Mercator Group Annual Report for 2003

Annual Report

Annual report A look back so we can look ahead. It's looking good. Many months, weeks and days. Countless moments of ordinary people. A life in pleasant company. Collective spirit is made of memories of individuals. For some the sweetest memories. It’s nice to be together, so we stay. And move ahead. Toward victories. It’s not only work. It’s also a home. Thought of tomorrow, safe and warm. Everyday we learn - to gain knowledge: It’s good to know. About things that might be of use one day. For there will be more days and months and years. And many special moments. Even moments that are somewhat less special. But ours. In a pleasant environment. In company of pleasant people. Zoran President of the Management Board and CEO, 7 years in Mercator

It's looking good

006 Annual Report 2003 007 Table of Contents*

011 Report of the President of the Management Board 013 Members of the Management Board 014 Report of the Supervisory Board 016 Members of the Supervisory Board 017 General Information 019 Short History 020 Key Events in 2003 021 Financial Highlights of 2003 022 Development Indicators for The Mercator Group

* The Annual Report 2003 in English language includes financial information according to the International Financial Reporting Standards, and is not a translation of the Slovenian version of the Annual Report 2003, which is the legal version.

006 Annual Report 2003 007 025 BUSINESS REPORT 026 About the Mercator Group 026 Group’s activities 026 Corporate Structure 029 Business Strategy of the Mercator Group 030 Impact of Market Conditions on Business Operations 031 Sales and Marketing 031 Sales 033 Store Formats 035 Market Share 036 Purchasing 036 Investments 036 Capital Expenditure 037 Long-term Financial Investments 039 Research and Development 039 Marketing Development 045 IT Development 045 Quality Development 046 Employees 050 Ownership Structure and the Company’s Shares 053 Communication with Stakeholders 053 Communication with Customers 053 Communication with Employees 054 Communication with Shareholders and Financial Community 054 Communication with Business Partners 054 Communication with the Environment 055 Public Relations 057 Financial Operations 059 Risk Management 063 Business Performance 063 Performance of the Mercator Group in 2003 064 Financial Ratios 064 Comments on Business Performance 065 Performance of the Companies within Mercator Group 069 Environmental Activities 071 Post Year-End Events 072 Plans for 2004 and Future Development of the Mercator Group

008 Annual Report 2003 009 073 FINANCIAL REPORT 075 Principal Accounting Policies 080 Audited Consolidated Financial Statements of the Mercator Group in Accordance with International Financial Reporting Standards 080 Consolidated Income Statement of the Mercator Group for the Year Ended 31 December 2003 081 Consolidated Balance Sheet of the Mercator Group as at 31 December 2003 082 Consolidated Cash Flow Statement of the Mercator Group for the Year Ended 31 December 2003 083 Consolidated Statement of Changes in Shareholders’ Equity 084 Notes to the Consolidated Financial Statements of the Mercator Group 105 Management Responsibility Statement 106 Report of the Auditors 107 Audited Financial Statements of the Company Poslovni sistem Mercator, d.d., in Accordance with Slovenian Accounting Standards 107 Balance Sheet of the Company Poslovni sistem Mercator, d.d., as at 31 December 2003 108 Income Statement of the Company Poslovni sistem Mercator, d.d., for the Year Ended 31 December 2003 109 Cash Flow Statement of the Company Poslovni sistem Mercator, d.d., for the Year Ended 31 December 2003 110 Contact Persons 112 The Mercator Group

008 Annual Report 2003 009 Stanislav Brodnjak (Member of the Management Board), Ales »erin (Member of the Management Board), Zoran JankoviÊ (President of the Management Board), Jadranka DakiË (Member of the Management Board), Marjan Sedej (Member of the Management Board)

In pleasant company

010 Annual Report 2003 011 Report of the President of the Management Board

The year 2003 is behind us and I am proud to report that it was an excellent year. I am happy to have been given the opportunity, together with my colleagues - Mem- bers of the Management Board, to run one of the most successful and the largest Slovenian company for another four years, since on 1 January 2003 our new five- year term of office was confirmed.

2003 was characterised by intensive preparations of the whole Slovenian corporate sector for the entry of Slovenia into the European Union. Mercator was no exception; we paid great attention to preparations and harmonisation required for entering the single European market. We continued thorough disinvestment and consolidation of business as well as cost reduction. In the first half of 2003 we sold three companies, which did not belong to our core activity: retail sale of food. On 9 May 2003 the partners ASPIAG MANAGEMENT AG and Poslovni sistem Mercator, d.d., signed a sales agreement with which Poslovni sistem Mercator, d.d., sold to the company ASPIAG MANAGEMENT AG its total 20-per cent stake in the company Spar Slovenija, d.o.o. This was the realisation of the call option related to the before mentioned interest in the company as stipulated, together with the purchase price, in the partnership contract, made by the previous Management Board of the company in 1997. We continued to take over the activities of subsidiary trade companies, at the end of the year we merged two subsidiaries with the parent company and acquired a majority holding in the company Æivila Kranj, d.d, which will have a significant impact on Mercator’s business after the entry of Slovenia in the European Union. This will increase its competitiveness in those parts of Slovenia, which will become more exposed to the competitors from neighbouring countries due to the creation of larger regions and removal of border crossings. We set up a project team, which studied the impact that Mercator’s entry in the European market will have on various sectors and assessed that we were fully prepared for the entry into the European Union.

Investment activities on the domestic market were carried out in line with the adopted strategy for 2003 and were slightly less intensive than in previous years. We opened several smaller trade centres, developed a new store format, i.e. a convenience store, and worked on the development of a new store format “hard discount”. The first stores of this type will be opened in the first half of 2004. In addition two Mercator Centres were being built, in Celje and Domæale, with which we will achieve our goal “a Mercator Centre in Every Slovenian Region”.

Investment activities on the new markets were much more intensive in 2003, especially in Croatia, our second most important market. We acquired land on 11 new exclusive sites for further expansion of our retail network and opened two larger stores. In Bosnia and Herzegovina we started building a Mercator Centre in Tuzla and purchased land in Sarajevo, where we intend to build a smaller shopping centre. In Serbia and Montenegro, where we started with business activities only at the end of 2002, we purchased land in Belgrade, Novi Sad and Kragujevac where we intend to expand our retail network.

A satisfied customer remains our greatest asset. 11 million customers did their shopping in Mercator’s stores every month. We focussed all our endeavours and activities on promptly monitoring their needs, wishes and expectations and the results of our efforts were seen in a rapid growth in the number of our loyalty card holders which reached 360,000. Similarly rapid was the increase in the loyalty card’s share in total turnover which, compared with 2002, grew by 11%. 010 Annual Report 2003 011 In September 2003 citizens of Slovenia decided on Sunday and public holiday store After all our trade companies in Slovenia obtained the ISO 9001 quality standard in opening hours at a referendum and voted for the stores to be closed on these days. 2002, we started introducing the certificates of quality in our companies on the new Closed stores on Sundays and public holidays will not have an immediate effect on our markets. In 2003 we carried out a complete renovation of our Web site and were the performance. The question presented at the referendum was not clearly stated and will first in Slovenia to have been given the Qweb certificate. require a lot of harmonisation and long lasting reviewing by the constitutional court, before the Trade Act comes into force. I am pleased to see that our stores are still full Despite extensive investment activities we further consolidated our financial on Sundays and I myself am a regular Sunday shopper at Mercator Centres. strength and total assets in 2003. With excellent performance and some desinvest- ments we increased our own capability to finance investments and pursued the At Mercator we are well aware that without satisfied employees, who with their target capital structure where the ratio of debt to equity was 1 : 1, which ensured personal touch, friendliness and a smile ensure that our customers are satisfied, we appropriately low costs of capital and an acceptable level of financial risk. We also in- could never be so successful. We take care of our employees in various ways, in addi- tensified the use of financial lease, which has become an increasingly attractive form tion to providing numerous training opportunities and contributing to their social of financing, allowing for a good ratio between maturity and price, thus significantly security, we organise social events. In 2003 the 25th annual gathering of the Group’s contributing to the improvement of the maturity of financial sources. In future we employees - Mercatoriada - was organised and attended by 10,000 employees and shall continue with our policy of early settlement of trade payables to maintain a their family members, who thus demonstrated a high level of dedication and loyalty high level of liquidity. to the Company, of which I am very proud. For the second consecutive time we organised a meeting of all Mercator’s employees before the New Year’s Eve at the At Mercator we are well aware of our responsibility to all our stakeholders, espe- Ljubljana Exhibition Grounds, the “party of all parties”, which was attended by a cially our shareholders. We directed all our activities and operations towards proving record number of employees. 9,000 employees turned up, wishing to socialise and that their trust has been justified. In 2003 the market price of Mercator’s shares grew have a good time. I regularly hold an open day for our employees to give everyone by 33 % which, including dividend payout, represented a 35.2 % return. Meeting the opportunity to visit me personally in my office for an open and honest discusion. our commitment to shareholders will remain one of our key goals in the future. I feel that this form of communication can significantly contribute to strengthening the principle that each and everyone of employees is an important part of the group In 2003 the Company’s operation was successfully supervised by its Supervisory and I intend to continue with this practice. Board, who, in accordance with the resolution of the 9th Annual General Meeting of Shareholders held in the second half of the year, performed its function in a re- Partnership with Slovenian producers and with producers in the markets, in which duced, 10-member composition. The Supervisory Board carried out its supervision we operate, has been strengthening from year to year. Together we penetrate new of the company Poslovni sistem Mercator, d.d., and the whole Mercator Group markets, we expand, develop new products and with other forms of co-operation professionally and thoroughly in 2003 and significantly contributed to achieving ensure our customers a wide range of competitively priced, high quality products, the Group’s set goals. I take this opportunity to thank them most sincerely. I am also made by local producers. This co-operation has a positive impact on producers, as it confident that the Supervisory Board will continue with its professional, responsible provides opportunities for long-term development, as well as on the whole Slovenian and independent supervision and contribute to the Group’s successful performance economy. In 2003 we organised the 4th Annual Marketing Days, where we presented and deliverance of adopted strategy in the future. our development plans and possibilities of further co-operation to our partners. At Mercator we have been preparing for entry in the European Union for a number We know that pursuing our business strategy is closely connected to our attitude to- of years and in 2003 preparations were especially intensive. We are aware of new ward the general social environment in which we operate. With humanitarian and opportunities and challenges as well as risks and difficulties, which will be brought charitable campaigns and numerous sponsorships in various fields, where we foster about by new terms of business and operation in the single European market. I can values such as freedom, quality of life and progress, we wish to help and contribute proudly assure you that we are ready to boldly and capably turn challenges into op- to higher quality of life for individuals and institutions. Special attention was paid portunities, which will enable us to further consolidate our position on the “new to preventive activities in health care and the principal humanitarian campaign was market”, prove our worth and continue to successfully compete with the largest dedicated to this purpose. With it we significantly contributed to continued treat- European retailers. We know that our wishes and plans have the complete support ment of some types of cancer. of all our stakeholders!

In 2003 business performance and efficiency were influenced by rationalisation We have the knowledge, the power and the will! and standardisation of business processes and consolidation of operation. By dispos- ing of non-trade companies, merging trade companies with the parent company, setting up a technical chain and cleaning the financial statements of subsidiaries we contributed significantly to increasing our competitiveness which partly reflected in this year’s results, but will have an even more important impact on our operation over a longer period of time. In addition to the before mentioned processes, the business excellence to which we aspire is confirmed by our attaining new quality Ljubljana, 26 March 2004 Zoran JankoviÊ, standards each year. President of the Management Board

012 Annual Report 2003 013 Members of the Management Board

Zoran JankoviÊ

President of the Management Board • Graduated in 1979 at the Faculty of Economics, Ljubljana. and CEO Since October 1997 • In 2001 received the award of the Chamber of Commerce and Industry of Slovenia for outstanding corporate and entrepreneurial achievements. • In 2002 was presented with the Manager of the Year award by the Manag- ers’ Association of Slovenia. • In 2003 received the award Primus 2003 for excellence in communication. Voted the most reputable Slovenian Director. • He is also Chairman of the Supervisory Board of the Pension Company Pokojninske druæbe A, d.d., Member of the Executive Board of the Man- agers’ Association of Slovenia, Member of the Executive Board of the Chamber of Commerce and Industry of Slovenia, President of the Slovenia Handball Federation and President of the Alumni Club of the Faculty of Economics in Ljubljana.

Stanislav Brodnjak

Member of the Management Board for • Graduated in 1976 at the Faculty of Law, Ljubljana. New Markets Since January 2003 • He is also Managing Director of the company Mercator - H, d.o.o., Chair- man of the Slovenian Trade Association , member of the Slovenian Associa- tion of Employers and member of the Managers’ Association of Slovenia.

Aleπ »erin

Member of the Management Board • Graduated in 1973 at the Faculty of Law in Ljubljana. for Corporate Activities and • He is also Deputy President of the Executive Board of the Regional Non-trade Segment Since October 1997 Chamber of Commerce of Ljubljana, member of the Managers’ Associa- tion of Slovenia and President of the Slovenian Cyclists’ Federation.

Jadranka DakiË

Member of the Management Board for Finance, • Graduated in1980 at the Faculty of Economics in Ljubljana. Controlling and Accounting Since January 1998 • She is also member of the Committee for International Competition and Co-operation at the Chamber of Commerce and Industry of Slovenia, member of the Executive Board of the Female Managers’ Section at the Managers’ Association of Slovenia and Chairwoman of Women Volley- ball Club of Ljubljana. Marjan Sedej

Member of the Management Board for • Graduated in 1981 at the Faculty of Organisational Sciences, Kranj, in Marketing, Development and Investments 1996 gained the M.Sc. degree in organisational sciences, and in 2003 a in Trade Segment Since January 1998 Dr.Sc. degree at the above Faculty. • He is also member of the Managers’ Association of Slovenia, member of the Slovenian Association of Employers and lecturer at the Faculty of Organisational Sciences in Kranj.

012 Annual Report 2003 013 Report of the Supervisory Board

Composition of the Supervisory Board • The Supervisory Board was submitted a written information about the good results achived by Poslovni sistem Mercator, d.d., and the Mercator Groups in the In 2003 the operation of the company Poslovni sistem Mercator, d.d., the parent period January - March 2003. company of the Mercator Group, was supervised by the Supervisory Board in accordance with its powers and responsibilities, conferred by law and the Company’s • At its regular meeting on 15 April 2003 the Supervisory Board considered and Articles of Association. approved the Annual Report for 2002 with the accompanying audited financial statements and approved the summoning of the 9th Annual General Meeting of The Supervisory Board was composed of the following members: Janez BohoriË, Shareholders. The Supervisory Board was submitted the reports on the disposal of Chairman and members: Vera AljanËiË-Faleæ, Ksenija BraËiË, Joæe Cvetek, Morena the companies M - SremiË, d.o.o. and Trgoavto, d.d., and the draft agreement on KocjanËiË, Dragica Derganc, Katja Galof, Matjaæ Gantar, Vladimir JanËiË, Marjan the sale of the company M - KÆK Kmetijstvo Kranj, d.o.o. In addition the Super- Somrak and Branko TomaæiË. Pursuant to the resolution of the 9th Annual General visory Board adopted the report on the merger of the companies Emona Merkur, Meeting of Shareholders of the company Poslovni sistem Mercator, d.d., on the re- d.d., and Æana, d.d., with the company Poslovni sistem Mercator, d.d. Together duction in the number of Supervisory Board members from 12 to 10, the Workers’ with the Annual Report for 2002 the Supervisory Board considered and approved Council of the Mercator Group resolved on 2 June 2003 to remove the employee- the proposal for allocation of distributable net profit for 2002 and recommended elected Katja Galof as member of the Supervisory Board. to the General Meeting of Shareholders to allocate part of the distributable net profit from 2000, amounting to SIT 1,443,826,800 for payment of SIT 450 gross Throughout the year 2003 the Company’s Management Board was composed of dividend per ordinary share, which was approved. Zoran JankoviÊ, President and CEO and members: Stanislav Brodnjak, Aleπ »erin, Jadranka DakiË and Marjan Sedej. • At its regular meeting on 19 August 2003 the Supervisory Board considered the report on the purchase of real estate - land on new markets, which are not yet operational, a report on the completion of the disposal of the companies M - Activities of the Supervisory Board KÆK Kmetijstvo Kranj, d.o.o., and Mesnine deæele Kranjske, d.d., the criteria for measuring the performance of the company Poslovni sistem Mercator, d.d., and Members of the Company’s Supervisory Board met regularly and promptly consid- the Mercator Group and was submitted the results of the surveys relating to the ered and supervised the running and the operation of the Company in 2003. The satisfaction of shareholders of the company Poslovni sistem Mercator, d.d. Supervisory Board met at five scheduled meetings in 2003. • At its regular meeting on 4 November 2003 the Supervisory Board was submitted Already at its last meeting in 2002, on 19 December 2002, the Supervisory Board the nine-month performance report of the company Poslovni sistem Mercator, considered and adopted the Business Plan of the Company Poslovni sistem Merca- d.d., and the Mercator Group and a comparison between the Mercator Group’s tor, d.d., and the Mercator Group for the year 2003. With this the scope of business market share and its performance and its competitors in Slovenia, Croatia, Serbia, activities and the goals of the Company and the Group for the year 2003 were set. Montenegro and Bosnia and Herzegovina, and with the largest European retailers. At that session the Company’s Supervisory Board was informed of the procedure At all meetings in 2003 the Supervisory Board promptly considered the following and therms and conditions of the completed takeover of the trade company Æivila areas of the Company’s operation: current business performance and the assets of Kranj, d.d. The Supervisory Board requested that in future the Management the Company and the Mercator Group, the work of the Management Board, cur- Board notify it of planned takeovers prior to the public disclosure at the latest. rent investment activities, raising of financial sources and execution of resolutions adopted by the Supervisory Board. • At its regular meeting on 16 December 2003 the Supervisory Board adopted the Busi- ness Plan of the Company Poslovni sistem Mercator, d.d., and the Mercator Group In addition to these regular activities the Supervisory Board considered the follow- for the Year 2004 and was submitted the report of the Risk Management Committee ing important business activities in 2003: of the Mercator Group, which in future will be done annually, and appointed a group of members of the Supervisory Board which, together with operational departments, • At its regular meeting on 18 February 2003 the Supervisory Board appointed a drew up a proposal for the establishment of an Audit Committee of the Supervisory three-member committee to draw up a report of the Supervisory Board to the Board and its duties with regard to the various areas of operation. General Meeting of Shareholders of Poslovni sistem Mercator, d.d. In addition the Supervisory Board appointed a merger auditor in respect of the merger of the company Æana, d.d., and discussed the amended Ljubljana Stock Exchange Semi-annual and Annual Report for the Year 2003 Rules relating to responsibilities of members of supervisory boards and management boards with regard to public disclosure of any changes in the ownership of The Supervisory Board was submitted the unaudited Semi-annual Report for the companies’ shares. period January - June 2003 of the Company and the Group at its regular meeting on

014 Annual Report 2003 015 19 August 2003. The Company published a summary of the unaudited Semi-annual • That the Annual Report presents a fair picture of the business development and Report in accordance with legal regulations and the Ljubljana Stock Exchange Rules. business position of the company Poslovni sistem Mercator, d.d., and the Merca- tor Group. The Supervisory Board considered the unaudited financial statements for 2003 of the Company and the Group with short notes to the statements at its regular meeting on Consequently the Supervisory Board had no comments on the Annual Report of 24 February 2004 and the Company published its non-audited financial statements the company Poslovni sistem Mercator, d.d., and the Mercator Group for 2003, in accordance with legal regulations and the Ljubljana Stock Exchange Rules. submitted by the Management Board and approved it unanimously at its meeting on 13 April 2004. For the 2003 results, which exceeded projections and were a successful implementation of medium-term strategic goals the Supervisory Board commended the Management Board and, in accordance with adopted “Criteria for Assessing the Business Perform- Proposal for Allocation of Distributable Net Profit ance of the Company Poslovni sistem Mercator, d.d., and the Mercator Group” and the employment contracts, determined the performance-based portion of their salary. By approving the Annual Report the Supervisory Board also approved the allocation of net profit in accordance with the competencies of the Management Board and At its regular meeting on 13 April 2004 the Supervisory Board considered the report of the Supervisory Board. In accordance with legal regulations SIT 2,639,809.68* of the auditing firm PricewaterhouseCoopers, d.o.o. on the audit of unconsolidated and net profit for 2003 of the company Poslovni sistem Mercator, d.d., is allocated to consolidated Annual Report for 2003. The meeting was attended by a certified auditor setting up reserves for own shares and SIT 4,357,910,991.95* for setting up other who was available for any additional commentary. In reviewing the submitted Annual reserves from profit. Report for 2003 the Supervisory Board took into account the following factors: The distributable net profit of the company Poslovni sistem Mercator, d.d., for 2003 • The company Poslovni sistem Mercator, d.d., and the Mercator Group concluded amounts to a total of SIT 5,962,162,991.95*, as confirmed by the certified auditor. the year 2003 very successfully as they exceeded the projected business results and The Management and the Supervisory Boards propose to the General Meeting of improved all key elements of business performance compared with 2002. Shareholders that the distributable net profit for 2003 be allocated as follows:

• Setting up of other reserves from the retaining net profit for 2003 was in line with • Part of the distributable net profit in the amount of SIT 704,022,701.67, deriv- the Company’s strategic development goals, adopted dividend policy and fiscal ing from undistributed net profit for 2000 and part of the distributable net profit, factors. which the management board and supervisory board resolved to transfer to distributable net profit and derives from other reserves from profit - from undistributed • On 26 March 2004 the auditing firm PricewaterhouseCoopers, d.o.o. issued a net profit for 1998 in the amount of SIT 900,229,298.33, to dividend payout, a positive opinion on the Company’s unconsolidated and consolidated financial gross dividend of SIT 500 per ordinary share. statements, which are includeded in the Annual Report. The Supervisory Board had no comments on the auditors’ report and expressed its agreement. • Part of distributable net profit in the amount of SIT 4,357,910,991.95, deriving from undistributed net profit for 2003, to other reserves from profit. • The Supervisory Board regularly monitored the running and the operation of the Company and the Group and promptly considered their business performance The Supervisory Board approved the above said distributable net profit allocation and their assets. The Management Board delivered to the Supervisory Board all as it considered it to be in line with the strategic goals, investment plans, dividend information, which was needed or required for the performance of its supervisory policy and fiscal policy of the Company and the Group. activities. This report has been prepared in accordance with Article 274.a of the Commercial On the basis of the above said supervisory activities and factors and of detailed Companies Act and is addressed to the General Meeting of Shareholders. review the Annual Report of the company Poslovni sistem Mercator, d.d., and the Mercator Group for 2003, submitted by the Company’s Management Board, the Supervisory Board established:

• That the Annual Report has been drawn up clearly and transparently,

• That the Annual Report presents a true and fair picture of total assets, liabilities, financial position and operating results of the company Poslovni sistem Mercator, Janez BohoriË d.d., and the Mercator Group, and Ljubljana, 13 April 2004 Chairman of the Supervisory Board

*According to Slovenian Accounting Standards

014 Annual Report 2003 015 Members of the Supervisory Board

In 2003 the Company’s Supervisory Board was composed of:

Chairman of the Supervisory Board: Employed with

Janez BohoriË President of the Management Board • Sava, d.d., Kranj

Members of the Supervisory Board: Employed with

Vera AljanËiË Faleæ Director of Legal Affairs • Poslovni sistem Mercator, d.d., Ljubljana

Ksenija BraËiË Director of Internal Services • Mercator - SVS, d.d., Ptuj

Joæe Cvetek Director of Finance and Accounting • Eta, d.d., Kamnik

Dragica Derganc Head of Legal Affairs • Mercator - Dolenjska, d.d., Novo mesto

Katja Galof Employee-elected Representative • Poslovni sistem Mercator, d.d., Ljubljana (until 2. 6. 2003)

Matjaæ Gantar Director • KD Holding, d.d., Ljubljana, KD Group, d.d., Ljubljana

Vladimir JanËiË Member of the Management Board • Petrol, d.d., Ljubljana

Morena KocjanËiË Director of Controlling and Development • Mercator - Degro, d.d., Portoroæ

Marjan Somrak President of the Management Board • Zarja, Stanovanjsko podjetje, d.d., Novo mesto

Branko TomaæiË President of the Management Board • HIT, d.d., Nova Gorica

016 Annual Report 2003 017 General Information

Full name Poslovni sistem Mercator, d.d.

Abbreviated name Mercator, d.d.

Activities G 52.110 / Retail sale in non-specialised stores with food

Identification number 5300231

Tax number 45884595

Court registry number 1/02785/00

Date of entry in the court register 12 October 1995

Share capital of the Company SIT 32,085,040,000

Share nominal value SIT 10,000

Number of issued and paid shares 3,208,504

Share listing Ljubljanska borza, d.d., official market, trading code: MELR

President of the Management Board and CEO Zoran JankoviÊ

Members of the Management Board Stanislav Brodnjak, Aleπ »erin, Jadranka DakiË, Marjan Sedej

Chairman of the Supervisory Board Janez BohoriË

016 Annual Report 2003 017 Franc Vice President for Trade, 43 years in Mercator Jelka Director of Retail Development, 14 years in Mercator The sweetest memories

018 Annual Report 2003 019 Short History

The history of the company Mercator goes back to 1949, when a wholesale company “Æivila Ljubljana” was founded, the predecessor of the company Poslovni The sweetest memories sistem Mercator, d.d.

In 1953 a wholesale company named “Mercator”, headquartered in Ljubljana started operating. The basic characteristic of Mercator’s development until the beginning of the nineties was integration of smaller local trade companies operating in trade, food processing industry, agriculture, hospitality and other service activities, all of which retained their legal independence.

In 1990 Mercator was registered as Poslovni sistem Mercator, d.d., which was established by transfer of unpaid capital to the parent company by previously integrated companies; that was the beginning of its organisation as a group of companies.

1993 was marked by the beginning of privatisation through public offering of shares; in terms of volume and value of capital it was the biggest privatisation in the Central Europe.

In October 1995 Poslovni sistem Mercator, d.d., was entered in the court register as a private joint-stock company.

1997 was a landmark year for the Company as it turned into one of the most successful retail traders in the region of the former Yugoslavia. The company Poslov- ni sistem Mercator, d.d., which until 1997 had recorded losses and operated without a vision, got a new Management Board, headed by a new President and CEO, Zoran JankoviÊ, who adopted an ambitious development strategy, which was to stop the negative trends from the past years and create the best retail trader in the country, comparable with the major retail trader chains in Europe and the world.

The period 1998 - 2002 was marked by internal restructuring and processes necessary for the integration of companies from the Slovenian food industry and other interesting sectors, which required implementation of further cost-effectiveness and business efficiency, aggressive action on the market and accelerated growth of retail network and marketing activities. Intensive merger and acquisition activities took place, relating to 18 retailers in Slovenia and one in Croatia. In addition Mercator penetrated new markets by establishing subsidiaries in Croatia, Bosnia and Herzegovina and Serbia and Montenegro.

Mercator managed to retain its leading retailer position in Slovenia also in 2003 despite deteriorated market conditions and was therefore able to increase and strengthen its public perception and market share on the new markets, where it intends to further expand its retail network in the future.

018 Annual Report 2003 019 Key Events in 2003

Changes in the Management Board Renewal of Mercator’s Web Site − Qweb

On 1 January 2003 the Management Board of the company Poslovni sistem Merca- On 4 November 2003 Mercator’s web site was renovated and certified in accordance tor, d.d., enlarged by an additional member, Stanislav Brodnjak, began its second with the standard Qweb, release 1.2, One star level, with which we were the first in five-year term of office. Slovenia to have a certified web site.

Expansion of Retail Network Shareholder Satisfaction

2003 was marked by: Mercator’s shares exceeded the value of SIT 30,000 in 2003 and reached SIT 32,662 • The opening of new trade centres and other stores in Slovenia and Croatia. At at the year-end. the end of 2003 the Mercator Group had 995 retail units, together with franchise stores the number was 1,127; • The purchase of several new sites on the new markets; Employee Satisfaction • The beginning of a hard discount chain. In April and May 2003 we measured employee satisfaction for the fourth consecutive time; the survey showed greater trust in our top management, higher satisfaction Change in the Organisational Structure with the management style of directors, with the nature of work, sources of informa- of the Mercator Group tion and with communications.

During 2003 the parent company Poslovni sistem Mercator, d.d.: • Sold its stake in the companies Trgoavto, d.d., (51 %), Mercator - KÆK Kmetijstvo Communication with Supliers Kranj, d.o.o., (100 %), Mesnine deæele Kranjske, d.d., (82.03 %), in line with its focussing on the core business of retail; In 2003 Poslovni sistem Mercator, d.d., organised the fourth traditional meeting of • Sold its 20 % stake in the company Spar Slovenija, d.o.o., as it had ended its co-op- Mercator with its suppliers, producers from Slovenia, Croatia, Bosnia and Herze- eration in wholesale supply with the company at the beginning of 2003, because govina and Serbia and Montenegro, with the purpose to present Mercator’s interna- Spar Slovenija, d.o.o. had set up its own distribution centre; tionalisation strategy and novelties in the supply business. • Founded the company Mercator - BH, d.o.o., Bosnia and Herzegovina, in which it holds a 100 % stake; • Bought a majority stake (89.03 %) in the company Æivila Kranj, d.d., in which, Communication with Customers after the completion of the public offering of shares it acquired a 98.41 % stake, including the company’s own treasury stock; In 2003 Poslovni sistem Mercator, d.d., organised two meetings of the clubs of • Formally merged the companies Emona Merkur, d.d., and Æana, d.d. loyal Mercator Pika card holders.

Referendum on Opening Hours Humanitarian Campaigns

Participants in the referendum on Sunday and public holiday opening hours of In 2003 the Mercator Group carried out three major humanitarian campaigns: stores voted for the stores to be closed on Sundays and public holidays. • Open Your Eyes − The Oncology Institute of Ljubljana was donated a device for treating gynaecologic and prostate carcinoma; • We Were All Children Once - in co-operation with the company Pejo trading, New Collective Wage Agreement d.o.o., part of sales revenues were earmarked for holidays for underprivileged children; In December 2003 a new collective wage agreement for the parent company Poslov- • The Paediatric Clinic in Ljubljana was donated a Lumpi van. ni sistem Mercator, d.d., was concluded.

Sponsorships and Donations Expansion of the Mercator’s Loyalty Card M Pika In 2003 Mercator supported various health, cultural, sports, and educational and In 2003 the use of M Pika card expanded to the markets of Croatia, Bosnia and preventive campaigns. Herzegovina and Serbia and Montenegro.

020 Annual Report 2003 021 Financial Highlights of 2003

Mercator Group

Year 2003 2002

Net sales revenues (in SIT mn) 331,502 319,777

Net profit before majority interest (in SIT mn) 9,125 7,082

Net profit after minority interest (in SIT mn) 9,224 6,959

EBITDA (in SIT mn) 25,538 24,520

Capital expenditure (in SIT mn) 28,529 24,491

Long-term financial investments (in SIT mn) 5,759 1,240

Return on equity 13.5 % 11.0 %

Earnings per share (in SIT) 2,875 2,169

Paid out dividend per share (in SIT) 450 400

Market share * 42.2 % 39.8 %

As at 31. 12. 2003 31. 12. 2002

Number of employees 14,673 14,331

Number of legal entities in the Group 19 25

*Source: Gral Iteo: Share of purchases by Slovene households in Mercator stores in the years 1997-2003

020 Annual Report 2003 021 Development Indicators for The Mercator Group

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Group profit (in SIT mn)

022 Annual Report 2003 023 ��

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022 Annual Report 2003 023 ��

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Market share in Slovenia and on new markets*

*Source: Gral Iteo

024 Annual Report 2003 024 Annual Report 2003 Business Report About the Mercator Group

Group’s activities Trade Activities

The Mercator Group is composed of trade and non-trade companies operating in The principal and most extensive activities of the Mercator Group are wholesale food processing industry and hospitality and other services. The company Poslovni and retail of consumer goods. We are one of the largest and most successful retail sistem Mercator, d.d., is the parent company of a group of related companies Poslov- chains in South-east Europe and the leading retail chain in Slovenia, and we are ni sistem Mercator, d.d., (“ the Mercator Group”) and performs a double role: improving our position on the markets of Croatia, Bosnia and Herzegovina and Serbia and Montenegro. These are rapidly growing markets where we mostly build • Carries on sales activities in the regions of Central Slovenia and the Adriatic coast larger shopping centres in order to obtain significant market shares in the shortest and time possible.

• Performs the holding company function for the companies of the Group in which Characteristic of the Mercator Group trade activities, which at the end of 2003 were it holds majority interests, such as: setting up centralised purchasing and selling carried out by 13 companies, of which 5 outside Slovenia, is a highly diversified retail policies, carrying out sales and marketing activities for the trade companies, car- network with various store formats: from shopping centres, hypermarkets, super- rying out development and investment activities, information support and educa- markets and department stores to self-service stores and specialised stores. With dition and training of all Group companies and setting up of uniform operational versified retail network and complementary services offered in our shopping centres processes and standards. we wish to satisfy the needs, wishes and expectations of all our customers.

Corporate Structure

As at 31 December 2003 the Mercator Group, which is a group of related companies of the Trade in Slovenia Mercator - SVS, d.d. Æivila Kranj, d.d. * Poslovni sistem Mercator, d.d., (parent company), was composed of: 100.00% 89.3% * Including own shares of the company Æivila Kranj, d.d., the shareholding amounts to 98.41%

Poslovni sistem Mercator - H, d.o.o. 99,68% Mercator - S, d.o.o.100,00% Subsidiaries Trade abroad Mercator, d.d. Mercator - H, d.o.o. Mercator - S, d.o.o. 99.68% 100.00%

Non-Trade Eta, d.d. Pekarna Grosuplje, d.d.

84.34% 75.13%

026 Annual Report 2003 027 In June 2003 the Mercator Technical Chain was set up within Poslovni sistem Mer- facturing bread and fresh pastry in Slovenia, it owns the company Belpana, d.o.o., cator, d.d., as a result of consolidation of activity, namely transfer of sale of technical Zagreb, which manufactures bread and fresh pastry in Croatia, mostly for the needs products from the trade companies to the parent company. of Mercator’s retail network. The company Mercator - Emba, d.d., deals in coffee roasting and packing, manufacturing of instant cacao products, toppings, products Within the trade segment of the Mercator Group operates a company specialised in from cereals and packing of other products. The company M Hotel, d.o.o., carries clothing, Mercator - Modna hiπa, d.o.o. Since 2001 the Company has operated as a on hotel and restaurant activities. The company Mercator - Optima, d.o.o. deals in specialised chain of clothing stores dealing in wholesale and retail sale in Slovenia. engineering and designing and is closely involved in the investment activities of the Mercator Group.

Non-trade Activities

In addition to trade companies the Mercator Group included companies, which in 2003 operated in food processing industry and hospitality and other service activities. The company Eta, d.d., produces sterilised and pasteurised garden products, mustard and various toppings and deals in fruit processing, producing compotes and frozen line. The company Pekarna Grosuplje, d.d., is the leading bakery, manu-

Mercator - Gorenjska, d.d. Mercator - Dolenjska, d.d. Mercator - Goriπka, d.d. Mercator - Degro, d.d. Mercator - Modna hiπa, d.o.o.

98.82% 100.00% 99.26% 100.00% 100.00%

Mercator - S, d.o.o.100,00% Mercator - S, d.o.o.100,00% Mercator - S, d.o.o.100,00% Mercator - TC Sarajevo, d.o.o. Mercator - BH, d.o.o. Intermercator, G.m.b.H.

90.16% 100.00% 100.00%

Belpana, d.o.o. Mercator - Emba, d.d. Mercator - Optima, d.o.o. M Hotel, d.o.o.

100.00% 69.17% 100.00% 100.00%

As at 31 December 2003 the Mercator Group had a 20% participating interest in the associated company Alpkomerc, d.d., Tolmin.

026 Annual Report 2003 027 Mateja Director of Marketing , 10 years in Mercator

028 Annual Report 2003 029 Business Strategy of the Mercator Group

The principal driving force behind our activities is satisfaction of people who come into contact with Mercator and who we treat as people with different expectations, experiences and qualities. With a personal touch and comprehensive offer, adjusted to shopping habits and market trends, we wish to improve their quality of life.

In line with our mission we pursued the following key strategic goals in 2003:

1. Offering products which ensure a better quality of life • Satisfying customers’ needs, wishes and expectations • Ensuring sales growth and consolidation of our position as the leading retail chain in Slovenia • Gaining an important market share in the new markets: in Croatia, Bosnia and Herzegovina and Serbia and Montenegro

2. Long-term partnership with producers

3. Alliances with foreign strategic partners

4. Maintaining the level of business performance of the best European retailers • Improving business efficiency • Ensuring security of investments • Generating greater value for shareholders

5. Meeting our commitments to employees and the general social environment

6. Ensuring competitiveness of non-trade segment of the Group and expanding of food processing companies’ operations to new markets.

Thought of tomorrow

028 Annual Report 2003 029 Impact of Market Conditions on Business Operations

Economic conditions in 2003 were relatively favourable for the Mercator Group, The key results of the surveys are shown in the next section: as the prevailing moderate economic growth, through increased purchasing power, influenced the growth of Mercator’s business. The other favourable impact was the • Expectations of strategic partners: lowering of domestic and foreign internest rates, which reduced the costs of financ- • The majority of Mercator’s strategic partners has already started to adjust to the ing of the Mercator Group. Costs of loans with foreign currency clause were further processes and requirements of operating in the European Union or have success- reduced by slower growth in foreign exchange rates in 2003. fully prepared themselves; • According to our strategic partners, the lowest levels of adjustment to the require- The Mercator Group is mainly active in retail of consumer goods; its operation de- ments of the European Union have been achieved in the following areas: adjust- pends on the following factors, which direct and adjust the operation of the whole ment of operating costs, prices of raw materials and protection of trademarks and industry: patents. In the areas such as consumer protection, safety at work, quality and safety of food and regulations relating to competition a complete or satisfactory harmo- • Consolidation: already in 1999 Mercator started with takeovers and acquisitions nisation has been achieved; of trade companies, which brought consolidation to the industry. Now is the turn • Strategic partners’ expectations upon the entry in the European Union are mostly of internal consolidation of operations of the Mercator Group, which has already optimistic. started; • Globalisation: preparation for the entry into the European Union and extensive • Expectations of Slovenian customers: expansion to the markets of SE Europe; • The majority of Slovenian customers thinks that the offer of Slovenian products • Category management: further development of the category management proc- will remain unchanged after the entry of Slovenia into the European Union; ess in co-operation with strategic partners; • In their opinion prices will rise after the entry of Slovenia into the European Union; • Relations with suppliers: development and strengthening of strategic partnership • The majority of customers belives that after the entry of Slovenia into the Euro- with key suppliers; pean Union the purchase of foreign products or purchase of foreign brands will • Improved cost-effectiveness; increase; • Improved productivity; • They think that shopping in Austria and Italy will decrease or remain the same • Increasing customers loyalty: further development and upgrading of the loyalty after the entry of Slovenia into the European Union; system (Mercator Pika card); • In their opinion shopping in Croatia will decrease or remain the same after the • Filling a gap in the market: development, differentiation and forming of store entry of Slovenia into the European Union. formats and specialised chains within the Mercator Group, which is approaching completion, and expansion of retail network; • Possibility of choice: development of new store formats, development and en- hancement of lines under the Mercator private label, development of innovative sales promotion projects.

In 2003 at Mercator we paid special attention to preparations and harmonisation relating to the entry of Slovenia into the European Union. A project team was set up which studied the impact that Mercator’s entry in the global and single European market will have in various sectors. We conducted numerous research surveys of the general and the professional publics and studied on the one hand the readiness of our strategic partners to the entry into the European Union and on the other the expectations of the consumers, especially in terms of retailers’ offer and further purchases.

030 Annual Report 2003 031 Sales and Marketing

Sales

The Mercator Group generated SIT 331,502 million of net sales revenues in 2003, which was 3.7% over 2002.

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Net sales revenues of the Mercator Group by business segment

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Net sales revenues of the Mercator Group by geographical segment

030 Annual Report 2003 031 Productivity

In 2003 productivity, measured as ratio between net sales revenues and number of employees per work hours used, recorded an 8.8 % growth compared with 2002. Net sales revenues per employee amounted to SIT 24,994 thousand in 2003.

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Productivity of the Mercator Group (in SIT thousand)

032 Annual Report 2003 033 Store Formats Intersport

At Mercator we develop various store formats in order to satisfy the needs of various Since 1999 Mercator has been the exclusive holder of licence to use Intersport brand segments of customers. In our stores customers can buy consumer goods from sports in Slovenia, since 2000 in Croatia and Bosnia and Herzegovina and since 2002 in wear and equipment and fashion clothes to furniture and home appliance, as well Serbia and Montenegro. Intersport is an international chain of sports stores, which as building materials. In our shopping centres we try to offer a very comprehensive in Slovenia is already well established and is gaining on reputation on the new mar- range of sales programmes. kets. By end of 2003 the number of our Intersport stores was 19. In future we plan to continue with the development of various store formats, especially the so-called In line with the demand for everyday products we have developed three principal SKI RESORT format (stores close to ski slopes). store formats: Modiana • Hypermarkets , where customers can get a wide and comprehensive offer, the opportunity for “one-stop shopping” and wide choice offered by a bigger shopping In 2003 we continued to upgrade the marketing strategy of the clothing chain opportunity. These stores are located near city bypasses with easy access by car and Modiana. To meet up-market demands we had launched a new type of clothes sell- have large car parks and convenient working hours. ing store and a new brand name store in 2002, which was first launched in Merca- tor Centre Split and Mercator Centre in Belgrade, and which in 2004 we intend • Other stores with everyday products, such as supermarkets, superettes and to launch also on the domestic market. The new brand name is Avenija Mode and smaller self-service stores, their principal purpose is to satisfy everyday needs of lo- represents stores with first class articles. cal customers; they are located in the vicinity of larger residential areas. Their offer is adapted to the customers’ daily shopping with the emphasis on fresh food; Beautique

In 2003 a new store format was developed, called convenience stores. These were The brand name Beautique designates chemist’s shops, which customers can find in developed to satisfy the needs of more demanding customers and are located in the some Mercator shopping and trade centres and in city centres of larger towns. They vicinity of business and city centres. In preparing the offer we followed the wishes excel in large offer of first class cosmetic articles and attentive and professionally and expectations of the more demanding customers’ segment, changes in eating trained customer sales staff. In 2003 we had 11 Beautique stores in all markets in habits and lifestyle of customers. The offer in these stores is based on fresh ready which we operate. meals (ready to cook and ready to eat meals) and a wide range of fresh fruit and vegetables. Mercator’s Technical Chain

By developing various store formats we wish to provide for our customers’ comfort, In 2003 we set up a technical chain of Mercator, which combines the offer of stores especially by considering factors such as easy access to stores, varied range of prod- previously selling furniture, technical products and building material. The chain of ucts on offer and regular and attractive sales promotion campaigns which increase stores was designed on the basis of thorough market research in which we studied the opportunities for favourable purchases. the shopping habits and target customer groups interested in sales programmes included in the chain, and we studied the activities of competing retailers in this field In 2003 we began to develop another store format, hard discount format. Hard both, on the domestic and on the new markets. We formed a marketing strategy discounts are stores with a similar sales area as supermarkets while the product range of the technical chain, which served as the basis for the Mercator’s technical chain, on offer comprise mostly grocery and a limited range of fresh, chilled and frozen which in 2004 will meet a number of new challenges and opportunities. We shall programmes. The main purpose of this store format is to meet the needs of the cus- pay special attention to designing and differentiating various store formats, which tomers’ segment with lower purchasing power as well as of customers who behave will make shopping easier for our customers. In 2004 we also intend to develop a rationally, despite their higher purchasing power (the rational customers’ segment). shopping centre offering all the sales programmes of the technical chain on one The product range on offer is limited, most conveniently priced and includes only location. The technical chain will be given a new name and an appropriate and a small share of renowned brand names. Hard discounts have been named Hura recognisable graphic image. diskont, and the first openings are scheduled in the first half of 2004. Www.mercator.si and the Web Store In addition to stores with everyday products at Mercator we offer to our customers the opportunity for shopping in our specialised store chains: 2003 was a landmark year for Mercator’s Web site www.mercator.si and the Web store, which were renovated and updated. Mercator’s Web site www.mercator.si is intended for all Mercator’s stakeholders, who search for information about the Com- pany on the Internet. After the renovation the content has been divided into four sections: “About the Company”, “Environment”, “Employees” and “Info Centre”.

032 Annual Report 2003 033 In the Web store, which is intended for those who do not have time to lose on shop- Structure of Retail Units of the Mercator Group as at 31 December 2003 ping for everyday products in “ordinary” stores, customers can choose from 4,500 fast moving consumer goods (FMCG), divided by sales programme and product No. of Net sales Gros sales Activity line. The purpose of the renovation was to ensure a pleasant shopping to the Web Units area in m2 area in m2 store customer, therefore we enabled an easy search, gave more information about the offer and the products, gave a clear introduction of the Mercator Private Label Hypermarkets 21 62,654 94,540 lines and of the sales promotion projects and finally enabled faster shopping. Supermarkets 87 63,083 98,439 Superettes 303 67,806 123,452 We are aware that for Web shopping the customers’ trust should be gained, so we Self-service stores 176 14,446 27,937 decided to provide for safety by certifying our Web store. This was done by the Slov- Department 26 18,706 28,759 enian Standards and Metrology Institute (SIQ) who is the only Slovenian member 14,071 of the IQNet, which assigns Qweb certificates to Web sites, intended for Web stores Discounts and Cash & Carry 24 18,082 and other electronic business activities. Mercator was the first in Slovenia to meet all Total market 637 240,766 391,210 the necessary requirements and obtain the Qweb certificate. Technical 87 29,878 67,380 Furniture 35 25,112 33,641 The number of customers, value of the average purchase and realised sales in the Apparel 129 39,336 48,076 Web store have been steadily growing from its beginnings in 1999. The results of Intersport 19 7,453 9,633 customer satisfaction surveys show that most of them are satisfied with this type of shopping. Chemist’s 18 1,383 1,762 Hotels and restaurants 65 7,815 12,337 Other 5 281 507 Total 995 352,025 564,544 Franchise store 132 17,839 17,839 Total with franchise stores 1,127 369,864 582,383

034 Annual Report 2003 035 Market Share

• On the Slovenian Market • On the Croatian Market

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Increase in market share on the Slovenian market Increase in market share on the Croatian market

* Market share of Mercator stores exclusive of franchise stores * Mercator is not yet present in Slavonia and central Croatia where other competing retailers have a Source: Gral Iteo: Share of purchases by Slovenian households in Mercator stores in the period 1997-2003. strong presence. Source: Gral Iteo: Share of purchases of Croatian households in Mercator stores and in competing stores in 2003. On the Slovenian market we wish to maintain our market share at the present high level by developing new products in the Mercator private label lines, by introducing new special offers for loyal customers, by offering various and innovative sales The approximate estimation of market share in Bosnia and Herzegovina is 2 %; promotion campaigns and developing new store formats to meet the needs, expecta- Mercator is thus ranked the second largest retailer in the country. In Serbia and tions, wishes and shopping habits of our customers. On the new markets we intend Montenegro the Mercator Group began its operations only in December 2002. At to increase our market share with a similar marketing strategy and activities on the the end of 2003 Mercator’s share of the market was 1 %. markets as in Slovenia and become an important retail chain on the markets of South-east Europe.

034 Annual Report 2003 035 Purchasing Investments

In 2003 the Mercator Group co-operated with suppliers who were put on a sup- In 2003 we continued to implement the investment plan. The whole Mercator pliers’ list at the end of the preceding year and for whom a supply plan had been Group invested a total of SIT 34,288 million in 2003 of which SIT 28,529 million prepared. In accordance with accepted ISO standards those suppliers who receive a refer to capital expenditure and SIT 5,759 million to long-term financial invest- positive grade from previous co-operation can be put on the suppliers’ list. On the ments. basis of strategic partnership the Mercator Group builds its business co-operation with the major suppliers with whom it co-operates in all its markets. An important factor for taking priority in business co-operation is the supplier’s willingness for joint activities on the new markets and its readiness to consider the project of expan- Capital Expenditure sion to new markets as a joint development project. In 2003 capital expenditure of the Mercator Group amounted SIT 28,529 million, of which SIT 11,304 million on the new markets. Over half of total investments in Strategic Partnership fixed assets of the Mercator Group (60.5 %) refer to the construction of Mercator shopping centres. The Mercator Group as the largest Slovenian retailer who operates and further ex- pands its retail network in four countries, encourages Slovenian production and the Value Structure production on new markets as in its stores priority is given, under the same condi- Type of Capital Expenditure in SIT mn in % tions, to products of Slovenian, Croatian, Bosnian and Serb companies. Mercator Centres and hypermarkets 17,493 61.3% - in Slovenia 7,248 25.4% Strategic partnership is built with business partners who consider Mercator a buyer, who is reliable, good, fair and the biggest partner on the Slovenian market, and - abroad 10,245 35.9% whose expansion to new markets means new development opportunity for them as Stores with FMCG 3,524 12.4% well. Successful performance on new markets is only possible on the basis of good partnership relations with suppliers who offer to customers attractive products of Non-food stores 714 2.5% European quality and appearance and at competitive prices. New units 21,731 76.2%

With business partners, with whom we co-operate in all our markets, we develop Investments in distribution centres 2,212 7.8% long-term contractual relations, a joint and uniform presence on these markets, Refurbishments and other 3,157 11.1% products under the Mercator private label and new products and joint creation and Total investments in trade segment 27,100 95.0% implementation of ambitious sales promotion projects. We expect to get fixed prices agreed for long-term period. - of which in Slovenia 15,803 55.4% - of which abroad 11,297 39.6% Category Management Total investments in non-trade segment 1,429 5.0% - of which in Slovenia 1,422 5.0% We have been implementing the category management project, which is focussed on - of which abroad 7 0.0% the needs and wishes of customers and on improving business effectiveness of trade companies, with 11 product lines of selected suppliers. In 2004 we shall expand the TOTAL 28,529 100.0% project to new product lines and select new suppliers. With the category management project we exert control over the sales area and selection of goods and form an efficient and rational offer, made to meet customers’ wishes and expectations.

Volume and Structure of Purchase

By remaining focussed and with strategic partnerships we reach a high level of concentration of purchasing so that 10 largest suppliers or producers represent close to 33 % share of total purchase and with 139 largest suppliers or producers we generate 75 % of value of total purchase of merchandise.

036 Annual Report 2003 037 Compared with 2002, when Mercator opened three large Mercator shopping cen- Long-term Financial Investments tres and two smaller trade centres, we mostly opened smaller shopping centres and similar stores in 2003: In 2003 the Mercator Group carried out long-term financial investments in the total amount of SIT 5,759 million of which SIT 5,128 million refer to the acquisition of • in Slovenia: Mercator centre in Trebnje, Trade centre at Cigaletova street in majority holding in the company Æivila Kranj, d.d. Ljubljana, trade centres in Levec and ©entjur pri Celju and a store in Lucija; In addition the Group earned SIT 6,533 million by divesting itself of long-term • in Croatia: store in Æupa DubrovaËka (supermarket, clothing and sports) and a financial investments in 2003 which refer mostly to the disposal of the companies supermarket, Modiana and Intersport in the department store Robna kuÊa Tekstil Trgoavto, d.d, Mesnine deæele Kranjske, d.d., Mercator - KÆK Kmetijstvo Kranj, Karlovac. d.o.o., and Spar Slovenija, d.o.o. In May 2003 the partners ASPIAG MANAGE- MENT AG and Poslovni sistem Mercator, d.d., signed a sales agreement with which On the new markets we purchased land for building Mercator shopping centres in Poslovni sistem Mercator, d.d., sold to ASPIAG MANAGEMENT AG its 20 % 2003 (Osijek, Rovinj, Zadar, Bjelovar, »akovec, –akovo, Slavonski Brod, Velika interest in the company Spar Slovenija, d.o.o.; this was the realisation of the call op- Gorica, Labin, Koprivnica, Kutina, Alipaπino polje in Sarajevo, Novi Sad, Zemun, tion related to the before mentioned interest in the company as stipulated, together two sites in Kragujevac). Major investments include purchase of land in Æelodnik with the purchase price, in the partnership contract made in 1997. near Domæale for building a central distribution centre with about 20 ha of space and land in Belgrade with 10 ha of space for building a distribution centre for Serbia and Montenegro.

In addition to shopping centres some new food and non-food stores were very important in 2003. Special mention should go to a new technical store and sports store in the Mercator store in Vrhnika. We continued to refurbish the existing retail network.

In 2003 the Mercator Group earned SIT 6,191 million by disposal of non-profitable enough fixed assets.

036 Annual Report 2003 037 Melita Director of Controlling and Internal Audit, 7 years in Mercator

It's good to know

038 Annual Report 2003 039 Research and Development

Marketing Development

The Mercator Group continues to develop marketing activities, which draw from our mission by which people are the principal driving force behind our activities.

We develop long-term and short-term strategic sales promotion projects, which result from continuous monitoring of needs, wishes and expectations of our customers. In preparing marketing activities we take into account the market trends, which mainly reflect in changed lifestyle and changed eating habits of people. Customers wish to buy products, which can make their everyday life easier and improve its quality.

Customers

On the basis of market research surveys, which we conduct to monitor customers’ shopping habits we set up three target customer groups, to whom we intend to adjust our marketing range − offer, services and marketing activities: families with children, senior citizens and students.

With our offer and presence on the market we also aim at the segment of demanding customers, for which special marketing activities had to be set up, especially a suitable store format, price strategy and marketing communication, added value has to be offered, such as possibility of shopping in the Web store, and favourable rewards for loyalty, adjusted to their characteristic lifestyles, eating and shopping habits.

The results of surveys of shopping habits show that Mercator covers the needs of all target segments in all Slovenian regions. The profile of Mercator’s customer is the same as that of the average Slovenian, who does the shopping for his household needs. Mercator’s customers give priority to domestic products, to favourable offers, they like shopping, they think it is fun. Customers link Mercator with values such as: honesty, friendship, ambition, relaxation, warmth, family, content and peace.

038 Annual Report 2003 039 At Mercator we consider a satisfied customer our greatest asset. Only by closely monitoring and recognising his expectations and shopping habits we can upgrade our activities and direct them so that we remain faithful to the meaning of our slogan: The Best Neighbour. In line with our marketing strategy we annually conduct several market research surveys, especially:

• Surveys of customer satisfaction and loyalty (survey of shopping habits, measurement of customer satisfaction, measurement of quality of provided services and products and monitoring customers’ comments, complaints and praise);

• Product marketing surveys where we asses customers’ perception of sales promo- � �� tion projects and their efficiency, which is especially important when we introduce new sales promotion projects; shopping habits by individual product group and � suitability of the media for advertising sales promotion projects;

� • Market analysis and surveys of competition, which include measurement of the reputation of the corporate brand name Mercator, forming guidelines for price- � setting policies which are to ensure price competitiveness, analysis of market and competition with which we check Mercator’s position in relation to its competitors Average score Average � on local markets and in relation to its competitors on the global market, analysis of marketing range and marketing strategies of the best retail chains in Europe and � elsewhere in the world. �� The results of customer satisfaction surveys show that Mercator’s customers in all the markets in which we operate are satisfied. Customers’ satisfaction From our customers’ satisfaction derives their high loyalty shown mainly in the Note: satisfaction was rated from 1 to 5 where 1 meant that the customer was not satisfied and 5 that the growing number of holders of Mercator Pika card and in the growth of the share customer was very satisfied; research was made in 2003. these customers represent in total sales of Mercator.

Mercator Pika Card

With the intention to offer, in a competitive environment, something more to our loyal customers we developed a bonus point system project in 1999 and offered to our customers the Mercator Pika card. The loyalty project is alive and well and yearly readjusted annually to the needs and expectations of target customer groups. In 2003 we began to upgrade the system especially in the field of surveys of shopping habits of Pika card holders, which will enable us to adjust our offer to the individual customer or segment of customers, in the field of developing co-marketing activities, which is based on co-operation with the existing suppliers and in the field of co-operation with strategic partners, which provide products and services which Mercator does not have and are an addition to the offer for our customers.

The purpose of upgrading the loyalty system is to extend the bonus point range and make the card even more attractive to its holders. In this way we intend to increase the number of Pika card holders and strengthen the loyalty and increase the fre- quency of purchases of Pika card holders. Bonuses will be adjusted to specific needs

040 Annual Report 2003 041 and wishes of individual target groups. The system upgrade will also be interesting �� to suppliers and strategic partners who can use the system to approach over 360,000 �� card holders and the response of the Mercator Club members is extremely high. This �� year we have started with this type of co-operation with the companies Kompas, d.d., and DZS. ��

In 2003 we gained over 95,000 new holders of the Mercator Pika card (25,390 hold- �� ers of credit card and 70,000 holders of cash card of which about 33,000 new cash �� Pika card holders on the new markets), which together with the previous holders makes up over 360,000 of all Pika card holders. ��

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Growth in the number of Mercator Pika card holders

That the loyalty of Mercator’s customers has increased is also shown by the growth �� in the share of the turnover, generated by the Pika card, in total turnover. At the end �� of 2003 this share was close to 35 %, which was 11 % over the year before. �� The key tasks in developing the customer relations management system in 2004 are �� as follows: �� • Development of Gold Pika card which will ensure special treatment of big �� (%) spenders; �� • Development of Business Pika card which will be intended for loyal customers �� who buy larger volumes of goods for special purposes of for further sale; �� • Setting up a system of customer relations management (CRM) with which we �� shall meet the needs and expectations of our loyal customers more efficiently; • Expanding the use of Pika card to new areas such as transport, railway, new �� technology and telecommunications, culture, sports, insurance, working with � � children, gas stations; �� • Promotion of sale of certain products by discount coupons for the Pika card holders, and Growth in the turnover • Numerous other activities with which we shall reward and delight our loyal cus- generated by the Pika card tomers.

We hope to have 1,000,000 holders of Mercator Pika card in the next five years.

040 Annual Report 2003 041 Development of the Mercator Private Label Lines

The speed and tempo of life are increasing and require the development of new services and new products. Similarly the trends in brand name developments are linked to changing market conditions and to changes in shopping and eating habits.

Wishing to increase the quality of life and on the basis of surveys conducted among our customers this year we added two new lines in addition to the already established four lines of the Mercator Private Label: • Ready meals line The Wishing Table!, which is Mercator’s response to trends and habits detected among our customers and which demonstrate a changed lifestyle and eating habits of the segment of busy people with above average living standard and a smaller number of household members. The line includes three product �� groups: ready to cook meals, which shorten the time of preparing a meal and are �� suitable for customers who, despite having no time to spare, like to cook and add � to the meals a personal touch. The second product group comprises ready to eat �� meals and the third group ready meals which only have to be heated and can be used as main course. By the end of 2003 The Wishing Table comprised 42 prod- � �� ucts. In 2004 we shall continue to expand the product line by sales promotion �� campaigns such as food-tasting events, and by rearranging the products on the �� shelves. �� • Healthy Life line, where we also followed the trends and habits shown by people �� who wish to improve the quality of life. The project is intended for the target Number of products �

group of customers who appreciate values such as a beautiful body, health, well- �� Share in total sales % �� ness, family, friends and leisure time. The Health Care Centre in Kranj co-operates in the project by assisting with its professional expertise in selecting the products, �� and in order to increase the customers’ trust in the products also permits the use of � � its name and logotype. By the end of 2003 already 31 products were displayed on �� our shelves (mostly of Slovenian origin), and in 2004 we shall continue to add new products to the line. Great attention will be paid to education of customer sales The number of Mercator Private Label products staff to enable them to present all the benefits and advantages of the product line. and the share in total sales - Slovenia • In 2003 we rapidly expanded the Lumpi Line, which comprises products for children. With the intention to increase the perception and education of the target customer group (families with children) we prepared, at the beginning of the year, a short Lumpi’s good night wish to the children, which was daily aired by the Slovenian National Television. In July 2003 a one-month campaign was conducted with Lumpi’s giants, to which Slovenian kindergartens were invited. The campaign received a very positive response from the kindergartens and the general public. Children drew pictures, which in July and August of 2003 could be seen exhibited as posters along the roads throughout Slovenia. By the end of 2003 the line comprised 90 products.

A total of 206 new products were included in the Mercator Private Label lines, which, in addition to the before said lines include a group of generic products, M Line - a line of articles of clothing and Total Body Care - cosmetic and toilet articles. The Mercator Private Label products are being developed in all the markets in which we operate. At present the line comprises 478 products in Slovenia, 154 products in Croatia, 157 products in Serbia and Montenegro and 240 products in Bosnia and Herzegovina. At the end of 2003 the Mercator Private Label products generated 9 % of total turnover.

042 Annual Report 2003 043 The results of a survey about how much customers know, like and use The Mer- Year 2003 Number of products Share in total sales % cator Private Label products showed that the products are well known (the Merca- Croatia 154 1.21 % tor Private Label is known by over 90 % of customers), almost half of all customers on the market prefer these products and over 60 % of customers also know the lines Serbia and Montenegro 157 0.78 % The Wishing Table, Healthy Life, Lumpi and Total Body Care. Customers choose Bosnia in Herzegovina 240 1.40 % to buy the Private Label products mainly due to the favourable ratio between the price and the quality of products. Products from this programme retain their price for one year. The number of Mercator Private Label products and the share in total sales - New markets In the second half of 2003 we began to develop a new project named Five a Day. Its aim is to increase the daily consumption of fruit and vegetables per inhabitant to at least 5 meals per deal and to increase the awareness of customers, their concern for health and well-being. A correct colour combination of fruit and vegetables can provide us with a wide range of various vitamins, minerals, fibre and other elements needed by the body. All these substances help us fight off the adverse affect of the environment, of ageing and they reduce our exposure to various illnesses. Sales promotion campaigns related to consumption of fresh fruit and vegetables are carried out weekly from Thursday to Monday. The selection of products is adjusted to seasons and available supply. In 2004 we intend to expand the project to other product ranges such as frozen and dried fruit and vegetables, juices etc.

042 Annual Report 2003 043 In 2003 we also began to carry out new and upgrade the existing, among customers’ well known, sales promotion projects:

Development of Short-term Sales Promotion Projects

In 2003 we continued and expanded our short-term sales promotion projects and carried out 11 regular campaigns, 12 hypermarket campaigns, 9 Intersport store campaigns, 10 campaigns in chemist’s shops Beautique, 12 in stores selling clothing “77 % of customers occasionally and fancy articles within the hypermarket campaigns and 2 extraordinary campaigns entitled “Going to the Seaside’, and “It’s School Time’, 6 campaigns in stores selling buy products on special offer.” furniture, 9 campaigns in stores selling technical products and building material and 50 co-marketing campaigns, where we co-operated with various renowned domestic and foreign suppliers.

We prepared a new concept of short-term sales promotion campaigns entitled Without Doubt. Without Doubt has a special cover slogan and image and combines various Mercator’s campaigns, which enables more effective advertising, greater recognition among the target customer groups and announces them the offer of attractive products at very competitive prices. Sales campaigns, of which there were 19 in 2003, were carried out from February until November. In terms of content, the campaigns were linked to public holidays (national and international) and to the seasonal activities (going to the seaside, hot summer days for the sale of beverages, time to go to school, celebration of new wine Martinovo, etc.).

The campaign had extraordinary sales effects and was well accepted by the customers, and will be continued in 2004. The project Without Doubt has been carried out “88 % of customers occasionally in all the markets in which we operate. buy products from the project Development of Long-term Sales Promotion Projects In 2003 we continued with the already established sales promotion projects, which Every Day Low Prices.” have been carried out over a longer period of time.

• Every Day Low Prices: in Slovenia the project includes 320 products, in Croatia 158, in Serbia and Montenegro 138 products and in Bosnia and Herzegovina 129 products. The purpose of the project is to offer the customers products at the most favourable prices, hence it is intended for price-sensitive customers. At the end of 2003 we generated about 9 % of total turnover with the sale of products covered by the project.

• Slovenian, Croatian, Serb and Bosnian Shopping Baskets is a project with “69 % of customers occasionally which we wish to offer to the customers the most renowned products of domestic producers and brand names at the most favourable prices. The product range is selected according to the season and is changed every four months. In Slovenia the buy products from the project project includes 50 products of Slovenian producers (in smaller stores the range is from 15 - 25), in Croatia 25 products of Croatian producers, in Serbia 29 products Slovenian Shopping Basket.” of Serb producers and in Bosnia 39 products of Bosnian producers,

044 Annual Report 2003 045 IT Development • Management of discrepancies, comments and praise relating to processes; it means systematic monitoring of any discrepancies, comments and praise relating In the Mercator Group the field of information technology is important, since high to processes and prompt removal of errors; it enables us to avoid ambiguity and quality and timely information about the Group’s operation is a precondition for indirectly to reduce the operating costs. high quality decision-making. We therefore endeavour to pursue the Group’s strategic development by continually improving the IT systems. • Making appraisals and internal controls; in the already certified companies we upgraded the quality system ISO 9001:1994 by implementing the requirements of In 2003 we continued with the key information support projects in the whole of the new standard ISO 9001:2000 and successfully underwent an external appraisal Mercator and especially in retail. The principal project remained the project of cen- made by the SIQ. With internal controls and internal appraisals we tested if our tral purchasing where we linked the EPOS systems of our retail units into a central operations were adjusted to the requirements of the standards. purchase system. Important steps forward were made in information support to e-business operations by the renovation of the Mercator’s Web site and of its Web • Implementing corrective and preventive measures, on the basis of findings of store as new suppliers were included in the electronic data exchange and renovation the before mentioned procedures, such as preventive actions to ensure food safety of electronic fax operations. and to appraise the performance in functioning of the quality system during management reviews which were carried out in all the Mercator Group companies To ensure the safety of our IT system we introduced the project “Complete Regula- which had implemented the ISO 9001 standard. tion of the Processes of Development, Security and Protection of Information and Information System of the Company Poslovni sistem Mercator, d.d.” in which we • Training for quality standards; conditions on the market require continuous assessed the risk exposures and the proposals for reducing the risks. improvement of services and of the quality of goods, therefore we train our employees for carrying out documented processes, educate them about the relevant In 2003 the Mercator Group allocated SIT 697 million to investments in informa- legislation and on the Mercator standards, the systems HACCP and DHP (good tion technology of which SIT 340 million in the parent company. The share of total hygiene practice). costs of information technology in the Mercator Group in net sales revenues for 2003 was 1.1 %. • Information support to the quality system; which enables the linkage of all trade companies of the Mercator Group with the collection of documents. In 2004 the key activities in the field of information support development will again be supporting management and decision-making, supporting efficient operational • ISO 9001 on the new markets; trade companies of the Mercator Group have processes and their unification. already obtained the certificate confirming their adjustment to the requirements of the ISO 9001 standard so that the project was only carried out in the companies on the new markets where we started the procedures for the beginning of certifica- tion. Quality Development • Qweb; we renovated the Mercator’s Web site and certified it according to the re- We dedicate all our knowledge and attention to the quality of our products and quirements of the standard Qweb, release 1.2, One star level with validity from 4 services. By introducing quality standards we strive for an efficient system, with November 2003; we were the first in Slovenia to certificate the Web site. which we wish to ensure long lasting customer satisfaction, successful performance, development of the Company and a firm base for development and satisfaction of • Business excellence; the Management Board of the company Poslovni sistem employees, owners and the general social environment. Mercator, d.d., approved the introduction of the project Business Excellence in the Parent Company aimed at preparing a self-evaluating role of the company (deter- The following measures were taken in 2003 to ensure the quality of our mine the priorities and opportunities for improvement of organisation and carry operations: out corrective measures) to obtain the 2005 Business Excellence Award conferred by the Republic of Slovenia. • Management of documents and records; it means keeping, updating and revis- ing the collection of Mercator standards in accordance with legislation, standards and improvements which provide to the users immediate information for co-ordinated operation; the collection is available on Mercator’s intranet pages.

044 Annual Report 2003 045 Employees

Overview of Employees With regard to members of the staff of the Mercator Group the year 2003 was in the Companies of the Mercator Group marked by redeployment of staff from the companies Æana, d.d., and Mercator - Degro, d.d., to the company Poslovni sistem Mercator, d.d.; by the setting up of a No. of employees No. of No. of technical chain within the parent company and disposal of stakes in the companies Company based on hours employees as at employees as at Trgoavto, d.d., Mesnine deæele Kranjske, d.d., and Mercator - KÆK Kmetijstvo worked in 2003 31 Dec. 2003 31 Dec. 2002 Kranj, d.o.o., and integration of the company Æivila Kranj, d.d., into the Mercator Poslovni sistem Mercator, d.d. 5,167 5,837 4,393 Group. Emona Merkur, d.d. 1 - 1 Æana, d.d. 2 - 116 At the end of 2003 the Mercator Group had 14,673 employees of whom 5,837 Mercator - SVS, d.d. 1,426 1,424 1,618 in the company Poslovni sistem Mercator, d.d. Compared with the 2002 figure, Æivila Kranj, d.d. 354 1,492 - the number of employees in the Group increased by 2.4 %. The highest increase Mercator - Dolenjska, d.d. 923 861 1,046 was recorded in the trade segment (9 %) due to the integration of the company Mercator - Gorenjska, d.d. 1,070 1,091 1,107 Æivila Kranj, d.d., into the Group. In non-trade segment the number of employees decreased (by 52.8 %) on account of disposal of the companies Mesnine deæele Mercator - Degro, d.d. 255 13 988 Kranjske, d.d., and Mercator - KÆK, Kmetijstvo Kranj, d.o.o. Mercator - Goriπka, d.d. 700 730 773 Mercator - H, d.o.o. 1,151 1,281 1,252 In 2003 the Mercator Group had 2,584 newly employed, 2,242 employees left and Mercator - TC Sarajevo, d.o.o. 247 261 254 1,425 employees fluctuated within the Mercator Group. In 2004 we expect further Mercator - BH, d.o.o. 1 1 - growth in the number of employees in the Mercator Group, mainly due to expan- Mercator - S, d.o.o. 340 357 383 sion of retail network on the new markets. Trgoavto, d.d. - - 272 Mercator - Modna hiπa, d.o.o. 561 593 581 Demographic and Educational Structure of Employees Intermercator, G.m.b.H. 4 4 4 Total trade 12,201 13,945 12,788 The average age of employees in the Mercator Group is 38.9 years. At the end of MDK, d.d. 264 - 651 2003 the educational structure of the Mercator Group was as follows: the first group MDK - H, d.o.o. 1 - 1 (“I. - III.” primary school level) comprised 1,945 employees or 13.3 % of total em- Eta, d.d. 304 311 308 ployees, the second group (“ IV. and V.” secondary school level) comprised 11,921 Pekarna Grosuplje, d.d. 229 232 217 employees or 81.2 % of total and the third group (“VI. or over” higher education and university degrees) comprised 807 employees or 5.5 % of total employees. The aver- Belpana, d.o.o. - - - age education level (measured with: 1 - I. primary education level, 8 - VIII. Univer- Mercator - Emba, d.d. 104 106 95 sity degrees) of employees in the Mercator Group was 4.09 on 31 December 2003. Mercator - KÆK Kmetijstvo Kranj, d.o.o. 87 - 192 M Hotel, d.o.o. 45 49 48 Mercator - Optima, d.o.o. 29 30 31 Total non-trade 1,062 728 1,543 Total Mercator Group 13,263 14,673 14,331

046 Annual Report 2003 047 ��

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Structure of employees by education group in the Mercator Group on 31 December 2003

Absenteeism Motivation of Employees

In the Mercator Group the total hours of sick leave in 2003 were 1,706,521 of which In addition to meeting ordinary commitments to the employees we pursue our 858,651 were charged to the companies and 847,870 hours to the Health Insurance strategic goals by providing for their personal and professional development; our Institute of Slovenia. The absenteeism rate in the Mercator Group was 5.75 %. employees have the opportunity to attend various forms of training and education, which is reflected in the fact that in 2003 a total of 21,360 employees attended the courses. In addition to functional training and education, we monitored the progress of 194 trainees, 305 employees attended external study programmes, we awarded scholarships to 51 high school and university students, monitored 85 trainees in our retail and production units and enabled 966 high school and university students and holders of our scholarship work practice.

In line with our human resource management strategy we continued to hold annual interviews for Mercator employees in 2003, which contribute to improving mutual relations and communications between managers and their subordinates, to identifying personal goals and understanding the work of individuals and help in discovering hidden, unutilised capabilities of employees.

For the third consecutive year in 2003 the Mercator Group paid for its employees in Slovenia the premiums of supplemental additional collective pension insurance, which is carried out by the insurance company Pokojninska druæba A, d.d., thus improving the employees’ long-term social security.

046 Annual Report 2003 047 Survey of Employee Satisfaction

For the fourth consecutive time we ordered a survey of employee satisfaction, which was carried out in April and May of 2003 by the Centre for Public Opinion Pooling at the Faculty of Social Sciences in Ljubljana. Compared with the year before the results were better, employees demonstrated an increased trust in top management; they were more satisfied with directors’ management style, nature and conditions of work, with information disclosure and communications.

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Average scores by section in measuring employee satisfaction Minimal score: 1.00; Maximal score: 5.00

048 Annual Report 2003 049 Survey of Industrial Relations Climate

In November 2003 the largest trade companies of the Mercator Group participated for the third time in the industrial relations climate research (SiOK) carried out by the Chamber of Commerce and Industry of Slovenia. The survey results showed a very favourable climate in Mercator. Compared with the other Slovenian companies we exceeded the average scores or were high above the average score reached by the participating retailers.

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Average scores by section in measuring industrial relations climate in 2002 and 2003 Minimal score: 1.00; Maximal score: 5.00

048 Annual Report 2003 049 Ownership Structure and the Company’s Shares

Ownership Structure of Poslovni sistem Mercator, d.d., Members of the Number Participation in as at 31 December 2003 Management Board of shares total capital Zoran JankoviÊ 47,013 1.465 % In 2003 the number of shareholders of the company Poslovni sistem Mercator, d.d., Aleπ »erin 6,000 0.187 % decreased by 12 so that on 31 December 2003 the Company’s register had 20,919 shareholders recorded. Jadranka DakiË 5,700 0.178 % Marjan Sedej 5,950 0.185 % Stanislav Brodnjak 3,070 0.096 % Total 67,733 2.111 % Members of the Number Participation in Slovenian Supervisory Board of shares total capital Compensation Fund 13.57 % Janez BohoriË - 0.000 % Individuals Vera AljanËiË Faleæ 30 0.001 % 29.27 % Ksenija BraËiË 75 0.002 % Capital Fund 16.50 % Joæe Cvetek 2,000 0.062 % Dragica Derganc 142 0.004 % Matjaæ Gantar - 0.000 % Vladimir JanËiË - 0.000 % Morena KocjanËiË 500 0.016 % Marjan Somrak 20 0.001 % Branko TomaæiË - 0.000 % Investment Other Funds legal entities Total 2,767 0.086 % 18.21 % 22.45 % At the end of 2003 the participation of foreign investors in the capital of the company Poslovni sistem Mercator, d.d., was 3.71 %, which was 1.26 percentage points over the end of 2002 figure. Shareholders of the company Poslovni sistem Mercator, d.d.

Major Shareholders Shareholder Information

As at 31 December 2003, 10 major shareholders held a total of over 55 % of the The Company’s share capital is divided into 3,208,504 ordinary registered shares, Company’s shares: trading on the official market of the Ljubljana Stock Exchange Inc., Ljubljana, with • Kapitalska druæba pokojninskega in invalidskega zavarovanja, d.d. (Capital Fund) the nominal value of SIT 10,000 per share. From 22 December 1997, when the (16.50 %); shares were first listed on the Ljubljana Stock Exchange, to 31 December 2003, their • Slovenska odπkodninska druæba, d.d. (Slovenian Compensation Fund) (13.57 %) value grew by 660.1 %. • KD Group, FinanËna druæba, d.d. (11.60 %); • Zavarovalnica Triglav, d.d. (2.64 %); Shares of the parent company are listed on the official market of the Ljubljana Stock • Sava, d.d. (2.00 %); Exchange under the trading code MELR. • Triglav, steber I, posebna investicijska druæba, d.d. (2.53 %); • NFD 1 Investicijski sklad, d.d. (2.44 %); In accordance with the Securities Market Act provisions and the Ljubljana Stock • Zoran JankoviÊ (1.47 %); Exchange Rules, the Company regularly informed the public of its business results • Krona Senior, posebna investicijska druæba, d.d. (1.21 %); and other important events. • Bank Austria Aktiengesellschaft, Vienna (1.12 %).

050 Annual Report 2003 051 31 Dec 2003 31 Dec 2002 Index 2003 / 2002

Number of ordinary shares 3,208,504 3,208,504 100.0

Market capitalisation (in SIT thousand) 104,794,858 78,770,762 133.0

Market value per share (in SIT thousand) 32,662 24,551 133.0

Book value per share (in SIT thousand)* 27,122 24,872 109.0

Annual low (in SIT) 22,812 16,183 141.0

Annual high (in SIT) 33,147 27,166 122.0

Weighted average market price, excluding block and cross trades (in SIT) 32,648 22,254 146.7

Earnings per share (in SIT) 2,875 2,169 132.5

Price/earnings ratio (P/E) 11.36 11.32 100.4

Capital yield (in %) 33.34 51.55 64.7

Dividend yield (in %) 1.84 2.47 74.5

Total yield (in %) 35.18 54.02 65.1

*Calculated by using capital of the parent company according to Slovenian accounting standards.

Movements in the Market Price of Shares Shareholder Satisfaction

A comparison of movements in the average daily price of MELR in 2003 and the In 2003 we carried out, in co-operation with the Faculty of Social Sciences - Institute SBI 20 index is shown in the following graph: of Social Sciences: Centre for Public Opinion Pooling and Mass Communications, our third survey of shareholder satisfaction. The survey is conducted in accordance �� with the ISO 9001 standard and its primary goal is to monitor shareholders satisfaction over a longer time period. The results showed that Mercator’s shareholders were �� still satisfied with their Company.

�� Dividend Policy �� In 2003 the Company pursued the adopted dividend policy, which had been deter-

in SIT �� mined on the basis of shareholders’ expectations, capital structure of the Company, �� investment opportunities and aspects of taxation. At the 9th Annual General Meet- ing, held on 20 May 2003, shareholders resolved to allocate part of the distributable �� net profit for 2000, amounting to SIT 1,443,826,800 to payment of dividends in the gross amount of SIT 450 per ordinary share. In 2003 gross dividend value was �� higher than in 2002 by SIT 50 in nominal terms. �� The Company will pursue the set dividend policy also in the future. The Manage- To enable comparison the trend of the SBI 20 index has been adjusted so that the ratio of the price of ment and the Supervisory Board propose to the General Meeting of Shareholders MELR and SBI 20 is 7.38 during the whole period under review as it was on 1 January 2003. that a gross dividend of SIT 500 per share be paid in 2004.

050 Annual Report 2003 051 ��

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�� Ranking of shareholder satisfaction criteria by degree of satisfaction

052 Annual Report 2003 053 Communication with Stakeholders

At Mercator we are aware of the importance of communication and of establishing response of the customers therefore we shall continue with them also in 2004. relations with various publics, especially with By the end of 2003, 480,000 Slovenian households received the Month Magazine four times, while the December issue was also received by Croatian customers who Customers received it for the first time. In 2004 four issues of the magazine will be published in Slovenia and Croatia. Employees We regularly communicate with our customers also through praise, complains and comments, which we receive via various media − letters, electronic and tel- Shareholders and financial community ephone messages, and reading complaints and praise books, which are available in Business partners all Mercator stores − and to which we promptly and regularly respond. Environment Communication with Employees

The media At Mercator we are aware that internal communication contributes to establishing the Company’s reputation among the employees, to their loyalty, to conveying cor- To achieve the best possible result in conveying Mercator’s mission and vision and to porate strategy to the employees and satisfying their needs and wishes. increase the satisfaction of each and every group of stakeholders we adjust the forms of communication to each public separately. In the field of communication with employees the beginning of 2003 was marked by the CEO’s open day for all the employees of the Mercator Group. Every first That the top management is well aware of the importance of communication is Tuesday of a month all Mercator’s employees get the opportunity to talk to the evidenced by the Primus Award, which the Slovenian Public Relations Association President of the Management Board and CEO of Poslovni sistem Mercator, d.d., together with the Chamber of Commerce and Industry of Slovenia, The Managers’ Zoran JankoviÊ; they can tell him about their problems, wishes as well as proposals Association of Slovenia and The Management Consulting Association presented to and suggestions for improving work conditions. In this way the principle that each the President of the Management Board of Poslovni sistem Mercator, d.d., Zoran employee is important for the Company is being adhered to. JankoviÊ in 2003. In 2003 we continued to communicate with our employees through the popular internal newsletter Mercator, which has a circulation of eighteen thousand copies Communication with Customers and is being sent to Mercator’s employees, retired employees and students. Last year the newsletter Mercator celebrated its 40th anniversary. Its content is dictated by Because customers are very important for Mercator and our driving force is making current internal and external economic, political and other circumstances in which people, who come in contact with Mercator satisfied, we wish to keep in contact the Company operates and its mission is to inform the employees about important with them in various ways. events and decisions, which regard them as well. In addition to nine issues of the Mercator newsletter in 2003 we published a special issue entitled “Quality in Merca- The Month Magazine is one of our ways of communication with customers and has tor” which was prepared in Slovenian and Croatian editions. been published for the fifth consecutive year. Its intention is to inform and advise customers about healthy food, the new products launched on the market and to raise With a similar purpose, to foster an interest in Mercator’s common values and cor- people’s awareness of the importance of quality in life. The Month Magazine follows porate culture among the employees we organised the 25th annual gathering of all the lifestyles of people and gives useful advice and information about our product Mercator’s employees - Mercatoriada; it is a special day for the employees when range and about the events and interesting facts in our stores. Topics are adjusted they and their family members are invited to the gathering. In 2003 the gathering to target customer groups and to the seasons. In 2003 the magazine was updated was attended by ten thousand people from four countries. In December 2003 we and enriched with current information about the products on offer; with columns organised another meeting of all Mercator’s employees in Slovenia − Party of All relating to product launches and interesting advice, events and other products on Parties, which was held before the New Year’s Eve and was attended by a record nine offer in Mercator stores; the magazine also contains articles about projects which are thousand employees. Similar Season’s meetings were organised in all the markets in being prepared, brief news on what is happening in Mercator and information about which we operate. novelties relating to Pika card.

The Month Magazine encourages shopping in Mercator by publishing discount coupons, with which some products can be bought at more favourable prices. Each issue of the magazine included 9 - 10 coupons. Coupons were met by a favourable

052 Annual Report 2003 053 Communication with Shareholders Communication with Business Partners and Financial Community One of Mercator’s key strategic goals is to strengthen the relations with business Complete, timely, transparent and correct public information disclosure was our partners, producers and suppliers. This is proved by the traditional Mercator’s principal guideline in disclosing information about our operation, business plans Marketing Days, which are dedicated to the presentation of strategic objectives of and other price- sensitive information. We actively communicate with investors and the Mercator Group, of its development plans and marketing strategy to business other financial community members, which means that we regularly inform them partners. about our business operations and other important events in accordance with legal regulations and the Ljubljana Stock Exchange Rules. In 2003 Mercator’s Marketing Days were held for the fourth consecutive year. Dur- ing the event we presented our internationalisation strategy and new developments We provided information to investors and other financial community members in our business co-operation with suppliers. Representatives of chambers of com- mainly through the Ljubljana Stock Exchange electronic information dissemina- merce from Slovenia, Croatia, Bosnia and Herzegovina and Serbia and Montenegro tion system SEOnet where we regularly published current data on our financial attended the meetings as participating guests. We emphasised the importance of operations and other price-sensitive information, which provided the existing and mutual trust and partnership between Mercator and producers from the markets in potential investors with important guidelines in their investment decisions. The which we operate. In future Mercator will continue to give them priority on its sales results for 2002 and semi-annual results for 2003 were published in the form of counters, while maintaining equal quality and competitive prices, and enhance its marketing announcement in the newspapers Delo and Finance; in this way both offer only with the world most renowned brand names. the general public and professional public were informed of our performance. This was in line with our awareness that all the publics with which we maintain contact In presenting trade business co-operation we emphasised the organisational and matter to Mercator. market changes in relation with suppliers which should be based on good partnership relations between Mercator and suppliers to enable successful joint activity on We organise regular meetings with financial analysts and funds’ representatives; for the new markets. We underlined our expectations that suppliers would maintain them we prepare presentations and during the meetings we provide comprehensive their relationship with Mercator as buyer on the premise that Mercator is a reliable, answers to the questions, which may arise from the provided material. In doing this good and correct partner and their largest trade partner on the Slovenian market, we strictly observe the key principle of correct information disclosure to all inves- whose growth on the new markets presents a common development opportunity for tors. both parties. We are convinced that close relationship with suppliers and producers can enable us to offer to our customers products and services of high quality at Important members of our financial community are banks with which we meet favourable price. several times a year to inform them about our business operations. We co-operate closely with them since we use their sources to achieve our development goals. At the year-end we organise a Meeting of Financial Partners of the Mercator Group, Communication with the Environment which in 2003 was held for the fourth consecutive time. The purpose of the meetings, which are attended by banks, insurance companies and by representatives of Mercator’s marketing communication fully reflects the Company’s business pol- other financial institutions (Stock Exchange, Tax Administration), is to make a icy: to be the market leader by providing the best shopping experience - shopping presentation of our objectives for the future year and of the possibilities for future which is not just an indispensable household chore but a pleasant activity which falls mutual co-operation. in the category of quality spending of leisure time. To this is also adjusted Mercator’s communication strategy. All our communication related activities in Slovenia and In 2003 we completely renovated our Web site, which includes information intend- in other markets in which Mercator operates are co-ordinated. All our brand names ed for our shareholders and the remaining financial community, so that they can have their own communication support but with a clear reference to the corporate find all important information on the operations of the Mercator Group in one go. brand name.

However, the Annual Report remains one of the significant sources of commu- In applying our business strategy in 2003 we gave priority to people’s wellbeing nication with shareholders and the remaining financial community. The Annual and expanded the existing dimensions of the corporate brand name Mercator also Report comprises a company profile and a collection of other information in one in terms of sponsorships. We wish to help whenever quality of life is concerned. To place. Since 1999 we have been preparing an English edition, which is different give back to the environment is a significant part of Mercator’s strategy; we pursue from the Slovenian report as it includes financial information prepared according to values such as freedom, quality of life and progress. We continued with the princi- the International Accounting Standards, which is of special importance for foreign pal humanitarian campaign, which has become a tradition. This year we named it investors. “Open Your Eyes” and dedicated it to the Oncology Institute of Ljubljana, which is the principal institute for treating cancer in Slovenia. By purchasing an important device, Varian GammaMed Plus, valued at SIT 84 million we wished to enable the successful continuation of treatment of some types of cancer for all inhabitants of Slovenia who require this type of treatment.

054 Annual Report 2003 055 Mercator exercises its social responsibility in all the markets in which it operates. Public Relations Therefore the principal humanitarian campaign Open Your Eyes was extended to Croatia where we donated to the Lung Disease Clinic in Jordanovac a video bron- Public relations are an important part of the whole communication mix as through choscope in the value of HRK 500,000. Upon the opening of the Mercator Centre them Mercator communicates with various publics. During the year we convened in Tuzla the campaign will be extended to the market of Bosnia and Herzegovina. several press conferences, prepared press releases and materials for journalists and Shopping in Mercator stores is an experience and a pleasant event, and with this the we published announcements of important business events in the daily media. We store becomes a place where customers give their contributions to charity. In the promptly reacted to questions from the media and to invitations for interviews. autumn of 2003 we invited our customers, in co-operation with the supplier Pejo trading, d.o.o. to participate in the charitable campaign We Were All Children Once. The purpose of the campaign was to collect funds for giving a one week of care-free and happy holidays to two hundred children from Slovenia, organised by the Friends of Youth Association of Slovenia, whose principal activity is to ensure that children and youngsters spend quality leisure time. All three organisers wish to join forces in more effectively achieving the set goal. The campaign will be continued in the year 2004.

At Mercator we are aware of the problems the Slovenian health institutions are fac- ing, therefore for a number of years we have endeavoured to help, with a donations strategy, in the fields where help is most needed and we donate medical devices and accessories from which the greatest possible number of patients can benefit. In 2003 we helped the Paediatric Clinic in Ljubljana and donated a Lumpi van, since the Clinic had difficulties in providing a safe and timely transport of young patients for medical check-ups.

As sponsor Mercator is actively involved in meeting the needs of the general social environment. In 2003 sponsorships and donations were earmarked for the development of sports, culture, education and projects related to protection of environment. Culture, sports and entertainment - be it events or shows - become pleasant experiences, widen horizons and improve the quality of life. Success and recognition achieved in culture, sports and entertainment lead to the strengthening of personal- ity, recognition and reputation of sponsors and donators and of Slovenia.

Foundation Use Your Head at the Party, which carries out educational and preventive campaigns during events attended by the young and families with children; these events are associated with drinking alcohol and driving; the Mercator Centres throughout Slovenia participated in the Foundation’s campaigns in 2003 by draw- ing attention to the importance and the content of the slogan. In 2003 we again supported the project Golden Graduates, where we presented gifts to the best graduates in Slovenia. With this we supported and encouraged education among the young. As sponsors we participated in the project Green Backpack, in which over 1500 children from kindergartens in Ljubljana and its suburbs took part. The principal topic of the event was separate collection of waste material. Mercator supported the project in line with its environment protection policy.

Mercator is known as a long-standing sponsor of the gold season-ticket perform- ances in Cankarjev Dom, in 2003 it was the golden sponsor of the 6th Euro- pean Men’s Handball Championship. As general sponsor Mercator supported the Ljubljana Maraton, since the event could be fully incorporated in its corporate mission − foster the idea of healthy lifestyle and healthy eating. As sponsor Mercator co-operated with the popular sportsman Iztok »op, who advertised a new Mercator Private Label line Healthy Life.

054 Annual Report 2003 055 Samo President of the Management Board Mercator SVS, 11 years in Mercator Mensud Director of the Company Mercator - BH, 4 years in Mercator

Special moments

056 Annual Report 2003 057 Financial Operations

At the end of 2003 the Mercator Group achieved a 1 : 1.34 ratio between owners’ equity, stated as owners’ equity plus long-term provisions according to International Financial Reporting Standards, and debt capital, stated as non-current and current borrowings. In 2003 the Mercator Group continued to successfully pursue the target capital structure of 1 : 1.5 ratio between the owners’ equity and debt capital. This target ratio would ensure the Mercator Group appropriately low average weighted cost of capital at moderate financial risks.

At the year end we were briefly at variance with the at least 90 % coverage of non- current liabilities with non-current assets since a 81.5 % coverage was reached. The reason for the lower coverage was a temporary increase in current bridge loans on account of various activities undertaken at the end of 2003 − due to the need for financing the takeover of the company Æivila Kranj, d.d., and to the fact that with the company we took over their borrowings, which were mainly current loans. An additional reason for temporarily higher current borrowings was our intention to issue bonds on the Slovenian capital market at the end of 2003, which we did not carry out due to unfavourable price conditions, and we did not succeed in replacing the current bridge borrowings by the end of the year. This was not particularly important as current borrowings were at that time better priced than non-current.

Due to the increased volume of business and further implementation of our investment plan relating to the expansion and updating of our retail network in Slovenia and on the new markets in 2003, borrowings grew in 2003 by 14.7 % (SIT 13,522 million) and reached SIT 105,384 million at the year end.

In 2003 we continued to use long-term financial lease, which offered acceptable interest rates and long maturity periods and gave us the opportunity to diversify our financial sources. In addition to the existing Mercator Centres in Jesenice and Kranj, we used financial lease in building the shopping centre in Celje. In future we intend to increase the use of financial lease especially in Croatia due to our extensive investments there. Increased use of these sources will not only improve the ratio between the price and maturity but also the maturity structure of financial liabilities and coverage of non-current liabilities with non-current assets.

In current borrowing we implemented the Euro commercial papers programme again in 2003 as it represents an important element of diversification of financial sources of the Mercator Group − by issuing short-term securities with maturity from 7 to 364 days on the international capital market. In February and March we issued four new tranches of Euro commercial papers at favourable terms, which at the end of 2003 amounted to EUR 6 million.

In the first quarter of 2004 the Mercator Group intends to speed up the replacement of current bridge sources with bilateral current borrowing and increase the use of financial lease in order to improve the maturity structure of financial liabilities and coverage of non-current liabilities with non-current assets.

056 Annual Report 2003 057 ��

��

The ratio between non-current and current financial liabilities

��

The ratio between financial liabilities in Tolars and foreign currency

058 Annual Report 2003 059 Risk Management

The Mercator Group has been monitoring various types of risks for a number of Financial Risks years with the aim of ensuring that its operations run smoothly and avoid any potential interruption or stoppage. We established that in general the implemented The Mercator Group pursued the adopted financial risk management policy, took process has favourably reduced the exposure of Mercator to various unforeseen appropriate measures and carried out activities and maintained a low exposure to events and shocks, improved its competitive position, enabled a better control over individual financial risks. In 2003 the Group was exposed to the following financial the costs, more precise projection of cash flows and profit, enabled a better credit risks: rating and improved the trust of shareholders, suppliers, customers and other parties as well as being useful as a support in management decision making, all of which combined reflects in Mercator’s market value.

In 2003 we made an important step forward in risk management by setting up a �� Risk Management Committee. Risk management has thus become formalised and �� co-ordinated at the Group’s level with the aim to unify and improve its efficiency.

The Risk Management Committee has formed three subcommittees for managing risks associated with individual fields of exposure: ��

��

Significant progress was made in interest rate risk management. Despite the fact that there were no significant changes with regard to the exposure (which, according �� to internal assessment, remained moderate) we decided, due to record low interest �� rates, uncertainty on the international financial markets, which prevailed during most of 2003 and possibility of improving projections and reducing variability of costs of financing, to hedge part of borrowing in foreign currency, linked to floating reference interest rate Euribor. To make the hedging we concluded an interest rate swap with which we effectively fixed the financing costs of part of the borrowing The subcommittees’ activities in 2003 further improved the risk management level linked to the floating interest rate. As at 31 December 2003 the hedged borrowings and in the long run will ensure low exposure to various types of risk and make amounted to SIT 17.5 billion, which made up 25.9 % of total borrowings linked to achievement of set strategic goals more reliable. the floating interest rate or 18 % of total financial liabilities.

058 Annual Report 2003 059 The picture below shows the ratio between borrowings with floating and fixed inter- By hedging the before said borrowings, exposure to interest rate in terms of internal est rates in the Mercator Group as at 31 December 2003. It is clear that by hedging assessment reached a low level, one that is comparable to all the remaining types of part of borrowings the exposure to interest rate risk was reduced since the share of financial risk. borrowing with floating interest rates was lower than it would have been if we had not made the hedging.: Exposure to credit risk, which arises mostly in the Mercator Group’s wholesale activities and from non-trade activities (in retail sale this risk is negligible due to prevailing prompt payments in cash or with payment cards), was also estimated to be low in 2003 for the following reasons:

• We established that Mercator’s wholesale buyers were well dispersed, so that exposure to individual buyers was eliminated, at the same time revenues from �� wholesale and non-trade activities represented only a small share in total revenues �� of the Group; �� • Exposure to individual wholesale buyers or business partners was limited and regular monitoring of slow payers was being carried out;

�� • We checked the credit rating of all potential new wholesale buyers; �� • We had binding sales and payment terms (selling prices, quantity and financial discounts) for individual categories of external buyers;

• With new and doubtful buyers we used various instruments to secure trade �� receivables; �� • We introduced a collection procedure for trade receivables, which ensures that the majority of trade receivables are settled;

• We limited open account payments on the new markets;

�� • We carried out prompt settlement of receivables and payables on bilateral and �� multilateral basis, we reduced the share of unmatured and matured receivables due �� from buyers and other business partners and with it the extent of credit risk.

Our assessment of risk exposure and of the effectiveness of implemented measures was confirmed by a statistical research, which was carried out within the risk man- �� agement process. On the basis of research, with which we monitored the volume �� of doubtful receivables by individual month and analysed the dynamics of settled receivables from 1999 onward, we established that with its existing measures and activities the Mercator Group had appropriately and efficiently managed credit risk and we considered that no additional measures or activities were necessary to reduce and better manage credit risk.

�� In 2003 we improved the appraisal of exposure to currency risk by upgraded meth- �� odology and precisely selected management policy. Risk was appraised on the basis of the Group and of individual companies and individual markets. Exposure to currency risk was assessed on the basis of planned cash flows of the Company in various currencies and expected unfavourable changes of actual currency exchange rates.

060 Annual Report 2003 061 We established that exposure to currency risk associated with operations of Slovenian On the basis of the above reasons we consider that the existing scope and measures companies of the Mercator Group was low, especially on account of very predictable used in liquidity risk management are adjusted to the low level of exposure and are and stable EUR / SIT exchange rate. A further reason was the forthcoming entry of in line with the selected risk management policy. Slovenia into the European Union and the expected integration into the mechanism of currency exchange rates ERM 2 at the end of 2004 and change over to Euro in Inflation risk is considered low in Slovenia where a steady downward trend has 2007. Slightly higher exposure was detected in Croatian and Serb subsidiary compa- been present for a longer period of time. In addition low inflation is one of key eco- nies, especially due to higher volatility of the exchange rate of Euro against the local nomic goals of Slovenia in the future years and a low inflation is a principal factor currencies. Despite this the exposure in terms of the Group is still very low so that of successful integration of Slovenia in the European Union and a precondition for protection against the risk by use of hedging instruments was not carried out. joining the European Monetary Union. A continuous tendency to lower inflation will therefore be a certainty. The Mercator Group, in which inflation is felt through In 2003 we again assessed Mercator’s exposure to liquidity risk. Thie liquidity risk changed prices set by suppliers, is capable, on account of its strong market position could occur if at a given moment the Company did not have enough liquidity to and established practice in Slovenia, to transfer increased purchase prices to the sell- meet its current financial obligations to enable the ordinary course of business. The ing prices. Group’s exposure to liquidity risk was again considered as low for the following reasons: Maintaining low inflation is one of Croatia’s key economic goals, which the national bank has up to now been successfully pursuing, since it is also in line with the • A significant portion of retail sales revenues, accounting for over 70 % of total country’s aim to join the European Union. In 2003 a very low inflation was reached operating revenues, was in the form of prompt cash payments, representing as- (-1.5 %), which was lower than the year before, when it was 2.3 %; based on various sured daily inflow. Similarly assured were bank inflows referring to settlement of macroeconomic estimations we assess this risk as low. payables from credit card payments which represented a considerable share in total A similar result was obtained in Bosnia and Herzegovina, where inflation also was payments as well; lower than the year before. For the before mentioned reasons and considering the fact that the Bosnian currency is fixed to EUR we consider that the inflation risk in • We can raise large cash amounts during a given day from granted revolving facili- Bosnia and Herzegovina is low. ties or accounts opened with commercial banks; In Serbia and Montenegro the favourable trend of reforms and economic progress • Liquidity reserves can be set up by suspension of early payments, which the Group continued in 2003, which reflected in slower price growth; therefore we predict a uses in relation with financial discounts prior to due date in the event of sudden slow-down of inflation; and considering the size of our Serb subsidiary company liquidity requirements. Additional reserves can be provided by the Euro commer- compared with the whole Mercator Group, we consider that this risk is low as well. cial papers programme, which was prepared in 2001 and enables prompt reaction to liquidity requirements. The market has been very interested in the securities so We consider that our exposure to price risk is low since we do not have materially far and we estimate that we shall be able to use this form of liquidity reserve also significant investments in traded securities, and we use derivative financial instru- in the future; ments for hedging and not for trading purposes.

• Within the Treasury Department a cash management system is in place which enables accurate decision making in managing liquidity; Business Risks

• An additional step forward in managing liquidity are Mercator’s daily contacts Business risks, which are associated with generation of revenues, cost control and with major buyers. In this way we are promptly advised of the volume of inflows with maintaining the value of operating assets, were in 2003 assessed in terms of originated by them and updates are made daily; potential negative effects on the movements in the market share and of sales, on investments, purchase and on the achievement of relative price difference. • In debt financing we co-operate with the majority of Slovenian banks and numerous foreign banks which reduces the liquidity risk associated with potential fall-out of individual sources of finance;

• We regularly monitor changes in external environment which influence the liquidity requirements and take appropriate measures to ensure adequate liquidity.

060 Annual Report 2003 061 Business risks were assessed in retail and wholesale: In respect of exposure to business risks in retail sale we shall in future pay special attention to: • Risks associated with competitive marketing mix, especially risk arising from un- �� competitive prices, sales promotion projects and risk associated with the arrival of �� new competitors; • Risk associated with the growth in the number of customers, especially risk associated with the quality of service and risk of unpredictable events; • Investment risk, where we shall focus on risks associated with completed invest- �� ments, and • Risks associated with purchasing, where we shall regularly monitor and consider �� the risks of selecting the local suppliers and risks associated with the influence of �� multinational companies. �� In respect of exposure to business risks in wholesale we shall pay special attention to: • Risks associated with ensuring competitive prices, and �� • Risks associated with ensuring competitive services.

�� Operating Risks �� In 2003 the Mercator Group considered its exposure to operating risks, which refer �� to planning, implementing and monitoring operational processes and activities, in the following areas of activity:

�� • Adherence to legal regulations and standards; �� • Ensuring competent staff; • Development and functioning of information infrastructure (HW in SW); �� • Purchasing; �� • Storage, distribution and retail sale; • Production within trade companies; • Providing insurance - accidents; All risks were considered separately for the Slovenian market and for the new mar- • Accounting and controlling; kets. • Measurements, analyses and improvements.

In respect of risks in retail sale we considered: • Business risks associated with growth in market share and sales; On the basis of analyses and assessment of exposure to individual types of risk we • Business risks associated with purchasing shall in future focus on risks in the following areas: • Business risks associated with generating price difference. • In respect of adherence to legal regulations we shall focus on risks associated with the Mercator brand name, especially on the new markets, and on the risk associ- In wholesale we can be exposed to the risk of unsold goods and services (e.g. ated with business confidentiality; franchise and distribution), which may be a result of (un)competitive prices, • In respect of ensuring competent staff we shall focus on unsuitable manpower (un)competitive services (sales and distribution) and (un)competitive offer (product planning; range) and their combination and arising risks associated with growth in sales or in • In respect of development and functioning of information infrastructure we shall market share. In addition in wholesale we may be exposed to credit risks. regularly monitor irregularities in the functioning of software in the event of changes; • In respect of purchasing we shall focus on work overload in administration; • In respect of production within trade companies we shall focus on managing the risk associated with ensuring safe food.

062 Annual Report 2003 063 Business Performance

Performance of the Mercator Group in 2003 • Application of uniform standards: in all Mercator companies we endeavour to adhere to the same business standards. To this end some non-trade companies had In 2003 the Mercator Group continued with the rationalisation of business proc- to adjust their business operation with the prescribed standards and clean up the esses, which had been started several years ago, and is reflected in the performance unprofitable programmes or abandon them and prepare new ones, which resulted ratios presented in the next section. In 2003 we focussed on the following areas: in write-offs and affected Mercator’s financial statements.

• Cost reduction: we merged the companies Emona Merkur, d.d., and Æana, d.d., • Decrease in office staff: the share of office staff in total staff decreased in the past with the parent company after having acquired their retail outlets and transferred from 9.5 % to 6.5 % in 2003 and will be further reduced in the future due to their activities to the parent company a year earlier and took over the retail and transfer of activities to the parent company. As a result of integration of subsidiary wholesale activities of the company Mercator - Degro, d.d., and on 1 January 2004 trade companies in Slovenia into the parent company the number of executive of Mercator - Gorenjska, d.d., with which we succeeded in reducing the overhead personnel will also decrease, especially in the companies’ management boards. costs. • Management policy relating to working capital: in accordance with the ac- • Reorganisation of business operations: we set up a technical chain within the counting policy and internal control system we provide for regular valuation, parent company in June 2003, by transferring outlets selling technical products cleaning and managing of current assets. from domestic trade companies to the parent company, thus ensuring greater competitiveness on the market and reduce the number of office staff and reduce the operating costs. We reorganised the business processes in the company Eta, The Mercator Group d.d., where we made a revaluation of inventories, introduced new packaging and reduced the product range and prepared a new business strategy and vision for the In 2003 the Mercator Group generated SIT 331,502 million of net sales revenues, company. these were 3.7 % over the 2002 revenues and reached 98.2 % of projections for 2003. Net sales revenues were lower than projections for 2003 on account of fall- • Consolidation of activity: we disposed of our holdings in the companies Trgoav- out of net sales revenues of the subsidiary companies Trgoavto, d.d., Mesnine deæele to, d.d., Mesnine deæele Kranjske, d.d., Mercator - KZK Kmetijstvo Kranj, d.o.o. Kranjske, d.d., and Mercator - KÆK Kmetijstvo Kranj, d.o.o., which were disposed on which we had decided in line with our strategic focussing on the retail sale of of in 2003. The fall-out of revenues was partly replaced by the integration of rev- food and on the basis of results of company valuation. enues of the company Æivila Kranj, d.d., in the last three months of operation.

• Mergers and acquisitions: we acquired a majority interest in the company Æivila The Mercator Group earned a net profit of SIT 9,125 million in 2003, which was Kranj, d.d., with the principal purpose to consolidate the market position, expand 28.8 % over the year before. Of this the majority owner’s net profit amounted to the product range, increase competitiveness and extend Mercator’s offer in the SIT 9,224 million, while the minority owners recorded a loss of SIT 99 million. regions of Gorenjsko, Podravje and Prekmurje, where the number of stores of the The majority owner’s net profit was lower than the profit recorded by the company company Æivila Kranj, d.d., was the largest. Restructuring of the company Æivila Poslovni sistem Mercator, d.d., mainly on account of elimination of intra-group Kranj, d.d., began immediately after the successful takeover and had a strong transactions. impact on its operation in 2003 due to adjustment to Mercator standards and principles and accounting policies; this strongly affected the financial statements for 2003 of Æivila Kranj, d.d., and those of the parent company and of the Merca- tor Group (impairment of the book value of assets of Æivila Kranj, d.d., additional adjustments owing to revaluation of receivables and new investment evaluation with a resulting impairment). Business functions of the company Æivila Kranj, d.d., shall be integrated in Mercator’s existing organisation with the transfer of retail activities scheduled for 1 July 2004.

• Concentration of distribution warehouses: in 2003 we had the opportunity to sell a site on Poljanska street in Ljubljana (warehouse) as a result of concentration of distribution warehouses with the final aim: to ensure supply from one central warehouse (purchased land of about 20 ha); preparations for building are in place. In 2003 storage facilities of the company Mercator-Degro, d.d., were disposed of and the related activities transferred to the parent company.

062 Annual Report 2003 063 Financial Ratios

Mercator Group 2003 2002 Profitability ratios Return on equity 13.5 % 11.0 % Return on sales 2.8 % 2.2 % Dividend yield of share capital 7.7 % 7.7 % Financial structure ratios Capital and long-term provisions to total liabilities 33.9 % 34.5 % Financial liabilities to total liabilities 45.8 % 43.9 % Financial liabilities and financial lease / capital and long-term provisions 134.9 % 127.3 % Long-term coverage of fixed assets 81.5 % 92.7 % Operating efficiency and productivity ratios Revenues per employee per work hour (in SIT thousand) 24,994 22,981 Added value per employee per work hour (in SIT thousand) 5,339 4,875

The profitability and productivity ratios have been calculated at average values of balance sheet elements. Financial structure ratios, investment ratios and horizontal financial structure ratios are calculated as at 31 December. Added value is calculated as the sum of EBITDA plus staff costs.

Comments on Business Performance

Profitability ratios show that in 2003 the Mercator Group engaged its capital to generate considerably higher net profit when compared with 2002, and its improved it’s ROE by 22.7 % compared to 2002.

In 2003 the Mercator Group, in line with adopted strategic financial objectives and in accordance with financial requirements wanted to reach the target structure of 90 % coverage. The reason for the lower coverage was a temporary increase in current bridge loans mainly due to the need for financing the takeover of the company Æivila Kranj, d.d., which had mainly current loans. As a result the share of non-current financial debts in total financial debts decreased from 67.1 % at the end of 2002 to 52.6 %, at the end of 2003. Consequently the ratio of long-term coverage of fixed assets decreased from 92.7 % at the end of 2002 to 81.5 % at the end of 2003.

Productivity, measured with net revenues per employee per work hour increased despite growing retail revenues in total revenues. Productivity growth was mostly a result of increased retail revenues generated in retail units with larger space - Mercator Centres and supermarkets. Along with improved business performance, efficiency and productivity, the added value per employee has grown also. Compared to 2002 it increased by over 9.5 %.

064 Annual Report 2003 065 Performance of the Companies Mercator - Dolenjska, d.d. within Mercator Group The company Mercator - Dolenjska, d.d., performed successfully in 2003 despite fierce competition in the region of Dolenjska. The Company endeavoured to retain its competitiveness by opening new and refurbishing existing retail units. In August The next section highlights the performance of the Mercator Group companies in 2003 a new Mercator Centre in Trebnje was opened. The Company intends to start 2003. building two new trade centres in 2004 - in ©entjernej and Sevnica, while their opening is scheduled for 2005. The Company will continue to reduce costs and increase the sales volume. Trade Companies Mercator - Goriπka, d.d. Mercator - SVS, d.d. In 2003 the company Mercator - Goriπka, d.d., achieved the projected business Druæba Mercator - SVS, d.d., performed successfully in 2003 in spite of strong results. In the second half of the year the retail units selling furniture and technical competition. During the year two new supermarkets were opened in Rogatec and products were transferred to the company Poslovni sistem Mercator, d.d., and the ©entjur, a supermarket in Ruπe was renovated as were other seven retail units. The Company focussed on the fast moving consumer goods programme. In 2003 the Company’s investments were earmarked for purchase of real estate of the company Company acquired five units in Ilirska Bistrica and the rest of its investment ac- Æivila Kranj, d.d., in Pomurje. In 2004 the Company will invest in obtaining the tivities included building of parking and replacement spaces in the shopping centre site development permit and enlargement of the trade centre Breg in Ptuj, purchase ©empeter and in the warehouse, purchase of storage space of commodity reserve of land in Maribor - Jug and Pesnica, seeking agreed planning consents and prepar- in ©empeter and AjdovπËina, purchase of the retail unit Ideja in Nova Gorica and ing planning documents for Mercator Centre Pobreæje in Maribor and additional improvement of information support in the retail network. In addition the Com- acquisition of real estate from the company Æivila Kranj, d.d. In January 2004 the pany adjusted its product range to customers and organised its offer in the Mercator Company sold a chemist’s shop in Mercator Centre in Maribor to the company Centre in Nova Gorica. In 2003 disinvestments were carried out in retail units of Poslovni sistem Mercator, d.d., and in 2004 two further stores will be disposed of Vipolæe, Srednje Lokave, Bilje and Æeleznina Kanal. In 2004 the Company’s de- within the technical chain of stores. In 2004 the Company plans to disinvest from a velopment activities will be directed to adjusting the product range, on offer in the retail unit in Hajdina near Ptuj and carry out part of its investment in a new business units acquired in 2003, to Mercator’s standards, to organising the retail network in centre on the same site, which is to be completed in 2005. The Company plans to the region of Vipavska, investing in the Mercator Centre in Nova Gorica, transfer- introduce central purchasing and centrally managed calculations. ring the chemist’s shop Beautique to the chemist’s shop chain and finally abandon- ing of the apparel and technical programmes. Æivila Kranj, d.d. Since 22 September 2003 the company Poslovni sistem Mercator, d.d., has been a Mercator - Degro, d.d. majority, 55.75 % owner of the company Æivila Kranj, d.d. After the completion of In March 2003 the company Mercator - Degro, d.d., transferred the complete public share offering the company Poslovni sistem Mercator, d.d., acquired a 89.03 wholesale and retail sale activities to the parent company Poslovni sistem Mercator, % shareholding in Æivila Kranj, d.d., which rose to 98.41 % shareholding including d.d., with the purpose to increase business efficiency and performance in the Coastal the company’s own treasury stock. The changed ownership structure and gradual region. Accordingly during 2003 all employees were redeployed in the parent com- integration in the Mercator Group reflected strongly in the Company’s performance pany. The rest of the year the Company focussed on efficient management of the in 2003, especially as a result of adjustments to operating in accordance with Mer- remaining assets. The Company is to be fully integrated into the parent company cator’s standards. In 2003 the Company transferred the activities of the Agrooprema in 2004. Division, stores with agro-programme, building material and technical products, to the company Poslovni sistem Mercator, d.d. In March 2003 the Company opened Mercator - H, d.o.o. a new Mercator Centre in Kranj. In 2004 the Company will operate as part of the In 2003 the company Mercator - H, d.o.o. improved its performance especially by Mercator Group. The Company’s development will be directed towards further ad- reducing costs, efficiently organising retail activities and further strengthening its po- justment to business standards and corporate culture of the Mercator Group and to sition on the Croatian market. It also endeavoured to create the required conditions streamlining its operation. for improving its business performance. To achieve an adequate capital structure the Company’s capital was increased by the company Poslovni sistem Mercator, d.d. In Mercator - Gorenjska, d.d. December 2003 the Company opened two new trade centres, in Æupa DubrovaËka In 2003 the company Mercator - Gorenjska, d.d., exceeded the projected business and in Karlovac. In addition its investment activities were earmarked for sites ap- results. The Company’s investment activities included the opening of a new store propriate for building new retail units and for carrying out a market research about in Gorenja vas and in 12 larger renewals of retail units. After the end of the year potential towns in Croatia, which will be continued in 2004. In February 2004 the the complete operation and staff of the Company were taken over by the company Company will open a new trade centre in MetkoviÊi and another four Mercator Poslovni sistem Mercator, d.d. The Company retained the activity of letting and Centres are to be opened in »akovec, –akovo, Zadar and Osijek. operating real estate. By the end of 2004 the Company is scheduled to be integrated into the parent company Poslovni sistem Mercator, d.d.

064 Annual Report 2003 065 Mercator - S, d.o.o. in line with the Mercator retail network strategy. In 2004 investments will also be The company Mercator - S, d.o.o., performed successfully in 2003 although it directed to the renewal of stores, which had been taken over within the clothing was its first year of operation, and consolidated its position on the Serb market. chain project. The Company’s research and development activities in 2003 were directed towards searching for attractive sites in all major towns in Serbia and Montenegro; it pur- Intermercator, G.m.b.H. chased land in Novi Sad, Kragujevac and Zumun and land for a distribution centre The company Intermercator, G.m.b.H. is in the process of liquidation, as after in Dobanovci near Belgrade. In 2003 the Company’s capital was increased by the Slovenia has joined the European Union it will lose all the advantages for which it company Poslovni sistem Mercator, d.d., to achieve an adequate capital structure. In was founded. 2004 the Company will upgrade the existing activities to further strengthen its position on the market, especially by starting to expand its retail network to other towns in Serbia and Montenegro. In the second half of 2004 the Company plans to open a Non-trade Companies trade centre in Zemun and to start building two new Mercator Centres, in Novi Sad and Kragujevac, with the openings scheduled for 2005. In 2004 the Company will Eta, d.d. continue to acquire land on attractive sites as it intends to reach a 3 % market share The company Eta, d.d., performed successfully in 2003 and rapidly adjusted its in Serbia and Montenegro by the end of 2005. By 29 February 2004 the company production and sales programmes to the competition which it will face upon the Mercator - S, d.o.o., has to introduce, in all its sales outlets, fiscal cash registers to entry of Slovenia into the European Union. It successfully introduced new packag- enable inspection of tax payers’ liabilities by the state. Equipping sales outlets with ing, size and form of products and revived the brand name Natureta and launched fiscal cash registers was carried out by the Information Technology Division of the new products to retain its share of the domestic market and increase its possibilities company Poslovni sistem Mercator, d.d., in co-operation with the local Company. for sales on new markets. In addition the Company provided for adequate supply of required key raw materials for seasonal processing despite extremely unfavourable Mercator - TC Sarajevo, d.o.o. weather conditions. It prepared the base for co-operation with a strategic partner, The company Mercator - TC Sarajevo, d.o.o.improved its performance in 2003 and obtained the “healthy heart” label for a group of 13 products, co-ordinated pro- generated a net profit. The Company’s activities focused on analysing the market of duction between plants in Kamnik and Bohova, increased storage capacities and Bosnia and Herzegovina, especially on the potential sites for building retail units in renovated the factory’s shop. In 2004 the Company acquired a new buyer in Austria, Alipaπino Polje and Dobrinia; it also analysed its competition and market potential launched a new baked vegetables programme and promoted the sale of old-design on the foreseen sites. In 2003 the Company’s capital was increased by the company products. In 2004 the Company will complete the consolidation of its operation, Poslovni sistem Mercator, d.d., to achieve an adequate capital structure. In 2004 the mainly with additional measures for achieving optimum differentiation of produc- Company will continue to reduce costs and increase the sales volume. tion and sales programmes and revival of the brand name; in this it will focus on the most profit- making products, which have a stable, or improving position on Mercator - BH, d.o.o. the market. By capitalising on funds invested over the last years and improving cost The company Mercator - BH, d.o.o. was established on 23 May 2003 to exploit the effectiveness, with unavoidable staff reduction, increased sales on foreign markets, customs and tax allowances related to investments in expansion of retail network in especially in line with the Mercator retail network strategy, the Company will by Bosnia and Herzegovina. The Company was founded by Poslovni sistem Mercator, end of 2005 reach the European average values of sales revenues, added value per d.d., which is its 100 % owner. In the second half of 2003 the company Poslovni employee and return on equity. sistem Mercator, d.d., increased the Company’s capital. In 2004 the Company will open two new retail units, Mercator Centre in Tuzla and a hypermarket in Alipaπino Pekarna Grosuplje, d.d. Polje. In 2003 the company Pekarna Grosuplje, d.d., perfomed successfully and ap- proached its aim of becoming the best known bakery in Slovenia. During 2003 it Mercator - Modna hiπa, d.o.o. developed six new kinds of bread and pastry goods and two new products of the In 2003 the company Mercator - Modna hiπa, d.o.o. performed successfully and fresh pastry programme, and contributed to the expansion of the range and selec- continued with the project of restructuring the clothing chain within the Mercator tion of Mercator’s Lumpi Line and Healthy Life Line. The Company continues to Group. The Company’s investments were directed to the opening and refurbish- upgrade production processes to improve the quality and safety of products, reduce ment of retail units in newly built Mercator Centres. During 2003 the Company costs and simplify production. In February 2004 the Company purchased land and opened four new retail units of Modiana: in Trebnje, within BTC in Ljubljana, in a commercial building in Grosuplje where it will build a modern plant for bulk Levec and ©entjur near Celje; in addition two larger renewals were completed, in production of private label products, and complete the implementation of quality Slovenska Bistrica and Sevnica. Modernisation and refitting of stores ensure the cus- standard ISO 9001: 2000 which was certified on 13 February 2004. The Company tomers a quality offer of clothing articles of Slovenian and foreign manufacturers. In will continue to pursue its strategic goals in 2004, build production facilities in 2004 the Company plans to renovate and develop the corporate graphic image of its Croatia, adjust its operating processes to the changed business environment after own brand name and of other brands. In 2004 the setting up of EPOS systems in Slovenia’s entry into the European Union in order to ensure that its operating proc- the Company’s units will be completed and integrated in the information system of esses are of high quality and its business efficiency is further improved. the Company. Further development and the opening of new retail units are planed

066 Annual Report 2003 067 The activities of its subsidiary company Belpana, d.o.o. in Croatia include manufacturing of bread, fresh pastry and cakes, however in 2003 the Company did not carry out production activities. Management and marketing activities were carried out in Pekarna Grosuplje, d.d., because Belpana, d.o.o., did not yet employ appropriate staff. In 2003 land was purchased in Croatia for building a bakery and the capital of the subsidiary company was increased.

Mercator - Emba, d.d. The company Mercator - Emba, d.d., performed successfully in 2003. The Com- pany continued to penetrate the West-European market and developed a number of promotional products for the company Mc Donald’s within established programmes, and new instant cacao products for the requirements of the French market, new fla- vours of fruit fillings for the bakery industry and hot white chocolate powder for the hotel and restaurant industry. In addition the Company introduced new, more functional and attractive packaging for dry products of nature. In December 2003 the Company bought from the company M - Gorenjska, d.d., its brand name Kava, in January 2004 it started to produce and market the brand name throughout Slov- enia. In 2004 the Company’s main activities will be directed to strategic production programmes with emphasis on increasing the share of their coffee on the Slovenian market, on production of coffee in Sarajevo for the needs of the Mercator’s retail network and other buyers on the new markets and on further consolidation of business co-operation with the multinational company Mc Donald’s and on penetration on the new markets of Romania, Bulgaria and Italy.

M Hotel, d.o.o. In 2003 the company M Hotel, d.o.o. performed successfully and increased its productivity. It disposed of the last building outside the hotel compound - the Gustelj Inn. The Company endeavoured to achieve the best financial results applicable to its hotel category, the highest work effectiveness and the highest number of hotel bookings; this will be continued in the future years. In 2004 the Company plans to further improve its operating effectiveness, financial strength and competitive power, which are to contribute to the achievement of strategic objectives.

Mercator - Optima, d.o.o. In 2003 the company Mercator - Optima, d.o.o. performed successfully and followed the world trends in engineering and organisation to ensure comprehensive finalisation of projects, and searched for new solutions to problems related to existing retail equipment, efficient use of energy and new technologies in designing buildings and furniture and fittings. In 2003 the Company finalised four big projects: MC Trebnje, ©entjur near Celje, Karlovac and Æupa DubrovaËka. In the same year its activity of selling and fitting air conditioners was transferred to the company Poslovni sistem Mercator, d.d., where it is organised within the technical chain of stores. A significant post year-end event was the completion and opening of Mercator Centres in Celje, MetkoviÊi, Tuzla and Domæale, while the designing of two new trade centres in Osijek and Zadar was approved. The Company’s main goal remains to fully fulfil the obligations to its principal client, the Mercator Group of companies in terms of quality, price and due dates.

066 Annual Report 2003 067 ©tefan Director of the Company Pekarna Grosuplje, 30 years in Mercator Vera Director of Legal Affairs, 10 years in Mercator

In a pleasant environment

068 Annual Report 2003 069 Environmental Activities

In the trade segment of the Mercator Group we endeavoured to practice environmental protection in 2003 by being active in the field of waste management to minimise the environmental impact of our activities and products; we acted in compliance with legislation governing environmental protection and with our business policy. In line with our socially responsible attitude we met some demanding legal requirements relating to environmental protection.

The basis of setting up an efficient system of waste and disposable packaging management was the entering into an agreement with the Company for the Manage- ment of Disposable Packaging; this meant that disposable packaging was managed in full compliance with legislation. We began to prepare the Plan of Waste Manage- ment for a Four Year Period, which will be completed in the first half of 2004 and will serve as basis for suitable waste management. We introduced free recovery of disposable bulk and transport packaging materials for customers in nine towns in Slovenia and a centralised disposable packaging management system, for which a prior application for entry in the register of waste collectors had to be made with the Environmental Agency of the Republic of Slovenia. By our own sorting disposable packaging on the place of origin and hauling it to collection points we intend to reduce the environmental impact on air, increase the portion of disposable packaging intended for recycling and reduce the quantities of municipal waste and its environmental impact.

In 2003 all trade companies tried to ensure that their operations were environment- friendly, ensuring efficient use of energy, raw materials and natural resources.

Mercator’s investment activities in the field of site planning and other interventions in natural environment was in accordance with valid legislation in 2003, all requirements in the fields of environmental protection, health care, cultural heritage and space planning were fully complied with.

Rubble and dug-out materials were deposited on registered disposal dumps and recycling spaces. Because of development plan requirements the architectural style of the new Trade Centre on Cigaletova street in Ljubljana is a copy of the former old building, which had been demolished, the neighbourhood of the Mercator Centre in Trebnje has been protected from noise pollution by a fence, and we supplied banks at the new stores to enable strict adherence to the Rules on the Management of Packaging and Disposable Packaging. In carrying out larger renewals we took care that the facades of store buildings were painted in colours, which embellished the environment in which we operate.

In selecting trade technology we gave priority to solutions ensuring efficient use of energy and equipment made of materials, which are ecologically friendly and pose no danger to health. In stores with more refrigerators and freezers waste water was used for heating

In a pleasant environment Sanitary water and as supplemental energy source for in-store heating. In preparing the range of programmes for our shopping centres we wish to provide for the needs of local inhabitants, therefore in letting spaces we give priority to phar- macies or, if the location is not suitable to pharmacy activities, to partners offering programmes of green pharmacy and medical accessories.

068 Annual Report 2003 069 We made newly built shopping centres accessible to disabled people (parking spaces 25 %. They reduce energy consumption by using devices for controlling total con- for the disabled, larger checkout areas, shopping trolleys for the disabled) and en- sumption of electricity and of non-productive energy and a device for compensating sured a pleasant atmosphere for all customers. non-productive energy. With devices on furnaces they also improved the efficiency of combustion and reduced emission of CO in the air. Pekarna Grosuplje, d.d., also In 2003 non-trade companies of the Mercator Group carried out other forms of carries out sorting and disposal of waste: organic waste, paper, metal, waste oil and environmental activity. other. With this they considerably reduced the costs of waste management.

The company Mercator - Emba, d.d., whose mission − to produce products of the The company M Hotel, d.o.o., which operates a hotel, carefully sorted waste in highest quality, apply the principles of healthy and natural food and respect the en- 2003, carried out separate collection of glass, organic waste and waste oils, while vironment − paid great attention to protection of natural and social environment in for communal refuse they used an environment-friendly bank. The Company was order to minimise the impact of their activities to the working and general environ- among the first in Slovenia to implement the HACCP rules in everyday practice. ment. As they are liable to legislation governing management of disposable packaging as communal waste, the company Mercator - Emba, d.d., concluded a co-opera- In designing, planning and construction engineering the company Mercator - Op- tion agreement with the Company for the Management of Disposable Packaging tima, d.o.o., strictly adheres to international and national regulations on protection - SLOPAK d.o.o. They manage disposable packaging by sorting and transporting and management of environment. In its activity the Company does not produce various kinds of waste materials. To minimise the quantities of disposable packaging special waste, however they collect waste paper for recycling. The Company’s devel- they agreed with individual suppliers of various raw materials on using re-usable opment concept is based on efficient use of space and energy, modern technological, packaging. In 2003 they prepared planning documents for the construction of water environmental and design solutions and on the use of ecologically safe materials in purification plant; prepared planning documents and obtained a building permit for construction. The investor strictly follows these guidelines in building, while the parking spaces in accordance with legislation (rain water is removed by collectors of commendable role of the company Mercator - Optima, d.o.o., is transferred also to oil). In updating and renovating technological procedures they selected equipment other corporations. In accordance with the Construction Act and internal rules and with minimal impact on working and general environment (user-friendly equip- regulations of Mercator - Optima, d.o.o. in preparing the technical documents for all ment, low noise levels, efficient use of energy and raw materials); in selecting new planned buildings, the document Influence Area Determination has to be prepared. packaging materials they chose re-usable, environment-friendly materials, which In designing, all potential impacts on the ground, water, air, neighbouring buildings are easy to handle and therefore customer-friendly. The Company regularly follows and people’s health have to be assessed. They take into account foreseen permitted scientific research relating to healthy food. In respect of numerous doubts about levels of emission of substances or energy from the building into the environment genetically altered food they decided that their products would not contain geneti- and their impact on the environment. The Company’s modern architecture enables cally altered substances. Mercator’s customers to park underneath the building with which the asphalted parking areas around the building are reduced as is the emission of substances from The company Eta, d.d., made its contribution to environmental activities indirectly parking areas into the environment since they are situated under the building. by improving and modernising technological procedures. Investments in this equipment contributed to improve productivity and quality and indirectly to environmental protection since all new or improved technological procedures ensured more efficient use of energy, water and waste material and minimised their environmental impact.

At the company Pekarna Grosuplje, d.d., they are well aware that employees and their wellbeing are important to the Company’s successful performance, therefore they continually improve work conditions and endeavour to provide safe, healthy and friendly work environment. Nature gives them the components for their activity and in return they respect nature and are aware of their responsibility. The Compa- ny’s activities have a much smaller environmental impact, however, the Company monitors and reduces it even further by using excess heat produced in cooling systems for heating industrial waste water and cover 30 % of energy requirements, they also use the heat of burnt gases from furnaces for heating industrial waste water thus covering 80 % of required energy, they fit production plants with air- conditioning systems and prevent emission of flour dust in the air. In modernising technological procedures the Company selects the best available and energy efficient equipment; by introducing state-of-the-art technology to cool products after baking with vacuum technique they will reduce the costs of electricity used for cooling by

070 Annual Report 2003 071 Post Year-End Events

In 2004 the Mercator Group continues to operate in line with the economic plan for 2004 which was adopted by the Supervisory Board of the company Poslovni sistem Mercator, d.d., at its session held on 15 December 2003.

The beginning of 2004 was marked by the following significant events:

• In January 2004 liquidation of the company Intermercator, G.m.b.h., Aus- tria began;

• On 22 January 2004 Mercator Centre in Celje was opened including a cinema complex Kolosej;

• On 27 February 2004 Trade Centre in MetkoviÊi in Croatia was opened;

• On 4 March 2004 Mercator Centre in Kranj was opened;

• On 10 March 2004 Mercator Centre in Tuzla, Bosnia and Herzegovina was opened;

• On 8 April Mercator Centre in Domæale was opened;

• A decision of the Competition Protection Office of the Republic of Slovenia was received, relating to industry concentration represented by the merger of the companies Poslovni sistem Mercator, d.d., and Æivila Kranj, d.d., stating that it did not oppose the merger but requesting that Poslovni sistem Mercator, d.d., complies with certain additional terms to ensure adherence to competition regulations;

• Preparation to change over from the existing Slovenian accounting and reporting standards to International Accounting Standards and in accordance with the expected amendments to the Commercial Companies Act.

070 Annual Report 2003 071 Plans for 2004 and Future Development of the Mercator Group

In 2004 and in the years ahead the Mercator Group intends to continue with activi- • Increasing the satisfaction of employees, who are the key factor in ensuring suc- ties related to mergers and acquisitions within the Group in Slovenia, which in the cessful performance; long run will reflect in improved performance and business efficiency ratios of the whole Group. We expect a stable growth in productivity (sales per employee and • Ensuring security of creditors’ investments and generate greater value for added value per employee) and improved cost-effectiveness. shareholders;

In 2004 the Mercator Group will continue to pursue the following strategic goals: • Increasing Mercator’s involvement in the local and general social environment. • Ensuring customer satisfaction, mainly by recognising their needs, wishes and expectations; adjust and develop new store formats and prepare an innovative range of products and services to generate added value for customers and increase Since the beginning of preparations for Slovenia’s entry into the European Union their loyalty to the Company; we have recognised the need to be prepared in order to be able to compete with all major European retailers, therefore we have co-ordinated operational processes in • Ensuring growth in sales and retaining the position of the leading and inno- our companies to this end for several years. vative retailer in Slovenia; The Management Board of the company Poslovni sistem Mercator, d.d., is aware of • Further development of retail network and increase in market shares on the new the significance and impact of responsible and efficient management for the Com- markets (Croatia, Bosnia and Herzegovina, Serbia and Montenegro); pany’s performance and the resulting greater added value for the Company and the whole Group. Recently the Ljubljana Stock Exchange Inc., Association of Members • Merger of companies Mercator - Degro, d.d., and Mercator - Gorenjska, d.d., of Supervisory Boards and the Managers’ Association of Slovenia have drawn up a with the parent company and preparations for a similar merger of the company Corporate Governance Csode, which will disclose the Slovenian corporate govern- Æivila Kranj, d.d.; ance systems to the general public and enable the previously neglected stakeholders to better exercise their rights. The Code is a collection of guidelines, which can be • Successful adjustment of operational processes to the changed environment applied in commenting on the reasons for being at variance with stipulations. The created by the entry of Slovenia into the European Union; company Poslovni sistem Mercator, d.d., already complies with the majority of the Code’s stipulations, some exceptions will be presented to the public by 30 Septem- • Setting up a hard discounts chain, additional restructuring of the Mercator ber 2004 through the Ljubljana Stock Exchange electronic information dissemina- Clothing Chain and further development of Mercator Technical Chain; tion system (SEOnet) and on the Company’s Web site.

• Ensuring the quality of Mercator’s operational processes on all the markets in which we operate (compliance with ISO standards and their introduction in the company Mercator - S, d.o.o.);

• Ensuring that trade companies of the Mercator Group offer safe food in accordance with requirements of the systems HACCP and DHP;

• Improving business efficiencyby further reducing costs and taking advantage of economies of scale;

• Carrying out activities related to efficient management of risks to which the Mercator Group is exposed;

• Selecting a strategic partner for the non-food line;

072 Annual Report 2003 072 Annual Report 2003 Financial Report Marko Director of Investments and Development, 6 years in Mercator Peter Director of Retail FMCG, 6 years in Mercator

Toward victories

074 Annual Report 2003 075 Principal Accounting Policies

Basis of preparation

The consolidated financial statements are prepared in accordance with and comply with International Financial Reporting Standards. The consolidated financial statements are prepared under the historical cost convention except as disclosed in the accounting policies below. Unless otherwise stated the amounts in these financial statements are expressed in millions of Slovenian tolars.

Group companies prepare their statutory financial statements in accordance with the relevant local Regulations on Accounting and Reporting in their countries. These financial statements are based on the statutory records, with adjustments and reclas- sifications recorded for the purpose of fair presentation in accordance with IFRS.

Consolidation

Subsidiary undertakings, which are those companies in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to exercise control over their operations, are consolidated. Subsidiaries are consolidated from the date on which effective control is transferred to the Group and are no longer consolidated from the date that control ceases. All intercom- pany transactions, balances and unrealised gains and losses on transactions between Group companies have been eliminated. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. Minority interest is separately disclosed.

Revenue recognition

Sales are recognised upon delivery of products and customer acceptance, if any, or performance of services (mainly rental income and marketing support revenues), net of sales taxes and discounts, and after eliminating sales within the Group. Revenue from the sale of the goods is recognised when significant risks and rewards of ownership of the goods are transferred to the buyer.

Other revenues earned by the Group are recognised on the following bases: • Interest income − as it accrues unless collectability is in doubt in which case the amount is written down to recoverable amounts and interest income is thereafter recognised based on the rate of interest that was used to discount the future cash flow. • Dividend income − when the Group’s right to receive payment is established.

074 Annual Report 2003 075 Investments in associated undertakings Financial instruments

Investments in associated undertakings are accounted for by the equity method of The Group’s financial instruments include cash and cash equivalents, investments, accounting. These are undertakings over which the Group has between 20 % and receivables, accounts payable and borrowings. Other than interest rate swaps Group 50 % of voting rights, and over which the Group exercises significant influence, but did not hold any other derivative financial instruments, hedges or available-for-sale which it does not control. assets as at 31 December 2003.

Equity accounting involves recognising in the income statement the Group’s share Other than interest rate swaps, the Group does not hold any other derivative finan- of the associates’ profit or loss for the year. The Group’s interest in the associate is cial instruments, nor did it enter into any other hedging activities. carried in the balance sheet at an amount that reflects its share of the net assets of the associate and includes goodwill on acquisition. Goodwill and negative goodwill

Foreign currencies Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net assets of the acquired enterprise at the date of acquisition, a) Measurement currency and is amortised using the straight-line method over its estimated useful life, not Items included in the financial statements of each entity in the Group are exceeding 5 years. measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the measurement Where an indication of impairment exists, the carrying amount of goodwill is as- currency”). The measurement currency of the Company is the Slovenian Tolar sessed and written down immediately to its recoverable amount. (SIT). The consolidated financial statements are presented in millions of SIT, unless otherwise stated. Negative goodwill arises on acquisition when the fair values of the Group’s share of the net assets of the acquired enterprise exceeds the consideration paid. Negative b) Transactions and balances goodwill arose from expectations of future losses and expenses that are identified in Foreign currency transactions are translated into the measurement currency using the Group’s plan for each acquisition and can be measured reliably, but which do not the exchange rates prevailing at the dates of the transactions. Foreign exchange represent identifiable liabilities. It is recognised in the income statement when such gains and losses resulting from the settlement of such transactions and from the losses and expenses are incurred or using the straight-line method over its estimated translation of monetary assets and liabilities denominated in foreign currencies useful life, not exceeding 5 years. Negative goodwill is presented in the same balance are recognised in the income statement. sheet classifications as goodwill.

Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange gains and losses. Trans- Intangible assets lation differences on non-monetary items such as equities held for trading are reported as part of the fair value gain or loss. Translation differences on available- Expenditure on acquired patents, trademarks and licences is capitalised and amor- for-sale equities are included in the revaluation reserve in equity. tised using the straight-line method over their useful lives, generally over 5 years. The carrying amount of each intangible asset is reviewed annually. c) Group companies Income statements and cash flows of foreign entities are translated into the Where an indication of impairment exists, the carrying amount of intangible assets Group’s reporting currency at average exchange rates for the year and their bal- is assessed and written down immediately to its recoverable amount. ance sheets are translated at the exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities and of borrowings are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

076 Annual Report 2003 077 Investments Where the carrying amount of an asset is greater than its estimated recoverable amount it is written down to its recoverable amount. The Group classifies its investments into the following categories: trading, originated, held-to-maturity and available-for-sale. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amounts and are taken into account in determining op- Investments that are acquired principally for the purpose of generating a profit from erating profit. short-term (less than one year) fluctuations in price are classified as trading, and are included in current assets. These assets are carried at fair value, and realised and All borrowing costs are expensed as incurred. unrealised gains and losses arising from changes in the fair value of trading assets are included in the income statement in the period in which they arise. Impairment of long lived assets Loans and receivables, originated by the enterprise by providing money, goods or services to consumer credit organisations, and classified as originated investments. Property, plant and equipment and other non-current assets are reviewed for impair- These assets are measured at amortised cost. ment losses whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount Investments with fixed maturity that the management has the intent and ability to by which the carrying amount of the asset exceeds its recoverable amount, which is hold to maturity are classified as held-to-maturity and are included in non-current the higher of an asset’s net selling price and value in use. For the purposes of assess- assets; during the period the Group did not hold any investments in this category. ing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows. Investments intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, are classified as available-for-sale; during the period the Group did not hold any investments in this Investment property category. Investment property, principally comprising office buildings, is held for long-term Management determines the appropriate classification of its investments at the time rental yields and is not occupied by the Group. Investment property is stated at of the purchase and re-evaluates such designation on a regular basis. historical cost less depreciation and impairment losses. Depreciation is calculated on the straight-line method to write off the cost of investment properties to their residual values over estimated useful lives. Estimated useful lives of investment prop- Property, plant and equipment erties are the same as those of similar property, plant and equipment. Gains or losses on disposal of investment property are determined by reference to their carrying All property, plant and equipment are recorded at historical cost, less depreciation. amounts and are taken into account in determining operating profit.

Depreciation is calculated on the straight line method so as to write off the cost of each asset to their residual values over their estimated useful life as follows: Inventories

Buildings 20 - 40 years Inventories are stated at the lower of cost or net realisable value, using the first-in, Office equipment 3 - 10 years first-out (FIFO) method. The cost of finished goods and work in progress comprises Plant and machinery 10 - 15 years raw materials, direct labour, other direct costs and related production overheads, but Plantations and livestock 2 - 15 years excludes interest expense. Net realisable value is the estimate of the selling price in Leasehold improvements 3 - 8 years the ordinary course of business, less the costs of completion and selling expenses.

Land is not depreciated as it is deemed to have an indefinite life and construction in progress is not depreciated until put into use.

076 Annual Report 2003 077 Trade receivables Deferred income tax is provided on temporary differences arising on investments Trade receivables are carried at original invoice amount less provision made for in subsidiaries, associates and joint ventures, except where the timing of the reversal impairment of these receivables. A provision for impairment of trade receivables is of the temporary difference can be controlled and it is probable that the temporary established when there is objective evidence that the Group will not be able to col- difference will not reverse in the foreseeable future. lect all amounts due according to the original terms of receivables.

The impairment policy is made on the following basis: Trade receivables are im- Borrowings paired in amount of: Borrowings are recognised initially at the proceeds received, net of transaction costs • 50 %, if from due date expired 61 to 74 days, incurred. In subsequent periods, borrowings are stated at amortised cost using the • 75 %, if from due date expired 75 to 89 days, effective yield method; any difference between proceeds (net of transaction costs) • 100 %, if from due date expired over 90 days. and the redemption value is recognised in the income statement over the period of the borrowing.

Cash and cash equivalents Leases For the purposes of the cash flow statement, cash and cash equivalents comprise cash in hand, deposits held on call with banks, and investments in money market instru- Leases of property, plant and equipment where the Group has substantially all the ments, excluding bank overdrafts. In the balance sheet, bank overdrafts are included risks and rewards of ownership are classified as finance leases. Finance leases are in borrowings under current liabilities. capitalised at the inception of the lease at the lower of the fair value of the leased Cash and cash equivalents are carried in the balance sheet at cost. property or the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of Provisions finance charges, are included in other long-term payables. The interest element of finance cost is charged to the income statement over the lease period. Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying Property, plant and equipment acquired under finance leases is depreciated over the economic benefits will be required to settle the obligation, and a reliable estimate of shorter of the useful life of the asset or the lease term. the amount of the obligation can be made.

Share capital Deferred income taxes Ordinary shares are classified as equity. Incremental external costs directly attribut- Deferred income tax is provided, using the liability method, for all temporary dif- able to the issue of new shares, other than in connection with a business combina- ferences arising between the tax bases of assets and liabilities and their carrying tion, are shown as a deduction in equity from the proceeds. Any excess of the fair amounts in the financial statements. Currently enacted tax rates are used to deter- value of consideration received over the par value of shares issued is recognised as a mine deferred income tax. share premium.

The principal temporary differences arose from: revaluations of certain non-current assets, provisions for retirement benefits and jubilee bonuses, tax losses carried Treasury shares forward and certain other provisions recognised only for tax purposes, reflected in the statutory financial statements of the Group and not in the IFRS financial Where the company or its subsidiaries purchases the company’s equity share capital, statements. Deferred tax assets relating to the carryforward of unused tax losses are the consideration paid including any attributable incremental external costs net of recognised to the extent that it is probable that future taxable profit will be available income taxes is deducted from total shareholders’ equity as treasury shares until they against which the unused tax losses can be utilised. are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity.

078 Annual Report 2003 079 Dividends

Until formal approval is obtained in the annual general meeting, proposed dividends are treated as retained earnings.

Segment reporting

Business segments provide products or services that are subject to risks and returns that are different from those of other business segments. Geographical segments provide products or services within a particular economic environment that is subject to risks and returns that are different from those of components operating in other economic environments.

Comparatives

Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.

078 Annual Report 2003 079 Audited Consolidated Financial Statements of the Mercator Group in Accordance with International Financial Reporting Standards

Consolidated Income Statement of the Mercator Group for the Year Ended 31 December 2003

Year ended 31 December (All amounts in millions of Slovenian tolars) 2003 2002 Sales 331,502 319,777 Cost of sales (239,660) (234,255) Gross profit 91,841 85,522 Other operating revenues 7,896 4,844 Selling and distribution costs (64,458) (60,967) Administrative expenses (17,776) (14,576) Operating profit 17,503 14,823 Net finance costs (7,453) (7,194) Share of result before tax of associated undertakings 44 121 Profit before tax 10,094 7,750 Tax (970) (668) Group profit before minority interest 9,125 7,082 Minority interest 99 (123) Net profit 9,224 6,959 Earnings per share in tolars 2,875 2,169

080 Annual Report 2003 081 Consolidated Balance Sheet of the Mercator Group as at 31 December 2003

31 December 31 December (All amounts in millions of Slovenian tolars) 2003 2003 2002 2002 Assets Non-current assets Property, plant and equipment 151,539 131,296 Investment property 7,083 4,113 Intangible assets 546 431 Goodwill and negative goodwill (4,004) (774) Investments in associated undertakings 416 1,356 Other investments 1,461 999 Non-current receivables 1,894 731 Deferred tax assets 4,975 5,655 163,909 143,807 Current assets Inventories 35,436 34,695 Financial investments 1,896 1,030 Trade and other receivables 26,008 26,155 Prepaid expenses 778 689 Cash and cash equivalents 2,271 3,053 66,389 65,622 Total assets 230,299 209,429 Equity And Liabilities Capital and reserves Ordinary shares 32,085 32,085 Share premium 619 619 Treasury shares 3 - Retained earnings 40,737 32,957 Fair value and other reserves 36 234 73,480 65,895 Minority interest 2,328 4,552

Non-current liabilities Borrowings 55,397 61,097 Provisions for employee benefits 559 464 55,955 61,561 Current liabilities Trade and other payables 44,896 43,763 Accruals 1,892 1,644 Borrowings 49,987 30,765 Obligations for liabilities and charges 1,761 1,249 98,536 77,421 Total liabilities 154,491 138,982 Total equity and liabilities 230,299 209,429

080 Annual Report 2003 081 Consolidated Cash Flow Statement of the Mercator Group for the Year Ended 31 December 2003

Year ended 31 December (All amounts in millions of Slovenian tolars) 2003 2002 Cash flows from operating activities Cash generated from operations 19,488 19,823 Interest received 794 786 Interest paid (6,466) (7,623) Tax paid (532) (240) Net cash from operating activities 13,284 12,746 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired (5,423) (1,040) Purchase of property, plant and equipment (25,215) (22,400) Purchase of intangible assets (386) (212) Movement on non-current investments (172) (197) Purchase of current investments (1,487) - Loans made (422) (1,439) Disposal of subsidiary, net of cash disposed 6,438 255 Proceeds from sale of property, plant and equipment 7,285 4,561 Proceeds from sale of current investments 47 3,187 Proceeds from sale of intangible assets 247 1 Dividends received 137 85 Loan repayments received 575 589 Net cash used in investing activities (18,376) (16,610) Cash flows from financing activities Purchase of treasury shares (50) (14) Proceeds from borrowings 56,711 50,748 Repayments on borrowings (50,907) (45,276) Dividends paid (1,444) (1,283) Net cash used in financing activities 4,311 4,175 (Decrease) / increase in cash and cash equivalents (781) 311 Movement in cash and cash equivalents At beginning of year 3,053 2,724 Decrease / increase (781) 311 Effects of exchange rate changes (1) 18 At end of year 2,271 3,053

082 Annual Report 2003 083 Consolidated Statement of Changes in Shareholders’ Equity

Ordinary Share Treasury Retained Fair value and (All amounts in millions of Slovenian tolars) shares premium shares earnings Other reserves Total Balance at 1 January 2002 32,085 618 - 27,281 - 59,984 Net profit - - - 6,959 - 6,959 Purchase of treasury shares - - (14) - - (14) Sale of treasury shares - 1 14 - - 15 Dividend payments - - - (1,283) - (1,283) Currency translation differences - - - - 234 234 Balance at 31 December 2002 32,085 619 - 32,957 234 65,895 Balance at 1 January 2003 32,085 619 - 32,957 234 65,895 Net profit - - - 9,224 - 9,224 Purchase of treasury shares - - 50 - - 50 Sale of treasury shares - - (47) - - (47) Dividend payments - - - (1,444) - (1,444) Fair value gains on derivative financial instruments - - - - 142 142 Currency translation differences - - - - (340) (340) Balance at 31 December 2003 32,085 619 3 40,737 36 73,480

According to Slovenian legislation only a portion of the retained earnings of the parent company are available for distribution at 31 December 2003. These amounted to 5,062 million tolars, of which 1,604 million tolars (SIT 500 per share) will be proposed to the General Meeting for distribution to its shareholders in 2004.

082 Annual Report 2003 083 Notes to the Consolidated Financial Statements of the Mercator Group

The consolidated financial statements of the Mercator Group include the financial statements of Poslovni sistem Mercator, d.d., the parent company, and the financial statements of all subsidiary companies, in which the parent company directly or indirectly, holds a majority shareholding.

Due to activities related to mergers and acquisitions and on account of consolidation within the Group, the following changes in the structure of the Mercator group occurred in 2003:

• The subsidiary company Æivila Kranj, d.d., was acquired in 2003.

• In November Emona Merkur, d.d., was merged with Poslovni sistem Mercator, d.d., and in December 2003 Æana, d.d., was merged with Poslovni sistem Merca- tor, d.d.

• In June 2003 the parent company Poslovni sistem Mercator, d.d., sold its majority stake in the company Mercator KÆK Kmetijstvo, d.o.o.

• In July 2003 the parent company Poslovni sistem Mercator, d.d., sold its majority stake in the companies Mesnine deæele Kranjske, d.d., and MDK-H, d.o.o.

• In January 2003 Trgoavto, d.d., was reclassified from subsidiary to associate for the purpose of disposal.

• During the year 2003 the parent company Poslovni sistem Mercator, d.d., sold its stake in associated companies Trgoavto, d.d., and Spar, d.o.o.

The financial statements of the Mercator group are prepared and fully comply with International Financial Reporting Standards, but it has to be emphasised that the only financial statements that are legally required in Slovenia are the financial statements of the parent company Poslovni sistem Mercator, d.d., prepared in accordance with Slovenian Accounting Standards.

In the notes all amounts are shown in millions of Slovenian tolars unless otherwise stated.

Segment information

The Group is organised into two main business segments: • Trade, which consist of retail and wholesale of fast moving consumer goods, apparel goods and technical goods. Fast moving consumer goods trade represent the core business of the Mercator Group. • Non-trade, which consists of food processing, agriculture and hospitality & other services.

084 Annual Report 2003 085 Primary reporting format − business segments • Domestic trade refers to sales in Slovenia. • Trade in foreign markets refers to sales in all the other countries in which the Mercator Group has subsidiaries.

Domestic Trade in Year ended 31 December 2003 Trade Trade foreign Markets Non-trade Eliminations Group Revenues-external 320,903 277,745 43,158 10,598 - 331,502 Revenue from other segments 1,149 1,114 35 9,284 (10,433) - Segment revenues 322,052 278,859 43,194 19,882 (10,433) 331,502 Segment result 15,591 14,833 758 108 1,805 17,503 Finance cost (net) (7,453) Share of associates 44 Profit before tax 10,094 Tax (970) Group profit 9,125 Minority interest 99 Net profit 9,224 Segment assets 310,337 252,763 57,574 14,425 (99,854) 224,908 Associates 416 Unallocated assets 4,975 Total assets 230,299 Segment liabilities 168,988 140,194 28,794 5,519 (15,220) 159,287 Capital expenditure 27,100 15,803 11,297 1,429 - 28,529 Depreciation and amortisation 8,090 5,735 2,355 888 - 8,978 Negative goodwill amortisation (3,013) (3,013) - (133) - (3,146)

Domestic Trade in Year ended 31 December 2002 Trade Trade foreign Markets Non-trade Eliminations Group Revenues-external 305,084 273,932 31,152 14,693 - 319,777 Revenue from other segments 2,859 1,636 1,223 11,787 (14,646) - Segment revenues 307,943 275,568 32,375 26,480 (14,646) 319,777 Segment result 11,298 11,913 (615) 816 2,709 14,823 Finance cost (net) (7,194) Share of associates 121 Profit before tax 7,750 Tax (668) Group profit 7,082 Minority interest (123) Net profit 6,959 Segment assets 273,147 223,563 49,584 25,828 (96,557) 202,418 Associates 1,356 Unallocated assets 5,655 Total assets 209,429 Segment liabilities 162,467 122,481 39,986 11,440 (34,925) 138,982 Capital expenditure 22,801 8,846 13,955 1,690 - 24,491 Depreciation and amortisation 8,053 6,366 1,687 1,093 - 9,146 Negative goodwill amortisation (1,020) (1,020) - (92) - (1,112) Impairment charge (371) - (371) - - (371)

084 Annual Report 2003 085 Secondary reporting format - geographical segments

Although the Group’s business segments are managed centrally, they operate in two main geographical areas: • Slovenia is the home country of the parent company, which is also the main operating company. The areas of operation in Slovenia are: trade (retail and wholesale), food processing, agriculture and hospitality & services. • Former Yugoslav countries, which include Croatia, Bosnia-Herzegovina and Ser- bia. The area of operations in these countries is trade (retail).

Country Sales Total assets Capital expenditure 2003 2002 2003 2002 2003 2002 Slovenia 290,359 291,220 261,238 249,187 17,231 10,337 Former Yugoslav countries 44,476 33,423 57,849 49,787 11,297 14,154 Inter-segment (3,333) (4,866) (88,788) (89,545) - - Total 331,502 319,777 230,299 209,429 28,529 24,491

Operating profit

The following items have been charged or credited in arriving at operating profit:

2003 2002 Depreciation on property, plant and equipment 8,632 8,657 Net gain on disposal of property, plant and equipment (3,271) (2,327) (included in ‘Other operating revenues’) Repair and maintenance expenditure 3,739 3,327 Amortisation of intangible assets - Goodwill (included in ‘Administrative expenses’) 100 274 - Other intangibles assets (included in ‘Administrative expenses’) 246 216 Amortisation of negative goodwill (3,146) (1,112) (included in ‘Other operating revenues’) Rent expense 1,665 996 Staff costs 45,267 43,316 Impairment loss on receivables 878 570

086 Annual Report 2003 087 Other operating revenues

Other operating revenues of 7,896 million tolars (2002: 4,844 million tolars) mostly refer to amortisation of negative goodwill in amount of 3,146 million tolars and to net gain on disposal of property, plant and equipment in amount of 3,271 million tolars. This net gain appears mainly from the sale of location Poljanska, which was an unique occurrence.

Staff costs

2003 2002 Wages and salaries 30,333 30,108 Social security costs 6,380 5,368 Other payroll costs - including accrued vacation pay 8,554 7,840 45,267 43,316

The average number of persons employed by the Group during the year was 13,263 (2002: 13,915).

Finance costs (net)

2003 2002 Interest income 794 786 Revenue from investments 176 209 Other financial revenues including gains 147 205 Finance income 1,117 1,199 Net foreign exchange transaction gains / (losses) (463) (513) Interest expense (6,466) (7,623) Realised and unrealised losses on financial investments (1,641) (256) Finance costs (8,108) (7,880) Net finance costs (7,453) (7,194)

Realised and unrealised losses on financial investments of 1,641 million tolars (2002: 256 million tolars) refer to loss on disposal of subsidiaries and other realised losses on financial investments in subsidiary companies.

086 Annual Report 2003 087 Tax

2003 2002 Current tax 532 240 Deferred tax 438 427 970 668

The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the basic tax rate of the home country of the Group as follows:

2003 2002 Profit before tax 9,635 7,750 Expected tax calculated at the rate of 25 % 2,409 1,937 Expenses not deductible for tax purposes 1,180 1,041 Utilisation of tax relief (2,619) (2,310) Tax charge 970 668

Earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares in issue during the year, excluding the average number of ordinary shares purchased by the Company and held as treasury shares. There are no dilutive ordinary shares.

2003 2002 Net profit attributable to shareholders (millions of tolars) 9,224 6,959 Number of ordinary shares in issue 3,208,504 3,208,504 Basic earnings per share (tolars) 2,875 2,169

088 Annual Report 2003 089 Property, plant and equipment

Office Land and Plant and and other Leasehold Livestock and Construction buildings machinery equipment improvements plantation in progress Total Cost At 31 December 2002 138,947 10,764 28,691 566 157 8,447 187,572 Exchange differences (307) - (32) - - (37) (377) Acquisition of subsidiaries 19,735 - 7,374 - - 225 27,335 Additions 19,277 2,816 1,077 - - 1,688 24,857 Disposal of subsidiaries (11,472) (1,071) (2,952) - (3) (34) (15,532) Disposals / transfers (6,429) (3,205) (3,106) - (154) (3,627) (16,520) As at 31 December 2003 159,750 9,305 31,052 566 - 6,662 207,335 Accumulated depreciation At 31 December 2002 33,861 4,330 17,652 419 14 - 56,276 Exchange differences 16 - 11 - - - 27 Charge for the year 3,863 2,367 1,911 56 4 - 8,201 Acquisition of subsidiaries 7,638 - 5,772 - - - 13,410 Disposal of subsidiaries (6,281) (627) (2,239) - - - (9,146) Disposals / transfers (7,251) (2,922) (2,779) - (18) - (12,971) As at 31 December 2003 31,846 3,148 20,327 475 - - 55,796 2003 Net book value 127,905 6,157 10,724 91 - 6,662 151,539 2002 Net book value 105,086 6,435 11,039 147 143 8,447 131,296

Bank borrowings are secured by land and buildings with carrying value of 2,586 million tolars at 31 December 2003 (4,410 million tolars at 31 December 2002).

088 Annual Report 2003 089 Investment property

2003 2002 Costs At beginning of year 5,741 5,643 Additions 3,672 2,140 Disposal / transfer (544) (2,042) At 31 December 8,869 5,741 Accumulated amortisation At beginning of year 1,628 2,202 Amortisation charge 431 329 Disposal / transfer (273) (903) At 31 December 1,786 1,628 Net book value at 31 December 7,083 4,113

Rental revenues from investment and other properties of 1,747 million tolars (2002: 1,093 million tolars) were recognised by the Mercator Group in 2003.

Fair values of investment property at 31 December 2003 are substantially equal to their book values.

090 Annual Report 2003 091 Intangible assets

2003 2002 Costs At beginning of year 919 709 Exchange differences - 4 Acquisition of subsidiaries 279 - Additions 386 212 Disposal of subsidiaries (213) - Disposal / transfer (202) (6) At 31 December 1,168 919 Accumulated amortisation At beginning of year 488 272 Exchange differences - 1 Acquisition of subsidiaries 128 - Amortisation charge for the period 246 216 Disposal of subsidiaries (101) - Disposal / transfer (139) (1) At 31 December 622 488 Net book value at 31 December 546 431

Intangible assets represent expenditure on rights, patents and trademarks.

Investments in associated undertakings

2003 2002 Opening net book amount 1,356 1,319 Share of results before tax 44 121 Distribution of dividend (137) (85) Reclassification from subsidiary to associate 1,500 - Disposal of associates (2,347) - Closing net book amount 416 1,356

In January 2003 Trgoavto, d.d., was reclassified from a subsidiary to an associate as the Group intended to sell this investment.

090 Annual Report 2003 091 During the year 2003 the parent company Poslovni sistem Mercator, d.d., sold its stake in associated companies Trgoavto, d.d., and Spar, d.o.o..

The principal associated undertakings are:

% interest held % interest held 2003 2002 Alpkomerc, d.d. 20 % 20 % Spar Slovenija, d.o.o. - 20 %

Associated company Alpkomerc, d.d., is incorporated in Slovenia.

Other investments

Other investments of 1,461 million tolars (2002: 999 million tolars) refer to diversified investments in other companies.

Non-current receivables

2003 2002 Interest rate swaps 142 - Other loans 1,752 731 1,894 731

Non-current receivables of 1,752 million tolars (2002: 731 million tolars) comprise mainly loans given to employees for housing, the majority of which are secured by bills of exchange.

Loans are denominated in Slovenian tolars with the following weighted average interest rates:

2003 (%) 2002 (%) Other loans 10.5 10.3

2003 2002 The non-current receivables are expected to mature as follows: Between 1 and 2 years 248 57 Between 2 and 3 years 144 137 Between 3 and 4 years 201 184 Between 4 and 5 years 108 307 Over 5 years 1,193 46 1,894 731

092 Annual Report 2003 093 Inventories

2003 2002 Raw materials 1,425 1,368 Work in progress 2,350 3,008 Finished goods 541 935 Merchandise 32,967 30,717 Advances paid for inventories 102 167 Less: Provision for obsolete inventories (1,949) (1,500) 35,436 34,695

Trade and other receivables

2003 2002 Trade receivables 29,620 26,824 Receivables from associated undertakings 192 2,281 Other receivables 141 116 Less: Provision for the impairment of receivables (3,944) (3,066) 26,008 26,155

Financial investments (tradable and non-tradable)

2003 2002 Financial investments held for trading 1,393 2 Loans, originated by the enterprise 503 1,028 1,896 1,030

Tradable financial assets are carried at fair value, which represents the market value of each financial asset at the year-end.

Prepaid expenses

Prepaid expenses of 778 million tolars (2002: 689 million tolars) comprise mainly accrued supplier rebates and prepaid items.

092 Annual Report 2003 093 Cash and cash equivalents

2003 2002 Cash at bank and in hand 2,271 3,053

Trade and other payables

2003 2002 Trade payables 40,419 38,856 Amounts due to associated undertakings 447 32 Social security and other taxes 1,613 2,429 Other payables 2,417 2,446 44,896 43,763

Accruals

Accruals of 1,892 million tolars (2002: 1,644 million tolars) comprises mainly accrued discounts payable on bonus points to the holders of Mercator-Pika loyalty cards. The Group makes full provision for all points outstanding at 31 December.

Borrowings

2003 2002 Current Revolving bank borrowings 49,047 29,858 Loans from other companies 940 907 49,987 30,765 Non-current Bank borrowings 46,427 55,465 Loans from other companies 8,970 5,632 55,397 61,097 Total borrowings 105,384 91,862

094 Annual Report 2003 095 Borrowings (continued)

The interest rate exposure of the borrowings of the Group was as follows:

2003 2002 Total borrowings: - At fixed rates 47,005 21,900 - At floating rates 58,379 69,962 105,384 91,862

The weighted average effective interest rates of borrowings at the balance sheet date, nominated in Slovenian tolars were as follows:

2003 (%) 2002 (%) Bank borrowings: short-term 8.0 10.9 long-term 10.1 (T+4.1) 11.9 (T+4.6) Loans from other companies 6.5 9.6

“T” represents the index used by Slovenian banks, which serves as an approxima- tion for domestic inflation based on the consumer price movements in the last 12 months. In January 2003 “T” was 7.3 %, in December 2003 4.8 % and the yearly average was 5.9 %. In January 2002 it was 7.3 %, in December 2002 7.3 %. The average yearly “T” was 7.7 % in 2002.

Floating rates mainly refer to interest rates linked to EURIBOR. Fixed rates mainly refer to loans from domestic banks with fixed real interest rate, but linked to the inflation index “T”.

The carrying amount of all borrowings approximate to fair values.

The weighted average effective interest rates of borrowings at balance sheet date, denominated in foreign currencies were as follows:

2003 (%) 2002 (%) Bank borrowings: short-term 3.6 5.1 long-term 3.4 4.4 Loans from associated undertakings - 5.1 Loans from other companies 3.5 6.0

094 Annual Report 2003 095 Borrowings (continued)

Currency structure

2003 2002 - In Tolars 27,820 20,375 - In EUR 76,761 70,207 - In Croatian Kuna (HRK) 111 596 - In Swiss Francs (CHF) 491 684 - Other 201 - 105,384 91,862

Maturity of non current borrowings:

2003 2002 Between 1 and 2 years 16,517 16,757 Between 2 and 3 years 12,848 15,551 Between 3 and 4 years 11,218 9,018 Between 4 and 5 years 6,040 11,515 Over 5 years 8,774 8,256 55,397 61,097

Finance lease liabilities - minimum lease payments:

2003 2002 Not later than 1 year 580 409 Later than 1 year and not later than 5 years 2,319 1,640 Later than 5 years 8,351 5,815 11,250 7,864 Future finance charges on finance leases 2,859 2,334 Present value of finance lease liabilities 8,391 5,530

096 Annual Report 2003 097 Borrowings (continued)

The present value of finance lease liabilities is as follows:

2003 2002 Not later than 1 year 287 177 Later than 1 year and not later than 5 years 1,254 788 Later than 5 years 6,850 4,565 8,391 5,530

The carrying values of all borrowings approximate fair values. The percentage of non-current borrowings within total borrowings was 53 % at 31 December 2003 (67 % at 31 December 2002).

Deferred income taxes

Deferred income taxes are calculated on all temporary differences under the liability method using a principal tax rate of 25 % (2002: 25 %).

The movement in the deferred income tax account is as follows:

2003 2002 At beginning of year - net deferred tax asset 5,655 6,122 Income statement charge (438) (427) Disposal of subsidiaries (242) (40) At end of year - net deferred tax asset 4,975 5,655

096 Annual Report 2003 097 Deferred income taxes (continued)

The deferred tax assets and liabilities and deferred tax (charge)/credit in the income statement are attributable to the following items:

31 December 2002 Change 31 December 2003 Deferred income tax liabilities Provisions not recognised for accounting purposes (901) (179) (1,080) (901) (179) (1,080) Deferred income tax assets Provisions not recognised for tax purposes 76 24 100 Intangible assets revaluation not recognised for accounting purposes 78 - 78 Tangible assets revaluation not recognised for accounting purposes 6,442 (283) 6,159 Disposal of subsidiaries (40) (242) (282) 6,556 (501) 6,055 Net deferred income tax asset 5,655 (680) 4,975

As the deferred tax assets and liabilities are with the same fiscal authority they are netted in the balance sheet.

Potential tax benefits from tax loss carry forwards existing on 31 December 2003 are as follows:

Expiring in: 2005 103 2006 270 2007 335 2008 411 Total 1,119 Less valuation allowance: (1,119) 0

The above tax losses have not been recognised as deferred tax assets as it is not probable that sufficient taxable profit will be available to allow the benefit of these deferred tax assets to be utilised.

098 Annual Report 2003 099 Provision for employee benefits

2003 2002 Provision for jubilee and retirement payments 559 464 Provisions are made for the estimated liability of statutory retirement payments and jubilee (long service) bonuses as a result of service rendered by employees up to the balance sheet date, discounted to present value. The above provision has been made for expected payments. In 2003 an additional provision of 95 million tolars was made.

Contributions are made to the Government’s health, retirement benefit and unem- ployment schemes at the statutory rates in force during the year, based on gross salary payments. The cost of social security payments is expensed in the same period as the related salary cost. The Group is paying contributions for its employees to a voluntary additional collective pension insurance plan according to the Law on pension insurance from 1 January 2001, from which the Group has no future obligations.

The Group does not operate any other pension scheme or post retirement benefit plan and, consequently, has no obligation in respect of pensions. In addition, the Group is not obliged to provide further benefits to current and former employees.

The assets in a voluntary additional collective pension insurance plan are independent and the Group has no control over these assets.

Other provisions

Denationalisation claims Environmental liabilities Legal claims Total At 31 December 2002 575 80 594 1,249 Exchange differences - 3 - 3 Acquisition of subsidiary 58 - - 58 Additional provisions 14 - 497 511 Utilised during year - (16) - (16) Disposal of subsidiary (44) - - (44) At 31 December 2003 603 67 1,091 1,761

Denationalisation claims refer to potential liabilities of the Group arising from the Law on Denationalisation. Management is at present unable to estimate the timing of cash outflows relating to denationalisation claims. Environmental liabilities refer to potential liabilities of the Group arising from the Law on Privatisation.

Group companies are the defendants in various legal actions including an action against the subsidiary company relating to a violation of contract liabilities with its acquired company Klas, d.d., Maribor, in the amount of 497 million tolars provided for under obligations for legal claims. In the opinion of management, after taking appropriate legal advice, the outcome of other legal actions will not give rise to any significant unprovided loss.

098 Annual Report 2003 099 Goodwill and negative goodwill

Goodwill Negative goodwill Total Goodwill At 31 December 2002 1,370 (5,558) (4,188) Acquisitions - (5,840) (5,840) Additions - (251) (251) Disposals (369) - (369) At 31 December 2003 1,001 (11,649) (10,648) Accumulated amortisation At 31 December 2002 752 (4,166) (3,414) Disposals (185) - (185) Amortisation charge (credit) for the period 100 (3,146) (3,046) At 31 December 2003 668 (7,311) (6,644) Net book value at 31 December 2003 333 (4,338) (4,004) Net book value at 31 December 2002 618 (1,392) (774)

100 Annual Report 2003 101 Financial instruments

Derivative financial instruments

At 31 December 2003 Assets Liabilities Interest rate swaps 142 142

Net fair values of derivative financial instruments

The net fair values of derivative financial instruments at the balance sheet date and designated for cash flow hedges were:

2003 2002 Contracts with positive fair values: Interest rate swaps 142 -

The notional principal amounts of the outstanding interest rate swap contracts at 31 December 2003 were in total of 17,504 million tolars (73.9 million EUR) whereas on the same date the fixed interest rates varied from 2.2775 % to 2.39 % and the applicable floating rates, respectively 3m and 6m Euribor, were at 2.124 % and 2.168 %.

Other than interest rate swaps the Group did not hold any other derivative financial instruments or hedges as at 31 December 2003.

Contingent liabilities

At 31 December 2003 the Group had no contingent liabilities in respect of bank and other guarantees or other matters arising in the ordinary course of business from which it is anticipated that material unprovided liabilities will arise.

Commitments

The amount of capital expenditure contracted for at the balance sheet date but not recognised in the financial statements was as follows:

2003 2002 Property, plant and equipment 8,155 5,920 Certain of these commitments are denominated in EUR. Management consider, that due to the close correlation of the movement in the domestic currencies/EUR exchange rates with domestic inflation rates, there are no significant financial- im pacts of these commitments that needs to be accounted for at 31 December 2003.

The Group does not have any significant non-cancellable leases at 31 December 2003.

100 Annual Report 2003 101 Minority interest

2003 2002 At start of year 4,552 5,037 Increase in capital share of existing subsidiaries (488) (608) Acquisition of subsidiaries 196 - Share of net profit / (loss) of subsidiaries (99) 123 Disposal of subsidiary (1,833) - At end of year 2,328 4,552

Cash generated from operations

2003 2002 Profit before tax 10,094 7,750 Adjustments for: Depreciation 8,632 8,656 Amortisation 346 490 Impairment charge - 371 Net gain on sale of property, plant and equipment (3,271) (2,327) Loss on disposal of subsidiary 687 174 Interest income (794) (786) Amortisation of negative goodwill (3,146) (1,112) Interest expense 6,466 7,623 Currency translation differences (340) 234 Share in results of associated undertakings (44) (121) 18,630 20,952 Changes in working capital (excluding the effects of acquisition and disposal of subsidiaries): - Trade and other receivables 559 191 - Inventories (173) (3,485) - Payables 376 2,071 - Provisions 95 94 Cash generated from operations 19,488 19,823

102 Annual Report 2003 103 Disposal of subsidiaries

At the end of the year 2003 the Group disposed of its interest in the company M- KÆK, d.o.o, MDK, d.d., and MDK-H, d.o.o. The sales, results and net cash flows for these companies in 2003 were as follows:

2003 Sales 5,677 Operating costs (6,011) Operating profit / (loss) (334) Finance costs (net) (111) Profit before tax (445) Tax (9) Net profit (454)

Non-current assets 5,428 Current assets 2,669 Total assets 8,097 Total liabilities 3,026 Net assets 5,071 Less minority interest (393) Groups share of net assets 4,678 Net of cash disposed 4,057 Loss on disposal of subsidiaries 621

102 Annual Report 2003 103 Acquisition of subsidiary

On 22 September 2003 the Group acquired 98,2 % of the share capital of Æivila Kranj, d.d., a trade company. The acquired business contributed revenues of 7,954 million tolars to the Group for the period from 1 October 2003 to 31 December 2003, and its assets at 31 December 2003 were respectively 22,510 million tolars and liabilities 13,330 million tolars.

2003 Non-current assets 15,958 Current assets 7,414 Total assets 23,372 Total liabilities (13,507) Net assets 9,866 Less minority interest (196) Groups share of net assets 9,670 Net cash acquired (5,128) Negative goodwill 4,542

Related party transactions

Related party transactions refer to transactions with associated undertakings and are as follows:

2003 2002 Sales to associated undertakings 4,578 19,243 Receivables from associated undertakings 206 2,417 Payables due to associated undertakings 447 43

Sales to associated undertaking were carried out on commercial terms and at market prices.

There were no loans given to directors. Total emoluments to members of the Man- agement Board equalled 352 million tolars in the year 2003 (2002: 278 million tolars).

104 Annual Report 2003 105 Management Responsibility Statement

The consolidated financial statements are the responsibility of the Company’s management. The consolidated financial statements present a true and fair view of the financial position of the Group at 31 December 2003, and of the results of its operations and changes in financial position for the year then ended.

Management confirms that appropriate accounting policies are applied on a con- sistent basis and that the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures are based on principle of prudence. Management is responsible for ensuring an appropriate accounting and internal control structure to protect the assets of the Group and comply with relevant laws and regulations.

Management also confirms that the consolidated financial statements with disclosures are prepared under the going concern assumption and in accordance with International Financial Reporting Standards, which include the standards and inter- pretations issued by the IASB and SIC.

On behalf of the Board of Directors:

Jadranka DakiË, Zoran JankoviÊ Member of the Board of Directors President of the Board of Directors for Finance, Controlling and Accounting

104 Annual Report 2003 105 Report of the Auditors

To the Management of Poslovni sistem Mercator, d.d.

We have audited the accompanying consolidated balance sheet of Poslovni Sistem Mercator, d.d., (the Company) and its subsidiaries (the Group) as at 31 December 2003 and the related consolidated statements of income, cash flows and changes in shareholders’ equity for the year then ended. These consolidated financial statements set out on pages 75 to 104 are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion the consolidated financial statements present fairly, in all material respects, the financial position of the Group at 31 December 2003, and the results of its operations and its cash flows for the year then ended in accordance with Inter- national Financial Reporting Standards.

Ljubljana, 26 March 2004

106 Annual Report 2003 107 Audited Financial Statements of the Company Poslovni sistem Mercator, d.d., in Accordance with Slovenian Accounting Standards

Balance Sheet of the Company Poslovni sistem Mercator, d.d., as at 31 December 2003 Year ended 31 December All amounts in millions of Slovenian tolars 2003 2002 Assets Non-current assets 148,631 118,095 Intangible assets 295 371 Property, plant and equipment 65,434 50,594 Non-current financial investments 82,902 67,130 Current assets 36,538 43,472 Inventories 14,337 10,771 Trade and other receivables 18,594 19,117 Current financial investments 2,973 12,901 Cash and cash equivalents 634 683 Prepaid expenses 545 605 Total assets 185,714 162,172 Equity and liabilities Capital 87,020 79,802 Share capital 32,085 32,085 Share premium 652 652 Reserves 19,721 13,036 Retained earnings 704 2,148 Net profit for the year (undistributed) 4,358 2,325 Valuation adjustments of capital 29,500 29,556 Provisions 3,402 3,601 Non-current borrowings 32,046 36,258 Non-current trade and other payables 6,847 4,062 Current borrowings 27,192 13,365 Current trade and other payables 28,567 24,576 Accruals 640 508 Total equity and liabilities 187,714 162,172

106 Annual Report 2003 107 Income Statement of the Company Poslovni sistem Mercator, d.d., for the Year Ended 31 December 2003 Year ended 31 December All amounts in millions of Slovenian tolars 2003 2002 Sales 161,348 137,499 Cost of sales (115,118) (100,366) Gross profit 46,230 37,133 Selling and distribution costs (28,464) (21,813) Administrative expenses (9,988) (7,668) Other operating revenues 2,507 964 Operating profit 10,285 8,616 Revenues from investments 4,399 2,702 Interest revenues from non-current receivables 251 512 Interest revenues from current receivables 689 1,433 Current and non-current investments write-offs (2,851) (3,416) Interest expenses and other financial expenses (3,943) (5,106) Profit from ordinary activities 8,830 4,741 Extraordinary revenues 28 17 Extraordinary expenses (68) (35) Profit from extraordinary activities (40) (18) Tax (72) (74) Net profit 8,718 4,649

108 Annual Report 2003 109 Cash Flow Statement of the Company Poslovni sistem Mercator, d.d., for the Year Ended 31 December 2003 Year ended 31 December All amounts in millions of Slovenian tolars 2003 2002 Cash flows from operating activities Inflows from operating activities 164,466 136,896 Revenues relating to operating activities 163,855 138,463 Extraordinary revenues relating to operating activities 28 17 Increase in trade and other receivables 523 (1,430) Increase in prepaid expenses 60 (156) Outflows from operating activities (146,758) (120,548) Expenses exclusive of depreciation and provisions (149,961) (126,625) Extraordinary expenses relating to operating activities (68) (35) Tax on profit and other taxes (72) (74) Increase in inventories (3.566) (1,277) Increase in trade and other payables 6,777 7,557 Increase in accruals 132 (95) Net inflows / (outflows) from operating activities 17,709 16,346 Cash flows from investment activities Inflows from investment activities 14,327 4,732 Revenues relating to investment activities 4,399 2,703 Decrease in non-current investments - 558 Decrease in current investments 9,928 1,471 Outflows from investment activities (36,996) (13,308) Expenses relating to investment activities (2,851) (3,416) Increase in intangible assets (39) (67) Increase in property, plant and equipment (18,334) (9,825) Increase in non-current investments (15,772) - Net inflows / (outflows) from investment activities (22,669) (8,576) Cash flows from financing activities Inflows from financing activities 14,767 9,313 Revenues relating to financing activities 940 1,945 Increse in capital (without net profit) - 124 Increase in non-current borrowings - 7,076 Increase in provisions - 168 Increase in current borrowings 13,826 - Outflows from financing activities (9,854) (17,262) Expenses relating to financing activities (3,943) (5,106) Decrease in capital (without net profit) (67) - Decrease in provisions (200) - Decrese in non-current borrowings (4,212) - Decrease in capital (dividend paid) 1,432 (1,283) Decrease in current borrowings - (10,873) Net inflows / (outflows) from financing activities 4,913 (7,949) Closing balance of cash and cash equivalents as at 31 Dec 634 683 Increase / (decrease) in year (48) (179) Opening balance of cash and cash equivalents as at 1 Jan 683 682

The financial statements of the company Poslovni sistem Mercator, d.d., for the year ended 31 December 2003, prepared in accordance with Slovenian Accounting Standards have been audited by PricewaterhouseCoopers and unqualified opinion was issued on 26 March 2004.

108 Annual Report 2003 109 Contact Persons

Poslovni sistem Mercator, d.d. Dunajska 107, 1001 Ljubljana T 00 386 1 560 10 00 E [email protected] www.mercator.si

Function Name and surname Telephone E- mail Management Board President of the Management Board and CEO Zoran JankoviÊ 00 386 1 560-11-96 [email protected] Member of the Board for New Markets Stanislav Brodnjak 00 386 1 560-17-66 [email protected] Member of the Board for Corporate Activities and Non-trade Segment Aleπ »erin 00 386 1 560-17-42 [email protected] Member of the Board for Finance, Controlling and Accounting Jadranka DakiË 00 386 1 560-16-80 [email protected] Member of the Board for Marketing, Marjan Sedej 00 386 1 560-16-77 [email protected] Development and Investments in Trade Segment Marketing Activities Vice President for Trade Franc Prvinπek 00 386 1 560-11-77 [email protected] Vice President for International Relations Mitja Marinπek 00 386 1 560-14-46 [email protected] Director of Marketing Mateja Jesenek 00 386 1 560-12-54 [email protected] Director of Retail Development Jelka Æekar 00 386 1 560-17-22 [email protected] Director of Fruit and Vegetables Retail Peter Sajovic 00 386 1 234-36-22 [email protected] Director of Fresh Food Retail Joæe Sadar 00 386 1 560-13-13 [email protected] Director of Grocery Retail Marjan Nagode 00 386 1 560-12-10 [email protected] Director of Non-food Retail I. Irena Novinec 00 386 1 560-13-71 [email protected] Director of Non-food Retail II. Tadej JurkoviË 00 386 1 560-17-45 [email protected] Director of Internal Consumption SreËo Bukovec 00 386 1 560-11-65 [email protected] Director of Product Marketing Aleksandra Kocmut 00 386 1 560-17-37 [email protected] Director of Imports and Exports Metka Nedelko 00 386 1 560-12-98 [email protected] Director of Investments and Development Marko Umberger 00 386 1 560-17-39 [email protected] 00 386 1 560-11-90 Director of IT and Organisation Franc Kodela [email protected] 00 386 2 749-31-00 Director of Quality Control Boæo Virant 00 386 1 560-16-35 [email protected] Director of Wholesale Janez BlaæiË 00 386 1 560-32-21 [email protected] Director of Logistics Marko Cedilnik 00 386 1 560-32-20 [email protected] Director of Retail FMCG Peter Zavrl 00 386 1 560-32-74 [email protected]

110 Annual Report 2003 111 Function Name and surname Telephone E- mail Director of Intersport Chain Pavle Pirc 00 386 1 560-16-70 [email protected] Director of Hard Discounts Chain Marko GvardjanËiË 00 386 1 560-12-57 [email protected] Director of Technical Chain Stane Kavkler 00 386 1 560-32-88 [email protected] Director of Furniture Retail Vinko Savnik 00 386 1 560-34-00 [email protected] Director of Building Materials and Technical Products Retail Robert Kotnik 00 386 1 560-32-78 [email protected] Director of Household Appliances and DIY Robert Surina 00 386 1 560-39-92 [email protected] Finance, Controlling and Accounting Activities Director of Finance Dean »erin 00 386 1 560-16-76 [email protected] Director of Accounting Darja Crnjak 00 386 1 560-13-34 [email protected] Director of Controlling and Internal Audit Melita Kolbezen 00 386 1 560-15-95 [email protected] Human Resources, Legal, Internal and Corporate Activities Director of HRM Aljoπa Prajs 00 386 1 560-15-02 [email protected] Director of Legal Affairs Vera AljanËiË Faleæ 00 386 1 560-12-40 [email protected] Public and Investor Relations Public Relations Jana Lutovac Lah 00 386 1 560-12-51 [email protected] Investor Relations Kristina Pukl 00 386 1 560-16-25 [email protected]

110 Annual Report 2003 111 The Mercator Group

Poslovni sistem Mercator, d.d. Mercator - Gorenjska, d.d. Mercator - Træni centar, d.o.o. Mercator - EMBA, d.d. • Head Office: • Head Office: • Head Office: • Head Office: Dunajska cesta 107 KidriËeva cesta 54 LoæioniËka 16, 71000 Sarajevo SlovenËeva 21 1113 Ljubljana 4220 ©kofja Loka • Director: 1000 Ljubljana • President of the Management Board: The Company is in the process of merg- Husein MorankiÊ • Director: Zoran JankoviÊ ing with Poslovni sistem Mercator, d.d. T 00 387 33 286-132 Mladen MladeniË T. 01 560-11-96 E [email protected] T 01 560-90-02, int.2002 M: [email protected] E [email protected]

Mercator - SVS, d.d. Mercator - Goriπka, d.d. Mercator - S, d.o.o. M Hotel, d.o.o. • Head Office: • Head Office: • Head Office: • Head Office: Rogozniπka 8 GregorËiËeva 19 Bulevar umetnosti 4 DerËeva ulica 4 2250 Ptuj 5000 Nova Gorica 11070 Novi Beograd, ZRJ 1000 Ljubljana • President of the Management Board: • President of the Management Board: • Director: • Director: Samo Gorjup Silvan Makuc Vladimir KravËuk Sonja »ernËiË Lagerwall T 02 780-72-50 T 05 334-30-02 T 00 381 11, 311-05-81 T 01 513-70-04 E [email protected] E [email protected] E [email protected] E [email protected]

Æivila Kranj, d.d. Mercator - Intermercator, Mercator - Optima, d.o.o. • Head Office: Modna hiπa Maribor, d.o.o. Handelsgesellschaft, G.m.b.H. • Head Office: Cesta na Okroglo 3 • Head Office: • Head Office: Dunajska cesta 105 4202 Naklo Partizanska 3-5 Bahnhofstr. 38. c/V. Postfach 131. 1113 Ljubljana • President of the Management Board: 2000 Maribor A-9021 Klagenfurt/Celovec • Director: Branko Remic • Director: The Company is in the process of Primoæ Goslar T 04 256-82-20 Joæef ©ilec liquidation. T 01 560-19-00 E [email protected] T 02 235-60-22 E [email protected] E [email protected]

Mercator - Dolenjska, d.d. Mercator - H , d.o.o. ETA, d.d. • Head Office: • Head Office: • Head Office: Livada 8 Hrvatske bratske zajednice 1 Kajuhova pot 4 8000 Novo mesto 10410 Velika Gorica 1240 Kamnik • President of the Management Board: • Managing Director: • Director: Stanislav Hribar Stanislav Brodnjak Franc Alojz T 07 373-07-17 T 00 385 1 622-25-44 T 01 830-84-04 E // E [email protected] E [email protected]

Mercator - Degro, d.d. Mercator - BH, d.o.o. Pekarna Grosuplje, d.d. • Head Office: • Head Office: • Head Office: Lucija, Obala 144 LoæioniËka 16, 71000 Sarajevo Gasilska 2 6320 Portoroæ • Director: 1290 Grosuplje The Company is in the process of merg- Mensud Lagumdæija • Director: ing with Poslovni sistem Mercator, d.d. T 00 387 33 286-130 ©tefan Plankar E [email protected] T 01 786-69-05 E [email protected]

112 Annual Report 2003 113 Notes:

112 Annual Report 2003 113 Published by Poslovni sistem Mercator d.d., Dunajska 107, 1000 Ljubljana • Production Pristop, d.o.o., Ljubljana • Text Poslovni sistem Mercator d.d. • Photos Aljoπa Rebolj • Printing Tiskarna »ukgraf • Printed issues 800 • May 2004