financial Services sectors. Kardan also expects to expand its Infrastructure activities in this region. Kardan will solidify and enhance the growth and profitability of its core business sectors: Real Estate, Financial Services and Infrastructure, all of which made a positive contribution to the results in Furthermore, Kardan expects the Consumer Goods sector to return to the profitability levels of previous years and assesses that further write-offs in the Communications & Technology segment will be limited. Based on the above, Kardan expects to continue to improve profitability in 2004, as demonstrated by the results of second half of Amsterdam, 31 March 2004 Board of Management H. Harel B. Bremer 16 Annual report 2003

17 Divisional report

18 THROUGH KARDAN REAL ESTATE LTD. AND GTC INTERNATIONAL B.V., THE COMPANY DEVELOPS REAL ESTATE IN POLAND, HUNGARY, THE CZECH REPUBLIC, ROMANIA, SERBIA AND ISRAEL, THE COMPANY IS ENGAGED IN THE ACTIVE PROMOTION AND DEVELOPMENT OF OVER 1 MILLION SQUARE METERS. OF BUILT AREA, IN PROJECTS THAT INCLUDE OFFICE PARKS, INDIVIDUAL OFFICE BUILDINGS, RESIDENTIAL AND SHOPPING CENTRES. Real Estate

19 With a view to capitalizing on its real estate expertise and the unique opportunities presented by the emerging CEE markets, in 1994 the Kardan Group established GTC International B.V. (GTC) in the Netherlands, which is a holding company that focuses on real estate development in Central and Eastern Europe. GTC carefully examines each business venture in these countries and sets up local professional management teams to implement each country s projects. In 1995 GTC founded GTC Poland, which has become one of the largest real estate companies in Poland, developing a variety of projects throughout Poland for office, commercial and residential purposes. In light of its success in Poland, GTC has added Bank Handlowy (the successor of CitiBank Poland), Deutsche Bank, the European Bank for Reconstruction and Development (EBRD), Rodamco Europe and Orbis as strategic partners in its activity in Poland. Based on its success in Poland, GTC is currently developing projects in Hungary, the Czech Republic, Romania and Serbia, based on similar business models. OVERVIEW 2003 The real estate segment contributed an operational profit of approximately USD 11 million in the reported period compared to USD 6 million in This increase over the full year is mainly due to gains from revaluation of assets and from a strong increase in sale of residential units. The real estate operations in CEE generated to GTC rental revenues amounting to USD 57.5 million in 2003 and gross profit of USD 42.5 million. Revenues from sale of residential units amounted to USD 33.7 million in 2003 with gross profit of USD 4.4 million. In the period under review, Kardan has further grown its real estate portfolio, specifically in Eastern Europe. It has started operations in Serbia, and has secured new real estate projects in Krakow, Poland and in Prague, the Czech Republic. Two major projects have been completed in Budapest. The marketing of these projects is progressing well with the majority of office space already leased and the majority of residential units already sold. Furthermore, Kardan executed several strategic sales: - Sale of The Europe House, one of the first modern office building in Bucharest, Romania, to Europolis Invest, a large Austrian investment fund, at a value exceeding USD 30 million. This transaction represented a gross yield of 11.5%, a record for the Romanian real estate investment market. - Sale of a 50% interest in one of the largest shopping and entertainment centres in Warsaw, Galleria Mokotów, to Rodamco Europe at a property value of approximately USD 165 million. In addition, during the year, Kardan has increased its equity stakes in its real estate subsidiaries Kardan Real Estate from 45.7% to 66% and in GTC International from 44.5% to 69.4%. As of 31 December 2003, the Real Estate activities are consolidated in the Kardan results for the first time. OUTLOOK GTC intends to continue its development activities in the markets in which it currently operates, and may consider mergers and acquisitions that would reinforce its ability to grow in additional CEE markets or other opportunities to expand into those markets. GTC investments in real estate development, mainly in the field of shopping centers and offices, are expected to increase. Poland will continue to be GTC s primary market, but GTC s activities will have a broader focus, with a larger percentage of its activities taking place in other CEE markets. Despite the sale of 50% of Galeria Mokotow, GTC anticipates its revenues will increase in 2004, due to the completion of additional projects. Furthermore, the expected proceeds from the planned IPO of GTC Poland on the Warsaw stock exchange, will allow the Company to accelerate the expansion of its real estate operations in Poland and in other CEE countries. Annual report

20 TBIH FINANCIAL SERVICES GROUP N.V., KARDAN S SUBSIDIARY WHICH ENGAGES IN THE FINANCIAL SERVICES SECTOR, IS A LEADING INVESTOR IN ITS SEGMENT IN SEVERAL CEE COUNTRIES. TBIH IS THE MAJORITY SHAREHOLDER OF THE LARGEST INSURER IN BULGARIA, THE THIRD LARGEST INSURER IN ROMANIA, AND THE LARGEST PENSION MANAGEMENT COMPANIES IN BULGARIA, SLOVAKIA, SERBIA AND GEORGIA. IT IS ALSO INVOLVED IN INSURANCE IN CROATIA AND GEORGIA, AND PENSION FUND MANAGEMENT IN CROATIA. IN 2002 TBIH ENTERED THE FIELDS OF LEASING, CONSUMER FINANCE, AND ASSET MANAGEMENT IN BULGARIA, ROMANIA AND SLOVAKIA. TBIH MISSION IS TO ESTABLISH A LONG-TERM PRESENCE IN THE FINANCIAL SECTOR OF THE PAN BALKAN REGION AND SELECTED COUNTRIES IN CEE; AND TO BECOME A LEADING PROVIDER OF FINANCIAL SERVICES IN THE COUNTRIES IT OPERATES. Financial Services

21 INSURANCE ACTIVITIES TBIH Financial Services Group N.V. (TBIH), through its subsidiaries, is active in the fields of general and life insurance in Bulgaria, Romania, Croatia and Georgia. TBIH s major insurance subsidiaries are: - Bulgaria: Bulstrad Insurance & Reinsurance AD (Bulstrad) - operates in a wide variety of general insurance fields in Bulgaria. Bulstrad s market share in the general insurance market was approximately 20% for the year 2003, and it is the leader in its main lines of business: green-card, motor TPL, property, marine and aviation insurance. - Romania: Omniasig Insurance & Reinsurance SA (Omniasig) - the third largest insurance carrier in Romania, operating primarily in the field of general insurance. Omniasig s main lines of business are motor casco, motor TPL, green-card, marine and aviation, and property insurance. - Croatia Helios Insurance PLC - operates in a wide variety of general insurance fields in Croatia, and through a subsidiary, in Bosnia-Herzegovina. TBIH s subsidiaries operate both through branches deployed throughout the various countries of operation, as well as through agents, mainly for policies sold to individuals. PENSION FUND MANAGEMENT TBIH holds a controlling interest in Pension Assurance Company Doverie AD (Doverie), which manages mandatory and voluntary pension funds in Bulgaria. Doverie operates through approximately 49 offices and branches. As of 31 December 2003 Doverie employed 123 employees, approximately 82 of which are marketing personnel, and had over 5,000 agents, having a market share of approximately 43%. In addition TBIH fully owns VSP Tatry a.s. (Tatry), which administers and manages a voluntary pension fund in Slovakia. Since its establishment, Tatry has been the largest pension fund in Slovakia by number of members and assets under management, with a market share in 2003 of approximately 50%. OVERVIEW 2003 Revenues from financial services in 2003 amounted to USD 68.6 million as compared to USD 44.2 million in The increase is primarily the result of the growth of the existing activities, the expansion into other markets and the increased stake in the financial services subsidiary TBIH. During the first half of 2003, health insurance operations in Bulgaria and Romania were established as well as leasing and consumer credit activities in Romania and Serbia. In 2003, total insurance premiums earned by TBIH amounted to USD 195 million. In comparison, total insurance premiums for the full year 2002 amounted to USD 135 million, representing an increase of over 44%. Insurance activities contributed an operational profit USD of 5.3 million in 2003 (2002: USD 2.5 million). Pension fund members grew by 27% from 1.2 million to 1.5 million. Furthermore, assets under management in the pension funds more than doubled, from USD 163 million at year-end 2002 to USD 350 million at year-end Pension funds activities generated an operational loss of USD 2.3 million (2002: an operational loss of USD 1.8 million) This loss is mainly caused by investments made to acquire new clients and pension members in the amount of USD 2.6 million, which, under IFRS, have to be recognized in full as expenses in each reporting period. The financing companies, active in leasing and consumer credit activities, were started up in 2003 and contributed an operational profit of USD 1.7 million in 2003 (2002: nil). In total, the financial services segment contributed an operational profit of approximately USD 1.2 million in 2003 (2002: USD 1.1 million operational loss). Included in this result is goodwill amortization amounting to USD 1.6 million. Annual report

22 In the fourth quarter of 2003, Kardan increased its indirect shareholdings in its Financial Services subsidiary TBIH to 58.7% through a share transaction with EBRD. OUTLOOK The general insurance market in the countries in which subsidiaries of TBIH operate is characterized by low levels of insurance density (premium income per capita) and insurance penetration (percentage of GDP spent on insurance). Life insurance premiums as a percentage of total insurance premiums range from approximately 10% to 30% as compared to 50% or more in most Western economies. Although the insurance penetration is low, the pace of its increase is high compared to Western Europe, which Kardan sees as an important opportunity in these countries. TBIH anticipates an increase in the scope of its insurance activities in the coming year, based on expected economic growth in the markets in which it operates, as well as expected increases in insurance penetration and the accession of Croatia to the EU and the announcement of Bulgaria and Romania as candidates for In the pension field, TBIH anticipates increased revenues from its general mandatory fund in Bulgaria, which began receiving contributions in In Slovakia TBIH will continue to invest in its pension infrastructure, in anticipation of the possible introduction of mandatory funds in TBIH intends to continue to invest in the development of its leasing, consumer finance, and asset management businesses, as well as to consider opportunities in new insurance and pension markets where it may be able to obtain a significant market share. 22 Annual report 2003

23 Annual report

24 TAHAL ENGAGES IN ENGINEERING PROJECTS IN THE FIELD OF WATER RESOURCES AND WATER SUPPLY; AGRICULTURAL PLANNING AND MARKETING; IRRIGATION, DESALINATION, SANITATION AND WASTEWATER TREATMENT; ENVIRONMENTAL ENGINEERING; CIVIL ENGINEERING AND INFRASTRUCTURE; INDUSTRIAL ENGINEERING AND ENERGY; WATER SUPPLY AND SEWERAGE SYSTEMS; AND GEOGRAPHIC INFORMATION SYSTEMS. TAHAL WAS PRIVATIZED IN 1996 AND IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF KARDAN. Infrastructure

25 The Tahal Group is primarily involved in the fields of design, supply, engineering, supervision and implementation of internationally and locally financed private and local engineering projects as well as ownership, management and participation in Turnkey and B.O.T. (Build-Operate-Transfer) projects. Through these activities Tahal Group provides its customers with engineering solutions and fund raising to those projects. A major part of Tahal Group s projects, initiated by international Government bodies, is financed by the World Bank, regional developments banks and commercial banks. Tahal benefits from an excellent international reputation for the standard of its services, based on its vast experience and its commitment to quality and excellence. The Tahal Group is involved in numerous projects worldwide, mainly in CEE, Latin & South America, Asia, Africa, and Israel. OVERVIEW 2003 Revenues for the infrastructure sector amounted to USD 51.8 million (Full year 2002: USD 52.1 million). In 2003 the infrastructure segment contributed an operational profit of approximately USD 1 million (net of goodwill amortization), almost twice as much as in 2002 (USD 0.5 million). The share of revenues from the CEE region is continuously growing. The order book for new projects increased substantially during the year. Recently two major projects were obtained: an order to upgrade and expand the municipal water system of Santo Domingo, the capital of the Dominican Republic, which will generate a turnover of approximately USD 50 million in the coming years and a contract with the Belgrade Water Board to build a water treatment plant in the Serbian capital, representing a turnover of USD 17 million over a three year period. OUTLOOK Tahal intends to further increase its order book and revenues by further expanding its international operations. The particular emphasis shall be in the CEE countries where Kardan has existing operations. The Company is looking to expand into these markets by acquiring companies, in the infrastructure sector in target countries, and by strengthening its marketing structure by recruting additional marketing personnel. Annual report

26 KARDAN IS INVOLVED IN THE IMPORT AND MARKETING OF VEHICLES AND HOUSEHOLD APPLIANCES AND ELECTRONICS IN ISRAEL. THE ACTIVITY IN THE AUTOMOTIVE FIELD IS PERFORMED BY UNIVERSAL MOTORS ISRAEL (UMI), THE ISRAELI DISTRIBUTOR OF THE GENERAL MOTORS GROUP AND ITS AFFILIATES (THE GM GROUP), INCLUDING THE BRAND NAMES CHEVROLET, BUICK, CADILLAC, GMC AND OPEL, AND VEHICLES MANUFACTURED BY SAAB, ISUZU AND FORMER DAEWOO. Commerce

27 UMI also engages in the import and marketing of spare parts and accessories, as well as rendering of maintenance and repair services to vehicles imported by it. Another subsidiary of Kardan distributes the Whirlpool and Bauknecht white line brands and AIWA and Sanyo's audio-video products throughout Israel. OVERVIEW 2003 In the Consumer Goods sector, Kardan s revenues amounted to USD 18.5 million as compared to USD 26.8 million in It is to be noted that the revenues of UMI, which is 40.5% held by Kardan, are not consolidated in Kardan s report. The decrease in the sector s revenues derived mainly from the sale of a company that generated a large portion of the revenues in During 2003 Kardan has obtained the rights to import more car brands in Israel through its subsidiary UMI, adding multiple types to the current range of products and reinforcing its marketing ability substantially. This expansion which substantially increased UMI s market share and revenues in the second half of 2003, is expected to add to the profitability of this sector. OUTLOOK The Company expects its strong operational performance of the second half of 2003 to continue, especially in the marketing of the South korean models. Consequently, UMI s net results are expected to improve substantially in In the household electric appliances, Kardan expects to improve its sales and net results due to a reduction of taxes on these products in the first quarter of 2004, which should result in higher sales figures. Annual report

28 KARDAN GROUP IS ACTIVE IN THE ISRAEL AND ISRAELI RELATED COMMUNICATIONS AND TECHNOLOGIES MARKETS MAINLY VIA TWO SUBSIDIARIES KARDAN COMMUNICATIONS AND KARDAN TECHNOLOGIES. THE COMMUNICATIONS AND TECHNOLOGIES MARKETS HAVE SUFFERED IN RECENT YEARS FROM BOTH ISRAELI AND GLOBAL SHOCKS, AS WELL AS FROM A CONTINUING WEAKNESS OF THE CAPITAL MARKETS. KARDAN GROUP S CURRENT POLICY IS ACCORDINGLY AIMED AT REORGANIZING AND FOCUSING ITS COMMUNICATIONS AND TECHNOLOGIES INVESTMENT PORTFOLIO AND LIQUIDATING NON-PROFITABLE ACTIVITIES. Telecom

29 Kardan Communications focuses on investments in small to medium size companies, most of which are beyond the start up stage, but have a strong growth potential. Each of the companies it invests in, are either unique in their sphere, or has a potential to become an industry leader in its segment. Kardan Technologies - Having achieved significant success during the 1990 s in pioneering initiation and investments in Venture Capital funds. Currently, in accordance with the general market trends, Kardan Technologies is not making further investments and is waiting for some of its portfolio start-ups in the Concord Venture Capital Funds to mature. The shares of Kardan Technologies are listed on the Tel-Aviv Stock Exchange. OVERVIEW 2003 The Technology and Communications sector contributed in 2003 a net operational loss of USD 10.4 million compared to an operational loss of USD 11.1 million in The operational loss is mainly resulting from the write-offs of investments in Kardan Technologies (mainly in Concord 1 Venture Capital Fund, Concord 2 Venture Capital Fund; and Callis Soft). These write-offs were for a large part carried out in the first half of 2003, further limiting the exposure to this segment. In December 2003 Kardan Communications has acquired a 50.01% equity stake in TDN Networks Ltd., a company active in the communications equipment field. OUTLOOK The Company intends to follow closely the developments in the technology and communications markets, and to develop its current investee companies, in particular in the field of communications. The Company also intends to cautiously consider additional investment opportunities in these fields. Annual report

30

31 Financial Statements FOR THE YEAR ENDED DECEMBER 31, 2003

32 32 Annual report 2003

33 Contents CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 34 CONSOLIDATED PROFIT AND LOSS STATEMENTS 36 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 37 CONSOLIDATED CASH FLOW STATEMENTS 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 42 OTHER INFORMATION 106 COMPANY ONLY FINANCIAL STATEMENTS COMPANY-ONLY BALANCE SHEET 111 COMPANY-ONLY PROFIT AND LOSS STATEMENT 112 NOTES TO COMPANY-ONLY FINANCIAL STATEMENTS 113 OTHER INFORMATION 118 AUDITORS' REPORT 119 Annual report