Table of contents. Introduction... 1

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2 Table of contents Introduction... 1 REPORT BY THE PRESIDENT OF THE MANAGEMENT BOARD... 2 SUPERVISORY BOARD REPORT... 5 MERCATOR GROUP PROFILE AND ORGANIZATION Mercator Group markets... 9 Mercator Group Profile Mercator Group Activities Organization and Composition of the Mercator Group Company Profile MERCATOR GROUP BUSINESS STRATEGY Vision Mission Corporate Values Core Strategic Goals SWOT analysis MERCATOR GROUP PERFORMANCE HIGHLIGHTS FOR THE PERIOD MAJOR EVENTS IN CORPORATE GOVERNANCE STATEMENT Business report IMPACT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP OPERATIONS IN DEVELOPMENT AND REAL ESTATE MANAGEMENT Investment and Divestment Summary of retail unit launches by markets Activities of real property monetization SALES AND MARKETING Sales Marketing Digital Communication Store Formats FINANCIAL MANAGEMENT MERCATOR SHARE AND INVESTOR RELATIONS Mercator share and ownership structure Investor relations RISK MANAGEMENT Business Risks Financial risks Operational risks PERFORMANCE ANALYSIS ANTICIPATED ECONOMIC CONDITIONS AND PLANS FOR

3 Sustainability Report RESPONSIBLE MANAGEMENT OF SUSTAINABLE DEVELOPMENT Commitment of sustainability Sustainable development management CORPORATE SUSTAINABILITY BY KEY AREAS Responsibility to customers Responsibility to employees Responsibility to natural environment Responsibility to social environment Responsibility to suppliers Responsibility for security Our responsibility and care for quality CONTENT INDEX ACCORDING TO THE GLOBAL REPORTING INITIATIVE SUSTAINABILITY REPORTING GUIDELINES G INDEPENDENT AUDITOR'S STATEMENT ON SUSTAINABILITY REPORT Financial report FINANCIAL REPORT OF THE MERCATOR GROUP Consolidated statement of financial position Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to consolidated financial statements Independent Auditor's Report AUDITED FINANCIAL STATEMENTS OF THE COMPANY POSLOVNI SISTEM MERCATOR, D.D Statement of financial position Income statement Statement of comprehensive income Statement of changes in equity Proposal on the allocation of distributable profit Cash flow statement Contacts

4 Introduction 1

5 REPORT BY THE PRESIDENT OF THE MANAGEMENT BOARD A year of many challenges Our anticipations of a challenging year proved correct. In all markets, Mercator Group faced the impact of the economic crisis which was reflected in a lower demand and changes in the composition of the shopping basket. We witnessed bankruptcies of major enterprises, the number of unemployed rose, and raw material price hikes exerted additional downward pressure on consumption. The credit crunch did not subside, economic growth was low, and huge sovereign debt in many countries added to the sense of insecurity. Although the business environment in the region was even worse than expected, we nevertheless saw many challenges as opportunities to intensively adapt to the consumers, to beef up our competitive edge, and to carry on our growth. Because customers expect more We know our customers well, and we are aware that they have given priority to needs over wishes and desires; that they are looking to get more for their money; and that they expect their loyalty to be more generously rewarded. Therefore, Mercator invested heavily in 2011 to provide lower retail prices and thus maintain the level of consumer purchasing power; in addition, we allocated a part of our margin for alleviating the effects of raw material price hikes on the consumers. With great diligence and responsibility to our customers, we prepared a number of measures to adapt to their needs even faster and more intensively. Mercator is a major partner for Slovenian suppliers and suppliers in our international markets. In the long run, however, we can only work with those who offer products tailored to consumers' preferences. Therefore, we strived to further improve our cooperation with the suppliers, particularly local food producers, and worked with them to plan the further development of the offer in accordance with customers demand. Further development activities Mercator Group investments in 2011 totalled to nearly EUR 120 million, with the bulk of this sum spent on retail network development in all markets. In addition to own investments, long-term lease has been an increasingly important method of acquiring new retail area. Throughout the year, we opened 96 new retail units in six markets. Moreover, we consolidated our market position through strategic business combinations. In the Serbian market, Mercator reinforced the position of the second largest retailer by acquiring the trade operations of the company Familija Marketi, d.o.o.; Mercator - BH, d.o.o., forged a strategic combination with Drvopromet, d.o.o., to prop up its position of the third largest retailer in Bosnia and Herzegovina. Acquisition of the company En Plus, d.o.o., renamed to M - Energija, d.o.o., is consistent with Mercator's pursuit of the strategic goal of developing supplementary trade services. Customers will be offered self-service petrol stations at the parking lots of major shopping centers, initially in Slovenia with subsequent roll-out to Serbia and Croatia. This will improve the distinctiveness and recognition of the brand, and provide a wider, more comprehensive offer for the end customer at a single location. 2

6 Solid growth of revenue even in harsh conditions Mercator Group generated EUR 2.93 billion of revenue in 2011, which is 5.3 percent more than in In 2011, Mercator stood its ground as the retailer with the leading market share in the domestic market; revenue growth, however, was mostly fuelled by international markets. With revenue more than 5 percent above the figure form the year before, Group net income amounted to EUR 23.5 million or 22.5 percent less than in The reasons for the step back in performance are mostly a result of notable aggravation of the economic circumstances in the second half of 2011, negative impact thereof on the volume and composition of consumption, required additional investment into favourable prices for the consumers, adverse developments in exchange rates, and other factors. Positive and stable operations even in harsh conditions allow us to pay out dividends to our shareholders each year, notwithstanding the severe financial and economic background. In 2011, the company Mercator paid out dividends in the gross amount of EUR 8.00 per ordinary share, which totalled to nearly EUR 30 million of overall payments and ranked Mercator share among those with the highest dividend yield. Hedging the financial risks remains a key task Financial risk management remained a vital task in 2011 as the conditions in the global financial markets grew even harsher, especially in the second half of Stable generation of cash flows, consistent compliance with the covenants and commitments to our financial partners, excellent long-term relations with over 30 banking partners, additional diversification of financing sources, and improved composition of financing sources by maturity were the key factors of keeping the financial risks in check. At the same time, these were solid proofs of the financial stability and trust by financial partners, enjoyed by Mercator. It should also be noted that in compliance with the medium-term plans, we launched the activities to gradually monetize a part of our real estate portfolio. The principal purpose of this project is to reduce our debt and to bring the composition of our assets closer to that of major European retailers. Today, Mercator Group is also the largest real estate fund in the Southeastern European region, as well as this region's largest fast-moving consumer goods retailer. After the monetization of a part of the real property portfolio, the focus on retail will also be evident from the structure of assets and liabilities. Responsibility to employees and the social environment Our most powerful asset are our employees; there are over 24,000. Their knowledge and experience are a priceless source of energy for the Mercator family. Investment into their personal and professional development paves the way for Mercator's steady development even in times of crisis. In 2011, we continued to create new jobs, especially beyond Slovenian borders, and to improve Mercator's reputation as an employer. The spotlight was on communicating our corporate values, promoting employee education, developing leadership at all levels, consolidating the system of in-house instructors, and caring for the safety and health of our employees. The best employees were commended and rewarded at the Mercator Awards, Best Boss, and Best Stores events. Our care and responsibility for the broad social environment was also manifest in donations to humanitarian, cultural, educational, and sports institutions. We are sincerely proud of the awards that our employees received for their professional achievements. 3

7 Our efforts were also rewarded with international and domestic professional awards in various fields of our activities. Mercator received the European Business Award in the category of corporate sustainability. This prestigious international award was presented to Mercator for nurturing a high moral, social, and environmental awareness, in addition to maintaining a high level of business performance. Confidently moving on Our vision is clear. We shall not change it because the conditions in which we operate are more exacting; in fact, we can expect the business environment to remain strenuous and uncertain in the future. But with every test comes new opportunity, new motivation. Since we are constantly adapting, we are not only reinforcing our advantages; we are also creating new value. Many stories about customers and employees, minor and major suppliers, minority shareholders and major investors, and local and international markets are intrinsically connected to Mercator. Out of our responsibility stems an imperative to be bold and determined in our further efforts for the benefit of all stakeholders. On behalf of all Mercator employees, I sincerely thank everyone by our side for their trust and support. Ljubljana, 16 February 2012 Žiga Debeljak, MScBA President of the Management Board 4

8 SUPERVISORY BOARD REPORT Supervisory Board Activities Pursuant to the legislation and company Articles of Association, operations of the company Poslovni sistem Mercator, d.d., as the controlling company of the Mercator Group were supervised in 2011 by a Supervisory Board which met at six regular sessions in the course of the year. As of 31 October 2009, Supervisory Board consists of Robert Šega as the Supervisory Board Chairman, and the following members: Jadranka Dakič (deputy chairwoman), Stefan Vavti and Kristjan Verbič, all appointed by the Shareholders Assembly at their regular meeting held on 20 July 2009, and Jože Cvetek, Janez Strniša, Mateja Širec, and Ivica Župetić, appointed by the Workers Council of the company Mercator, d.d. At the 16th regular Shareholders Assembly held on 13 July 2010, two new members were appointed to the Supervisory Board: Matjaž Kovačič and Miro Medvešek. Furthermore, The Workers Council also elected two Supervisory Board members at their 2nd session held on 19 May 2011: Sandi Leban and Ivan Valand. On 20 December 2011, Matjaž Kovačič resigned as a Supervisory Board member. Supervisory Board sessions in 2011 were held on 1 March, 27 May, 23 August, 8 November, 14 November, and 20 December. At the said meetings, the Supervisory Board mostly discussed current performance and property of the company and the Mercator Group, interim reports, Annual Report, Management Board activities, investment activities, implementation of major projects, financial policy and financial position, annual business plans, and implementation of the resolutions adopted by the Supervisory Board. Major Supervisory Board resolutions In 2011, the Supervisory Board discussed and examined the audited financial statements for 2010 for the company Poslovni sistem Mercator, d.d., and the Mercator Group, and took note of the performance and results of the company Poslovni sistem Mercator, d.d., and the Mercator Group. In addition, the Supervisory Board discussed other current issues and adopted the following major resolutions: the Supervisory Board discussed and adopted the Annual Report for the company Poslovni sistem Mercator, d.d., and the Mercator Group for the year 2010, and confirmed the wording of the Supervisory Board Report on the Annual Report audit, and the opinion to the proposal on the allocation of distributable profit for 2010; the Supervisory Board confirmed the proposal by the Audit Committee to appoint the company KPMG Slovenija, d.o.o., to audit the financial statements of the company Poslovni sistem Mercator, d.d., and the Mercator Group for the year 2011; the Supervisory Board adopted the Business Reports of the Mercator Group and the company Mercator, d.d., for the periods I-III 2011, I-IV 2011, and I-IX 2011; the Supervisory Board confirmed the resolution proposals for the 17 th regular Shareholders Assembly of Poslovni sistem Mercator, d.d., including the meeting agenda; the Supervisory Board confirmed the Report on the Fulfilment of Commitments related to the cartel charge and proceedings, pursuant to the decision by the Competition Protection Office of the Republic of Slovenia, No /2007 dated 7 May 2009, for the year 2010; and the Report on the Fulfilment of Commitments related to the proceedings for alleged violation of dominant position, pursuant to the decision by the Competition Protection Office of the Republic of Slovenia, No /2007 dated 26 June 2009, for the year 2010; the Supervisory Board was presented the Comparative Analysis of competition in the fastmoving consumer goods industry in the region in 2010, the results of the completed selfassessment, and the progress of the sale of the majority package of shares of the company Mercator, d.d.; 5

9 the Supervisory Board was informed about the Management Board activities aimed at supporting the process of sale of the majority package of shares of the company Mercator, d.d., by the consortium of sellers, and confirmed the negotiating positions relating to the process of reaching the agreement with respect to the protection of the interests of the Mercator Group between the company Mercator, d.d., and both the consortium of sellers and the consortium of buyers (consisting of Agrokor, EBRD, IFC, and One Equity Partners); the Supervisory Board was informed about the progress of activities of the project "Refreshment of the offer of market program in Slovenia," the project of "Refreshment and restructuring of FMCG offer in Croatia", and the project of "Establishing a hardware and electronics store chain"; the Supervisory Board confirmed their draft session schedule for 2012 and the financial calendar of major announcements of the company Mercator, d.d., in the year Activities of the Audit Committee The Audit Committee is in charge of the quality of supervision and control functions at the company Mercator, d.d. In 2011, the Committee held six meetings. As of 19 November 2009, the Audit Committee includes the committee chairwoman Jadranka Dakič (Supervisory Board member) and two members: Jože Cvetek (Supervisory Board member) and Peter Ribarič (independent expert on accounting and auditing). Audit Committee sessions in 2011 were held on 15 February, 28 February, 12 May, 22 August, 7 November, and 15 December. At these meetings, the Audit Committee discussed mostly current affairs and adopted the following notable resolutions: the Audit Committee discussed and commented the Annual Report of the company Mercator, d.d., and the Mercator Group for the year 2010; the Audit Committee was presented the report by the independent certified auditor on the progress and findings of the first stage of the audit conducted at the company Mercator, d.d., and the Mercator Group in 2010; the Audit Committee examined and commented on the Risk Management Report of the company Mercator, d.d., and the Mercator Group for the year 2010; the Audit Committee was presented the Risk Management Reports for the company Mercator, d.d., and the Mercator Group for the periods I-III 2011, I-VI 2011, and I-IX 2011, and provided recommendations for improvement of these reports; the Audit Committee examined the Business Report for the company Mercator, d.d., and the Mercator Group for the periods I-III 2011, I-VI 2011, and I-IX 2011; the Audit Committee confirmed the offer for auditing services for the company Mercator, d.d., and the Mercator Group for the year 2011 and proposed to the Supervisory Board that the auditing company KPMG Slovenija, d.o.o., is selected as the company auditor; the Audit Committee was presented the report by the independent certified auditor on the progress and findings of the second stage of the audit carried out at the company Mercator, d.d., and the Mercator Group in 2010; the Audit Committee was presented the report on transfer pricing and corporate income tax accounting for the company Mercator, d.d., for 2010; the Audit Committee was informed about the activities of the project Horizontal Monitoring in the first half of 2011; the Audit Committee was presented the work of internal audit in 2010 and in the first half of 2011; the Committee also submitted an initiative to provide additional human resources for the internal audit department; the Audit Committee was informed about the activities of employee training and education; 6

10 the Audit Committee was presented the Comparative Analysis of the competition fast-moving consumer goods industry in the region for the year 2010; the Audit Committee was presented the report by the independent certified auditor on the progress and findings of the first stage of the audit conducted at the company Mercator, d.d., and the Mercator Group in 2011; the Audit Committee was presented the plan of internal audits at the Mercator Group companies in 2012; the Audit Committee was presented the Mercator Group IT strategy implementation report; the Audit Committee adopted its draft session schedule for the year Semiannual and Annual Report for 2011 The Supervisory Board was presented the non-audited Semi-annual Business Report of the company Mercator, d.d., and the Mercator Group for the period I-VI 2011 at their regular meeting held on 23 August The company announced the summary of non-audited Semi-annual report pursuant to the relevant legislation and the Rules and Regulations of the Ljubljana Stock Exchange, d.d. At its regular meeting held on 27 February 2012, the Supervisory Board discussed the audited non-consolidated and audited consolidated Annual Report for the year 2011, audited by the auditing company KPMG Slovenija, podjetje za revidiranje, d.o.o., Ljubljana. Annual Report was first discussed on 17 February 2012 by the company Audit Committee. Also present at this Audit Committee session was the certified auditor who provided any additional explanations required. On 16 February 2012, the auditing company issued an unqualified opinion on the unconsolidated and consolidated Annual Report. Supervisory Board did not have any objections to the certified auditor's reports and concurred with both. The Supervisory Board had no objections to the submitted Annual Report of the company Poslovni sistem Mercator, d.d., and the Mercator Group for 2011, and confirmed it unanimously at their meeting held on 27 February Proposal on the allocation of distributable profit Simultaneously with the confirmation and adoption of the 2011 Annual Report, the Supervisory Board also confirmed the proposal on the allocation of distributable profit to be proposed by the Management and Supervisory Board to the Shareholders Assembly for confirmation. Proposal on the allocation of distributable profit amounting to EUR 28,820, as at 31 December 2011 is as follows: a part of the distributable profit in the amount of EUR 16,944, shall be allocated for the payment of dividends, with the gross value of EUR 4.50 per ordinary share, remaining part of the distributable profit in the amount of EUR 11,876, shall remain undistributed. The Supervisory Board agrees with such proposal on the allocation of distributable profit, as the Board finds that the proposal is based on a correct decision adopted by the Management Board in view of the expected considerable aggravation of economic conditions in the market. 7

11 The demanding economic conditions, which continued to deteriorate in the second half of the year, had adverse effect on the business performance of Mercator Group. Supervisory board estimates, that in spite of such deteriorating macroeconomic conditions, the main goals and tasks were successfully completed in 2011, namely revenue growth, continuation of stable business operations and risk management. This Report was issued by the Supervisory Board pursuant to the provisions of Article 282 of the Companies Act. The Report is intended for the Shareholders Assembly. Ljubljana, 27 February 2012 Robert Šega Supervisory Board Chairman 8

12 Mercator Group markets Source for market shares: market research and own calculations. 9

13 MERCATOR GROUP PROFILE AND ORGANIZATION Mercator Group Profile Slovenia Current foreign markets New foreign markets Markets of operation in 2011 Slovenia Serbia, Croatia, Bosnia and Herzegovina, Montenegro Bulgaria, Albania Share of revenues 57.7% 41.8% 0.5% Competitive environment Sales program Trade is relatively stable and consolidated; the trend of increasing role of discount stores and drug stores persists. In addition to the traditional retailers, discount stores are further increasing the already high level of competitiveness. Strong pressure on prices is expected (due to increased pricesensitivity of consumers). Fast-moving consumer goods Home products Intersport Modiana Supplementary trade services: M Holidays, Maxen, M Mobil Trade is relatively less consolidated, but highly competitive. Many international retailers are present in addition to the regional and local players. Further consolidation of retail is anticipated, including the possibility of entry of new international retailers (discounters included). Fast-moving consumer goods Home products Intersport Modiana Number of stores The market is relatively underdeveloped, highly fragmented and traditional. Several local and international chains are present; particularly in Bulgaria, competition by international retailers is very strong. Purchasing power is low. Entry of international retailers is expected, as well as the primary consolidation of the market. Fast-moving consumer goods Intersport Store brands Growth strategy Adjustment and rationalization of the assortment; increase in the share of private label products and adjustment of private label management process; improvement in price competitiveness store modernization; comprehensive refurbishment of the customer loyalty system and adjustment of promotional activities. Expansion of retail network; adapting store formats to the local environment; high-quality, wide, competitive, and innovative offer; superior level of service; pleasant shopping experience; targeted promotional activities for loyal customers. Expansion of retail network; entering the markets of Macedonia and Kosovo; adapting store formats to the local environment; highquality, wide, competitive, and innovative offer; superior level of service; pleasant shopping experience; targeted promotional activities for loyal customers. 10

14 Mercator Group Activities The most important and extensive activity of the Mercator Group is retail and wholesale of fastmoving consumer goods. In order to round off the offer and meet the needs wishes, and expectations of all customers, the Group is expanding its core activity by offering supplementary services. Fast-moving consumer goods Mercator Group has developed a dense and extensive retail network throughout Slovenia and other countries, providing high-quality offer to meet every customer's desires, tastes, and needs. We are working to bring our shopping centers, hypermarkets, supermarkets, smaller neighbourhood stores, Hura! discount stores, and the web store as close as possible to the customers, and to provide a pleasant shopping experience. Home products Mercator Group is offering home products in stores called M Tehnika (appliances and electronics), M Gradnja (construction), and M Pohištvo (furniture); the offer of products is complemented by favourable terms of payment. The offer includes high-quality and reliable construction materials, modern furniture and equipment for every room in the home and office, modern home appliances and major appliances, and consumer electronics by globally renowned manufacturers. In order to accommodate the consumers' rapid pace of every day even better, we also offered technical consumer goods in our web store. Mercator Real Estate Due to the extent of its own real estate portfolio, real estate management is organized as a separate business field at the Mercator Group. The fundamental tasks of the real estate field include optimum management of real estate, development of retail network, and improving the attractiveness of shopping centers. Real estate field is also in charge of activities of monetizing a part of the real estate portfolio. Other operating activities In order to present a comprehensive offer to consumers, Mercator Group has been developing additional business activities that include the offer of sportswear at the Intersport stores, apparel at Modiana stores, Maxen self-service petrol stations, and M Holidays tourist services. Mercator Group also includes the manufacturing company Mercator-Emba, d.d. 11

15 Organization and Composition of the Mercator Group Mercator Group is conducting operations in seven markets of Southeastern Europe. Appropriate organization of the Group's activities provides the conditions for fast and efficient decision-making and adaptation to the economic circumstances in each market. To this end, the Group divided its functions into strategic and operational. Strategic functions involve devising strategies, standards, and rules applicable to the entire Group; operational fields, on the other hand, are responsible for the best possible performance of particular units within these strategies. The main reasons for reorganization include the necessity to improve local responsiveness in all markets, better adjustment to consumer needs, improved efficiency of our operations, the need to adapt the organization of complex international operations, and preparation for the option to monetize trade facilities. Mercator Group Poslovni sistem Mercator, d.d. Žiga Debeljak President of the Management Board Strategic business fields STRATEGIC MARKETING AND GLOBAL SUPPLY MANAGEMENT Mateja Jesenek Senior Vice President STRATEGIC FINANCE AND IT Melita Kolbezen Senior Vice President Operational business fields STRATEGIC HUMAN RESOURCES AND ORGANIZATION DEVELOPMENT Vera Aljančič Falež Senior Vice President MERCATOR TRADE SLOVENIA HARDWARE AND ELECTRONICS, WHOLESALE, AND SUPPLEMENTARY ACTIVITIES Peter Zavrl Senior Vice President MERCATOR TRADE SLOVENIA RETAIL MARKET PROGRAM Jože Sadar Senior Vice President MERCATOR TRADE SOUTHEASTERN EUROPE Stanka Čurović Senior Vice President MERCATOR REAL ESTATE Aleš Resnik Senior Vice President 12

16 As at 31 December 2011, Mercator Group included the following companies: MERCATOR GROUP MERCATOR TRADE SLOVENIA Poslovni sistem Mercator, d.d., Slovenia Mercator IP, d.o.o., Slovenia (100.0%) M.COM, d.o.o., Slovenia (100.0%)* M - Tehnika, d.d., Slovenia (100.0%)* MERCATOR TRADE SOUTHEASTERN EUROPE Mercator - S, d.o.o., Serbia (100.0%) Mercator - B, e.o.o.d., Bulgaria (100.0%) Mercator - H, d.o.o., Croatia (99.9%) Mercator - A, sh.p.k., Albania (100.0%) Mercator - BH, d.o.o., Bosnia and Herzegovina (100.0%) Mercator Makedonija, d.o.o.e.l., Macedonia (100.0%)* M - BL, d.o.o., Bosnia and Herzegovina (100.0%) Mercator - K, l.l.c., Kosovo (100.0%)* Mercator - CG, d.o.o., Montenegro (100.0%) MERCATOR REAL ESTATE Investment Internacional, d.o.o.e.l., Macedonia M - nepremičnine, d.o.o., Slovenia (100.0%) (100.0%)** Mercator - Optima, d.o.o., Slovenia (100.0%) OTHER OPERATING ACTIVITIES Intersport ISI, d.o.o., Slovenia (100.0%) Modiana, d.o.o., Slovenia (100.0%) Intersport S-ISI, d.o.o., Serbia (100.0%) Modiana, d.o.o., Serbia (100.0%) Intersport H, d.o.o., Croatia (100.0%) Modiana, d.o.o., Croatia (100.0%) Intersport BH, d.o.o., Bosnia and Herzegovina (100.0%) Modiana, d.o.o., Bosnia and Herzegovina (100.0%) Mercator - Emba, d.d., Slovenia (100.0%) M - Energija, d.o.o., Slovenia (100.0%) * The company has not yet commenced its business operations. ** Project-based real estate company which has not launched its activities yet. Branch Offices As at 31 December 2011, Mercator Group companies did not have any branch offices. Other Organizations The company Poslovni sistem Mercator, d.d., is the founder of the Mercator Humanitarian Foundation whose purpose is provision of humanitarian aid to Mercator employees. 13

17 Company Profile The company Poslovni sistem Mercator, d.d., is the controlling company of a group of associated companies (the Mercator Group), one of the largest corporate groups in Slovenia and the entire region of Southeastern Europe. Full name Poslovni sistem Mercator, d.d. Abbreviated name Mercator, d.d. Activity G Retail in non-specialized food retail outlets Registration number VAT number Court registry date 1 January 1990 Company share capital as at 31 December 2011 Number of shares issued and paid-up as at 31 December 2011 Share listing Management Board President Senior Vice Presidents Supervisory Board Chairman EUR 157,128, ,765,361 Ljubljana Stock Exchange, d.d., official market, prime market, code/symbol MELR Žiga Debeljak Mateja Jesenek, Melita Kolbezen, Vera Aljančič Falež, Peter Zavrl, Stanka Čurović Robert Šega Deputy Supervisory Board Chairwoman Jadranka Dakič 14

18 MERCATOR GROUP BUSINESS STRATEGY Vision To be the consumers' first choice when shopping for fast moving consumer goods and home products. Mission Mercator's mission is summarized in four points: 1) To provide optimum value for the consumers with our service and offer of fast moving consumer goods and home products. 2) To provide consumers with the best possible service in a pleasant shopping environment, by offering expert support of highly motivated employees. 3) To provide returns for our shareholders through growth and efficient operation. 4) To manage our operations in a way that improves the quality of life in our social and natural environment. Corporate Values Following are Mercator's corporate values: Responsibility Each employee is responsible for their work. Integrity We work honestly and fairly. Respect Each individual matters and deserves respect. Cooperation What one person cannot do, we can accomplish together. Learning We build on our knowledge and experience. Responsiveness Prompt response is our advantage. 15

19 Core Strategic Goals Following are Mercator Group's fundamental strategic goals: 1) In our domestic market (Slovenia): a. To retain the position of the leading fast moving consumer goods retailer. b. To consolidate the position of the second largest retailer of home products. c. To develop supplementary trade services related to our customer loyalty system. 2) In existing foreign markets (Serbia, Croatia, Bosnia and Herzegovina, Montenegro): a. To consolidate or attain the position of the second largest fast moving consumer goods retailer. b. To rank among the top three retailers of home products. c. To develop supplementary trade services related to our customer loyalty system. 3) In new foreign markets (Bulgaria, Albania, Macedonia, Kosovo): a. To rank among the top five retailers of fast moving consumer goods. SWOT analysis STRENGTHS Leading retailer in the Slovenian market with a highly established and reputable brand. Well-developed marketing mix (a broad assortment of renowned brands and private labels, targeted promotional activities etc.). Well-developed retail network, wholesale, and franchise system with several programs and store formats. Management of different customer segments (loyalty card, clubs etc.). Existence of supplementary services (M Holidays, Maxen etc.). SLOVENIA WEAKNESSES Suboptimal logistics system. Suboptimal retail network, particularly smaller older stores. Poorer perception of price competitiveness. OPPORTUNITIES Adjustment of the network of smaller stores to the characteristics of the local environment. Further development of the marketing mix (rationalization of assortment, increased share of private label products, improved competitiveness in terms of pricing etc.). Development of new store formats (convenience stores). Development of supplementary services: insurance, finance, telecommunications, energy engineering. Upgrade and expansion of the fast-moving consumer goods web store; linking various sales channels (web and traditional retail). THREATS Further expansion of retail network in an already saturated market. A drop in consumption as a result of harsh economic conditions in the market. 16

20 Current foreign markets (Serbia, Croatia, Bosnia and Herzegovina, Montenegro) STRENGTHS Ranking among leading retailers in all markets. Relatively developed network of major shopping centers in most markets. Presence with two complementary brands in all markets (Mercator and Roda/Getro/DP Marketi). Relatively well-developed marketing mix (a broad assortment of renowned brands and private labels, targeted promotional activities etc.). Well-developed retail network with several programs and store formats. Completed foundations for customer segment management (customer loyalty card). WEAKNESSES Still underdeveloped retail network in most markets, particularly in the segment of neighbourhood stores and supermarkets, along with certain voids in geographic coverage. In some markets, volume of operations is still insufficient to allow reaping the economies of scale for long-term competitiveness. Poorer pricing perception regarding Mercator store formats. Suboptimal logistics infrastructure. OPPORTUNITIES Expansion of operating segments through twotier branding system (Mercator and Roda/Getro/DP Marketi). Further expansion and positioning in the regions where we are not yet present. Setting up a franchise system and development of wholesale activities. Further development of the marketing mix (adjusting the assortment, increasing the share of private label products, improving competitiveness at Mercator store formats etc.). Accession of these countries to the EU and resulting macroeconomic and political stabilization. Reaping synergies in procurement and logistics at the regional level. THREATS Very strong competition by both multinational and local retailers in some markets (particularly Croatia). Entry of new international players, particularly discount retailers. Economically less stable markets, greater political risks in some of them. Exceptionally low purchasing power and undeveloped modern stores in some regions. Potential foreign exchange and other macroeconomic risks. 17

21 New foreign markets (Bulgaria, Albania, Macedonia, Kosovo) STRENGTHS Retail units already present in two markets (Bulgaria, Albania); in others, preparation for entry are under way. In the middle run, Mercator could reap the economies of scale and competitive advantages as a strong regional player. WEAKNESSES Relatively weaker investment capacity compared to large trade chains (essential particularly in Bulgaria). Retail network underdeveloped or in the early stages of development. Volume of operations still insufficient to allow reaping the economies of scale. Underdeveloped logistics operations. Relatively high macroeconomic and political risks. Less knowledge of cultural idiosyncrasies than in the existing markets. OPPORTUNITIES Opportunities to grow and establish an important role in the market. Possibility of growth through strategic business combinations in some markets. Economic integration of the Southern Balkans into the European streams. Experience with launches in other countries of the region; offer of supplementary services. Reaping regional synergies. THREATS Macroeconomic and political instability as a result of transition (unemployment, bureaucracy, unstable financial systems, considerable share of grey and black market, corruption etc.). Low market potential outside major cities, and low purchasing power of local population. 18

22 MERCATOR GROUP PERFORMANCE HIGHLIGHTS FOR THE PERIOD Summary of Mercator Group operations in the period INCOME STATEMENT Index 2011/2010 Revenue (in EUR 000) 1,749,206 2,064,583 2,445,258 2,708,560 2,643,315 2,781,604 2,928, Results from operating activities (in EUR 000) 30,401 50,776 91, ,327 71,842 94,505 88, Profit before income tax (in EUR 000) 20,588 36,724 54,475 49,993 25,196 40,344 31, Profit for the year (in EUR 000) 13,626 30,149 43,814 40,761 21,119 30,387 23, Gross cash flow from operating activites (in EUR 000) 111, , , , , , , Gross cash flow from operating activites before rental expenses (in EUR 000) 117, , , , , , , FINANCIAL POSITION Total assets (in EUR 000) 1,533,457 1,861,175 2,070,473 2,540,122 2,476,348 2,608,854 2,647, Equity (in EUR 000) 551, , , , , , , Net financial debt (in EUR 000) 655, , , , , ,081 1,091, INVESTMENT ACTIVITIES Capital expenditure (in EUR 000) 238, , , , , , , Long-term financial investments (in EUR 000) 39, ,467 49,221 15,104 1, ,248 - EMPLOYEES Number of employees as at the end of the period 16,372 19,539 20,893 21,636 21,404 23,482 24, Number of employees based on hours worked 15,086 17,101 19,099 20,438 20,266 21,632 22, FINANCIAL INDICATORS Revenue per employee based on hours worked (in EUR 000) Value added per employee per hours worked (in EUR 000) Return on sales 0.8% 1.5% 1.8% 1.5% 0.8% 1.1% 0.8% 73.6 Return on equity 2.7% 5.2% 6.8% 5.6% 2.6% 3.9% 3.0% 77.9 Net financial debt / equity Loan-to-value (LTV) 74.0% 69.3% 62.5% 62.6% 58.4% 56.6% 64.0% Net financial debt / gross cash flow from operating activities Gross cash flow from operating activites / revenue 6.4% 6.6% 6.6% 6.5% 6.3% 6.1% 5.5% 90.3 Gross cash flow from operating activites before rental expenses / revenue 6.7% 6.9% 7.0% 7.3% 7.2% 7.4% 7.0% 95.5 SHAREHOLDERS INFORMATION Market value per share as at the end of the period (in EUR) Dividend per share (in EUR) Earnings per share (in EUR) NUMBER OF COMPANIES IN THE GROUP Number of companies in the group as at the end of the period

23 MAJOR EVENTS IN 2011 RETAIL NETWORK DEVELOPMENT In 2011, EUR 119,715 thousand was invested in retail network development. Hence, 96 new units were acquired in all markets of our operations combined, spanning a total area of 131,635 square meters; the figure includes both own real estate and operating lease. CHANGES IN THE COMPOSITION OF MERCATOR GROUP As of 1 September 2011, the new macro-organizational structure for the Mercator Group took effect. The purpose of the reorganization was to allow efficient progress of strategic projects such as Refreshment of the offer of market program and Establishing a hardware and electronics store chain. The extensive field of Mercator Trade Slovenia were split into business fields each of which is now more homogeneous in terms of organization: FMCG Program Retail, and Hardware and electronics, wholesale, and supplementary activities. As of 1 September 2011, Mr Jože Sadar was appointed to manage the business field FMCG Program Retail; thus, he became a senior vice president in charge of the said field. The business field hardware and electronics, wholesale, and supplementary activities is headed by Mr Peter Zavrl whose responsibility thus also includes the management of companies Mercator-Emba, d.d., apparel chain Modiana, and sportswear chain Intersport. Consistently with the new organizational structure, the company M - Tehnika, d.d., was founded in Slovenia on 8 November 2011 as an independent business entity, or legal person. Through subsidiaries, this company will also be present in other Southeastern European markets of Mercator Group operations. On 9 August 2011, the company Poslovni sistem Mercator, d.d., became the 100-percent shareholder of the company En Plus, d.o.o. On 28 September 2011, this company was renamed to M - Energija, d.o.o. On 16 February 2011, the company Poslovni sistem Mercator, d.d., signed an agreement to dispose of its 100-percent shareholding in the company Eta, živilska industrija Kamnik, d.d., Kamnik. The agreement is effective as of 30 June STRATEGIC BUSINESS COMBINATIONS Slovenia On 9 August 2011, the agreement took effect based on which the company Poslovni sistem Mercator, d.d., became the 100-percent shareholder of the company En Plus, d.o.o. On 28 September 2011, the company was renamed to M - Energija, d.o.o. This strategic combination is consistent with Mercator, d.d., strategy of developing supplementary trade service for its customers. On 30 December 2011, Poslovni sistem Mercator, d.d., signed an agreement based on which the company will, subject to meeting the conditions specified in the agreement, become the 100- percent shareholder of the company Vesna, Trgovsko podjetje, d.d. Prior to this agreement being signed, the company Mercator, d.d., had held 45.5 percent of the company share. With this strategic combination, Mercator, d.d., will acquire 7 sales units in Northeastern Slovenia, which have thus far operated as Mercator franchise units. 20

24 Serbia On 5 April 2011, the agreement between Mercator - S, d.o.o., and the company Coka, d.o.o., took effect, based on which trade operations of the companies in the Coka Group in the Serbian market were transferred to Mercator - S, d.o.o., on a long-term lease; this includes a sublease of 22 trade facilities with total sales area of over 12 thousand square meters. All 22 stores were opened in On 29 July 2011, the Mercator - S, d.o.o., and the companies Familija Marketi, d.o.o., and Robne kuće Beograd, d.o.o., signed an agreement on the transfer of trade operations and employment contracts of the company Familija Marketi, d.o.o., to the company Mercator - S, d.o.o. In addition, Mercator - S, d.o.o., obtained on a long-term lease 27 trade facilities of the company Robne kuće Beograd, d.o.o., spanning over a total of 22 thousand square meters. Of the 27 trade facilities obtained, 16 were already in operation in 2011; others are scheduled for opening in Bosnia and Herzegovina On 20 October 2011, the company Mercator - BH, d.o.o., and the company Drvopromet, d.o.o., signed the agreements on strategic combination, according to which Mercator - BH, d.o.o., subject to meeting the conditions stipulated therein, will take over the trade operations of the company Drvopromet, d.o.o., and obtain on a long-term operating lease 63 retail "DP Marketi" outlets held by the company Drvopromet, d.o.o., with a total combined sales area of over 24 thousand square meters. In 2011, 36 Drvopromet, d.o.o., stores were in operation; others are scheduled for opening in Montenegro On 27 January 2011, the agreement took effect, according to which the company Mercator - CG, d.o.o., took over the trade operations and employees of the companies Pantomarket, d.o.o., and Plus Commerce, d.o.o., as well as take on a long-term lease 77 stores owned by these two companies. All leased stores were already in operation in CORPORATE GOVERNANCE At their session held on 19 May 2011, the Workers Council elected two new Supervisory Board members to represent the employees. Sandi Leban and Ivan Valand were appointed for a fouryear term. On 20 December 2011, Matjaž Kovačič irrevocably resigned as a Supervisory Board member of the company Poslovni sistem Mercator, d.d. At the 17th regular Shareholders Assembly of Poslovni sistem Mercator, d.d., held on 22 June 2011, company shareholders confirmed the proposal on dividend payment in the amount of EUR 8.00 gross per ordinary share, and granted discharge to the company Management Board and Supervisory Board. CORPORATE ACTIVITIES In March, we held the 11th meeting of Mercator Group financial partners, which was attended by approximately 70 representatives of commercial banks, leasing companies, Tax Administration of the Republic of Slovenia, and other financial institutions. In April, marketing days were held for the twelfth consecutive year. This traditional meeting of Mercator management with major suppliers and partners from all markets of Mercator operations was attended by 420 representatives of Mercator suppliers from Slovenia and Southeastern Europe. 21

25 Mercator investor relations activities included participation at and organization of various meetings throughout the year, which are attended by Mercator investors and financial analysts. Such events include the following: We took part in the Days of Slovenian Capital Market held for promotion of Slovenian companies among domestic and international portfolio investors. We took part in webcast presentations held by the Ljubljana Stock Exchange in order to present the company to investors and stock market analysts. We took part in the Investor Conference in Stockholm where we presented to foreign companies the operations and performance of the Mercator Group in 2010, along with the medium term business plan for the period Mercator is also fostering sound relations with investors by taking part in the Pan-Slovenian Shareholders Association (VZMD) and the Minor Shareholders Together We Are Stronger society ("Društvo Mali delničarji Skupaj smo močnejši"). In order to promote the international recognition of its stock, the company Poslovni sistem Mercator, d.d., published a proxy authorization form and the Convocation of its Shareholders Assembly on the EuroVote system for the second time in The project was established in order to promote and facilitate international voting through proxies in the European Union, via the Euroshareholders web platform. AWARDS RECEIVED The World Finance magazine presented Mercator with an award for excellent corporate governance in Slovenia as the company was found to be successful in serving the interests of all stakeholders in the best possible way despite the harsh business environment. Each year, this magazine conducts a survey on excellence in business and singles out those corporations, companies, business groups, or organizations that set the standards of success and define the best practice in the world of finance and business. This year, we also won our second Ruban d'honneur award, a ribbon of honour for corporate and environmental sustainability. We also won the prestigious European Business Award for corporate sustainability. The European Business Award celebrates and promotes excellence, best practice and innovation in the European business community. In one of Europe's largest consumer surveys Trusted Brand, conducted globally by the Reader's Digest Magazine, Mercator won the award in the Shopping Center category for the fifth straight year in Pan-Slovenian Shareholders Association presented the Shareholder-Friendly Company award to the company Poslovni sistem Mercator, d.d. We view this award as evidence of our success in providing complete information to all shareholders, treating them equally, and thus also protecting the interest of minority shareholders. We also received the full Family-Friendly Company certificate in Slovenia. 22

26 In the best Annual Report contest held each year by the Finance daily paper, the company Poslovni sistem Mercator, d.d., received the award for the Best Annual Report on risk management for the year The award confirmed our efforts to provide a clear picture of the Mercator Group and the risk management system to the entire financial community. Mercator's subsidiary Mercator IP, d.o.o., won the Best Annual Report among small and medium enterprises award for the year Mr Dean Čerin, executive director of strategic finance and risk management at Mercator, was presented the Finance daily paper's Financial Manager of the Year award. The award stresses the role of financial managers in a company and commends their responsible and professional work. The Marketing Manager of the Year 2011 award, presented by the Slovenian Marketing Association, went to Ms Mojca Avšič, executive director of strategic marketing at Mercator. The Marketing Manager of the Year award is presented to marketing professionals who asserted marketing philosophy to contribute to business success of their companies. It is a recognition of years of professional work that resulted in palpable business success. 23

27 CORPORATE GOVERNANCE STATEMENT Pursuant to Article 70, Paragraph 5 of the Companies Act, the Business Report of the company Poslovni sistem Mercator, d.d., also includes a Corporate Governance Statement. Reference to the Corporate Governance Code The governance of the company Poslovni sistem Mercator, d.d., is based on legal provisions, sound business practice, and the principles of the Corporate Governance Code. Corporate Governance Code (Official Journal of the Republic of Slovenia, No. 118/2005, dated 17 December 2005, amended on 5 February 2007, revised and adopted on 8 December 2009, hereinafter referred to as "the Code") is available on the Ljubljana Stock Exchange website at in Slovenian and English language. The company is using the Code and complying with it voluntarily. Management and Supervisory Board of the company Poslovni sistem Mercator, d.d., headquartered at Dunajska cesta 107, Ljubljana, hereby submit this statement of compliance with the Code, which is also a constituent part of the 2011 Annual Report. It is available at company website at Compliance with the provisions of the Code Management Board and Supervisory Board of the company Poslovni sistem Mercator, d.d., have reviewed the corporate governance at the company Poslovni sistem Mercator, d.d., and the Mercator Group, and the compliance thereof with the Code, and prepared a new statement which reflects the actual situation of corporate governance at the company Poslovni sistem Mercator, d.d., and the Mercator Group. It was found that corporate governance at the company Poslovni sistem Mercator, d.d., and the Mercator Group complies with the provisions of the Corporate Governance Code, with particular deviations explained below. Relations with shareholders Recommendation 4.2: Given the fact that major shareholders communicate their investment plans on their own initiative, the company did not invite them separately to publicly disclose their management policies with regard to their investment in publicly traded stock corporation. Recommendation 5.2: The company publicly announced on its website all information about lodging proxies for voting at particular Shareholders Assemblies; in addition, each shareholder was informed individually in this regard. However, the company did not announce on its website the information on the cost of organized lodging of voting proxies at particular Shareholders assemblies, although it did make sure the most competitive provider of these services was hired. Recommendation 5.6: Shareholder's Assembly did not vote on the Supervisory Board members individually. Supervisory Board Recommendation 7.1: Some Supervisory Board members have not produced documentation to prove their specialized professional or expert competencies for Supervisory Board membership. Nevertheless, they qualify for such engagement due to professional competencies or experience. 24

28 Recommendation 8: All Supervisory Board members have signed a special statement specifying their position on meeting each of the independence criteria. However, the company did not announce the signed statements on its website; the statements are deposited at the company headquarters. The company Mercator, d.d., shall continue to observe the recommendations of the Code in the future, looking to implement as far as possible the non-binding recommendations of the Code and thus to improve its corporate governance system. Description of key characteristics of internal control and risk management at the company, with regard to the financial reporting process In a rapidly changing business environment, efficient and successful business decision-making requires quality information on a timely basis. Provision of financial information is the responsibility of the company Management Board. Risks occurring in the process of preparation and compilation of such information are managed in the following ways: clear and concise accounting practices and their strict implementation, completely synchronized accounting policy throughout the entire Group, efficient organization of the accounting function at each company, as well as at the Mercator Group level, comprehensive and extensive disclosures and explanations, timely preparation, detailed treatment, and suitable concept in terms of contents and substance in statements relevant for business decision-making, preparation of financial statements in line with the International Financial Reporting Standards (IFRS), regular internal and external audits and reviews of business processes and operations. Mercator Group companies compile their financial statements pursuant to the International Financial Reporting Standards (IFRS), making sure that the financial position, income, and cash flows are presented fairly and consistently by taking into account the actual effects of business events. Many internal controls have been put into place in order to support and facilitate these activities. The purpose of internal controls in accounting is to manage the risks pertaining principally to the following: credibility of accounting information based on valid and credible bookkeeping documents, and evidence of the existence of business events, complete with a clear presentation of all information relevant for correct bookkeeping of such events; accuracy of financial data which is appropriately reviewed before announcement; controls are conducted at several levels by comparing the data of analytic bookkeeping to the data in the bookkeeping documents, as well as to the data of business partners or actual physical status of assets, and reconciliation between the analytical accounting and the main ledger; completeness and timeliness of financial information, provided by uniform accounting policies and precisely defined procedures and recording deadlines as laid down in the accounting rules and regulations of the Mercator Group, and in other internal acts of the Group companies; also important is appropriate delineation of tasks and responsibilities. The information system pays a vital role in the provision of quality accounting information from the aspect of the use of modern technology. Most Mercator Group companies employ SAP as the main IT system. It is suitably integrated with other IT solutions at the Group companies. Operation of the SAP system and the internal controls integrated therein are checked annually in cooperation with authorized third-party service providers. 25

29 All this, however, is only possible with highly professional, meticulous, and persistent employees complying with the relevant legislation and sharing Mercator values. Therefore, a lot of care is devoted to their regular education. We provide both internal and third-party professional education, as well as training to acquire the "soft" skills. Audit Pursuant to the Companies Act, audit of financial statements is mandatory for Mercator Group companies. The purpose of the audit is to increase the level of trust among the users of financial information. The auditor applies appropriate audit procedures and methods to review the financial statements and passes an opinion as to whether they are compiled in compliance with the appropriate framework of financial reporting in all relevant aspects. External auditing At the 17th regular Shareholders Assembly, company shareholders appointed the auditing company KPMG Slovenija, podjetje za revidiranje, d.o.o., as the auditor for the company Mercator, d.d., and the Mercator Group for the year Auditing company KPMG Slovenija, podjetje za revidiranje, d.o.o., employs the most recent audit methodology as laid down in the KPMG Audit Manual (KAM) which is prepared in compliance with the latest national and international auditing standards, as well as to support and improve the quality of the audit and contribute to its efficiency. Internal auditing Internal audit has been in operation at the Mercator Group as an independent support function since It is organized as a part of the controlling company. The basic function of internal audit is perpetual development and monitoring of the internal control systems from the aspect of managing, or hedging, all sorts of operating and other risks to which the Mercator Group is exposed. The aim of internal audit is to provide assistance to the top management and other levels of management in the improvement of Mercator Group asset management, enhancement of quality, sound and prudent management and effective business operations within the scope of adopted strategies, business policies, and business and financial plans. Internal audit includes regular and extraordinary auditing of particular areas of operations of the Mercator Group companies, as well as collaboration with external auditors. In 2011, the following regular audits were conducted: general audits at the following companies: Mercator - S, d.o.o., Mercator - H, d.o.o., Mercator - CG, d.o.o., Mercator - BH, d.o.o., M - BL, d.o.o., Mercator - B, e.o.o.d., and Mercator - A, sh.p.k., tax audits at the following companies: Mercator - CG, d.o.o., Mercator - BH, d.o.o., Intersport ISI, d.o.o., Modiana, d.o.o., M - BL, d.o.o., Intersport H, d.o.o., Mercator - Emba, d.d., Modiana, d.o.o., Zagreb, Mercator - B, e.o.o.d., Modiana, d.o.o., Sarajevo, Intersport BH, d.o.o., and Mercator - Optima, d.o.o., review of the procurement of non-trade goods and services at the following companies: Mercator, d.d., (in the field of maintenance, minor refurbishments and investments, and in IT), Mercator - S, d.o.o., Mercator - H, d.o.o., Mercator - BH, d.o.o., and M - BL, d.o.o., review of commitments to the Competition Protection Office of the Republic of Slovenia, review of implementation of the measures and financial effects of the project of optimizing the Mercator Group operations, review of the risk management measures at the Mercator Group. 26

30 In addition to regular audits, we also carried out in 2011 an extraordinary audit of merchandise operations with consignment goods by some business partners at the company Mercator, d.d. Audit Committee The Supervisory Board of the company Mercator, d.d., appointed the Audit Committee in 2008, pursuant to Article 280 of the Companies Act. The central task of the Audit Committee is to monitor the efficiency of internal controls at the company, operation of internal audit and the risk management process, and the progress of mandatory audit of annual and consolidated financial statements, as well as to control the accuracy and validity of financial information submitted by the company. The Audit Committee reports on their work to the Supervisory Board. Horizontal Monitoring On 5 October 2010, the company Mercator, d.d., signed an agreement with the Tax Administration of the Republic of Slovenia to take part in the pilot project of Horizontal Monitoring. The company's participation in the Horizontal Monitoring pilot project started on 1 January 2011 and it will presumably last two years. The main benefit that the company expects from taking part in the project is higher certainty regarding taxation. In 2011, the operation of internal controls was reviewed in the field of value-added tax accounting. In addition, the Tax Administration responded instantly and professionally to the questions submitted by the company and thus contributed to the mitigation of tax risks regarding major business decisions. For 2012, audit of internal controls is planned in the field of personal taxes and the corporate income tax. Composition of major holders of company securities as at 31 December 2011 Major Shareholders Country Number of shares Share 1 Pivovarna Union, d.d. Slovenia 464, % 2 NLB, d.d. Slovenia 404, % 3 Pivovarna Laško, d.d. Slovenia 317, % 4 UniCredit banka Slovenija, d.d. Slovenia 301, % 5 Société Générale-Splitska banka, d.d. Croatia 254, % 6 Nova KBM, d.d. Slovenia 197, % 7 GB, d.d. Slovenia 142, % 8 Prvi faktor - faktoring, d.o.o. Serbia 125, % 9 Abanka Vipa, d.d. Slovenia 103, % 10 Radenska, d.d. Slovenia 96, % Total 2,409, % Restriction of voting rights With the decision No / dated 23 September 2010, the Securities Market Agency prohibited NLB, d.d., Banka Celje, Abanka Vipa, d.d., Gorenjska banka, d.d., NKBM, d.d. and Banka Koper, d.d., to exercise the voting rights carried by all the corresponding shares of the target company Poslovni sistem Mercator, d.d., and MELR shares, in 2011, due to concerted action and violation of exceeding the legal takeover threshold. 27

31 Company rules on appointment and replacement of members of managerial and supervisory bodies and changes to the Articles of Association The company Poslovni sistem Mercator, d.d., is represented by the Management Board. The Management Board consists of six members. Its purpose is to diligently and responsibly pursue the goals laid out, in compliance with the Corporate Governance Code. The number of Management Board members and their respective fields of work and responsibilities are defined as proposed by the president of the Management Board and confirmed by the Supervisory Board with the adoption of the Management Board Act. Pursuant to the Supervisory Board resolution adopted at the session held on 30 March 2010, President of the Management Board and Senior Vice Presidents of the company Poslovni sistem Mercator, d.d., were appointed for a five-year term beginning on 1 January All Management Board members of the company Poslovni sistem Mercator, d.d., signed their respective fixed-term employment agreements with the company for a period of five years, which is consistent with the duration of their terms. The fundamental function of the Supervisory Board is to supervise the management of company affairs. Pursuant to the Corporate Governance Code, Supervisory Board members are independent in their work and decision-making. The Supervisory Board includes members who represent the interests of the shareholders and are appointed by the Shareholders Assembly, and members who represent the interests of the employees and are appointed pursuant to the Worker Participation in Management Act, by the company Workers Council. Pursuant to Shareholders Assembly resolution dated 13 July 2010, Supervisory Board of the company comprises twelve members. Changes to the Articles of Association are adopted by the Shareholders Assembly with a threequarter majority of the represented share capital. Authorization to the Management Board to issue or acquire treasury shares, and approved capital At its 16th regular meeting held on 13 July 2010, the Shareholders Assembly issued to the company an authorization to acquire and dispose of treasury shares, as follows: the authorization is valid for a period of 36 months following its issue, maximum number of treasury shares that may be acquired is 376,536; however, the total share of the shares acquired based on this authorization, combined with any other treasury shares previously held by the company, shall not exceed at any moment 10 percent of the company share capital, acquisition price shall not exceed the average daily share price of the company as traded on the Ljubljana Stock Exchange in the most recent full calendar month before the day of share acquisition, plus 10 percent; in addition, the share price shall not be lower than EUR 41.73, which is the amount each share represents in the company share capital; the company may only acquire treasury shares in the organized capital market, the price at which the company shall dispose of treasury shares shall not be lower than their average acquisition price, and not lower than the average daily price per share as traded at the Ljubljana Stock Exchange, d.d., in the most recent full calendar month before the day of their disposal. Subject to certain conditions, the company Mercator, d. d., has the option to issue approved capital in the amount of up to 20 percent of the current company share capital, by 12 July

32 Shareholders Assembly and shareholder rights Shareholders Assembly is the superior body of governance through which the shareholders assert their rights with regard to the company affairs. The company Poslovni sistem Mercator, d.d., is committed to full compliance with the principle of equal treatment of shareholders, allowing them to exercise their legal or statutory rights. All shareholders shall have equal voting rights. As a rule, Company Management Board shall convene the Shareholders Assembly of Poslovni sistem Mercator, d.d., once per year. The convocation shall be announced at least 30 days before the Assembly meeting. The convocation of the Assembly shall be announced in the Delo daily paper, and in the electronic information dissemination system of the Ljubljana Stock Exchange, d.d., called SEOnet, no less than 30 days prior to the Assembly date. In addition to the location and time of the Assembly, the convocation, or announcement defines the conditions for taking part in the assembly and asserting the voting right, as well as the agenda and proposed resolutions. A shareholder or a proxy may assert the voting right at the Assembly by presenting a written authorization. Convocation of the Assembly, agenda, proposed resolutions with the relevant explanations, and the Assembly resolutions, are also announced on the official company website at In 2011, 17th regular Shareholders Assembly took place with percent of total shares with voting rights present. The Assembly included a presentation of the 2010 Annual Report, the Supervisory Board Report on the 2010 Annual Report Audit, the information on the compensation paid to members of managerial and supervisory bodies. The Assembly voted on the allocation of distributable profit for 2010 and dividend payment, and granted discharge to the Management Board and Supervisory Board. Furthermore, the Shareholders Assembly appointed the certified auditing company for

33 Managerial and supervisory bodies and their committees MANAGEMENT BOARD: President of the Management Board Žiga Debeljak, MScBA Education: MScBA, BS Computer Engineering Fields of responsibility: coordinating the work of the Management Board of Poslovni sistem Mercator, d.d., and the Mercator Group; management and coordination of operational real estate management activities, together with Mr. Aleš Resnik, Senior Vice President in charge of this field; management and coordination of operational business field Mercator trade Slovenia retail market program, together with Mr. Jože Sadar, Senior Vice President in charge of this field (as of 1 September 2011). Strategic Marketing and Global Supply Management, Senior Vice President Education: MBA, BA Economics Fields of responsibility: management and coordination of strategic marketing of products and services, strategic market research and development, global supply and supplier relations, public relations. Mateja Jesenek, MBA Strategic Finance and IT, Senior Vice President Education: MScBA, BA Economics Fields of responsibility: management and coordination of strategic finance, strategic controlling, Group accounting and internal audit, and IT and telecommunications. Melita Kolbezen, MScBA 30

34 Strategic Human Resources and Organization Development, Senior Vice President Education: LL.M., LL.B. Fields of responsibility: management and coordination of strategic human resource management, corporate organization, and corporate legal affairs. Vera Aljančič Falež, LL.M. Mercator Trade Slovenia Hardware and Electronics, Wholesale, and Supplementary Activities, Senior Vice President Education: BA Economics Fields of responsibility: management and coordination of operational trade activities and related activities in Slovenia (until 1 September 2011); management and coordination of operational business field Mercator Trade Slovenia hardware and electronics, wholesale, and supplementary activities in Slovenia (as of 1 September 2011); Peter Zavrl Mercator Trade Southeastern Europe, Senior Vice President Education: MScBA, BA Economics Fields of responsibility: management and coordination of the operational business area Mercator Trade Southeastern Europe. Stanka Čurović, MScBA Senior Vice President for the operational business field Mercator Trade Slovenia Retail Market program Education: BA Economics Fields of responsibility: Senior Vice President managing and coordinating the operational business field Mercator Trade Slovenia Retail program; member of the Mercator Group Management Board Council. Jože Sadar 31

35 Senior Vice President for the operational business field of real estate Education: BA Economics Fields of responsibility: Senior Vice President managing and coordinating the operational real estate management activities. member of the Mercator Group Management Board Council. Aleš Resnik Senior Vice President for international affairs Education: LL.B. Fields of responsibility: Senior Vice President and advisor to the President of the Management Board for international affairs; member of the Mercator Group Management Board Council. Stanislav Brodnjak MEMBERS OF THE MERCATOR GROUP MANAGEMENT BOARD COUNCIL Mercator Group Management Board Council includes all Management Board members, Senior Vice Presidents Mr Jože Sadar and Mr Aleš Resnik, and advisor to the President of the Management Board Mr Stanislav Brodnjak. Presiding over the Mercator Group Management Board Council is the President of the Management Board, who convenes the Council session according to his discretion, usually twice per month. From left to right: Jože Sadar, Peter Zavrl, Stanka Čurović, Vera Aljančič Falež, Žiga Debeljak, Mateja Jesenek, Melita Kolbezen, Stanislav Brodnjak, and Aleš Resnik. 32

36 SUPERVISORY BOARD MEMBERS: Supervisory Board Chairman Robert Šega Education: BS and MS Electrical Engineering and Electronics Employment: Pivovarna Laško, d.d., advisor to the Management Board Membership in Supervisory or Management Boards of other companies: Supervisory Board member at Delo, d.d. Supervisory Board Members Representing Shareholders Jadranka Dakič, Deputy Chairwoman Education: BA Economics Employment: Deputy Mayor of Municipality of Ljubljana - non-professional (until 4 December 2011); Director of the company LANEA, d.o.o., Ljubljana Membership in Supervisory or Management Boards of other companies: Supervisory Board Chairwoman at Javni holding Ljubljana, d.o.o. (Public Holding Ljubljana); Supervisory Board Chairwoman at Termoelektrarna toplarna Ljubljana, d.o.o. (until 12 September 2011). Stefan Vavti Education: MA Economics Employment: executive director for private banking in Central and Eastern European countries, UniCredit Bank Austria, AG. Kristjan Verbič Education: MA Sociology; professor of philosophy and sociology Employment: President of the Pan Slovenian Shareholders Association. Matjaž Kovačič (member until 20 December 2011) Education: BA Economics Employment: President of the Management Board, Nova KBM, d.d. (until 1 January 2012). Membership in Supervisory or Management Boards of other companies: Supervisory Board Chairman at Zavarovalnica Maribor, d.d.; Supervisory Board Chairman at Adria bank, d.d.; Chairman of board of directors at Credy banka, a.d.; Deputy Supervisory Board Chairman at the Council of the Bank Association of Slovenia. Miro Medvešek Education: BA Economics Employment: Director of the company Svetovanje M, d.o.o. Membership in Supervisory or Management Boards of other companies: Supervisory Board Chairman at the company Commerce, d.d. 33

37 Supervisory Board Members Representing Employees Jože Cvetek Education: BA Economics Employment: retired. Janez Strniša Education: BA Economics Employment: Head of department at Mercator, d.d. Mateja Širec Education: BA Sociology Employment: Head of department at Mercator, d.d. Ivica Župetić Education: BA Economics Employment: advisor to the executive director of real estate projects; employed at Mercator- H, d.o.o. Ivan Valand Education: BA Economics Employment: store manager at hypermarket Maribor. Sandi Leban Education: BA Economics Employment: security expert for Western Slovenia. Gross monthly payment for performing the tasks and responsibilities in the Supervisory Board shall amount to EUR 2, for the Chairperson, and EUR 1, for other members. In addition, Supervisory Board members shall receive attendance fees in the amount of EUR net per session for the Chairperson, and EUR net for other members, plus reimbursement for travel expenses. All Supervisory Board members have signed a special statement specifying their position on meeting each of the independence criteria. All Supervisory Board members have declared that they are independent members. Information on activities and composition of the Audit Committee The Supervisory Board of the company Mercator, d.d., appointed the Audit Committee in 2008, pursuant to Article 280 of the Companies Act. The activities of the Audit Committee are aimed at further improvement of performance of the supervisory function at the company. The Committee's main tasks include the following: controlling the validity and accuracy of financial information reported by the company; controlling the operation of the risk management system, internal audit, and the system of internal controls; evaluating the composition of the Annual Report, including the proposal for the Supervisory Board; taking part in defining the main fields of auditing; taking part in the selection of an independent third-party auditor and preparing the agreement to be signed between the auditor and the company; supervising the independence, neutrality, and efficiency of independent third-party auditors; supervising the nature and scope of non-auditing services. 34

38 The Audit Committee at the company Poslovni sistem Mercator, d.d., consists of three members. Two members are also Supervisory Board members; the third member is an independent expert on accounting and auditing. In 2011, the Audit Committee continued to include the following members: chairwoman Ms Jadranka Dakič (Supervisory Board member) and two members: Mr Jože Cvetek (Supervisory Board member) and Mr Peter Ribarič (independent expert on accounting and auditing). The Audit Committee is performing its duties pursuant to the provisions of the Companies Act. Complying with the Companies Act, the Supervisory Board, upon the foundation of the Audit Committee appointed the members and specified their compensation which amount to one half of the monthly compensation paid to the Supervisory Board chairperson or members respectively. For the performance of their tasks and duties Audit Committee members receive monthly payments, as well as session fees. Monthly compensation paid to the Audit Committee chairperson amounts to EUR 1, gross; the other two members receive EUR gross per month each. Session fee amounted to EUR net for the Audit Committee members and EUR net for the chairwoman. All amounts remained the same relative to the year Management of Subsidiaries Mercator Group consists of the parent company Poslovni sistem Mercator, d.d., and its subsidiaries in which the parent company holds, directly or indirectly, the majority interest or the majority of voting rights. The parent company, with single management, controls the subsidiaries and pursues the principles of improving business performance in each subsidiary and the Group as a whole. The company Poslovni sistem Mercator, d.d., as the parent company of the Mercator Group, operates by the principles of improving business performance in each subsidiary and the Group as a whole, common harmonized development of the Group, optimum supply of fast-moving consumer goods and services in all markets of Group's operations, improving competitiveness, efficient allocation and coordination of material flows, harmonized and coordinated procurement and sales at home and abroad, financing of current operations and development by using the available funding at a group level, security, risk and liquidity management, and generating maximum returns on financial investments. In Slovenian and international subsidiaries incorporated as limited companies (d.o.o.), the parent company Management Board performs the function of company Assembly, or the function of subsidiary Supervisory Board, with involvement of either all or only some of the parent company Management Board members. Members of the supervisory bodies at subsidiaries do not receive any additional compensation for performance of such functions. 35

39 Management Responsibility Statement The company Management Board is responsible for the compilation of the Annual Report for Poslovni sistem Mercator, d.d., and the Mercator Group for the year 2011, including all relevant financial statements which, to the best knowledge of the Management Board, present truly and fairly the development and performance of company operations and the company's financial position, including the description of all significant types of risk to which the company, any other companies included in the consolidation, or the Group as a whole, are exposed. The Management Board confirms that the financial statements were compiled by applying duly and consistently the relevant accounting policies; that the accounting estimates were made on the principles of fair value, prudence and sound management; and that financial statements represent a true and fair view of the company's financial position, and of the results of its operations in The Management Board shall also be responsible for appropriate and accurate accounting, and adoption of relevant measures to protect its property and other assets. The Management Board hereby confirms that the financial statements, including all and any notes, are compiled based on the going concern assumption and in compliance with relevant legislation and International Financial Reporting Standards as adopted by the European Union. The company Management Board hereby adopts and confirms the Annual Report for the Company Poslovni sistem Mercator, d.d., and the Mercator Group for the Year Ljubljana, 16 February 2012 Žiga Debeljak, MScBA President of the Management Board Mateja Jesenek, MBA Senior Vice President Melita Kolbezen, MScBA Senior Vice President Vera Aljančič Falež, LL.M. Senior Vice President Peter Zavrl Senior Vice President Stanka Čurović, MScBA Senior Vice President 36

40 Business report 37

41 IMPACT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP OPERATIONS IN 2011 Economic conditions in Mercator Group target markets in 2011 In the first half of 2011, all markets of Mercator operations have seen a slight recovery which, however, started to loose its steam in the second half of the year. A drop in the key economic indicators was a sign of further aggravation of economic conditions and a general economic slowdown. Consumer confidence index, the first harbinger of change in the economic atmosphere in the retail industry, deteriorated further in Slovenia; similar changes were seen in other markets of our operations. The Southeastern European region also saw a high level of unemployment, and inflation rate remained relatively high as well. Pessimistic expectations about another wave of the economic crisis are a result of large-scale indebtedness and soaring budget deficits. Countries like Greece, Ireland, Portugal, Spain, and Italy still face excessive sovereign debt which also exerts a negative impact on the economies of other countries. Credit rating agencies downgraded the credit rate of nine European countries and announced negative prospects for most of the European Union members, except Germany and Slovakia, along with a forecast of notable slowdown in economic growth for Adding fuel to the flames are the heated discussions of the disintegration of the euro zone by economists and financial analysts; this would result in a severe recession in the global economy. Another indication of the harsh conditions in international financial markets are the rising prices of borrowing for an increasing number of countries, and ever more restricted access to financing sources for governments and business alike. In 2011, the European Central Bank both raised and lowered the interest rate for main refinancing operations. In the beginning of the year, the rate was at 1.00%; in April, it was upped to 1.25%; in July it was increased again to 1.50%; only to be gradually lowered back to the current value of 1.00%. The decrease in interest rate for main refinancing operations also affects the decrease in inter-bank offered rates in the euro zone. As at 31 December 2011, the 6-month EURIBOR reached 1.617%, which is 32.1 percent more than as at the beginning of the year. The average level of EURIBOR in the period was at 1.64% (1.08% in the equivalent period in the year before). Slovenia According to the estimates by the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia, economic growth in 2011 reached 0.5%, which is lower than in 2010 when it amounted to 1.4%. Inflation rate in 2011 was at 2.0%, which is 0.2 percentage points higher than in International credit rating agencies downgraded Slovenia's rating twice in 2011; first in September from Aa2 to Aa3, followed by another downgrade in December from Aa3 to A1. This resulted in an increase of the yield of Slovenian government bonds, as well as interest on new borrowings. Serbia Economic growth in Serbia in 2011 is estimated to have amounted to 1.7%. Inflation rate estimated for 2011 is higher than the 2010 rate. In 2011, inflation reached 11.2%, compared to 10.3% in As at 2011 year end, the Serbian dinar exchange rate stood at RSD per 1 EUR; in 2010, the exchange rate on the last day of the year was at RSD per 1 EUR. Average annual RSD exchange rate in 2011 amounted to RSD per 1 EUR (in 2010: RSD per 1 EUR). 38

42 Croatia The change in gross domestic product was positive in 2011 with an estimate at 0.6%. Average inflation rate in 2011 is estimated to have been twice as high as that in In 2010, inflation reached 1.1%, compared to the estimated 2.4% in Average exchange rate for Croatian kuna amounted to HRK 7.44 per 1 EUR in 2011 (in 2010: HRK 7.29 per 1 EUR). As at 31 December 2011, the closing rate was HRK 7.54 per 1 EUR (as at 31 December 2010: HRK 7.38 per 1 EUR). Bosnia and Herzegovina Inflation rate estimate for 2011 stands at 3.7%, while economic growth is estimated at 1.8%. The exchange rate of the convertible mark is pegged to euro at the rate of KM per 1 EUR. Montenegro Gross domestic product growth in 2011 is estimated at 2.0% and inflation estimate for the year is at 3.3%. Montenegrin official currency is the euro. Bulgaria In Bulgaria, economic growth is estimated to have reached 2.2% in Inflation rate in 2011 amounted to 4.2%. The exchange rate of Bulgarian lev is pegged to euro at the rate of BGN per 1 EUR. Albania In 2011, Albania saw economic growth of 2.50% and inflation rate of 3.90%. As at 31 December 2011, the closing rate for the Albanian lek was ALL per 1 EUR (as at 31 December 2010: ALL per 1 EUR). Average exchange rate for Albanian lek amounted to ALL per 1 EUR in 2011 (in 2010: ). Changes in consumer behaviour and effect of the market situation on consumption In recent years, markets of Mercator operations were challenged by the economic crisis which persisted in The crisis resulted in an increase of unemployment which has reached new historical highs in key markets of Mercator operations. Higher propensity to save and stagnating household purchasing power are reflected in lower spending volume, as well as lower value of the shopping basket. Shattered consumer confidence and an entire mix of effects from the business environment will bear a permanent impact on the shopping behaviour. Most notably, consumers will become more rational and prudent. The most recent data on Slovenian economic growth deviate considerably form the forecast announced in fall According to the Institute of Macroeconomic Analysis and Development of the Republic of Slovenia, Slovenian economic growth in 2011 falls short of one percent; for 2012, stagnation is expected, or even a negative growth rate in case of further deterioration of conditions in the international environment. IMAD warned about the aggravation of circumstances in the international environment and about the fact that negative trends therefrom tend to spread to the Slovenian export-driven economy rapidly and in full extent. Economic slowdown will result in higher unemployment rate which in turn will lead to lower household consumption and government spending. Moreover, consumer confidence remained very low in the period Recession is felt by the consumers harder than ever 1. According to consumer surveys, they can afford less, and they feel the impact of the recession in their daily lives. The number of consumers who expect their financial position to deteriorate further also increased considerably 1. The consumers expect a 1 Source: Marketing Monitor SMA, Valicon, Fall Revaluations/adjustments to receivables also include adjustments related to Mercator Pika card. 39

43 new wave of crisis. However, contrary to 2009, they are prepared for it with their new shopping behaviour. Low consumer confidence, low purchasing power paired with higher price sensitivity of consumers, and pessimistic expectations lead to more rational consumption, which sets the perfect background for the development and rapid growth of discount retailers. According to Planet Retail estimate, Slovenia ranked sixth globally by market share held by discount stores in In the existing foreign markets (Croatia, Serbia, Bosnia and Herzegovina, and Montenegro), consumers responded differently to the crisis. In Serbia, the trend of falling sales volumes and decreasing number of shopping sessions persisted in 2011, particularly in the fast-moving consumer goods market. Serbian dinar exchange rate appreciated and the inflation rate in 2011 stabilized at a relatively high level. Throughout the year, we saw a slight drop in the value of retail revenue, with the fourth quarter being more pronounced in this regard. In Croatia, both consumption volume and the value of average shopping basket were lower. Along with the drop in sales volume, the latter is a result of increased consumption of products that represent an alternative to the leading brands, which is also reflected in the increased share of products of private label lines. In Bosnia and Herzegovina, consumers' response, although occurring somewhat later, took the form of reduced frequency of shopping. There was also a shift in the most frequent shopping destination for the consumers: the share of shopping at hypermarkets is increasing at the expense of small traditional stores. The consumers responded to the crisis mostly by altering the composition of purchases, denying loyalty to major brands and increasing their demand for less expensive products instead. Retail decline in terms of value only started in 2011, despite the earlier onset of harsh conditions. New foreign markets (Bulgaria and Albania) are less developed; traditional forms of retail still prevail. There are many local retailers; particularly in Bulgaria, the number of international retailers has been increasing recently. Economic conditions are reflected in conservative consumer behaviour and less frequent shopping sessions. In March 2011, Belgian retailer Delhaize took over the Delta Maxi Group, thus entering the markets of Serbia, Bosnia and Herzegovina, Montenegro, Bulgaria, and Albania. Entry of Delhaize is expected to make competition in the region even more stringent. 40

44 DEVELOPMENT AND REAL ESTATE MANAGEMENT In 2011, Mercator Group efforts in real estate development and management continued to be geared towards meeting the goals laid down in the adopted development strategy. Our key task was the acquisition of new sales and logistics infrastructure. Leasing the retail area was the preferred method as we moved away from the principle of predominantly own construction. We proactively developed relations with local and international investors and sought opportunities in their projects. Furthermore, we carried out various development activities to optimize Mercator real estate management and analyzed the possibilities to update the concept of Mercator shopping centers, to improve the mix of products and services there, to improve composition of third-party providers, and to establish strategic partnership with renowned international providers. We also launched the project of Refreshment of FMCG offer and refurbished five stores to implement to new concept of sale. The project will be implemented with a high priority in Following are Mercator key goals in real estate management: Development of Mercator retail network Effective real estate management Improvement and update of shopping centers Monetization Investment and Divestment In 2011, investment into property, plant, and equipment (CAPEX) amounted to EUR 119,715 thousand percent of this sum was invested in Slovenia; 65.8 percent was invested in existing foreign markets (Serbia, Croatia, Bosnia and Herzegovina, and Montenegro); and 2.0 percent was invested in other markets (Albania, Bulgaria, and Macedonia). CAPEX in year 2011 (EUR thousand) Composition (in %) Slovenia 38, Serbia 51, Croatia 17, Bosnia and Herzegovina 4, Montenegro 5, Bulgaria Albania Macedonia 1, TOTAL 119, Investments in development of retail capacity (Mercator centers, trade centers, Roda centers, individual stores, and stores within other shopping centers) represent 66.9% of total investments; 18.8% was allocated for refurbishment of the existing facilities; and the remaining 14.3% was invested into logistics, IT, and non-trade activities. 41

45 In 2011, we acquired 131,635 square meters of new gross area, of which 92% was obtained by operating lease and 8% was obtained by acquisitions or construction. In 2011, Mercator Group disposed of EUR 17,229 thousand worth of property, plant and equipment. Share of newly launched facilities by markets Share of investments by markets Summary of retail unit launches by markets Slovenia Area of new facilities: 27,366 m 2 Number of new retail units: 8 Openings: MC Maribor Tabor II; Mercator hardware, electronics and construction center in Murska Sobota; Mercator Keros hardware, electronics and construction center in Rogaška Slatina; Supermarket Litija in the Ježa shopping center; Kranjski kolaček (Kranj Cupcake) plant in Naklo; Cash&Carry in Krško; Cash&Carry Keros in Rogaška Slatina; and herbal pharmacy in the Maximarket department store in Ljubljana. 42

46 Serbia Croatia Area of new facilities: 41,075 m 2 Number of new retail units: 36 Openings: Roda center in Vrbas; Roda center in Jagodina; supermarket and hardware, electronics and construction center in Velika Plana; supermarket and hardware, electronics and construction center in Zaječar; hardware, electronics and construction center in Smederevo; mega market in Smederevo; supermarket in Loznica; supermarket Karaburma; Cash&Carry in Mladenovac; Cash&Carry in Zrenjanin; restaurant in Novi Sad; superettes in Požarevac, Stanišići, Riđica, Futog, and Ada, and two in Smederevo; 16 stores of the company Familija (based on the agreement on strategic business combination between Mercator-S, d.o.o., Novi Sad, and the companies Familija Marketi, d.o.o., Belgrade, and Robna kuća Beograd, d.o.o., Belgrade). Area of new facilities: 44,715 m 2 Number of new retail units: 10 Openings: supermarket in Zagreb; Intersport in Imotski; trade center in Rovinj; hypermarket in Osijek; supermarket and Intersport in Biograd; logistics and distribution center Sveta Nedelja near Zagreb; Benetton in Rijeka; Modiana in Split; and Modiana in Zagreb. Bosnia and Herzegovina Area of new facilities: 16,827 m 2 Number of new retail units: 39 Openings: supermarket with supplementary offer outlets in Cazin; superette in Fojnica; supermarket Kotor Varoš; 36 stores of the company Drvopromet (based on the agreement on strategic business combination between Mercator - BH, d.o.o., Sarajevo, and the company Drvopromet, d.o.o., Sarajevo). Montenegro Bulgaria Area of new facilities: 728 m 2 Number of new retail units: 2 Openings: superettes in Berane and Pljevlja. Area of new facilities: 924 m 2 Number of new retail units: 1 Openings: South Mall Studentski grad supermarket in Sofia. 43

47 Summary of total gross retail area as at 31 December 2011 Gross retail area in m 2 Used for own operations Leased out Total as at 31 Dec Owned retail area 831, ,785 1,014,468 Leased retail area 388,803 14, ,697 Total retail area 1,220, ,679 1,418,165 Owned warehouse capacity 145, ,590 Leased warehouse capacity 54, ,398 Total warehouse capacity 199, ,988 Owned commercial facilities 25,756 2,093 27,849 Leased commercial facilities 5, ,364 Total commercial facilities 31,049 2,164 33,213 GROSS AREA UNDER MANAGEMENT 1,451, ,843 1,651,366 - of which owned 1,003, ,878 1,187,907 - of which leased 448,493 14, ,459 Activities of real property monetization Reaping the growth potential lying in real property is highly important for successful operations of the Mercator Group which owns nearly three quarters of the total of 1.7 million square meters of real property under its management. In comparison to its European competitors, Mercator balance sheet includes much more real estate or assets that could, were they monetized, be used to reduce debt. Hence, in addition to activating the undeveloped land and divestment of unnecessary and non-viable assets, we launched the preparations for monetization of Mercator real estate in the first half of The project included preparing the documentation for selection of the consultant for the project, and sending this documentation to selected recipients leading international real estate experts and investment bankers. Based on a thorough analysis of the offers received, we selected the company Cushman & Wakefield, a global real-estate consultancy headquartered in London, as the best bidder. Working with the selected consultant, we shall compose an appropriate real estate portfolio and offer it to international investors. Selection of investors and the sale-and-leaseback transactions in Slovenia and Croatia, totalling at an estimated EUR 500 million, are planned for 2012 and The total of proceeds from monetization shall be used to reduce the debt which will make Mercator's debt indicators more comparable to those of the majority of our international competitors. In 2012, activities on the real estate monetization project shall be carried on. Working with the selected consultant, the company Poslovni sistem Mercator, d.d., shall specify the real property that will be subject to monetization, and select the legal, financial, and other consultants to work on the project. This will be followed by structuring an appropriate real estate portfolio and its presentation to international investors. In the next stage, real estate market conditions will be tested and investors interested in the projects will be singled out. In the ensuing step, investors will be selected and the sale-and-leaseback of a part of the real estate portfolio in Slovenia and Croatia will be carried out. In 2012, EUR 250 million worth of real estate is planned for monetization. 44

48 SALES AND MARKETING Sales Operations in 2011 were marred by notably harsh economic conditions. Consumer purchasing power was low in all markets of Mercator's operations and it was reflected in a change in consumer behaviour. Both volume and value of the shopping basket dropped. Putting in place appropriate counter-crisis measures and marketing activities, Mercator Group generated EUR 2,928,433 thousand of revenues in 2011 despite the challenging business environment. Relative to 2010, Mercator Group revenue rose by 5.3 percent. In Slovenia, revenue actually dropped by 0.2% while in foreign markets, revenue was up 13.9%, mostly as a result of the takeover of trade operations of the companies Pantomarket and Plus Commerce in Montenegro, and Familija Marketi and Coka Group in Serbia. Mercator Group revenue by geographical segments: Mercator Group revenue from trade operations by programs: In 2011, the majority of Mercator Group trade revenue resulted from sales of fast-moving consumer goods as they accounted for 86.9 percent of total revenue; revenue from other specialized programs amounted to 13.1 percent. 45

49 Market shares of fast-moving consumer goods sales in respective markets of Mercator Group operations, estimated based on the available information, are given in the following table: Market of operation Slovenia Serbia Croatia Current foreign markets Bosnia and Herzegovina New foreign markets Montenegro Bulgaria Albania Market Share 33 34% 8 9% 8 9% 4 5% 18 19% <0.5% 1% Source: market research and own calculations Mercator Group revenues by type of sale: In 2011, Mercator Group retail operations generated 86.9 percent of the Group revenues from sales of goods and material, while the remaining 13.1 percent was generated in wholesale. Marketing Being one of the largest enterprises in the Southeastern European region, retaining the leading market positions in a highly competitive industry, and pursuing the strategy of regional expansion is a formidable business ambition for the Mercator Group. Our activity is embedded in the economic and social development of the environment in which we operate. Pursuant to our vision and mission, we are focused on the consumers whom we place at the center of our operations. Committed to our vision of being the consumers' first choice, we are doing our best to offer a wide array of high-quality products, both branded and private label; we provide the best service and a pleasant contemporary shopping experience, and conduct activities devoted to the care for the environment and the society. We are proud to pamper our consumers. We are the first retailer in Slovenia with the largest stores and the largest number of them. There, we offer our consumers the broadest choice of fast-moving consumer goods. We were the first to bring the web store to the homes of our consumers. We were the first to develop the offer of private labels with over 2,800 quality and reasonable priced products. With a strong focus on the consumer, Mercator Group activities in 2011 were dedicated to adaptation to the permanently changed shopping behaviour. Increasingly rational consumers in all markets of Mercator's operations continued to seek even more intensively the best value for their money and became more willing to buy private label products. Special attention was paid to extension of the offer of private label products which offer our customers high quality at a favourable price. We conducted many short-term sales promotion activities to offer the customers more favourable shopping for fast-moving consumer goods in times of economic hardship, thus contributing to alleviation of financial burden imposed on the households. 46

50 In one of Europe's largest consumer surveys, Trusted Brand, conducted globally by the Reader's Digest Magazine, Mercator received the Trusted Brand certificate for the fifth straight year in In marketing, we are pursuing the policies specified: 1. Mercator is the consumers' first choice when shopping for fast-moving consumer goods. Mercator Group is looking to be the first choice of consumers shopping for fast-moving consumer goods and thus to become the leading and largest retail chain offering fast-moving consumer goods and technical consumer goods. All our activities in 2011 were focused in all markets on provision of the broadest possible offer for the consumers. As we prepare our favourable offer of products and services, we devote special care to seasonal and theme-related products that are adapted to the needs of our consumers in respective markets of our operations. For consumers whose time is at a premium, we followed the trends and continued with development of web store. In 2011, Mercator offered the customers thirteen private label lines which include alimentary products, household products, apparel, technical consumer goods, cosmetics, child care products, toys, ready-made food, pastry, and products for a healthy diet. Showing great care for the consumers, Mercator launched a new line of products in 2011 under the brand Mercator Bio. This independent line includes 37 organically grown or processed food products. The new Mercator Bio private label combines four important components: quality, local sourcing, reasonable pricing, and convenience. 47

51 Development of new private label products is based on the provision of safety and quality of the products. We wish to offer our customers products whose quality matches that of the leading brands, yet which are better priced. The quality of alimentary products is tested and certified by the Faculty of Biotechnology, and the Kranj Institute of Public Health. In testing and certifying the nonalimentary products, we are working with the Slovenian Institute of Quality and Metrology SIQ. Country Number of lines Number of products Slovenia 13 2,746 Serbia Croatia 10 2,156 Bosnia and Herzegovina 9 1,089 Montenegro Bulgaria Albania Mercator is offering fast-moving consumer goods and home products to create the best value for the consumers. Consumer behaviour has been growing increasingly rational for a while. The key indicator of the changed behaviour in times of economic hardship is the focus on value. Retail industry, highly dynamic and rapidly changing in itself, is now adapting to the changes in consumer behaviour, looking to offer the consumers an assortment that allows choice while remaining competitively priced. The trend in fast-moving consumer goods is pointing towards a quest for solutions which offer consumers pleasure even in a harsh environment, provide good value for money, and allow the retailer to build trust and customer loyalty. For Mercator, the Mercator Pika card is a major competitive advantage which allows us to perceive the changes in shopping behaviour and to adapt appropriately with specially targeted activities. For quite a long time now, card holders have also been offered favourable shopping for appealing products as a part of the Special Pika Discounts activities. In addition, we also developed in 2011 the functionality of web payment by Mercator Pika Card, especially for the requirements of Mercator web store. Working with the partners in the Mercator Pika card system, we are offering the card holders special benefits and the possibility of joining various Mercator clubs according to their lifestyle and interests (Healthy Lifestyle, Lumpi, Maxi, M mobil). In June 2011, Senior Club was founded in Slovenia, the purpose of which is to simplify the process of providing proof of the status of a retired person at the stores, for the purpose of Thursday's retiree discounts. Various activities will be carried out for club members, including awarding extra points, coupons for certain products, and discounts on certain products or product categories. At the end of 2011, there were a total of 168,178 registered club members. Mercator Call Center allows direct contact with our consumers and offers support for Mercator Pika Card transactions. In Slovenia, the share of total retail revenues generated by purchases completed with Mercator Pika card amounted to percent (57.54 percent in 2010). In all markets of Mercator operations combined, this share amounted to percent (45.30 percent in 2010). 48

52 3. Mercator offers consumers high-quality service and a pleasant shopping environment. At Mercator Group, we offer our customers a pleasant shopping experience and a high level of service. We are constantly looking for new technologies and services that would make shopping at our stores easier and more interesting. According to the global trends, web stores are the most rapidly growing sales channel. Accordingly, Mercator expanded the web offer by introducing the Mercator Tehnika (technical consumer goods) Web Store which affords convenient shopping for products for home and household. Development of mobile applications is geared towards bringing our services even closer to the consumers who are now offered a simple and quick overview of stores (location, opening hours, contact) and the option to check their credit or number of bonus points on their Mercator Pika Card on their cell phones, wherever they may be. In June 2011, Mercator acquired through a strategic combination with the company En Plus, d.o.o., a chain of 18 automatic self-service petrol stations which are now in operation under the brand Maxen. This acquisition allows extending the business network of petrol stations to the existing locations of Mercator's major shopping centers in Slovenia, Croatia, and Serbia as the transaction also includes the transfer to Mercator of exclusive rights for the use of technological and spatial solutions for installing the petrol stations to parking lots of shopping centers in all three countries. This strategic combination is another step forward in the development of supplementary activities for the consumers. Fuel offer can be subsequently extended with other services like supply of natural gas for households, and supply of electricity. We also broadened our offer of travel arrangements through M Holidays, and developed photo services. Furthermore, we introduced new financial services of paying utility bills at Mercator stores, and the option of mobile payments via the Moneta system. 4. Mercator's operations improve the quality of life in the Group's social and natural environment. As the best neighbour, Mercator is aware of its effect on the social, natural, and cultural environment. Hence, the fundamental principles of our operations reflect our embeddedness into the local environment through initiatives for local production, humanitarian activities, sustainable development, and care for general health and care-free development of children. We steer our activities towards sustainable development, and work to improve environmental awareness among consumers, employees, and business partners. Our operations are conducted with careful consideration of environmental benefits, principles of sustainability, and principles of social welfare. In 2011, we emphasize the fundamental principle of sustainable development according to which our needs today should be satisfied in a way that does not threaten the future of the generations to come. 49

53 In 2011, we teamed up with the Finance daily paper to organize a contest "Draft solutions for packaging made of environmentally friendly packaging materials for organic and other products of Slovenian origin". Mercator offers partnership to Slovenian farmers and small growers by providing appropriate packaging in which food of Slovenian origin grown on farms could reach the customers at Mercator more quickly and suitably packed and presented. With this project, Mercator will provide a favourable cost of standard packaging for products of Slovenian origin, which will comply with the modern guidelines, and which will be made of environmentally friendly raw materials. This will also reduce the final price of the products for our consumers. The first products to be offered on Mercator's shelves in new, environmentally friendly packaging will include seasonal fruit and vegetables by local growers. Digital Communication Mercator has used different sales or distribution channels for over 10 years as the company is constantly adapting to the changes in the behaviour of modern consumers. With today's intensity of competition on the one hand, and completely new consumer position on the other, in a period of intensive use of the world wide web and social networks, redefined use of cell phones, and other forms of rapid exchange of information, the saying that»customer is king«is truer than ever. Consumers have increasing amounts of information available to them and therefore, they demand even more from the retailers. They expect not only low prices and a pleasant shopping environment; they are looking for offer tailored to their habits and needs, same terms and service regardless of the distribution channel, and combination of different options to pick up their goods. In defining a comprehensive approach to efficient management of digital communication, the elements of integrated multi-channel strategy are of key importance: consumer, excellence in execution, organization, and use of technology. 50

54 Strategically planned appearance in digital communications which the Mercator Group Digital Communication Council prepared in 2011, has had its impact on marketing results as it has improved brand awareness and brand management, which in turn strengthened consumer loyalty and allows offering quality products and boosting sales. We are building confidence which is one of the most important aspects of corporate reputation. In 2011, the following major projects were prepared for our customers in the field of digital communication. Websites and web stores By launching the Mercator Tehnika (Technical Consumer Goods) Web Store, we opened up the online door to those who are looking to shop for such products in the most convenient way. Along with the web store, we also introduced the option of online payment by green or gold Mercator Pika card. Hence, over 50 percent of all payments in the Mercator Tehnika web store are already made by the Mercator Pika card. Modern web store follows the needs of the web user. Our offer includes over 11,000 products from a wide range of technical consumer goods, including home appliances, computers, photo equipment and supplies, audio and video entertainment, and telephone equipment, as well as everything for the home, personal care, and wellness. Special care is paid to the offer of seasonal products. 51

55 The modern user interface is based on Mercator corporate visual identity. Carefully devised details lead the web store visitor from the overview of our offer and current special offers to the completion of the purchase and checkout. In the background, we employ advanced tools to adapt particular promotional elements to various groups of visitors, to specify pricing terms and special offers, and to design special landing pages for certain search keywords; thus, we are improving the efficiency of our web store. In June, we set up the web portal "Mmm Recepti" ("Yummy Recipes") which offers the visitors many recipes by renowned chefs and also allows publishing user recipes. Visitors are offered a wide array of recipes through interesting contributions by chefs, user recommendations, and the option of simple shopping for ingredients at the Mercator web store. Furthermore, we have developed the option to view, book, and pay for M Holidays travel arrangements online at The refurbishment of the M Holidays website brings a new user experience as visitors are led through the booking process smoothly and fast. Advantages and benefits of M Holidays are stressed even more clearly; graphic design was refreshed; and a wider offer of holidays, trips, and travels in Slovenia and abroad was prepared for the customers. Mercator club members can claim all benefits. Moreover, payment by Mercator Pika card is possible, in up to 12 instalments, with zero-interest rate. In the refurbished Maxi department store, customers are offered free Wi-Fi access throughout the building; in addition, ipad tablet computers are available in the Maxi Club. Along with the refurbished store, the customers were also offered a redesigned website. We also set up a website for Mercator's new energy engineering brand and service - Maxen. Mobile applications, mobile web portal We established a mobile portal that offers access to the key contents of the central Mercator website, adjusted for display on tablet computers and smart phones. Mobile applications "Stores" and "Mercator Pika" bring us closer to our customers wherever they are as they can use their smart phones to find the nearest Mercator store and information on its working hours regardless of their location and time of query. Mercator Pika application allows access to the My Pika service which provides an overview of the bonus points and credit on the Pika account. Another service related making use of cell phones is the option to pay by Moneta system at Mercator stores. This service allows the users to pay cash-free for the goods and services at all Mercator FMCG stores, M Tehnika, M Gradnja (construction), and M Pohištvo (furniture) stores, using their mobile phone. At the moment, payment by Moneta is not possible yet at franchise stores and at Tik Tak self-service check-out cashiers. 52

56 Social networks In 2011, we markedly boosted our presents in the social networks both in Slovenia and in the markets of Southeastern Europe: we created new profiles: Kranj Cupcake, Modiana, Beautique, and Intersport, we set up a welcome page on Facebook, including a welcome address to the visitors, encouraging them to join us and keep up to date with our news, we actively communicated all major marketing projects: the Smurfs, new private label lines, double and triple Pika points, we upgraded the communication plan and our presence on the Twitter social network, we included Mercator stores in the Foursquare social network, we successfully connected and used all web channels (voting in the contest for "Draft solutions for packaging made of environmentally friendly raw materials"). Numerous friends and users joined us both in Slovenia and in Southeastern European markets: the number of all Mercator Facebook profile users is over 109,000; number of followers on Twitter in Slovenia is over 1,300; total number of hits on YouTube is nearly 180,000; In Slovenia, more than 15,000 users took part in the "Refresh yourselves!" ("Osvežite se!") contest. Monitoring Mercator presence in digital media Early in 2011, we established a web clipping system for regular monitoring of Mercator's appearance on the Internet; the key target is to allow Mercator to respond to contents published in digital media as well, not only in classic media. Looking to engage all persons who are in a position to provide a competent reply in direct communication, we introduced in December the rules of communication and response to contributions about and mentions of Mercator in the digital media: We communicate constantly, directly, and with added value. We plan the contents of our communication in advance. Appropriate content provides information to the user, offers added value, and it is likely to be forwarded to other users. We always work to establish a continuous dialogue. We are highly responsive. We seek to publish news that is relevant and up to date, and we respond promptly to any questions. We stay in touch and develop relations with those who have shown interest in this respect, regardless of whether it involves positive or negative response by the customer. Our communication is open, honest, and transparent. We respect and heed the opinion of the user. We employ multimedia contents to support what we present. 53

57 Consistently with the company's digital communication strategy, legal and procedural aspect of the external system of web and mobile community management were established. Store Formats Responding to changes in consumer behaviour, we started to prepare in 2011 the foundations for Mercator's repositioning in order to optimize the portfolio of store formats and to bring Mercator closer to the modern consumers who are different and much more aware. A change in values was perceived as our customers increasingly became smart shoppers. Mercator is currently in the preparation stage of revision and refreshment of its retail network, which will align us with the perceived needs and expectations of our customers in the changed market circumstances, and allow us to offer them added value for their money. At present, Mercator Group's retail units are present in seven markets of different economic maturity. This requires adjusting our operations to the needs of the customers in each market. To this end, we developed a multi-level strategy of store brands (Mercator, Getro, Roda) and a multi-format strategy with a broad range of store formats. These are intended to cater to major, previously planned shopping sessions, as well as minor, daily or occasional shopping for fastmoving consumer goods, technical consumer goods, cosmetics, and sportswear. Store brands and formats in the Mercator Group 54

58 FMCG Store Formats Mercator brand Mercator Centers and Shopping Centers Mercator centers are shopping centers with a wide offer of all Mercator programs, as well as offer of other attractive service providers operating in leased outlets, and the offer of complementary services. Hence, our customers are offered everything at one place. These facilities are located in major cities. Hypermarkets Mercator hypermarkets are located in larger shopping centers where people not only do their major weekly shopping, but also socialize and spend their leisure time. State-of-the-art hypermarkets feature a wide offer of both alimentary and nonalimentary products. The offer is complemented by superior service and cutting-edge store and information technology like the Tik Tak self-checkout cashiers, wine vending machines, and digital technology in stores, intended for the customer's information, education, and enjoyment. Supermarkets and neighbourhood stores Supermarkets and neighbourhood stores are Mercator traditional store formats recognized by the slogan "The Best Neighbour". They are located in major residential and commercial areas and they are intended for minor daily shopping trips. Comfort stores Mercator comfort stores are located in central or, downtown areas of major cities. Their program mix is adapted to the requirements of contemporary urban customers who are constantly in a rush. Mercator Web Store Mercator web store enables saving time and comfortable shopping without leaving your armchair. Mercator web store is up and running in Slovenia and Croatia. In March 2011, Mercator also launched its technical consumer goods web store; hence, we are pursuing our goal of a multi-format retailer on the web as well. Cash&Carry Mercator Cash&Carry are conventional Cash&Carry stores selling only to legal persons, or only offering wholesale services. Assortment and sales area are adapted accordingly. These stores are located outside city centers or at the outskirts of major cities. Discount stores At discount stores, customers are offered rational shopping for basic FMCG, under the Hura! brand. The offer is based on the best ratio between price and quality, while providing the most competitive products in the market. 55

59 Roda brand Roda centers Roda centers are a format of modern shopping centers that combine the benefits of shopping at Roda megamarkets or supermarkets with the offer by many other attractive service providers, as well as some specialized Mercator programs. Roda megamarkets Roda megamarkets are larger stores offering affordably priced products, mostly to customers dosing their major weekly or monthly shopping. They are located in Roda centers where the offer of various supplementary service providers and complementary services allows socializing and enjoying leisure time. Roda supermarkets and markets Roda supermarkets and markets are located in major residential and commercial areas. They are intended primarily for daily shopping. Roda Cash&Carry Roda Cash&Carry is an open-type cash&carry format serving both legal persons and individuals. Assortment and sales area are adapted accordingly. These stores are located outside city centers or at the outskirts of major cities. Getro brand Getro Cash&Carry Getro Cash&Carry is an open-type Cash&Carry format serving both legal persons and individuals. Getro Market The stores are located in major and minor settlements with lower purchasing power. They are intended primarily for daily shopping. These stores provide the best possible choice of goods at favourable prices and satisfactory service. Home product store formats Construction and garden centers Construction and garden centers offer a broad selection of construction materials, tools, and supplies for DIY as well as for professional construction. The program comprises a wide offer of basis construction materials, roofing materials and façades, concrete products, ceramics, dyes, paints, lacquers, tools, power tools etc. For home landscaping, we are offering an array of gardening and landscaping products including garden equipment, machinery, and supplies, and products for plant watering. These centers are located in the outskirts of major cities, as well as smaller towns. 56

60 Home improvement stores Home improvement stores offer everything our customers may need to equip or refurbish their homes. In addition to a wide range of consumer electronics, major appliances, other home appliances, and bathroom equipment, these stores also offer tools and supplies for both DIY and professional workshops. They operate as independent stores at Mercator Centers, or as independent stores in major cities. Furniture showrooms Our furniture showrooms offer all types of furniture for kitchens, dining rooms, reception rooms, halls, children's rooms, bedrooms, living rooms, bathrooms, and gardens. Home interior stores Home interior stores are intended for all generations of consumers as they offer a very broad selection of dining supplies, small appliances, consumer electronics (i.e. white and brown goods), and photo and computer equipment in other words, all products that are indispensable in a modern home. They operate as independent stores at Mercator Centers, or as departments within department stores in smaller towns. Other store formats Clothing program and drugstores Textile program includes apparel store formats adjusted in terms of size, scope, and level of the offer. Our customers are offered a wide selection of clothing of various brands. Beauty program is presented under the Beautique label. Intersport Mercator Group is the license holder for Intersport, the largest global chain of sportswear and sports equipment stores. In Slovenian, Croatian, Bosnian, Serbian, Montenegrin, and Albanian market to which our license applies, we are present with 83 own stores and two franchise stores. Intersport stores are located within Mercator and other shopping centers, or as independent stores in major city centers and tourist resorts. In a modern, neatly designed and laid out environment, our customers are offered products of numerous globally renowned brands that represent the core of our offer, as well as products of Intersport's own exclusive brands. M Holidays At M Holidays offices which are located in Mercator Centers in Slovenia, we offer reliable and favourable holiday arrangements under our own M Holidays brand, as well as a broad selection of tourist arrangements by domestic and foreign tour operators. M Holidays offer includes shorter and longer holiday arrangements in Slovenia and abroad, trips and travels in Slovenia and abroad, custom tailored travels, booking of hotels and airline tickets throughout the world, tickets to many cultural, sports, and other events in Slovenia, as well as offer of many Slovenian and international tour operators. 57

61 Maxen Modern self-service petrol stations employ advanced technology to allow simple and fast refuelling and payment without any staff. They are environmentally friendly and they meet all safety requirements and standards. Access to the service is possible 24/7. These petrol stations are already being constructed in the parking lots of some major Mercator shopping centers. Composition of retail units as at 31 December 2011 COUNTRY ACTIVITY SLOVENIA SERBIA CROATIA Number of units Number of units BOSNIA AND HERZEGOVINA Number of Number Number of units units of units Number of units Number of units Number of units Gross sales area Hypermarkets , ,539 Supermarkets , ,942 Neighbour stores , ,019 Comfort stores ,215 3,669 Getro market ,518 7,986 Cash & Carry , ,741 Hard discount stores ,102 5,753 Restaurants ,573 5,579 M Holidays TOTAL FMCG program , ,457 Home program ,752 74,140 Furniture program ,515 24,246 TOTAL home program ,267 98,386 Clothing program and drugstores ,773 59,367 Clothing program ,178 56,381 Drugstores and perfumeries ,594 2,986 Intersport ,683 39,824 TOTAL specialised programs ,456 99,191 TOTAL retail units under management ,304 1,220, ,033 Franchise stores ,980 34,274 TOTAL with franchise stores ,586 1,272, ,307 MONTE- NEGRO ALBANIA BULGARIA MERCATOR GROUP Net sales area Development of New Technological Solutions Mercator is an innovative retailer. In terms of development of store formats, this includes implementation of state-of-the-art technology and equipment in retail facilities in order to make shopping easier, provide additional information, and offer a more pleasant and streamlined shopping experience. In year 2011, the following activities took place: examining the upgrade of info stands for the requirements of customer loyalty system management; process of development and procurement of an eco info stand (solar and "manual" powered); placement of wine vending machines in some hypermarkets; development of other beverage vending machines (for oil, vinegar, juice, honey etc.); testing the fruit and vegetable moistening equipment; testing the digital price tags in stores; preliminary testing of magnifying glasses on shopping carts; examining the placement of PSA (Personal Shopping Assistant) system to stores; and examining the implementation of smaller selfservice check-out cashiers that would also be appropriate for smaller store formats. 58

62 Development of New Store Concepts Refurbishment of the Maximarket department store On 5 October 2011, the comprehensively refurbished Maximarket department store was opened. The newly defined store and marketing concept aims to make Maxi a legendary place for quality shopping, i.e. a place for haute fashion, a place of individual lifestyle statements, a place of inspiration, entertainment, shopping, quality, and services, as well as a place for socializing. Convenience stores Today, time is at a premium for every consumer. Therefore, we developed a new format of an urban convenience store that allows saving time and effort while shopping for a particular item. The first convenience store Kongresni trg was opened on 22 June Program mix of the store fully reflects the needs of the target customer (employees of nearby buildings, high school and college students, and passers-by running various errands), as well as the characteristics of the micro-location (offer appropriate also for nearby residents and tourists). Special features of the store include in particular attractive offer of quality convenience products (warm fresh food for immediate consumption, salads, fruit salads, sandwiches, freshly squeezed juices etc.), a wide offer of fresh products, various coffee beverages (coffee to go), well stocked deli section, a corner offering typical Slovenian produce, and a smaller department with basic alimentary and non-alimentary products intended for the nearby residents. Green store One of the goals of pursuing sustainable development at Mercator is to erect the first environmentally friendly or green store in Slovenia. It will represent a development concept that will include various fields of development (construction aspect, sustainable operation, marketing and trade concept). This specimen store will span approximately 700 square meters. The offer of this environmentally friendly store will combine an extensive and profound range of products in all categories which is characteristic of a supermarket, with the following highlights: wide offer of organic products of those categories that most commonly include healthy and safe food; locally grown produce; fresh programs and offer of fruit and vegetables. In 2011, the floor plan and the technology for the store were prepared; development of the visual identity for the store is currently in progress; and we are also intensively developing new environmentally friendly technological solutions that will be implemented in the green store. 59

63 FINANCIAL MANAGEMENT Net financial debt Relative to the balance as at the end of 2010, Mercator Group financial liabilities including derivative financial instruments rose by 11.3 percent in As at the end of 2011, Mercator Group net financial debt amounts to EUR 1,091,145 thousand, which is 15.0 percent more than as at the end of The increase is mostly due to the company's decision to make use of early payment discounts offered by our suppliers, which resulted in a decrease in trade payables by EUR 58,762 thousand compared to the end of in EUR thousand 31 Dec Dec Index 31 Dec. 2011/ 31 Dec Non-current financial liabilities 822, , Current financial liabilities excl. other financial liabilities 362, , Derivative financial instruments (liabilities) 4,562 2, Financial liabilities including derivative financial instruments 1,189,295 1,068, Cash and cash equivalents 27,540 20, Derivative financial instruments (assets) Available-for-sale financial assets 2,628 3, Loans and deposits 67,824 94, Financial assets 98, , NET FINANCIAL DEBT 1,091, , Net financial debt / Gross cash flow from operating activities Net financial debt / Fair value of real estate 64.0% 56.6% Increase in financial liabilities, which is in this case directly related to the decrease in trade payables, is a result of Mercator Group business policy in trade payable management. Borrowings allow us to settle our trade payables early and thus claim extra financial discounts from our suppliers. Relative to the increased finance expenses, the net effect of revenue from the received early payment discounts is positive and it reflects in current economic conditions the suitability of such approach to trade payable management. Debt-to-Equity Ratio As at 31 December 2011, Mercator Group attained a debt-to-equity ratio of 1:1.33. The ratio is a quotient between equity, which includes share capital as reported in financial statements and noncurrent provisions, and net financial debt. Diversifying the Sources of Financing Consistently with the planned monetization of some real estate, long-term operating lease of trade facilities is becoming an increasingly important form of investment financing for Mercator. This applies especially to Mercator companies abroad where Mercator is leasing real estate from existing owners, or property is developed for Mercator by local real estate partners. 60

64 On 31 January 2011, the company Poslovni sistem Mercator, d.d., made last drawdown of a syndicated loan facility in the amount of EUR 105 million, agreed in In 2010, EUR 85 million of the facility was utilised, followed by the remaining EUR 20 million in The company used this loan to restructure a major part of its current financial liabilities into non-current financial liabilities without incurring any additional debt. In 2011, additional EUR 25 million was approved to the company based on the syndicated loan facility; the company utilised it by the end of March Total amount of the syndicated loan thus stood at EUR 130 million. By improving the composition of financial liabilities by maturity, Mercator Group notably reduced the refinancing risk, thus consolidating the stability of its operations. The syndicated credit facility is divided into two tranches: tranche A has a maturity of three years and requires a bullet repayment; tranche B has a five-year maturity, with semi-annual principal repayment. Seven commercial banks headquartered in the Republic of Slovenia and two commercial banks headquartered in Austria took part in the syndicated loan facility. On 9 March 2011, Mercator Group signed with the Deutsche Bank AG as the agent a loan agreement in the amount of EUR 58 million. Assignable loan (Ger.: Schuldschein-Darlehen) is a form of debt instrument that has been used for a number of years in the German-speaking countries. It is basically a bilateral loan intended for a known group of investors; however, the loan is not listed in the markets and it is subject to German legislation. In September 2011, the company Poslovni sistem Mercator, d.d., drawdown a new syndicated loan facility in the amount of EUR million while the company had no additional borrowing. The loan was used to refinance a major part of current financial liabilities into non-current financial liabilities. The syndicated credit facility is divided into two tranches: tranche A has a maturity of four years and a bullet repayment; tranche B has a four-and-a-half-year maturity, with semi-annual principal repayment. Ten commercial banks, of which five are based in Slovenia and five abroad, were involved in the syndicated loan. In 2011, Mercator Group worked with commercial banks to refinance a part of its bilateral shortterm borrowings to non-current borrowings. Thus, over EUR 400 million of short-term debt was refinanced which resulted in notable improvement of financial liabilities in terms of maturity. In 2011, Mercator Group started to cooperate with three new international banks, which can be viewed as proof of their trust in Mercator as a reliable financial partner. Current to Non-Current Financial Liability Ratio The share of non-current financial liabilities amounted to 69 percent as at 31 December 2011, which is 6 percentage points higher than as at 31 December While the value of current financial liabilities at the end of 2011 was approximately the same as at the end of 2010, the value of non-current financial liabilities rose predominantly on the account of the increase in non-current borrowings from commercial banks. Regardless of the fact that in 2011, availability of non-current banking sources was restricted, Mercator Group managed to improve the composition of financial liabilities by maturity. 61

65 Changes in the ratio between current and non-current financial liabilities between 2005 and 2011 points out that in 2011, despite the harsh financial conditions, Mercator Group's financial management and operations remain stable, without major deviations in respective years. Ratio of variable to fixed or hedged financial liabilities of Mercator Group As at 31 December 2011, the ratio between variable and fixed or hedged financial liabilities at the Mercator Group stood at 44.6:55.4. In 2011, Mercator signed new interest rate swap agreements in the amount of EUR 175 million, and interest rate cap agreements for EUR 175 million in order to hedge the interest rate risk. Available liquidity lines as at 31 December 2011 As at 31 December 2011, Mercator Group had access to the following liquidity lines: in EUR thousand 31 Dec Cash and cash equivalents 27,540 Bank deposits 1,016 Standby revolving credit lines 25,163 Total 53,719 Equal treatment of all financial partners Mercator Group treats all creditors equally. No financial liability of the Mercator Group is secured by a mortgage on real property. Mercator made a commitment to all creditors not to encumber its property with mortgages or liens. Fulfilment of financial commitments and covenants to banking partners As of 31 December 2011, Mercator Group met all financial covenants and other terms, stated in loan agreements with banking partners. Financial covenants are uniform for all financial liabilities and they are represented by three indicators: ratio between net financial liabilities and equity (leverage ratio); ratio between gross cash flow from operating activities and net interest expense (interest coverage ratio); and amount of Group equity (consolidated tangible net worth). 62

66 Takeover intent for the company Pivovarna Laško, d.d. On 22 December 2012, the company Poslovni sistem Mercator, d.d., announced a takeover intent which included acquisition of all shares of the company Pivovarna Laško, d.d. The Management Board viewed the takeover of Pivovarna Laško, d.d., as an independent strategic project that could result in positive economic and business effects for Mercator. Following the announcement of the takeover intent, Shareholders Assembly of the company Pivovarna Laško, d.d., was convened, which resulted in new facts that could introduce previously non-existent legal risks in case of further pursuit of this strategic project, which could not be effectively managed or hedged before or during the takeover process, as well as risks that would affect the probability of overall success of the takeover bid, given the known economic assumptions and starting points. Thus, the Management Board adopted on 19 January 2012 the decision not to announce the takeover bid for the acquisition of all shares of the company Pivovarna Laško, d.d., despite the business appeal and interest in such transaction; however, the possibility of further pursuit of this strategic project shall be examined in the future, subject to the circumstances in effect at that time. 63

67 MERCATOR SHARE AND INVESTOR RELATIONS Mercator share and ownership structure Basic information on the share of the company Poslovni sistem Mercator, d.d., as at 31 December 2011 Code / Symbol MELR Type Ordinary share Listing Prime market of Ljubljana Stock Exchange, d.d. Share capital EUR 157,128, Number of shares 3,765,361 Number of treasury shares 42,192 Number of shareholders 15,610 Ownership structure of the company Poslovni sistem Mercator, d.d., as at 31 December

68 Major Shareholders As at 31 December 2011, the following ten largest shareholders combined owned percent of the company: Major Shareholders Country Number of shares Share 1 Pivovarna Union, d.d. Slovenia 464, % 2 NLB, d.d. Slovenia 404, % 3 Pivovarna Laško, d.d. Slovenia 317, % 4 UniCredit banka Slovenija, d.d. Slovenia 301, % 5 Société Générale-Splitska banka, d.d. Croatia 254, % 6 Nova KBM, d.d. Slovenia 197, % 7 GB, d.d. Slovenia 142, % 8 Prvi faktor - faktoring, d.o.o. Serbia 125, % 9 Abanka Vipa, d.d. Slovenia 103, % 10 Radenska, d.d. Slovenia 96, % Total 2,409, % Shares held by Management and Supervisory Board Members as at 31 December 2011 First and last name Position Number of shares Share Management Board 1 Žiga Debeljak Management Board President 1, % 2 Mateja Jesenek Senior Vice President 1, % 3 Melita Kolbezen Senior Vice President % 4 Vera Aljančič Falež Senior Vice President % 5 Peter Zavrl Senior Vice President % 6 Stanka Čurović Senior Vice President % Total 2, % Supervisory Board 1 Robert Šega Supervisory Board Chairman % 2 Jadranka Dakič Deputy Supervisory Board Chairwoman % 3 Štefan Vavti Supervisory Board member % 4 Kristjan Verbič Supervisory Board member % 5 Miro Medvešek Supervisory Board member % 6 Mateja Širec Supervisory Board member % 7 Jože Cvetek Supervisory Board member 2, % 8 Janez Strniša Supervisory Board member % 9 Ivica Župetić Supervisory Board member % 10 Sandi Leban Supervisory Board member % 11 Ivan Valand Supervisory Board member % Total 2, % Foreign shareholders As at 31 December 2011, the share in the company Poslovni sistem Mercator, d.d., held by foreign investors amounted to percent, which is 2.43 percentage point more than at the end of

69 Shareholders indirectly or directly owned by the Republic of Slovenia Directly or indirectly state-owned shareholders currently hold 14.11% of the company Poslovni sistem Mercator, d.d. Treasury shares As at 31 December 2011, the company Poslovni sistem Mercator, d.d., held 42,192 treasury shares. In period , the company neither acquired nor disposed of treasury shares. Movement of closing price per MELR share in 2011, compared to the movement of the SBI20 index 66

70 Key information for the shareholders 31 Dec Dec Index 31 Dec. 2011/ 31 Dec Number of shares entered in the Court Register 3,765,361 3,765, Number of treasury shares 42,192 42, Market capitalization as at 31 Dec (in EUR) 553,508, ,797, Market price per share as at 31 Dec (in EUR) Book value per share as at 31 Dec (in EUR) Minimum close rate in the period (EUR) Maximum close rate in the period (EUR) Average close rate in the period (EUR) Earnings per share (in EUR) P/E ratio Capital gain (in %) Dividend yield (in %) Total yield (in %) Market capitalization is calculated by multiplying the number of shares entered into the court register as at 31 December with market price per share as at 31 December. Earnings per share is calculated as the ratio between net profit of the company Poslovni sistem Mercator, d.d., and weighted average number of ordinary shares in the period at hand, excluding the treasury shares. Share book value is calculated as the ratio between the value of the equity of the company Poslovni sistem Mercator, d.d., as at 31 December 2010, and the weighted average number of ordinary shares in the period at hand, excluding treasury shares. P/E (price-to-earnings ratio) is calculated as the ratio between market price per share as at 31 December and net profit per share. Capital gain is calculated as the ratio between market price per share as at 31 December in the period at hand and market price per share as at 31 December in the previous period. Dividend yield is calculated as the ratio between dividend per share and market price per share as at 31 December. Dividend policy Pursuant to the resolution adopted at the 17th regular Shareholders Assembly held on 22 June 2011, the company Poslovni sistem Mercator, d.d., paid out gross dividend of EUR 8.00 per ordinary share in 2011, which amounted to a total of EUR 29,785 thousand. Despite the announced aggravation of the economic crisis in 2012 and resulting further challenges for the operations of Poslovni sistem Mercator, d.d., the company is planning to pay out dividend in the amount of EUR 4.50 gross per share in Management Board will work with the Supervisory Board to examine each year the suitability of the amount of dividend, given the business and financial aspects; the decision on actual payment of dividends, however, lies with the Shareholders Assembly. Approved capital Subject to certain conditions, the company Mercator, d. d., has the option to issue approved capital in the amount of up to 20 percent of the current company share capital, by 12 July

71 Investor relations The strategy of communication with the shareholders, financial analysts and institutions, the media, and the general public, is based on the pursuit of transparency and clarity of our operations; this is achieved by regular and timely announcement of information on the company status and position, as well as on major changes in company operations. The company Poslovni sistem Mercator, d.d., treats all shareholders holding shares of the same class equally, both internal and external, minority and majority, domestic and foreign. The company shall motivate all shareholders to exercise their rights proactively and responsibly. Stronger representation of minority shareholders at the Shareholders Assembly is also encouraged indirectly, through representatives. The company motivates major shareholders and institutional investors to publicly disclose their investment policy at the company, e.g. their voting policy, level of activity in the corporate governance processes and the manner thereof, and the mechanisms and frequency of communication with the managerial or supervisory bodies. Mercator is looking to consolidate shareholder confidence by regularly reporting on the events at the company and anything related to it. The financial community is informed via the company website at and SEOnet, the electronic information system of the Ljubljana Stock Exchange, in which all releases and announcements have also been published in English since All financial statements of the company Poslovni sistem Mercator, d.d., and the Mercator Group are prepared in compliance with International Financial Reporting Standards. Mercator also regularly organizes meetings with shareholders at company headquarters, press conferences on major business events and announcements of results, meetings with investors and analysts, presentation meetings, and conferences for investors at home and abroad. In 2011, the company Poslovni sistem Mercator, d.d., conducted the following investor relations activities: In March 2011, the Mercator Group Management Board presented the Group's operations in 2010 and major plans for the future at an international press conference. On 10 March 2011, Mercator held the 11th meeting of Mercator Group financial partners which was attended by approximately 70 representatives of commercial banks, leasing companies, and other financial institutions. On 21 April 2011, Mercator took part in the Days of Slovenian Capital Market held for promotion of Slovenian companies among domestic and international portfolio investors. The promotion included individual meetings of companies with the investors and financial analysts. Mercator was introduced to the investors at individual meetings where operations of the Mercator Group in 2010 were presented along with the medium term business plan for the period On 3 May 2011, Mercator took part in the roadshow presenting the companies listed in the Southeastern European stock exchanges. The event, organized by the Ljubljana Stock Exchange, Vienna Stock Exchange, and the Wood Investment Bank, took place in Stockholm, Sweden, and it was intended to present the companies to investors and stock market analysts from Scandinavian countries. The key issue was a review of Mercator operations in 2010 and medium term business plan for the period Mercator took part in two webcast corporate presentations, on 1 June 2011 and on 13 September These events were organized by the Ljubljana Stock Exchange in order to present the companies to investors and stock market analysts. On 6 December 2011, Mercator took part in the investor meetings held by the Ljubljana Stock Exchange. The event took the form of individual meetings with various investors and financial analysts. 68

72 At the meeting held on 19 December 2011 by the Pan-Slovenian Shareholders Association, the company Poslovni sistem Mercator, d.d., was presented the Shareholder- Friendly Company award. In the explanation, it was stated that Mercator provides complete information to all shareholders, treating them equally, and thus also protecting the interest of minority shareholders. Throughout the year 2011, the company Mercator conducted activities to support the process of disposal of a majority block of company shares by a consortium of sellers, subject to legal and other possibilities and the condition that interests of Mercator Group are suitable protected. The company kept the shareholders informed about the developments in this regard via the SEOnet information system. Financial calendar for 2012 The company Poslovni sistem Mercator, d.d., announces the outline financial calendar late each year for the following year, listing major events and announcements planned. The calendar is announced in the SEOnet electronic communication system. The following announcements are planned for 2012: Type of information Planned announcement date* Unaudited results for the year 2011 and Business plan for the year 2012 Audited Annual Report of the Mercator Group and the company Poslovni sistem Mercator, d.d., for the year 2011 Thursday, 19 January 2012 Monday, 27 February th regular Shareholders Assembly Friday, 30 March 2012 Ex dividend date Tuesday, 3 April 2012 Date of record in the register of shareholders, to establish entitlement for dividends Date of dividend payment Business Report of the Mercator Group and the company Poslovni sistem Mercator, d.d., for the period Wednesday, 4 April days after the adoption of the decision of the regular Shareholders Assembly Wednesday, 16 May 2012 Business Report of the Mercator Group and the company Poslovni sistem Mercator, d.d., for the period Business Report of the Mercator Group and the company Poslovni sistem Mercator, d.d., for the period Wednesday, 22 August 2012 Wednesday, 14 November 2012 Business plan for the year 2013 Wednesday, 12 December 2012 * The dates listed are the currently planned dates. Actual dates may be subject to change. The announcements will be available on the Ljubljana Stock Exchange website in the SEOnet system, and on the website of the company Poslovni sistem Mercator, d.d. The same applies to any changes to the financial calendar. 69

73 RISK MANAGEMENT Mercator Group performance in 2011 was considerably affected by aggravated conditions in global financial markets, which bore a negative impact on the entire economic environment both globally and in the markets of Mercator operations. This was reflected in notable drop in retail demand, as well as in the persistence of the trend of uncertainty with regard to financial risks which were not common in the period before the crisis. In such harsh and uncertain environment, it was crucial for Mercator Group to carefully manage the risks that it faces in its business operations. Risk management goals Active risk management at the Mercator Group is geared towards the objective of timely recognition and response to potential threats by developing appropriate measures to hedge against identified risks or to reduce risk exposure. Adopted risk management measures are incorporated into daily operations at all companies of the Mercator Group. Following are the benefits of risk management: at the very beginning, there is the choice between ambition on one hand, and the viability of more appropriate and successful strategies and more efficient tactics for attaining the goals on the other; anticipation, timely identification of negative trends and events, and timely response or preventive action; anticipation, timely identification of positive trends and events, and turning these trends to our benefit; more efficient management of the value of companies in the Group and resulting improvement in performance; lesser negative volatility, or variance, of future business performance; lesser probability of business or financial problems; improved relations with the Group stakeholders customers, suppliers, bankers, shareholders, employees as a result of more reliable operations; better information for adopting business decisions; better quality of planning future operations. Risk management organization Risk management activities at Mercator Group are the responsibility of the dedicated Risk Management Council. The Council is managing systematic risk management processes which are precisely laid down in the Rules of Procedure for Risk Management. Responding to the requirement to monitor and analyze the risks from the aspect of several professional areas, and specific characteristics of respective risks, the Risk Management Council established particular support teams covering the three key areas of risks. 70

74 Risk management methodology Risk management process at the Mercator Group includes specifying the risk management policy, identification of risks, sensitivity analysis, defining the threshold value for key risks, adopting measures for managing the risks, and implementation thereof to daily decision-making in individual fields. Estimates of exposure to individual risk types are prepared according to the probability and an assessment of damages in case of certain events that would result in such damages. Risk exposure is estimated based on sensitivity analysis which yields a percentage decrease in gross cash flow from operations at the Mercator Group or company level in case of occurrence of certain event which is the basis for risk analysis. The probabilities of the occurrence of particular events are calculated based on an analysis of historical data and expectations about the frequency of such events in the following year. Various influences and factors are considered in the analysis, which are adjusted to specific type of risk. Risks that cannot be assessed quantitatively are assessed qualitatively. Risks for which the negative economic effect, weighted by the probability of occurrence, exceeds 1 percent of gross cash flow from operating activities of the Mercator Group or a particular company, are identified as key risks. Key risks for which no measures have yet been taken or which are not hedged in a manner that in which they would be entirely controlled, are most closely monitored and managed by adopting measures that either minimize the damage upon the occurrence of an event, or reduce the level of likelihood of the occurrence of such event, thus mitigating the risk to an acceptable level. Implementation of adopted measures for managing the key risks is reviewed in a special internal audit. Risk management activities are also reported on quarterly basis to the Audit Committee. 71

75 Managing the key risks in 2011 At the Mercator Group, we are constantly re-examining and analyzing the existing and potential new risks, as we devise and implement the measures for their management. Particular attention is paid to the changes in economic conditions and their effect on individual areas of risk management. Following is a presentation of risks that were defined as key risks within their respective types, or groups of risks, and which were therefore most closely monitored and controlled in

76 Business Risks Business risks are related to company operations and our core activity. Key risk Risk management analysis for 2011 Planned activities Assessment of the change in exposure 2012/2011 Risk of a decline in purchasing power Assessment of the risk of a decline in purchasing power (size of market) due to challenging economic conditions. - We are monitoring on quarterly basis the changes in key macroeconomic indicators (unemployment, GDP, inflation rate etc.) and their effect on Mercator operating activities and retail in general, in all markets of our operations. - Forecasts of economic growth for Central and Eastern Europe which include all key markets of Mercator operations, have seen a downward adjustment for The reason for such adjustment is the region's strong link to the euro zone. Slower economic activity normally results in higher unemployment which in turn leads to lower household consumption and government spending. - The unemployment rate is the key indicator of purchasing power and the sense of security on the part of the consumers. In the last year, this category has reached the highest levels in the last five years in the key markets of Mercator operations. - We have adapted the marketing activities to the new conditions in order to provide adjusted offer for our customers, and to retain our revenue level. - Strategic project of refreshment of Mercator FMCG offer in order to adjust the operations to the stringent conditions in the market includes the following measures: 1. Adapting and rationalizing the assortment 2. More ambitious development of the private label 3. Improving the price competitiveness 4. Store modernization 5. Comprehensive revision of the customer loyalty system and adjustment of promotional activities - Rationalization of operations and reaping untapped internal potential in operating activities. Risk of suboptimal marketing mix and effects of the competitive environment Assessment of risk based on market conditions and Mercator's position in the Group's target markets. - We are regularly monitoring the perception of key elements of the marketing mix. In 2011, a slight relative improvement of market position could be seen in Slovenia. Such improvement was fuelled by more efficient management of the marketing mix. - Highly competitive environment in all markets compels us to monitor our competitors even more closely with regard to every aspect of the marketing mix, and to respond promptly with the marketing mix management tactics. - Further improvement in the efficiency of marketing mix management as a part of the project of refreshment of Mercator FMCG offer, with simplified strategies and tactics for each category (particularly for target categories), based on shopping behaviour of consumers and measures implemented by competitors, from the following aspects: 1. pricing management based on regular monitoring of competitiveness of our regular retail prices; 2. successful and efficient and simple promotional activities for key products; 3. active assortment management both for branded and for private label products; 4. consistent management of sales area including planograms for the smallest stores. 73

77 Risks of failure to attain the planned profit margin Assessment of the effect of further aggravation of economic conditions on the purchasing power and consequently on the attained profit margin. - Due to the increasingly harsh economic situation which will surely result in lower consumer purchasing power, additional investments in terms of pricing will be required; this will affect the profit margin attained. - Planned and actual key performance indicators for the entire FMCG format and for particular categories are regularly monitored. In case of any deviation, shortterm and long-term measures for the improvement of key performance indicators within each category or at the level of a particular product must be implemented immediately. Furthermore, effective and successful management or regular and promotional retail prices is also of key importance. Risks in the supply process Assessment of global impact on Mercator's supply processes. Local effects on Mercator's supply processes - Local risks in the process of purchasing products for resale are rooted in the harsh economic conditions faced by our suppliers. Some of our suppliers have seen insolvency and bankruptcy proceedings instituted. The results are delivery failures and delivery of goods of inadequate quality. Global effects on Mercator's supply processes - Global risks include currency exchange risks (drop in the value of EUR relative to the USD) and risks related to tradable commodity prices (fuels, basic alimentary products) which affect the cost of products purchased by the Mercator Group. Managing local risks - Transparent operations with proven suppliers allow us to perceive any problems resulting from the economic hardship in a timely manner, and to adjust instantly to reduce the possibility of delivery failures. - Regular monitoring and checking of supplier solvency, and annual assessment of suppliers allow timely redirection to new supply sources. Managing global risks - Transition to centralization of global supply in order to improve the procurement terms and conditions, and to reduce the effect of input raw material price volatility on the production of products in target categories. - The effect of an increase in raw material prices which would translated into higher cost of products purchased by the Mercator Group - In the Southeastern European region, customs and other duties, as well as some other forms of protection of local manufacturing are present. Legend: 74

78 Financial risks Financial risks are those that may negatively affect the ability to generate cash flows, management of cash flows, maintaining the value of financial assets, and managing financial liabilities. Key risk Risk management analysis for 2011 Planned activities Assessment of the change in exposure 2012/2011 Credit risk in wholesale Assessment of the risk that receivables from business partners resulting from deferred payment will only be settled partly or not at all. - We are monitoring the level and changes in the level of receivables to wholesale customers. - In 2011, the problems of defaults and delinquency (late payments) were still persisting with some major wholesale buyers. Therefore, we continued to restrict the portion of deferred payment sales without collateral, which resulted in lower exposure to wholesale and other partners. - In 2011, impairment of trade receivables rose by 4.7% relative to 2010; however, this is less than the increase in revenue in the same period (5.3%). - Earlier stoppage of further deliveries in case of late payment of the due payables. - Balancing the limit for those customers whose receivables are secured with first grade insurance. - Increasing bilateral or multilateral netting (netting by novation). - Hiring a third-party agency for the collection of overdue receivables. - Monitoring exposure to individual customers at the Mercator Group level. Impairment of receivables 2 : EUR thousand Index 2011/2010 Impairment of receivables 36,270 34, Mercator Pika card credit risk Assessment of the Mercator Pika card credit risks (possibility that receivables from customers, resulting from deferred payment, shall only be settled partly or not at all). - We are daily monitoring the changes in receivables from Mercator Pika card holders. - Introduction of maximum number of instalment purchases on a single card. - Introduction of SMS overdue reminders. - Regular monitoring of card abuse. - Improved management of credit risk for family cards. - Lowering the limit for instalment payments. 2 Revaluations/adjustments to receivables also include adjustments related to Mercator Pika card. 75

79 Currency risk Assessment of the loss of economic benefit due to changes in exchange rate. - Subsidiaries in Serbia, Mercator-S, d.o.o., and in Croatia, Mercator-H, d.o.o., are particularly exposed to fluctuations in the EUR/RSD and EUR/HRK exchange rates, respectively, in the segment of financing of financial liabilities from international and local EUR-denominated loans. In 2011, average kuna exchange rate was HRK 7.44 per 1 EUR. Compared to the year before, the Croatian kuna exchange rate depreciated by 2.1% relative to the euro (7.29 in 2010). Average exchange rate for the Serbian dinar was at RSD per 1 EUR; average rate of the Serbian dinar in 2010 was at RSD per 1 EUR. - Constant monitoring of macroeconomic background of the changes in the exchange rate at hand, and other related macroeconomic indicators and trends. - Based on the general trends and expectations, we are looking to adapt our operations, as far as possible, in such way that it is naturally unexposed to foreign currency risk. - In case of an increase in currency risk, the Group will decide with regard to appropriate additional measures and measures to mitigate the risk. EUR/RSD exchange rate movements in 2011: EUR/HRK exchange rate movements in 2011: Interest rate risk EURIBOR interest rate is subject to market fluctuations and it is changing on a daily basis, which can lead to increased financing costs. - Mercator Group liabilities include some liabilities that are dependent on the changes in the EURIBOR variable interest rate. In 2011, variable 6m EURIBOR rate rose from 1.224% to 1.617%, or by 32.1 percent. Average 6m EURIBOR in 2011 was 1.64%. 6m EURIBOR movements in 2011: - Regular monitoring of the changes in variable interest rates and, given any forecasts of rising interest rates, examining the possibilities offered by derivative financial instruments in order to hedge the interest rate risk. - At any moment, at least 50% of all financial liabilities used to finance noncurrent assets and at least 25% of total financial liabilities are hedged. - In 2011, Mercator signed interest rate swap agreements in the amount of EUR 175 million, and interest rate cap agreements for EUR 175 million. 76

80 Liquidity risk Assessment of the risk that at a certain moment, the company will not have enough liquid assets to settle its current liabilities. - In 2011, Mercator Group further pursued the activities to restructure current financial liabilities into non-current liabilities. In this period, we completed the drawdown of a syndicated loan facility in the amount of EUR 105 million (EUR 85 million had been drawn by December 31st 2010). Furthermore, we signed in this period the highest syndicated loan in the history of the company operations, in the total amount of EUR million, and also utilised this credit facility. As a result, the ratio between non-current and current financial liabilities was improved from 63.0:37.0 (as at the end of 2010) to 69.4:30.6 (end of 2011). - Establishing liquidity management at the Mercator Group level according to the needs of each company. - Improvement in working capital, searching for internal untapped potential, and diversification of financing sources. Changes in composition by maturity for Mercator Group liabilities 2011: Legend: 77

81 Operational risks Operational risks are related to the progress of business processes and activities at the Mercator Group, and to the consumption and costs incurred in the progress of business processes. Key risk Risk management analysis for 2011 Planned activities Assessment of the change in exposure 2012/2011 Category management operational risks Increase of tradable commodity prices, seasonal effect. - Category management includes daily monitoring of actual gross profit margin (AGM) and actual turnover which is affected by delivery failure risks, inspection penalties, warranty claims, weather effects, increases in excise duties, and private label delivery failures. - Particular attention is paid to constant monitoring of tradable commodity and raw material prices and seasonal weather effects on individual categories. - We also time the announcement of tenders for private label production for periods when the prices of tradable commodities are lower; in addition, we pay particular attention to the supplier's commitment regarding the period of validity of the tender price offered. - We also look to reach agreements with the suppliers for additional discounts in case of additional price cuts or in case of return of goods following the end of season. Core activity operational risks Failure of the refrigeration system and electrical wiring. IT risks - We are regularly monitoring the operational activities of retail, wholesale, logistics, and production. - The most critical risks pertain to a failure of the refrigeration system and electrical wiring in the existing warehouse infrastructure at the Zalog and Bohova sites. In 2011, pipelines and valves were inspected and restored as required, and ammonia detectors were procured. - Mercator Group IT risk appears in management of business data, business IT systems, and internal business processes. The following measures are to be implemented at the Zalog and Bohova warehouse: education of refrigeration system managers; protection equipment management; management of electrical wiring and cleaning of switch boxes and terminals; installation of ammonia indicators in working areas with delayed detection; measurements of electrical wiring; upgrade of smoke sensors in switch boxes and terminals, with a connection to fire alarms. - Maintaining an up-to-date backup copy of the key IT systems and segmentation and mirroring of key system elements. - Constant monitoring and improvement of internal business processes. 78

82 Environmental risks Electrical energy. - We are regularly monitoring our power consumption and the causes of any inefficiency in the use of electrical energy. - In 2011, we installed covers on refrigeration chests, installed LED lighting, adopted the decision to install a combined heat and power (co-generation) plant etc.; however, there are still possibilities to reduce the power consumption. - Further activities to reduce power consumption in Slovenia and in the markets of Southeastern Europe. - Regularly monthly monitoring of environmental reports and conducting analyses of the energy status of buildings with above-average energy consumption. - Preparing the studies and analyses for decisions on the use of alternative sources of energy. Human resource risks Absenteeism due to illness. - The risk of health-related absenteeism is not likely to decrease in the future as rationalization measures will result in even higher workload and exhaustion of our employees, which in turn will increase the probability of work-related injuries and absenteeism due to illness. This is particularly acute in units or regions with higher average age of employees (especially Slovenia). - Educating and informing the employees about healthy lifestyle; working with doctors of various specialities who should be invited to perform extraordinary examinations (Croatia); holding interviews with employees who are absent more frequently; verifying absenteeism due to illness in cases where abuse is suspected (Croatia); such cases should be reported to the management. Legend: Risk exposure assessment According to the forecasts by analysts, we can expect to enter a new cycle of economic crisis and the resulting further aggravation of economic circumstances in the coming years, which in turn would bear a negative impact on Mercator Group operations in all of its markets. Due to a high level of uncertainty regarding the future development of business circumstances, any assessment of the effects on the exposure to risks would be quite unreliable. Should any major changes occur relative to the current expectations with regard to the key aspects of our business and economic environment, the exposure of Mercator Group to the key risks could become considerable, or high, despite the measures introduced to hedge them. The Management Board shall assess the exposure to key risks on regular basis in view of the crucial aspects of the economic environment, and devise appropriate measures to mitigate or hedge such risks as far as reasonably possible. 79

83 PERFORMANCE ANALYSIS Mercator Group operations were challenged by harsh economic conditions in We adjusted our operations to the economic hardship and changes in consumer behaviour, while remaining devoted to our mission of offering the consumers the best value for their money through a pleasant shopping experience despite the hectic everyday. The following factors affected Mercator Group performance in 2011: + revenue growth resulting from development activities and strategic business combinations; conducting marketing and development activities in order to adjust the offer to the lower consumer purchasing power; further implementation of business rationalization measures; harsh economic conditions were reflected in the stagnation of purchasing power and the resulting decrease in the volume and value of consumption of fastmoving consumer goods; pessimistic expectations regarding economic recovery and lower purchasing power resulted in a decrease in consumption of durable and luxury goods; the negative impact is felt in the sportswear, sports equipment, and textile sales; in addition, poor winter season and more conservative response by the consumers on sales and special offers also bore a negative effect; extensive investment in terms of retail product pricing in order to offer more affordable prices to our consumers; more stringent competition, particular by discount retailers; negative exchange rate movements; credit risks in wholesale as a result of weaker liquidity of businesses restricted the possibilities of generating revenue in wholesale. Following is an analysis of performance for 2011, focused only on the Mercator Group. The company Poslovni sistem Mercator, d.d., has a double role in the Mercator Group: it is the parent company that holds ownership shares in the Group's subsidiaries; simultaneously, it is an operating company carrying out all trade and other activities in Slovenia. Hence, it is sensible to focus for the purpose of performance analysis only on the consolidated financial statements that represent the performance of the Mercator Group as a uniform business entity. In addition, due to the transfer of a part of operating activities to the companies Intersport ISI, d.o.o., and Modiana, d.o.o., in 2010, financial statements of the parent company Poslovni sistem Mercator, d.d., are not comparable in all categories between the periods. 80

84 ANALYSIS OF CONSOLIDATED INCOME STATEMENT in EUR thousand Index 2011/2010 Revenue 2,928,433 2,781, Costs of sales -2,762,213-2,611, Gross profit 166, , Administrative expenses -103,442-99, Other income 26,064 23, Results from operating activities 88,842 94, Net interest expenses -50,232-41, Net finance foreign currency translation differences -3,383-10, Other net finance expenses -3,286-2, Profit before income tax 31,941 40, Tax -8,401-9, Profit for the year 23,540 30, Gross cash flow from operating activities 161, , Gross cash flow from operating activities before rental expenses 205, , Revenue and productivity Revenue in 2011 amounts to EUR 2,928,433 thousand, which is 5.3 percent more than in In Slovenia, revenue amounted to EUR 1,690,381 thousand, which is 0.2% lower than in In other markets, revenue stood at EUR 1,238,052 thousand, which represents an increase of 13.9% over the year before. The increase predominantly pertains to takeovers of trade operations in 2011 (activities of the Coka Group and Familija Marketi in Serbia) and to the fact that entire year of operations of the acquired activities of the companies Pantomarket, d.o.o., and Plus Commerce, d.o.o., in Montenegro was included in the financial statements. The greatest share in total revenue goes to net sales of goods, materials and products (93.6%); the rest is related to revenue from services rendered. Labour productivity at Mercator Group in 2011 amounted to EUR thousand per employee based on hours worked, which is 1 percentage point more than in

85 Cost efficiency The graph below shows the changes in total costs without costs of goods sold, amortization and depreciation, rents and provisions as a share of revenue, compared to revenue per employee. Throughout the years at hand, productivity has grown while the ratio between costs and revenue was falling, except in 2009 and 2010 when all markets of Mercator operations suffered the negative effects of the global economic crisis. In 2011, Mercator Group again saw an increase in productivity and improvement in cost efficiency. Costs of sales Mercator Group costs of sales which include the purchase value of goods sold, production costs, selling and marketing costs, and other expenses, amounted to EUR 2,762,213 thousand in 2011, which is 5.8% more than in The increase of costs of sales is 0.5 percentage points higher than the increase in revenue, which is a result of extensive investments into prices. With these investments, Mercator adapted to the changes in consumer behaviour and the drop in their purchasing power; however, they could not be fully compensated for by cost rationalization of operations. Administrative expenses Mercator Group administrative expenses in 2011 amount to EUR 103,442 thousand, which is 3.8% higher than in Given the extent of the operating activities, this points to further cost rationalization of operations. Expenses by nature The largest share of selling and marketing costs, administrative expenses and production costs, is represented by labour costs (42.7%) which amount to EUR 295,660 thousand in 2011, or 1.3% more than in 2010; the number of employees based on hours worked rose by 4.5% in the year. Costs of material and services in 2011 amount to EUR 293,126 thousand, which is 5.5% or EUR 15,236 more than in Rental costs (as Mercator Group has recently employed long-term operating lease as a predominant method to expand its retail network) were up by EUR 9,424 thousand, or 27.1%. The share of cost of material and services in revenue is at 10% which is the same as in Depreciation costs in 2011 amounted to EUR 81,306 thousand, which is EUR 2,612 thousand more than in

86 Results from operating activities In 2011, Mercator Group's results from operating activities (operating profit) amounted to EUR 88,842 thousand, which is EUR 5,663 thousand, or 6.0% less than in Results in 2011 were positively affected by the increase in revenue, marketing and development activities, and business rationalization measures. On the other hand, they were negatively affected by harsh economic conditions and their influence on consumption in all markets, and extensive investments into more affordable prices, as a response to the falling consumer purchasing power. Finance income and expenses in EUR thousand Mercator Group Index 2011/2010 Interest income 3,647 3, Interest expense -53,879-44, Net interest expense -50,232-41, Net finance foreign currency translation differences -3,383-10, Other net finance expense -3,286-2, NET FINANCE EXPENSE -56,901-54, In 2011, Mercator Group finance income from interest received amounts to EUR 3,647 thousand, which is EUR 220 thousand or 6.4% more than in Finance income in the amount of EUR 1,377 thousand is related to revenues from regular interest on financing; the rest includes revenues from default interest and other finance income. In 2011, Mercator Group finance expenses for interest paid amount to EUR 53,879 thousand, which is EUR 8,931 thousand or 19.9% more than in Finance expenses in the amount of EUR 53,676 thousand include expenses from regular interest on borrowings from commercial banks. Net negative currency translation differences in financing amount to EUR 3,383 thousand in The increase of finance expenses was considerably affected by the growth of EURIBOR: they were higher by EUR 6 million as the average reference rate (6-month EURIBOR) rose by 32.1 percent relative to

87 Profit for the year in EUR thousand Index 2011/2010 Results from operating activities 88,842 94, Net finance expense -56,901-54, Tax -8,401-9, Total 23,540 30, In 2011, Mercator Group profit before income tax amounts to EUR 31,941 thousand, which is EUR 8,403 thousand or 20.8% less than in Cash flows from operating activities The relevant indicator of the ability to generate operating cash flow, which also accounts for the expansion of Mercator Group's retail network through operating lease, is gross cash flow from operating activities which amounted to EUR 205,898 thousand in 2011, or 0.5% more than in The relative decrease of the ratio between gross cash flow before rental expenses and revenue was mostly a result of extensive investments into affordable pricing which could not be fully compensated by cutting the operating costs. Stable generation of cash flows from operating activities, even in the time of economic hardship, indicates great financial power, competitiveness, and business efficiency of the Group. Mercator Group's gross cash flow from operating activities in 2011 amounted to EUR 161,715 thousand, which is 4.9 percent less than in In 2011, Intersport and Modiana Groups operated as independent legal entities. They generated a combined total of EUR 158,031 thousand of revenue; gross cash flow from operating activities reached EUR 142 thousand, and gross cash flow from operating activities before rental expenses stood at EUR 15,445 thousand. 84

88 ANALYSIS OF CONSOLIDATED STATEMENT OF FINANCIAL POSITION in EUR thousand Index 2011/2010 Non-current assets 2,035,379 2,016, Current assets 612, , Total assets 2,647,663 2,608, Equity 788, , Non-current liabilities 907, , Current liabilities 951,639 1,046, Total equity and liabilities 2,647,663 2,608, Assets Mercator Group assets as at 31 December 2011 amounted to EUR 2,647,663 thousand, which is EUR 38,809 thousand more than at the end of As at 31 December 2011, the value of Mercator Group non-current assets amounted to EUR 2,035,379 thousand, which is EUR 18,659 thousand, or 0.9 percent more than as at 31 December The biggest share of non-current assets is represented by property, plant and equipment, accounting for 93.6% (EUR 1,906,018 thousand) of the total figure. Their amount rose by EUR 35,590 thousand relative to the end of The change in 2011 is related to investments, revaluation adjustments, depreciation and amortization, disposal of unnecessary and non-viable property, plant, and equipment, and currency translation differences. As at 31 December 2011, the value of intangible assets amounts to EUR 47,623 thousand, of which EUR 40,847 pertains to brands, material rights, and patents, and EUR 6,776 is related to goodwill. Relative to the end of 2010, the value of intangible assets fell by EUR 5,003 thousand. Investment property as at 31 December 2011 is valued at EUR 3,450 thousand, which is EUR 444 thousand less than as at the end of 2010; the change in value in 2011 pertains to disposal of investment property, and depreciation and amortization. As at 31 December 2011, the value of Mercator Group current assets amounts to EUR 612,284 thousand, which is 3.4 percent, or EUR 20,150 thousand, more than a the end of The largest share thereof includes inventories (54.8%) and trade and other receivables (39.8%). 85

89 Equity and liabilities Share capital and provisions As at 31 December 2011, Mercator Group share capital amounts to EUR 788,969 thousand, which is EUR 9,196 thousand, or 1.2%, less than as at the end of Relative to the situation as at the end of 2010, provisions were reduced by EUR 2,998 thousand; net effect of the change in provisions on the income statement was merely EUR 647 thousand. Financial liabilities As at 31 December 2011, total financial liabilities amount to EUR 1,184,733 thousand, which is EUR 114,505 thousand more than as at the end of In the composition of financial liabilities, non-current liabilities represent 69.4% while current liabilities represent the remaining 30.6% (as at 31 December 2010, the ratio between non-current and current financial liabilities was 63:37). Net debt of the Mercator Group, calculated as the difference between financial liabilities and financial assets, amounted to EUR 1,091,145 thousand as at 31 December 2011 (31 December 2010: EUR 949,081 thousand), which is EUR 142,064 thousand, or 15%, more than as at 31 December The increase in net financial debt is notably related to lower balance of trade payables as at the end of the year, and the management policy for working capital and current financial liabilities. Trade and other payables Trade and other payables as at 31 December 2011 amounted to EUR 586,351 thousand, which is EUR 58,762 thousand less than at the end of The decrease is consistent with Mercator Group's policy of trade payable management. Debt-to-Equity Ratio As at 31 December 2011, Mercator Group attained a debt-to-equity (capital structure) ratio of 1:1.33. The ratio is a quotient between equity, which includes share capital as reported in financial statements and non-current provisions, and net financial debt. Non-current Asset Coverage As at 31 December 2011, non-current coverage of non-current assets with non-current liabilities at the Mercator Group amounts to 83.3%, which is 5.9 percentage points more than as at the end of

90 ANALYSIS OF CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Total comprehensive income in 2011 amounted to EUR 22,545 thousand, which is EUR 995 thousand less than profit for the year Changes in comprehensive income mostly pertain to negative changes in the effective part of gains and losses from hedges which amount to EUR - 2,780 thousand, and positive currency translation differences which amount to EUR 2,015 thousand. ANALYSIS OF CONSOLIDATED STATEMENT OF CASH FLOWS in EUR thousand Index 2011/2010 Net cash from operating activities -1, ,745 Gross cash flow from operating activities 161, , Changes in working capital -101,017 75,347 Interest paid and tax expenses -62,417-55, Net cash from investing activities -65, , Net cash from financing activities 73,752-9,916 Net increase in cash and cash equivalents 6,514 5, In 2011, Mercator Group increased the value of cash and cash equivalents by EUR 6,514 thousand. Net cash from operating activities is negative in 2011 at EUR -1,719 thousand, which is mostly the result of decrease in trade and other payables. Net cash from investing activities is also negative in 2011 at EUR -65,519 thousand, mostly as a result of acquisition of property, plant and equipment. Net cash from financing activities is positive in 2011, amounting to EUR 73,752 thousand, which is the result of higher debt of the Mercator Group. PERFORMANCE ANALYSIS BY MARKETS Serbia Despite the turbulent macroeconomic environment marred by high inflation rate and persisting pressure on depreciation of the local currency at the end of the year, Mercator succeeded in improving its performance in Serbia in 2011 relative to the year before. The reason behind such improvement was successful adjustment to the changed consumer behaviour, as well as efficient implementation of cost rationalization measures. Also contributing to the increase in revenue in 2011 was the takeover of trade operations of the companies of the Coka Group (a total of 22 new units spanning a gross area of over 12 thousand square meters) and the company Familija Marketi (a total of 27 new units with combined area of 30 thousand square meters), as well as opening of more than ten new stores of all formats. In Serbia, Mercator generated revenue of EUR 563,355 thousand, which is 17.6% more than in

91 Croatia In Croatia, Mercator's performance slipped in 2011 relative to 2010, which is mostly the result of bleak macroeconomic situation, low consumer purchasing power, and growing competition. Mercator's business performance in fast-moving consumer goods retail in Croatia has been struggling since 2009 when Mercator lost nearly one seventh of consumers in a very short period of time as a result of a very emotional response to the political dispute between Slovenia and Croatia; with the onset of recession and declining economy, we were unable to subsequently replace this loss of revenue. Notable change in operating volume had a strong effect on business performance and this effect persisted in 2011 when additional investment was required to provide affordable prices for the consumers. In 2011, we launched the project of restructuring Mercator's offer in Croatia, which is aimed at refreshment and adjustment of the offer to the changes in consumer behaviour. The project will be carried out both in Mercator and Getro retail units. At the same time, Getro shopping centers are being restructured, which involves optimization of sales area, re-branding of some units to Mercator, and development of the offer of technical consumer goods and offer by third-party tenants within Getro trade centers. Croatia's accession to the European Union and the resulting possibility of reaping regional synergies between Slovenia and Croatia is of key importance for the improvement of performance in the Croatian market where economies of scale are very important due to the specific structure of the market. In Croatian market, Mercator revenue amounted to EUR 429,683 thousand in Relative to the year before, revenue is up by 0.6%. Bosnia and Herzegovina In the market of Bosnia and Herzegovina, Mercator succeeded in increasing its revenue despite the harsh economic conditions, mostly by successfully adjusting to the changes in consumer behaviour and by expanding the activities of wholesale. A part of the growth can also be attributed to the takeover of retail operations of the company Drvopromet, by which Mercator obtained 63 quality sites in the Sarajevo area and other major cities of Bosnia and Herzegovina, with total area of over 24 thousand square meters. In Bosnia and Herzegovina, revenue rose by 5.4% in 2011 relative to the year before, reaching a total of EUR 130,520 thousand. Montenegro At the beginning of 2011, the agreement took effect according to which Mercator took over the trade operations of the companies Pantomarket and Plus Commerce in Montenegro (a total of 77 new units spanning over 31 thousand square meters), which made Mercator the leading retailer in this market. Expansion of operations allowed Mercator's Montenegro company to reap the economies of scale, which is the first precondition for efficient and successful retail operations. Solid performance is also a result of timely response to the changes in consumer behaviour, and effective implementation of cost rationalization measures. In 2011, revenue amounted to EUR 100,645 thousand, which is 103.5% more than in Bulgaria and Albania In 2009, Mercator launched its operations in two completely new markets: Bulgaria and Albania. The model of market penetration and development for both companies was based on leasing large retail area in capitals of the said countries, mostly for FMCG stores of the hypermarket format. Harsh economic conditions bear an important impact on the development of these two markets, both in terms of delays of development activities and in terms of performance. Furthermore, operations in these markets is in the early stages, which means that overall performance is burdened with entry costs related to marketing and investment activities, and costs of activating new retail area. Moreover, the companies have not yet reached an adequate operating volume which would allow reaping the economies of scale in procurement and logistics. Mercator's entry in this market is based on the model of long-term operating lease of retail facilities, which reduces the need for invested capital, but presents a burden for the current business performance. 88

92 Responding to the changes in circumstances resulting from the economic crisis and related risks that present a major obstacle to the implementation of the initially devised development model for the companies in the Bulgarian and Albanian market, Mercator Group redefined in 2011 the entire strategy of future development of these companies. The central goal of the new strategy is rapid expansion of the retail network through lease of commercial premises in urban parts of capitals, which shall be allocated for smaller units of supermarket store format, as well as adjustment of the sales assortment predominantly by increasing the share of private label products and by competitive pricing. In Bulgaria, Mercator generated revenue of EUR 8,482 thousand in 2011, which is 157.1% more than in In Albania, revenue rose by 20.5% in 2011 relative to the year before, reaching a total of EUR 5,367 thousand. Major financial categories and indicators by respective markets (EUR thousand) Slovenia Serbia Croatia Bosnia and Herzegovina Montenegro Bulgaria Albania Mercator Group Revenue 1,690, , , , ,645 8,482 5,367 2,928,433 Share Group revenue 57.7% 19.2% 14.7% 4.5% 3.4% 0.3% 0.2% 100.0% Gross cash flow from operating activities before rental expenses 125,659 47,646 17,061 11,587 7,176-2, ,899 Gross cash flows from operating activities before rental expenses / revenue 7.4% 8.5% 4.0% 8.9% 7.1% -31.3% -10.7% 7.0% Gross cash flow from operating activities 116,931 36,876 4,496 7,326 1,850-4,440-1, ,715 Invested capital in active noncurrent commercial property 819, , , ,535 20,037 10,590 4,616 1,545,709 Gross cash flows from operating activities / Invested capital in active non-current commercial property 14.3% 13.5% 1.4% 6.9% 9.2% -41.9% -28.7% 10.5% Capital invested in active non-current commercial property represents the carrying value of property, plant and equipment, investment property, and intangible assets, less inactive and unnecessary and non-viable assets and revaluation surplus on property, plant, and equipment as at 31 December

93 Key Financial Indicators Poslovni sistem Mercator Group Mercator, d.d INDICATORS OF PROFITABILITY Return on equity 3.0% 3.9% 3.8% 4.8% Return on sales 0.8% 1.1% 1.9% 2.2% Gross profit margin 5.7% 6.1% 7.8% 8.3% INDICATORS OF FINANCIAL STRUCTURE Financial liabilities / equity Net financial debt / equity Equity and provisions to total equity and liabilities 31.0% 32.0% 42.0% 42.2% Financial liabilities to total equity and liabilities 44.7% 41.0% 40.6% 38.4% Trade and other payables to total equity and liabilities 22.1% 24.7% 15.2% 17.0% Net financial debt / gross cash flow from operating activities Non-current asset coverage 83.3% 77.5% 91.4% 81.7% INDICATORS OF OPERATING EFFICIENCY AND PRODUCTIVITY/CAPACITY TO GENERATE CASH FLOW Revenue per employee based on hours worked (EUR thousand) Revenue / labour costs Value added per employee based on hours worked (EUR thousand) Gross cash flows from operating activities / revenue 5.5% 6.1% 7.2% 7.7% Gross cash flows from operating activities before rental expenses / revenue 7.0% 7.4% 7.7% 8.1% 90

94 ANTICIPATED ECONOMIC CONDITIONS AND PLANS FOR 2012 Anticipated macroeconomic environment Macroeconomic analyses for 2012 forecast further aggravation of economic conditions compared to recent years. A new cycle of economic crisis is expected which will negative affect the operations. On most key markets of Mercator operations, low or negative economic growth is expected for 2012, except in Montenegro where the economy is expected to grow faster in 2012 than in the year before. Inflation rate is expected at a somewhat lower figure compared to 2011, but it will remain relatively high. High unemployment rate which is expected to persist in the coming years, will depress the purchasing power of the general population. Consumers will be more price-sensitive and pricing competition among retailers will grow more stringent. Despite the decrease in the 6-month EURIBOR anticipated by the analysts for 2012, the simultaneous increases in margins will drive the financing costs upwards. Anticipated competitive environment Fast-moving consumer goods market in the Southeastern European region is expected to see further consolidation in the Major international retailers will most likely enter these markets and expand their capacity by takeovers of smaller regional players. Discount retailers are also expected to build up their market position. Strategic projects in 2012 Since change is the only thing certain in the increasingly hectic business environment, responsiveness is essential for success. In order to improve our competitiveness and to offer our customers a broad array of affordably priced products, we shall continue to implement in 2012 our strategic projects of Refreshment of FMCG offer and Establishing a hardware and electronics store chain. The project Refreshment of FMCG offer in Slovenia and Croatia will include making further adjustments of our offer to the changes in consumer behaviour by responsive, carefully thought out, and efficient assortment management. We shall increase the share of private label in our offer and provide fair and competitive prices. We shall also revise the customer loyalty system which will allow our customers to immediately claim their discounts on the selected products. The project of Establishing a hardware and electronics store chain will be expanded to Croatia in The new home improvement chain will offer a broad array of quality technical consumer goods in different price segments in order to effectively address all customers. Reaping the potential lying in real estate is of key importance for successful performance and faster growth. Therefore, we shall carry on in 2012 with the monetization project for selected existing retail facilities in Slovenia and in Croatia, with a total combined value of EUR 250 million. These funds will be allocated entirely for reducing the Mercator Group debt. 91

95 Counter-crisis measures Harsh economic conditions require measures for more effective risk management. Therefore, the company Mercator adopted 12 counter-crisis measures already in 2011, which represent a proactive approach to the anticipated hostility of the economic environment, higher unemployment rate, drop in consumers purchasing power, and increased price-sensitivity. These measures are targeted at generating value for the consumers and rationalizing the operations. Creating value for our consumers let us be determined and innovative! In our efforts to offer affordable shopping for essential fast-moving consumer goods in times of economic hardship, we shall adjust to the changes in consumer behaviour by revising the product assortment to include a larger share of private label products; we shall also revise the Mercator Pika customer loyalty system, and reach new customers through new sales channels. In order to help our customers maintain their purchasing power, we shall carry on our activities of investing our savings into more affordable retail prices of products. Let us find the internal improvement potential let us be efficient! Rationalization of operations will be aimed at finding internal improvement potential in our operations, and using the resulting savings to make our retail prices more affordable. We shall improve the efficiency of processes in sales and administration by cutting direct costs of material and services, and by cutting power consumption. Additional sources for our investment activities will be obtained by improved inventory and receivables management. Monetization o real estate will cut our debt in order to reinforce our financial stability and the Group's development capacity. Anticipated key economic indicators Mercator Group Plan Index Plan 2012/ Revenue (EUR thousand) 3,030,387 2,928, Results from operating activities (EUR thousand) 76,376 88, Profit before income tax (EUR thousand) 24,172 31, Profit for the year (EUR thousand) 15,708 23, Gross cash flow from operating activities (EUR thousand) 150, , Gross cash flow from operating activities before rental expenses (EUR thousand) 214, , Capital expenditure (EUR thousand) 88, , Long-term financial investments (EUR thousand) 0 2,248 Return on equity 2.0% 3.0% 66.1 Return on sales 0.5% 0.8% 64.5 Gross cash flows from operating activities / revenue 5.0% 5.5% 89.8 Gross cash flows from operating activities before rental expenses / revenue 7.1% 7.0% Net financial debt / equity Number of employees based on hours worked 23,350 22, Number of employees as at the end of the year 24,915 24,

96 Sustainability Report 93

97 In 2011, we upgraded our sustainability activities with a medium-term Mercator Group Sustainability Strategy for the period until Appointment of the Mercator Group Sustainable Development Council marks the start of our systematic and focused efforts in this field which is highly important for both Mercator and the broad environment of our operations. Sustainable development policy Mercator operations are sustainable and responsible, creating a healthy and safe future for the people and the environment. Dear stakeholders, Sustainable development takes a central place in our strategy of corporate development. In our conception, it consists of a range balanced activities in particular fields of social responsibility, environment protection, and economic sustainability. Our decision to take the path of socially responsible and sustainable operation dates back many years. We made our own sustainability commitments and laid down specific measurable goals in many areas. Our sustainable projects are carried out to promote energy efficiency and to save natural resources. We are maintaining comprehensive control of our impacts on the environment, and we are systematically reducing the amount of waste and emissions. We work in a constructive manner with our suppliers to develop new products. We guarantee safety and quality of products for our customers to whom we provide information to raise their awareness. We provide neat and safe working conditions for our employees and contribute to the development of our local environment. We are highly attentive to both the most important social issues and individuals. Our operations are transparent and compliant with the highest business standards; we treat all stakeholders equally. Therefore, the European Business Award presented to Mercator for corporate sustainability in 2011 was very important to us. We firmly believe that as one of the largest enterprises in the region, we are in a position to contribute a lot to sustainable trade. We are, however, aware that permanent and indeed sustainable results for the generations to come can only be attained through integration and cooperation. We all share the responsibility for our future. Žiga Debeljak, MScBA President of the Management Board Ljubljana, 16 February

98 RESPONSIBLE MANAGEMENT OF SUSTAINABLE DEVELOPMENT Commitment of sustainability Mercator is fostering economic and social development in each local environment of our operations as we generate broader economic and social effects, provide a pleasant and neat environment for the consumers and employees, and constantly improve the quality of the goods and services we offer. We are aware that only socially responsible operations will lead to greater business success, competitiveness, and productivity. With such awareness, we devised our strategic guidelines and policies for our corporate sustainability Field of operation Quality Natural environment Employees Business partners Social environment Customers Strategic policies We strive to implement the international quality management systems. We carry out preventive internal controls to boost efficiency. We efficiently manage our documentation and non-compliance, implement corrective and preventive measures, and monitor the key quality indicators at the level of Mercator Group. We are systematically establishing a relation to our natural environment through energy-efficient construction or refurbishment of stores and office buildings, efficient use of energy, and careful waste management, as well as by thoughtful consideration of other relevant aspects. We provide sustainable logistics and we proactively convey the right information and present our environmentally friendly offer to our customers. Human resource development is focused on developing leadership skills of both current and future leaders. The transfer of knowledge is based on internal instructors, intergenerational cooperation, internal mobility, and training of newly recruited retail personnel. In order to manage absenteeism due to illness and improve employee satisfaction, we are improving the working conditions and raising employee awareness of the importance of a healthy lifestyle. Partnership with suppliers is a key element of sustainable responsibility in business. We work with the suppliers to build solid partnerships based on transparent and straightforward transactions, while making every effort to establish an environmentally friendly supply chain. Mercator's donations are a notable contribution to efficient solutions in key areas of social life, most commonly in healthcare and social care. Mercator's sponsoring activities are closely related to sports, culture, and education. Consistently with Mercator's defined marketing strategy, we devise and carry out marketing activities based on the trends and customer needs. These activities reflect Mercator's commitment to offering environmentally friendly products and services, and to promoting environmental awareness and environmentally friendly activity. We shall continue to pay particular attention to processes and procedures of providing food safety for products in our shelves, and to bring the information on our offer closer to the customers through innovative approaches. 95

99 Sustainable Development Council The Sustainable Development Council operating within the Mercator Group coordinates the activities in areas that are of key importance for corporate sustainability. In early 2011, the Council had an important task of preparing the medium-term strategy of Mercator Group sustainable development and laying down specific goals for the period until This also included defining the starting points for strategic policies by respective fields of sustainable development: Sustainable development management Following are the goals in sustainable development for the period : Field Strategic GOALS ( ) ATTAINMENT OF GOALS (IN 2011) Reducing consumption of Mercator's goals in the Republic of Slovenia regarding energy efficiency Lowering the index of specific power consumption 2011/2010 for Mercator, d.d., to 98.23, or reducing the power power and fuels for are consistent with the adopted consumption by 4.29 kwh/m 2. National Action Plan for energy Reducing the index of specific carbon dioxide emission of heating by efficiency until the year fuels for 2011/2010 at Mercator, d.d., to 97.65, or reducing implementing savings Mercator's goal in the operational the emission by 3.42 kgco 2/m 2. measures, by current business area of Mercator Operations Installing covers and doors on refrigeration equipment in 29 maintenance, and by Southeastern Europe: reducing the selected stores. investments. consumption of electrical energy and fuels by implementing activities for efficient use of energy. Replacement of existing fluorescent lamps with LED luminaires in lightboxes with Mercator's visual identity on seven commercial facilities. Installing equipment for combined heat and power generation Working with verified suppliers. Corporate social responsibility. Care for food safety. Marketing activities related to the offer of environmentally friendly and wellpriced products and services, and information and education of consumers about the environmentally friendly activities. Signed statements, with all suppliers, on product safety and quality, compliance of food and materials, respect of human rights, and attitude towards the broad environment. To consolidate the reputation of the company and the brand with all stakeholders in the region Making notable contributions through sponsorships and donations in those fields that matter the most to the society and the people Focus on humanitarian, cultural, educational, healthcare, and sports projects of national importance in each country of Mercator's operations. Support to over 2,000 projects each year in Slovenia and in the Southeastern European markets. Annual internal control in each store Establishing a permanent expert team for control of quality and safety of our Mercator private label Education of employees regarding food safety. Consistent use of new communication solutions for environmentally friendly offer and services both in stores and in digital media. At least one major marketing activity in fast-moving consumer goods program and at least one major activity for home products. at five retail facilities. Signed statements of safety, quality, and compliance of food and materials in contact with food, with all suppliers. Statements of respect of human rights and attitude towards the broad environment will be signed in mid Our aisles include products by 410 local farmers and small Slovenian producers and growers. We pursued the goals laid down and responded to numerous requests for cooperation, support, and aid in all fields and markets of operation. We made sure we included all local environments of our operations and supported a total of over 2,000 projects. Major ones include the traditional participation in the Ljubljana Marathon, and year-long support to the Slovenian Olympic Committee. Central humanitarian campaign Together Against Cancer involved contributing funds to the Ljubljana Institute of Oncology for the purchase of new ultrasound equipment for brachytherapy of prostate cancer; supporting the activity of the Society of Oncology Patients of Slovenia; and taking part in the organization of the cycling race The Wheel of Life. We supported the project Traditional Slovenian Breakfast and presented breast pumps and sports equipment for children's rehabilitation and recovery to the Ljubljana Paediatric Clinic, as well as provided presents for all children inpatients at the end of the year. We carried out at least one control at food stores; a total of 654 controls. Our in-house control included analysis of over 2,100 products, in addition to recording over 400 product analyses conducted by government control agencies. 800 employees took part in internal training and education courses, spanning a total of 5,700 course hours. In 2011, we developed and introduced the uniform communication solution for environmentally friendly activities and local product labelling. In Slovenia, we conducted several activities under the slogan "Thinking locally": exposed and specially labelled or indicated offer of locally grown FMCG products, and sales promotion activity including the offer of furniture by Slovenian manufacturers. 96

100 Presentation and reporting about sustainable development Organization profile As at 31 December 2011, Mercator Group consisted of the parent company Poslovni sistem Mercator, d.d., headquartered in Ljubljana, and nine subsidiaries in Slovenia, three in Serbia, three in Croatia, four in Bosnia and Herzegovina, one in Montenegro, Bulgaria, Albania, and Kosovo, respectively, and two in Macedonia. Detailed table presenting the Mercator Group composition is presented in the section Mercator Group Profile and Organization in the Business Report. All interim changes regarding the Group composition are reported in the section Major Events in 2011, also in the Business Report. Annual Report is published on Mercator website at in Slovenian and English, in the form of a pdf file and in the form of web interactive version. Annual Report of the company Poslovni sistem Mercator, d.d., includes information required by relevant Slovenian legislation, as well as other information for which the company believes may be of interest to its stakeholders. The contact regarding the Sustainability Report is Poslovni sistem Mercator, d.d., Dunajska 107, 1000 Ljubljana, Head of Group Sustainable Development Council Ms Jana Bergant, Assistant Director of the Brand Management Sector. Characteristics, scope, and boundaries of the report Mercator Group Sustainable Development Council shall report on the attainment of goals and activities in the field of sustainable development on quarterly basis within regular business reporting. Reports on the activities conducted and goals attained in Mercator Group sustainable development efforts shall be developed by the Mercator Group Sustainable development Council based on a standardized reporting form in compliance with the international guidelines for sustainability reporting Global Reporting Initiative G3 (GRI G3). For 2011, Sustainability Report is prepared for the first time based on the GRI guidelines. In reporting about the activities conducted, our starting points are always the goals as laid down in the medium term strategy of Mercator Group Sustainable Development for the period Corporate governance and commitments The company Poslovni sistem Mercator, d.d., which is the parent company of the Mercator Group, is managed by a 6-member Management Board and a 12-member Supervisory Board consisted of 6 shareholder representatives (representatives of capital) and 6 employee representatives. The company's corporate governance is based on the internal document Mercator Group Corporate Governance Policy which is in compliance with the Slovenian legislation and the provisions and recommendations by other government institutions. The document is publicly available on Mercator Website in the section "Investors", "Corporate Governance". Corporate governance in 2011 is reported in more detail in the section Major Events in Mercator is a member of several Slovenian and international associations within which the company has an opportunity for dialogue with the stakeholders and for exchange of sound practice: Regarding Environment Protection, we are members of the Environment Committee with the Slovenian Chamber of Commerce, and the Committee of Environment and Logistics with the Eurocommerce Association. In the field of marketing, we work with the Slovenian Marketing Association, Slovenian Advertising Chamber, and the Consumer Goods Forum which is a global association of retailers and producers. We took an active role in the United Nations Global Compact Slovenia sustainable development initiative, part of the UN Global Compact (UNCG) network. 97

101 The community in which we operate presented us with HRM awards: in Slovenia, we received the full Family-Friendly Company certificate. We successfully complied with our commitments laid down in the Retail Environmental Sustainability Code, which was proven by the review of the international organization Retailers' Environmental Action Programme (REAP). We are involved in the European project PLASTiCE "Innovative value Chain development for sustainable plastics in Central Europe", the purpose of which is to identify and eliminate the restrictions preventing a faster and large-scale implementation of sustainable types of plastics in Central Europe. As a socially responsible trade company, Mercator, d.d., is involved in the project in order to secure access to information confirmed by experts and to offer its customers packaging with a lesser environmental footprint while raising their awareness of the advantages and weaknesses of the use of bio-degradable and other types of plastics. Workers Council is also active at the parent company, providing appropriate representation of the interests of all company employees. Information about the operation of the Workers Council is provided to all employees via internal communication channels; moreover, the employees may contact the members of the Workers Council directly. Stakeholder involvement and communication Mercator's relevance in the broad social environment goes beyond the role of a retailer. Our influence and our activities reach into other important fields of social life as well and therefore, we are looking to involve and integrate our stakeholders into all our key processes. In development of sales and promotional activities, we heed the response, recommendations, and opinions of our customers who are also included in environmental awareness campaigns and in our humanitarian campaigns. The employees are involved in planning and execution of all major projects both in particular fields of work and in the implementation of strategic projects. Indeed, we are counting on the efforts of every employee in order to reach the goals of our operations. In our supplier relations, we are fair partners in procurement activities. We also work with our suppliers in development of new products tailored to our customers, and in adjustment of our offer. The shareholders are treated equally and they are efficiently informed. We are proactive in communicating our achievements and plans to the financial community and we work constantly with the media in all environments of our operations. Key stakeholder groups in all Mercator Group markets thus include the following: customers, employees, suppliers, shareholders (Slovenian and international investment and financial environment); financial institutions (national and international); broader social environment and the media; government and other relevant institutions. 98

102 Annual Report and interim (quarterly) reports of the Mercator Group play a special role among methods of communicating with our stakeholders. Current communication with the public about our operations also includes analyses of the plans for the coming periods, presentations for investors, and general presentations of the Mercator Group, as well as all public announcements made within SEOnet, the electronic information dissemination system of the Ljubljana Stock Exchange. Company website is an increasingly important and frequented medium which includes regularly updated information about the company, its operations and performance, as well as detailed information about our offer and services for the customers. We also worked diligently to develop our digital communication, particularly in social networking sites which present one of the key and most effective communication channels in recent times. Communication with customers In 2011, Mercator Group generated benefits for the customers by providing excellent retail services, high quality goods, and competitive pricing. It is Mercator's goal to not only attract customers, but even more importantly, to retain them and to increase their loyalty by developing a complex customer loyalty system. Understanding of their requirements is of key importance in this regard. Customer satisfaction is built on the following elements of offer: establishing a retail network that will best meet the needs, expectations, and desires of our customers in order to increase their satisfaction and loyalty; defining a selection of products and pricing there of in retail stores in compliance with customer expectations; focus on development and offer of high-quality service that will result in customer satisfaction. Communication with the employees We are making every effort to be an employee and their families friendly company as satisfied employees are proven to be more effective in the workplace, more loyal, and less likely to be absent from work due to illness. At Mercator, we communicate with our employees in various ways. Once per year, we organize key employee meetings; we keep our employees up to date via internal websites and in the company newsletter called Časomer ("The Timekeeper"). Communication with suppliers It is Mercator's goal to establish such relationships and rules with the suppliers that will provide stable and, given the scope, most favourable supply sources for trade and non-trade goods and services in the long run. Therefore, we hold Mercator Marketing Days every year to which our suppliers and business partners are invited. The meeting is an opportunity to define additional starting points for Mercator's ensuing development cycle, in addition to presenting Mercator Group strategic policies, development plans of Mercator trade companies, and marketing strategies for individual sales programs. Communication with shareholders Mercator is committed to equal treatment of all shareholders holding shares of the same class, both internal and external, minority and majority, domestic and foreign. The company shall motivate all shareholders to exercise their rights proactively and responsibly. 99

103 Stronger representation of minority shareholders at the Shareholders Assemblies is also promoted by the company indirectly through proxies, while major shareholders and institutional investors are invited to inform the public of their investment policy, frequency of communication with managerial or supervisory bodies, and other information of interest. Communication with financial institutions Each year, the company holds Mercator Banking Days to which financial institutions working with the Group are invited. This is an opportunity to present the Mercator Group strategic policies, results, and annual Business Plan, as well as to define additional starting points for Mercator's further development. In relation to government institutions, business processes at Mercator Group are conducted in compliance with the relevant legislation, acts, standards, and directives of the European Union. These documents are also the basis for the company's legal acts which are managed in the Mercator Standards Collection. Communication with the media We communicate proactively with the media to provide up-to-date information about all major events at Mercator. We provide comprehensive response to their questions as promptly as possible as we are aware of the importance of timely information for the public, especially regarding the following matters: operations and performance of the Mercator Group and individual subsidiaries; retail network development; strategic business combinations and projects; novelties in the offer and services for the customers; humanitarian and other socially beneficial activities. In March 2011, Mercator Group held an international press conference which was attended by nearly 100 journalists and reporters from all countries of Mercator's operations. Mercator's regular public announcements and press releases kept the broad public informed about the operations and performance of the Group and particular companies, as well as provided useful information for the customers regarding the projects that may be of interest to them. We were attentive to both the quality content and the technological aspects of the media which allowed us to improve the intensity and the pace of communication. Communication with groups of influence Mercator's strategic business combinations in 2011 required Mercator's communication with the relevant competition protection bodies in the markets of Serbia and Bosnia and Herzegovina. The company released public announcements in the Ljubljana Stock Exchange information system SEOnet to inform all shareholders equally and transparently about the activities regarding the procedure of sale of the majority block of company shares. The monetization project involved communication with leading international real estate experts and investment bankers. 100

104 Commendations and awards In 2011, Mercator received a number of important commendations and awards. The most notable ones are detailed in the section Major Events in 2011 in the Business Report. Commendations and awards are proof and reassurance by the expert community that Mercator's results are indeed excellent: European Business Award, World Finance, Trusted Brand, Best HR Project, Pekarna Grosuplje Gold Medals, Marketing Director of the Year, Financial Manager of the Year, Family-Friendly Company, Best Financial Report 2010 for Mercator IP, d.o.o, Best Annual Report 2010 in risk management for Poslovni sistem Mercator, d.d. Economic effects Following are the key economic effects in 2011: Mercator Group provided 24,266 jobs in seven countries. EUR 221 million was spent on employee benefits. We supported over 2,000 social responsibility projects. 14,933 shareholders of the parent company were paid out dividends in total amount of EUR 29,785 thousand, or EUR 8.00 gross per share. Mercator Group generated revenue of EUR 2,928 million. We invested EUR 122 million for development and investment. 101

105 CORPORATE SUSTAINABILITY BY KEY AREAS Responsibility to customers In order to maximize customer satisfaction, Mercator is conducting regular surveys and measurements in this regard, using the so-called Mystery Shopper survey method. One also highly important aspect of care for customer satisfaction is resolving complaints and warranty claims received through different communication channels (mail, phone, fax, electronic mail, entries in the customer feedback logs etc.). Measurement of customer satisfaction At Mercator, customer satisfaction has been continuously monitored since 2003 in all markets of our operations: in Slovenia, Serbia, Croatia, Bosnia and Herzegovina, and Montenegro. Since 2010, these activities have also been in place in new markets, Bulgaria and Albania, in all store formats. The goal of the research is to obtain an estimate of customer satisfaction about particular elements of the service and offer at Mercator, both by markets and by sales programs, and to identify the possibilities for improvement of particular elements of service and offer in order to increase the level satisfaction among Mercator's customers. Following is a summary of the results of customer satisfaction surveys for the FMCG program in Slovenia and in the Southeastern European markets for Slovenia General satisfaction among the customers included in the survey was very high. In 2011, 89% of customers were satisfied in Mercator stores (22% very satisfied, 67% satisfied). In 2011, the customers were most satisfied about varied and broad choice of products, friendly employees, and easy access to the stores. 102

106 Southeastern European markets In Serbia, general satisfaction both with Mercator and Roda brands is high; as many as 96% of all customers are satisfied with Mercator. In Croatia, satisfaction level for the Getro brand is somewhat below that of the satisfaction with Mercator. In Bosnia and Herzegovina, satisfaction rate with Mercator is the lowest of all markets. However, the percentage of customers who are very satisfied with the offer and services of Mercator - BH, d.o.o., is considerably above average (38% of very satisfied customers). In Montenegro, satisfaction rate for Roda and Mercator brands is high and equal for both (92% of satisfied customers). In Albania, the share of satisfied customers is notably higher than in Bulgaria (which is also reflected in average satisfaction rate). Mystery shopper Mystery shopper survey is conducted on a quarterly basis. The goal of the survey is to provide regular monitoring of the quality of service at Mercator stores. The results are used to improve the quality of service. The survey includes evaluating the following aspects: attitude to customers, cleanliness and neatness of stores and employees, knowledge about the products, selling skills, product presentation, pricing, and waiting time. Following are the result summaries for the Mystery Shopper survey for FMCG program by quarters in 2011, separately for Slovenia and Southeastern Europe: Slovenia As in the previous three quarters, the average overall result in the last quarter of 2011 was stable (82%), but somewhat below the expected level of Mercator retail standards (minimum expected standard is defined at 90%). Price labelling (98%) and cleanliness and neatness of stores (92%) are in compliance with Mercator standards. Ratings for employee cleanliness and neatness (89%), product presentation (89%), and waiting time (87%) are solid and close to Mercator's standards. Informing the shop assistants about products (85%) should be improved, and the same applies to their selling skills (75%) and attitude to customers (85%). 103

107 Southeastern European markets: Overall results of Mystery Shopper surveys for all markets of Mercator's operations in the Southeastern Europe do not vary notably by quarters and they are stable; however, they are slightly below the desired results (i.e. 90% as the minimum according to Mercator's standards). Cleanliness, neatness, and price labelling are generally meet Mercator's standards. Cleanliness and neatness of employees (88%), product presentation (88%) and waiting time (87%) are very close to the expected level of quality. However, product knowledge (86%) and attitude to customers (84%) should be improved; above all, selling skills (72%) should be improved in all markets of our operations. Responsible management of food quality and safety The process of distributing safe food is constantly improved and advanced by continuous monitoring of mandatory legislation, government and internal control, novelties and innovation in the field, in-house development, and food safety guidelines. As a result, our food safety management system is compliant with the requirements of the ISO international standard. We believe our in-house control has an important preventive role in the entire process of the flow of goods and services, which is a part of the verification of the system pursuant to ISO 9001 and ISO standards. Preventive control is carried out at each Mercator store selling food products at least once per year. In 2011, we conducted 654 controls. Mercator private label products were under constant control in We checked around 500 private label products, took around 1,600 food samples on open products and received around 400 analysis results from the government monitoring system. 104

108 Supplier control was extended with information from our own and government control of product safety and quality. In case of noncompliance, we work with the suppliers to implement corrective measures. We have set up a system for sharing and dissemination of knowledge and experience on HACCP system management. The system has proven successful for employees at all levels. In 2011, around 800 employees took part in professional training, for which a total of at least 5,700 hours were spent. We updated the process of recalling non-compliant products, which included cutting our response time and the time in which the noncompliant goods are eliminated from the shelves; this has resulted in effective improvement in the safety and protection of the consumers. Activities for the customers In the beginning of the year, we successfully completed the customer loyalty project which resulted in sale of 223 thousand pieces of organic bathroom textile products in Slovenia, and additional 142 thousand pieces in the Southeastern European markets. We launched the "Local" ("Lokalno") project, the purpose of which is to inform our consumers about the offer of locally grown products at our stores and to emphasize the importance of local production. We launched the events emphasizing "green", or environmentally friendly activities, and prepared several "green corners" at Mercator centers. In September, we presented to the consumers the independent line of organic products, called Mercator Bio. Four essential components were included in brand design: quality, local origin, reasonable price, and convenience. The line of products will be expanded; currently, it includes 23 products that can be tested by the consumers at numerous tasting and presentation stands at our stores. Consistently with the guidelines and activities of sustainable development, we worked with the Finance daily paper to prepare in late June 2011 the contest "Draft solutions for packaging made of environmentally friendly packaging materials for organic and other products of Slovenian origin". The purpose of the project was to provide solutions for the farmers and small growers to make sure their products reach the shelves of the leading Slovenian retailers and thus reach the widest group of end customers. Mercator is looking to provide favourable cost of packaging and thereby to ensure affordability of the final products for the customers. 105

109 We carried on the activity of "trading in" of used products at hypermarkets and technical consumer goods stores. The offer of ecological origin, as well as offer for a healthy lifestyle, were regularly included in our flyers (in September 2011, we issued a special flyer to present the organic products of our private labels and other renowned brands, and held numerous promotion activities and tastings). Our offer of technical consumer goods including the following: The BEING GREEN section of the BEING - Living with Mercator magazine focused in the six issues on providing educational and informative advice, especially regarding power consumption in households. We successfully carried on the sales promotion project for escooters "Switch to GREEN ENERGY with the best neighbour!" We carried out the first specialized sales promotion campaign for furniture, which included offering functional, modern, ergonomic, high-quality, and favourably priced furniture by Slovenian manufacturers, supported by a design version of Thinking Locally. Resolving customer complaints Resolving customer complaints is a very important aspect of providing a quality service that contributes to improved customer satisfaction. All complaints and warranty claims are pooled together in the Call Center, regardless of where the complaint is received and who it is received by. Each received complaint is followed by interaction with the customer and immediate response to the received information in order to quickly and efficiently resolve the complaint in an optimum manner. The purpose of pooling customer complaints is to have a comprehensive overview of the complaints received, which in turn allows resolving these complaints in an efficient manner and adopting the measures to improve the offer and services, and thereby boosting customer satisfaction. At the Call Center, each complaint is entered into a work application (where complaints are also classified by type). Then, it is resolved or its resolution is coordinated in a way that allows completing the entire procedure in the shortest possible time. Responsibility to employees As the region's largest employer in the trade industry, we manifested our corporate social responsibility to the employees through managerial and other training, internal communication, employee motivation, improvement of working conditions, internal staffing and recruitment, and care for the safety and health of our employees and their families was a year of intensive communication or Mercator corporate values which present the foundation of our operations as they guide us along the right paths as we pursue our vision. Presentation and description of values was the topic of a special issue of the Časomer newsletter. In addition, every employee was presented with a cube presenting on its faces the six fundamental corporate values which all employees respect as they work together to implement Mercator strategy. We are aware of the importance of training and education. Therefore, we offered our employees a number of training and education courses. We held educational and social teambuilding sessions on Vogel and in Ohrid, and organized workplace training. We held the Key Employee Council for the fifth consecutive year. In 2011, it was attended by over 1,200 employees. 106

110 At the traditional 33rd Mercatoriada (Mercator sports games), 810 employees competed in various sports disciplines. Activities of the "Family-Friendly Company" project included allowing 439 employees to accompany their children on their first day at school or kindergarten. As every year, we awarded the best stores and presented the Best Boss award to 13 best leaders. We enabled vacation for over 1,900 employees and their families at our holiday facilities. The health promotion project and the Mercator Society of Sports and Culture care for the health and healthy lifestyles of our employees. In 2011, we defined and presented for the first time the six corporate HR standards: on employee training and education, staffing and recruitment, internal communication, HR planning and reporting, satisfaction and organizational climate surveys, and reception and induction of new employees. These standards shall bring uniformity and improve the quality of HR management activities and processes at all Mercator Group companies. Non-Discrimination Statement In day-to-day operations, Mercator Group respects and complies with the legislative norms and forbids any kind of discrimination. We hereby declare that no child labour or forced labour is employed at Mercator Group companies. Employees by markets As at 31 December 2011, Mercator Group had 24,266 employees, of which 12,232 (50.4 percent) were employed in markets outside Slovenia. Relative to the end of 2010, total number of employees rose by 3.3 percent. MARKET Number of employees 31 Dec Dec Index 31 Dec. 2011/ 31 Dec Slovenia 12,034 12, Serbia 4,806 4, Croatia 3,873 4, Bosnia and Herzegovina 1,722 1, Montenegro 1,429 1, Bulgaria Albania TOTAL 24,266 23, Employees by type of employment In Slovenia, the predominant share of employees was employed based on an employment contract for an indefinite period of time (permanent employment) (91.4%); the most fixed-term employment contracts were held by the company Mercator-S, d.o.o. (43.9%). Employees by gender Mercator employs more female than male employees: 71.9% of employees are women and 28.1% are men. Compared to 2010, the percentage remained virtually the same. 107

111 Employees by age Average age of employees is increasing. In 2011, average age of employees was higher than in the year before by 1.1% or 0.4 years. It now amounts to 39.8 years. Employees by fields of work In 2011, the general composition of employees did not change considerably relative to Operational personnel, or shop assistants, remain the largest group of employees by field of work Job management In 2011, we developed the Mercator Group Job Catalogue which includes information about 132 typical jobs at the trade companies of the Mercator Group. Jobs from the catalogues of particular trade companies were then linked to the typical jobs. Job catalogue management process was specified in the rule "Job and Position Management". As at 31 December 2011, the number of systematized jobs stood at 2,

112 Composition by education Most Mercator employees have completed the fourth or the fifth-degree education. Average education level of employees is increasing, albeit not changing considerably. This is quite understandable considering the fact that workplaces and requirements related thereto are not changing considerably either. Employee training, education, and development Year Number of hours Number of attendants Education costs (in EUR) ,669 34,147 *598, ,522 35,219 *818,790 * The amount does not include the cost of internal training In 2011, we were focused primarily on training of store managers and shop assistants. We held shop manager training for the business areas of Mercator Operations Slovenia (attended by 312 shop managers) and Mercator Operations Southeastern Europe (attended by 270 shop managers). At the company Mercator - H, d.o.o., the shop manager training was attended by 128 shop managers. In order to provide extra knowledge and skills to talented or employees so as to prepare them for assuming more demanding tasks, we held training for prospective managers and executives. 76 employees from operational and administrative departments took part in the program. We also held the 4th International Mercator Business Academy which was attended by 26 young talented employees. The managers developed their team spirit at teambuilding events on Vogel (with 357 participants) and in Ohrid (with 83 participants). 24 IT Friday workshops were held in Slovenia. Shop assistants were trained within our training network. We founded two new competence centers, for hospitality services and for M holidays. As at the end of 2011, there were 348 trainers in Slovenia and 269 trainers in Southeastern Europe. They completed a combined total of 20,414 shop assistant training hours. Trainers are an indispensable source of knowledge and experience in retail, contributing to the improvement of work and processes in retail. 109

113 In Slovenia, we developed the web version of occupational safety and fire safety training. 973 administrative workers have already taken part in this training program and passed the test. We launched the revision of the e-library titled Mercator's Growing Book. Job rotation is a newly introduced form of training developed in order to induce internal staffing and recruitment, and especially to allow our talented employees to focus on the core areas of trade: retail and category management. The program currently involves three promising employees being trained in operations. Job rotation program in administration also includes three talented graduate candidates from Faculty of Economics in Ljubljana: two in retail and category management, and one in controlling, finance, and accounting. Staffing and recruitment The most staffing and recruitment activities took place at Mercator - BH, d.o.o. where 667 employees were transferred upon the takeover of the company Drvopromet, d.o.o. At Mercator - S, d.o.o., 126 new workers joined the Group upon the takeover of the operations of the company Familija Marketi, d.o.o. Major HR activities were also conducted in fields that include companies in Slovenia as the operating area Mercator Operations Slovenia was divided into two independent areas: FMCG Program Retail and Hardware and Electronics, Wholesale, and Supplementary activities. Operating area Hardware and Electronics, Wholesale, and Supplementary Activities including the founding of the company M - Tehnika, d.d., to which 1,121 employees were transferred from the company Poslovni sistem Mercator, d.d. 14 employees from the field of IT and Telecommunications were re-employed at the company Ličer Solutions, d.o.o., an IBM partner and Mercator outsourcing partner for this field. At the end of 2011, we had 27 expatriates, of which 24 were from Slovenia, 2 from Croatia, and 1 from Serbia. Our requirements for new employees were mostly announced on Mercator website and on the Moje Delo portal. Employee involvement 33rd traditional Mercatoriada (Mercator sports games) was the largest corporate event of the year. A total of 810 Mercator employees competed in 130 teams. In addition, the 11th meeting of Mercator internal instructors, held in 2011, again pointed out the indispensable role of involvement of experts and managers in the process of transfer of knowledge and experience within the Mercator Group. Special acknowledgements and awards were presented to 19 internal instructors for their work. Over 1,200 key employees from Slovenia gathered at the 5th Key Employee Conference held in Cankarjev Dom in Ljubljana, where Mercator management presented the Group's operations and the plans for the future. A major contest also took place between individual stores. The best 46 stores of the Mercator Group were presented the Best Store 2011 award; in addition, 13 Best Boss awards were presented to the best leaders. In November, 25 employees were also presented the Mercator Award, the most prestigious award presented by the Group for outstanding achievements and incorporation of Mercator values. 110

114 Employee development One of six project teams involved in the 4th International Mercator Academies presented their paper System of Mass Improvements (or improvement proposal system); the system will be implemented in The system called Mercator Creator includes collection, evaluation, rewarding, and implementation of the ideas contributed by employees. This will allow us to improve the business processes and customer satisfaction, and identify new market opportunities. In our experience, employees in all jobs and positions have numerous ideas on how to improve the efficiency of all work processes. Communication with the employees 2011 was the year of communicating our corporate values. A special issue of our company newsletter was published, dedicated to corporate values. In addition, every employee was presented with a cube presenting on its faces the six fundamental corporate values which all employees respect as they work together to implement Mercator's strategy. We conducted 8,444 annual interviews at companies in Slovenia, and 8,084 annual interviews at companies in the markets of Southeastern Europe. Our company and all aspects of employment were presented to newly recruited employees in a special induction manual - Handbook for Newcomers. Intranet is becoming an increasingly important means of internal communication as 461 announcements were published there in Cooperation with employee representatives In 2011, a new Workers Council was appointed at the company Poslovni sistem Mercator, d.d., which includes 31 members. Mercator Management Board and the Workers Council signed an agreement on employee participation in management. This agreement regulates in more detail the way in which worker rights to participation in management are exercised. The Management Board also holds regular meetings with management of trade unions organized at the companies Mercator, d.d., Mercator - S, d.o.o., Mercator - H, d.o.o., Mercator - BH, d.o.o., and M - BL, d.o.o. Human resource management Our present and retired employees are offered vacations at our holiday facilities which include 105 accommodation units in Slovenia and in Croatia. In 2011, 1,739 current and 177 retired Mercator employees and their family members spent their holidays in our facilities. We provided New Year's presents for 2,419 children of our employees. The Family-Friendly Company project included giving out 350 Lumpi packages for newborns, and 260 parents of first-graders were allowed an extra day of paid leave on the first day of school. As of 1 September 2011, additional day of paid leave is also offered to parents taking their children to kindergartens for the first time. 179 employees took this option. The Mercator Humanitarian Foundation paid out EUR 95,720 of aid to 143 employees who are in financial distress or seriously ill. Solidarity aid in the total amount of EUR 146,046 was received by 300 employees or their family members. 111

115 Occupational health and safety Numerous activities are in place aimed at improving the health and well-being of our employees. The Mercator Society of Sports and Culture, which has 676 members, offers our employees opportunity for exercise in various sports disciplines. Mercator Mountaineering Club held a record number of 16 hiking trips in The trips were attended by a total of 1,033 employees. The health promotion project offers many beneficial preventive activities such as mammography, reimbursement of costs for quitting smoking, education about varicose veins, school of healthy cuisine etc. In 2011, a total of 670 workplace accidents were recorded. Compared to 2010, the number of accidents is lower by 2.5%. The most accidents took place in stores, with the following types of injury being the most common: cuts, injuries during manual handling of loads, and injuries when using ladders. The department of occupational and fire safety adopted measures to reduce the number of workplace accidents. The department issued instructions for safe bread cutting, instructions on conduct in case of robbery or attack by a third party, instructions on manual handling of loads, and instructions on safe use of ladders, inspection, and replacement of ladders. COMPANY Number of workplace accidents Poslovni sistem Mercator, d.d Mercator IP, d.o.o Mercator - S, d.o.o Mercator - H, d.o.o Mercator - BH, d.o.o M-BL, d.o.o. 6 4 Mercator - Mex, d.o.o. 0 2 Mercator - CG, d.o.o Mercator - B, e.o.o.d. 1 0 Eta, d.d. 7 8 Mercator - Emba, d.d. 2 2 Intersport ISI, d.o.o. 2 5 Intersport S-ISI, d.o.o. 1 0 Intersport H, d.o.o. 2 2 Intersport BH, d.o.o. 1 0 Modiana, d.o.o., Slovenia 9 6 Modiana, d.o.o., Croatia 4 1 Modiana, d.o.o., Bosnia and Herzegovina 2 1 TOTAL Employment of disabled persons The largest number of disabled persons are employed at the company Poslovni sistem Mercator, d.d., which also has the highest average age of employees. A considerable number of disabled persons are also employed in Mercator IP, d.o.o., Mercator's social enterprise. Of a total of 399 employees, 204 are persons with disabilities. Disabled persons are mostly employed in manufacturing and service activities, such as decoration, production of pastry, cosmetic, and textile. Adaptation of workplaces is approached with special care and consideration of individual's abilities and possibilities. 112

116 We introduce ergonomic improvements to the working environment and thus improve safety, and contribute to development of efficiency and rational use of working hours. Workplaces were adapted in nearly all units where disabled persons are employed or where such adaptations were required. COMPANY Number of disabled persons 31 Dec Dec Poslovni sistem Mercator, d.d Mercator IP, d.o.o Mercator - S, d.o.o Mercator - H, d.o.o. 9 6 Mercator - BH, d.o.o. 8 6 Mercator - CG, d.o.o. 2 1 Mercator - B, e.o.o.d. 3 4 Mercator - A, sh.p.k. 1 0 Mercator - Optima, d.o.o. 1 0 Mercator - Emba, d.d. 6 4 Intersport ISI, d.o.o. 9 7 Modiana, d.o.o., Slovenia TOTAL The number of disabled persons among our employees increased notably at the company Mercator - S, d.o.o., because this is required by the Serbian legislation in the Act on Professional Rehabilitation and Employment of Disabled Persons. Responsibility to natural environment The pace and purpose of exploitation of renewable and non-renewable natural resources are increasingly reducing the ability of our planet to restore the sources of energy on which our welfare and growth depend. Therefore, the company Mercator, d.d., is making every effort to preserve the natural resources and reduce the negative impact on the environment by embracing the principles of sustainability which include rational production and consumption. Energy efficiency Apart from climate change, reduction of specific consumption of fuels for heating was also affected by measures implemented to improve the efficiency of the use of energy, such as closing the refrigeration chests, cabinets, and counters, and introduction of organizational measures according to the adopted manual. Hot water costs were also cut by installing the combined heat and power (or co-generation) equipment. Specific consumption of energy sources in 2011 Specific consumption (per m 2 ) Mercator Group Mercator, d.d. Electrical energy (kwh/m 2 ) Heating oil (L/m 2 ) Natural gas (m 3 /m 2 ) LPG (Liquefied petroleum gas) (m 3 /m 2 ) LNG (Liquefied natural gas) (L/m 2 ) District heating (kwh/m 2 ) Carbon dioxide emissions (kg CO 2 /m 2 )

117 Targeted monitoring of power consumption at the company Poslovni sistem Mercator, d.d., has grown in importance in recent years as it represents the largest environmental cost. Specific consumption of electrical energy (as presented in the graph below) was cut by 1.77% in 2011 relative to 2010, or by 4.29 kwh/m 2, as a result of the measures for efficient use of energy such as closing of refrigeration chests, cabinets, and counters, replacement of conventional lamps with LED fixtures in Mercator visual identity lightboxes, and other organizational measures according to the adopted Manual on Efficient Energy Use at the stores of Poslovni sistem Mercator, d.d. The table below presents a comparison between power consumption and specific power consumption and carbon dioxide emissions for the company Poslovni sistem Mercator, d.d., for the comparable periods of 2010 and Electrical energy (kwh) Specific power consumption (kwh/m 2 ) Carbon dioxide emissions (tons of CO 2 ) Specific carbon dioxide emissions per square meter (kg CO 2 /m 2 ) Index 2011/2010 Difference in consumption 174,700, ,891, ,190, , , , Energy policies of Mercator Group as a major retailer in Slovenia and neighbouring countries must comply with the policy of the Republic of Slovenia, which in turn is in line with the policies of the European Union. 114

118 Adopted "National Action Plan for Energy Efficiency for the Period " includes a 9-percent reduction in the final use of energy by 2016, which means savings of 1 percent per year. The ultimate goal is to attain the goals laid down by the European Union, i.e. reducing greenhouse gas emissions by 20%, increasing the use of renewable energy resources by 20%, and improving energy efficiency by 20% by By attaining these goals, which is possible in several ways, the company Mercator, d.d., would slash its annual energy costs by approximately EUR 0.2 million in comparison to 2008; these savings should be equal to or greater than our investments into efficient use and renewable energy. Since the price of electricity will surely grow faster than investment costs of improved energy efficiency, we believe that the financial effect will always be positive. Energy-efficient buildings Since 2000, our shopping centers have been constructed according to the principles of efficient use of energy, which include improved heat insulation, optimization of glass surfaces, daylighting, controlled shading, displacement ventilation with floor heating and cooling, exploiting waste heat from refrigeration appliances and HVAC equipment, managing buildings through a central control system, etc. As a socially responsible retailer, we prioritized our sustainable development and defined as one of the key activities the "Eco House" development project which will upgrade the existing energy-efficient technologies and systems. Waste and other environmental aspects Environmental aspects at have been managed in a systematic manner at Mercator since 2009, which is also confirmed by the certificate for the environmental management system in compliance with the requirements of the international standard ISO 14001:2004. Mercator is the only trade company in Slovenia engaging in wholesale or retail of fast-moving consumer goods to be awarded the ISO certificate. Management of environment aspects In order to efficiently manage the environmental aspects, we implemented the project for efficient management of property, plant, and equipment with the greatest impact on the environment. We identified the environmental characteristics of the buildings and equipment and prepared a set of corrective measures in case of emergency with potential negative effects on the environment. A set of internal and external environmental documents was prepared, for which central collection and access will be provided to all users. In 2011, we started the calculation of carbon footprint as a method to establish a comprehensive system of environmental impact management. The calculation will be made for the entire company, sustainable trade, and selected product of the Mercator private label, in order to identify the areas that are the most detrimental to the environment and which are the greatest energy hogs. Calculation of carbon footprint will provide the basis for planning priority steps to attain the greatest effects in terms of reduction of the negative impacts on the environment and improvement of energy efficiency. 115

119 In order to reduce environmental impact, we conducted various activities for managing the environment aspects in Waste and raw materials - The project of Optimization of Product Environmental Data Management included providing transfer of environmental data on our products from the MData application to G.O.L.D., creating new codebooks (ID lists) of product environmental data, providing entry of data on the packaging of non-trade goods, and updating the data on PVC product packaging. - We carried on our activities to install bins for separate collection of recyclable waste, and to rationalize the volume of containers for mixed communal waste. - We optimized our handling or waste radioactive fire alarm equipment. - We prepared the technological procedure for waste battery management, complete with photo and graphic material that allows the users a better understanding of the problems at hand. - We updated the Waste Management Plan at the company Mercator, d.d., and developed the Waste Management Plan for the Grosuplje Bakery plant. Water and wastewater - We regulated the use of water from the water course and obtained the water course permit for the Maximarket site. - Following the change in activity at the Distribution Center Bohova site, no industrial wastewater is generated there anymore. Emissions into atmosphere and ozone depleting substances - We installed environmentally friendly refrigeration equipment in seven newly constructed or refurbished facilities. Hazardous substances and preparations - All stationary containers for storing hazardous liquids were inspected. - Furthermore, an expert assessment was made of the condition of refrigeration machinery and pressurized equipment for the cooling system containing ammonia at the Distribution Center Zalog and Distribution Center Bohova. Noise - We reduced noise emissions at 14 sites; at 4 sites, activities to adapt the source of noise to limit values are still being conducted. States of emergency - The project of Establishing the SAP Plant Maintenance Module allowed us to identify the state of emergency regarding the environmental impact, for which we are currently preparing preventive and corrective measures. - We established a central system for identifying and recording states of emergency which may result in generation of major amounts of biologically degradable waste. Identified discrepancies Successful and efficient operation of the environmental management system can be attained by regularly inspecting and evaluating it. This allows us to identify the opportunities for improvements and their implementation. 116

120 We are regularly monitoring changes in relevant legislation on environment protection. 72 such changes were identified in External audits External audit of the environmental management system according to the ISO standard was carried out; no non-compliance was found; 17 recommendations were issued. Internal audits Internal audit of the environmental management system according to the ISO standard (inhouse experts) was carried out; no deviations were found. Inspections Environment Protection Inspectorates of the Republic of Slovenia conducted ten inspections. Noncompliance was found in five inspections, and fines were imposed in three cases. Questions and complaints by interested public We received 50 questions and complaints by interested public regarding environment protection, to which we responded accordingly. In 2011, we adopted 14 resolutions that included measures to reduce the effects of critical environmental risks, of which 9 resolutions were completed. Communication, promotion of awareness, education A system of internal communication has been established with employees whose work has considerable environmental impact. Our commitment to protection of environment is also manifest in communication with our customers and other interested communities (or publics). - We published articles on environmental topics in our company newsletter Časomer, and provided information on the Intranet. - We defined the criteria for environmental aspects as a part of the project "The Best Store in terms of sustainable development". Sustainable logistics and supply chain organization Supply to a wide and dispersed network of stores such as that operated by Mercator is not possible without extensive logistics support. Being aware, however, that every kilometer saved is a contribution to the protection of our environment, we are on a constant mission to improve it. In supply of our FMCG delivery points with merchandise and non-trade goods, we attained approximately the same volume usage of our cargo transport vehicles in 2011 as in the year before. The index of distance covered 2011/2010 is 100.4: o For market program, the index is at 97.6; o For Pekarna Grosuplje, the index is (the reason is the increase in semi-baked products refrigerated to -18 C, and increase in the number of delivery points). Responsibility to social environment Mercator vision of sustainable development and corporate social responsibility dictates specific activities that contribute to the development of both local and regional environment and which improve the quality of people's lives. Sponsorships and donations and inclusion in the socially beneficial campaigns are an important part of Mercator Group strategy of comprehensive corporate responsibility. We support and make possible humanitarian, sports, cultural, scientific, educational, and other projects. 117

121 Major sponsorships and donations In Slovenia Central humanitarian campaign Together Against Cancer involved contributing funds to the Ljubljana Institute of Oncology for the purchase of new ultrasound equipment for brachytherapy of prostate cancer; supporting the activity of the Society of Oncology Patients of Slovenia; and taking part in the organization of the cycling race The Wheel of Life. We sponsored many humanitarian, educational, cultural and sports events. Major events, teams, and individuals receiving sponsorship funds included the following: Kurentovanje carnival in Ptuj; Slovenian Drama Week; Istria carnival; Idrija Lace Festival; Senior Citizen's Festival; Borštnik Festival; Selling Technique Competition; Cankarjev Dom Golden Subscription; Ljubljana Summer Festival; subscription concerts at the Slovenian Philharmonics; Stand-up Comedy at the SiTi theatre; exhibition "Greeks of the Antiquity in Croatia" at the City Museum of Ljubljana; City of Women Festival; Musical and Stage Spectacle with Lipizzan horses in Stožice; International Graphics Biennial; Finals of the Ski Jumping World Cup in Planica; international alpine ski competition in Stari Vrh; table tennis international open championship of Slovenia; hike along the wire; Ljubljana Marathon; bicycle race across Slovenia; basketball team of the Slovenian Association of Paraplegics; table tennis player Maja Pintar; Running for Hope, organized by Europa Donna; Rowing World Championship in Bled; humanitarian football spectacle in Bilje; hike along the Levstik road; and Slovenian Olympic Committee. We donated funds to Foundation for Promoting Child Development; "Varna pot" ("Safe Way") Institute in education on traffic safety; and Humanitarian Society Materina Dušica for the Children's House; we worked with the Ministry of Agriculture, Forestry, and Food, and with farmers, farming companies, food processing companies, and bee-keepers, to support the project Traditional Slovenian Breakfast; we provided a year's worth of aid to twelve families in social and economic hardship; we supported the house painters competition which took place in the Center for Hearing and Speech in Maribor; we donated funds to Friends of the Youth Association of Slovenia for the project Wink at the Sun; to the Okrešelj fund for children of fatally injured rescue team members; and to the Paediatric Clinic for breast pumps and sports equipment for children's rehabilitation and recovery; we also provided presents for all children inpatients at the end of the year. Throughout the year, we allowed the Red Cross of Slovenia and the Slovenian Karitas to collect food products for families in financial and social distress at our stores. Southeastern European markets: In Serbia, we donated funds to the residents of Kraljevo in the aftermath of the earthquake; to the general hospitals of Vrbas and Subotica; and to the largest children's festival in Serbia. We were also the golden sponsor of the Serbian Olympic Committee. In Croatia, we donated funds to the Center of Education and Upbringing in Zagreb; four shelter homes for children in Osijek, Split, Zagreb, and Rijeka; paediatric hospital in Osijek; and Neven and Neriodla kindergarten in Rovinj. We also supported the Statehood Day, and co-financed the erection of the pavilion of cultural and artistic events in Zagreb. In Bosnia and Herzegovina, we donated funds to the Clinical Center in Banja Luka; and sponsored the second international "Salon of Taste" in cooperation with the Slovenian Embassy; and the Children's Festival. 118

122 In Montenegro, we donated funds to the Food Bank and the Institute of Education and Rehabilitation of Children and Youngsters from Podgorica. In Albania, we donated alimentary products to families of police officers who died on assignment. Protection of competition In accordance with the global policy of the company Poslovni sistem Mercator, d.d., and its subsidiaries, the conduct of Mercator employees, representatives, and proxies, regardless of their location, shall comply with the relevant and binding legislation, rules, and regulations in all fields of work. A part of this commitment represents respecting the legislation on competition and trade regulations that serve the purpose of effective competition in the market both in the Republic of Slovenia and abroad. The company's core policy stipulates operations within the limits of valid legal regulations that are binding for the company. Competition legislation is a part of market legislation which directly regulates competition. Competition law lays down the rules that are of fundamental importance for the conduct of companies in the market. It defines market discipline which is mandatory for all market participants, by preventing any anti-competitive conduct (restriction or prevention of competition, unfair competition), and maintaining and promoting competition through basic factors: price, quality, and sales terms and conditions. The purpose of the competition law is to stimulate competition and free enterprise in order to improve the efficiency and provide the best prices for the consumers. The fundamental characteristic of the competition law is the mandatory and binding nature of the norms that either command or restrict certain conduct in order to provide free and effective competition and market discipline. The Competition Protection Office of the Republic of Slovenia instituted the following proceedings against the company Mercator, d.d., in 2007: on 18 December 2007, the proceedings to establish whether violation has occurred regarding the alleged abuse of the dominant position of the company Mercator, d.d., in the upstream market for fast-moving consumer goods, No /207; and On 20 December 2007, the proceedings to establish whether violation has occurred regarding the alleged concerted action in the upstream market between the companies Mercator, d.d., Spar Slovenija, d.o.o., and Engrotuš, d.o.o., No / Both proceedings were complete by the adoption of commitments that Mercator offered to the Office, for the period until Based on the adopted commitments, Mercator is obliged to report annually on the compliance with the commitments to the Competition Protection Office. Other proceedings regarding alleged violations of competition law were not instituted against Mercator. Responsibility to suppliers Creating and maintaining long-term partnership relations with suppliers is a key element in the corporate sustainable responsibility. Transparent transactions and joint efforts allow us to establish an environmentally friendly supply chain as we work with our suppliers. 119

123 Selection of suppliers Assessment of suppliers is aimed at providing constant quality, safety, and traceability of products for the health of customers in compliance with the contractual provisions, relevant legislation, and Mercator's special requirements. Assessment of current FMCG suppliers takes place once per year, before new procurement contracts are signed. The criteria according to which a supplier is evaluated depend on the clauses and provisions from the core annual contract; they are divided into two sets: commercial criteria and criteria of quality. Criteria of quality refer to any non-compliance in the process of supply of goods, and non-compliance of products. Based on an overall evaluation of each supplier, its rating is defined: suitable, conditionally suitable, unsuitable. Contracts for the current year are only signed with suitable and conditionally suitable suppliers. Furthermore, corrective measures and timelines for their implementation are agreed upon with conditionally suitable suppliers. Contracts are not signed for the current year with unsuitable suppliers, unless there are no alternative supply sources available. Inclusion of Slovenian local suppliers The purpose of the Locality project commenced in 2011 is to include the products by local farmers and farms into the offer of hypermarkets. Although farmers from close vicinity of a particular hypermarket are preferred, products that are deemed local in a wider Slovenian area may also be included. Our local offer includes: local offer of farms and minor growers; offer by growers and producers of a certain region, Pan-Slovenian local offer e.g. Slovenian apples; products for which the basic raw material is of Slovenian origin. As at the end of 2011, the project included 410 products and 80 local suppliers. Inclusion of products by local suppliers allows cutting supply and transport routes and thus to reduce carbon dioxide emissions. Supplier commitments, monitoring and control Mercator, d.d., signs annual contracts on supply of goods with the suppliers. General Terms and Conditions of the company Poslovni sistem Mercator, d.d., which define the terms and conditions of cooperation in supply of fast-moving consumer goods, are a constituent part of every such contract. By signing the contract, the suppliers confirm that they are fully aware of the General Terms and Conditions and that they fully agree with them. A special section of the General Terms and Conditions is devoted to quality, safety, labelling, and traceability of goods. By signing a special statement, suppliers of fruit and vegetables commit to providing appropriate and safe products, while suppliers of other food products sign a written Statement of Product Safety, Quality, and Compliance for food and materials in contact with food. Statements of respect of human rights and attitude towards the broad environment will be signed in mid Supplier control is carried out by the internal control and food safety department. Control is extended with information from our own and government control of product safety and quality. In case of non-compliance, we work with the suppliers to implement corrective measures. 120

124 Responsibility for security Responsibility for security lies with all Mercator Group employees. We see security as a very important aspect of our operations. This requires respect and compliance with the security standards, especially in terms of reducing security risks. Responsibility for security involves the pursuit of the fundamental goals of the security policy which is aimed at attaining the optimum security level at the Mercator Group. By implementing security measures, we provide safety for our customers, employees, as well as security of our buildings and equipment, IT systems, and business processes. Implementation of security policy All employees comply with the security policy and the valid internal acts effective for this field. The bulk of responsibility and stress on the execution of tasks regarding security lies with the managerial or authorized staff in all sectors and departments, and with persons authorized for security. The method of work depends on the state of security at the company and it is being constantly adapted to the current needs so that appropriate level of security is provided. The level of security is subject to the management's decision which is made based on the status or assessment of security and the level of risk, based on the proposal by the responsible authorized person for security and directors or heads of other organizational units. Security of buildings (trade, office, warehouse), transport vehicles, goods, employees, customers, important information and data, in other words the security of the entire sales and logistics chain is an important and vital part of Mercator Group operations. All employees should be aware of the importance of the security of the business system as one of the essential aspects of successful pursuit of our mission; our conduct should contribute to continuous improvement of security at the Mercator Group. Building and system security Mercator Group sees security as a highly important aspect of its operations. Therefore, technical security standards for buildings are consistently complied with. In this respect, the requirements and methods in which security is provided for a particular building are also defined. Comprehensiveness of security means that the following fields are connected in terms of planning, analysis, contents, and operations: physical security, technical security, and fire safety. Activities to provide security shall comply with the standards of technical security and standards of minimum requirements for the execution of security measures in protected areas. By employing the procedures and rules for providing particular types of security, the risks pertaining to protection of people and property are mitigated. Information and information technology security With regard to protection of personal information, we continue to carry out activities in the following areas: restriction of access to personal information of the Mercator Pika card holders; full separation of personal information and information about the shopping baskets of card holders; tracing the use of information; management of consents or permits for processing the information on Mercator Pika card holders. 121

125 Our responsibility and care for quality Consistently with our commitment to sustainable management of the environment, our operations are focused on reducing the harmful impact on the environment, and on the implementation of new methods of measuring and managing the environmental aspects. In our care for sustainability, we apply international quality standards and the principles of business excellence which were introduced and merged into an integrated management system. Thus, transparency and international comparability of the Group's operations are provided. Efficient management of business processes is provided through compliance with the requirements of the international quality management systems. We maintain already certified systems and we are implementing new ones. A total of 13 management systems are currently implemented and certified at Mercator Group companies. Company Quality Management System Mercator, d.d. Mercator - Slo Mercator - Cro Mercator - BH Mercator - Montenegro Mercator - Bulgaria Mercator IP Emba Modiana ISO 9001 Quality Management System COMPLETED May 2011 COMPLETED November 2011 COMPLETED June 2011 COMPLETED November COMPLETED December 2011 ISO Environmental Management System ISO Food Safety Management System HACCP Food Safety Management COMPLETED May 2011 COMPLETED May COMPLETED November 2011 COMPLETED June 2011 IFS International Food Standard AEO Authorized Economic Operator Status COMPLETED November 2010 COMPLETED June 2011 Family-Friendly Enterprise COMPLETED October 2011 COMPLETED October 2011 COMPLETED October 2011 Legend for external audits and new certificates in the current year: PLANNED Independent (third-party) audit COMPLETED Independent (third-party) audit NEW CERTIFICATE PLANNED 122

126 CONTENT INDEX ACCORDING TO THE GLOBAL REPORTING INITIATIVE SUSTAINABILITY REPORTING GUIDELINES G3.1 Standardized reporting on corporate social responsibility and sustainability in compliance with the Global Reporting Initiative ( guidelines provides comprehensive sustainability reporting which includes economic, environmental, and social aspects. The performance indicators allow comparison between respective periods as well as between similar organizations. We decided to apply the reporting level "C+" which requires reporting on 10 performance indicators and external assurance by an independent organization. In compliance with the requirements of GRI G3.1, a GRI content index is provided, i.e. a table identifying the location of standard disclosures, affording a quick and simple overview of the report for the users. Table of contents according to GRI G3 Page 1 Strategy and analysis 1.1 Statement from the President of the Management Board SR about the relevance of sustainability to the organization and its strategy 2 Organization profile Name, brands, headquarters location, organization, nature of ownership, markets, key information, significant changes regarding composition and ownership, awards received in SR 97, 101 AR 9-14, 19-20, 22-23, 27, the reporting period 3 Report parameters Report profile, report scope and boundary SR Explanation of the effects of changes in information from previous reports and reasons for them, major changes SR 97 AR relative to the previous reporting period GRI content index SR Governance, commitments, and engagement Governance structure of the organization, mechanisms for shareholders to provide recommendations and initiatives to the Supervisory Board, and for employees to provide recommendations or direction employee representatives in the Supervisory Board 4.12 Commitments to external initiatives, support to external 4.13 initiatives, membership in associations 4.14 Stakeholder groups engaged by the organization, basis for 4.15 selection of stakeholders with whom to engage Economic performance indicators EC1 Direct economic value generated and distributed, including revenues, operating costs, employee compensation, donations and other community investments, payments to shareholders SR 97-99, 111 AR SR SR 98, 100 SR 101, 111 AR 60-63, 67,

127 Environment performance indicators EN3 Direct energy consumption by primary energy source (fuels) SR EN4 Indirect energy consumption by primary energy source SR 113 (electrical energy) EN7 Initiatives to reduce indirect energy consumption and SR reductions achieved EN26 Initiatives to mitigate environmental impacts of products and SR , 120 services EN28 Compliance SR EN29 Significant environmental impacts of transporting products SR 117 and other goods and materials used for the organization's operations Labour practice and decent work performance indicators LA1 Total workforce by employment type, employment contract, SR 107, 110 and region LA7 Rates of injury, occupational diseases, lost days, and SR 112 absenteeism LA10 Average hours of training per employee and by employee SR 109 category LA11 Programs for skills management and lifelong learning SR Society performance indicators SO7 Anti-Competitive Behaviour / Protection of competition SR 119 Product and service responsibility performance indicators PR5 Practices related to customer satisfaction measurement SR 102, , 119 Levels of GRI Guideline application C C+ B B+ A A+ Mandatory Self-diagnosis / Selfdeclaration / / / / / Voluntary External assurance / / / / / Reviewed by GRI / / / / / / 124

128 INDEPENDENT AUDITOR'S STATEMENT ON SUSTAINABILITY REPORT 125

129 Financial report 126

130 FINANCIAL REPORT OF THE MERCATOR GROUP Consolidated statement of financial position EUR thousand Note 31 Dec Dec ASSETS Non-current assets Property, plant, and equipment 14 1,906,018 1,870,428 Investment property 16 3,450 3,894 Intangible assets 15 47,623 52,626 Deferred tax assets 19 9,837 8,700 Loans and deposits 22 65,823 77,113 Available-for-sale financial assets 17 2,628 3,959 2,035,379 2,016,720 Current assets Inventories , ,081 Trade and other receivables , ,871 Current tax assets 3,934 Loans and deposits 22 2,001 17,346 Derivative financial instruments Cash and cash equivalents 23 27,540 20, , ,134 Total assets 2,647,663 2,608,854 EQUITY 24 Share capital 157, ,129 Share premium 198, ,872 Treasury shares (3,235) (3,235) Revenue reserves 285, ,194 Fair value reserve 192, ,187 Retained earnings 10,294 6,671 Profit for the year 7,983 30,396 Currency translation reserve (60,275) (62,295) Total equity attributable to owners of the parent company 788, ,919 Non-controlling interests Total equity 788, ,165 LIABILITIES Non-current liabilities Trade and other payables 28 2,369 2,447 Financial liabilities , ,375 Deferred tax liabilities 19 49,830 51,269 Provisions 27 32,711 35, , ,800 Current liabilities Trade and other payables , ,666 Current tax liabilities 507 5,892 Financial liabilities , ,853 Derivative financial instruments 18 4,562 2, ,639 1,046,889 Total liabilities 1,858,694 1,810,689 Total equity and liabilities 2,647,663 2,608,

131 Consolidated income statement EUR thousand Note Revenue 9 2,928,433 2,781,604 Costs of sales 11 (2,762,213) (2,611,100) Gross profit 166, ,504 Administrative expenses 11 (103,442) (99,622) Other income 10 26,064 23,623 Results from operating activities 88,842 94,505 Finance income 13 5,699 6,070 Finance expenses 13 (62,600) (60,231) Net finance expenses (56,901) (54,161) Profit before income tax 31,941 40,344 Tax 19 (8,401) (9,957) Profit for the year 23,540 30,387 Profit for the year attributable to: Owners of the parent company 23,557 30,396 Non-controlling interests (17) (9) Basic and diluted earnings per share in EUR

132 Consolidated statement of comprehensive income EUR thousand Note Profit for the year 23,540 30,387 Other comprehensive income Foreign currency translation differences foreign operations 2,015 (28,515) Change in fair value of available-for-sale financial assets 24 (1,208) (1,457) Change in fair value of cash flow hedges 24 (2,780) 1,799 Revaluation of property 24 22,094 Deferred taxes (4,389) Other comprehensive income for the year (995) (10,468) Total comprehensive income for the year 22,545 19,919 Total comprehensive income for the year attributable to: Owners of the parent company 22,567 19,927 Non-controlling interests (22) (8) 129

133 Consolidated statement of changes in equity EUR thousand Share capital Share premium Treasury shares Revenue reserves Fair value reserve Retained earnings Profit for the year Currency translation reserve Total equity attributable to owners of the parent company Noncontrolling interests Total equity Balance at 1 January , ,872 (3,235) 270, ,029 8,697 21,232 (33,782) 805, ,390 Total comprehensive income for the year Profit for the year 30,396 30,396 (9) 30,387 Other comprehensive income 14,158 3,886 (28,513) (10,469) 1 (10,468) Total comprehensive income for the year 14,158 3,886 30,396 (28,513) 19,927 (8) 19,919 Transactions with owners of the parent company directly recognized in equity Contributions by and distributions to owners Dividends to equity holders* (26,807) (26,807) (26,807) Transfer of profit for the year to retained earnings 21,232 (21,232) Total contributions by and distributions to owners (5,575) (21,232) (26,807) (26,807) Changes in ownership interests in subsidiaries that do not result in a loss of control Acquisition of non-controlling interests (337) (337) (337) Total transactions with owners of the parent company (5,912) (21,232) (27,144) (27,144) Balance at 31 December , ,872 (3,235) 270, ,187 6,671 30,396 (62,295) 797, ,165 * The amount of dividend payment differs from the amount specified in the Shareholders Assembly resolution because treasury shares were included in the calculation of the required amount for dividend payment. 130

134 Consolidated statement of changes in equity (continued) EUR thousand Share capital Share premium Treasury shares Revenue reserves Fair value reserve Retained earnings Profit for the year Currency translation reserve Total equity attributable to owners of the parent company Noncontrolling interests Total equity Balance at 1 January , ,872 (3,235) 270, ,187 6,671 30,396 (62,295) 797, ,165 Total comprehensive income for the year Profit for the year 23,557 23,557 (17) 23,540 Other comprehensive income (6,022) 3,012 2,020 (990) (5) (995) Total comprehensive income for the year (6,022) 3,012 23,557 2,020 22,567 (22) 22,545 Transactions with owners of the parent company directly recognized in equity Contributions by and distributions to owners Dividends to equity holders* (29,785) (29,785) (29,785) Transfer of profit for the year to retained earnings 30,396 (30,396) Distribution of profit for the year pursuant to Management Board/Supervisory Board decision 15,574 (15,574) Total contributions by and distributions to owners 15, (45,970) (29,785) (29,785) Changes in ownership interests in subsidiaries Disposal of subsidiary (1,956) (1,956) (1,956) Total transactions with shareholders 15,574 (1,956) 611 (45,970) (31,741) (31,741) Balance at 31 December , ,872 (3,235) 285, ,209 10,294 7,983 (60,275) 788, ,969 * The amount of dividend payment differs from the amount specified in the Shareholders Assembly resolution because treasury shares were included in the calculation of the required amount for dividend payment. 131

135 Consolidated statement of cash flows EUR thousand Note Cash flows from operating activities Profit for the year 23,540 30,387 Adjustments: Income tax expense 19 8,401 9,957 Depreciation of property, plant and equipment 14 71,745 68,946 Depreciation of investment property Amortization of intangible assets 15 9,401 9,575 (Gains) losses on disposal and impairment of property, plant, and equipment and intangible assets (236) 2,676 Change in provisions 27 (677) 4,343 Gains on disposal of subsidiaries 13 (1,150) Dividends received and impairment of available-for-sale financial assets 13 (29) 37 Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost 8 (2,028) (7,626) Net foreign currency translation differences from financing 13 2,356 10,098 Interest received 13 (3,647) (3,427) Interest paid 13 53,879 44,948 Gross cash flow from operating activities 161, ,087 Change in inventories (16,442) (17,302) Change in trade and other receivables (18,035) (19,910) Change in trade and other payables (66,540) 112,559 60, ,434 Interest paid 13 (53,879) (44,948) Income tax paid 19 (8,538) (10,741) Net cash from (used in) operating activities (1,719) 189,745 Cash flows from investing activities Acquisition of subsidiaries and business operations, net of cash acquired 8 (7,706) (40,954) Acquisition of property, plant and equipment and investment property 14, 16 (111,024) (91,910) Acquisition of intangible assets 15 (4,800) (3,532) Acquisition of available-for-sale financial assets 17 (10) Loans and deposits made (1,481) (62,529) Disposal of subsidiaries, net of cash disposed of 8 9,985 Proceeds from sale of property, plant, and equipment and investment property 14, 16 17,228 16,759 Proceeds from sale of intangible assets Proceeds from sale of available-for-sale financial assets Interest received 13 3,647 3,427 Dividends received Loans and deposits repayments received 28,585 3,983 Net cash used in investing activities (65,519) (174,611) 132

136 Cash flows from financing activities Repayment of non-current borrowings (203,387) (323,340) Increase in non-current borrowings 350, ,012 (Repayment) increase in current borrowings (42,836) 96,674 Dividends paid (30,038) (31,262) Net cash from (used in) financing activities 73,752 (9,916) Net increase in cash and cash equivalents 6,514 5,218 Cash and cash equivalents as at beginning of year 20,766 16,844 Effect of exchange rate fluctuations on cash and cash equivalents held 260 (1,296) Cash and cash equivalents as at end of year 23 27,540 20,

137 Notes to consolidated financial statements 1. Reporting company Poslovni sistem Mercator, d.d. (hereinafter referred to as Mercator, d. d.), is a company headquartered in Slovenia. The address of its registered head office is Ljubljana, Dunajska cesta 107. The consolidated financial statements of the Mercator Group as at and for year ended 31 December 2011 comprise the company Mercator, d.d., and its subsidiaries (together referred to as the "Group"). The Group's core operating activity is retail and wholesale of fast-moving consumer goods. 2. Basis of preparation (a) Statement of compliance Consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and in compliance with the provisions of the Slovenian Companies Act. Consolidated financial statements were approved by the Company Management Board on 6 February (b) Basis of measurement Consolidated financial statements have been prepared on the historical cost basis, except for the items listed below, where fair value was considered. derivative financial instruments, available-for-sale financial assets, property by revaluation model. The methods used to measure fair values are discussed further in Note 5. (c) Functional and presentation currency The consolidated financial statements attached herewith are presented in EUR, i.e. in the functional currency of the company Poslovni sistem Mercator, d.d. All financial figures presented in EUR are rounded to one thousand units. (d) Use of estimates and judgements Preparation of financial statements in compliance with the IFRS requires the company management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. In particular, information about significant areas of uncertainty regarding estimation and critical judgements in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is given below. 134

138 (i) Goodwill Each year, impairment test is conducted by the Group concurrently with the compilation of financial statements. The recoverable amount of the cash generating unit is defined based on the calculations of value in use. The calculations include projections of cash flow that are based on operational plans for the successive year, as adopted by the Management Board, and the extrapolation of the growth rates for all successive periods. The Management Board has defined the gross margin based on the business performance record (history) and expectations with regard to development of the market. The discount rate applied is based on market rates adjusted to reflect the specific risks related to the business units. (ii) Accounting for borrowing costs In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after 1 January 2009, the Group, pursuant to IAS 23 Borrowing Costs (2007), capitalizes borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Capitalization of interest expense is performed for major investments (investments which at completion amount to over 3% of book value of items of property, plant and equipment at the beginning of the year) which started after 1 January 2009 and whose construction and preparation for use lasts more than 6 months. In 2011, no investment meets the above criteria for classification as a major investment. (iii) Available-for-sale financial assets The Group's non-current financial investments into equity of other companies, classified as available-for-sale financial assets, also include such assets that could not be measured at fair value. Shares of these companies are not listed or traded in the stock market. The Group estimates that the costs of evaluating these non-current financial investments into equity of other companies by their fair value would be too high, while the evaluation would not affect significantly the correctness of financial statements; hence, these assets are valued at cost. (iv) Trade and other receivables The estimate is based on the assumption that trade and other receivables will be paid in recognized amount. Provision for the impairment of trade and other receivables is based on pending legal processes and previous years' experience. In the future, the Group does not expect any events that would significantly influence the accounting estimates. (v) Inventories Carrying values of inventories approximate net realizable value in all material aspects. Allowances and write-downs of inventories are based on previous years' experience. In the future, the Group does not expect any events that would significantly influence the accounting estimates. (vi) Provisions Carrying values of provisions are measured as the present value of the expenditures expected to be required to settle the obligation. Estimates are given by experts, or the values are based on original documentation. The outcome and the date of resolution of legal proceedings which were the basis for recognition of provisions are uncertain. In the future, the Group does not expect any events that would significantly influence the accounting estimates. Retirement benefits and jubilee premium provisions refer to estimated payments of retirement benefits and long service awards presented to the employees who have been with the Group for a long period of time, as at the reporting date, discounted to present value. These provisions have been made for expected payments. Calculation of the figure also accounted for the expected growth of wages from the day of the calculation until the day of retirement of a particular employee, as well as employee fluctuation. Salary growth consists of career promotion and the related wage inflation. To calculate the present value of retirement benefits and jubilee premium provisions, a discount rate was used that is equal to the market yield on highly rated euro-denominated 135

139 corporate bonds. In the future, the Group does not expect any events that would significantly influence the accounting estimates. (vii) Deferred tax Deferred income taxes are calculated on all temporary differences under the liability method using a principal domestic tax rate of individual consolidated entity's country. If the tax rate changes, the deferred income tax assets and liabilities will change appropriately. In the future, the Group does not expect any events that would significantly influence the accounting estimates. 3. Significant accounting policies The accounting policies laid out below have been applied consistently to all periods presented in these consolidated financial statements, by all Group entities. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control is deemed to exist when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable are taken into account. Financial statements of subsidiaries are included in the consolidated financial statements from the date such control is commenced until the date such control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (ii) Acquisitions from entities under common control Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date when common control was established; for this purpose comparatives are restated. The assets and liabilities acquired are recognized at the carrying amounts recognized previously in the Group's controlling shareholder's consolidated financial statements. The components of equity of the acquired entities are added to the same components within Group equity, with the exception of any share capital of the acquired entities, which is recognized as a part of share premium. Any cash paid for the acquisition is recognized directly in equity. (iii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra- group transactions, are eliminated from the consolidated financial statements. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group's interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates effective at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies as at the reporting date are re-translated to the functional currency at the exchange rate effective at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are re-translated to the 136

140 functional currency at the exchange rate effective at the date the fair value was determined. Foreign currency differences arising on re-translation are recognized in profit or loss, except for differences arising on re-translation of available-for-sale equity instruments, non-financial liabilities designated as hedges of net investment in foreign operations, or qualifying cash flow hedges which are recognized directly in equity. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euro at exchange rates effective at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to euro at average exchange rates. Foreign currency differences are recognized directly in equity. From the day of transition to the IFRS, these changes shall be recognized in the translation reserve. When a foreign operation is disposed of, in part or fully, the relevant amount in the currency translation reserve (FCTR) is transferred to profit or loss. In case of a subsidiary that is not in total control, a pro rata share of currency translation reserve is allocated to non-controlling interest. When a company abroad (foreign operation) is disposed of in a way that it is no longer controlled and that significant influence or joint control no longer exist, corresponding accrued amount in the currency translation reserve shall be transferred to profit or loss, or re-classified as revenue or expense resulting from the disposal. If the Group which only disposes of a part of its stake in a subsidiary that includes a foreign company, and still maintains significant influence or common control, an appropriate pro rata share of accumulated amount is allocated to profit or loss. If the Group only divests a part of its interest in an associate or a joint venture which includes a subsidiary abroad, yet significant influence or joint control is retained, the relevant relative share of the accrued amount shall be transferred to profit or loss. (c) Financial instruments (i) Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Initially, the Group recognizes loans and receivables and deposits on the day of their occurrence. Other financial assets (including assets which are estimated at their fair value through profit or loss) are initially recognized on an exchange date or when the Group becomes a party in accordance with contractual terms of the instrument. The Group shall derecognize financial assets when the contractual rights to cash flows of such assets expire or when Group moves the rights to contractual cash flows of financial asset related to a business in which all risks and benefits from ownership of the financial asset are transferred. Any share in the transferred financial asset that is created or transferred by the Group shall be recognized as individual asset or liability. Financial assets and liabilities are offset and the net amount is presented in the statement of financial position, but only if the Group has a legal right to settle the net amount or to realize the asset and at the same time settle the liability. Financial assets at fair value through profit or loss Instrument is allocated at its fair value through profit or loss, if it is held for trading or if it is deemed recognized at the beginning. Financial assets are determined at their fair value subject to the condition that the Group is able to manage these assets and has the power to take selling and purchasing decisions on fair value basis. Related costs of such transaction are recognized in profit 137

141 or loss at the day of their occurrence. Financial assets at fair value through profit or loss shall be measured at fair value; the amount of the change in fair value shall be recognized in profit or loss. Financial assets at fair value through profit or loss include ownership securities that would in other way be allocated to available-for-sale financial assets. Loans and receivables Loans and receivables are financial assets with fixed payments, which are not listed in an active market. These assets are initially recognized at fair value increased by related direct costs. Later, these assets are recognized at amortized cost using the effective interest method, decreased by losses or impairments. Loans and receivables include cash and cash equivalents, loans to other companies and bank deposits, trade and other receivables, and non-current deposits for rent payment. Non-current deposits for rent payment are considered in terms of content (finance lessors) and represent non-current financial receivables. They shall be discounted with market or contractual discount rates. Discount rate shall be the basis for accounting of finance income in the entire period for which the rent was paid. Cash and cash equivalents Cash and cash equivalents include cash in hand and call deposits. Bank overdrafts, which are repayable on demand and used for cash management purposes in the Group, are included in cash and cash equivalents in the statement of cash flows. Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified into the above categories. Subsequently to initial recognition, they are measured at fair value and changes therein. Impairment losses (see Note 3(i)(i)) and foreign exchange differences on available-for-sale financial monetary items (see Note 3(c)(i)) are recognized in other comprehensive income and reported in equity or in fair value reserve. When an investment is de-recognized, the cumulative gain or loss in equity is transferred to profit or loss. Available-for-sale financial assets also include equity securities. Available-for-sale financial assets of the Group also include such assets whose fair value could not be evaluated. Shares of these companies are not listed or traded in the stock market. The Group estimates that costs of evaluating the fair value of all these financial assets would have been too high, while the evaluation would not considerably affect the correctness of financial statements. Other Other non-derivative financial instruments are measured at amortized cost using the effective interest method, less any impairment losses. (ii) Non-derivative financial liabilities Initially, the Group recognizes issued debt securities and subordinate debt at the date of their occurrence. All other financial liabilities (including liabilities measured at their fair value through profit or loss) are initially recognized at their trading date, when the Group becomes the contractual party related to that instrument. The Group derecognizes a financial liability, if obligations determined in contract are met, repealed or obsolete. Financial assets and liabilities are offset and the amount is recognized in the statement of financial position if the Group has the official enforceable right to offset recognized amounts and intent to pay net amount or it is legally entitled to offset amounts and has an intent to pay net amount or realize the asset and on the same time settle the liability. 138

142 Group recognizes non-derivative financial instruments as other financial liabilities. These financial liabilities are initially recognized at fair value increased by the directly related costs. Subsequently, these financial liabilities are measured at amortized cost using the effective interest method. Other financial liabilities include loans and trade and other payables. Bank overdrafts which are repayable on demand and used for cash management purposes in the Group are included in cash and cash equivalents in the statement of cash flows. (iii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity, net of any tax effects. Repurchase of share capital (treasury shares) When share capital recognized as equity is repurchased, the amount of consideration paid, which includes directly attributable costs, is net of any tax effects, and is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to share premium. (iv) Derivative financial instruments The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Upon the inception of the hedge, the Group shall keep formal documents about the ratio between risk management and the purpose of risk management at the company, and about the strategy of the hedge project, as well as the methods used in estimating the effectiveness of this ratio. The group estimates the hedge with conventional method and at its inception, when highly successful hedge is expected to reach the offset changes of fair value or cash flows which are added to hedge, and when the realized amounts reach percent. With cash flow hedges, the expected business/transaction that is the subject of hedging must be highly probable and exposed to cash flow changes which could ultimately affect the profit or loss in a decisive manner. Derivatives are initially recognized at fair value; attributable transaction costs are recognized in profit or loss when incurred. Subsequently to initial recognition, derivatives shall be measured at fair value, and changes therein shall be accounted for as described below. Cash flow hedges Changes in the fair value of the derivative hedging instruments designated as a cash flow hedge are recognized directly in other comprehensive income of the period to the extent that the hedge is effective. Should the hedge prove to have been ineffective, the changes in fair value shall be recognized through the Income Statement. If the hedging instrument no longer meets the criteria for hedge accounting, if it expires, or if it is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The accumulated profit or loss, recognized through equity, shall remain recognized through equity until the announced transaction is completed. Should a non-financial asset be the subject of hedging, the amount recognized through equity shall be transferred to the asset's carrying amount after the actual recognition. In other cases, the amount recognized through equity shall be transferred to Income Statement in the period in which the hedged asset affects the profit or loss. 139

143 (d) Property, plant, and equipment (i) Recognition and measurement Plant and equipment are measured using the cost model. They are carried at their cost less any accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Borrowing costs related to the acquisition or construction of qualifying assets are capitalized if they exceed 3% of the carrying amount of property, plant and equipment at the beginning of the year; if they start after 1 January 2009; and if construction or preparation for use lasts over 6 months. In 2011 the group has not made capital expenditures, which would meet the described criteria. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located, as well as capitalized borrowing costs. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal of an item of property, plant and equipment with the net value (carrying amount) recognized in other income/expenses in the income statement. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained earnings. The Group employs the revaluation model to measure the value of land and buildings. The fair values reported are based on periodical, but not less than three-year valuations by an external independent appraiser, less accumulated depreciation. Increases in the carrying amount from land and building revaluation are reported in the increase of revaluation reserve in equity. Impairments of assets the value of which was previously increased shall be directly subtracted from the then recognized revaluation reserve in equity; otherwise, they shall be recognized in the income statement. Depreciation charge based on revalued value of assets shall be recognized in the income statement. Useful life and remaining value of buildings is evaluated / appraised annually, by an internal committee of experts, based on events that indicate the need for revaluation of a particular asset. a) Estimation of fair value of real property In compliance with the Accounting Rules, Mercator Group periodically, at least once every three years, reviews the fair values of its real estate. Real estate valuation was made on 1 January 2010 by a certified real estate appraiser in accordance with the International Valuation Standards and International Financial Reporting Standards. The value of real estate was measured based on the measurements, extracts from land registries, folder copies, purchase agreements, expected revenues and expenses of cash-generating unit data, and other sources. Pursuant to the International Accounting Standards, the company defined already in 2005 its cashgenerating units for the purposes of determining the fair value of real property. One such unit shall include all real estate located at same location/address. b) Assessment of useful lives of property, plant and equipment At Mercator Group, property, plant and equipment are depreciated by the straight line depreciation method, using the depreciation rates that reflect estimated useful lives of different assets at each Mercator Group company. Useful lives and residual value of property, plant and equipment shall be tested annually by internal experts or external independent appraisers based on any events that indicate the need for revaluation of a particular asset. 140

144 (ii) Reclassification to investment property If a piece of real estate used by the owner is transformed into investment property, such property shall be evaluated by its historical cost and transferred to investment property. The Group measures its investment property by the cost model. Only independent real estate units entirely leased to a third party shall be classified as investment property. If only a part of a building/facility is leased to a third party, it is not classified as investment property, as it cannot be sold separately, and because the other important part of the facility is being used for selling or producing goods. (iii) Subsequent costs The cost of replacing a part of a piece of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within that part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part shall be de-recognized. The costs of the day-to-day servicing of property, plant and equipment shall be recognized in profit or loss as soon as they are incurred. (iv) Depreciation Depreciation is calculated on a straight-line basis over the estimated useful lives of respective parts of an item of property, plant and equipment. Leased assets are depreciated by taking into account the lease term and their useful lives, unless it is reasonably certain that the company will obtain ownership by the end of the lease term. Land is not depreciated. For the part of the depreciation that relates to revalued property, plant, and equipment, the Group shall continuously eliminate the established revaluation reserves to retained earnings. The estimated useful lives for the current and comparative periods are as follows: Buildings years years Plant and equipment 2-18 years 2-18 years Useful lives and residual values are reviewed at each reporting date. (e) Intangible assets (i) Goodwill Goodwill (negative goodwill) arises from the acquisition of subsidiaries, associates and joint ventures. Acquisitions as of the day of transition to IFRS For acquisitions on or after 1 January 2006, goodwill represents the excess of the cost of the acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognized immediately in profit or loss. (ii) Acquisitions of non-controlling interests All surpluses or difference between cost of additional investment and carrying amount of assets shall be recognized in equity for those changes in ownership interest that do not lead to a change in control over the company. (iii) Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. 141

145 (iv) Subsequent expenditure Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including internally generated brands, shall be recognized in profit or loss as soon as they are incurred. (v) Amortization Amortization is calculated on a straight-line basis over the estimated useful lives of intangible assets (except for goodwill). It shall be recognized from the date the intangible asset is available for use. The estimated useful lives for the current and comparative periods are as follows: patents, licenses, and brands 2-15 years 2-15 years (f) Investment property Investment property is property held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services, or for administrative purposes. Only independent buildings/real estate units that are entirely leased to third parties are classified as investment property. If only a part of property (building) is leased out, it shall not be transferred to investment property as it cannot be sold separately and since other relevant part of the building is used for performance of in-house service activity or production of goods (e.g. a hypermarket within a shopping center). Investment property is recorded by the cost model. Depreciation is calculated based on a linear method, so that the purchase value of assets is divided on their respective remaining values throughout the anticipated useful life which is the same as for property. When the use of property changes so that it is reclassified as property, plant and equipment, the fair value of such asset shall be measured. Positive difference shall be recognized in fair value reserve, while negative difference shall be recognized in the income statement. (g) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset shall be reported at an amount equal to the lower of either fair value or the present value of the sum of minimum lease payments. Subsequently to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases shall be considered operating leases. Leased assets shall not be recognized in the Group's statement of financial position. (h) Inventories Inventories are measured at the lower of cost and net realizable value. Following are the methods of calculating the cost of inventories and relevant expenses: FIFO method for merchandise, method of average purchase prices (cost) for raw materials and packaging; cost of inventory includes purchase value, costs of production, transformation, and other costs incurred in bringing them to the current location and in the current condition; with both finished products and semi-products, the costs also include the relevant part of indirect production costs, under the assumption of normal use of means of production. 142

146 The net realizable value is equal to the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. The estimation of net realizable value of inventory is conducted at least once per year, upon the compilation of regular annual inventory lists. Write-offs and partial write-offs (write-downs) of damaged, expired, and dead inventories shall be conducted regularly during the year on specific items. At the end of the year, inventories shall be revalued as at 31 December on groups of related or connected items depending on their ageing or obsoleteness. They are impaired on the basis of previous years' experience. (i) Impairment of assets (i) Non-derivative financial assets For each financial asset that is not recognized at fair value through profit or loss, an assessment is made on the reporting date to determine whether there is objective evidence from which the impairment of an asset is seen. Financial asset is impaired if there is objective evidence indicating that after the initial recognition of asset, there was, for one or a number of events, a decrease of expected cash flows from this asset and this difference in cash flows can be measured. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount owed to the Group subject to Group's consent; indications that bankruptcy proceedings will be instituted for a debtor; adverse changes in the payment ability/status of borrowers or issuers in the Group; and economic conditions that correlate with the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Loans and receivables The Group shall consider any evidence of impairment for loans and receivables at both specific asset and collective (grouped) level. All significant receivables shall be assessed individually for specific impairment. All individually significant loans and receivables found not to be specifically impaired shall be collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables that are not individually significant are collectively assessed for impairment by grouping together loans and receivables with similar risk characteristics. In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired asset continues to be recognized. When a subsequent event (e.g. repayment by a debtor) causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Available-for-sale financial assets Impairment losses on available-for-sale financial assets shall be recognized by transferring the losses accumulated in the fair value reserve in equity, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost and the current fair value, less any impairment loss recognized previously in profit or loss. 143

147 If, in a subsequent period, the fair value of an impaired available-for-sale equity security increases and the increase can be related objectively to an event occurring after the impairment loss was recognized in profit or loss, then the impairment loss cannot be reversed trough profit or loss. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognized in other comprehensive income. (ii) Non-financial assets The carrying amounts of the Group's non-financial assets, other than investment property, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated on each reporting date. Impairment of cashgenerating unit is recognized when its carrying amount exceeds its recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets, which cannot be tested separately, are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or CGU). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated shall be aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. The goodwill acquired in a business combination, for the purpose of impairment testing, shall be allocated to cash-generating units or groups of units that are expected to benefit from synergies of the combination. The Group's corporate assets do not generate separate cash inflows and are utilized by more than one CGU. Corporate assets shall be allocated to CGUs on a reasonable and consistent basis. They shall be tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. An impairment loss is recognized in income statement. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. (j) Employee benefits (i) Other long-term employee benefits retirement benefits and jubilee premium provisions In the balance sheet, the Group recognized provisions deriving from future liabilities to employees for long service awards, calculated in compliance with the collective labour agreement for this activity / industry, and the mandatory retirement benefits as stipulated by the relevant act. The changes in retirement benefits and jubilee premiums provisions are recognized in the income statement. The provisions are determined based on actuarial calculations that are revised annually. Actuarial gains or losses are the effect of changed facts that affect the actuarial calculation (e.g. change in legislation), or a change in actuarial assumptions. 144

148 (ii) Termination benefits Termination benefits are recognized as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting date, then they are discounted to their present value. (iii) Short-term employee benefits Short-term employee benefit obligations shall be measured on a non-discounted basis; they shall be expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (k) Provisions A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax discount rate that reflects current market assessments of the time value of money and, if required, the risks specific to the liability. (i) Onerous contracts A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognizes any impairment loss on the assets associated with that contract. (ii) Restructuring A provision for restructuring is recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. (l) Revenue (i) Revenue from sales of goods, products, and material Revenue from the sale of goods, products and material is measured at the fair value of consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognized when the significant risks and rewards of ownership have been transferred to the buyer, recovery of consideration is probable, the associated costs and possible return of goods, products and material can be estimated reliably, there is no continuing management involvement with the quantity of goods sold, and the amount of revenue can be measured reliably. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. For wholesale of goods, transfer usually occurs when the product is received at the customer's warehouse; however, for some international shipments transfer occurs upon loading the goods onto the relevant carrier. 145

149 (ii) Customer loyalty program The Group issues credit and debit cards Mercator Pika to its customers for collecting bonus points at purchases. Bonus periods last six months. The first bonus period in the year lasts from 1 February to 31 July, the second bonus period from 1 August to 31 January of the following year. During the bonus period, customers collect bonus points. Depending on the amount of purchases and consequently the number of collected points, they can earn a 3 to 6-percent discount. During the year, the Group shall allocate potential discounts on the basis of collected points, whereas revenue from unrealized bonus points is allocated based on experience from previous bonus periods. Despite the fact that the second bonus period ends on 31 January the following year, the Group in this way ensures that recorded revenues match expenditures that were necessary for their realization. (iii) Revenue from services rendered Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. (iv) Rental income Rental income is recognized in profit or loss on a straight-line basis over the term of the lease. Any discounts and benefits granted are recognized as an integral part of the total rental income. (m) Government grants All types of government grants are recognized initially as deferred income when there is reasonable assurance that they will be received and that the Group will comply with the conditions associated with the grant. Grants that compensate the Group for expenses incurred are recognized in profit or loss on a systematic basis in the same periods in which the expenses are recognized. Grants that compensate the Group for the cost of an asset are recognized in profit or loss among other income on a systematic basis over the useful life of the asset. (n) Leases Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease discounts and benefits received are recognized as an integral part of the total lease expense. Payments made under financial leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease discounts and benefits received are recognized as an integral part of the total lease expense. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Determining whether an arrangement includes a lease At inception of an arrangement, the Group determines whether such an arrangement is or contains a lease. A specific asset shall be deemed the subject of a lease if the fulfilment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Group the right to control the use of the underlying asset. At inception or upon reassessment of the arrangement, the Group separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognized at an amount equal to the fair value of the underlying asset. Subsequently the liability is reduced as 146

150 payments are made and an imputed finance charge on the liability is recognized using the Group's incremental borrowing rate. (o) Finance income and expenses Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, and gains on hedging instruments that are recognized in profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Dividend income is recognized in profit or loss on the date that the Group's right to receive payment is established, which in the case of quoted securities is the ex-dividend date. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, impairment losses recognized on financial assets, and losses on hedging instruments that are recognized in profit or loss. All borrowing costs are recognized in profit or loss. Profits and losses from currency translation differences shall be recognized in net amounts. (p) Corporate income tax Income tax expense for the year comprises current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future, initial recognition of goodwill. Deferred tax liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. 147

151 (q) Net earnings per share The Group calculates basic earnings per share by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Since the Group does not have any preference shares or convertible bonds, diluted earnings per share are the same as basic earnings per share. 4. New standards and interpretations not yet adopted New amendment to the standards shall be effective for the year starting on 1 January 2012; hence, it was not complied with in the preparation of the Group's financial statements. This amendment does not affect the Group's financial statements. Amendment to IFRS 7 Financial Instruments: Disclosures transfers of financial assets (effective for annual reporting periods commencing on or after 1 July Earlier application is permitted.) The amendment requires that the Group discloses information that allows the users of the Group's financial statements the following: understanding the relation between transfers of partly de-recognized financial assets and the related liabilities; and assessing the nature of continuing involvement of the Group in financial assets that are derecognized in their entirety, and the risks pertaining to such involvement. The amendment defines "continuing involvement" for the purposes of compliance with the disclosure requirements. Considering the nature of operations and the type of financial assets held, the Group does not expect the amendment to IFRS 7 to significantly affect its financial statements. 5. Determination of fair values Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Property, plant, and equipment The fair value of property, plant and equipment recognized as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. (b) Intangible assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. 148

152 (c) Investment property The fair values in business or strategic combinations are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion (arm's length transaction). In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash flows expected to be received from renting out the property. A yield that reflects the specific risks inherent in the net cash flows then is applied to the net annual cash flows to arrive at the property valuation. Valuations reflect, when appropriate: the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting vacant accommodation, and the market's general perception of their creditworthiness; the allocation of maintenance and insurance responsibilities between the Group and the lessee; and the remaining economic life of the property. When rent reviews or lease renewals are pending with anticipated reversionary increases, it is assumed that all notices, and when appropriate counter-notices, have been served validly and within the appropriate time. (d) Inventories The fair value of inventories acquired in business combinations shall be determined based on their estimated selling price in the ordinary course of business, less the estimated costs of completion and sale, and a reasonable profit margin considering the effort required to complete and sell the inventories. (e) Investments in equity and debt securities The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets in business or strategic combinations is determined by reference to their quoted bid price at the reporting date, or if not available, determined using a valuation technique. Valuation techniques which can be employed include market multiples and discounted cash flow analysis using expected future cash flows and a market-related discount rate. The fair value of held-to-maturity investments is determined for disclosure purposes only. (f) Trade and other receivables The fair value of trade and other receivables, excluding construction work in progress, in business or strategic combinations is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. (g) Derivatives The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds). The fair value of interest rate swaps is based on broker quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. 149

153 (h) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the most recent market value of bonds in the stock market, prior to the reporting date. Fair values of other nonderivative financial liabilities are not determined, as the carrying amount represents a reasonable approximation of fair value. 6. Tax policy (a) Slovenia Tax statements (financial statements for tax authorities) of the company Poslovni sistem Mercator, d.d., and the companies of the Mercator Group in Slovenia, are prepared in accordance with International Financial Reporting Standards and the Corporate Income Tax Act. In 2011, there were no changes to the provisions of the Corporate Income Tax Act, which would affect the tax statements of the Mercator Group companies in Slovenia. Corporate income tax rate is 20%. Pursuant to the corporate Income Tax Act, a company's taxable base is the profit as the surplus of revenues over expenses, where the basic criteria for recognition, or inclusion, in a tax statement are still the revenues and expenses as shown in the income statement, defined pursuant to the legislation or accounting standards. In 2011, Mercator Group companies in Slovenia recognized and derecognized deferred taxes related to the following aspects: differences between business and tax recognized depreciation, impairment of receivables, provisions made, change in fair value of derivative financial instruments, revaluation of property, plant and equipment, property, plant and equipment, whose value does not exceed EUR 500 and whose useful life is longer than one year, change in fair value of available-for-sale financial assets; change in fair value of investment into equity of subsidiaries. Each company shall provide documentation on transfer prices; general documentation may be common to a group of related entities as a whole. (b) Serbia Tax statements of the company Mercator - S, d.o.o., are prepared in compliance with International Financial Reporting Standards and the relevant Corporate Income Tax Act ("Zakon o porezu na dobit pravnih lica"). Corporate income tax rate is 10%. In the assessment of corporate income tax, the following tax reliefs can be exercised: investment relief in the amount of 20% of the sum invested in the current year (but not over 50% of levied tax). 150

154 In 2011, the companies Mercator - S, d.o.o., and Modiana, d.o.o., Serbia, recognized deferred tax liabilities for the differences between depreciation as calculated for business purposes, and tax depreciation calculated exclusively for the tax statement. The companies Intersport S-ISI, d.o.o., and Modiana, d.o.o., Serbia, recognized a reversal in deferred tax assets pertaining to depreciation and amortization. (c) Croatia Tax statements of the companies Mercator - H, d.o.o., Intersport H, d.o.o., and Modiana, d.o.o., Croatia, are prepared in compliance with International Financial Reporting Standards and the relevant Corporate Income Tax Act ("Zakon o porezu na dobit"). Taxable base is the profit calculated according to the accounting principles, from which tax recognized costs are subtracted, or to which non-recognized costs are added. The company may also decrease its taxable base by the amount of revenues from dividends or participation in profit of other companies, and by depreciation that was not recognized as expense in previous periods. Corporate income tax rate is at 20%. In the assessment of corporate income tax, the following tax reliefs can be exercised: investment relief for promoting investments (under terms stated in the relevant act); investment relief for taxpayers in areas under special government protection. In 2011, the company Mercator - H, d.o.o., derecognized deferred tax liabilities due to depreciation and disposal of revalued property. The companies Intersport H, d.o.o., and Modiana, d.o.o., Croatia, recognized deferred tax assets for trade receivables and inventory revaluation. (d) Bosnia and Herzegovina Tax statements of the companies Mercator - BH, d.o.o., and M - BL, d.o.o., are prepared in compliance with International Financial Reporting Standards and the relevant Corporate Income Tax Act ("Zakon o porezu na dobit"). Corporate income tax rate is at 10%. In the assessment of corporate income tax, companies in Bosnia and Herzegovina may exercise the following tax reliefs: investment relief for investments in production on the territory of Bosnia and Herzegovina (taxpayers investing no less than BAM 20 million for 5 years in succession); investment relief for exports; investment relief for hiring disabled persons. In 2011, the company Mercator - BH, d.o.o., derecognized deferred tax liabilities due to depreciation and disposal of revalued property. The company M - BL, d.o.o., derecognized deferred tax assets due to differences between business and tax deductible depreciation. (e) Montenegro Tax statements of the company Mercator - CG, d.o.o., are prepared in compliance with International Financial Reporting Standards and the relevant Corporate Income Tax Act ("Porez na dobit pravnih lica"). Corporate income tax rate is at 9%. 151

155 In the assessment of corporate income tax, the following tax reliefs can be exercised: investment relief for newly hired, that are employed for indefinite time period, in the amount of their wages; investment relief for the acquisition of assets that increase energy efficiency (taxable base is decreased for 50% of completed investments). In 2011, the company Mercator - CG, d.o.o., recognized deferred tax liabilities for amortization. (f) Bulgaria Tax statements of the company Mercator - B, e.o.o.d., are prepared in compliance with International Financial Reporting Standards and the "Corporate Tax on the Annual Taxable Profit (Loss)". Corporate income tax rate is at 10%. In the assessment of corporate income tax, the following tax reliefs can be exercised: investment relief for hiring handicapped persons; investment relief for taxpayers in areas, which are less developed (under terms stated in the relevant act); investment relief for newly hired employees (under terms stated in the relevant act). In 2011, the company Mercator - B, e.o.o.d., recognized deferred tax liabilities for amortization. (g) Albania Tax statements of the company Mercator - A, sh.p.k., are prepared in compliance with International Financial Reporting Standards and the Corporate Tax on Income. Corporate income tax rate is at 20%. Companies may recognize a Tax relief for sponsorship. In 2011, the company Mercator - A, sh.p.k., did not recognize deferred tax assets or liabilities. 7. Operating segments For the purpose of reporting by segments, the Mercator Group defined two segments by considering various sets of activities or services performed by the companies within the Group. Market prices are used for selling goods, products and services between the segments. The Group is organized into two main operating segments: Trade, which consists of retail and wholesale of fast-moving consumer goods, textile, technical consumer goods, sportswear, and sports equipment, and related supplementary activities. Fast moving consumer goods trade represents the core business of the Mercator Group; Non-trade, which consists of food processing and other non-trade activities. 152

156 Information about reportable segments Trade Non-trade Total EUR thousand Total segment revenue 2,912,780 2,762,559 38,796 45,768 2,951,576 2,808,327 Inter-segment revenue 2,741 2,857 20,402 23,866 23,143 26,723 Interest income 3,610 3, ,647 3,427 Interest expense 53,460 44, ,879 44,948 Depreciation and amortization 79,580 76,596 1,726 2,098 81,306 78,694 Total segment results from operating activities 88,546 91, ,046 88,842 94,510 Assets 2,620,370 2,566,035 34,171 55,321 2,654,541 2,621,356 Liabilities 1,849,021 1,796,264 16,551 26,927 1,865,572 1,823,191 Capital expenditure 114, , , , ,394 Reconciliation of reportable segment revenues, results from operating activities, assets and liabilities, and other material items Revenue EUR thousand Total segment revenue 2,951,576 2,808,327 Elimination of inter-segment revenue (23,143) (26,723) Consolidated revenue 2,928,433 2,781,604 Results from operating activities EUR thousand Total segment results from operating activities 88,842 94,510 Elimination of inter-segment profits (5) Consolidated results from operating activities 88,842 94,505 Assets EUR thousand Total assets for reportable segments 2,654,541 2,621,356 Inter-segment elimination (6,878) (12,502) Consolidated total assets 2,647,663 2,608,854 Liabilities EUR thousand Total liabilities for reportable segments 1,865,572 1,823,191 Inter-segment elimination (6,878) (12,502) Consolidated total liabilities 1,858,694 1,810,

157 Other material items 2011 EUR thousand Reportable segment totals Inter-segment eliminations Consolidated totals Interest income 3,647 3,647 Interest expense 53,879 53,879 Depreciation and amortization 81,306 81,306 Capital expenditure 115, ,824 Other material items 2010 EUR thousand Reportable segment totals Inter-segment eliminations Consolidated values Interest income 3,427 3,427 Interest expense 44,948 44,948 Depreciation and amortization 78,694 78,694 Capital expenditure 116, ,394 Geographical segments Mercator Group operates in two main geographical areas: Slovenia, the location of the parent company, which is also the largest business unit of the Group. Fields of operation in Slovenia include the following: trade (retail and wholesale); food processing, and other non-trade activities; Foreign markets, including Serbia, Croatia, Bosnia and Herzegovina, Montenegro, Bulgaria, and Albania. Operations in these countries are carried out in the operating segment of trade. Revenues from external customers Non-current assets EUR thousand Slovenia 1,690,381 1,694,276 1,085,428 1,087,884 Foreign markets 1,238,052 1,087, , ,836 Total 2,928,433 2,781,604 2,035,379 2,016,720 Revenues from any individual customer do not reach 10% of total revenues of the Group. Mercator Group comprises the following companies as at 31 December 2011 (data in EUR thousand): 154

158 Poslovni sistem Mercator, d.d. TRADE Mercator - S, d.o.o % Mercator - H, d.o.o. 99.9% Slovenia Serbia Croatia Equity 825,825 Equity 234,181 Equity 211,069 Financial liabilities 823,594 Financial liabilities 99,493 Financial liabilities 193,998 Profit for the year 31,148 Profit for the year 21,227 Profit for the year (15,577) Revenue 1,608,903 Revenue 544,155 Revenue 392,313 Number of employees 10,582 Number of employees 4,565 Number of employees 3,417 Mercator - CG, d.o.o % Mercator - BH, d.o.o % M - BL, d.o.o % Montenegro Bosnia and Herzegovina Bosnia and Herzegovina Equity 33,314 Equity 39,790 Equity 36,193 Financial liabilities 2,110 Financial liabilities 38,032 Financial liabilities 3,127 Profit for the year 400 Profit for the year 1,724 Profit for the year 993 Revenue 100,712 Revenue 88,618 Revenue 33,612 Number of employees 1,429 Number of employees 1,289 Number of employees 292 Mercator - B, e.o.o.d % Mercator - A, sh.p.k % Intersport ISI, d.o.o % Bulgaria Albania Slovenia Equity (3,570) Equity 514 Equity 15,215 Financial liabilities 14,482 Financial liabilities 6,013 Financial liabilities 10,973 Profit for the year (7,327) Profit for the year (2,481) Profit for the year 530 Revenue 8,536 Revenue 5,445 Revenue 48,420 Number of employees 268 Number of employees 134 Number of employees 327 Intersport H, d.o.o % Intersport S-ISI, d.o.o % Intersport BH, d.o.o % Croatia Serbia Bosnia and Herzegovina Equity 4,602 Equity 1,720 Equity 810 Financial liabilities 6,314 Financial liabilities 1,616 Financial liabilities 1,097 Profit for the year 29 Profit for the year 61 Profit for the year 53 Revenue 25,442 Revenue 8,746 Revenue 5,182 Number of employees 254 Number of employees 108 Number of employees 63 Modiana, d.o.o % Modiana, d.o.o., Croatia 100.0% Modiana, d.o.o., Serbia 100.0% Slovenia Croatia Serbia Equity 10,743 Equity 3,276 Equity 2,571 Financial liabilities 13,322 Financial liabilities 3,938 Financial liabilities 3,029 Profit for the year (3,765) Profit for the year 43 Profit for the year (395) Revenue 47,414 Revenue 17,022 Revenue 12,546 Number of employees 595 Number of employees 202 Number of employees 133 Modiana, d.o.o., Bosnia and Herzegovina 100.0% M Energija, d.o.o % M-Tehnika, d.d % Bosnia and Herzegovina Slovenia Slovenia Equity 1,074 Equity 7,256 Equity 24 Financial liabilities 1,309 Financial liabilities 4,245 Financial liabilities 0 Profit for the year 284 Profit for the year (1,319) Profit for the year (1) Revenue 7,007 Revenue 15,036 Revenue 0 Number of employees 78 Number of employees 6 Number of employees 0 Mercator Makedonija, d.o.o.e.l.* 100.0% Mercator - K, l.l.c.* 100.0% M.COM, d.o.o.* 100.0% Macedonia Kosovo Slovenia Equity 605 Equity 1 Equity 8 Financial liabilities 0 Financial liabilities 0 Financial liabilities 0 Profit for the year 0 Profit for the year 0 Profit for the year 0 Revenue 0 Revenue 0 Revenue 0 Number of employees 0 Number of employees 0 Number of employees 0 155

159 NON-TRADE Mercator - Emba, d.d % Mercator IP, d.o.o % Mercator - Optima, d.o.o % Slovenia Slovenia Slovenia Equity 6,391 Equity 2,298 Equity 2,399 Financial liabilities 10,855 Financial liabilities 40 Financial liabilities 0 Profit for the year (408) Profit for the year 727 Profit for the year 2 Revenue 19,093 Revenue 10,283 Revenue 561 Number of employees 110 Number of employees 399 Number of employees 15 M - Nepremičnine, d.o.o.** Slovenia 100.0% Equity 4,074 Financial liabilities 0 Profit for the year 69 Revenue 453 Number of employees 0 * The company has not yet commenced its business operations. ** Project-based real estate company which has not launched its activities yet. 156

160 8. Acquisitions and disposals of subsidiaries and non-controlling interests Business combinations and founding of new companies Slovenia On 9 August 2011, the agreement took effect based on which the company Poslovni sistem Mercator, d.d., became the 100-percent shareholder of the company En Plus, d.o.o. On 28 September 2011, the company was renamed to M - Energija, d.o.o. This strategic combination is consistent with Mercator Group's strategy of developing supplementary trade service for the customers. Strategic business combination had the following effect on the assets and liabilities of the Mercator Group on the day of acquisition: EUR thousand Note Pre-acquisition carrying amounts Fair value adjustments Recognized values on acquisition Property, plant, and equipment 14 11,064 (207) 10,857 Intangible assets Deferred tax assets Inventories Trade and other receivables 2,243 2,243 Cash and cash equivalents Financial liabilities (8,849) (8,849) Trade and other payables (3,471) (3,471) Deferred tax liabilities 19 (73) (73) Net identifiable assets and liabilities 2, ,356 Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost Consideration transferred 2,238 Cash acquired 37 Cost of acquisition, net of cash acquired 2,201 Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost in the amount of EUR 118 thousand was derecognized by the group through profit and loss for the current year. The acquired operations of the company M - Energija, d.o.o., generated revenue in the amount of EUR 7,025 thousand and earnings before taxes of EUR -577 thousand in the period from the day of takeover until the end of 2011, which also includes restructuring costs and the costs of the company's integration into the Group. 157

161 According to the opinion by an independent financial consultant on the fairness of the transaction from the aspect of the company Mercator, d.d., and its shareholders, the transaction was, considering the relevant economic and financial terms and conditions, financially sound and appropriate. On 8 November 2011, the company Poslovni sistem Mercator, d.d., founded the company M - Tehnika, d.d., with a contribution of share capital in the amount of EUR 25 thousand. The company deals with sale of products for construction, refurbishment, maintenance, and equipment of home, in the Slovenian market. On 30 December 2011, Poslovni sistem Mercator, d.d., signed an agreement based on which the company will, subject to meeting the conditions specified in the agreement, increase its interest in the company Vesna, Trgovsko podjetje, d.d., from to 100 percent. With this strategic business combination, Mercator, d.d., will acquire seven retail units in Northeastern Slovenia, which have thus far operated as Mercator franchise units. Serbia On 29 July 2011, the Mercator - S, d.o.o., and the companies Familija Marketi, d.o.o., and Robne kuće Beograd, d.o.o., signed an agreement on the transfer of trade operations and employees of the company Familija Marketi, d.o.o., to the company Mercator - S, d.o.o. In addition, Mercator - S, d.o.o., obtained on a long term operating lease 27 trade facilities of the company Robne kuće Beograd, d.o.o., spanning a total of over 22 thousand square meters. In 2011, the company took over 16 retail units; the remaining 11 units will be taken over in Strategic business combination had the following effect on the assets and liabilities of the Mercator Group on the day of acquisition: EUR thousand Note Preacquisition carrying amounts Fair value adjustments Recognized values on acquisition Property, plant, and equipment 14 2,336 2,336 Inventories 8 8 Net identifiable assets and liabilities 2,344 2,344 Goodwill 15 Consideration transferred 2,344 Cash acquired Cost of acquisition, net of cash acquired 2,344 The acquired operations of the company Familija Marketi, d.o.o., generated revenue in the amount of EUR 3,069 thousand and earnings before taxes of EUR -249 thousand in the period from the day of takeover until the end of 2011, which also includes restructuring costs and the costs of the company's integration into the Group. 158

162 According to the opinion by an independent financial consultant on the fairness of the transaction from the aspect of the company Mercator, d.d., and its shareholders, the transaction was, considering the relevant economic and financial terms and conditions, financially sound and appropriate. Bosnia and Herzegovina On 20 October 2011, the company Mercator - BH, d.o.o., Sarajevo, and the company Drvopromet, d.o.o., Sarajevo, signed the agreements on strategic combination, according to which Mercator - BH, d.o.o., subject to meeting the conditions stipulated therein, will take over the trade operations of the company Drvopromet, d.o.o., thereby acquiring on a long-term operating lease 63 retail outlets "DP Marketi" held by the company Drvopromet, d.o.o., spanning a total area of over 24 thousand square meters. The takeover was carried out in two successive stages: 36 units were taken over in 2011, and the remaining units were taken over in January Strategic business combination had the following effect on the assets and liabilities of the Mercator Group on the day of acquisition: EUR thousand Note Preacquisition carrying amounts Fair value adjustments Recognized values on acquisition Property, plant, and equipment 14 1,555 1,555 Intangible assets 15 1,910 1,910 Inventories 1,606 1,606 Net identifiable assets and liabilities 3,161 1,910 5,071 Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost 10 1,910 Consideration transferred 3,161 Cash acquired Cost of acquisition, net of cash acquired 3,161 Fair value adjustment in the amount of EUR 1,910 thousand pertains to the capitalization of the "Drvopromet" brand, which was appraised by an independent appraisal expert. Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost in the amount of EUR 1,910 thousand was derecognized by the group through profit and loss for the current year. The acquired operations of the company Drvopromet generated revenue in the amount of EUR 1,095 thousand and earnings before taxes of EUR 1,870 thousand in the period from the day of takeover until the end of 2011, which also includes the excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost, and integration and restructuring costs of the Drvopromet units acquired in According to the opinion by an independent financial consultant on the fairness of the transaction from the aspect of the company Mercator, d.d., and its shareholders, the transaction was, considering the relevant economic and financial terms and conditions, financially sound and appropriate. 159

163 Disposal of subsidiary In 2011, the Group disposed of its 100-percent shareholding in the company Eta, d.d., at a price of EUR 10,000 thousand. Gain from disposal for the Group amounted to EUR 1,150 thousand (Note 13). Effect of the disposal on individual Group assets and liabilities is as follows: EUR thousand 2011 Property, plant, and equipment 5,274 Intangible assets 52 Inventories 5,189 Available-for-sale financial assets 101 Loans and deposits 2,961 Trade receivables 4,814 Cash 15 Provisions (536) Financial liabilities (6,000) Trade payables (2,517) Deferred tax liabilities (503) Net assets and liabilities 8,850 Consideration received 10,000 Cash (15) Net proceeds 9, Revenue Breakdown of revenue by categories EUR thousand Sales of goods 2,718,402 2,565,483 Sales of services 196, ,656 Sales of products 21,052 23,875 Sales of materials Expenses for discounts granted (7,895) (6,942) Total 2,928,433 2,781,604 Sales of goods are also reduced by the amount of discounts to customers - Mercator Pika card holders. 160

164 10. Other income EUR thousand Gain on sale of property, plant and equipment 6,997 2,513 Reversal of provisions 5,664 4,370 Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost 2,028 7,626 Other operating income 11,375 9,114 Total 26,064 23,623 Gain on sale of property, plant and equipment, pertains to the disposal of unnecessary and nonviable property in Slovenia, amounting to EUR 965 thousand; to the disposal of land in Croatia in the amount of EUR 4,980 thousand; and to the divestment of unnecessary and non-viable property in other markets in the amount of EUR 1,052 thousand. Revenue from reversal of provisions pertains to the reversal of provisions pertaining to restitution claims in the amount of EUR 1,769 thousand; reversal of provisions for legal claims in the amount of EUR 357 thousand; reversal of provisions for retirement benefits and jubilee premiums in the amount of EUR 1,172 thousand; and drawing of provisions for improvement of working conditions of disabled persons in the amount of EUR 2,366 thousand. Excess of acquirer's interest in the net fair value of acquiree's identifiable assets and liabilities over cost pertains to the takeover of the operations of the company Drvopromet, d.o.o., in the amount of EUR 1,910 thousand, and the takeover of the company M - Energija, d.o.o., in the amount of EUR 118 thousand. The remaining part of the Group's other income includes indemnities based on insurance premiums and other indemnities, as well as bonuses on hiring of persons with disabilities, and other operating income. 11. Expenses by nature EUR thousand Depreciation of property, plant and equipment 71,745 68,946 Amortization of intangible assets 9,401 9,575 Depreciation of investment property Labour costs (personnel expenses) 295, ,901 Cost of material 83,947 79,014 Costs of services excl. rents 164, ,117 Rental/lease costs 44,183 34,759 Cost of provisions 2,417 3,839 Other expenses 13,236 13,051 Impairment of goodwill and fixed assets and losses on sale of property, plant and equipment 6,761 5,189 Change in the value of inventories 378 (39) Other operating expenses 2,582 5,208 Cost of goods sold 2,170,189 2,034,989 Total cost of goods sold, selling and marketing costs and administrative expenses 2,865,655 2,710,

165 In 2011 production costs amounted to EUR 32,229 thousand (2010: EUR 33,755 thousand), selling and marketing costs amounted to EUR 557,213 thousand (2010: EUR 542,356 thousand) and administrative expenses amounted to EUR 103,442 thousand (2010: EUR 99,622 thousand). Impairment of goodwill amounts to EUR 3,037 thousand, which pertains to goodwill from acquisition of the companies Presoflex, d.o.o., and Era Tornado, d.o.o., in Croatia. Impairment of tangible and intangible assets amounts to EUR 2,700 thousand; PPE write-offs amount to EUR 850 thousand; and losses on sale of property, plant, and equipment, amount to EUR 174 thousand. In 2011, the Group's costs of services also include the costs of audit in the amount of EUR 336 thousand. The auditors did not provide any other services in Cost of goods sold are reduced by rebates, received discounts, and indemnities pertaining to the gross margin; on the other hand, they are increased by impairment of inventory, write-offs of damaged, expired, and dead inventory, and deficits/losses. 12. Personnel expenses EUR thousand Wages and salaries 220, ,802 Pension insurance costs 19,401 20,345 Health insurance costs 13,253 12,779 Other labour costs 42,250 45,975 Total 295, ,901 Number of employees as at 31 December 24,266 23,482 Average number of employees in the Group during the year (calculated based on hours worked) amounts to 22,602 (2010: 21,632). 162

166 13. Finance income and expenses Recognized in profit or loss EUR thousand Interest income 3,647 3,427 Gain on disposal of subsidiaries 1,150 Net operating foreign currency translation differences 1,103 Dividend income 56 4 Other finance income 846 1,536 Finance income 5,699 6,070 Interest expense (53,879) (44,948) Disposal of available-for-sale financial assets (27) (41) Impairment of trade and other receivables (5,301) (5,120) Net operating foreign currency translation differences (1,027) Net finance foreign currency translation differences (2,356) (10,098) Other finance expense (10) (24) Finance expenses (62,600) (60,231) Net finance expenses recognized in profit or loss (56,901) (54,161) Recognized in other comprehensive income (net) EUR thousand Foreign currency translation differences foreign operations 2,015 (28,515) Net change in fair value of cash flow hedges (2,224) 1,641 Net change in fair value of available-for-sale financial assets (972) (1,163) Finance (expense) income recognized directly in comprehensive income (1,181) (28,037) Attributable to: Owners of the parent company (1,176) (28,035) Non-controlling interests (5) (2) Finance (expenses) income recognized in comprehensive income Recognized in: Fair value reserve (3,196) 478 Currency translation reserve 2,020 (28,513) Non-controlling interests (5) (2) Total (1,181) (28,037) 163

167 14. Property, plant, and equipment EUR thousand Note Land Buildings Production equipment Office and other equipment Construction in progress Total Balance at 1 January, 2010 Cost Accumulated depreciation Carrying amount Year ended 31 December, 2010 Opening carrying amount Effect of movements in exchange rates Acquisitions through business combinations Additions Transfers Disposals Depreciation charge Revaluation Closing carrying amount Balance at 31 December, 2010 Cost Accumulated depreciation Carrying amount Year ended 31 December, 2011 Opening carrying amount Effect of movements in exchange rates Acquisitions through business combinations Subsidiary disposals Additions Transfers* Disposals Depreciation charge Impairment and write-offs Closing carrying amount Balance at 31 December, 2011 Cost Accumulated depreciation Carrying amount 605,763 1,617, , ,159 46,593 2,682,849 - (533,260) (172,486) (113,812) - (819,558) 605,763 1,083,792 78,796 48,347 46,593 1,863, ,763 1,083,792 78,796 48,347 46,593 1,863,291 (8,815) (24,873) (2,595) (1,094) (590) (37,967) , ,952 2,855 1, ,521 83,474 91, ,857 55,883 5,686 17,601 (86,475) (448) (9,493) (6,571) (134) (135) 1,128 (15,205) 11 - (43,531) (14,262) (11,153) - (68,946) 6,133 14, , ,300 1,080,524 85,065 57,087 44,452 1,870, ,300 1,778, , ,749 44,452 2,852,096 - (698,039) (176,967) (106,662) - (981,668) 603,300 1,080,524 85,065 57,087 44,452 1,870, ,300 1,080,524 85,065 57,087 44,452 1,870,428 (279) 1, , ,478 6, ,748 (2,381) (1,845) (688) (302) (58) (5,274) 4,999 1, ,197 98, , ,475 16,978 12,820 (104,623) (2,878) (6,142) (3,626) (218) (418) - (10,404) 11 - (44,874) (14,725) (12,146) - (71,745) - (728) (850) - - (1,578) 600,477 1,112,074 92,109 62,262 39,096 1,906, ,477 1,836, , ,867 39,096 2,915,498 - (723,927) (171,948) (113,605) - (1,009,480) 600,477 1,112,074 92,109 62,262 39,096 1,906,018 * Transfers are related to transfers between groups. Advance payments are included in construction in progress in the amount of EUR 279 thousand. 164

168 As at 31 December 2011, the Group held EUR 174,968 thousand of inactive property valued at fair value (2010: EUR 183,158 thousand). Inactive real property includes land intended for future development projects, and real property selected for disposal. Investments in property, plant and equipment, which are recognized under acquisitions through business combinations and additions in amount of EUR 125,772 thousand, relate to: EUR thousand 2011 Acquisition of property, plant and equipment through business combinations 14,748 Additions of property, plant and equipment (new facilities) 76,512 Refurbishment of retail and wholesale units 25,039 Other 9,473 Total 125,772 Disposals of property, plant and equipment in the amount of EUR 10,404 thousand are related to the disposal of unnecessary and non-viable property. The most recent appraisal for all land and buildings (property and plant) of the Group dates to 1 January The appraisal was conducted based on fair market value as determined by an independent certified real estate appraiser. Depreciation of property, plant and equipment in the amount of EUR 71,745 thousand is included among production costs in the amount of EUR 1,434 thousand, among the selling and marketing costs in the amount of EUR 65,052 thousand, and among the administrative expenses in the amount of EUR 5,259 thousand. If land and buildings were stated on the historical cost basis, the amounts would be as follows: EUR thousand Cost 1,733,039 1,670,024 Accumulated depreciation (429,752) (404,410) Carrying amount 1,303,287 1,265,614 Leased property, plant, and equipment Carrying amount of property, plant and equipment held under financial leases amounts to EUR 222,562 thousand (2010: EUR 222,338 thousand) and refers to land and buildings. Security Bank borrowings are not secured by land and buildings as at 31 December

169 15. Intangible assets EUR thousand Goodwill Trademarks, rights and licenses Total Balance at 1 January 2010 Cost 13, , ,179 Accumulated amortization (64,184) (64,184) Carrying amount 13,001 38,994 51,995 Year ended 31 December, 2010 Opening carrying amount 13,001 38,994 51,995 Effect of movements in exchange rates (100) (3,449) (3,549) Acquisitions through business combinations 13,225 13,225 Additions 3,532 3,532 Disposals (85) (85) Impairment (2,917) (2,917) Amortization (9,575) (9,575) Closing carrying amount 9,984 42,642 52,626 Balance at 31 December 2010 Cost 9,984 78,846 88,830 Accumulated amortization (36,204) (36,204) Carrying amount 9,984 42,642 52,626 Year ended 31 December, 2011 Opening carrying amount 9,984 42,642 52,626 Effect of movements in exchange rates (171) Acquisitions through business combinations 2,771 2,771 Disposal of subsidiary (52) (52) Additions 4,800 4,800 Disposals (1) (1) Transfers 1 1 Impairment (3,037) (545) (3,582) Amortization (9,401) (9,401) Closing carrying amount 6,776 40,847 47,623 Balance at 31 December 2011 Cost 6,776 75,414 82,190 Accumulated amortization (34,567) (34,567) Carrying amount 6,776 40,847 47,623 Intangible assets in development as at 31 December 2011 amount to EUR 469 thousand. Intangible assets as at 31 December 2011 include the following: rights, patents, licenses, trademarks, and investments into software in amount of EUR 29,835 thousand (2010: EUR 28,899 thousand); rights to lease property in the company Mercator - S, d.o.o., in the amount of EUR 11,012 thousand (2010: EUR 13,743 thousand); and goodwill in the amount of EUR 6,776 thousand (2010: EUR 9,984 thousand). 166

170 Goodwill in the amount of EUR 6,776 thousand, which arose in previous years, is related to the following: acquisition of the company Presoflex, d.o.o., Croatia, in 2007 in the amount of EUR 4,360 thousand; acquisition of the companies Era Tornado, d.o.o., Croatia, and Trgohit, d.o.o., Croatia, in 2005 in the amount of EUR 1,579 thousand; acquisition of the company Interier, d.o.o., in 2007 in the amount of EUR 457 thousand; acquisition of the companies Evolution, d.d., and Mercator IP, d.o.o., in 2008 in the amount of EUR 380 thousand; and other acquisitions of noncontrolling interests in previous years. Amortization in the amount of EUR 9,401 thousand was included among the production costs in the amount of EUR 33 thousand; among the selling and marketing costs in the amount of EUR 4,015 thousand; and among the administrative expenses in the amount of EUR 5,353 thousand. Impairment testing of goodwill Goodwill in the amount of EUR 4,360 thousand, which was created upon the acquisition of the company Presoflex, d.o.o., Croatia, was allocated to cash-generating units of the Group, defined according to the store format, and tested for impairment on 31 December Goodwill in the amount of EUR 1,579 thousand, which was created in 2005 upon the acquisition of the companies Era Tornado, d.o.o., and Trgohit, d.o.o., in Croatia was allocated to cash-generating units of the Group, defined according to the store format; on 31 December 2011, it was tested for impairment. Remaining goodwill in the amount of EUR 837 thousand, which relates to various smaller transactions, was not allocated to cash-generating units and was not impaired, because it was estimated that the recoverable amount of acquired assets exceeds their carrying amount, including the goodwill. A summary of the goodwill allocation and impairment is presented below: Effect of movements in EUR thousand 31 Dec exchange rates Impairment in Dec Hypermarkets 847 (14) (296) 537 Supermarkets 7,643 (127) (2,529) 4,987 Markets 626 (11) (208) 407 Other stores 13 (4) 9 Unallocated 855 (19) 836 Total 9,984 (171) (3,037) 6,776 When testing goodwill for impairment with regard to the acquisition of the company Presoflex, d.o.o., the recoverable amount of cash-generating unit was determined based on the calculations of value in use. The calculations are based on cash flow projections prepared against the background of business plans for the following year, and projected forwards upon appropriate assumptions. The main assumptions considered in the calculation of values in use include the following: revenue growth rate of 2.5% and discount rate of 9%. Gross cash flow from operating activities as percentage of sales revenue is defined based on operation and performance history, structure of sales, and expectations regarding the developments in the market. The discount rate applied is based on market rates, adjusted to reflect the specific risks related to the business units. It was determined that the recoverable amount of cash-generating units is lower than their carrying amount, including the goodwill, therefore goodwill was impaired in amount of EUR 2,500 thousand. 167

171 When testing goodwill for impairment with regard to the acquisition of the companies Era Tornado, d.o.o., and Trgohit, d.o.o., the recoverable amount of cash-generating unit was determined based on the calculations of value in use. The calculations are based on cash flow projections prepared against the background of business plans for the following year, and projected forwards upon appropriate assumptions. The main assumptions considered in the calculation of values in use include the following: revenue growth rate of 2.5% and discount rate of 9%. Gross cash flow from operating activities as percentage of sales revenue is defined based on operation and performance history, structure of sales, and expectations regarding the developments in the market. The discount rate applied is based on market rates adjusted to reflect the specific risks related to the business units. It was determined that the recoverable amount of cash-generating units does not exceed their carrying amount, including the goodwill, therefore goodwill was impaired in amount of EUR 537 thousand. Impairment of goodwill amounted to a total of EUR 3,037 thousand, of which EUR 2,500 thousand pertains to goodwill impairment from the acquisition of the company Presoflex, d.o.o., and EUR 537 thousand pertains to goodwill impairment from acquisitions of companies Era Tornado, d.o.o., and Trgohit, d.o.o. 16. Investment property EUR thousand Balance at 1 January 3,894 4,127 Transfer from property, plant, and equipment 12 Disposals (296) (60) Depreciation (160) (173) Balance at 31 December 3,450 3,894 Balance at 31 December Cost 7,303 7,943 Accumulated depreciation (3,853) (4,049) Carrying amount 3,450 3,894 Fair value of investment property as at 31 December 2011, amounts to EUR 9,360 thousand (2010: EUR 10,757 thousand). The following amounts were recognized in the income statement with regard to investment property: EUR thousand Rental income Direct operating expenses arising from investment properties that generate rental income (236) (264) Total (3) (26) Depreciation of investment property in the amount of EUR 160 thousand was included among the cost of sales. 168

172 17. Available-for-sale financial assets EUR thousand Balance at 1 January 3,959 5,473 Effect of movements in exchange rates (5) (2) Additions 10 Changes in fair value (1,235) (1,457) Disposal of subsidiary (101) Disposals (55) Balance at 31 December 2,628 3,959 The Group's available-for-sale financial assets also include assets that could not be valued at fair value; thus, these assets are measured at cost. Shares of these companies are not listed or traded in the stock market. The Group estimates that costs of evaluating the fair value of all these financial assets would have been too high, while the evaluation would not considerably affect the correctness of financial statements. EUR thousand Available-for-sale financial assets measured at cost Available-for-sale financial assets measured at fair value 1,885 3,214 Total equity securities and shares 2,628 3,959 As at 31 December 2011, the Group does not hold any financial assets at fair value through profit or loss, or held-to-maturity investments. 18. Derivative financial instruments EUR thousand Assets Interest rate caps Liabilities Interest rate swaps (4,562) (2,478) The carrying amounts of derivative financial instruments equal fair values. The amount of borrowings hedged from interest rate risk as at 31 December 2011 amounted to EUR 550,000 thousand; Mercator held interest rate swaps in the amount of EUR 175,000 thousand (contracted interest rates varied between 2.127% and 2.521%) and interest rate caps in the amount of EUR 375,000 thousand with a strike price of 4.00% and 3.50%. As at 31 December 2011, the relevant floating interest rate, i.e. the 6-month EURIBOR, amounted to 1.617%. Held derivative financial instruments are designated for cash flow hedging and are very effective at regulating cash flows from borrowings. As of 31 December 2011, the Group did not hold any derivative financial instruments designated as fair value hedges. Other than interest rate swaps and interest rate caps, the Mercator Group did not hold any other contracts with third parties that represent derivative financial instruments as at 31 December

173 Mercator Group manages financial risks in the framework of adopted policy centrally at the parent company level which enters into interest rate swap and currency forward contracts with subsidiaries on market terms (arm's length principle) based on specific policies for managing specific risks. Such derivative financial instruments are recognized and reported appropriately. 19. Taxes Tax recognized in profit or loss EUR thousand Current tax expense 8,538 10,741 Deferred tax (137) (784) Tax 8,401 9,957 In 2011 income tax liability of the companies in the Mercator Group amounts to EUR 8,538 thousand. According to IAS 12 current tax and deferred tax are recognized as revenue or expense and are included in profit or loss. If tax relates to items recognized in equity, deferred tax is also recognized directly in equity. Tax recognized in other comprehensive income EUR thousand 2011 Value before tax Tax Value after tax Disposal and depreciation of property Change in fair value of available-for-sale financial assets (1,208) 236 (972) Change in fair value of cash flow hedges (2,780) 556 (2,224) Foreign currency translation differences foreign operations 2,015 2,015 Other comprehensive income (1,973) 978 (995) EUR thousand 2010 Value before tax Tax Value after tax Revaluation of property 22,094 (4,309) 17,785 Change in fair value of available-for-sale financial assets (1,457) 294 (1,163) Change in fair value of cash flow hedges 1,799 (360) 1,439 Foreign currency translation differences foreign operations (28,515) (28,515) Other changes (14) (14) Other comprehensive income (6,079) (4,389) (10,468) 170

174 Reconciliation to effective tax rate EUR thousand Profit for the year 23,540 30,387 Tax 8,401 9,957 Profit before income tax 31,941 40,344 Tax calculated at 20-percent tax rate 6,388 8,069 Tax on income that increases the tax base (134) 353 Tax on income that decreases the tax base (3) (1,226) Tax of non-deductible expenses 1,395 2,804 Tax relief (1,514) (2,296) Effect of different tax rates and other 2,269 2,253 Total income tax expense 8,401 9,957 Effective tax rate 26.3% 24.7% Deferred taxes are calculated based on temporary differences under the liability method, by applying the tax rate effective in individual countries of the Mercator Group's operations. The movement in the deferred tax balances is as follows: EUR thousand At beginning of year net deferred tax assets (liabilities) (42,569) (41,240) Effect of movements in exchange rates (51) 431 Acquired in business combinations 377 Disposal of subsidiary 503 Recognized in profit or loss Recognized in other comprehensive income 978 (4,389) Recognized in liabilities 632 1,845 At end of year net deferred tax assets (liabilities) (39,993) (42,569) 171

175 The deferred tax assets and liabilities are attributable to the following items: Deferred tax liabilities EUR thousand Revaluation of property, plant and equipment Change in fair value of available- forsale financial assets Depreciation of property, plant and equipment under EUR 500 Difference between tax recognized and business depreciation Total Balance at 1 January , ,410 49,326 Effect of movements in exchange rates (323) (61) (384) Recognized in profit or loss (4) (35) Recognized in other comprehensive income 4,310 (228) 4,082 Recognized in liabilities (1,552) (293) (1,845) Balance at 31 December , ,185 51,269 Effect of movements in exchange rates (67) 20 (47) Acquired in business combinations Disposal of subsidiary (503) (503) Recognized in profit or loss (7) 10 (80) (77) Recognized in other comprehensive income (188) (65) (253) Recognized in liabilities (632) (632) Balance at 31 December , ,125 49,

176 Deferred tax assets EUR thousand Provisions not recognized for tax purposes Impairment of trade receivables Impairment of inventory Differences between tax recognized and business deprecia-tion Change in fair value of available-forsale financial assets and derivatives Other Total Balance at 1 January ,373 1, ,588 1, ,086 Effect in exchange rates movements (4) Recognized in profit or loss (289) (255) 874 Recognized in other comprehensive income (13) (294) (307) Balance at 31 December ,071 1, ,073 1, ,700 Effect in exchange rates movements (6) (41) (51) (98) Acquired in business combinations Recognized in profit or loss (575) (4) (25) Recognized in other comprehensive income Balance at 31 December ,496 1, ,408 1, ,837 In 2011 companies of Mercator Group have recognized deferred tax liabilities as well as deferred tax assets. Deferred tax liabilities charged to the income statement decrease tax bases of individual companies of the Group in 2011, whereas the deferred tax assets credited to the income statement in 2011 increase them. Deferred tax assets and liabilities are not offset in the balance sheet. 20. Inventories EUR thousand Material 5,116 6,730 Work in progress 12 4,086 Finished goods 857 1,721 Merchandise 347, ,076 Less: write-down of inventories (18,725) (20,532) Total 335, ,081 Inventories of raw materials, work in progress, finished goods and merchandise as at 31 December 2011, amounted to EUR 335,249 thousand, which represents an increase by 4.1% compared to the beginning of the year. The increase in inventory is mostly the result of business combinations in Bosnia and Herzegovina and in Serbia. 173

177 21. Trade and other receivables EUR thousand Trade receivables 226, ,427 Deferred costs 7,572 2,813 Accrued revenues 8,911 3,631 Total trade and other receivables 243, ,871 Trade receivables have increased by EUR 11,531 thousand, which is mostly the result of business combinations in Bosnia and Herzegovina and in Serbia. As of 31 December 2011, Mercator Group does not have any trade and other receivables from related parties. Accrued revenues refer to transactions with Pika card, accrued revenues from acquisition or disposal of property under finance lease and accrued revenue from interest of derivative financial instruments. In April 2011, the company Mercator, d.d., received a decision by the Tax Inspection Office, the subject of which was the accuracy and timeliness of accounting of duties pertaining to the payment of meal and annual leave allowance paid by the company to the employees in Based on the decision, the company was required to pay withholding personal income tax in the amount of EUR 457 thousand, and social security contributions in the amount of EUR 1,552 thousand, along with legal default interest in the amount of EUR 36 thousand. The company made the required payments, but disagrees with the decision. Therefore, the company first filed a complaint regarding the decision by the tax administration, followed by action brought before the Administrative Court in January The Group recognized the total paid amount of EUR 2,045 thousand in receivables. Carrying amounts of all trade and other receivables are in materially relevant sums consistent with their respective fair values. Receivables are measured at amortized cost. The amount of provision for the impairment of receivables as at 31 December 2011 amounted to EUR 36,270 thousand (2010: EUR 34,627 thousand). Movements of the provision for impairment of trade receivables are presented in Note 29 (Financial instruments). 22. Loans and deposits EUR thousand Non-current deposits for rent payment 61,165 73,297 Loans to other companies 5,643 12,709 Deposits in banks 1,016 8,453 Total loans and deposits 67,824 94,459 Non-current deposits for rent payment relate to paid in advance rents for trade facilities abroad and are charged with interests. They are insured by mortgages on trade facilities. Loans granted to other companies mostly pertain to current loans to companies that built or are still building trade facilities in Serbia; these loans are secured by a mortgage on the property being developed. 174

178 23. Cash and cash equivalents EUR thousand Cash and cash equivalents 27,540 20,766 Cash in the amount of EUR 27,540 thousand includes cash in banks, cash in transit (daily proceeds of retail units), cash in hand, and foreign currency letters of credit. 24. Equity Share capital Share capital of the company Mercator, d.d., amounts to EUR 157,128, It is divided into 3,765,361 ordinary shares. Approved capital Pursuant to the resolution adopted at the 13th Shareholders Assembly of the company Poslovni sistem Mercator, d.d., the Management Board may, subject to previous consent of the Supervisory Board, in five years after the entry of changes to the company Articles of Association and By-laws into the court register, increase the share capital by up to 20% of the share capital entered on the day of adoption of this resolution at the 13th regular Shareholders' Assembly of the company Poslovni sistem Mercator, d.d., by issuing new shares; pre-emptive right of the existing shareholders may be waived under the following conditions: The newly issued shares are used to acquire shares or shareholdings in other companies, or business assets within strategic alliances and combinations; Waiver of pre-emptive right is approved by the company Supervisory Board; Prior to the issuing of new shares, the company Management Board shall inform the shareholders of the reasons for the emission and reasons for omission of the pre-emptive right; these explanations shall be published on the stock market's information dissemination system; Within each strategic business combination, a particular recipient of the newly issued shares or a group of associated recipients of newly issued shares shall not acquire more than 10% of the company's share capital; Independent financial consultant shall issue a positive opinion on the fairness and justifiability of the issue of new shares from the aspect of the shareholders and the company, and the Management Board shall inform the shareholders with such opinion by an announcement in the stock market information dissemination system no later than in 30 days after the agreement on the issue of new shares. Conditional capital increase Shareholders' Assembly of the company Poslovni sistem Mercator, d.d., can adopt a resolution on capital increase on the basis of provisions stated in 46th article of the company Articles of Association and By-laws; such possibility has not been realized so far. Treasury shares As at 31 December 2011, the company Poslovni sistem Mercator, d.d., held 42,192 treasury shares in the amount of EUR 3,235 thousand (2010: 42,192 treasury shares; EUR 3,235 thousand). 175

179 Reserves Reserves consist of the share premium, revenue reserves, fair value reserve and currency translation reserve. None of those types of reserves can be used for the payment of dividends or other participations in profit. Share premium amounts to EUR 198,872 thousand as at 31 December It includes the excess over nominal value of paid-up shares and surplus that was created as the difference between purchase and sales values of disposed treasury shares. Revenue reserves, amounting to EUR 285,768 thousand as at 31 December 2011, include legal reserves and other revenue reserves. As at 31 December 2011, the Group holds legal reserves in the amount of EUR 13,389 thousand. Share premium and legal reserves can be used in surplus amount to increase the share capital from company assets, and for covering the net loss of the business year, or to cover the carried forward net loss, if revenue reserves are not used simultaneously to pay dividends to the shareholders. As at 31 December 2011, the Mercator Group held 42,192 treasury shares in the amount of EUR 3,235 thousand. The reserve for treasury shares is reported among other revenue reserves. Other revenue reserves as at 31 December 2011 amount to EUR 269,144 thousand. They include residuals of retained earnings from previous years. They can be used for any purpose, except for the amount of the reserve for treasury shares within other revenue reserves. Currency translation reserve has increased by EUR 2,020 thousand in 2011, which is related to an increase due to currency translation differences that occurred upon the inclusion of financial statements of foreign subsidiaries into the consolidated financial statements. Fair value reserve which amounts to EUR 192,209 thousand as at 31 December 2011, includes the revaluation reserve of property as measured by the revaluation model, changes in the fair value of available-for-sale financial assets, and changes in the value of effective cash flow hedges. Fair value reserve is shown below: EUR thousand Revaluation reserve of property 197, ,275 Fair value reserve of available-for-sale financial assets (431) 520 Hedging reserve (4,832) (2,608) Total fair value reserve 192, ,187 Dividends Shareholders' Assembly adopted a resolution to pay dividends in 2011 in total amount of EUR 30,123 thousand (2010: EUR 27,111 thousand), or EUR 8.00 of gross dividend per share (2010: EUR 7.2 gross per share). Since the company Mercator, d.d., also included the 42,192 treasury shares in the calculation of dividends payout, an amount of EUR 338 thousand related to treasury shares was transferred back to retained earnings. Therefore undistributed profit of the period for the purposes of dividend payout was actually decreased to EUR 29,785 thousand (2010: EUR 26,807 thousand). The proposed payment of dividends for 2012 amounts to EUR 16,944 thousand (EUR 4.50 per share); this proposal is yet to be confirmed by the Shareholders' Assembly. 176

180 Other comprehensive income EUR thousand Revaluation reserve of property Fair value reserve Fair value reserve of available-for-sale financial assets Hedging reserve Retained earnings Currency translation reserve Total other comprehensive income attributable to owners of the parent company Noncontrolling interests Total other comprehensive income 2011 Disposal and depreciation of revalued property (3,671) 3,671 Change in fair value of cash flow hedges (2,780) (2,780) (2,780) Change in fair value of available-for-sale financial assets (1,208) (1,208) (1,208) Disposal of available-for-sale financial assets Deferred taxes (659) Foreign currency translation differences foreign operations 2,020 2,020 (5) 2,015 Total other comprehensive income (2,826) (972) (2,224) 3,012 2,020 (990) (5) (995) 2010 Revaluation of property 22,090 22, ,094 Disposal and depreciation of revalued property (4,726) 4,726 Change in fair value of cash flow hedges 1,799 1,799 1,799 Change in fair value of available-for-sale financial assets (1,457) (1,457) (1,457) Disposal of available-for-sale financial assets Deferred taxes (3,548) (840) (4,388) (1) (4,389) Foreign currency translation differences foreign operations (28,513) (28,513) (2) (28,515) Total other comprehensive income 13,816 (1,457) 1,799 3,886 (28,513) (10,469) 1 (10,468) 177

181 25. Earnings per share Basic earnings per share are calculated by dividing the profit for the year attributable to owners of the parent company by the weighted average number of ordinary shares in issue during the year, excluding the average number of treasury shares Profit attributable to owners of the parent company (EUR thousand) 23,557 30,396 Weighted average number of ordinary shares 3,723,169 3,723,169 Basic earnings per share (in EUR) Issued ordinary shares at 1 January 3,765,361 3,765,361 Effect of treasury shares (42,192) (42,192) Weighted average number of ordinary shares at 31 December 3,723,169 3,723,169 Since the Group does not have any preference shares or convertible bonds, diluted net earnings per share are the same as basic earnings per share. 26. Financial liabilities EUR thousand Non-current financial liabilities Bank borrowings 613, ,488 Finance lease liabilities 208, ,867 Borrowings from other companies Total 822, ,375 Current financial liabilities Bank borrowings 146, ,550 Borrowings from other companies 16,441 2,010 Current portion of finance lease liabilities 14,247 13,471 Current portion of bank borrowings 185, ,911 Current portion of bonds 36,540 Current portion of other financial liabilities 4,371 Total 362, ,853 Total financial liabilities 1,184,733 1,070,228 Relative to the previous year, the maturity of financial liabilities improved in 2011 relative to On 16 March 2011, the Group completed the drawing of the non-current syndicated loan in the amount of EUR million (EUR 85.0 million was drawn until 31 December 2010); furthermore, the Group completed in September 2011 the drawing of the second non-current syndicated loan in the amount of EUR million. In 2004, Mercator Group issued 365,400 bonds with nominal value of EUR 100 per bond. Nominal value (face amount) was due for payment in entirety upon the maturity of the bond, i.e. on 27 September As at 31 December 2011, the Group does not report any financial liabilities pertaining to bonds issued (2010: EUR 36,540 thousand). 178

182 As at 31 December 2011, the Group does not have any pledged property. Effective interest rates as at the date of statement of financial position: Bank borrowings 4.53% 3.85% Other borrowings 3.66% 3.47% Floating interest rates are mostly interest rates related to EURIBOR. Average 6-month EURIBOR was higher in 2011 than in the year before by 0.55 percentage point. Fixed interest rates are mostly related to borrowings from domestic banks, with fixed nominal interest rate. Financial liabilities are hedged with the use of derivative financial instruments, i.e. by interest rate swaps and caps. As of 31 December 2011, Mercator Group met all financial covenants and other terms, stated in loan agreements with banking partners. Financial covenants are uniform for all financial liabilities and they are represented by three indicators: ratio between net financial liabilities and equity (leverage ratio); ratio between gross cash flow from operating activities and net interest expense (interest coverage ratio); and amount of Group equity (consolidated tangible net worth). Mercator Group does not have a contracted clause in any of its loan agreements on loan becoming due in case of important change in ownership (Change of Control Clause). Finance lease liabilities Finance lease liabilities - minimum lease payments: EUR thousand Future minimum lease payments Interest Present value of minimum lease payments Future minimum lease payments Interest Present value of minimum lease payments Less than one year 22,693 8,427 14,266 18,229 4,758 13,471 Between one and five years 128,762 23, , ,440 13,619 96,821 More than five years 115,797 13, , ,965 4, ,046 Total 267,252 44, , ,634 23, ,338 Carrying amounts of all financial liabilities approximate their fair values. The share of non-current financial liabilities in total financial liabilities as at 31 December 2011 amounted to 69% (63% as at 31 December 2010). 179

183 Financial liabilities based on creditor rating (credit rating by S&P Agency*): EUR thousand 2011 No. of financial partners "AAA" - "AA-" 147,394 4 "A+" - "A-" 578, "BBB+" - "BBB-" 74,752 3 "BB+" or lower 326,401 9 no rating 57,733 8 Total 1,184, * Creditors have ratings by different rating agencies; for comparability, these ratings were adjusted to those shown by the Standard & Poor's rating agency. 27. Provisions EUR thousand Restitution claims Restructuring provisions Legal claims Retirement benefits and jubilee premiums provisions Other provisions Total Balance at 1 January , ,544 21, ,709 Disposal of subsidiary (286) (250) (536) Increase 2, ,336 4,987 Utilization (70) (241) (1,414) (2,366) (4,091) Reversal (1,769) (357) (1,172) (3,298) Effect of movements in exchange rates (38) (18) (4) (60) Balance at 31 December , ,189 18, ,711 Compared to the end of 2010, provisions are lower by EUR 2,998 thousand. In 2011, provisions in the amount of EUR 4,987 thousand were recognized; EUR 1,725 thousand was utilised to the debit of liabilities; and EUR 5,664 thousand were reversed and transferred to operating revenue. Net effect on the income statement amounted to EUR 677 thousand. Provisions for restitution claims Provisions for restitution claims as at 31 December 2011 amount to EUR 3,117 thousand. Compared to the year before, these provisions are lower by EUR 1,769 thousand on the account of restitution claim reversals. Provisions for restructuring costs Provisions for restructuring costs as at 31 December 2011 amount to EUR 40 thousand, which is EUR 70 thousand less than in the year before. The decrease pertains to redundancy/severance pay related to the reorganization of Mercator, d.d. 180

184 Legal claims In 2011 provisions for legal claims were increased by EUR 1,645 thousand. EUR 357 thousand of provisions were reversed and the amount of legal claims paid out stood at EUR 241 thousand. Based on received legal claims and legal opinion, the Group recognized additional provisions in the total amount of EUR 2,281 thousand. Retirement benefits and jubilee premiums provisions As of 31 December 2011 retirement benefits and jubilee premiums provisions amount to EUR 18,821 thousand. Compared to the year before, provisions are lower by EUR 2,520 thousand. In 2011 payment of severance and jubilee bonuses has been debited to provisions in the total amount of EUR 1,414 thousand. The difference is included in other income for the current year. Other provisions Other provisions are lower by EUR 250 thousand due to the disposal of the subsidiary Eta, d.d. The remaining portion of the increase and decrease in other provisions in the net amount of EUR -34 thousand pertains to recognition and utilisation of provisions at the companies Mercator, d.d., Mercator IP, d.o.o., Intersport, d.o.o., and Modiana, d.o.o. Other provisions are higher due to recognition of provisions for improvement of working conditions of disabled persons in the total amount of EUR 2,336 thousand. In 2011, provisions for improvement of working conditions were utilised in compliance with the relevant legislation in the total amount of EUR 2,366 thousand, and allocated for: capital expenditure related to the work of disabled persons; improvement of working conditions for disabled persons; retaining the existing jobs for the disabled persons and creating new ones; covering loss of revenue due to sick leaves; education and training of employees; and to cover the rental expenses for property, plant, and equipment related to the work of the disabled persons at the company Mercator IP, d.o.o. 28. Trade and other payables EUR thousand Trade payables 509, ,739 Payables to employees 20,842 24,076 Social security and other taxes 11,478 18,124 Other payables 4,464 3,576 Accrued costs 23,710 23,583 Deferred revenues 16,464 17,015 Total 586, ,113 Trade payables in 2011 are lower by EUR 58,762 thousand, which is mostly the result of the managing policy regarding trade payables and current financial liabilities. As at 31 December 2011, Mercator Group does not have any liabilities towards the members of the Supervisory Board, while liabilities towards Management Board members and other employees include recognized undisbursed compensation for December

185 29. Financial instruments Financial risk management (a) Risk overview The Group is monitoring and controlling different types of financial risks to which its operations are exposed: - credit risk, - liquidity risk, - market risk. Market risk management involves managing the interest rate and currency risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group's financial performance. This note presents the information on the Group's exposure to the risks listed above, as well as the goals, policies, and processes for measurement and management thereof and the Group's management of capital. (b) Risk management policy Active risk management at the Mercator Group pursues the objective of timely recognition and response to potential threats by developing appropriate measures to hedge against identified risks or to reduce risk exposure. The parent company manages interest rate, currency and liquidity risks centrally for the entire Group, whereas credit risks are managed as a rule by subsidiaries. Risk management measures are incorporated into daily operations at all companies of the Mercator Group. Risk management activities at Mercator Group are the responsibility of the Risk Management Council. The council is managing a systematic risk management process which is laid down in the Rules of Procedure for Risk Management. Since the risks are monitored and managed from the aspect of several professional fields, Risk Management Committees, covering three main fields of risks, were founded to provide support to the Risk Management Council. Risk management is a central corporate function managed and coordinated by the company Mercator, d.d. Mercator Group manages financial risks in the framework of adopted policy centrally at the parent company level which enters into interest rate swap and currency forward contracts with subsidiaries on market terms (arm's length principle) based on specific policies for managing specific risks. Such derivative financial instruments are recognized and reported appropriately. Risks occurring in the process of preparation of financial statements are managed by employment of clear and concise accounting practices and their strict implementation; efficient organization of the accounting function; and regular internal and external audits and reviews of internal controls, business processes, and operations. Pursuant to the Companies Act, audit of financial statements is mandatory for the Mercator Group. The purpose of the audit is to increase the level of trust among the users of financial information. The auditor applies appropriate audit procedures and methods to review the financial statements and issues an opinion as to whether they are prepared in compliance with the appropriate framework of financial reporting in all material respects. 182

186 Internal audit has been in operation at the Mercator Group as an independent support function since The basic function of internal audit is perpetual development and monitoring of the internal control systems from the aspect of management, or hedging, of all sorts of operating and other risks to which the Group is exposed. Quality performance of the supervisory function by the Supervisory Board of the company Mercator, d.d., is also supported by the Audit Committee which, among other duties, is in charge of supervising the operation of the risk management system, internal audit and the internal control system, and takes part in specifying the major auditing areas and the selection of the independent third-party auditor for the Group companies. At Mercator Group, we are constantly studying and analyzing the existing and potential new risks, and implementing measures to manage, or hedge them. Risk management process includes risk identification, sensitivity analysis, determination of threshold for key risks, taking measures to control risks and the implementation of these in the everyday decision-making in individual areas. Estimates of exposure to individual risk types are prepared according to the probability and an assessment of damages in case of certain events. Exposure to risks is assessed based on sensitivity analysis which identifies by how much the gross cash flow from operating activities at the level of the Group or a particular company would drop in case of occurrence of a particular event taken as the basis for risk analysis. Probability is calculated based on analysis of data on past events, and expectations on the frequency of individual events in the year ahead. The analysis includes different effects and factors adjusted to particular types of risk. Risks that cannot be quantified are assessed qualitatively. Estimated key risks, that exceed 1% of gross cash flow from operating activities of the Group or individual company, and for them no measures have been taken so far or they are not hedged in a manner that the risk would be entirely controlled, are most closely monitored and managed with measures, that either minimize the damage at the occurrence of an event, or reduce the level of likelihood of occurrence of an event, thus mitigating the risk to an acceptable level. Implementation of the measures adopted for managing the key risks is reviewed by a special internal audit, and reported to the Audit Committee on a quarterly basis. Mercator Group performance in 2011 was considerably affected by aggravated conditions in global financial markets, which bore a negative impact on the entire economic environment both globally and in the markets of Mercator operations. This was reflected in notable drop in retail demand, as well as in the persistence of the trend of uncertainty with regard to financial risks which were not common in the period before the crisis. In such harsh and uncertain environment, it was crucial for Mercator Group to carefully manage the risks that it faces in its business operations. Credit risk Credit risk is the risk that the Group will suffer financial loss if a party to an agreement defers a payment and later does not settle its obligations in full or not at all. Credit risk arises mainly from receivables to wholesale customers and receivables from Pika card. 183

187 Group's exposure to credit risk is particularly dependent on the characteristics of individual customers. However, Mercator Group's exposure to customers is highly dispersed. In accordance with the adopted policy for each new customer, an analysis of its creditworthiness is performed before the Group offers its standard payment terms. The analysis of the Group's credit rating includes external ratings and assessments, if they exist. Limits on purchases, which represent the maximum amount of open positions, are determined for each customer individually. Group's business with customers who do not meet the benchmark credit rating shall take place only on the basis of advance payments or subject to appropriate payment insurance/security. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: EUR thousand Trade and other receivables 243, ,871 Non-current deposits for rent payment 61,165 73,297 Loans to other companies 5,643 12,709 Deposits in banks 1,016 8,453 Total 311, ,330 Trade receivables derive from wholesale of goods, material, and services, and sale of goods to individuals, Mercator Pika card holders. Both wholesale and retail customers are dispersed; hence, there is no major exposure to an individual customer. The Group is also constantly monitoring customer payment defaults and checks the rating of external customers and Mercator Pika card holders. Measures prepared in case of a considerable increase in risk include above all obtaining appropriate security, introduction of more strict control of customers in default, more active collecting procedures, and, if required, establishment of an expert rating department that would evaluate and monitor credit risk systematically. Maximum exposure to credit risk for trade and other receivables at the reporting date by geographic region was as follows: EUR thousand Slovenia 154, ,698 Foreign markets 156, ,632 Total 311, ,330 Maximum exposure to credit risk for trade and other receivables at the reporting date by type of customer was as follows: EUR thousand Retail customers 92,310 84,239 Wholesale customers and other partners 218, ,091 Total 311, ,330 In the category of retail partners the Group included receivables from individuals related to purchases in company retail units with Mercator Pika card; the category of wholesale and other partners includes all receivables from sale of goods, material, and services, to legal/corporate entities, and receivables from employees and state/government bodies. Revenues from any individual customer do not reach 10% of total revenues of the Group. 184

188 Security of trade and other receivables (in gross amounts, without the allowance for impairment): EUR thousand Trade receivables 253, ,983 Secured receivables 165, ,626 Unsecured receivables 88,318 86,357 Other receivables 93, ,974 Total 347, ,957 Trade receivables are secured with bank guarantees, paid collaterals, cash deposits, prime mortgages, and liabilities to these customers. Among other receivables, the Group reports receivables from banks, credit card issuing banks, government, employees, as well as deferred costs and accrued expenses. Impairment of receivables Ageing of trade and other receivables at the reporting date: Gross value Impairment Gross value Impairment EUR thousand Not past due 265, ,337 Past due 0-60 days 30, ,946 Past due days 2, ,818 2,109 Past due days 1, ,667 3,365 Past due more than 90 days 46,477 34,925 32,189 29,153 Total 347,496 36, ,957 34,627 Increase in receivables past due more than 90 days is a result of increased occurrence of delinquency (late payments). In 2011, activities for obtaining prime payment protection insurance were additionally intensified. Changes in the allowance for impairment in respect of trade and other receivables: EUR thousand Balance at 1 January 34,627 30,860 Effect of movements in exchange rates (1) (484) Impairment loss recognized during the year 6,320 9,387 Receivable write-off (2,146) (2,049) Decrease of allowance for impairment during the year (2,417) (3,087) Disposal of subsidiary (113) Balance at 31 December 36,270 34,627 The quality of trade and other receivables is rated based on the policies specified by the Risk Management Council. Credit risk is monitored by classifying the trade and other receivables based on their characteristics. Guarantees Guarantees provided by the parent company to its subsidiaries for borrowings from banks, rent payments, and in rare cases for delivery of goods, amount to a total of EUR 377,695 thousand. 185

189 Liquidity risk Liquidity risk is the risk that the Group will in the course of its business activities encounter difficulties in settlement of its current liabilities which are settled in cash or with other financial assets. The Group ensures its liquidity so that it always has ample liquid assets to meet its obligations in due time, both in normal as well as challenging circumstances, without the occurrence of unacceptable losses or decline in the Group's reputation. The financial crisis that has continued and grown worse in 2011 has significantly reduced the lending activity of banks. Also, the risk that banks will not refinance existing financial liabilities incurred by non-financial firms has occurred. The Group actively manages liquidity risk by: operating a centralized cash management system, statistically supported forecasting of cash flows, daily contact with its largest wholesale customers, thereby increasing the predictability of its cash flows, operating a centralized cash pooling system. As at 31 December 2011, Mercator Group had access to the following liquidity lines: EUR thousand 2011 Cash and cash equivalents 27,540 Bank deposits 1,016 Standby revolving credit lines 25,163 53,

190 Following is an overview of the contractual maturity of liabilities and estimated interest payments: 2011 Up to 6 months 6-12 months 1-3 years 3-5 years Over 5 years EUR thousand Carrying amount Contractual cash flows Redemption Interest Redemption Interest Redemption Interest Redemption Interest Redemption Interest Non-derivative financial liabilities Bank borrowings 945,720 1,033, ,255 21, ,106 16, ,022 38, ,022 11,280 11, Borrowings from other companies 16,451 16,525 16, Finance lease liabilities 222, ,252 7,342 4,174 6,924 4,253 68,445 14,497 37,180 8, ,671 13,126 Trade and other payables and current tax liabilities 586, , ,489 2,369 Total 1,771,591 1,903, ,523 25, ,035 20, ,845 52, ,202 19, ,986 13,

191 2010 Up to 6 months 6-12 months 1-3 years 3-5 years Over 5 years EUR thousand Carrying amount Contractual cash flows Redemption Interest Redemption Interest Redemption Interest Redemption Interest Redemption Interest Bank borrowings 804, , ,690 15, ,771 9, ,810 27, ,467 8,517 60,211 3,304 Bonds 36,540 38,294 36,540 1,754 Borrowings from other companies 2,030 2,050 2, Finance lease liabilities 222, ,813 6,834 3,318 6,637 3,464 38,102 12,262 58,719 8, ,046 11,232 Other financial liabilities 4,371 4,371 4,371 Trade and other payables and current tax liabilities 651, , ,558 2,447 Total 1,721,233 1,825, ,458 18, ,953 14, ,379 39, ,186 16, ,257 14,

192 Market risks Market risk is risk that is common to the entire class of assets and liabilities. Market risk is deemed to exist when there is probability that the value of investments or financial assets in a certain period of time will decrease due to changes in economic environment or other events affecting the market. The Group uses derivative financial instruments to hedge certain market risk exposures. In these activities the company employs hedge accounting. Interest rate risk Interest rate risk of the Group derives from financial liabilities. Financial liabilities expose the Group to cash flow interest rate risk. The Group is exposed to interest rate risk as its liabilities and assets include such liabilities and assets that are sensitive to changes in interest rates, which means that some of the financial liabilities are linked to the variable interest rate EURIBOR. EURIBOR is changing on a daily basis, as it is subject to market fluctuations; this can lead to increased finance expenses for the Group. Consequently, the Group is managing and controlling the increase of finance expenses in an appropriate centralized manner. Group policy is to have at least 50% of financial liabilities that finance non-current assets hedged, and at least 25% of all financial liabilities hedged. Exposure The following table presents the Group's exposure to interest rate risk: 31 Dec Dec EUR thousand Weighted average interest rate Carrying amount Weighted average interest rate Carrying amount Fixed rate instruments Financial assets , ,765 Financial liabilities 5.10 (106,703) 4.91 (96,528) Total (38,879) (10,763) Variable rate instruments Financial assets ,694 Financial liabilities 4.28 (1,078,030) 3.63 (973,700) Total (1,078,030) (965,006) Fair value sensitivity analysis for fixed rate instruments The Group does not hold any fixed rate financial instruments at fair value through profit or loss, nor derivative financial instruments designated as hedging instruments under a fair value hedge accounting model. Therefore, a change in interest rates at the reporting date would not affect profit or loss. 189

193 Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) profit or loss and equity by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for Profit or loss Equity EUR thousand 100 bp increase 100 bp decrease 100 bp increase 100 bp decrease 2011 Variable rate instruments (10,780) 10,780 Interest rate swaps and caps 1,750 (1,750) 4,613 (4,512) Cash flow sensitivity (net) (9,030) 9,030 4,613 (4,512) 2010 Variable rate instruments (9,650) 9,650 Interest rate swaps and caps 1,500 (1,500) 650 (850) Cash flow sensitivity (net) (8,150) 8, (850) Currency risk Mercator's operations in an international environment necessarily involve exposure to currency risk. Mercator Group is facing currency risk in the markets of Serbia, Croatia and Albania; exposure to risk has increased on these markets according to estimate. In case of an increase in exposure to this type of risk, the Group has prepared a general policy of risk management that involves the following two steps: constant monitoring of macroeconomic background against which the movement of a particular exchange rate is taking place, and the related macroeconomic aspects and trends, adapting the operations based on the general trends and expectations, towards lesser exposure to currency risk. In case of increased risk, the Group will decide with regard to implementation of any further measures based on the estimated level of exposure; needless to say, such measure will only be implemented following a thorough analysis and with consideration of the 'cost-benefit' principle. The type of measure will depend on its appropriateness or viability, the nature of exposure, planned Group operations, and anticipated economic effects. There are no effective instruments to hedge currency risk; therefore, the Group is currently primarily using so-called natural hedging or matching. 190

194 Exposure to currency risk The Group's exposure to foreign currency risk was as follows: 31 December 2011 EUR thousand EUR HRK RSD BAM BGN ALL Trade and other receivables 163,138 73,094 69,116 4, Available-for-sale financial assets 2, Cash and cash equivalents 11,104 2,332 12,419 1, Financial liabilities (1,151,472) (26,892) (6,369) Trade and other payables (332,256) (102,280) (131,997) (17,274) (2,142) (909) Balance sheet exposure (1,307,028) (53,576) (50,462) (17,745) (981) (405) Estimated sales 1,682, , , ,638 11,950 5,539 Estimated purchases (1,254,171) (341,416) (501,743) (161,682) (10,489) (4,542) Estimated transaction exposure 427,845 64,569 63,283 32,956 1, Forward exchange contracts Net exposure (879,183) 10,993 12,821 15, * HRK (Croatian kuna), RSD (Serbian dinar), BAM (convertible mark), BGN (Bulgarian lev), ALL (Albanian lek). 191

195 Mercator Group does not hold any derivative financial instruments for currency risk hedging (forward exchange contracts) as at 31 December December 2010 EUR thousand EUR HRK RSD BAM BGN ALL Trade and other receivables 173,014 73,219 71,326 5,512 1,740 1,519 Available-for-sale financial assets 3, Cash and cash equivalents 5,382 1,676 9, , Financial liabilities (1,057,660) (12,558) (10) Trade and other payables (361,654) (116,778) (149,662) (15,597) (5,577) (1,737) Balance sheet exposure (1,237,161) (54,239) (68,766) (9,244) (1,106) 338 Sales 1,673, , , ,293 8,307 5,261 Purchases (1,269,706) (332,565) (454,402) (101,538) (7,568) (4,410) Transaction exposure 403,794 58,912 63,162 20, Forward exchange contracts Net exposure (833,367) 4,673 (5,604) 11,511 (367) 1,189 The following significant exchange rates applied during the period: Average rate Reporting date spot rate Units per EUR HRK RSD BAM, BGN ALL

196 Sensitivity analysis A 5 percent change in the exchange rate of local currencies against the Euro at 31 December would have increased (decreased) profit or loss by the amounts shown below. A change in exchange rate would not affect the Group's equity. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for (Estimated) transaction exposure Exposure of statement of financial position EUR thousand Profit or loss Profit or loss Change in exchange rate -5% +5% -5% +5% 2011 HRK 3,398 (3,075) (2,820) 2,551 RSD 3,331 (3,013) (2,656) 2,403 BAM, BGN 1,811 (1,639) (986) 892 ALL 52 (47) (21) HRK 3,101 (2,805) (2,855) 2,583 RSD 3,324 (3,008) (3,619) 3,275 BAM, BGN 1,131 (1,024) (545) 493 ALL 45 (41) 18 (16) Capital management Policy of the Group is oriented to achieving adequate amount of capital so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management Board therefore monitors on an ongoing basis the return on capital and capital structure. The target capital structure ratio of the Group is 1:1.5 between equity and provisions, and net financial liabilities. As at reporting date, the said ratio was as follows: EUR thousand Financial liabilities and liabilities for derivative financial instruments 1,189,295 1,068,335 Less: Loans and deposits 67,824 94,459 Available-for-sale financial assets 2,628 3,959 Derivative financial instruments Cash and cash equivalents 27,540 20,766 Net financial debt 1,091, ,081 Equity and provisions 821, ,874 Ratio between equity and provisions, and net financial debt 1:1.3 1:1.1 As at 31 December 2011, the company Poslovni sistem Mercator, d.d., held 42,192 treasury shares (2010: 42,129 treasury shares). 193

197 Accounting for derivative financial instruments The Group has signed several agreements on interest rate swaps and interest rate caps, exclusively for the purposes of hedging; all criteria relevant to such purposes are met. The instruments employed are intended for cash flow hedging and are highly effective in managing the cash flows related to Group's borrowings. Upon completion of a transaction, Mercator Group documents the relation between derivative financial instruments and hedged items, as well as the risk management objective and strategy for effecting various hedging transactions. This process also includes relating all derivative financial instruments to the portfolio of borrowings, or to particular borrowings. The Group also documents every estimate it makes, both upon the completion of a transaction, as well as later, with regard to the effectiveness of derivative financial instruments employed for hedging, in managing the cash flow from borrowings. The Group employs derivative financial instruments for hedging purposes and recognizes them initially at fair value. If the cash flow hedge is effective, the changes in fair value are recognized directly in equity; otherwise, they are recognized in the profit or loss for the current period. The method for recognizing the profit or loss related to these instruments does not depend on the form of the hedged item. Mercator Group manages financial risks in the framework of adopted policy centrally at the parent company level which enters into interest rate swap and currency forward contracts with subsidiaries on market terms (arm's length principle) based on specific policies for managing specific risks. Such derivative financial instruments are recognized and reported appropriately. The following table indicates the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to occur and their impact on profit or loss EUR thousand Carrying amount Expected cash flows 1 year or less 1-2 years 2-5 years Over 5 years Interest rate swaps and caps Assets 158 Liabilities (4,562) (4,574) (1,351) (2,159) (1,064) 2010 EUR thousand Carrying amount Expected cash flows 1 year or less 1-2 years 2-5 years Over 5 years Interest rate swaps and caps Assets 70 Liabilities (2,478) (3,794) (3,794) 194

198 Fair values Fair values of assets and liabilities and carrying amounts as shown in the statement of financial position: 31 Dec Dec EUR thousand Carrying amount Fair value Carrying amount Fair value Derivative financial instruments (4,404) (4,404) (2,408) (2,408) Trade and other receivables 243, , , ,871 Current tax assets 3,934 3,934 Loans and deposits 67,824 67,824 94,459 94,459 Available-for-sale financial assets 2,628 2,628 3,959 3,959 Cash and cash equivalents 27,540 27,540 20,766 20,766 Fixed rate bank borrowings (106,703) (106,703) (57,785) (57,785) Floating rate bank borrowings (839,017) (839,017) (743,790) (743,790) Bonds (36,540) (36,851) Borrowings from other companies (16,451) (16,451) (5,404) (5,404) Other financial liabilities (4,371) (4,371) Finance lease liabilities (222,562) (222,562) (222,338) (222,338) Trade and other payables (586,351) (586,351) (645,113) (645,113) Current tax liabilities (507) (507) (5,892) (5,892) Fair values of non-derivative financial liabilities are not determined, as the carrying amount represents a reasonable approximation of fair value. The fair value of derivative financial instruments has been calculated as the present value of the estimated future cash flows and deferred in the 'hedging reserve' in equity. Calculation of the fair value changes of each instrument is assessed on a quarterly basis and recognized in the income statement when the hedged transaction affects the income statement. Fair value hierarchy Based on the calculation of their fair value, financial instruments are divided into three levels: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; Level 3: inputs for the asset or liability that are not based on observable market data. 195

199 2011 EUR thousand Level 1 Level 2 Level 3 Total Available-for-sale financial assets 1, ,628 Derivative financial instruments - assets Derivative financial instruments - liabilities (4,562) (4,562) 2010 EUR thousand Level 1 Level 2 Level 3 Total Available-for-sale financial assets 3, ,959 Derivative financial instruments - assets Derivative financial instruments - liabilities (2,478) (2,478) In 2011, there were no transfers of financial instruments between particular levels. Changes in the value of financial instruments classified to Level 3 in 2011: EUR thousand 2011 Balance at 1 January 745 Effect of movements in exchange rates (12) Additions 10 Balance at 31 December Operating leases Minimum lease payments pertaining to operating lease (Group as the lessee) are as follows: EUR thousand Less than one year 31,295 17,216 Between one and five years 118,933 68,612 More than five years 225, ,732 Total 375, ,560 Rents are mostly agreed upon in fixed terms, i.e. their amount does not depend on the revenue generated in leased stores. 31. Capital commitments Capital expenditures (investment into property, plant and equipment) agreed upon and specified in contracts and agreements, which were not yet recognized in the financial statements as at the statement of financial position date: EUR thousand Property, plant, and equipment 27,280 49,

200 32. Contingencies EUR thousand Coupons 5,941 7,074 Merchandise in consignment 15,498 10,632 Guarantees 13,120 9,695 Other 1,822 2,461 Total 36,381 29,862 As at 31 December 2011, the Group does not have any pledged property. Tax authorities may, in the period of five or ten years after the tax return date, review the operations of the companies in the Group, which may result in additional taxation, including the liability of default interest payment and penalty related to corporate income tax or other taxes and duties. The companies of the Group are not aware of any circumstances that could cause such material liability, except for the dispute reported in Note 21: Trade and Other Receivables. 33. Related party transactions Related parties of the Group are its management personnel. Included in the management personnel are members of Management Boards and Supervisory Boards in the companies of Mercator Group. As at the end of the year, managerial staff held 4,226 shares of the company Mercator, d.d., which represents 0.11% of total share capital. In 2011, the Group paid out the following compensation in gross amounts to Management Board members and Supervisory Board members of group companies: EUR thousand Amount Number of recipients Amount Number of recipients Members of Management Boards of companies in Mercator Group 2, , basic salaries 2, , performance bonuses other employment benefits Members of Supervisory Boards of companies in Mercator Group Total 3, , Members of Supervisory Boards at Mercator Group subsidiaries do not receive any compensation for their work; therefore the disclosed amounts refer solely to the parent company. The number of managerial staff in the Mercator Group companies rose due to the increase of the number of Management Board members at the parent company, and the increase in the number of Management Board members at some subsidiaries pursuant to the uniform organizational model. Furthermore, higher number is also a result of the cases of fluctuation in managerial staff at particular companies during the year, i.e. when members resigned and new members were appointed. 197

201 Gross payments to Management Board and Supervisory Board members of companies in Mercator Group represent 1.1% of total personnel expenses (2010: 0.8 percent). 34. Subsequent events On 8 November 2011, the company Mercator, d.d., founded the company M - Tehnika, d.d., to which the operations pertaining to technical consumer goods were transferred on 1 January The transfer of operations also included the sale of the inventory of merchandise and store equipment to the newly founded company. 198

202 Independent Auditor's Report 199