Kalev                         FINANCIAL RESULTS                 12/01/2003



2002/2003 ANNUAL REPORT 1/1



ACTIVITY REPORT



1. MARKET AND SALES OF CONFECTIONARY



According to the retail market research company AC Nielsen,

the market share of AS Kalev was 54,5 percent of the

confectionary market in Estonia at the end of January 2003.

This is a 6,2 percent increase from the prior period. In the

chocolate confectioneries group, Kalev AS’s market share

increased by 2,8 percent to 58,4 percent.



The total sale of confectioneries in fiscal year 2002/2003

amounted to 7130,3 tons, which increased approximately by 2

percent when compared to the comparable period*. 80 percent

of the product was sold on the local market and 20 percent

was exported. During the reporting period main export

countries continued to be Latvia and Ukraine. Other export

countries included Russia, Scandinavian countries and the

United States.



The sales increase on the local market was accomplished by

more aggressive marketing activities and increase in sales

staff in conjunction with the implementation of the new

direct distribution system had an effect on increased sales.



Several new products were introduced during the reporting

period such as Valik,

handmade confectionary presented in a metal box, and also a

gift box Vana Tallinn. These two products were targeted at

the tourist segment of the market. At the beginning of

October 2002, new Christmas collection was introduced. The

Christmas collection included a line of traditional Christmas

products (various chocolates and candy boxes),

‘’Päkapikutajate’’ collection for children, and other new

products timed to be introduced during the holiday season

(eg. candy Zurii). During the month of December 2002,

Estonian National Puppet Theatre gave several performances of

the Christmas play "Päkapikutajad" on the AS Kalev premises,

approximately 23 thousand people went to see the play.

According to the market study conducted by AS Emor, 7 people

out of 10 bought AS Kalev Christmas products. The most

popular products were chocolate bars in different sizes.



At the beginning of the year 2003 AS Kalev introduced three

new candies: Banaani, Moonike and Marja. In February 2003, an

assortment of candies was released for St. Valentine’s Day of

which the candy box Flirt was the most popular. Sales of St.

Valentine’s day products during the year of 2003 increased by

84 percent as compared to the prior period.



This year’s Easter product line included various sweets such

as chocolate bars, bunny and chick shaped gift packages,

figures made from marzipan, and fruit dragee.



___________________________________________

* Comparable period - 1.07.2001 through 30.06.2002

  

  

Receipt of special food license



On February 11th, 2003 Health Protection Inspectorate issued

AS Kalev a permit to handle special foods, according to which

the enterprise is allowed to produce sugarfree products for

specific purposes such as for people with difficulties to

metabolise carbohydrates (diabetics).  AS Kalev was the first

and until now still the only producer of confectionary

products in Estonia to be granted this permit. In May 2003,

AS Kalev introduced the first and currently the only

sugarfree product in Estonia, raspberry, lemon and pear

caramel which is packed in 50 gram packaging.





Start-up of stage II of direct distribution



At the beginning of 2001 AS Kalev stopped using resellers for

marketing its products and started with direct distribution

(stage I of direct distribution). In order to further improve

sales and customer service, Kalev started preparing stage II

of direct distribution in the second quarter of 2002. For

that in August 2003, 51 additional sales personnel were hired

across Estonia - sales representatives and product

distributors. Their responsibility is to guarantee a 98 per

cent distribution level for AS Kalev products in Estonian

market based on the approved product portfolio.





Development of the shop-cafe chain Kalev’s Home



On December 15th, 2002 a new Kalev’s Home was opened in

Jõhvi. The chain currently consists of five shop-cafes.

During fiscal year 2002/2003, the Company’s primary

investments were construction of its new production complex

and moving its production to new facilities. Development of

the shop-cafe chain received second priority. Expansion of

Kalev’s Home to other county centers in Estonia will continue

during future reporting periods.



The main reason for establishing the chain of shop-cafes is

AS Kalev’s intention to develop a café culture in different

places in Estonia as well as to make a wide selection of

confectionery products available outside the main cities.

Local labor force will be given preference during the

establishment process of Kalev’s Home shop-cafes and the

personnel responsible for the daily operations of the shop-

cafes will also be hired locally.





2. OPERATING ACTIVITIES AND FINANCIAL RESULTS



AS Kalev’s last audited annual report covered only six months

and therefore cannot be compared with the 2002/2003 annual

report.



AS Kalev’s 2002/2003 fiscal year’s consolidated net sales

were 347,7 million kroons (22,2 million EUR).



The Company’s consolidated net profit in the fiscal year was

32,5 million kroons (2,1 million EUR). Net profit was

affected by following factors: hiring of additional sales

personnel in August; escalating costs of raw materials; and

costs associated with moving to new production facility. The

increase of the cost of raw materials was caused by the price

increase of cocoabeans, an essential raw material for AS

Kalev, on the world market. Based on AS Kalev’s analysis, the

cost of the Company’s products consisting of cocoa increased

to 11 million kroons during the reporting period.



AS Kalev estimates that forgone revenues during the reporting

period from its principal activities were 9,61 million kroons

(0,6 million EUR). The main reasons were following:

suspension of production on 30.04.2003 in its production

facility located at  Pärnu mnt 139, compulsory redundancy

payments to 30 administrative employees and 62 production

employees, a 2-month vacation of production employees, and

increase of inventory levels in its finished goods warehouse

for production suspension period.



AS Kalev’s profit was significantly influenced by the fair

value of investment property

in prior periods.





3. ORGANIZATION AND PERSONNEL



Implementation of management control system based on balanced

performance report



AS Kalev started implementing the principles of balanced

performance report in 2000. At that time, long- and short-

term goals were set at the Company level in four different

groups as follows: customers, core activities, development

and personnel, and finance.



During fiscal year 2002/2003, AS Kalev improved the control

system based on balanced performance report by changing its

strategy, and by setting goals based on measurable indicators

for which the monitoring system using an IT solution is

currently in development.





To update the planning and motivation system, the Company is

currently developing performance reports for its subunits and

key personnel, which are based on the strategy and

performance reports of the Company.





Reorganization of Company’s finances



From May through June 2003 AS Kalev’s finances were

reorganized due to the necessity to update the management of

the Company. This area was also reorganized because of the

demands set by finance auditing companies. The goal of

updating financial management and accounting systems is to

support the enterprise’s principal processes through

providing necessary figures. Instead of the previous 20

employees, the finance department currently employs half as

many employees.  New software package has been installed,

which is in accordance with other departments.  A new finance

director and head accountant have been employed, both of whom

have long-term professional experience.





ISO 9001:2000 quality control system implementation



During fiscal year 2002/2003 AS Kalev started the inspection

of its control systems, bringing them in compliance with ISO

9001:2000 quality control systems.





Employee count and average salary



During fiscal year 2002/2003, AS Kalev employed 554 people on

average, an increase of 10 percent in comparison with the

prior reporting period. In October 2002 AS Kalev assumed the

employment obligations based on employment contracts with the

employees of AS Paide Piimakombinaat.  In August 2002, the

sales staff was increased by 49 employees. On September 16th,

2002, 35 of AS Kalev’s previous technical staff were

transferred to Tööstuse Teenindamise AS. During the fiscal

year, 92 employees left the company, 80 of whom left the

Company due to the Company changing its location (moving out

of Tallinn).



The average monthly salary of AS’ Kalev employees during

fiscal year 2002/2003 fiscal year was 6 716 kroons (429 EUR).



____________________________________________

* Comparable period - 1.07.2001 through 30.06.2002









4. IMPORTANT EVENTS DURING FISCAL YEAR 2002/2003



AS Kalev - Estonia’s most reputable company



According to the traditional study on the reputation of

Estonian companies conducted by the market research company

TNS Emor, local people ranked AS Kalev as the most reputable

company in the country.



Emor conducts the above mentioned study in order to determine

the recognition and image of the largest companies in Estonia

based on two parameters - overall impression and image

strength.



Parameters used in the study give an overview how residents

of Estonia perceive companies doing business in the local

market as follows: which companies are known, which companies

appear stronger to people, and which companies people like

the most. The results of the study show respondents’

subjective opinion and their general perception of different

companies.



The results of the reputation study reveal that AS Kalev’s

name is known to 95 percent of the population of Estonia. The

Company has the same recognition level in different consumer

segments and there are no major differences.  AS Kalev has

above average recognition level in the southern part of

Estonia (where AS Kalev was known to all people questioned)

and among middle and high income (2001 to 3000 kroons and

above 3000 kroons per family member) population.



AS Kalev is perceived as one of the strongest companies in

Estonia. Reputation studies show consistently that AS Kalev

is the most likeable company, receiving higher appraisals

than in prior years. By viewing the inter-relationship of two

parameters (strength appraisal and personal attitude), AS

Kalev is a reputation leader.





Construction of the new production facility and relocation



On January 30th, 2002, AS Kalev entered into project

management contract with Skanska EMV AS to construct a new

production facility on Põrguvälja registered immovable

located in Rae rural municipality of Harju county. The

construction of new production facility started after

building permit was received in May 2002. The construction of

the building will be completed in 2003 and it will be the

largest food processing production facility completed in one

step since regaining independence. The total area of AS

Kalev’s new production facility is 26 500 square meters of

which production and technical space is 16 500 square meters,

warehouses are 6000 square meters, and non-work facility is

4000 square meters. Employee dressing rooms, cafeteria and

other rooms are located on the first floor of the 2000 square

meter non-work facility and offices are located on the same

space of the second floor.



On February 17th, 2003, finished goods warehouse, logistics

warehouse and distribution center started operating in the

new facility. On June 16th, 2003 office staff moved to

Põrguvälja location.



Dismantling of machinery in the old production facility

started on May 3rd, 2003. Moving took place from May to mid

July. AS Kalev’s caramel unit will continue its operations in

Pärnu mnt., Tallinn until March 30th, 2004.





Forming a subsidiary AS Kalev Paide Tootmine



On June 18th, 2003, AS Kalev formed a subsidiary  AS Kalev

Paide Tootmine with share capital of 400 thousand kroons,

which was paid in cash on July 1st, 2003. On July 17th, 2003,

AS Kalev Paide Tootmine was entered into a commercial

register.



The primary reason for forming a subsidiary was the need to

reorganize the Company activities in order to ensure the most

optimum and rational management of the organization and

processes. AS Kalev Paide Tootmine is an independently

managed and operated business unit.



AS Kalev Paide Tootmine is currently producing milk based

confectionery  products. The Company has also the capacity to

produce flour based confectioneries and glogg. To utilize all

the production capacity, the subsidiary acting as a

subcontractor is producing highly pasteurized drinking milk,

milk based powders, butter and butter mixes.



On August 8th, 2002, AS Kalev and AS Hansa Liising Eesti

entered into a lease agreement and capital lease agreement,

which allows AS Kalev to lease the registered immovable and

machinery belonging to AS Paide Piimakombinaat from AS Hansa

Liising Eesti. AS Kalev started utilising the assets under

lease agreement on October 10th, 2002.



Based on lease agreements, the purchase price for assets is

45 million kroons and an additional interest cost is 10 593

297 which accumulates over a 34-month leasing agreement

period. Therefore, the total price for assets including

interest is 55 593 297 million kroons.





Conducting a special audit



On March 4th, 2003, an emergency general meeting of the

shareholders of AS Kalev was called together at the request

of AS Kalev’s shareholder AS Milestone. According to the

shareholder, the reason for calling together the general

meeting was the need to perform a special audit in the

Company.



It was decided at the general meeting of the shareholders,

that AS Kalev’s management performance and financial

condition will be audited by AS PricewaterhouseCoopers

beginning with the year 2000. According to the commercial law

in Estonia, a report based on the findings during the special

audit will be issued to the general meeting of the

shareholders by the auditors performing the audit.



On July 4th, 2003, AS Milestone filed a statement of claim to

challenge the resolution of the general meeting of the

shareholders for conducting a special audit (see chapter

Shareholder claims).





Transactions regarding the legal share of Pärnu mnt 139

registered immovable



Sale of the 7093/52410 legal share of the registered

immovable



On February 10th, 2003, AS Kalev sold its 7093/52410 legal

share of the Pärnu mnt 139 registered immovable (AS Kalev’s

old non-work facility with adjoining commercial land) to OÜ

Corigeer for 43 million kroons (2,7 million EUR). The buyer

paid 17 million kroons (1,1 million EUR) in advance and the

remaining 26 million (1,7 million EUR) was to be paid to AS

Kalev no later than February 12, 2003.



From the proceeds of the sale, AS Kalev paid off prematurely

the principal balance of 27 million kroons (1,7 million EUR)

of long-term financing loan and 10 million kroons (0,6

million EUR) of overdraft to AS Eesti Ühispank.



Because the loans were paid off prematurely, the mortgage on

the legal share of the property in the amount of 104 million

kroons (6,6 million EUR) was transferred over to AS Hansapank

according to the investment plan concerning the construction

of a new production facility and acquisition of machinery.



Signing of commercial lease



On January 28th, 2003 AS Kalev signed a commercial lease with

Tallinn Police Prefecture, according to which  the Company

leases non-work and administrative offices of the production

facility as well as the parking lot located at Pärnu mnt. 139

to the prefecture.



The total area of the leased space amounts to 14 000 square

meters, the term of the lease is 20 years.



On February 28th, 2003, an amendment to the commercial lease

was signed, according to which the lessee has the right to

decline leasing up to 6000 square feet.  The lessee is

obliged to notify the lessor in writing three months in

advance.



Before leasing the space, AS Kalev was obliged to renovate it

in accordance with the agreed upon construction project.  The

Company will also provide furniture and general lighting to

the leased space.



According to the contract, the police prefecture pays the

lessor 150 kroons (9,6 EUR) a month for every square meter

utilised.  The rent includes administration and maintenance

of the building, as well as maintenance of the territory.

Not included in the rent are utilities (including water,

sewerage, electricity, heat, etc.)  according to the actual

usage.



Sale of the 18070/52410 legal share of the registered

immovable



On March 11th, 2003 AS Kalev signed a sales contract under

the law of obligations with the right to repurchase the

18070/52410 legal share of the registered immovable located

in Pärnu mnt 139 (AS Kalev’s old production facility with

adjoining commercial land) for 87 million kroons (5,6 million

EUR) with OÜ Raldon.  The purchaser is committed to invest up

to 90 million kroons (5,8 million EUR) in renovating the

space of Tallinn Police Prefecture (date of moving in:

1.09.2003).





The purchaser is committed to pay 10 millions kroons (0,6

million EUR) no later than on March 14th. According to the

amended sales contract (signed May 21st, 2003) the buyer is

committed to pay 33,5 million kroons (2,1 million EUR) no

later than May 23rd and 43,5 million kroons (2,8 million EUR)

by October 3rd. The buyer actually paid the last portion of

the sales price on October 8th, 2003. Because of late

payment, the buyer paid 0,019% interest on arrears for every

delayed day.



According to the signed contract, AS Kalev has the right to

repurchase a part of the registered immovable during a five

year period beginning with 1.09.2005. In case of

repurchasing, the price of the object could amount to 177

million kroons (11,3 million EUR), in accordance with the

construction investments made by OÜ Raldon (up to 90 million

kroons, 5,8 million EUR). The specified repurchase price is

reduced by the depreciation expense, which is 2 percent per

year as agreed to by both parties.



According to the signed contract, the buyer will assume all

the rights and obligations of the lease contracts concerning

the object (lease contracts signed with Tallinn Police

Prefecture  (see above), including the obligation to invest

in the renovation of the future space of Tallinn Police

Prefecture. Additionally, a nonessential lease contract was

signed regarding the lease of 220 square feet on the first

floor of the administrative space of the production

facility). In case AS Kalev chooses to excercise the

repurchase right in the future, all the rights and

obligations stipulated in the lease contract will be

transferred to AS Kalev.



Sale of the 2284/52410 legal share of the registered

immovable



On March 25th, 2003, AS Kalev sold the 2284/52410 legal share

of the Pärnu mnt. 139 registered immovable to OÜ Tartex

Trading for 12 million kroons (0,8 million EUR). Of the sales

price 4,8 million kroons (0,3 million EUR) had to be paid on

the day of signing the contract, and buyer agreed to pay the

remaining 7,2 million kroons (0,5 million EUR) within two

banking days after signing the contract.



Both parties agreed that the seller has the obligation to

repurchase the legal share of the registered immovable and

the buyer has the obligation to resell the legal share within

three years after signing the contract using the price which

was used in selling the object of the contract to the buyer.



AS Kalev’s legal share of registered immovable



After the described deals, AS Kalev owns a 24963/52410 legal

share of the Pärnu mnt 139 registered immovable and it is

encumbered by a mortgage in the amount of 14 million kroons

(0,9 EUR) for the benefit of AS Hansapank. Additionally, the

whole Pärnu mnt 139 registered immovable is encumbered by a

mortagage in the amount of 4,2 million kroons (0,3 million

EUR) for the benefit for the benefit of the Republic of

Estonia.



5. MAIN AREAS OF ACTIVITY FOR THE 2003-2004 FISCAL YEAR.



The main goal of AS Kalev in fiscal year 2003/2004 continues

to be not so much the rapid increase of profits as the

attainment of continuity and long-term development.



In the current fiscal year the whole supply chain will be

inspected beginning with the purchasing of raw materials and

finishing with the distribution of the finished product.  To

accomplish this the current situation will be assessed, areas

that need improvement will be determined as well as

activities will be reorganized in order to guarantee as

effective a supply chain as possible.



One of the priorities of the fiscal year continues to be the

development of exports and  this primarily through entering

new strategic markets.  In current markets the goal is to

further strengthen the position of the Company.



The marketing activity of AS Kalev is mostly directed at the

critical inspection of the current product range: elimination

of aging products and introduction of new potential products.

Great emphasis continues to be laid on the so-called holiday

products (Easter, Christmas, etc.).  The Company is also

planning to widen the important selection through baked

confectionary products.  For Christmas 2003, gingerbread

cookies under the trademark of Kalev will reach the market,

made by the subsidiary of AS Kalev,  AS Kalev Paide Tootmine.

Different brands of cookies will be introduced later.  For

the 2003 Christmas season  the Company brings alcohol-free

glogg to the market, also made by AS Kalev Paide Tootmine.



In the selling activity, the Company continues to concentrate

on direct distribution and the opening of Kalev’s Home cafe-

shops in other county centers.  New IT developments will

guarantee faster servicing of clients and with fewer

mistakes.



The top priority of production is the start-up of the new



factory building and its full-scale production. The caramel

department of the enterprise currently still operating in

Pärnu mnt. will relocate to Põrguvälja from April until June

2004. It is estimated that full production of the new factory

should be reached by the end of 2003/2004 fiscal year. New

equipment both at the Põrguvälja factory of AS Kalev as well

as at the subsidiary located in Paide should help to increase

production efficiencies.



AS Kalev subsidiaries AS Kalev REC and Merchant Services Ltd

located in the US will continue their main activities which

are:



AS Kalev REC - development, administration, evaluation,

expert assessment, servicing, leasing, purchasing and sale of

real estate; real estate consultations



Kalev Merchant Services Ltd - introduction and sale of AS

Kalev’s products in the US.





Ruth Roht

PR manager

6 283 858