Baltika                       FINANCIAL RESULTS                 03/12/2002



MANAGEMENT REPORT OF 2001



Management report of AS Baltika Group 2001



The main target of Baltika Group (BG) in 2001 was the utilization

of the strategy conformed for the years 2000-2001. There were

four main targets to aim:

1.   To reform the BG organizational structure (reformation of 

the manufacturing company into retail organization with it’s own

manufacturing unit).

2.   To develop the BG retail concept (new structure of stores’

brands together with the practical solutions).

3.   To adjust the product collections to new sales collections

(retail and wholesale collections) and develop retail collections

for preference.

4.   To develop the logistic systems (data systems, warehouse

systems).



In 2001 new retail outlets were opened, at the end of 2001 BG was

operating on 55 retail outlets (at the end of 2000 the number was

35, so the growth has been 1,6 times), total floor size is 6 823

square meters (at the end of 2000 it was 3 585 square meters, the

growth has been 1,9 times).





General results



In the year 2001 the consolidated turnover of AS Baltika was

414,4 million kroons (26,5 mln EUR), which is 22% more than in

2000 (turnover 340,8 mln kroons/ 21,78 mln EUR). The growth was

73,6 mln kroons (4,72 mln EUR). The proportion of the retail

turnover (of own stores) of BG turnover raised 5% (to 37%, that

makes 153 mln kroons (9,8 mln EUR)). Wholesale turnover amounted

to 184 mln kroons (11,8 mln EUR) and the subcontracting turnover

to 75 mln kroons (4,8 mln EUR). Changes compared to 2000 were

respectively in wholesale turnover +34 mln kroons (+2,2 mln EUR)

and in subcontracting turnover - 5 mln kroons (-0,3 mln EUR).



The turnover of BG own production raised 31% in the year 2001 (by

78,9 mln kroons/ 5 mln EUR) and formed 81,4% (75,7% in 2000) of

net turnover. Numbers respectively: in 2001: 336,8 mln kroons

(21,5 mln EUR) and in 2000: 257,9 mln kroons (16,5 mln EUR). The

value of products sold to foreign countries formed 293,1 mln

kroons (18,7 mln EUR) in the year 2001 and 224,5 mln kroons (14,4

mln EUR) in the year 2000. The volume of export raised 31% (68,6

mln kroons/ 4,4 mln EUR). The predicted turnover (443 mln kroons/

28,3 mln EUR) wasn’t achieved (real sales was 6% smaller) because

of smaller sales in third quarter in 2001 and because the opening

of two new stores was suspended to the beginning of 2002.



In the year 2001 the consolidated net profit of AS Baltika was

15,7 million kroons (1,0 mln EUR). The growth in 2001 was 1,4 mln

kroons, that is 10%. Net profit in 2000 was 14,3 mln kroons (0,9

mln EUR). The biggest effect on the net profit was taken by one-

time research expense (effect on net profit 6,9 mln kroons/ 0,4

mln EUR), which will ensure the growth of sales and better

efficiency in the following years.



Balance sheet total as at 31.12.2001 was 297,4 mln kroons (19 mln

EUR), the growth compared to last year’s result was 64,2 mln

kroons (4,1 mln EUR). The value of inventories has grown because

the size and number of stores has grown (the growth of

inventories: 25,6 mln kroons/ 1,6 mln EUR). The value of fixed

assets has grown (by 28,7 mln kroons/ 1,8 mln EUR) because new

investments into manufacturing-, retail business- and IT-

projects were made. Also long-term liabilities have grown (by

62,4 mln kroons/ 4 mln EUR) – the loan taken for financing

investments and larger inventory reserves. The owners’ equity

formed 139,9 mln kroons (8,9 mln EUR), share capital formed 48

mln kroons (3,1 mln EUR).



The market value of shares was 151,2 mln kroons at 31.12.2001.

The closing price of the share was 31,5 kroons at 31.12.2001 (the

growth has been 5%).



Ratios:

                 2001    2000

Sales growth     22.0%   18.0%

Percentage of    37.0%   32.0%

retail turnover

out of whole

turnover

Profit margin    5.6%    5.7%

Net profit       4.0%    4.8%

margin

Profit per share 3.29%   2.98%

Return on equity 11.3%   11.2%







Relevant facts of 2001



April:    - A new cooperating agreement “shop in shopö was

            contracted with Tallinna Kaubamaja.

          - In stockholders’ meeting (April the 6-th) the decision

            was made to exert the share option for management for 3

            years in the total amount of 576 000 shares. Dividends

            were paid 0,75 kroons per share.



May:      A contract with US consultant firm RPA Inc. with the

          purpose to develop new retail concept.



June:     Negotiations started with franchise partner SIA Care to

          establish a retail joint venture in Latvia



August:   A new market director was employed in Poland.



September:  A new management structure was created in BG.

          10 years passed since the privatization-agreement of AS

Baltika.

          - Subsidiary AS Virulane celebrated its 50-th

            anniversary.

          - Construction works started to build a new factory in

            Ahtme.



October:  In the territory of the company in Tallinn a new

          logistics center and warehouse were built.

          RPA finished the development of a new retail concept.



November: The marketing partner of the new retail concept was

          elected – Finish agency PHS/TBWA.



December: 10 years passed since the opening of the first Baltman

shop (In Pärnu, Estonia).







Utilizing the strategy conformed for the years 2000-2001:



The main target of the strategy was the reformation of the

manufacturing company into a retail organization with it’s own

manufacturing unit within 2 years. The mission was to offer the

best service (product with the logistics support) for preference

to the retail clients (via the shops, via new type contracts

“shop in shopö and to franchise partners) to accelerate the

transition.



Fixed targets:

1.   To expand the size and number of retail outlets managed by

BG (in square meters) three times. Result: floor size at the end

of 2001 was 6 823 square meters, the growth: 4,2 times.



2.   To increase the retail sales. Result: together with

franchise and “shop in shopö contracts the retail sales increased

up to 218 mln kroons, the growth: 1,8 times.



3.   To decrease the tied monetary resources (money tied up in

inventories). Result: inventory turnover raised 11,2% (in 2000:

3,44; in 2001: 3,83).



In the middle of 2001 the following activities were started for

preparing the implementation of the strategy for the years 2002-

2004:



1.   The completion of the retail concept. Results: a new retail

concept was created, which will be executed in the fall and

winter season 2002.



2.   The expansion and strengthening of the retail organization

of BG. Results: a new cooperation pattern “center-marketsö was

created; the structures of market organizations were described;

new specialists were employed in the market organization in

Poland; negotiations started with franchise partner in Latvia for

establishing the market organization in Latvia in 2002.



3.   The development of retail product collections. Results:

since 2002 retail and wholesale collections are separated;

product development is organized by following the rules of retail

brands; new product classes; system of “fast fashionö.



4.   The development of logistics systems. Results: inventory

turnover raised 11,2%; implementation of the program of NOS

(“never out of stockö) products; “shop in shopö contract with

Tallinna Kaubamaja; implementation of the system for ensuring an

optimal inventory balance so that a season’s new fashion models

are obtainable as well. New warehouse – logistics center was

built, which substantially fastens the execution of the orders of

the central warehouse.



In the year 2001 25,6 mln kroons were invested into the

development of retail business.









Manufacturing



In the year 2001 the restructuring of the manufacturing division

was continued to support the BG strategic goals, which are:

  ·    To produce retail products, to insure high quality.

  ·    To develop a flexible and quick ordering system and hold



       minimum balance of inventories.



In the year 2001 the specialization of manufacturing units

continued. Construction works started to build a new factory in

Ahtme (will be ready in April 2002). In the year 2001 16,5 mln

kroons were invested into manufacturing (including 7,9 mln kroons

into Ahtme factory).



Production output was 841 thousand products (subcontracting and

own production), in 2000 respectively 829 thousand products. For

the first time in 2001 own production in pieces (432 thousand

products) exceeded subcontracting work (409 thousand products).







Organization



In the year 2001 the strengthening of the organization continued.

Steps to be completed were the following:

1.   Trade and marketing division was separated into two

     different divisions: division of retail business (to carry out

     the retail concept, coordinate the operating of inventories and

     retail operations) and division of markets.

2.   The new management structure was created.

3.   Three new positions were created: logistics and purchasing

     director, marketing director and retail operation director.



At the end of 2001 the number of employees in BG was 1585

(including 219 employees in retail business, 1203 employees in

manufacturing business; 1462 employees in Estonia, 123 in foreign

countries). The supervisory  board’s fee was 144 th kroons in

2001 and the management board’s fee was 2872 th kroons.



To increase the motivation of the senior management the share

option for management for 3 years in the total amount of 576 000

shares was announced. In the year 2001 one third of it (192 000

options) was exerted and divided between 23 key employees (by the

decision of the supervisory board).





Plans for 2002



In spring 2002 the management of BG introduces the company’s new

strategic plan for the years 2002-2004. According to the plan BG

will progress to become one of the leading fashion retail chain

in Central- and Eastern Europe.



In the year 2002 the company plans investments up to 40 mln

kroons. Investments include start-up costs of Ahtme factory (10

mln kroons), new and renovated retail outlets (20 mln kroons).



BG prognoses that in the year 2002 sales will grow faster than in

2001 (growth 22%).





Meelis Milder

Chairman of Management Board

+372 6302 736