Baugur Group hf.

Financial Statements For the year ended February 28, 2003

Baugur Group hf. Túngata 6 101 Reykjavik

Reg. no. 480798-2289 Contents

Endorsement by the Board of Directors and the President ...... 3 Balance Sheet ...... 7

Auditors’ Report ...... 5 Statement of Cash Flows ...... 9

Statement of Earnings and Comprehensive Income ...... 6 Notes to the Financial Statements ...... 10

Financial Statements of Baugur Group hf. February 28, 2003 ______2 ______Endorsement by the Board of Directors and the President

The Financial Statements of Baugur Group hf. include the Parent Company’s Financial Statements and the Consolidated Financial Statements for the Parent Company and its subsidiaries, which were 17 at the end of the fiscal year. The Consolidated Financial Statements of Baugur Group hf. for the year ended February 28, 2003 have been prepared in accordance with the Icelandic Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and have in all main respects been prepared in accordance with the same accounting principles as the Group’s Financial Statements for the previous year, except that now shares in listed companies are recorded at their market value and unrealized gain there on is entered as a separate item in the Statement of Earnings and Comprehensive Income and among Stockholders’ Equity in the Balance Sheet. Furthermore, expenses relating to stock option agreements are now expensed when they are incurred. Changes are further explained in the Notes to the Financial Statements.

According to the Statement of Earnings and Comprehensive Income, the Group’s sales amounted to ISK 51,990 million for the year ended February 28, 2003 and the Parent Company’s sales amounted to ISK 29,611 million. Net earnings amounted to ISK 6,329 million. When unrealised gain on shares, in the amount of ISK 1,111 million is accounted for, the Company’s comprehensive income amounted to ISK 7,440 million. According to the Balance Sheet, the Group’s assets amounted to ISK 46,092 million and the Parent Company's assets amounted to ISK 33,081 million. At the end of the fiscal year Stockholders’ Equity amounted to ISK 17,099 million. The Group’s equity ratio at the end of the fiscal year was 37% and the Parent Company’s equity ratio was 52%. Included in the Financial Statements is information regarding valuation of the Group’s principal assets.

At the annual shareholders’ meeting held on May 30, 2002, it was agreed to change the name of the Company to Baugur Group hf. Changes were also made to the Company’s Articles of Association relating to the purpose of the Company. The Company’s purpose is now retail operation, asset management, real estate operation, investment in shares and securities and in companies with related operations, lending activities, the buying and selling of assets and other related activities. In relation to those changes the Company’s organizational structure was also changed. The Company is now divided into three independent profit centers. Further information about key figures for each profit center are to be found in the notes to the Financial Statements.

The annual shareholders’ meeting of the company held in May 2002 approved an increase in the Company's capital stock, of a nominal value of ISK 700 million with the issue of stock split.

In the beginning of September 2002 A Holding S.A., a subsidiary of Baugur Group hf., sold its 20.1% share in Plc. for GBP 155 million or ISK 21,400 million. The shares are fully paid by the buyer. The original purchase price and costs relating to the purchase amounted to approximately ISK 12,000 million. At the time of sale, the book value of the shares, which were capitalized according to the equity method, and goodwill relating to them was ISK 14,000 million. The capital gains amounting to ISK 7,400 million, are entered as income in the Consolidated Financial Statements. A Holding S.A.’s share of Arcadia Group Plc.’s earnings for the period March to August 2002, amounts to ISK 1,200 million, and is entered in the Statment of Earnings and Comprehensive Income.

Financial Statements of Baugur Group hf. February 28, 2003 ______3 ______In the period October 2002 until February 2003, a subsidary of Baugur Group hf., A Holding S.A., invested in shares in Britsh retail companies for an amount of GBP 61 million or ISK 8,200 million. The shares are capitalised at their market value.

Shareholders in Baugur Group hf. were 1,651 at the end of the fiscal year, down from a number of 1,898 at the beginning of the fiscal year, a decrease of 247 during the year. At the end of the fiscal year two shareholders held more then 10% of the capital stock. They are:

Fjárfestingarfélagið Gaumur ehf. and related parties ...... 37.2% Reitan Handel A/S ...... 11.8%

At a shareholders meeting held on November 20, 2002, it was agreed to pay a special 15% dividend to shareholders. The dividends were paid to shareholders on December 10, 2002. The Board of Directors proposes that a dividend of 12% be paid to shareholders in the year 2003. Reference is made to the Financial Statements regarding distribution of earnings and other changes in the book value of stockholders’ equity within the year.

The Board of Directors and the President of Baugur Group hf. hereby confirm the Company’s Financial Statements for the year ended February 28, 2003 by means of their signatures.

Reykjavik, May 9, 2003.

Board of Directors

Hreinn Loftsson Jóhannes Jónsson Hans Kristian Hustad Kristín Jóhannesdóttir

President

Jón Ásgeir Jóhannesson

Financial Statements of Baugur Group hf. February 28, 2003 ______4 ______Auditors’ Report

Board of Directors and Shareholders of Baugur Group hf.

We have audited the accompanying Balance Sheet and consolidated Balance Sheet of Baugur Group hf. as of February 28, 2003, and the related Income Statement and Statement of Cash Flows for the year then ended. These Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Financial Statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Financial Statements are free of material misstatemens. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Financial Statements presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the Financial Statements give a true and fair view of the financial position of Baugur Group hf. as of February 28, 2003, and the results of its operations and its cash flows for the year then ended, in accordance with the law and generally accepted accounting principles in .

Reykjavik, May 9, 2003.

Stefán Hilmarsson Anna Thordardóttir

KPMG Endurskoðun hf.

Financial Statements of Baugur Group hf. February 28, 2003 ______5 ______Statement of Earnings and Comprehensive Income, for the year ended February 28, 2003

Group Parent Company Notes 12 months 14 months 12 months 14 months 2002 / 2003 2001 / 2002 2002 / 2003 2001 / 2002 Operating income less operating expenses:

Sales ...... 17 51,990 47,215 29,611 31,080 Cost of goods sold ...... ( 39,235) ( 35,174) ( 22,696) ( 23,678) Gross profit ...... 12,755 12,041 6,915 7,402 Other operating income ...... 220 472 110 82 Salaries and salary-related expenses ...... 19 ( 7,840) ( 6,458) ( 3,505) ( 3,560) Other operating expenses ...... ( 6,574) ( 4,730) ( 3,221) ( 3,041)

Operating (loss) profit before depreciation and financial expenses ...... ( 1,439) 1,325 299 883 Depreciation of property and equipment ...... 25 ( 1,057) ( 1,031) ( 686) ( 722) Amortization of goodwill ...... 23 ( 198) ( 254) ( 86) ( 107)

Operating (loss) profit before financial expenses ...... ( 2,694) 40 ( 473) 54

Net financial (expenses) income ...... 20 ( 492) ( 833) 137 ( 558) Gain on the sale of shares in associated company ...... 30 7,594 0 172 0 Income from subsidiaries ...... 0 0 6,183 1,944 Income (loss) from associated companies ...... 30 2,008 2,352 396 ( 10)

Pre-tax profit ...... 6,416 1,559 6,415 1,430 Income tax ...... 21 ( 283) ( 520) ( 86) ( 506)

Net earnings excluding minorities and discontinued operations ...... 6,133 1,039 6,329 924 Discontinued operations of Bonus Dollar Stores Inc...... 18 ( 534) ( 95) 0 0 Minority interest ...... 730 ( 20) 0 0

Net earnings ...... 35 6,329 924 6,329 924

Unrealised gain on shares ...... 15,31 1,111 0 1,111 0 Comprehensive income posted to Stockholders’ Equity ...... 35 7,440 924 7,440 924

Earnings per share: Net earnings per ISK 1 of capital stock ...... 2.70 0.42 Unrealised gain per ISK 1 of capital stock ...... 0.47 0.00 Total income per ISK 1 of capital stock ...... 6,22 3.17 0.42

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______6 ______Balance Sheet

Assets

Group Parent Company Notes 28/02/2003 28/02/2002 28/02/2003 28/02/2002 Fixed assets: Intangible assets: Goodwill ...... 7,23 2,956 3,048 1,243 1,304 Long-term cost ...... 8,24 564 736 122 255 3,520 3,784 1,365 1,559 Property and equipment: Buildings ...... 454 990 23 62 Fixtures, machinery and equipment ...... 6,929 6,238 3,393 3,914 Vehicles ...... 215 138 120 133 9,25 7,598 7,366 3,536 4,109 Investments: Shares in subsidiaries ...... 3,10,29 0 0 13,580 7,963 Shares in associated companies ...... 10,30 4,485 12,657 4,359 403 Shares in other companies ...... 11,31 9,013 632 401 206 Loans to subsidiaries ...... 0 0 1,027 4,449 Loans to associated companies ...... 443 51 443 51 Other loans ...... 334 146 330 146 14,275 13,486 20,140 13,218

Fixed assets 25,393 24,636 25,041 18,886

Current assets: Inventories ...... 12,32 7,415 8,455 2,058 2,376

Receivables: Accounts receivable ...... 13,33 612 1,996 290 545 Receivables from subsidiaries ...... 0 0 1,740 1,044 Receivables from associated companies ...... 111 83 111 0 Other receivables ...... 926 1,832 252 861

Cash and cash equivalents ...... 11,635 656 3,589 104 Current assets 20,699 13,022 8,040 4,930

Total assets 46,092 37,658 33,081 23,816

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______7 ______February 28, 2003

Stockholders’ equity, minority interest and liabilities Group Parent Company Note 28/02/2003 28/02/2002 28/02/2003 28/02/2002 Stockholders’ equity:

Capital stock ...... 34 2,396 1,686 2,396 1,686 Additional paid-in capital ...... 7,799 7,645 7,799 7,645 Translation difference ...... ( 1,681) ( 346) ( 1,681) ( 346) Value change of stock options ...... 104 0 104 0 Retained earnings ...... 7,370 2,324 7,370 2,324 Unrealised gain on shares ...... 1,111 0 1,111 0 Stockholders’ equity 35 17,099 11,309 17,099 11,309

Minority interest ...... 28,42 929 1,961 0 0

Commitments: Interest in subsidiaries’ negative equity ...... 0 0 1,907 0 Deferred income-tax liability ...... 14,37 15 141 154 68 15 141 2,061 68

Long-term debt: Bonds ...... 12,053 11,591 7,382 4,454 Credit institutions ...... 2,072 1,338 2,072 1,175 38 14,125 12,929 9,454 5,629

Current liabilities: Non-interest bearing liabilities: Accounts payable ...... 4,375 3,525 2,021 1,860 Accounts payable to subsidiaries ...... 0 0 86 115 Accounts payable to associated companies ...... 37 37 37 36 Other current liabilities ...... 1,780 2,920 713 829 6,192 6,482 2,857 2,840

Credit institutions ...... 6,333 3,301 1,081 2,843 Current maturities of long-term debt ...... 39 1,399 1,535 529 1,127 13,924 11,318 4,467 6,810

Total liabilities 28,064 24,388 15,982 12,507

Total stockholders’ equity, minority interest and liabilities 46,092 37,658 33,081 23,816

Mortages and commitments ...... 28,42

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______8 ______Statement of Cash Flows, for the year ended February 28, 2003

Group Parent Company 12 months 14 months 12 months 14 months 2002 / 2003 2001 / 2002 2002 / 2003 2001 / 2002 Cash flows from operating activities: Net earnings ...... 35 6,329 924 6,329 924 Operating activites without cash flow effect ...... 40 ( 9,178) ( 683) ( 6,389) ( 721) Working capital (used in) provided by operating activities ( 2,849) 241 ( 60) 203

Net change in operating assets and liabilities ...... 1,459 ( 250) 364 ( 183)

Net cash (used in) provided by operating activities ( 1,390) ( 9) 304 20

Cash flows from investment activities: Investment in intangible assets ...... ( 839) ( 502) ( 25) ( 31) Investment in property and equipment ...... 25 ( 2,148) ( 3,130) ( 581) ( 1,899) Proceeds from sale of property and equipment ...... 602 206 165 18 Investment in other companies ...... ( 7,511) ( 7,634) ( 4,437) ( 133) Proceeds from the sale of shares in other companies ...... 17,292 0 13 0 Receivables, change ...... ( 3,575) 52 3,106 ( 2,277) Net cash provided by (used in) investment activities 3,821 ( 11,008) ( 1,759) ( 4,322)

Cash flows from financing activities: Treasury stock sold and bought ...... 35 164 0 164 0 Dividends paid ...... 35 ( 555) ( 147) ( 555) ( 147) Proceeds from long-term borrowing ...... 11,664 10,073 10,229 3,226 Repayment of long-term debt ...... ( 4,599) ( 712) ( 3,234) ( 600) Short-term borrowing, change ...... 2,667 2,165 ( 1,664) 1,641 Net cash provided by financing activities 9,341 11,379 4,940 4,120

Increase (decrease) in cash ...... 11,772 362 3,485 ( 182)

Cash at the beginning of the year ...... 656 294 104 286 Effect of currency fluctuation on cash ...... ( 793) 0 0 0

Cash at the end of the year ...... 11,635 656 3,589 104

Investment and financing activities without cash flow effects: Proceeds from the sale of shares in other companies 3,336 Repayment of long-term borrowing ...... ( 3,336) Investment in shares in other companies ...... ( 4,708) ( 5,835) ( 5,835) Increase of capital stock ...... 5,835 5,835 New long-term borrowing ...... 4,708

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______9 ______Notes

Summary of Accounting Principles

Basis of preparation 1. The Financial Statements of Baugur Group hf. include the Consolidated Financial Statements of the Company and its subsidiaries and the Financial Statements of the Parent Company. The Financial Statements have been prepared in accordance with the Financial Statements Act and the Regulation on the Presentation and Contents of Financial Statements and Consolidated Financial Statements. The Financial Statements are prepared using the historical cost method. The Financial Statements have been prepared using the same accounting policies as for the previous year apart from changes referred to in note 15 to the effect that now shares in listed companies are entered at their market value and costs of stock options expensed when incurred. The Financial Statements are presented in Icelandic kronur, rounded to the nearest million. Subsidiaries are those enterprises in which the Company holds controlling interest. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The Financial Statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases.

Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements.

Associated companies are those enterprises in which the Group has significant influence, but not control, over the financial and operating policies. The Consolidated Financial Statements include the Group’s share of the total recognised gains and losses of associated companies on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds the carrying amount of the associated company, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has assumed obligations in respect of the associated company.

Foreign currencies 2. Transactions in foreign currencies are translated to Icelandic krónur at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the Balance Sheet date are translated to Icelandic krónur at the foreign exchange rate at the end of the year. Foreign exchange differences arising on translation are recorded in the Statement of Earnings.

Financial statements of foreign operations 3. The Group’s foreign operations are not considered an integral part of the Company’s operations. Accordingly, the assets and liabilities of foreign operations are translated to Icelandic krónur at foreign exchange rates ruling at the Balance Sheet date. The revenues and expenses of foreign operations are translated to Icelandic kronur at average exchange rates for the fiscal year. Foreign exchange differences arising on translation are posted as a special item among Stockholders’ Equity.

Hedging 4. The Company has entered into currency- and interest rate swaps to limit its exposure to exchange rate risk and its interest rate risk. Gains or losses arising from these agreements are recorded in the Statement of Earnings. Exchange rate difference arising from currency forward contracts used in the investment of shares in Arcadia Group Plc. amounting to ISK 28 million, is recorded as a decrease in the Company’s Stockholders’ Equity.

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______10 ______Notes, cont.:

Income recognition 5. Income is recognised in the Statement of Earnings when merchandise is delivered to the buyer.

Earnings per share 6. Earnings per share is the ratio of performance to average capital stock for the year and shows performance per ISK 1 of capital stock. Net profit for the year amounted to ISK 6,329 million and comprehensive profit amounted to ISK 7,440 million. Average nominal value of capital stock amounted to ISK 2,377 million.

Intangible assets 7. Goodwill arising on the acquisition of subsidiaries or associated companies represents the difference between the cost of the acquisition on the one hand and the share in the company´s equity at the date of purchase on the other. Goodwill is stated at cost less accumulated amortisation, recorded on a straight-line basis. In respect of associated companies, the carrying amount of goodwill is included in the carrying amount of the investment in the associated company.

8. Long-term cost in the Balance Sheet consists of expenses arising from preparation of the opening of new stores, cost of renovation of older stores, purchase of trade marks and various development costs. Long-term costs will be charged off over a period of three to ten years.

Property and equipment 9. Property and equipment are recorded at historical cost, less depreciation. Depreciaton is charged on a straight-line basis according to the estimated useful life of the asset in question, until a residual value has been met. The estimated useful lives are as follows: Buildings ...... 40 years Fixtures, machinery and equipment ...... 6-15 years Vehicles ...... 7 years

Subsidiaries and associated companies 10. Shares in subsidiaries and associated companies are capitalized at a value corresponding to the Company’s share in their equity, taking into account the difference between the purchase price of the stock and share in equity at the date of purchase. Premium is presented as goodwill which will be amortised over a period of 20 years. The Parent Company’s share of the subsidiaries´ profits, less amortisation of premium, is entered in the Parent Company’s Statement of Earnings and Comprehensive Income as a specific item.

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______11 ______Notes, cont.:

Other companies 11. Shares in listed companies are capitalised at the latest exchange rate of the fiscal year. The market value of the Company’s portfolio is higher than its historical cost and the resulting difference is recorded as gain on shares in the Company’s stockholders’ equity, the year’s change in the portfolio’s market value is recorded as unrealised gain on shares in the Statement of Earnings and Comprehensive Income. Shares in unlisted companies are recorded at their historical cost, less an allowance.

Inventories 12. Inventories are capitalised at the lower of cost or market.

Receivables and Securities 13. A provision has been made for doubtful securities and receivables to meet the estimated risk attached to these assets. This provision does not represent a final write-off. On one hand there is a special provision to account for securities and receivables which have been estimated as being especially risky and on the other hand there is a provision made for general risk. This provision is deducted from the appropriate Balance Sheet items.

Deferred income-tax liability 14. The Company’s deferred income tax liability has been calculated and included in the Financial Statements. The calculation is based on the temporary difference in the Balance Sheet items as presented in the tax return on one hand and in the Financial Statements on other hand. The reason for this difference is that the tax assessment is based on premises other than those used in the Financial Statements, mostly because expenses, especially depreciation, are generally expensed earlier in the tax return than in the Financial Statements. A deferred income tax asset resulting from loss carry-forward is deducted from the Company’s deferred income tax liability.

Changes in Accounting Policies

15. In the preparation of the Financial Statements a change has been made in accounting policies with regard to the presentation of shares in listed companies in which the Group holds a minority interest. At the beginning of the Company’s fiscal year it owned shares in one listed foreign company, Arcadia Group Plc., which was capitalised according to the equity method. The shares were sold in the beginning of September 2002. In the subsequent months leading up to the end of the fiscal year, further investments were made in listed foreign companies. The Company’s Board of Directors has decided that short-term investments in listed companies are to be capitalised at their market value in the Company’s Consolidated Financial Statements. Comparative figures for the year ended February 28, 2002 have not been adjusted accordingly. Comprehensive Income is now added to the Statement of Earnings, where changes in the market value of the Groups’ listed shares during the period are stated. The aggregated changes are entered as a specific item among stockholders’ equity in the Balance Sheet as accumulated other comprehensive income. The Company’s comprehensive income increases by the amount of unrealized gain. The effect of changes in accounting policies on operations for the year ended Febrary 28, 2003 is to increase comprehensive income by ISK 1,111 million. The Company’s stockholders’ equity at the end of the year is ISK 1,111 million higher than it would have been if the same accounting policies had been used as before.

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______12 ______Notes, cont.:

15. Cont.:

The change has been made regarding treatment of employee stock options that now expenses arising from them are charged as they are incurred. The effect of the change in accounting methods is that net profit is ISK 230 million lower than it would have been using the same accounting methods.

Quartely Summary

16. The Group's operations are specified as follows according to quarters:

Q1 Q2 Q3 Q4 Total 1.3.-31.5. 1.6.-31.8. 1.9.-30.11. 1.12.-28.2 1.3.-28.2. Sales ...... 13,142 12,856 12,521 13,471 51,990 Cost of goods sold ...... ( 9,576) ( 10,252) ( 9,227) ( 10,180) ( 39,235) Gross profit ...... 3,566 2,604 3,294 3,291 12,755 Other operating income ...... 35 14 17 154 220 Salaries and salary-related expenses ...... ( 1,958) ( 1,709) ( 2,102) ( 2,071) ( 7,840) Other operating expenses ...... ( 1,393) ( 1,641) ( 1,612) ( 1,928) ( 6,574) EBITDA ...... 250 ( 732) ( 403) ( 554) ( 1,439) Depreciation and amortization ...... ( 358) ( 331) ( 389) ( 177) ( 1,255) EBIT ...... ( 108) ( 1,063) ( 792) ( 731) ( 2,694) Net financing cost ...... 46 ( 353) ( 343) 158 ( 492) Gain on the sale of associated company ...... 0 0 7,429 165 7,594 Income from associated companies ...... 872 780 196 160 2,008 Pre-tax profit (loss) ...... 810 ( 636) 6,490 ( 248) 6,416 Income tax ...... ( 303) ( 125) 62 83 ( 283) Discontinued operations ...... 0 0 0 ( 534) ( 534) Minority interest ...... 7 408 158 157 730

Net earnings (loss) ...... 514 ( 353) 6,710 ( 542) 6,329 Other comprehensive income ...... 0 0 1,968 ( 857) 1,111

Comprehensive income posted to stockholders’ equity ...... 514 ( 353) 8,678 ( 1,399) 7,440

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______13 ______Notes, cont.:

Segment reporting

17. Operations and Balance Sheets of business segments are specified as follows: Baugur Baugur Baugur Baugur Operations: Iceland ID USA Group hf.

Sales ...... 35,068 147 16,775 51,990 Cost of goods sold ...... ( 26,398) ( 95) ( 12,742) ( 39,235) Gross profit ...... 8,670 52 4,033 12,755 Other operating income ...... 185 35 0 220 Salaries and salary-related expenses ...... ( 4,164) ( 501) ( 3,175) ( 7,840) Other operating expenses ...... ( 3,504) ( 772) ( 2,298) ( 6,574)

EBITDA ...... 1,187 ( 1,186) ( 1,440) ( 1,439) Depreciation and amortization ...... ( 1,096) ( 50) ( 109) ( 1,255)

EBIT ...... 91 ( 1,236) ( 1,549) ( 2,694) Net financing cost ...... ( 44) ( 105) ( 343) ( 492) Gain on the sale of associated companies ...... 0 7,594 0 7,594 Income from associated companies ...... ( 53) 2,061 0 2,008 Pre-tax (loss) profit ...... ( 6) 8,314 ( 1,892) 6,416 Income tax ...... 141 ( 424) 0 ( 283) Discontinued operations of Bonus Dollar Stores Inc...... 0 0 ( 534) ( 534) Minority interest ...... ( 83) ( 22) 835 730

Net earnings (loss) ...... 52 7,868 ( 1,591) 6,329 Other comprehensive income ...... 0 1,111 0 1,111

Comprehensive income posted to stockholders’ equity ...... 52 8,979 ( 1,591) 7,440

Baugur Baugur Baugur Baugur Balance Sheet: Ísland ID USA Group hf.

Fixed assets ...... 7,559 15,614 2,220 25,393 Current assets ...... 8,457 6,977 5,265 20,699 Stockholders’ equity ...... 3,255 15,164 ( 1,320) 17,099 Long-term debt ...... 8,277 2,264 4,528 15,069 Current liabilities...... 4,484 5,163 4,277 13,924 Net liabilities ...... 4,304 450 3,540 8,294

Statement of cash flows:

Net cash (used in) provided by operating activities ...... 456 ( 1,086) ( 2,219) ( 2,849)

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______14 ______Notes, cont.:

Discontinued operations

18. In March 2003 a subsidiary of the Company, Bonus Stores Inc.’s, decided to discountinue operations of Bonus Dollar Stores Inc. That company operated 18 retail outlets in Florida, USA. Bonus Stores Inc. net loss for the year amounted to ISK 534 million, thereof it is estimated that expenses related to discountinued operations amount to ISK 340 million.

Salaries and Salary-related Expenses

19. Salaries and salary-related expenses are specified as follows: Group Parent Company 2002 2001 2002 2001

Salaries ...... 6,617 5,735 3,060 3,141 Salary-related expenses ...... 1,223 723 445 419 Total salaries and salary-related expenses ...... 7,840 6,458 3,505 3,560

Average number of employees during the year measured as full time positions ...... 3,629 3,656 1,158 1,235

Salaries to the Board of Directors, president and managing directors amounted to ISK 239 million for the fiscal year including bonus payments. The president of the Company has entered into stock option agreement to purchase 25 million shares at the average price 6,38.

Net Financial Expenses

20. Net financial expenses are specified as follows: Group Parent Company 2002 2001 2002 2001

Interest income ...... 402 95 429 74 Dividends ...... 82 0 0 0 Interest expenses ...... ( 1,613) ( 1,059) ( 941) ( 783) Currency fluctuations ...... 805 160 765 180 Write-down of shares in other companies ...... ( 168) ( 29) ( 116) ( 29) Net financial (expenses) income ...... ( 492) ( 833) 137 ( 558)

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______15 ______Notes, cont.:

Income Tax

21. Income tax according to the Statement of Earnings is as follows: Group Parent Company 2002 2001 2002 2001 Parent Company's income tax ...... ( 117) ( 59) ( 314) ( 121) Income tax of subsidiaries and associated companies ...... 400 885 400 885 Decrease in tax rate ...... 0 ( 306) 0 ( 258) 283 520 86 506

Earnings per Share

22. Calculation of earnings per share is based on net earnings and the average capital stock at the end of the fiscal year.

Average capital stock 28.2.2003 28.2.2002 Issued capital stock 1.3 ...... 1,685 1223 Effects of tresury stock and increase in capital stock ...... ( 8) 272 Effects of issue of stock dividends ...... 700 700 Average capital stock 28.2 ...... 2,377 2,195

Intangible Assets

23. Goodwill is specified as follows: Group Parent Company 2003 2002 2003 2002

Balance 1.3...... 3,048 2,466 1,304 1,411 Translation difference ...... ( 115) ( 21) 0 0 Acquired ...... 679 953 25 0 Sold ...... ( 458) ( 96) 0 0 Amortization ...... ( 198) ( 254) ( 86) ( 107) Balance 28.2...... 2,956 3,048 1,243 1,304

Amortization ...... 5-20% 5-20% 5-20% 5-20%

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______16 ______Notes, cont.:

24. Long-term cost is specified as follows: Group Parent Company 2003 2002 2003 2002

Balance 1.3...... 736 359 255 281 Translation difference ...... ( 10) ( 2) 0 0 Acquired ...... 160 502 0 30 Sold ...... ( 183) 0 ( 77) Amortization ...... ( 139) ( 123) ( 56) ( 56) Balance 28.2...... 564 736 122 255

Amortization ...... 10-33% 10-33% 10-33% 10-33%

Property and Equipment

25. Property and equipment and their depreciation, recorded on a straight-line basis, are specified as follows:

Fixtures and Group: Buildings equipment Vehicles Total

Total value 1.3.2002 ...... 1,016 8,438 197 9,651 Previously depreciated ...... ( 26) ( 2,200) ( 59) ( 2,285) Carrying value 1.3.2002 ...... 990 6,238 138 7,366 Translation difference ...... ( 106) ( 360) ( 12) ( 478) Acquired ...... 208 2,008 152 2,368 Sold ...... ( 549) ( 68) ( 25) ( 642) Depreciation ...... ( 89) ( 889) ( 38) ( 1,016) Carrying value 28.2.2003 ...... 454 6,929 215 7,598

Total value 28.2.2003 ...... 538 9,834 292 10,664 Depreciated 28.2.2003 ...... ( 84) ( 2,905) ( 77) ( 3,066) Carrying value 28.2.2003 ...... 454 6,929 215 7,598

Depreciation rates ...... 2-4% 10-20% 15%

Fixtures and Transp. Parent Company: Buildings equipment equipment Total

Total value 1.3.2002 ...... 67 5,774 191 6,032 Previously depreciated ...... ( 5) ( 1,860) ( 58) ( 1,923) Carrying value 1.3.2002 ...... 62 3,914 133 4,109 Acquired ...... 98 445 38 581 Sold ...... ( 134) ( 365) ( 25) ( 524) Depreciation ...... ( 2) ( 602) ( 26) ( 630) Carrying value 28.2.2003 ...... 24 3,392 120 3,536

Total value 28.2.2003 ...... 24 5,523 186 5,733 Depreciated 28.2.2003 ...... ( 1) ( 2,130) ( 66) ( 2,197) Carrying value 28.2.2003 ...... 23 3,393 120 3,536

Depreciation rates ...... 2-4% 10-20% 15%

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______17 ______Notes, cont.:

25. Cont.:

Depreciation according to the Statement of Earnings is as follows: Group Parent Company 2002 / 2003 2001 / 2002 2002 / 2003 2001 / 2002 Depreciaton of property and equipment ...... 918 908 630 665 Amortization of intangible assets, note 24 ...... 139 123 56 56 Depreciation according to the Statement of Earnings ...... 1,057 1,031 686 721 Amortization of goodwill, note 23 ...... 198 254 86 107 Total amortizaion and depreciation ...... 1,255 1,285 772 828

Real estate Value and Insurance Value 26. Insurance value and real estate and carrying value value of property and equipment at the end of February 2003 is specified as follows: Group Parent Insurance value of buildings ...... 947 - Carrying value of buildings ...... 454 23

Insurance value of property and equipment ...... 6,837 3,375 Carrying value of property and equipment ...... 6,929 3,393

Capital Lease Agreements 27. Property and equipment that has been acquired by entering into capital lease agreements is capitalised in the Company's Balance Sheet, although formal ownership is still held by the lessor, according to the agreements. The remaining balance of these agreements amounted to ISK 695 million at the end of the fiscal year and this amount is due over the next five years.

Mortages and Commitments 28. The Group’s assets are mortaged to secure debts, the remaining balance of which amounted to ISK 13,500 million at the end of the fiscal year. The Company has quaranteed debt amounting to ISK 636 million. The Company has mortaged all of its credit card receivables.

The Parent Company has guaranteed a debt owed by a subsidiary, A Holding S.A., to Deutsche Bank. The guarantee amounted to ISK 4,708 million at the end of the fiscal year. The Parent Company has guaranteed a lease agreement entered into by a subsidiary, Baugur Sverige AB, amounting to ISK 782 million. The Parent company has guaranteed debt owed by Bonus Stores Inc. in the amount of ISK 817 million.

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______18 ______Notes, cont.:

Shares in Other Companies

Subsidiaries 29. At the end of the fiscal year the Company’s subsidiaries were 17, compared to 12 at the beginning of the year. The Company established the subsidiaries DBH Stockholm AB, DHB Danmark A/S and Baugur Invest ehf., Baugur Invest ehf. took over the Company’s share in Bonus Stores Inc. The Company established the subsidiary Baugur Ísland ehf. in the beginning of March. Baugur Ísland ehf. has taken over all of the Company’s retail operations in Iceland and Sweden. According the subsidiaries’ Statements of Earnings, their realised net income for the fiscal year after taxes amounted to ISK 6,685 million after taxes, but when period of ownership, amortization of premium and minority interest are taken into account, the effect of subsidiaries before taxes on the Parent Company’s realised income is positive by an amount of ISK 6,283 million, this amount is recorded in the Company’s Statment of Earnings. Minority share in the loss of subsidiaries' amounted to ISK 730 million and interest in their stockholders' equity amounts to ISK 929 million at the end of February. Minorty interest is presented specifically in the Consolidated Financial Statements. Subsidiaries, all included in the Consolidated Financial Statments, are as follows:

Domestic companies: Share Foreign companies: Share Augun okkar ehf., Reykjavik ...... 65% A Holding S.A., Luxembourg ...... 100% Baby Sam á Íslandi ehf., Reykjavik ...... 100% Baugur Holding Corp., BVI ...... 100% Baugur Invest ehf., Reykjavik ...... 100% Baugur Sverige AB, Sweden ...... 100% Baugur Ísland ehf., Reykjavik ...... 100% Bonus Stores Inc., Bandaríkin ...... 65% Baugur.net ehf., Reykjavik ...... 98% DBH Danmark A/S, Denmark ...... 100% á Íslandi ehf., Kópavogur ...... 100% DBH Stockholm, Sweden ...... 100% Dúkur hf., Reykjavik ...... 100% Tops Aps, Denmark ...... 100% Hrafnabjörg ehf., Reykjavik ...... 100% Lyfja hf., Reykjavik ...... 55% Noron ehf., Reykjavik ...... 100%

Associated Companies 30. Shares in associated companies, capitalised according to the equity method, are specified as follows:

Share Share

Allianz hf...... 41% Eignarhaldsfélagið Húsasmiðjan ehf...... 45% Árnes Apótek ehf...... 50% GK Reykjavík ehf...... 50% Grænt ehf...... 50% P/f SMS, Færeyjum ...... 50% Fasteignafélagið Stoðir hf...... 50%

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______19 ______Notes, cont.:

30. Cont.:

In the beginning of September 2002 A Holding S.A., a subsidiary of Baugur Group hf., sold its 20.1% share in Arcadia Group Plc. for GBP 155 million or ISK 21,400 million. The purchase price has been paid in full. The original purchase price and costs relating to the purchase amounted to ISK 12,000 million. At the time of sale, the book value of the shares, which were capitalized according to the equity method, and goodwill relating to them was ISK 14,000 million. Capital gains from the sale of the shares, ISK 7,400 million, has been accounted for in the Financial Statements. A Holding S.A.’s share of Arcadia Group Plc. earnings for the period March to August 2002, amounts to ISK 1,200 million, and is entered in the Statment of Earnings and Comprehensive Income. Income tax has not been calculated because of these transactions because A Holding S.A. in Luxembourg is not subject to income tax. The Group’s share in pre-tax profits of associated companies, taking into consideration the changes in goodwill, was positive by ISK 2,008 million and that amount is entered as income in the Statement of Earnings and Comprehensive Income.

Other companies 31. Shares in other companies are specified as follows: 28.2.2003 Carrying Share value Listed companies: The Big Food Group plc., UK ...... 22.1% 5,227 plc., UK ...... 8.0% 1,596 plc., UK ...... 2.9% 1,395 Mothercare plc., UK ...... 2.1% 176 Selfridges plc., UK ...... 0.4% 167 AcoTæknival hf., Iceland ...... 24.0% 85 Total market value of shares in listed companies ...... 8,646 Shares in 24 unlisted companies ...... 367 Total shares in other companies ...... 9,013

Inventories

32. Inventories are specified as follows: Group Parent company 28/2/2003 28/2/2002 28/2/2003 28/2/2002

Inventories, food ...... 2,015 2,303 1,294 1,263 Inventories, non-food ...... 5,232 6,126 750 1,087 Goods in transit ...... 168 26 14 26 Total inventories ...... 7,415 8,455 2,058 2,376

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______20 ______Notes, cont.:

Receivables and Securities

33. The provision for receivables and securities is specified as follows: Group Parent company 2003 2002 2003 2002

Balance 1.3.2002 ...... 76 46 67 39 Losses during the year ...... ( 37) ( 28) ( 37) ( 28) Provisions made during the year ...... 68 58 71 56 Balance 28.2.2003 ...... 107 76 101 67

Stockholders’ Equity

34. The Company’s total capital stock amounts to ISK 2,396 million, according to it’s Articles of Association, a stock split amounting to ISK 700 million was issued during the year. One vote is attached to each ISK one of capital stock. The Company holds treasury stock for a nominal value of ISK 0,2 million which is entered as a decrease in stockholders’ equity. At the Company’s annual general meeting in May 2002, the Board of Directors was granted permission to increase the Company’s capital stock by a nominal value for a maximum of ISK 100 million. This permission has not been exercised. The Board of Directors was also granted permission to increase the Company’s capital stock by an amount of ISK 10 million, whith the intention of selling it to employees, according to their stock option agreements.

35. Changes in Stockholders' Equity are specified as follows: Accumulated Group / Parent company Value other Addittional change compre- Capital paid in of stock Retained Translation hensive stock capital options earnings difference income Total

Balance 1.3.2002 .... 1,686 7,645 0 2,324 ( 346) 0 11,309 Stock split ...... 700 ( 700) 0 Treasury stock ...... 10 154 164 Dividends ...... ( 555) ( 555) Currency fluctuation of forwards ...... ( 28) ( 28) Value change of stock options ...... 104 104 Translation difference ...... ( 1,335) ( 1,335) Net earnings ...... 6,329 1,111 7,440 Balance 28.2.2003 .. 2,396 7,799 104 7,370 ( 1,681) 1,111 17,099

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______21 ______Notes, cont.:

Commitments

36. Stock option Plan The Group has granted its employees stock options which can be exercised during the years 2003 until 2005. The Group will use treasury stock and issue new stock to meet its employees’ stock options. On the one hand there are general stock option agreements offered to all permanent employees. These agreements are for three years and can be exercised in equal parts, the first time in July 2002. On the other hand there are agreements linked to employees position within the Company, which are offered to employees holding the appropriate position with the Company. According to these agreements the options can be exercised during the years 2003 until 2005.

A change relating to treatment of employee stock option has been made. The resulting expenses on these kinds of options are now charged to the Statement of Earnings among salaries and salary-related expenses. The Group’s expense due to a employee stock option is calculated as the difference between the strike price and the closing price of the stock at the end of the period. The stock options amount to a total of ISK 70 million nominal value at the end of the fiscal year, thereof granted unexercised an amounted to ISK 48 million. The Company has charged an amount of ISK 230 million due to stock options. In some cases employee stock option were settled in cash.

Deferred Income-tax Liability

37. The deferred income-tax liability according to the Balance Sheet is specified as follows: Group Parent

Balance 1.3.2002 ...... 141 68 Income tax from net earnings ...... ( 113) 86 Income tax due in 2003 ...... ( 18) 0 Other changes ...... 5 0 Balance 28.2.2003 ...... 15 154

The deferred income tax liability can be attributed to the following Balance Sheet items:

Property and equipment ...... 369 314 Current assets ...... 20 9 Loss carry-forward ...... ( 374) ( 169) Balance 28.2.2003 ...... 15 154

Deferred gain on the sale of the Parent Company’s share in other companies amounting to ISK 829 million, is offset against the taxable purchase price of shares in subsidiaries. An income tax liability has not been attributed to shares in subsidiaries as it is deemed highly unlikely that the difference between carrying value and taxable value, will be reversed in the future.

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______22 ______Notes, cont.:

Long-term debt

38. Long-term debts are specified as follows: Group Parent

Debt in foreign currencies ...... 11,704 6,921 Debt in domestic currency ...... 3,820 3,062 Long-term debts and their current maturities ...... 15,524 9,983 Current maturities of long-term debts ...... ( 1,399) ( 529) Long-term debts as according to the Balance Shee ...... 14,125 9,454

39. Aggregated annual maturities of long-term debts are specified as follows:

March 1, 2003 - February 29, 2004 ...... 1,399 529 March 1, 2004 - February 28, 2005 ...... 1,546 1,015 March 1, 2005 - February 28, 2006 ...... 1,946 1,484 March 1, 2006 - February 28, 2007 ...... 5,085 2,686 March 1, 2007 - February 29, 2008 ...... 2,541 1,735 Subsequent ...... 3,007 2,534 Long-term debts and their current maturities ...... 15,524 9,983

40. Operating activites without cash flow effect are specified as follows: Group Parent Company 2002 2001 2002 2001

Gain on the sale of property and equipment ...... 43 ( 104) ( 17) 1 Depreciation and amortisation ...... 1,255 1,300 772 829 Indexation and currency fluctuation ...... ( 801) ( 64) ( 780) ( 130) Gain on the sale of shares in other companies ...... ( 7,594) 0 ( 172) 0 Income from subsidiaries ...... 0 0 ( 6,183) ( 1,944) (Income) loss from subsidiaries ...... ( 2,008) ( 2,352) ( 396) 10 Income tax ...... 283 520 86 506 Other items ...... ( 356) 17 301 7 Total ...... ( 9,178) ( 683) ( 6,389) ( 721)

Derivatives

41. The Group has entered into currency- and interest rate swaps with financial institutions to limit its exposure to currency and interest rate risk. The Group has committed itself to forward trades in the amount of ISK 2,167 million at the fiscal year-end exchange rate. The contracts involve currency exchanges and changes in interest from fixed rates to floating rates.

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______23 ______Notes, cont.:

Other contracts

42. The Company holds 50% of the shares in Fasteignafélagið Stoðir hf. In addition the Company entered into mutual call and put options regarding 22.7% of the shares in the Fasteignafélagið Stoðir hf. The option is open until December 3, 2004. Fasteignafélagið Stoðir hf. holds a 7.0% share in Baugur Group hf.

43. According to contracts agreed upon regarding the merger of Lyfja hf. and Lyfjabúðir ehf., shareholders holding 45% of the shares in Lyfja, after the merger and Baugur Group hf. hold mutual call and put options for their shares, exercisable during the year 2004. If neither party exercises its option during the year 2004, the put option and Baugur Group hf.'s purchase obligation will be extended to the year 2007.

Uncertainties

44. The Company and its subsidiaries are parties to several lawsuits. It is the opinion of the Company’s attorneys that the outcome of these lawsuits will not have a material effect on the Company’s operations or its financial position.

45. At the end of August 2002, the State Police searced the Parent Company’s premisies as a result of a complaint made by an ex-supplier against the Company’s President, Jón Ásgeir Jóhannesson, and the Company’s former President, Tryggvi Jónsson. The police have still not concluded their investigation. It is unceartain what if any effect these events will have on the Company's operations and it's financial position.

Ratios

46. The Group’s primary ratios:

Operations: 01/03/2002 01/01/2001 - 28.2.2003 - 28.2.2002

Average margin - sales/cost of sales ...... 32.5% 34.4% Contribution margin as percentage of sales ...... 24.5% 25.6%

Balance Sheet: 28/3/2003 28/2/2002

Current ratio - Current assets/short-term liabilities ...... 1.5 1.1 Equity ratio - Stockholders' equity/Total capital ...... 37.1% 30.0%

Internal value of stock ...... 7.1 6.7 Nominal value of capital stock, (stock split taken into consideration) ...... 2,396 2,386 Stock market value ...... 25,148 20,567 Stock exchange rate, (stock split taken into consideration) ...... 10.5 8.6

Financial Statements of Baugur Group hf. February 28, 2003 In million of ISK ______24 ______