ANNUAL REPORT 2007 Contents Opening Statement 2 About the Company 5 General Information 5 Our Geography 11 Legal Structure of the Company 16 Structure of Company Management 17 HR Policy: New Possibilities for Career Growth 18 Social Responsibility and Charitable Activity 23 Results of 2007 27 Events of the Year 27 Key Annual Indicators 30 Marketing Policy and Operational Activity 36 - Multi-format and Format Development 36 - Assortment Policy, Logistics, Distribution Center 38 - High Quality Products and Service 41 - The Company's Own Production 43 - The Private Labels of Seventh Continent 45 - Special Events and Additional Services 46 - Order and Delivery Service 49 - IT 51 Information for Shareholders and Investors 53 Plans and Perspectives 67 Independent Auditor's Report 71 Company Management 81 Events After the Reporting Date 83 ANNUAL REPORT / 2007 Opening Statement Dear shareholders, colleagues and partners, The year 2007 without a doubt can best be described as a milestone in the mid- term development strategy of Seventh Continent. We continued our organic development, opening 6 stores of supermarket and hypermarket format in Moscow, Perm, and Chelyabinsk; we've also acquired a number of retail sites for future openings, and have laid a solid foundation for mid-term regional expansion and consolidation of the Company's leading position in the Moscow region, thanks to joint development projects with our strategic partners. Operational and financial performance indicators of the Company for 2007 confirm stable development. According to the results of audited financial state- ment under IFRS for 2007, the gross revenues of the Company increased by 33% compared with 2006 and amounted to 1,272.9 million U.S. dollars. We have successfully entered the Urals market, one of the most attractive investment regions, by opening the hypermarket under the brand “NASH Hypermarket” (Our Hypermarket) in Chelyabinsk; we've prepared several dozen sites for new hypermarket and supermarket stores in Moscow and Moscow region, Yaroslavl, Perm, Kaliningrad and the Kaliningrad region, St. Petersburg, Tomsk, Novocherkassk, Rostov-on-Don and many other major cities throughout the Russian Federation. In 2007 the Company successfully implemented a program for improving our existing technology, delivering better service, restyling premium supermarket and hypermarket stores, as well as significantly optimizing our operational busi- ness processes by introducing the latest information technology equipment and systems. The financial results of the regional sector of the chain confirmed the correct choice for an active regional expansion strategy, especially in regards to hyper- markets. In 2007 the number of customers in Russian regions grew by very high rates - on the whole, the stores in Kaliningrad and the Kaliningrad region, SEVENTH CONTINENT 2 OPENING STATEMENT St. Petersburg, Ryazan, Perm, Chelyabinsk and Minsk were visited by more than 20 million people - that is a 37% increase over that of 2006. The tradе revenue of stores that are located in the regions increased by 113% over those of 2006. Growth in the tradе revenue of the Company's hypermarkets in 2007 amounted to a 101% increase compared with 2006. In all our activities, we aim to keep a balance between ensuring the stable growth of the Company while at the same time increasing profitability. The key- stone of our success is a truly well-thought-out strategy, efficient management of business processes and the work of our highly professional management team. We look positively on the results of the past year and on the further Company's active development throughout the mid-term perspective. The Company's business model has proven its effectiveness in the Moscow region, and we plan to continue to roll out this strategy with success to the many regional mar- kets across Russia. Among the strategic priorities of the Company for the com- ing year - significantly accelerating the rate of development of the chain both in Moscow and the Moscow region, as well as in the whole of Russia, strength- ening the leading position in the supermarket format and actively increasing the share of hypermarkets in the chain. Galina Iliyashenko Chief Executive Officer JSC “The Seventh Continent” SEVENTH CONTINENT 3 ABOUT THE COMPANY About the Company GENERAL INFORMATION JSC “The Seventh Continent” was founded in 1994 and it is an internation- al retail chain and one of the leaders in the Russian retail market. The stores of the chain offer their customers a wide range of goods and serv- ices of high quality, with a flexible price policy, always meeting the demands of the market and being high-tech retail sites. As of December 31, 2007, the Company managed 127 stores operating in two main formats: supermarkets (29 of “The Seventh Continent - Five Stars”, 64 of “The Seventh Continent - Supermarket” and 28 of “The Seventh Continent - Next door” and hypermarkets (5 hypermarkets under the brand name “NASH Hypermarket” and 1 “ProStore” hypermarket). The stores of the chain are located in Moscow and the Moscow region (110 supermarkets and 2 hypermarkets), Kaliningrad and the Kaliningrad region (10 supermarkets), Perm (1 supermarket), St. Petersburg (1 hypermarket), Ryazan (1 hypermarket), Chelyabinsk (1 hypermarket) and Minsk, Republic of Belarus (1 hypermarket). Seventh Continent is one of the first Russian multi-format retail chains. Operating in several formats allows us not only to continuously expand the scope of our activities, but also to improve the competitiveness of our stores, while broadening the range of our loyal customers, who have a variety of shopping preferences and different income levels. In 2004 Seventh Continent became the first company in the food retail sec- tor which carried out a successful IPO, having placed its shares on the RTS Stock Exchange. The volume of attracted funds amounted to 81 million U.S. dollars. As a result of the successful placement of an additional issue of shares in April 2006, capitalization of the Company exceeded 1.8 billion U.S. dollars. In general, since the IPO took place the market capitalization of the Company increased by more than 3 times. SEVENTH CONTINENT 5 ANNUAL REPORT / 2007 AS A RESULT OF THE SUCCESSFUL PLACEMENT OF AN ADDITIONAL Seventh Continent is a Russian ISSUE OF SHARES IN APRIL 2006 CAPITALIZATION OF THE COMPANY company, which, throughout all its EXCEEDED 1.8 BILLION U.S. DOLLARS. IN GENERAL SINCE THE IPO work, adheres to the highest world TOOK PLACE THE MARKET CAPITALIZATION OF THE COMPANY standards. The intensive develop- INCREASED BY MORE THAN 3 TIMES ment of the chain occurs through a continuous, acive focus to opti- mize the business processes in the management of logistics, inventory, as well as the organization and effective use of information technology, professional staff and competent management structure. Following the successful experience of well world known retail operators in 2005 the Company created low-price segment private label “NASH Product” (Our Product). In 2007 the project continued its development in the average price segment - the first products under the brand name “Sedmoi Continent” (Seventh Continent) were successfully introduced. Today, more than 1150 different products under our own brands are sold in our stores. Those products of high quality are developed in coopera- tion with suppliers, in which we trust and with whom we have long-term business relationship. While constantly keeping pace with consumer demand and preferences and taking into account the dynamic lifestyles and the busyness of mod- ern consumers, since 2006 the Company has been actively developing its own production project. Numerous culinary, meat, fish, salad and bakery sections, offering more than 1000 different products to suit every taste and level of income, have been opened in our stores throughout Russia. The Company plans to further expand in this direction, seeing it as high-per- formance and highly profitable. In May 2006 with a focus on broadening the spectrum of services provid- ed, the Company acquired a controlling stake in JSC “Bank Finservice”, which is now actively being developed and is presented in Seventh Continent stores. The Company became the first retail chain that achieved a breakthrough, attracting buyers through loyalty programs based on joint discounted-bonus co-brand cards. JSC “The Seventh Continent” plans to continue its active expansion in SEVENTH CONTINENT 6 ABOUT THE COMPANY Moscow, regional and international COMPANY ACQUIRED A CONTROLLING STAKE IN JSC “BANK FINSER- markets, using the vast experi- VICE” WHICH IS NOW ACTIVELY BEING DEVELOPED AND IS PRESENT- ence, by introducing the latest ED IN SEVENTH CONTINENT STORES. THE COMPANY BECAME THE technological solutions in the man- FIRST RETAIL CHAIN THAT ACHIEVED A BREAKTHROUGH, ATTRACT- agement of business processes ING BUYERS THROUGH LOYALTY PROGRAMS BASED ON JOINT DIS- while constantly improving its com- COUNTED-BONUS CO-BRAND CARDS petitive abilities to supply and sat- isfy its customers. Major course of the Company in the mid-term are the real estate development projects and the further hypermarket format develop- ment. At the end of 2007 the number of customers in the stores of the Company increased by 10.4% over that of 2006 and amounted to 100.1 million peo- ple; the average ticket amounted to 14.1 U.S. dollars (including VAT) and increased by 19%. The Company has achieved high rates of profitability: the net profit for 2007 amounted to 99.2 million U.S. dollars