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LOTTE SHOPPING CO., LTD. and SUBSIDIARIES Consolidated

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LOTTE SHOPPING CO., LTD. and SUBSIDIARIES Consolidated LOTTE SHOPPING CO., LTD. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2010 and 2009 (With Independent Auditors’ Report Thereon) Contents Page Independent Auditors’ Report 1 Consolidated Statements of Financial Position 3 Consolidated Statements of Income 6 Consolidated Statements of Changes in Stockholders’ Equity 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 12 Independent Auditors’ Report Based on a report originally issued in Korean The Board of Directors and Stockholders Lotte Shopping Co., Ltd.; We have audited the accompanying consolidated statements of financial position of Lotte Shopping Co., Ltd. (the “Company”) and its subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity and cash flows for the years then ended. 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 certain subsidiaries including Lotte.Com Inc., whose financial statements represent 13.9% and 9.1% of the consolidated total assets as of December 31, 2010 and 2009, respectively, and 22.1% and 15.4% of the consolidated total sales for the years then ended, respectively. Those financial 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 those companies, is based solely on the reports of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lotte Shopping Co., Ltd. and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations, the changes in their equity, and their cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. The accompanying consolidated financial statements as of and for the year ended December 31, 2010 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in Korean won have been translated into dollars on the basis set forth in note 3 to the consolidated financial statements. Without qualifying our opinion, we draw attention to the following: As discussed in note 2(a) to the consolidated financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying consolidated financial statements are for use by those knowledgeable about Korean accounting principles and auditing standards and their application in practice. As discussed in note 35 to the non-consolidated financial statements, the Company changed its accounting estimates for the useful lives of property, plant and equipment in the current year. As a result of this change in accounting estimates, the Company's depreciation expense under the new useful lives was W108,804 million lower than it would have been under the previous useful lives for the year ended December 31, 2010, and the Company's unappropriated retained earnings increased by W82,367 million as of December 31, 2010. KPMG Samjong Accounting Corp. Seoul, Korea March 22, 2011 This report is effective as of March 22, 2011, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any. 2 LOTTE SHOPPING CO., LTD. AND SUBSIDIARIES Consolidated Statements of Financial Position As of December 31, 2010 and 2009 U.S. dollars (thousands) Korean won (millions) (note 3) Assets 2010 2009 2010 Current assets: Cash and cash equivalents (notes 12 and 16) W 1,419,616 843,449 $ 1,246,480 Short-term deposits (notes 4 and 15) 535,854 520,200 470,502 Short-term held-to-maturity securities (note 8) - 124 - Trade accounts receivable, net of allowance for doubtful accounts of W13,856 million in 2010 and W10,359 million in 2009 (notes 11 and 16) 432,023 382,057 379,335 Loans, net of allowance for doubtful accounts of W8,848 million in 2010 and W8,877 million in 2009 33,361 39,913 29,292 (note 16) Other accounts receivable, net of allowance for doubtful accounts of W7,507 million in 2010 and W6,035 million in 2009 (note 16) 208,358 135,803 182,946 Accrued income, net of allowance for doubtful for doubtful accounts of W394 million in 2010 and W304 million in 2009 40,024 26,967 35,142 Advance payments, net of allowance for doubtful accounts of W2,511 million in 2010 and W2,265 million in 2009 108,462 100,236 95,233 Inventories (notes 5 and12) 1,713,852 1,251,349 1,504,831 Deferred income tax assets (note 29) 120,147 90,388 105,494 Other current assets (note 9) 239,236 72,694 210,059 Total current assets 4,850,933 3,463,180 4,259,314 Card assets: Card assets, net of allowance for doubtful accounts of W141,571 million in 2010 and W94,674 million in 2009, and deferred loan income of W6,605 million in 2010 and W13,012 million in 2009 (notes 7 and 16) 5,109,582 3,570,305 4,486,419 Non-current assets: Available-for-sale securities (notes 8 and 15) 440,689 365,010 386,942 Equity method investment securities (note 8) 982,345 1,635,787 862,539 Non-current derivative assets (note 22) 56,430 177,137 49,547 Other investment assets 7,859 5,554 6,900 Property, plant and equipment, net of accumulated depreciation of W3,342,868 million in 2010 and W2,794,735 million in 2009 (notes 12, 15 and 35) 14,440,096 12,896,552 12,678,985 Intangible assets, net of amortization (note 13) 2,225,650 856,147 1,954,211 Long-term prepaid expenses 519,402 271,618 456,056 Long-term advance payments 102,072 76,960 89,623 Guarantee deposits (notes 20 and 32) 1,431,687 1,041,859 1,257,079 Other assets (note 14) 83,142 63,269 73,002 Total non-current assets 20,289,372 17,389,893 17,814,884 Total assets W 30,249,887 24,423,378 $ 26,560,617 See accompanying notes to consolidated financial statements. 3 LOTTE SHOPPING CO., LTD. AND SUBSIDIARIES Consolidated Statements of Financial Position, Continued As of December 31, 2010 and 2009 U.S. dollars (thousands) Korean won (millions) (note 3) Liabilities 2010 2009 2010 Current liabilities: Trade accounts payable (notes 11 and 16) W 2,902,435 2,283,837 $ 2,548,455 Short-term borrowings (notes 18 and 32) 1,617,626 955,222 1,420,341 Other accounts payable (note 16) 1,142,772 841,205 1,003,400 Accrued expenses (note 16) 298,407 309,857 262,013 Gift certificates 409,062 378,780 359,173 Short-term debentures, net of discount of W132 million in 2010 of W149 million in 2009 (notes 16 and 19) 180,703 321,389 158,664 Current portion of long-term borrowings (note 18) 44,697 70,532 39,245 Current portion of debentures, net of discount of W2,369 million in 2010 and W239 million in 2009 (notes 16 and 19) 1,353,231 707,338 1,188,191 Income tax payable (note 29) 306,573 164,271 269,183 Provision for bonus points reward program (note 21) 103,617 89,573 90,980 Other provisions (note 32) 226,659 192,536 199,016 Other current liabilities (note 17) 626,364 303,698 549,974 Total current liabilities 9,212,146 6,618,238 8,088,635 Long-term liabilities: Long-term borrowings (notes 16 and 18) 1,124,632 472,533 987,472 Long-term debentures, net of discount of W6,740 million in 2010 and W8,364 million in 2009 (notes 16 and 19) 3,971,870 2,514,812 3,487,461 Rental guarantee deposits 374,851 335,085 329,134 Provision for retirement and severance benefits, net (note 20) 90,473 78,521 79,438 Deferred income tax liabilities (note 29) 1,277,136 1,227,063 1,121,377 Other non-current liabilities 50,262 11,859 44,133 Total long-term liabilities 6,889,224 4,639,873 6,049,015 Total liabilities W 16,101,370 11,258,111 $ 14,137,650 See accompanying notes to consolidated financial statements.
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