MAGYAR TELECOM B.V. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, Page 1 of 89

Transcription

1 MAGYAR TELECOM B.V. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013 Page 1 of 89

2 Page Directors Report 3 Consolidated Financial Statements Consolidated Balance Sheet 16 Consolidated Statement of Profit and Loss and Other Comprehensive Income 17 Consolidated Cash Flow Statement 18 Consolidated Statement of Changes in Equity 19 Notes to the Consolidated Financial Statements 20 Parent Company Financial Statements Parent Company Balance Sheet 71 Parent Company Statement of Profit and Loss Account 72 Notes to the Parent Company Financial Statements 73 Other Information Statutory Provisions Regarding Appropriation of Results 87 Proposal for Loss Appropriation 87 Events after the Balance Sheet Date 87 Independent Auditor s Report 88 Page 2 of 89

3 Director s Report The Company Magyar Telecom B.V. ( the Company or Matel, together with its subsidiaries the Group ) was incorporated on December 17, 1996 as a limited liability company under the laws of the Netherlands and registered with the trade register of the Chamber of Commerce for Amsterdam with company registration number and on September 5, 2013 registered as an overseas company at Companies House in the UK with UK establishment number BR016577, having its head office at 6 St Andrew Street, London EC4A 3AE, United Kingdom. The Company was a wholly owned subsidiary of HTCC Holdco I B.V. ( Holdco I B.V. ) till December 12, After the liquidation of Holdco I B.V., from December 12, 2012 the Company was wholly owned by Hungarian Telecom Cooperatief U.A. ( Coop ). As of December 12, 2013 the shares of Matel were contributed by Coop to its 100% newly established subsidiary, Hungarian Telecom B.V. On December 12, 2013 Matel completed its restructuring as part of which its former notes were refinanced by issuing new notes and new shares (as described below). As of December 31, 2013, after completion of the resutructuring, Matel was 51% owned by Hungarian Telecom B.V. which is 100% owned by Mid Europa Partners Limited ( Mid Europa ), through its holding companies and 49% owned by Matel Holdings Limited, a newly established entity owned by noteholders. The Company's main activities during the year ended December 31, 2013 were financing, holding and investing activities. The Company is engaged in investing in telecommunication related activities in Hungary. These are in accordance with the Company s Articles of Association. Matel has: a) issued EUR 150,051 thousand 7.00%/9.00% Senior Secured PIK Toggle Notes due 2018 with additional 2% compulsory PIK interest (the 2013 Notes ) at a 100% issue price. The 2013 Notes were issued in exchange for formerly issued notes as described more in these financial statements. Matel Holdings Limited, a 49% direct owner of Matel, incorporated under the laws of Cayman Islands on October 2, 2013 and registered for taxation purposes in the United Kingdom has: b) issued 150,051,000 ordinary shares with a nominal value of EUR per each ordinary share, representing 100% of its existing issued share capital (the Shares ). Each issued as 150,051,000 units each consisting of 1 Share and EUR 1 aggregate principal of 2013 Notes co-issued by Matel and Matel Holdings Limited on December 12, The 2013 Notes will be stapled to the Shares for the stapling period, meaning that the 2013 Notes and the Shares are issued in the form of a Unit. The effect of this is that the 2013 Notes and the Shares cannot be traded separately and a transfer of the Units will result in a transfer of the 2013 Notes and the Shares. Matel is a holding company and conducts its operations entirely through its subsidiaries and depends on payments from its subsidiaries to make payments on the 2013 Notes. The main operational subsidiary through which Matel provides its services is Invitel Távközlési ZRt. ( Invitel ). Invitel is a leading fixed line telecommunications, cable TV and broadband internet services provider in Hungary. The 2013 Notes have been issued pursuant to an indenture (the Indenture ). The 2013 Notes are intended to be fully and unconditionally guaranteed on a senior basis by Invitel Távközlési Zrt. ( Invitel ), Invitel Technocom Kft. ( ITC ) and Invitel International Holdings B.V. (together, the Guarantors ). The 2013 Notes will be secured by first-priority security interests over certain assets of Matel and certain Guarantors. The 2013 Notes are listed on the Official List of the Luxembourg Stock Exchange. Page 3 of 89

4 Overview As of December 31, 2013, Matel had approximately 267,000 telephone lines connected to its network within its historical concession areas to service Residential Voice customers and approximately 57,000 active Residential Voice customers outside its historical concession areas connected through Carrier Pre- Selection ( CPS ), Carrier Selection ( CS ) or Local Loop Unbundling ( LLU ). This is compared to December 31, 2012 when Matel had approximately 270,000 telephone lines in service within its historical concession areas to service Residential Voice customers and approximately 71,000 active Residential Voice customers connected through indirect access outside its historical concession areas. In the Residential Internet & TV segment, as of December 31, 2013, we had approximately 155,000 broadband DSL customers, 9,000 WiFi customers, 44,000 IPTV customers and 17,000 DVB-T TV customers compared to 145,000 broadband DSL customers, 10,000 WiFi customers, 28,000 IPTV customers and 13,000 DVB-T TV customers as of December 31, In the Cable segment, as of December 31, 2013, Matel had approximately 83,000 cable TV lines, 55,000 cable internet lines and 31,000 cable voice lines compared to 80,000 cable TV lines, 50,000 cable internet lines and 24,000 cable voice lines as of December 31, In the Corporate segment, as of December 31, 2013, Matel had approximately 41,000 voice telephone lines within its historical concession areas compared to approximately 42,000 lines as of December 31, Outside its historical concession areas, Matel had approximately 36,000 direct access voice telephone lines and approximately 6,000 indirect access voice telephone lines as of December 31, 2013, compared to approximately 39,000 direct access voice telephone lines and approximately 7,000 indirect access voice telephone lines as of December 31, Matel had approximately 16,000 DSL lines and approximately 14,000 leased lines as of December 31, 2013 compared to approximately 16,000 DSL lines and approximately 15,000 leased lines as of December 31, In the Wholesale segment, Matel had approximately 230 customers as of December 31, 2013, which customers include incumbent telecommunications services providers, alternative fixed line telecommunications services providers, mobile operators, cable television operators and internet service providers in Hungary. Macroeconomic Factors From late 2010, a sovereign debt crisis developed in some European states, intensifying in early This included Eurozone members Greece, Ireland, Italy, Spain and Portugal, and also some non-eurozone European Union countries. Greece, Ireland and Portugal received bail out packages. Increased concern about Italy and possible default has weighed heavily on equity markets. The European Union ( EU ) has been unable to come up with a consensus view on how to address the issue which has increased uncertainty and volatility. Rising government debt levels concerned investors and resulted in a wave of downgrades of European government debt. Significant fluctuations in the global economy had an intense impact within the Hungarian economy and financial markets as well. Hungary has taken several measures to combat its financial crisis. Hungary reduced its debt issuances and lowered its government budget deficit target. EUR/HUF devalued to over 300 at the end of October 2011, and remained well above that level. The HUF has been weighed down by concerns about the country s potential downgrade to junk status. Standard & Poor s ( S&P ) placed its BBB- foreign and local currency sovereign credit ratings on Hungary on CreditWatch with negative implications. In November 2011, Hungary turned to the International Monetary Fund ( IMF ) / EU to take out a Precautionary Credit Line. The formal negotiations could not be started then because of the European Commission s ( EC ) infringement proceedings against Hungary. Page 4 of 89

5 In December 2011, S&P downgraded Hungary s rating from BBB- to BB+, with a negative outlook driven by unpredictable economic policy and government actions that has raised questions about the independence of oversight institutions and are complicating the operating environment for investors. Analysts main criticism over measures in 2011 was that the 2011 budget plan relied heavily on extra taxes, diverted pension transfers and a reduction in public sector employment, while it lacked structural measures. At the end of April, 2012 the Hungarian Government agreed with EC on the law changes needed and EC is likely to give the go-ahead to Hungary to start the IMF talks once it implements the legal changes. On May 18, 2012, the parliament passed the law on the new telecom tax through which the state expects to raise approximately HUF 44 billion additional annual budget revenue. The tax was introduced on July 1, 2012 as a consumption tax on all calls and SMS/MMS. In November 2012, Hungary s credit rating was lowered to two steps below investment grade to 'BB' from 'BB+ at S&P. S&P has justified its decision with the government s unorthodox policies which weaken the predictability of the country s economy. In July 2012, the IMF talks have begun that strengthened the HUF against the EUR to 276 HUF/EUR. In November 2012 the talks with IMF have stopped and on November 23, 2012 the Hungarian Parliament passed the law on the new utility tax expecting to raise the budget revenue by HUF 37.5 billion. In December 2012 Standard & Poor s downgraded Hungarian banks credit rating from BB to BB-. The rating company cited the increase of the Hungarian economical risk, impairing of creditability and the deceleration of the economy. The Hungarian Parliament approved the modified version of the act governing the introduction of the Financial Transaction Tax ( FTT ) in Hungary effective January 1, The standard rate of the FTT is 0.2% based on the value of the transaction with the exception of cash withdrawals when the tax rate is 0.3%. The maximum rate of FTT per transaction is capped at HUF 6,000. In January 2013 Hungary s parliament mandated a 10% reduction to the retail prices of energy (natural gas, electricity, district heating) and water/sewer services as of July The government has signaled its intention to legislate further utility rate reductions. In March 2013 the new Hungarian central bank s governor was appointed. He stressed the central bank s goals under the central bank law, i.e. the importance of price stability, financial stability and support of the government s economic policy. The Prime Minister stated that the government aims to raise domestic ownership of the banking sector to at least 50%. The forint weakened above the 305 HUF/EUR level. On March 21, 2013 S&P put Hungary s credit rating on negative watch indicating the potential for a downgrade due to recent changes in the Hungarian policy framework may weaken investor confidence and medium-term economic growth prospects. In April 2013, the President of the National Bank of Hungary announced a funding for lending program, which is similar to the measures of the Bank of England. The central bank grants two credit lines of HUF 250 billion to commercial banks at zero interest. These lines can be used to grant loans for SMEs at a maximum interest of 2% to support their operation and investment and to convert their foreign exchange denominated loans into HUF. In June 2013, Hungary was lifted from the EU s excessive deficit procedure which ensures a wider range for economic policy of the country. Page 5 of 89

6 In June Unfavorable ECJ rulings in French and Maltese telco sector cases handed down. In September the EC subsequently withdrew complaints against the Hungarian turnover-based telco sector taxes (i.e. the Crisis Tax) from the ECJ docket. In August 2013 minute-based telco tax rates levied on the Company changed from 2 to 3 HUF per minute for business customers. Monthly caps also raised on those customers. The tax payable on residential customer minutes remained unchanged at 2 HUF per minute. Effective August 1, 2013, the interest income of domestic private individuals is subject to a 6% healthcare contribution in addition to the already applicable 16% personal income tax. In September 2013 the National Bank of Hungary announced to prolong its funding for growth scheme providing another HUF 2,000 billion for SME sector until the end of In October 2013 the Hungarian Parliament approved the second energy price cut in Hungary is cut state-regulated household energy prices by an average 11.1% as of November 1, 2013, including natural gas, electricity and district heating. In November 2013 the Hungarian Parliament approved the expansion of foreign currency denominated loan rescue program. From February 2014 those debtors who have more than 90 days delay of the monthly installments, but less than 180 days can step into the existing fixation system, where the loan is calculated at 180 in case of CHF/HUF and at 250 in case of EUR/HUF for five years. In 2013 the National Bank of Hungary has continued to cut the prime interest rate monthly. The extent of the rate cut dropped from 0.25% to 0.20% as FED alluded a possible monetary easing slowdown. The end of December 2013 the interest rate was 3%. In December 2013 S&P downgraded the EU from the best AAA rating to AA+. The agency placed negative outlook besides the AAA rating in January 2012, and listed loosening cohesion among member states, worsening financial standing, and the downgrade of several EU-states (France, Italy, Spain, the Netherlands, etc.) among the causes of the decision. Effect of Economic and Financial Crisis on Business and Financial Covenant Compliance The economic crisis has had an impact on all of the Group s business segments, particularly on the Residential segments. The Residential Voice business continues to be impacted by a decreasing number of telephone lines and customers migrating to lower cost packages in the historical concession areas as well as reduced usage both in and outside the historical concession areas. Increasing competition is seen, particularly from cable television operators providing broadband internet services, which impacts the DSL broadband business. The Corporate segment operations have also been impacted by the economy as businesses look to cut expenditures and contract renewals become more competitive. The Group continues to carefully manage operating costs and capital expenditure. However, management cannot at this time predict with certainty the impact economic conditions and government measures will continue to have on the Group s business with respect to consumer and business spending on its services or on the Group s ability to repay its debt obligations, even following the Restructuring. Page 6 of 89

7 Explanation of Statement of Profit and Loss and Other Comprehensive Income Items Revenue Revenue is generated by five principal areas of activity as follows: Residential Voice the revenue generated from the fixed line voice and voice-related services provided to Residential customers within our historical concession areas and outside our historical concession areas in Hungary. Residential Voice revenue comprises monthly fees charged for accessing the network, time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in our network, monthly fees for value added services, one-time connection and new service fees, as well as monthly fees for packages with built-in call minutes. Residential Internet & TV the revenue generated from Internet connections and television broadcast provided to residential customers nationwide both inside and outside the historical concession areas on various technologies other than cable. Residential Internet comprises xdsl revenue provided through our copper and fiber network; DSL reselling revenue and wireless radio internet revenue all generated through a variety of monthly packages. Residential TV comprises revenue from television services delivered using Internet Protocol (IPTV) and digital terrestrial television broadcast services (DVB-T) in cooperation with Antenna Hungaria all generated through fixed monthly subscription fees. Cable the revenue generated from the provision of cable voice, broadband internet and TV services to customers outside the historical concession areas using the cable network acquired in the acquisition of Fibernet in March Corporate the revenue generated from the fixed line voice, data and internet services provided to business, government and other institutional customers nationwide. Corporate revenue comprises access charges, monthly fees, time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in our network, monthly fees for value added services, internet access packages and regular data transmission services. In addition, Corporate revenue includes revenue from leased line, internet and data transmission services which is comprised of fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Wholesale the revenue generated from voice and data services is provided on a wholesale basis to resellers to use excess network capacity. Wholesale revenue comprises rental payments for high bandwidth leased line services, which are based on the bandwidth of the service and the distance between the endpoints of the customers, and voice transit charges from other Hungarian and international telecommunications service providers, which are based on the number of minutes transited. Cost of sales exclusive of depreciation Cost of sales exclusive of depreciation consists of cost directly attributable to operations of segments such as interconnect expenses, access type charges, direct sales commissions (segment cost of sales in total) and expenses which are attributable to all segments such as network operating expenses and direct personnel expenses. Page 7 of 89

8 Operating Expenses Principal operating expenses consist of: indirect personnel expenses, including salaries, social security and other contributions, personnel related expenses, contracted employees and expatriate costs and bonuses and charges; headcount related costs, including office, building rental and maintenance, car related and training costs; advertising and marketing costs, including the costs of advertising campaigns and other publicity and market research; operating and other taxes including utility tax, which was introduced by the Hungarian Government in the first quarter of 2013, telecom tax, which was introduced by the Hungarian Government in the second quarter of 2012 and crisis tax, which was introduced by the Hungarian Government in the fourth quarter of 2010 with retrospective effect to January 1, 2010 through the end of 2012; IT costs including IT maintenance, software license and other IT related costs; bad debt expenses, including provisions for doubtful debts from customers; collection costs, including bank charges in respect of collecting payments from customers; legal and audit fees including fees paid to legal advisors and to auditors; consultant expenses including fees paid to other advisors; management fee including fees paid to trustees; non-recurring consulting expenses, which are fees paid to legal and financial advisors relating to strategic projects; and other overhead costs, net including other miscellaneous expenses and revenues. Depreciation and Amortization Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. Assets leased under finance leases are depreciated over the shorter of the lease term or their useful lives. Land and capital work in progress are not depreciated. Intangible assets with a finite useful life are amortized on a straight-line basis over the period in which the asset is expected to be available for use. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cashgenerating unit is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Page 8 of 89

9 Net Financial Expenses Net financial expenses comprise interest income, interest expense, amortization of bond discounts, amortization of deferred borrowing costs calculated using the effective interest rate method, foreign exchange gains and losses, gains and losses resulting from the changes in the fair values of derivative financial instruments and net other financial expense. Income Taxes Income tax expense comprises current and deferred taxes. Income tax expense is recognized in the income statement 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 corporate income tax and local business tax payable on taxable income for the year, using tax rates enacted at the balance sheet date and any adjustment to tax payable in respect of previous years. Result for the Year The following tables provide a summary of the consolidated financial statements of Matel as of and for the year ended December 31, 2013 and The summary consolidated financial information presented here as of and and 2012 should be read in conjunction with the notes to the consolidated financial statements. From January 1, 2013 the Group has changed its accounting policy with respect to accounting for Corporate segment sales commissions relating to contracts that are managed on a portfolio basis. The Group decided to recognize retrospectively these sales commissions as cost of sales instead of the previous treatment as recognizing these sales commissions as cost of acquiring a customer contract under IAS 38 Intangible Assets. Either treatment of these costs as expenditure through profit or loss as incurred or alternatively capitalization as intangible asset are currently applied policies in the industry. Cost incurred by the Group as sales commissions relate to both management of current portfolio of Corporate customers and also to acquire new customers. Because of changes in the operating environment, the Group believes that these costs mainly relate to maintenance of current portfolio and acquisition of contract related expenditure is not so significant any more. Accordingly, the Group decided to change the accounting policy to reflect this change in the nature of the costs. The Group believes that the new accounting policy provides reliable and more relevant information. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the comparative figures have been restated accordingly. In addition, Management of the Group decided to correct an prior year error with respect to certain groups of intangible assets. Upon the correction, certain items are reported as part of operating expenses and cost of sales instead of the previous presentation as part of intangible assets. See details in note 2.3. Changes in Accounting Policies in the consolidated financial statements. Page 9 of 89

10 For the year ended December 31, restated ( in millions) Statement of Profit and Loss and Other Comprehensive Income Data: Residential Voice Residential Internet & TV Cable Corporate Wholesale Total operating revenue Cost of sales exclusive of depreciation... (65.5) (63.8) Operating expenses... (48.7) (50.0) Cost of restructuring (1)... (1.3) (3.2) Depreciation and amortization... (48.6) (83.9) Income / (loss) from operations... (0.3) (27.4) Net financial expense (2)... (24.0) (43.8) Gain on extinguishment of debt (3) Income/ (loss) before tax (71.2) Income tax benefit/(expense)... (2.8) (3.7) Income/ (loss) for the year (74.9) As of December 31, restated ( in millions) Balance Sheet Data: Cash and cash equivalents Net working capital (4)... (16.8) (13.9) Total assets Net assets/(liabilities) relating to derivative financial instruments... (0.1) 0.1 Liabilities relating to finance leases Third party debt (5) Shareholders equity (6) (65.1) For the year ended December 31, restated ( in millions) Cash Flow Data: Net cash flow provided by / (used in) operating activities Net cash flow provided by / (used in) investing activities... (30.5) (34.7) Net cash flow provided by / (used in) financing activities... (3.9) (1.5) Net increase / (decrease) in cash and cash equivalents (21.7) Free cash flow before debt service (7) (13.6) Page 10 of 89

11 (1) Cost of restructuring and 2012 represents costs related to the reorganizations we have undertaken and mainly includes severance expenses in both years. Expenses relating to the Restructuring (see note 1.1 Restructuring in the notes to the consolidated financial statements) referred to elsewhere in these financial statements are included in operating expenses in the consolidated statement of profit and loss and other comprehensive income. (2) Net financial expense includes interest income, interest expense, amortization of bond discount, amortization of deferred borrowing costs, net foreign exchange gains / (losses), gains / (losses) on extinguishment of debt, gains / (losses) from fair value changes of derivative financial instruments and net other financial expense. (3) For the year ended December 31, 2013 gain on extinguishment of debt includes the gain on the Restructuring which was undertaken by the company (see note 1.1 Restructuring in the notes to the consolidated financial statements). (4) Net working capital is calculated as total current assets (excluding cash and cash equivalents and current assets relating to derivative financial instruments) less current liabilities (excluding current liabilities relating to derivative financial instruments, the current portion of borrowings and current portion of liabilities relating to finance leases). (5) Third party debt includes the 2013 Notes net of unamortized bond discount and excludes deferred borrowing costs and liabilities related to finance leases. Third party debt for the year ended December 31, 2012 includes the 2009 Notes net of unamortized bond discount and excludes deferred borrowing costs and liabilities related to finance leases. (6) Shareholders equity includes non-controlling interest. (7) Free cash flow before debt service equals net cash flow provided by / (used in) operating activities plus cash interest paid minus net cash flow used in / (provided by) investing activities. The following table sets forth the reconciliation of net cash flow provided by / (used in) operating activities to free cash flow before debt service: For the year ended December 31, restated ( in millions) Net cash flow provided by operating activities Cash interest paid Net cash flow used in investing activities... (30.5) (34.7) Free cash flow before debt service (13.6) Risk Factors The Group s activities expose it to a variety of risks: customer credit risk, liquidity risk, interest rate risk and foreign currency risk. The Group s risk management program focuses on the unpredictability of the financial markets and seeks to minimize potential adverse effects of the Group s financial performance. Risk management is carried out by Management under the policies approved by the Board of Directors. For more details refer to note 18 Financial Instruments and Financial Risk Management in the consolidated financial statements. Risk factors that could affect the Group s operations include, but are not limited to: The Group is affected by the wider economy and in particular, the macro-economic condition of Hungary. The Group has historically been unable to fund its operations through operating cash flow, and the Group may not be able to fund its operations through operating cash flow in the future without the availability of adequate working capital facilities. The Group s revenue and cash flow will be adversely affected if the Hungarian fixed line market further declines and its Residential Voice business declines at a higher rate than expected. The Group s failure to increase revenue in the Residential Internet&TV market may adversely affect its results of operations and reduce its market share. The Group s revenue from the Corporate segment may be adversely affected due to competition and the economic environment. The provision of cable services is highly competitive, and may become more competitive in the future, which could result in a loss of cable subscribers and revenue. Page 11 of 89

12 If the Group is not able to manage costs while effectively responding to competition and changing market conditions, its cash flow may be reduced and its ability to service its debt or implement its business strategies may be adversely affected. The Group will be subject to increased competition due to the business strategies of its competitors, prevailing market conditions and the effect of E.U. regulation on the Hungarian telecommunications market, which may result in the loss of customers and market share for the Group. The ongoing global financial and economic crisis may continue to result in the deterioration of economic conditions in the Group s operating areas, which may continue to impact demand for its services and affect its ability to obtain additional financing. Austerity measures introduced by the Hungarian government may similarly impact demand for its services. A new telecom tax was introduced by the Hungarian Ministry for Economy with a significant impact on the Group s traffic revenue. A new utility tax was introduced by the Hungarian Ministry for Economy with a significant impact on the Group s results. The agreements entered into in relation to the international sales may result in warranty claims against the Group. The loss of key senior management could negatively affect the Group s ability to implement its business strategy and generate revenue. Technological changes and the shortening life cycles of the Group s services and infrastructure may affect its operating results and financial condition and may require it to make unanticipated capital expenditures. Network or system failures could result in reduced revenue, or require unanticipated capital or operating expenditures, and could harm the Group s reputation. Success of the telecommunication business operations requires and depends on continuous upgrading of the existing network infrastructure. Any unanticipated investments required due to external or internal factors would require additional unplanned capital expenditure by the Group. The Group will be dependent on third party vendors for its information, billing and network systems. Any significant disruption in the Group s relationship with these vendors could increase its costs and affect its operating efficiencies. The Group will depend on third party telecommunications providers over which it has no direct control for the provision of certain of its services. The Group may not be able to fund its operations which require substantial capital expenditures from cash generated from its operations or financing facilities. The Group contains entities organised under the laws of a number of jurisdictions, and local insolvency laws may vary between jurisdictions. Variations in local insolvency laws may affect the rights of creditors upon insolvency. Page 12 of 89

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14 MAGYAR TELECOM B.V. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013 (PRESENTED IN THOUSAND EUROS) Page 14 of 89

15 Page Consolidated Balance Sheet 15 Consolidated Statement of Profit and Loss and Other Comprehensive Income 16 Consolidated Cash Flow Statement 17 Consolidated Statement of Changes in Equity 18 Notes to the Consolidated Financial Statements 19 Page 15 of 89

16 Consolidated Balance Sheet as of December 31, 2013 Notes At December 31 At December 31 At January Restated Restated Note 2.3 Note 2.3 Non-Current Assets Intangible Assets Property, Plant and Equipment Other Non-Current Financial Assets Current Assets Other Current Assets Trade and Other Receivables Derivative Financial Instruments Cash and Cash Equivalents Total Assets Equity Capital and Reserves Attributable to Equity Holders of the Parent Share Capital Capital Reserve Other Reserve 16 ( ) (16 693) (16 693) Hedging Reserve Cumulative Translation Reserve 16 (70 829) (65 877) (87 114) Accumulated Losses 16 ( ) ( ) ( ) Non-Controlling Interest Total Equity (65 098) (15 060) (65 109) (15 073) Liabilities Non-Current Liabilities Borrowings Other Non-Current Liabilities Current Liabilities Trade and Other Payables Derivative Financial Instruments Accrued Expenses and Deferred Income Accrued Interest Provisions for Other Liabilities and Charges Total Liabilities Total Equity and Liabilities Page 16 of 89

17 Consolidated Statement of Profit and Loss and Other Comprehensive Income / (Loss) For the year ended December 31 Notes Restated Note 2.3 Revenue Cost of Sales, Exclusive of Depreciation 4 (65 513) (63 836) Depreciation and Amortization 7 (48 608) (83 931) Operating Expenses 5 (48 678) (50 035) Cost of Restructuring 8 (1 300) (3 151) Income / (Loss) from Operations (284) (27 460) Financial Income Financial Expenses 9 (26 080) (47 191) Gain on Extinguishment of Debt Income / (Loss) Before Tax (71 235) Income Tax (Expense) / Benefit 27 (2 871) (3 679) Income / (Loss) for the Year (74 914) Other Comprehensive Income / (Loss): Items that will not be reclassified to Income / (Loss) - - Items that may be reclassified subsequently to Income / (Loss) Cash Flow Hedges 16 (592) 592 Change in Cumulative Translation Reserve (4 952) Total items that may be reclassified subsequently to Income or Loss (5 544) Other Comprehensive Income / (Loss) (5 544) Total Comprehensive Income / (Loss) (53 085) Attributable to: Owners of the Parent (53 083) Non-Controlling Interest 4 (2) (53 085) Page 17 of 89

18 Consolidated Cash Flow Statement For the year ended December 31 Notes Restated Note 2.3 Cash Flows from Operating Activities Income / (Loss) Before Tax (71 235) Adjustments for Interest Expense / (Income) 9, Gain on Extinguishment of Debt 17 (81 110) - Amortization 7,10, Depreciation 7,10, Result of Sale of Intangible Assets 10 - (1) Result of Sale of Property, Plant and Equipment 11 (1 193) (3 283) Change of Derivative Financial Instruments (583) (425) Provision for Impairment of Trade Receivables (2 149) Provisions (868) 697 Unrealized Foreign Exchange (Gain) / Loss Other Non-Cash Items Working Capital Changes: Change in Trade and Other Receivables (6 149) Change in Inventories (678) Change in Prepayments and Accrued Income (37) Change in Trade and Other Payables and Accrued Expenses and Deferred Income (6 857) Income Taxes Paid (2 388) (2 905) Interest Paid (5 733) (33 744) Net Cash Flow Provided by / (Used in) Operating Activities Cash Flows from Investing Activities Purchase of Property, Plant and Equipment and Intangible Assets (32 020) (41 105) Proceeds from Sale of Property, Plant and Equipment and Intangible Assets Interest Received Net Cash Flow Provided by / (Used in) Investing Activities (30 483) (34 723) Cash Flows from Financing Activities Settlement of Derivative Financial Instruments 192 (1 515) Repurchase of 2013 Notes 17 (14 949) - Proceeds from issuance of Sponsor debt Owner's Paid-in Capital Refinancing Costs 17 (14 171) - Net Cash Flow Provided by / (Used in) Financing Activities (3 928) (1 515) Effect of Exchange Rate Changes on Cash and Cash Equivalents 397 (63) Net Increase / (Decrease) in Cash and Cash Equivalents (21 748) Cash and Cash Equivalents at the Beginning of the Year Cash and Cash Equivalents at the End of the Year Summary of Non-Cash Transactions: The Group had unpaid capital expenditures in the amount of EUR 10,854 thousand and EUR 12,536 thousand as of December 31, 2013 and 2012, respectively. Other non-cash items contains EUR 500 thousand reversed Mid Europa management fees relating to the third and fourth quarter of 2012 and EUR 1,501 thousand capitalized interest relating to the 2013 Notes. The Group had a loss of EUR 4.5 million for the year ended December 31, 2012 as a result of waiving of receivables and liabilities in connection with the liquidation of former holding companies of Matel (see note 9 Financial Income and Expenses ). Page 18 of 89

19 Consolidated Statement of Changes in Equity Attributable to Owners of the Parent Cumulative Share Capital Other Hedging Translation Accumulated Non-Controlling Total Notes Capital Reserve Reserve Reserve Reserve Losses Total Interest Equity Balance at January 1, 2012 (Prior to Restatement) (16 693) - (87 114) ( ) (14 389) 13 (14 376) Restatement in Relation to Prior Year Error (268) (268) - (268) Restatement in Relation to Accounting Policy (416) (416) - (416) Balance at January 1, 2012 (Restated) (16 693) - (87 114) ( ) (15 073) 13 (15 060) Hedging of Foreign Currency Items Translation Adjustment for the Year Other Comprehensive Income / (Loss) Net Result for the Year before Restatement (74 316) (74 316) (2) (74 318) Restatement in Relation to Prior Year Error (140) (140) - (140) Restatement in Relation to Accounting Policy (456) (456) - (456) Net Result for the Period after Restatement (74 912) (74 912) (2) (74 914) Total Comprehensive Income / (Loss) (74 912) (53 083) (2) (53 085) Capitalized Shareholder Loan Balance at December 31, 2012 (Restated) (16 693) 592 (65 877) ( ) (65 109) 11 (65 098) Balance at January 1, (16 693) 592 (65 877) ( ) (65 109) 11 (65 098) Hedging of Foreign Currency Items (592) - - (592) - (592) Translation Adjustment for the Year (4 952) - (4 952) - (4 952) Other Comprehensive Income / (Loss) (592) (4 952) - (5 544) - (5 544) Net Result for the Year Total Comprehensive Income / (Loss) (592) (4 952) Issuance of B Shares ( ) Additional Paid-in Capital Total Transaction with Owners ( ) Balance at December 31, ( ) - (70 829) ( ) Page 19 of 89

20 1. General Information Magyar Telecom B.V. ( the Company or Matel, together with its subsidiaries the Group ) was incorporated on December 17, 1996 as a limited liability company under the laws of the Netherlands and registered with the trade register of the Chamber of Commerce for Amsterdam with company registration number On September 5, 2013 the Company was registered as an overseas company at the Companies House in the UK with UK establishment number BR016577, having its head office at 6 St Andrew Street, London EC4A 3AE, United Kingdom. Matel is engaged in investing in telecommunication related activities in Hungary. Its telecommunications service provider subsidiaries, Invitel Távközlési Zrt. ( Invitel ) and Invitel Technocom Kft. ( ITC ) are providing telecommunications services to residential and corporate customers. All subsidiaries are majority owned and controlled subsidiaries of Matel (collectively, the Group ). Matel, through its subsidiaries, is one of the largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services to residential and corporate customers in its historical concession areas. The historical concession areas and cable TV network cover an estimated 2.9 million people, representing approximately 29% of Hungary s population. Matel also provides fixed line telecommunications services as an alternative operator in the remainder of Hungary either by connecting corporate and residential customers to its backbone network and cable network, or through the use of carrier pre-selection or wholesale DSL services for residential customers. The Company was a wholly owned subsidiary of HTCC Holdco I B.V. ( Holdco I B.V. ) till December 12, After the liquidation of Holdco I B.V., from December 12, 2012 the Company was wholly owned by Hungarian Telecom Cooperatief U.A. ( Coop ). As of October 22, 2013, a new entity, Hungarian Telcom B.V. was established by Coop with a 100% onwnership. As of December 12, 2013 the shares of Matel were contributed by Coop to Hungarian Telecom B.V. On December 12, 2013 Matel completed its restructuring as part of which its former notes were refinanced by issuing new notes (see note 17 Borrowings ) and new shares (see note 16 Equity ). The new shares were issued to a newly established entity, Matel Holdings Limited. As of December 31, 2013, after completion of the Resutructuring, Matel was 51% owned by Hungarian Telecom B.V. which is 100% owned by Mid Europa Partners Limited ( Mid Europa ), through its holding companies and 49% owned by Matel Holdings Limited. Mid Europa does not prepare financial statements under IFRS. In March 2012, due to regulatory changes in Hungary, reorganization took place affecting ITC. A new company, MID-NEW Technocom Kft. was established by one of the directors of Mid Europa on March 8, Matel transferred 75% of its membership interest in ITC to MID-NEW Technocom Kft. The purchase price was determined at EUR 45,000 by an enterprise value calculation. Matel and MID-NEW Technocom Kft. accepted a revised Articles of Association of ITC following the transfer. According to the revised Articles of Association, only Matel is entitled to any distribution of dividends from ITC and there is a restriction on the transfer of membership interest in ITC whereby such transfer cannot take place without the approval of Matel. ITC remained consolidated by the Group. As of December 31, 2013 the Group includes the following subsidiaries: Invitel was incorporated on September 20, 1995 as a joint stock company under the laws of Hungary. The authorized share capital of Invitel as of December 31, 2013 is HUF 16 billion (approximately EUR 54 million). Page 20 of 89

21 ITC was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary. The authorized share capital of ITC as of December 31, 2013 is HUF 165 million (approximately EUR 556 thousand). Invitel International Holdings B.V. ( Invitel International Holdings ) was incorporated on March 26, 2009 in Amsterdam and has its statutory seat at Herikerbergweg 238, Luna ArenA, 1101CM Zuidoost, The Netherlands. The 100% owner of Invitel International Holdings is Invitel. Invitel International Holdings was the holding company of the Group s international operations, which was sold on October 7, The authorized share capital of Invitel International Holdings as of December 31, 2013 is EUR 18 thousand. Invitel International Holdings had no operations during the years ended December 31, 2012 and Restructuring During 2013 the Group worked with certain of its advisers to prepare a strategic review of the Group and its business on a going concern basis. The strategic review indicated that the Group was significantly over leveraged and needed to be restructured. One of the most significant adverse impacts on the liquidity of the Group was the amount required to service current debt levels under the 2009 Notes. The Group commenced negotiations regarding the terms of a Restructuring with an ad hoc committee of holders of its 2009 Notes in March 2013, with the aim of reducing the financial pressure on the business of the Group and ensuring that the Group could continue to operate as a going concern in the future. As part of this process, holders of approximately 40% of the aggregate principal amount of the 2009 Notes entered into the Restructuring Agreement on July 15, In light of, and consistent, with the Restructuring, the Company s Board decided not to make the payment of the June 15, 2013 coupon due to the holders of the 2009 Notes. By August 19, 2013, holders of over 70% of the aggregate principal amount of the 2009 Notes (the Consenting Creditors ) had entered into or acceded to the Restructuring Agreement. Pursuant to the terms of the Restructuring Agreement, the Consenting Creditors agreed, amongst other things: (a) (b) (c) to support the Restructuring and to use all reasonable endeavours to implement the Restructuring in a manner consistent with the terms of the restructuring agreement; to take all steps that were consistent with, and were reasonably required to implement the Restructuring (including taking all steps necessary to vote in favour of the Restructuring); and not to take any enforcement action or delay, impede or frustrate the Restructuring. The Restructuring involved a number of steps designed to facilitate an exchange of the 2009 Notes for new notes. Under the terms of the Restructuring, EUR million of the 2009 Notes were exchanged into new notes (the 2013 Notes ). The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from June 15, 2013 and paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. The 2013 Notes have a maturity date of June 15, The remaining EUR million of the 2009 Notes, together with all accrued interest were converted into 49% of the pro-forma post-restructuring equity in the Group, which is held by Matel Holdings Limited, a newly formed entity. Matel Holdings Limited s shares are stapled to the 2013 Notes. EUR 21.0 million of the 2009 Notes held by the Company in treasury were also cancelled as part of the Restructuring. Page 21 of 89

22 Mid Europa invested EUR 25.0 million consisting of EUR 15.0 million as additional cash contribution and EUR 10.0 million as debt (the Sponsor Notes ), which ranks pari passu with the 2013 Notes. The EUR 15.0 million new equity investment was used to buy back the 2013 Notes (and corresponding equity entitlement). Upon closing of the Restructuring Mid Europa owned 51% of the pro-forma postrestructuring equity in the Group. A consent fee of 0.25% of holdings of the 2009 Notes was payable on closing of the Restructuring to the noteholders that were party to or acceded to the Restructuring Agreement by August 15, The Restructuring was implemented via a UK scheme of arrangement (which requires a favorable vote of 75% in principal amount and a majority in number of those voting). To enable the Restructuring to be implemented pursuant to a scheme of arrangement under English law, the Matel Board took the decision to migrate the Center of Material Interest ( COMI ) of Matel to the UK. The steps taken by Matel in order to move its COMI to the UK included (i) appointing a majority of directors resident in the United Kingdom and removing the directors resident in the Netherlands; (ii) registering as an overseas company with the Registrar of Companies at Companies House in the UK; (iii) registering as UK tax resident; (iv) entering into an agreement to occupy premises in the UK; (v) notifying creditors of the transfer of Holdco s COMI to the UK, (vi) carrying out the administrative functions of Holdco in the UK, and (vii) carrying out all principal discussions and negotiations with noteholder creditors from the UK. After completion of the Restructuring, Mid Europa has the rights to appoint the majority of the Board of Directors of the Company. The noteholders (in their capacity as shareholders) are also able to appoint directors to the Board ( Noteholder Directors ), whose approval will be required in relation to certain strategic matters. As of December 31, 2013 the Group is controlled by Mid Europa. The Company has recorded a gain of EUR 81,110 thousand in relation to this Restructuring, which is related to the extinguishment of debt and the issuance of 2013 Notes reduced by the refinancing costs paid. 2. Significant Accounting Policies The significant accounting policies applied in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied by all Group entities to all periods presented in these consolidated financial statements, unless otherwise stated. Where it was necessary, accounting policies of the subsidiaries were modified to ensure consistency with the policies adopted by the Group. 2.1 Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as adopted by the European Union ( EU ). These consolidated financial statements were approved for issue on April 24, 2014 by the Board of Directors. Page 22 of 89

23 2.2. Basis of Preparation The consolidated financial statements are presented in euro ( EUR ) rounded to the nearest thousand of EUR ( TEUR ). The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgement in the process of applying the accounting policies. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are discussed in note Critical Accounting Estimates and Judgements. The Group has adopted the following new and amended IFRS as of January 1, 2013, which are relevant to the Group s consolidated financial statements: Amendments to IAS 1 Presentation of Financial Statements relating to the presentation of items of other comprehensive income. The amendment requires entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be recycled to profit or loss in the future. The amendments are effective for annual periods beginning on or after July 1, The Group has adopted these amendments and made the necessary changes in the presentation of other comprehensive income by reclassifying the effect of capitalisation of a shareholder loan in 2012 from other comprehensive income to equity in the amount of EUR 3,047 thousand. Amendments to IFRS 7 Financial Instruments: Disclosures relating to offsetting financial instruments. The amendments are effective for annual periods beginning on or after January 1, Adoption of the amendments did not have an impact on the consolidated financial statements of the Group. Amendments to IFRS 10 Consolidated Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control. Adoption of the amendments did not have an impact on the consolidated financial statements of the Group. IFRS 13 Fair Value Measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRS and US GAAP, provide guidance on how fair value accounting should be applied where its use is already required or permitted by other standards within IFRS. Adoption of the new standard has following impact on the consolidated financial statements of the Group: The price within the bid-ask spread that is most representative of fair value in the circumstances is used to measure fair value, which management considers is the last trading price on the reporting date. Prior to January 1, 2013, the quoted market price used for financial assets was the current bid price; the quoted market price for financial liabilities was the current asking price. The disclosures included in note 18 Financial Instruments and Financial Risk Management are in line with the requirements of IFRS 13. Amendments to IAS 19 Employee Benefits (issued in June 2011, effective for periods beginning on or after January 1, 2013) makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and to the disclosures for all employee benefits. The standard requires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows: (i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income. Adoption of these amendments did not have an impact on the consolidated financial statements of the Group. Page 23 of 89

24 2.3. Changes in Accounting Policies From January 1, 2013 the Group has changed its accounting policy with respect to accounting for sales commissions relating to Corporate segments that are managed on portfolio basis. Either treatment of these costs as expenditure through profit or loss as incur or alternatively capitalization as intangible asset are currently applied policies in the industry. The Group decided to recognize retrospectively these sales commissions as cost of sales. Previously the Group recognized these sales commissions as cost of acquiring a customer contract under IAS38 Intangible Assets. Cost incurred as sales commission fees relate to both management of current portfolio of corporate customers and also to acquire new customers. Because of changes in the operating environment the Group believes that these costs mainly relate to maintenance of current portfolio and acquisition of contract is not so significant any more. Accordingly, the Group decided to change the accounting policy to reflect this change in the nature of the cost. Therefore the Group believes that the new accounting policy provides reliable and more relevant information. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the comparative figures have been restated accordingly. In addition, Management has decided to correct an prior year error with respect to certain groups of intangible assets. Upon the correction, certain items are reported as part of operating expenses instead of the previous presentation as part of intangible assets. The effects of the change in accounting policy and the correction of prior year error are included in the tables below: At December 31 At December Intangible assets, net at the Beginning of the Year Restatement in Relation to Prior Year Error (140) (268) Restatement in Relation to Accounting Policy Change (456) (416) Cumulative Effect from Prior Years (684) - Intangible assets, net at the End of the Year At December 31 At December Accumulated losses at the Beginning of the Year ( ) ( ) Restatement in Relation to Prior Year Error (140) (268) Restatement in Relation to Accounting Policy Change (456) (416) Cumulative Effect from Prior Years (684) - Accumulated losses at the End of the Year ( ) ( ) Page 24 of 89

25 For the year ended December Cost of Sales, Exclusive of Depreciation before Restatement (62 629) Restatement in Relation to Accounting Policy Change (1 207) Cost of Sales, Exclusive of Depreciation after Restatement (63 836) For the year ended December Depreciation and Amortization before Restatement (84 817) Restatement in Relation to Prior Year Error 135 Restatement in Relation to Accounting Policy Change 751 Depreciation and Amortization after Restatement (83 931) For the year ended December Operating Expenses before Restatement (49 760) Restatement in Relation to Prior Year Error (275) Operating Expenses after Restatement (50 035) For the year ended December Net Cash Flow Provided by / (Used in) Operating Activities before Restatement Restatement in Relation to Prior Year Error (275) Restatement in Relation to Accounting Policy Change (1 207) Net Cash Flow Provided by / (Used in) Operating Activities after Restatement For the year ended December Purchase of Property, Plant and Equipment and Intangible Assets before Restatement (42 587) Restatement in Relation to Prior Year Error 275 Restatement in Relation to Accounting Policy Change Purchase of Property, Plant and Equipment and Intangible Assets after Restatement (41 105) Page 25 of 89

26 2.4. Basis of Consolidation Subsidiaries are those investees, including structured entities, that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has control over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases. The acquisition method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest s proportionate share of net assets of the acquiree. Non-controlling interests that are not present ownership interests are measured at fair value. Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount ( negative goodwill, bargain purchase ) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed and reviews appropriateness of their measurement. The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs related to the acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of the business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. Page 26 of 89

27 Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company and all of its subsidiaries use uniform accounting policies consistent with the Group s policies. Noncontrolling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separate component of the Group s equity. Business combinations arising from transfers of interests in entities that are under the common control of the shareholders that control the Group are accounted for by using predecessor accounting, at the date that the common control was established. The assets and liabilities are recorded at book values by the acquiree. The components of equity of the acquired entities are added to the same components within Group equity except that any share capital of the acquired entities is recognized as part of reserves. The difference between the consideration given and the aggregate book value of the assets and liabilities of the acquired entity as of the date of the transaction is recorded as an adjustment to other reserve in equity. No additional goodwill is created by these transactions. When the group ceases to have control any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the group had disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss Foreign Currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The functional currency of Matel is the EUR. The functional currency of the Hungarian subsidiaries of Matel is the Hungarian forint ( HUF ), the functional currency of the non-hungarian subsidiaries of Matel is the EUR. The assets and liabilities of operations that are measured in functional currencies other than the EUR are translated into EUR at foreign exchange rates in effect at the balance sheet date. Revenues and expenses of transactions measured in currencies other than the EUR are translated into EUR at average rates. Equity amounts are translated at historical exchange rates. Exchange rate translation differences are reported as a component of equity as cumulative translation reserve. Page 27 of 89

28 Transactions in foreign currencies are translated to the respective functional currencies at the foreign exchange rate in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate in effect 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. Foreign currency differences arising on translation are recognized in the consolidated income statement as net foreign exchange gain / (loss) in financial expenses. Non-monetary assets and liabilities denominated in foreign currencies other than the functional currency that are stated at historical cost are translated using the exchange rate at the date of the transaction Cash and Cash Equivalents Cash and cash equivalents is comprised of cash in bank balances and highly liquid call deposits with original maturities of three months or less and exclude all overdrafts which are shown within borrowings in current liabilities on the face of the consolidated balance sheet Financial Assets Financial assets are classified in the following categories: at fair value through profit or loss, loans and receivables and available for sale. The classification depends on the purpose for which the financial asset was acquired. The classification of financial assets is determined at initial recognition. Financial assets at fair value through profit or loss are financial assets held for trading. These financial assets are acquired for the purpose of sale in the short term. Derivative financial instruments are also classified as held for trading unless they are designated hedges. Assets in this category are classified as current assets, except it is expected to be settled in more than twelve months after the balance sheet date, which are classified as non-current assets. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in active markets. They are included in current assets, except it is expected to be settled in more than twelve months after the balance sheet date, which are classified as non-current assets. Available-for-sale financial assets are defined as financial assets that do not fall into one of the other categories described above. Gains and losses from revaluation of available-for-sale financial asset are recognized in other comprehensive income to the extent that any losses are assessed as being permanent and the asset is therefore impaired under IAS 39. If the asset is sold or impaired, the revaluation gain or loss implicit in the transaction is recognized within profit or loss. Regular sales and purchases of financial assets are recognized on the trade date, the date on which the Group commits to sell or purchase the financial asset. Page 28 of 89

29 A financial asset is considered to be impaired if objective evidence indicators that one or more events have had a negative effect on the estimated future cash flows from that asset. 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 original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. The primary factors that the Group considers in determining whether a financial asset is impaired or not are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: a) any portion or instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; b) the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Group obtains; c) the counterparty considers bankruptcy or a financial reorganisation; d) there is adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; or e) the value of collateral, if any, significantly decreases as a result of deteriorating market conditions. The recoverable amount of financial assets carried at amortized cost is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. The recoverable amount of the cash-generating units is the greater of their fair value less costs to sell and value-in-use. 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 Derivative Financial Instruments The Group uses derivative financial instruments to manage its exposure to foreign exchange and interest rate risks arising from operational, financing and investing activities. In accordance with its Treasury Policy, the Group does not hold or issue derivative financial instruments for trading purposes. Page 29 of 89

30 Derivative financial instruments are initially recognized at fair value and are subsequently re-measured to their fair value. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counter-parties. The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The fair value of cross currency interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates, foreign exchange rates and the current creditworthiness of the swap counter-parties. The method of recognizing gains or losses resulting from the changes in fair value of financial instruments depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the hedged item. The Group designates certain derivative financial instruments as cash flow hedges. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items. The Group also documents its assessment, both at the hedge inception and on an ongoing basis, of whether the derivatives that are used in the hedging transactions are highly effective offsetting changes in cash flows of the hedged items. The effective portion of the changes in the fair value of cash flow hedges is recognized in other comprehensive income in equity and the gain or loss relating to the ineffective portion is recognized immediately in the income statement. Amounts accumulated in equity are recognized in the income statement when the hedged item affects profit or loss. Financial instruments are classified as current or non-current depending on the terms of the contract. The portion of the financial instruments that is expected to be realized or settled within twelve months of the balance sheet date or where settlement can not be deferred for at least twelve months after the balance sheet date, is presented as current, the remainder is presented as a non-current financial instrument. 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. Changes in the fair value of separable embedded derivatives are recognized immediately in the income statement within financial income or expenses Trade and Other Receivables Receivables are recognized initially at fair value, and subsequently thereafter they are measured at amortized cost using the effective interest rate method less accumulated impairment losses. Receivables with a short duration are not discounted. The amounts of any impairment losses are included in operating expenses. Trade receivables and payables from other network operators are offset and the net amount is reported in the consolidated balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and liability simultaneously Trade and Other Payables Trade and other payables are initially recognized at fair value and subsequently at amortized cost. Page 30 of 89

31 2.11. Inventories Inventories consist of materials to be used in construction and repair of the telephone network. Inventories are carried at the lower of cost and net realizable value. Cost is based on the first-in, first-out principle and includes expenditures incurred in acquiring the inventories and bringing them to their existing condition and location Intangible Assets Intangible assets with indefinite useful life are stated at cost less accumulated impairment losses. Intangible assets with indefinite useful life are tested for impairment annually. After initial recognition it is determined whether an intangible asset has a finite or an indefinite useful life. Intangible assets with definite useful life are stated at cost less accumulated amortization and impairment losses. The cost of intangible assets with a finite useful life is amortized on a straight-line basis over the period in which the asset is expected to be used. The Group has the following types of intangible assets with definite useful lives, which are amortized on straight line basis over the following estimated useful lives: Customer relationships Software Property rights Other 9 years 3 years 1-43 years 1-16 years Customer relationships represent the value of the Group s cable customer base. The useful life of customer relationships was determined based on the average churn period of such customers. Software is stated at the cost incurred to acquire and bring to use the specific software assets less accumulated amortization and impairment losses. Property rights represent amounts paid for the right to use third party property for the placement of telecommunication equipment. Useful lives are determined based on the underlying contracts. Other intangible assets include subscriber acquisition costs, which are sales commissions paid to internal sales force and third parties in relation to fixed term subscriber contracts. Subscriber acquisition costs are amortized over the term of the related subscriber contracts. Amortization of intangible assets ceases at the earlier of the date that the asset is classified as held-for-sale in accordance with IFRS 5 Non-current assets held-for-sale and discontinued operations and the date the asset is derecognized. The amortization periods are reviewed annually at each financial year-end. Any changes arising from such review are accounted for as a change in an accounting estimate. Page 31 of 89

32 2.13. Property, Plant and Equipment Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labor and an appropriate proportion of overhead, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the cost of dismantling and removing the items and restoring the site on which they are located. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment. Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Capital work in progress is stated at cost less accumulated impairment losses and represents property, plant and equipment in the capital work in progress stage. Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. An asset acquired by way of a finance lease is measured initially at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Leased assets are depreciated over the shorter of the lease term or their useful lives unless it is reasonably certain that ownership will be obtained by the end of the lease term. Other leases are operating leases and the leased assets are not recognized in the consolidated balance sheet. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditure is included in the carrying amount if it is probable that future economic benefits embodied in that expenditure will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. All other expenditures are recognized in the consolidated income statement as an expense as incurred. Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Land and capital work in progress are not depreciated. The estimated useful lives are as follows: Buildings Network and equipment Other equipment years 3-25 years 3-7 years Page 32 of 89

33 Depreciation of property, plant and equipment ceases at the earlier of the date that the asset is classified as held-for-sale in accordance with IFRS 5 Non-current assets held-for-sale and discontinued operations and the date the asset is derecognized. Depreciation methods, useful lives and residual values are reviewed annually at each financial year-end. Any changes arising from such review are accounted for as a change in an accounting estimate Impairment of Non-Financial Assets Assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. For goodwill and intangible assets with an indefinite useful life or not available for use, the recoverable amount is estimated annually, irrespective of whether any indication of impairment exists. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. A cashgenerating unit is the smallest identifiable asset group that generates cash flows that are largely independent from other assets and groups. Impairment losses are recognized in the consolidated 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 fixed assets with any residual amount reducing the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss on non-financial assets other than goodwill 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 Non-Current Assets (or Disposal Groups) Held-for-Sale Non-current assets (or disposal groups) are classified as held-for-sale when their carrying amount is to be recovered principally through a sale transaction and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use Borrowings Borrowings are recognized initially at fair value net of transaction costs. Subsequent to initial recognition, borrowings are stated at amortized cost with any difference between initial cost and redemption value being recognized in the consolidated income statement over the period of the borrowings on an effective interest basis. Costs and expenses directly related to raising funds and borrowings or refinancing are deferred and amortized using the effective interest rate method. Such transaction costs are disclosed in the consolidated balance sheet as a reduction of borrowings. Page 33 of 89

34 2.17. Provisions Provisions for restructuring costs and legal claims are recognized in the consolidated balance sheet when the Group has a legal or constructive obligation as a result of past events that can be measured reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. A provision for restructuring is recognized when a detailed and formal restructuring plan is approved, and the restructuring has either commenced or has been announced publicly. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the obligation. Provisions are not recognized for future operating costs or losses Revenue Recognition Revenues are primarily earned from providing access to and usage of our networks and facilities. Access revenue is billed one month in advance and recognized the following month when earned. Revenues based on measured traffic are recognized when the service is rendered. Revenue from connection fees are recognized upon service activation. Wholesale data revenue from leased lines is based on the bandwidth of the service and the particular route involved and is recognized in the period of usage or when the service is available to the customer. From time to time, we sell fiber optical assets to other telecommunications companies. Revenue is recognized as and when the transfer of ownership is complete. Revenue from contracts relating to Indefeasible Rights of Use ( IRU ) comprises installation fees, oneoff or up-front fees, monthly fees and maintenance fees. One-off or up-front fees of IRU contracts are deferred over the term of the related contract. Installation fees, monthly fees and maintenance fees are charged periodically as specified in the related contract and the revenue is recognized straight-line over the life of the related contract. Revenues and cost of sales from other network operators for IRU contracts are shown net where a right of set-off exists and the amounts are intended to be settled on a net basis. Third parties using the Group s telecommunications network include roaming customers of other service providers and other telecommunications providers which terminate or transit calls on the Group s network. These wholesale traffic revenues are recognized in the period of related usage. A proportion of the revenue received is often paid to other operators for interconnection for the use of their networks, where applicable. The revenues and costs of these transit calls are stated gross in the consolidated financial statements as the Group is the principal supplier of these services using its own network freely defining the pricing of the services, and recognized in the period of related usage. The Group s main operating revenue categories are as follows: Residential Voice. The revenue generated from the fixed line voice and voice-related services provided to residential customers in the historical concession areas ( Residential Voice In ) and out of the historical concession areas ( Residential Voice Out ). Residential Voice revenue comprises time based call charges, subject to a minimum monthly fee charged for accessing the network and time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in the Group s network, monthly fees for value added services, one-off connection and new service fees, as well as monthly fees for packages with built-in call minutes. Residential Voice In revenue also includes access calls to dial-up ISPs networks at local call tariffs and revenue from providing DSL access to other ISPs, but revenue from bundled Internet call and Internet services is recorded under Residential Internet. Page 34 of 89

35 Residential Internet & TV. The revenue generated from dial-up and DSL Internet connections provided to residential customers nationwide both inside and outside the historical concession areas. Residential Internet comprises dial-up revenue, which is generated through a combination of time based and access fees, and DSL revenue, which is generated through a variety of monthly packages. Cable. The revenue generated from the provision of cable voice, broadband internet and TV services to residential customers outside our historical concession areas using our cable network acquired in the Fibernet acquisition. We charge our Cable voice customers a monthly subscription fee. We generally charge our Cable TV and internet customers a monthly subscription fee. Corporate. The revenue generated from the fixed line voice, data and Internet services provided to business, government and other institutional customers nationwide. Corporate revenue comprises access charges, monthly fees, time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in the Group s network, monthly fees for value added services, Internet access packages and regular data transmission services. Corporate revenue includes the same components as Residential Voice In and Residential Internet revenues and includes, in addition, revenue from leased line, Internet and data transmission services which is comprised of fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Wholesale. The revenue generated from voice and data services provided on a wholesale basis to a selected number of resellers to use the Group s excess network capacity. Wholesale revenue comprises rental payments for high bandwidth leased line services, which are based on the bandwidth of the service and the distance between the endpoints of the customers, and voice transit charges from other Hungarian and international telecommunications service providers, which are based on the number of minutes transited Pension Costs and Employee Benefits Contributions are made to the Hungarian pension, health and unemployment schemes at the statutory rates in force during the year, based on gross salary payments to employees. The cost of social security payments is charged to the income statement in the same period when the related salary costs incurred. The Group has no obligation for defined benefit pension or other post employment benefits beyond the government programs. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under shortterm cash bonuses or profit-sharing plans 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 Share Capital Incremental costs directly attributable to issue of ordinary shares and share options are recognized as a deduction from equity. When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity until cancelled. Page 35 of 89

36 2.21. Financial Income and Expenses Financial income includes dividend income, foreign exchange gains, interest income on funds invested and gains resulting from the changes in the fair values of derivative financial instruments. Interest income is recognized in the consolidated income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognized in the income statement 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. Financial expenses comprise of interest expense on borrowings, foreign exchange losses, losses resulting from the changes in the fair values of derivative financial instruments and impairment losses on financial investments. All borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in profit or loss in the period in which they are incurred Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made in respect of operating leases are charged to the profit or loss on a straight-line basis over the lease term and included in operating expenses. The Group leases certain property, plant and equipment. Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the lease s commencement at the lower of the fair value of the leased property and the present value of future minimum lease payments. Lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding lease 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 Current and Deferred Income Taxes The tax expense for the period comprises current and deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Current tax is the expected tax payable on taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date in the countries where the Group s enterprises operate and generate income and any adjustment to tax payable in respect of previous years. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable tax regulations are subject to interpretations. It establishes provisions where amounts are expected to be paid to the tax authorities. These provisions are classified as other payables in the consolidated balance sheet. Page 36 of 89

37 Deferred tax is provided for using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using the appropriate tax rate enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention or permissiability by a tax authority to settle balances on a net basis. Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realized Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Management Team. The Group has five operating segments that are identified in the accounting policy relating to revenue in accounting policy note 2.18 Revenue recognition. Allocation of revenues and cost of sales and other segment information into operating segments is based on management information collected in the information systems Critical Accounting Estimates and Judgements The management of the Group makes estimates and assumptions concerning the future. The estimates and assumptions that have a significant risk of affecting the carrying amounts of assets and liabilities in the consolidated financial statements are described below. For the year ended December 31, 2013 revenue and cost of sales includes a transaction recognized on gross basis in the amount of EUR 2,902 thousand and EUR 2,891 thousand respectively. Management believes recognition on gross basis is appropriate because the Group negotiated the relating purchase contract and consequently had a significant effect on the determination of the margin relating to this transaction. Furthermore the Group has the capability and intention to provide additional services to this customer. Based on the above analysis the Group has decided to account for this transaction on a gross basis. The Group recognizes deferred tax assets in its consolidated balance sheet relating to tax loss carry forwards if certain conditions are met. The recognition of such deferred tax assets is subject to the utilization of tax loss carry forwards. The utilization of such tax loss carry forwards is dependent on the amount of future taxable income of the Group companies. The accounting estimate related to the deferred tax assets is a critical accounting estimate since it involves assumptions and judgments about future taxable income of the Group. In light of the expected amount of taxable profits the Group has not recognised any deferred tax asset. Page 37 of 89

38 The Group maintains an impairment provision for doubtful accounts for estimated losses resulting from customers or carriers failure to make payments on amounts due. These estimates are based on a number of factors including: 1) historical experience; 2) aging of trade accounts receivable; 3) amounts disputed and the nature of the dispute; 4) bankruptcy; 5) general economic, industry or business information; and 6) specific information that we obtain on the financial condition and current credit worthiness of customers or carriers. The estimates used in evaluating the adequacy of the impairment provision for doubtful accounts receivable are based on the aging of the accounts receivable balances and historical write-off experience, customer credit-worthiness, payment defaults and changes in customer payment terms. The accounting estimate related to the impairment provision for doubtful accounts receivable is a critical accounting estimate since it involves assumptions about future customer behavior and the resulting future cash collections (see note 13 Trade and Other Receivables ). Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortized on a straight-line basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technology evolution and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually. The accounting estimate related to the determination of the useful lives of assets is a critical accounting estimate since it involves assumptions about technology evolutions in an innovative industry. Further, due to the significant weight of long-lived assets in the asset base, the impact of any changes in these assumptions could be material to the consolidated financial statements. As an example, if the Group was to shorten the average useful life of its assets by 10%, this would result in additional annual depreciation and amortization expense of approximately EUR 5.5 million and EUR 5.9 million for the years ended December 31, 2013 and 2012, respectively. 3. Revenue For the year ended December Residential Voice Residential Internet & TV Cable Corporate Wholesale Total Revenue Page 38 of 89

39 4. Cost of Sales, Exclusive of Depreciation For the year ended December Restated Sales commissions (2 636) (2 991) Interconnect expenses (7 105) (9 301) Access type charges (8 606) (9 433) Other cost of sales (18 810) (10 538) Network operating expenses (18 616) (20 260) Direct personnel expenses (9 740) (11 313) Total Cost of Sales, Exclusive of Depreciation (65 513) (63 836) Network operating expenses include the maintenance cost of the telecommunication infrastructure of the Group and its network related support and rental fees. Such support and rental fees amounted to EUR 3,131 thousand and EUR 3,482 thousand for the years ended December 31, 2013 and 2012, respectively. Other cost of sales increased due to higher sales volumes relating to IPTV, ICT and sale of telecom and IT equipment to Residential Internet & TV and Corporate segment customers. 5. Operating Expenses For the year ended December Restated Personnel expenses (19 320) (20 089) Operating and other taxes (12 713) (3 726) Headcount-related costs (7 775) (10 016) Advertising and marketing costs (3 754) (3 536) IT costs (3 670) (4 482) Collection costs (1 735) (132) Bad debt expense (1 268) (1 398) Legal and audit fees (439) (335) Consultant expenses (158) (353) Management fees 413 (1 030) Expenses relating to strategic projects (1 506) (60) Crisis tax - (9 379) Other cost, net (234) (670) (52 159) (55 206) Less: Capitalised costs Total Operating Expenses (48 678) (50 035) Page 39 of 89

40 The increase in operating and other taxes is due to the introduction of a new telecom tax and utility tax by the Hungarian Government from July 1, 2012 and January 1, 2013, respectively. The new telecom tax imposed on fixed and mobile usage and amounts to HUF 2 per minute and HUF 2 per SMS/MMS and from January 1, 2013 is capped at HUF 700 per month for individuals and HUF per month for companies. From August 1, 2013, the cap was changed to HUF per month for companies and tax imposed on fixed and mobile usage amounts to HUF 3 per minute and HUF 3 per SMS/MMS. The annual telecom tax liability recorded for 2013 was EUR 3.7 million. The utility tax is effective from January 1, 2013 and is payable by energy and water utility companies, fixed line telecom service providers and cable operators and amounts to HUF 125 per meter of the owned utility networks. Buried pipes and cables as well as lines on utility poles are also subject to the utility tax. The annual utility tax liability for 2013 was recorded by the Company as of January 1, 2013 in the amount of EUR 7.1 million. Collection costs increased due to the fact that the Group is no longer allowed to pass on the cost of postal payments (yellow check fees) to its customers effective from September 1, This had an increasing impact on cost of collection of EUR 1,606 thousand. Management fees relate to costs charged by the trustee of Matel as well as management fee paid to Mid Europa. Based on the Restructuring Agreement signed on July 15, 2013 (see Note 1.1 Restructuring ) all accrued Mid Europa management fees, including third and fourth quarter 2012 fees have been reversed and no further accruals are made. The reversed amount was EUR 1.0 million, from which EUR 0.5 million related to the financial year of Expenses relating to strategic projects mainly include legal and financial consulting expenses related to major projects of the Group as well as the cost of the management retention programme (see note 15 Management Compensation ). The crisis tax was introduced by the Hungarian Government as of October 20, 2010 with retrospective effect to January 1, 2010 until December The tax was calculated as a percentage of telecommunication services revenue based on the following rates: 0% up to HUF 500 million, 4.5% between HUF 500 million and HUF 5 billion and 6.5% for excess over HUF 5 billion. Capitalized costs include labor expenses associated with the construction of property, plant and equipment of the Group. 6. Personnel Expenses For the year ended December Salaries (10 418) (11 200) Social security and other contributions (2 977) (3 378) Personnel related expenses (3 309) (2 644) Bonuses and charges (2 616) (2 867) Total Personnel Expenses (19 320) (20 089) The number of employees of the Group was 1,173 and 1,196 as of December 31, 2013 and 2012, respectively. Page 40 of 89

41 7. Depreciation and Amortization For the year ended December Restated Amortization (8 663) (10 358) Depreciation (39 592) (41 953) Impairment loss (353) (31 620) Total Depreciation and Amortization (48 608) (83 931) Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s value in use and fair value less cost to sell, which considers a number of factors, including, future cash flows, technological obsolescence, discontinuation of services and other market evidence. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash-generating units. The Group has performed impairment reviews of its non-financial assets in accordance with its accounting policy for the years ended December 31, 2013 and Upon such review, no impairment charge arose for the year ended December 31, The recoverable amount of all cash generating units has been determined based on fair value less cost to sell calculation. For determining fair value less cost to sell, the Group used the EBITDA multiples method. Based on publicly available transaction data, two different multiples were used in the model that correspond to the acquisitions of European telecommunications companies in the period September 1, 2009 to November 30, One of the multiples takes the average of the EBITDA multiples with respect to the recent acquisitions of European incumbent telecommunication companies, and another multiple, specifically based on acquisitions of European cable companies. The latter multiple was applied to the cable segment and the former one was used for the remaining segments in the model. EBITDA was determined based on the Group s financial performance and amounted to EUR 48,327 thousand. If the EBITDA multiple used in the model had been 0.5 units lower, the carrying value of the assets would have equalled to the net recoverable amount with respect to the wholesale segment. Further lowering the EBITDA multiples would have resulted in an impairment charge for the period ended December 31, Apart from the annual impairment review of non-financial assets, the Group accounted for the following impairment charges in connection with individual assets due to physical damages and deterioration: impairment charge of EUR 353 thousand for the period ended December 31, 2013 in relation to the property, plant and equipment. For the year ended December 31, 2012, in connection with the annual impairment review, an impairment loss of EUR 31,620 thousand was recognized. The impairment loss realized related to the Residential Voice, Residential Internet & TV and Corporate Voice segments of the Group. The estimated value in use calculates with a 10% pre-tax discount rate, 1% growth rate (in perpetuity) and estimated cash flows until For determining fair value less cost to sell, the Group used the EBITDA multiples method. The multiples used correspond to recent acquisition transactions of similar companies. EBITDA was based on the Group s annual budget for The recoverable value of the assets is the higher of the fair value less costs to sell and the value in use. The fair value less cost to sell method resulted in a write down of property, plant and equipment and intangible assets by EUR 31,620 thousand for the year ended December 31, If the Group used one time lower EBITDA multiple for each segment in its impairment calculation, this would have resulted in an additional impairment charge of EUR 23.2 million for the year ended December 31, Page 41 of 89

42 8. Cost of Restructuring For the year ended December Severance (1 300) (3 032) Cost of reorganization - (119) Total Cost of Restructuring (1 300) (3 151) Severance expense for the years ended December 31, 2013 and December 31, 2012 mainly related to headcount reductions in Invitel. 9. Financial Income and Expense For the year ended December Interest income Fair value change of derivative financial instruments Net foreign exchange gain Financial Income Related party interest expense - (1 173) Third party interest expense (22 560) (33 249) Amortization of bond discount (553) (771) Amortization of deferred borrowing costs (2 250) (2 981) Other interest expense (601) (557) Interest expense (25 964) (38 731) Net foreign exchange loss - (1 796) Fair value change of derivative financial instruments (32) (1 805) Other financial expense (84) (4 859) Financial Expense (26 080) (47 191) Interest income in 2013 and 2012 relates to cash and cash equivalents. The unrealized gain on the fair value change of derivative financial instruments amounted to EUR 575 thousand and the unrealized gain on the fair value change of derivative financial instruments amounted to EUR 1,091 thousand for the year ended December 31, All related party loan balances have been waived during 2012, therefore no related party interest expense has been charged for the year 2013 (see note 28 Related Party Transactions ). Page 42 of 89

43 As of August 18, 2011 Invitel Holdings A/S, the former holding company of the Group, owed EUR 3,294 thousand intercompany loan and EUR 1,219 thousand other debt for recharged services to Invitel. The intercompany loans were interest free with maturity of December 31, An assignment agreement dated August 18, 2011 was concluded between Hungarian Telecom Cooperatief UA. ( Coop ) one of the current holding companies of the Group and Invitel, according to which the amount owed by Invitel Holdings A/S was overtaken by Coop towards Invitel with the total amount of EUR 4,513 thousand. On June 30, 2012 Invitel and Coop declared the forgiveness of the total debt by not requiring any consideration in return and the related expense was recognized in other financial expense for the year ended December 31, 2012 (see note 28 Related Party Transactions ). This amount was recorded as other financial expense for the year ended December 31, Intangible Assets Movements during the period in the intangible assets of the Group were as follows: Software Property Rights Goodwill Other ( in thousands of EUR ) Total Intangible Assets Cost at January 1, 2012 (Prior to Restatement) Restatement in Relation to Prior Year Error (298) (298) Restatement in Relation to Accounting Policy Change (574) (574) Cost at January 1, 2012 (Restated) Retirement - - (14 944) - (14 944) Additions during the year Reclassification Disposals during the year (294) (294) Restatement in Relation to Prior Year Error (275) (275) Restatement in Relation to Accounting Policy Change (1 207) (1 207) Effect of exchange rates Cost at December 31, 2012 (Restated) Accumulated amortization at January 1, 2012 (Prior to Restatement) (47 407) (21 130) (13 991) (24 285) ( ) Restatement in Relation to Prior Year Error Restatement in Relation to Accounting Policy Change Accumulated amortization at January 1, 2012 (Restated) (47 377) (21 130) (13 991) (24 127) ( ) Amortization charge for the year (2 932) (2 651) - (5 661) (11 244) Retirement Impairment for the year (79) (1 745) - - (1 824) Reclassification - (215) - - (215) Disposals during the year Restatement in Relation to Prior Year Error Restatement in Relation to Accounting Policy Change Effect of exchange rates (3 381) (962) (953) (1 497) (6 793) Accumulated amortization at December 31, 2012 (Restated) (53 340) (26 703) - (30 534) ( ) Carrying value at January 1, 2012 (Restated) Carrying value at December 31, 2012 (Restated) Cost at January 1, Additions during the year Reclassification (197) (789) - (886) (1 872) Effect of exchange rates (1 104) (766) - (815) (2 685) Cost at December 31, Accumulated amortization at January 1, 2013 (53 340) (26 703) - (30 534) ( ) Amortization charge for the year (2 480) (2 059) - (4 124) (8 663) Reclassification Effect of exchange rates Accumulated amortization at December 31, 2013 (54 610) (27 469) - (33 177) ( ) Carrying value at January 1, Carrying value at December 31, Page 43 of 89

44 From January 1, 2013 the Group has changed its accounting policy with respect to accounting for Corporate segment sales commissions relating to contracts that are managed on a portfolio basis (see note 2.3 Chages in Accounting Policies ). For the year ended December 31, 2012 the Group accounted for impairment in relation to intangible assets in the amount of EUR 1,824 thousand (see note 7 - Depreciation and Amortization ). Other intangible assets include capitalized customer acquisition costs (mainly sales commissions) and customer relationship in the amount EUR 2,416 thousand and EUR 8,204 thousand as of December 31, The net book value of capitalized subscriber acquisition costs which are internally generated amount to EUR 2,416 thousand and EUR 3,107 thousand as of December 31, 2013 and 2012, respectively. 11. Property, Plant and Equipment Movements in property, plant and equipment of the Group were as follows: Land and Buildings Network and Equipment Other Capital Work In Progress Total Property, Plant and Equipment ( in thousands of EUR ) Cost at January 1, Additions during the year Transfers from capital WIP (38 799) - Disposals during the year (1) (1 453) (710) - (2 164) Effect of exchange rates Cost at December 31, Accumulated depreciation at January 1, 2012 (2 074) ( ) (12 289) - ( ) Depreciation charge for the year (467) (39 917) (1 569) - (41 953) Impairment for the year (363) (29 429) (4) - (29 796) Disposals during the year Effect of exchange rates (127) (29 567) (951) - (30 645) Accumulated depreciation at December 31, 2012 (3 031) ( ) (14 108) - ( ) Carrying value at January 1, Carrying value at December 31, Cost at January 1, Additions during the year Reclassification - (6) Transfers from capital WIP (24 665) - Disposals during the year (957) (639) (35) - (1 631) Retirement Effect of exchange rates (106) (14 256) (442) (185) (14 989) Cost at December 31, Accumulated depreciation at January 1, 2013 (3 031) ( ) (14 108) - ( ) Depreciation charge for the year (421) (37 862) (1 309) - (39 592) Impairment for the year (224) (87) (42) - (353) Reclassification - 6 (91) - (85) Disposals during the year Retirement (201) (201) Effect of exchange rates Accumulated depreciation at December 31, 2013 (2 864) ( ) (15 110) - ( ) Carrying value at January 1, Carrying value at December 31, Page 44 of 89

45 Network and equipment includes all tangible assets associated with the telecommunications network and related equipment of the Group. Network and equipment also includes the cost of assets where the Group is the lessee under finance leases in the amount of EUR 2,849 thousand and EUR 2,904 thousand and accumulated depreciation of EUR 400 thousand and EUR 323 thousand as of December 31, 2013 and 2012, respectively. Other assets include other non-telecom equipment, fixtures and fittings, vehicles and computers. Capital work in progress includes property, plant and equipment in the course of construction. After completion, such assets are put into operation (capitalized) and are transferred to the appropriate fixed asset categories. No depreciation is charged on capital work in progress. The impairment of EUR 29,796 thousand for the year ended December 31, 2012 relates to the write down of assets as a result of the annual review of impairment (see note 7 Depreciation and Amortization ). 12. Cash and Cash Equivalents At December (in thousand of EUR) Cash on hand and in banks Cash deposits - - Total Cash and Cash Equivalents Out of the total of cash and cash equivalents of EUR 21,702 thousand as of December 31, 2013, the EUR denominated part is EUR 9,356 thousand or 43%, the USD denominated part is EUR 8 thousand or 1%, the HUF denominated part is EUR 12,072 thousand or 55% and the GBP denominated part is EUR 266 thousand or 1%. Out of the total of cash and cash equivalents of EUR 13,928 thousand as of December 31, 2012, the EUR denominated part is EUR 5,464 thousand or 39%, the USD denominated part is EUR 1 thousand or 1% and the HUF denominated part is EUR 8,463 thousand or 60%. The 2013 Notes Indenture (see note 17 Borrowings ) limits time deposits to be placed to banks having at a rating of A or better by Standard & Poor s and A2 or better by Moody s. Following the bank downgrades in June 2012 none of the Group s existing banks fulfilled the above requirement therefore the Group could no more invest its free cash into time deposits. As no such limitation applies for the cash kept on current accounts, the Group continued to keep free cash on the current accounts of its existing banks. Page 45 of 89

46 The Group keeps its free cash at the following banks rated by Moody s as follows: At December K&H Bank - subsidiary of KBC Bank N.V. A3 A3 MKB Bank - subsidiary of Bayerische Landesbank Baa1 Baa1 Unicredit Bank - subsidiary of Unicredit Bank Austrisa AG Baa1 A3 Raiffeisen Bank - subsidiary of Raiffeisen Bank International AG A2 A2 BNP Paribas A2 A2 ING Bank Branch of ING Bank N.V. A2 A2 CIB Bank - Intesa Sanpaolo Spa Baa2 Baa2 OTP Bank Ba2 Ba2 In 2013, out of its cash and cash equivalents, the Group held EUR 5,391 thousand in banks rated A2; EUR 5,065 thousand in banks rated A3; EUR 11,188 thousand in banks rated Baa1; EUR 33 thousand in banks rated Ba2 and EUR 25 thousand in non-rated banks or in other form (e.g. petty cash). The Group has no cash and cash equivalents in banks rated Baa2 as at December 31, In 2012, out of its cash and cash equivalents, the Group held EUR 547 thousand in banks rated A2; EUR 10,564 thousand in banks rated A3; EUR 2,512 thousand in banks rated Baa1; EUR 41 thousand in banks rated Baa2; EUR 56 thousand in banks rated Ba2 and EUR 208 thousand in non-rated banks or in other form (e.g. petty cash). 13. Trade and Other Receivables At December Trade accounts receivable Provision for impairment of trade receivables (5 447) (6 667) Other receivables Total Trade and Other Receivables Other receivables as of December 31, 2013 mainly include advances given relating to deposits in the amount of EUR 901 thousand, prepaid rental fees in the amount of EUR 1,478 thousand as well as corporate income tax and VAT receivables in the amount of EUR 1,130 thousand. Other receivables as of December 31, 2012 mainly include advances given relating to deposits in the amount of EUR 1,804 thousand, prepaid rental fees in the amount of EUR 2,174 thousand as well as corporate income tax and VAT receivables in the amount of EUR 1,646 thousand. Page 46 of 89

47 The carrying amounts of trade and other receivables are denominated in the following currencies: Currency At December in HUF in EUR Total Trade and Other Receivables The aging analysis of trade receivables of the Group are as follows: At December Not past due past due by less than 30 days past due by days past due by days past due by days past due by over 360 days Total Trade Accounts Receivable The vast majority of past due trade receivables are partly or fully provided for depending on the period of delay of payments. Only insignificant amounts of past due trade receivables are not provided for based on past experience of payment behavior of certain business customers. As these amounts are not significant, these are not disclosed separately. Non past due receivables are not assessed collectively for impairment, but in case of bankruptcy of the customer non past due receivables may have to be partly or fully provided for, the amount of which is not significant, therefore, not disclosed separately. The non past due trade receivables represent approximately one month of revenue. The Group has no collateral related to its trade receivables. The Group s not past due receivables are rated as follows: At December Aa A A Baa Baa Ba Residential - non-rated Corporate & Wholsale - non-rated Other operating receivable Total Not Past Due Page 47 of 89

48 Movements in the provision for impairment of trade receivables of the Group are as follows: Opening at January 1 (6 667) (10 672) Provision for receivables impairment (1 555) (2 149) Receivables written off during the year as uncollectible Amounts reversed 73 - Effect of exchange rates 127 (758) Closing at December 31 (5 447) (6 667) The creation and release of provision for impaired receivables are included in bad debt expense within operating expenses in the consolidated income statement. Amounts of impairment provision are generally written off when there is no expectation of recovering additional cash. 14. Other Current Assets At December Inventories Prepayments and accrued income Total Other Current Assets Management Compensation A Management Incentive Plan ( MIP ) was introduced to the Executive Management Team of Invitel in Q2 of 2012 but was subsequently cancelled in Q3 of 2012 due to the Restructuring. The MIP was replaced by a management retention programme in 2013 (the Retention Programme ), which forms part of the management s employment/service contracts. Under the Retention Programme, each member of the Executive Management Team is entitled to a bonus payment of up to 150% of their annual salary (the Bonus Amount ). Page 48 of 89

49 The terms of the Bonus Amount vary according to the provisions of each member s employment contract. For certain members, 40% of the Bonus Amount has been designated as a guaranteed payment (the Guaranteed Amount ), which will be paid from an escrow account to the respective member on January 15, 2014, provided that their employment was not terminated for cause (e.g. because of continued underperformance) before December 31, The remaining 60% of the Bonus Amount has been designated as a quarterly performance component ( QPC ), whereby payment is contingent upon satisfactory completion of certain performance targets, which the CEO of Invitel (in case of the CEO the owner) sets and evaluates each quarter. If the Executive Management Team member successfully attains the set targets at the end of each quarter following evaluation, they will receive the QPC payment. 50% of the QPC is paid directly to the Executive Management Team member, while the remaining 50% is paid into an escrow account and will be paid with, and based on the same terms and conditions as, the Guaranteed Amount. For the other Executive Management Team members, there is no Guaranteed Amount and, instead, 100% of the Bonus Amount has been designated as a QPC. As above, if the Executive Management Team member successfully achieves the required targets, as set and evaluated each quarter by the CEO, they will receive the QPC payment. As of December 31, 2013 there is no Bonus Amount, MIP or Retention Programme planned beyond January 1, The amount recorded as operating expense in relation to management compensation Retention Programme was EUR 1,476 thousand. 16. Equity As of December 31, 2012 the authorized share capital of Matel was EUR 408,600,000 divided into 90,000,000 shares with a par value of EUR 4.54 each. As of December 31, 2012 the issued share capital of Matel was EUR 92,201 thousand being 20,308,640 issued shares. During the 2013 December Refinancing, 20,308,640 shares have been split and converted into 9,220,122,560 A shares with a nominal value of EUR 0.01 each, leaving the total issued share capital of Matel unchanged with respect to A shares. Immediately after the 2013 December Refinancing 20,494,639,650 B shares were issued with a nominal value of EUR 0.01 each, amounting to a total issued capital of B shares of EUR 204,947 thousand. As of December 31, 2013 all A shares are owned by Mid Europa, representing 51% of the share capital of Matel and all B shares are owned by Matel Holdings Limited, a newly formed entity owned by the noteholders, representing 49% of the total share capital of Matel. The issued capital is fully paid in. The balance of capital reserve includes the amounts of share capital of former legal entities merged into Matel in the amount of EUR million and a capitalized shareholder loan that was provided to the Group during 2009 in the amount of EUR million. Additional shareholder loan was capitalized during 2012 in the amount of EUR 3.0 million relating to the waiving of receivables and liabilities with related parties in connection with the liquidations of former holding companies of Matel. These include balances with Matel Holdings N.V. and Holdco I B.V. During 2013 MEP paid in additional capital of EUR 15 million recorded as capital reserve as part of the Restructuring as described in note 1.1 Restructuring. There are no restrictions for distribution regarding these amounts. The hedging reserve contained during 2012 and 2013 the effective portion of the mark-to-market revaluation of derivative financial instruments used for cash-flow hedging of the interest payments of the 2009 Notes. At the end of 2013 there are no open cash-flow hedges for the interest payments of the 2013 Notes. Page 49 of 89

50 The balance of other reserves as of December 31, 2013 and 2012 includes the equity adjustment relating to the acquisition of Hungarotel and Pantel by Matel on April 27, 2007 with EUR 16,693 thousand. This acquisition was accounted for as a transaction between entities under common control at predecessor value and the equity adjustment represents the difference between the value of the investment and the net assets acquired by Matel. As of December 12, 2013 in connection with the 2013 December Refinancing Matel recorded an adjustment of EUR 119,553 thousand to other reserve to reflect the fair value of the equity instrument issued to noteholders (the B shares) in exchange for EUR 173,956 thousand of the 2009 Notes. The balance of cumulative translation reserve comprises all foreign exchange differences arising from the translation into EUR of the financial statements of foreign operations whose functional currency is not EUR. As of December 31, 2013 and 2012 the non-controlling interest related to the 0.01% investments held in Invitel by local municipalities. 17. Borrowings At December Notes net of bond discount Notes re-purchased - (21 041) 2009 Notes Notes Deferred borrowing costs of 2009 Notes - (9 401) Total Borrowings On July 15, 2013 Matel entered into an agreement to implement a Restructuring of its balance sheet with an informal group (the Noteholder Group ) of holders of the net outstanding EUR 329 million 2009 Notes due 2016 (the 2009 Notes ). Under the terms of the Restructuring, EUR million of the 2009 Notes was exchanged into new notes (the 2013 Notes ). The 2013 Notes were issued by Matel on December 12, 2013, in the principal amount of EUR 150,051,000 at 100% issue price. Mid Europa invested EUR 25.0 million consisting of EUR 15.0 million as additional cash contribution (see note 16 Equity ) and EUR 10.0 million as debt (the Sponsor Notes ), which ranks pari passu with the 2013 Notes. The EUR 15.0 million new equity investment was used to buy back 2013 Notes (and corresponding equity entitlement). The remaining EUR million of the 2009 Notes, together with all accrued interest, was converted into 49% of the pro-forma post-restructuring equity in the Group which is held by Matel Holdings Limited, a newly formed entity. Matel Holdings Limited s shares are stapled to the 2013 Notes. Mid Europa retained 51% of the post-restructuring equity in the Group. EUR 21.0 million of the 2009 Notes held by the Group in treasury were cancelled as part of the Restructuring. Page 50 of 89

51 A gain on extinguishment of debt of EUR 81,110 thousand was recorded in the consolidated statement of profit and loss and other comprehensive income in connection with the 2013 December Refinancing, comprising of: (i) the gain of EUR 88,563 arising from the difference between the extinguishment of the 2009 Notes and the fair value of equity instrument issued to the noteholders, (ii) the write-off of accrued interest on the 2009 Notes relating to the period until June 15, 2013 in the amount of EUR 15,625 thousand, reduced by (iii) the write-off of transaction costs and bond discount relating to the 2009 Notes in the amount of EUR 8,907 thousand and (iv) refinancing costs in the amount of EUR 14,171 thousand. The fair value of the equity instruments issued to the Noteholders was determined using the EBITDA multiple method (see note 7 Depreciation and Amortization ). On December 12, 2013, Matel issued senior secured notes in the principal amount of EUR 150,051,000 (the 2013 Notes ). The 2013 Notes mature in 2018 and are subject to the indenture dated December 12, 2013 (the 2013 Notes Indenture ). The 2013 Notes are listed on the Luxembourg Stock Exchange, and are governed by New York law. The Notes are fully and unconditionally guaranteed on a senior basis by Invitel, ITC and Invitel International Holdings. The guarantees are subject to contractual and legal limitations, and may be released under certain circumstances. The 2013 Notes are secured by first-priority security interests over certain assets of Matel and certain Guarantors. The security interests are subject to limitations under applicable laws and may be released under certain circumstances. The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from June 15, 2013 and is paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. Matel may redeem the 2013 Notes at any time at a redemption price of 100% plus accrued and unpaid interest, if any to the date of redemption. Subject to retaining a minimum cash balance and certain other requirements as set out in the 2013 Notes Indenture, Matel must redeem the 2013 Notes at a redemption price of 100% plus accrued and unpaid interest, if any to the date of redemption with the proceeds of certain asset sales. If Matel undergoes a change of control, Matel may be required to make an offer to purchase the 2013 Notes. The 2013 Notes Indenture contains covenants restricting Matel s ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries or the making of loans, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets, (viii) merge, consolidate, amalgamate or combine with other entities, (ix) designate subsidiaries as unrestricted subsidiaries, (x) de-list the notes, (xi) impair any security interests and (xii) engage in any business other than specifically enumerated activities. The 2013 Notes Indenture also contains customary events of default, including non-payment of principal, interest, or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. Capitalized interest on the 2013 Notes as of December 31, 2013 amounted to EUR 1,501 thousand. Page 51 of 89

52 The Notes are secured by first-priority liens over the assets described below: No. Document Security Provider Secured Assets Governing law Hungarian Security 1 Stand Alone Pledge of Bank Accounts Technocom Hungarian accounts Hungarian 2 Stand Alone Floating Charge Technocom All assets of business Hungarian 3 Stand Alone Security Deposit Technocom Shares in Invitel Hungarian 4 Pledge Agreement Technocom Intra-group loans Hungarian 5 Stand Alone Pledge of Bank Accounts Matel Hungarian accounts Hungarian 6 Stand Alone Security Deposit Matel Shares in Invitel Hungarian 7 Stand Alone Quota Pledge Matel & MID-New Technocom Quotas in Technocom Hungarian 8 Stand Alone Pledge of Bank Accounts Invitel Hungarian accounts Hungarian 9 Stand Alone Floating Charge Invitel All assets of business Hungarian 10 Pledge Agreement Invitel Intra-group loans Hungarian Dutch Security 11 First Ranking Pledge of Intra-Group Rights and Claims Matel Intra-group loans Dutch 12 First Ranking Pledge over Shares Hungarian Telecom B.V. Shares in Matel Dutch 13 First Ranking Pledge over Shares Matel Holdings Limited Shares in Matel Dutch 14 First Ranking Pledge over Shares Invitel Shares in International Holdings B.V. Dutch English Security 15 Bank Account Charge Matel UK accounts English On December 9, 2009 Matel issued senior secured notes in the principal amount of EUR 345,000,000 (the 2009 Notes ). The 2009 Notes matured in 2016 and were subject to the indenture dated December 16, 2009 (the 2009 Notes Indenture ). The 2009 Notes were listed on the Luxembourg Stock Exchange, and were governed by New York law. The proceeds from the issuance of the 2009 Notes were used to refinance certain indebtedness including redeeming the remaining of the 2004 Notes and to make a consent payment to the holders of the 2007 Notes who consented to certain proposed waivers and amendments to the 2007 Notes Indenture. Interest on the 2009 Notes was payable semi-annually at an annual rate of 9.50% on June 15 and December 15 of each year, beginning on June 15, The 2009 Notes were guaranteed, by some of Matel s subsidiaries, which guarantee ranked senior in right of payment to any existing and future guarantee of Matel and the subsidiary guarantors that was subordinated in right of payment to the 2009 Notes (including the 2007 Notes). The obligations of Matel and the subsidiary guarantors were secured by first priority liens over, inter alia, all shares or quotas (as applicable), bank accounts and assets of certain of our subsidiaries. Prior to December 15, 2012, Matel had the option to redeem all or part of the 2009 Notes by paying a make-whole amount specified in the 2009 Notes Indenture and following such date at the redemption prices set forth in the 2009 Notes Indenture. In the event of a change of control at any time, Matel was required to offer to repurchase the 2009 Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of the purchase. Matel was also required to offer to purchase the 2009 Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount thereof. Page 52 of 89

53 The 2009 Notes Indenture contained covenants restricting Matel s ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries or the making of loans, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets, (viii) enter into sale and leaseback transactions, (ix) merge, consolidate, amalgamate or combine with other entities, (x) designate subsidiaries as unrestricted subsidiaries, (xi) de-list the notes, (xii) impair any security interests and (xiii) engage in any business other than specifically enumerated activities. The 2009 Notes Indenture also contained customary events of default, including non-payment of principal, interest, premium or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. On March 30, 2011 Matel issued EUR 80 million Senior Secured Notes (the Additional 2009 Notes ), which had the same obligations as the 2009 Notes. In June, September and December 2011, Matel repurchased 2009 Notes in the aggregate principal amount of EUR 21.0 million at a total purchase price of EUR 17.6 million. On December 12, 2013 Matel completed the Restructuring (see note 1.1 Restructuring ). Under the Restructuring, EUR million of the 2009 Notes was exchanged for the 2013 Notes and the remaining EUR million of the 2009 Notes, together with all accrued interest, were converted into 49% of the pro-forma post-restructuring equity in the Group which is held by Matel Holdings Limited, a newly formed entity. As of December 2012, Matel has been in compliance with all of the covenants defined in the 2009 Notes Indenture. As of December 2013 Matel has been in compliance with all of the covenants defined in the 2013 Notes Indenture. In order to reflect the new obligations under the 2013 Notes and establish the relative rights of certain creditors under Matel s financing arrangements (including priority of claims and subordination) a new Intercreditor Deed was concluded (the Intercreditor Agreement ). The Intercreditor Agreement was concluded with, among others, the security trustee, the trustee for the 2013 Notes and certain others. The Intercreditor Agreement provides that if there is an inconsistency between the provisions of the Intercreditor Agreement (regarding subordination, turnover, ranking and amendments only), and certain other documents, including the 2013 Notes Indenture governing the 2013 Notes, the Intercreditor Agreement will prevail. The Group s borrowings are repayable as of December 31, 2013 and 2012 as follows: At December Year or Less Years Years Total Borrowings Deferred borrowing costs of 2009 Notes - (9 401) Total Page 53 of 89

54 18. Financial Instruments and Financial Risk Management Financial instruments carried on the consolidated balance sheet include cash and cash equivalents, trade and other receivables, other non-current financial assets and borrowings. The Group also has derivative financial instruments that reduce the exposure to fluctuations in foreign currency exchange and interest rates and manage credit risk. The Group s financial instruments by category are as follows as of December 31, 2013: Assets at fair value through the profit and loss Loans and receivables (in thousand of EUR) Available-for-sale December 31, 2013 Assets as per consolidated balance sheet Trade and other receivables Other non-current financial assets Cash and cash equivalents Total Total Liabilities at fair value through the profit and loss Other financial liabilities (in thousand of EUR) Liabilities as per consolidated balance sheet 2013 Notes Trade and Other Payables Derivative financial instruments Total Total The Group s financial instruments by category are as follows as of December 31, 2012: Assets at fair value through the profit and loss Loans and receivables (in thousand of EUR) Available-for-sale December 31, 2012 Assets as per consolidated balance sheet Trade and other receivables Other non-current financial assets Derivative financial instruments Cash and cash equivalents Total Total Liabilities at fair value through the profit and loss Other financial liabilities (in thousand of EUR) Total Liabilities as per consolidated balance sheet 2009 Notes Trade and Other Payables Derivative financial instruments Total Page 54 of 89

55 The Group s activities expose it to a variety of financial risks: customer credit risk, liquidity risk, interest rate risk and foreign currency risk. The Group s risk management programs focuses on the unpredictability of the financial markets and seeks to minimize potential adverse effects of the Group s financial performance. Risk management is carried out by the Executive Management Team under the policies approved by the Board of Directors. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers requiring credit over a certain amount. The Group generally does not require collateral in respect of financial assets. The Group is not exposed to any significant concentration of credit risk as its customer base is widely spread. Investments are allowed in EUR or HUF denominated securities, which are freely negotiable, marketable and (1) are rated at least AA by Standard & Poor s Corporation or Aa2 by Moody s or (2) are issued by the Republic of Hungary. Transactions involving derivative financial instruments are with counterparties with whom the Group has a signed netting agreement as well as high credit ratings. Given their high credit ratings, management does not expect any counter-party to fail to meet its obligations with respect to its derivative financial instruments. The Group has made provisions of EUR 5,447 thousand and EUR 6,667 thousand for overdue receivables as of December 31, 2013 and 2012, respectively. Besides the risk on receivables the maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the consolidated balance sheet. Due to the nature of the services provided by the Group there are no significant concentrations of credit risk. Management does not expect any losses from non-performance of the financial institutions. The Group s investments in fixed-rate debt securities and its fixed-rate borrowings are exposed to a risk of change in their fair value due to changes in interest rates. The Group s investments in variable-rate debt securities and its variable-rate borrowings are exposed to a risk of change in cash flows due to changes in interest rates. As of December 31, 2013, all borrowings of the Group bear fixed rate interest, thus the Group has no more interest rate risk. The majority of the Group s recurring revenue is denominated in Hungarian forint, but its debt is 100% euro denominated. To limit the impact of fluctuations between the HUF and the EUR, the Group from time to time enters into foreign exchange forward agreements, to receive EUR and pay HUF, thereby creating the equivalent of HUF debt obligations (see note 2.8 Derivative Financial Instruments ). Page 55 of 89

56 In accordance with the Treasury Policy of the Group as approved by the Board of Directors, prudent liquidity management is maintained by means of holding sufficient amounts of cash that are available for making all operational and debt service related payments when those become due. Investments are only kept in highly liquid assets, which are readily convertible into cash. The table below provides the information on the Group s financial liabilities classified into relevant maturity groupings based on the remaining period to the contractual maturity date as of December 31, 2013 and The amounts disclosed in the table are contractual undiscounted cash flows. December 31, 2013 Total 1 year or Less 2-3 years 4-5 years After 5 years (in thousand of EUR) Borrowings and interest payments Finance lease liabilities Derivative financial instruments Trade and other payables December 31, 2012 Total 1 year or Less 2-3 years 4-5 years After 5 years (in thousand of EUR) Borrowings and interest payments Finance lease liabilities Derivative financial instruments Trade and other payables The carrying amounts of financial assets including cash and cash equivalents, trade and other receivables and trade and other payables reflect reasonable estimates of fair value due to the relatively short period to maturity of the instruments. The Group estimates the fair values of derivative financial instruments by using a model which discounts future contractual cash-flows determined based on market conditions (foreign exchange rates, yield curves in the functional currency and in the foreign currency) prevailing on the date of the valuation. The model is regularly tested against third party prices for reasonableness. The fair value represents the estimated amounts that the Group would pay or receive to terminate the contracts as of December 31, 2013 and The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments. The fair market value of the 2013 Notes approximately equals the carrying value as of December 31, Because the 2013 Notes have been issued in the Luxembourg Stock Exchange on December 12, 2013 the impact of discounting is not significant. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Page 56 of 89

57 Fair value of current and non-current derivative financial instruments is presented in the consolidated balance sheet as of December 31, 2013 and 2012 are as follows: At December Fair value of fx forward contracts - current Current Derivative Financial Instruments - Assets The tables below provide a reconciliation of the fair value of the derivative contracts outstanding as of December 31, The fair value of derivatives were recognized in the consolidated balance sheet as derivative financial instruments among current assets, non-current assets, current liabilities or non-current liabilities depending on the maturity of the contracts. At December 31, 2012 Asset Liability Net Fair value of foreign currency forward contracts - current The following table shows the sensitivity of debt instruments and derivatives of the Group and the related transactions to foreign currency exchange rate and interest rate changes as of December 31, 2013 and 2012: 2013 Notional amount 1% p.a. increase in EURIBOR 20% increase in HUF/EUR fx rate Debt Net profit impact on debt services 2013 Notes (2 132) Total (2 132) 2012 Notional amount 1% p.a. increase in EURIBOR 20% increase in HUF/EUR fx rate Debt Net profit impact on debt services 2009 Notes (6 650) Total (6 650) 2012 Notional amount 1% p.a. increase in EURIBOR 20% increase in HUF/EUR fx rate Derivatives Net profit impact on related derivatives Forward deals (71) Total (71) Page 57 of 89

58 The above table shows the impact of a 1% increase in interest rates (e.g. BUBOR and EURIBOR) and a 20% increase in the EUR/HUF exchange rate on the interest payable on the notes and the fair value of derivative financial instruments as of December 31, 2013 and The Group s objectives when managing capital are to safeguard the Group s ability to continue as a going concern (see note 1.1 Restructuring ). 19. Other Non-Current Liabilities At December Deferred income Financial lease liabilities (Note 24) Other non-current liabilities Total Other Non-Current Liabilities Deferred income includes the long-term part of deferred income related to IRU contracts. Out of the total of deferred income of EUR 7,325 thousand as of December 31, 2013, the EUR denominated part is EUR 319 thousand or 4% and the HUF denominated part is EUR 7,006 thousand or 96%. Out of the total of deferred income of EUR 8,855 thousand as of December 31, 2012, the EUR denominated part is EUR 325 thousand or 4% and the HUF denominated part is EUR 8,530 thousand or 96%. 20. Provisions for Other Liabilities and Charges At December Provision for restructuring Other provisions Total Provisions for Other Liabilities and Charges Other provisions as of December 31, 2013 mostly relate to provisions made in connection with tax audits carried out at subsidiaries of the Group. Other provisions as of December 31, 2012 relates to provisions for legal cases of the Group. The amount of provisions made approximates the expected outflows of economic benefits. Page 58 of 89

59 Movements in the balance of provisions were as follows: At January Additions to provisions Used during the year (1 600) (1 072) Exchange differences (33) 70 At December Trade and Other Payables At December Trade payables Other payables Total Trade and Other Payables Other payables as of December 31, 2013 mainly include VAT and other taxes payables in the amount of EUR 5,167 thousand and a liability due to the minority shareholders of the International Business sold in 2010 in the amount of EUR 844 thousand. Other payables as of December 31, 2012 mainly include VAT and other taxes payables in the amount of EUR 6,004 thousand and a liability due to the minority shareholders of the International Business sold in 2010 in the amount of EUR 661 thousand. 22. Accrued Expenses and Deferred Income At December Accrued expenses Accrued interest Deferred income Total Accrued Expenses and Deferred Income Accrued expenses are mainly related to access type charges and accruals for operating expenses. Page 59 of 89

60 23. Operating Leases The Group leases various telecommunication network equipment and rights and other equipment under non-cancellable operating lease agreements. Non-cancellable future operating lease rental payments are as follows: At December year or less years years After 5 years Total Non-Cancellable Future Lease Payments Finance Leases As of December 31, 2013 and 2012 the present value of the minimum finance lease payments of the Group are as follows: At December year or less years years After 5 years Total Non-cancellable Finance Leases Payable Less Current Portion (219) (207) Non-Current Portion of Non-cancellable Finance Leases Payable Page 60 of 89

61 25. Commitments During the year ended December 31, 2013 and 2012 the Group entered into several purchase contracts and commitments for future capital expenditures (including the purchase of new equipment or upgrading existing equipment). Current projects to which such capital commitments relate to investments in information systems and customer service related infrastructure, number portability compliance, data and voice transmission equipment, and access network construction. Capital commitments are expected to be realized during the course of the following year. The value of such capital commitments was EUR 1,987 thousand as of December 31, 2013 and EUR 6,510 thousand as of December 31, Guarantees and claims arise during the ordinary course of business from relationships with suppliers and customers when the Group requests its bankers to guarantee its performance if specified triggering events occur. Non-performance under a contract could trigger an obligation for the Group. These potential claims can arise from late or non-payment to suppliers ( payment guarantees ) and/or late or incomplete delivery of services to customers ( performance guarantees ). The Group also provides bid guarantees to new or existing customers in connection with bids on commercial projects. Potential future payments of the Group under these guarantees as of December 31, 2013 and 2012 are summarized as follows: At December Payment guarantees Total Guarantees Contingencies Relating to the Holdco I B.V. liquidation, a shareholder loan with accrued interest was eliminated as of May 31, The Mid Europa subsidiary, Hungarian International Finance Ltd. ( HIFL ) assigned its EUR million receivable against Holdco I B.V. to another Mid Europa subsidiary, Hungarian Telecom LP ( HTLP ) in exchange for a Promissory Note in the same amount. HTLP contributed the receivable against Holdco I B.V. to another entity controlled by Mid Europa, Hungarian Telecom Cooperatief U.A. ( Coop ). After liquidation of Invitel Holdings A/S, a former holding company of the Group, Holdco I B.V. issued 10 additional shares to Coop by way of set-off against all obligations owed under the EUR million receivable owed by Holdco I B.V. to Coop. After the set-off, no outstanding loan balances remained outstanding between the Group and Mid Europa as of December 31, Page 61 of 89

62 The Group is involved in legal proceedings in the normal course of business. Based on legal advice, management made appropriate provisions in its December 31, 2013 consolidated balance sheet for the potential future cash outflows relating to certain ongoing legal matters. The Group accounts for termination services provided by mobile operators at regulated interconnection rates. The mobile service providers have ongoing legal cases against the regulator with respect to such termination fees. Management of the Group believes that the outcome of such disputes will not have a significant impact on the consolidated financial statements of Matel, and accordingly no provision has been recorded in the consolidated financial statements for the possible return of amounts arising from reduced regulated interconnection rates. In 2005, T-Com requested the Economic Competition Office ( ECO ) to establish that Hungarotel (a legal predecessor of Invitel) was in breach of the regulation of its carrier selection obligation, hindering its subscribers right to carrier selection and thus distorting competition. The ECO established the violation and imposed a fine of HUF 150 million on Hungarotel. In the judicial review proceedings initiated by Invitel, the Court, accepting Invitel s petition, annulled the decision of the ECO based on procedural grounds. The ECO appealed against Court s decision. In November 2008, the Budapest Tribunal confirmed the decision of the lower court annulling the decision of the ECO and requesting the ECO to commence a new proceeding based on the aspects specified in the judgment. In the repeated process, in March 2011, the ECO again determined the violation by Hungarotel and imposed a fine of HUF 200 million (EUR 673 thousand). The fine was paid, as the request for the suspension of the payment was rejected. Invitel requested a judicial review of the ECO s decision. The Court (both first and second instance) verified the violation by Hungarotel, but annulled the decision in respect of the amount of the fine (e.g., violation was by a legal predecessor, violation occurred approximately 10 years ago, and such circumstances no longer exist on the market) and ordered the ECO to re-conduct the procedure with respect to the setting of the fine. Based on the decision of the Budapest Tribunal Court, the ECO refunded the HUF 200 million plus interest to Invitel on April 3, 2013 and the ECO turned to the Curia (Supreme Court) against the decision for an extraordinary judicial review. The review hearing before the Curia was held on January 29, The Curia nullified both the second and first instance Court decisions and ordered the first instance Court to repeat its procedure. The Company is waiting for the written resolution to be published by the Curia setting out the steps of the process to be repeated. The Group recorded a provision in the amount of HUF 150 million (EUR 505 thousand) in connection with this legal case during 2013 (see note 20 Provisions for Other Liabilties and Charges ). COMPASS Kft. ( Compass ) filed a claim against Fibernet, a legal predecessor of Invitel for EUR 16.5 million plus expenses (allegedly 10% of Fibernet's purchase price by Invitel in 2011). Compass legal argument is based on a draft contract sent to Fibernet s CEO and on the fact that he did not respond (according to their argument he accepted the contract with all its terms and conditions). The argument of Compass is that an agreement came into effect which in principle was not tied to the fulfillment of any concrete task by Compass, only the requirement that Compass contribute to a sale being concluded. (Compass has not been able to demonstrate that it had contributed in any manner to the sale.) Page 62 of 89

63 The first instance Court dismissed the petition on October 24, In its ruling the Court ordered Compass to pay Invitel an amount of app. HUF 17 million in legal costs. The Court s decision was appealed by Compass. The second instance Court Decision approved the first instance decision and ordered Compass to pay HUF 20 million to Invitel. The sentence is final. In December 2008, Hungarian Telephone & Cable Corp. ( HTCC USA ), one of the former parent companies of the Group, transferred the shares of its direct subsidiary HTCC Holdco I B.V. to a then newly formed subsidiary of the Group, Invitel Hungary Holdings Kft. as part of the Group s move of domicile from the United States. HTCC USA recognized the difference between the fair market value of the shares transferred and its cost base as taxable capital gain. The fair market value of the shares transferred was determined based on a valuation study prepared by an independent third party valuation firm. The United States Internal Revenue Service ( IRS ) began a standard audit of HTCC USA s 2008 Corporate Income Tax filing in At the end of the audit process, on October 17, 2012, the IRS issued a Revenue Agent Report ( RAR ) describing the audit findings and a supplemental IRS Economist Report in which the IRS disputes HTCC USA s fair market valuation of the shares of HTCC Holdco I B.V. The independent third party valuation firm examined the counter-points raised in the IRS reports, and found the arguments supporting a higher valuation unconvincing, a position held to this day. Based on this assessment, as well as the Group s assessment that its original valuation is proper, the Company appealed against the RAR and a Protest was submitted on November 14, The IRS issued its Rebuttal and the case was transferred to the IRS Appeals Division for consideration, which issued a Notice of Deficiency ( ND ) addressed to Hungarian Telephone and Cable Corp. The appeal closed on August 1, Successor in Interest to Hungarian Telephone and Cable Corp., which was received by the accountants that had been representing HTCC USA before the IRS. The Group engaged a specialist tax counsel in relation to this matter. Such outside specialist tax counsel retained in the matter, believe that the IRS issued an ineffective ND, as the ND issued was to HTCC USA (taxpayer) and Invitel Holdings A/S (successor), both entities being non existent. Because Invitel Holdings A/S is no longer in existence and it has no assets in the United States against which the IRS could file a lien or levy, recovery by the IRS would be through a claim of transferee liability. Thus, outside specialist tax counsel retained in the matter, believe that a valid and effective ND has not been issued to any existing entity. The Company is currently awaiting the start of the appeals process. Based on the merits of the valuation case, as well as the procedural issues noted above based on outside counsel advice, the Group currently continue to believe that the likelihood of monetary penalty in this case is not probable. On the effective date of the Restructuring, an agreement came into effect by which Matel would indemnify Hungarian Telecom Cooperatief U.A. ( Coop ) from: (a) the lesser of 50% of all taxes required to be paid pursuant to a settlement or final determination in relation to the IRS s claim referred to above (the Due Taxes ); and (b) $2,500,000; and in relation to a demand by Coop that is made; (i) after the Stapling Period; or (ii) during the Stapling Period and is accompanied by evidence that the aggregate value of the Units then outstanding exceeds the aggregate principal amount of the 2013 Notes then outstanding, the lesser of (i) all Due Taxes; and (ii) $2,500,000. Page 63 of 89

64 The Group is involved in various other legal actions arising in the ordinary course of business. The Group is contesting these legal actions in addition to the actions noted above; however, the outcome of individual matters is not predictable with assurance. Although the ultimate resolution of these actions (including the actions discussed above) is not presently determinable, management believes that any liability resulting from the current pending legal actions, in excess of amounts provided therefore, will not have a material effect on the consolidated financial position, results of operations or liquidity of the Group. 27. Taxation At December Corporate tax (20) (16) Local business tax (2 851) (3 663) Total income tax benefit / (expense) (2 871) (3 679) Matel was resident for tax purposes in the Netherlands until September 4, 2013 and was subject to Dutch corporate income tax on its net worldwide income. For the year ended December 31, 2012 and the period ended September 4, 2013 the corporate income tax rate for Matel was 25.5%. Since Matel s subsidiaries are subject to the participation exemption in Article 13 of the Dutch Corporate Income Tax Act, dividends received from the subsidiaries will not be subject to Dutch corporate income tax upon meeting the relevant criteria. Matel is required to remit 8.3% withholding tax on dividends paid to its shareholders. As part of the Restructuring (see note 1.1 Restructuring ), from September 5, 2013 Matel has moved its COMI to the UK. As part of this move, Matel became tax resident in the UK. For the period after September 5, 2013 the corporate income tax rate for Matel was 23%. In the UK, effective from April 1, 2013, the corporation tax main rate is 23%, applicable for companies whose profits exceed GBP 1.5 million, whereas a marginal relief is deducted from the main rate for companies whose profits range between GBP 300,000 and GBP 1.5 million. Below GBP 300,000 the applicable tax rate is 20%. Invitel and ITC are tax residents in Hungary. From January 1, 2010, the corporate income tax rate in Hungary was 19%. From July 1, 2010 the corporate income tax rate was changed to 10% up to HUF 250 million of the positive corporate income tax base and the tax base above this limit is subject to 19% corporate income tax. From January 1, 2011 the limit to apply the 10% corporate income tax rate was changed to HUF 500 million. The law on the determination of local business tax has changed effective from January 1, In accordance with the new rules, the amount of tax deductible items in the local business tax calculation can be taken into account only to the extent as set out in the law. Bands were set up in the law based on the amount of tax deductible items. These bands determine the extent to which the tax deductible item can be included in the tax base. Furthermore, the local business tax base is required to be determined in aggregate by adding up the tax base of all related parties according to the amendments made to the local business tax law. Page 64 of 89

65 Local business tax as of December 31, 2013 mainly include municipality taxes in the amount of EUR 2,217 thousand, innovation contribution in the amount of EUR 466 thousand and witholding taxes in the amount of EUR 168 thousand. Local business tax as of December 31, 2012 mainly include municipality taxes in the amount of EUR 3,161 thousand and innovation contribution in the amount of EUR 502 thousand. Deferred tax assets and liabilities are determined by the legal entities of the Group. Deferred tax is calculated at the respective statutory tax rates where the entities of the Group are tax resident. A deferred tax asset is recognized on deductible temporary differences only to an extent that offset deferred tax liabilities on taxable temporary difference. For Hungarian corporate income tax purposes, the Group had unused net operating tax loss carry forwards of approximately EUR 243,299 thousand as of December 31, 2013 and EUR 282,595 thousand as of December 31, Such tax losses are not subject to any statutory expiry limitations. In view of the expected taxable profits the Group has not recognised any deferred tax asset. Deferred tax assets and liabilities as of December 31, 2013 and 2012 are attributable to the following items: Assets Liabilities December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012 Tax loss carried forward Derivative financial instruments Interest bearing borrowings Trade and other receivables Property, plant and equipment Intangible assets Net Deferred Tax Assets - - Reconciliation of effective tax rate is as follows: For the year ended December 31 Net profit / (loss) before tax (71 235) Income tax using the parent company corporate tax rate (11 935) Tax losses for which no deferred tax asset was recognized (8) (14 729) Effect of different tax rates in foreign jurisdictions (3 597) Tax on non-taxable income Tax on non-deductible expenses (351) (2 437) Movement in deferred tax allowance relating to tax losses on which no deferred tax asset was recognized previously Local business and other taxes paid, net of tax benefit (2 587) (3 297) Under /(over) provided in prior years 249 (34) Income Tax (Expense) / Benefit (2 871) (3 679) Page 65 of 89

66 Tax losses for which no deferred tax was recognized include the current year s tax losses made by Matel and Invitel International Holdings B.V. as there is uncertainty if these entities are able to generate enough taxable income in the future against which these tax losses could be utilized. 28. Related Party Transactions Related parties as of December 31, 2013 and 2012 include the Group s subsidiaries, as well as Mid Europa, Holdco I B.V., Hungarian Telecom B.V., Matel Holdings Limited and key management personnel of the Group. Salaries and other short-term employee benefits paid to key management personnel (members of the executive management team) amounted to EUR 4,734 thousand and EUR 3,039 thousand for the years ended December 31, 2013 and 2012, respectively. Termination benefits paid to key management personnel amounted to EUR nil and EUR 381 thousand and 2012, respectively. There have been no share based compensation, post-employment benefits or other longterm benefits paid to key management personnel during the years ended December 31, 2013 and There have been no loans or guarantees provided to key management personnel during the years ended December 31, 2013 and Based on the Restructuring Agreement (see note 1.1 Restructuring ) all accrued Mid Europa management fees, including third and fourth quarter 2012 fees have been reversed and no further accruals will be made. The reversed amount for the period ended December 31, 2013 was EUR 0.5 million. On February 21, 2011 Invitel provided a loan to Holdco I B.V. in the amount of EUR 20,313 thousand for the redemption of the 2006 PIK Notes. Related party receivables and payables have been netted off as of December 31, 2011 based on contractual rights and the intention to settle the outstanding amounts on a net basis. In connection with the liquidation of Holdco I B.V. the following transactions took place during the year ended December 31, 2012 with respect to such receivables: As of May 31, 2012 EUR 28,881 thousand principal loan and EUR 1,844 thousand accrued interest was owed by Matel to Holdco I B.V. The EUR 1,844 thousand interest accrual was capitalised as of May 31, As of May 31, 2012 Invitel had EUR 20,535 thousand receivables against Holdco I B.V. Holdco I B.V. assigned the same amount of its outstanding receivable from Matel to Invitel in full satisfaction of the receivables owed by Holdco I B.V. to Invitel. The remaining liability against Holdco I B.V. amounted to EUR 10,190 thousand. Matel owed to Holdco I B.V. EUR 249 thousand beside the remaining EUR 10,190 thousand loan. Holdco I B.V. owed EUR 7,392 thousand loan to Matel. The remaining Holdco I B.V. loan and due receivables in the amount of EUR 10,439 thousand and Matel debt in the amount of EUR 7,392 thousand was satisfied in full and the due receivables was reduced to EUR 3,047 thousand.holdco I B.V. contributed the remaining receivables of EUR 3,047 thousand owed by Matel to Holdco I B.V. to the capital reserve of Matel, resulting in an extinguishment of that receivable by operation of law. The amount was credited to the capital reserve of Matel (see note 16 Equity ). As of August 18, 2011 Invitel Holdings A/S owed EUR 3,294 thousand intercompany loan and EUR 1,219 thousand other debt for recharged services to Invitel. The intercompany loans were interest free with maturity of December 31, An assignment agreement dated August 18, 2011 was concluded between Coop and Invitel, according to which the amount owed by Invitel Holdings A/S was overtaken by Coop towards Invitel with the total amount of EUR 4,513 thousand. On June 30, 2012 Invitel and Coop declared the forgiveness of the total debt by not requiring any consideration in return and the related expense was recognized in other financial expense for the year ended December 31, 2012 (see note 9 Financial Income and Expense ). Page 66 of 89

67 29. Segment Reporting The chief operating decision maker considers the Group from a revenue service perspective and assesses the performance based on segment gross margin. This measurement primarily focuses on the variable costs associated with this business. Other fixed and non-cash charges are excluded from this measure. Segment liabilities are not regularly reviewed by the chief operating decision maker. For the year ended December Restated Revenue Residential Voice Residential Internet & TV Cable Corporate Wholesale Inter-segment elimination (1 327) (1 808) Total Revenue Segment Cost of Sales Residential Voice (2 762) (3 660) Residential Internet & TV (8 371) (6 365) Cable (4 774) (4 322) Corporate (18 226) (14 290) Wholesale (4 297) (5 377) Inter-segment elimination Total Segment Cost of Sales (37 157) (32 263) Network operating expenses (18 616) (20 260) Direct personnel expenses (9 740) (11 313) Total Cost of Sales, exclusive of Depreciation (65 513) (63 836) Segment Gross Margin Residential Voice Residential Internet & TV Cable Corporate Wholesale Inter-segment elimination (54) (57) Total Segment Gross Margin Network operating expenses (18 616) (20 260) Direct personnel expenses (9 740) (11 313) Depreciation and amortization (48 608) (83 931) Operating expenses (48 678) (50 035) Cost of restructuring (1 300) (3 151) Financial Income Financial Expenses (26 080) (47 191) Gain on Extinguishment of Debt Income / (Loss) Before Tax (71 235) Page 67 of 89

68 30. Subsequent Events On January 8, 2014 Coop sold its 100% ownership interest in Hungarian Telecom B.V. to MID-NEW Technocom Kft. On January 8, 2014 MID-NEW Technocom Kft. sold its 75% ownership interest in ITC to Matel. The purchase price of the ownership interest was set at EUR 45,000, which equals the amount of the loan Matel has provided to MID-NEW Technocom Kft. when it has purchased the 75% ownership interest in ITC. This loan became payable on January 8, 2014 when Matel exercised its call option to buy the 75% ITC ownesrship interest fom MID-NEW Technocom Kft. The purchase price and the loan payable were netted against each other, as it was stated in the call option deed between the companies. These transactions do not have any significant accounting implications on the consolidated financial statements of the Group as of December 31, Page 68 of 89

69 MAGYAR TELECOM B.V. PARENT COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013 The accompanying notes form an integral part of the financial statements. Page 69 of 89

70 Parent Company Balance Sheet (before appropriation of result) as of December 31, 2013 Notes At December 31 At December 31 At January Restated Restated Non-Current Assets Financial Fixed Assets Current Assets Other Current Assets Trade and Other Receivables Cash and Cash Equivalents Total Assets Equity Capital and Reserves Attributable to Equity Holders of the Company Share Capital Capital Reserve Other Reserve 7 ( ) (16 693) (16 693) Hedging Reserve Cumulative Translation Reserve 7 (70 829) (65 877) (87 114) Accumulated Losses 7 ( ) ( ) ( ) Liabilities (65 109) (15 073) Non-Current Liabilities Borrowings Current Liabilities Trade and Other Payables Borrowings Accrued Expenses and Deferred Income Total Liabilities Total Equity and Liabilities The accompanying notes form an integral part of the financial statements. Page 70 of 89

71 Parent Company Statement of Profit and Loss Account For the year ended December Restated Share of Result of Investments after Tax (65 351) Other Income and Expense after Tax (9 561) Result for the Year (74 912) The accompanying notes form an integral part of the financial statements. Page 71 of 89

72 Other information 1. General Information Magyar Telecom B.V. ( the Company or Matel, together with its subsidiaries the Group ) was incorporated on December 17, 1996 as a limited liability company under the laws of the Netherlands and registered with the trade register of the Chamber of Commerce for Amsterdam with company registration number During the year 2013 the Company carried out a Restructuring (see note 1.1 Restructuring in the consolidated financial statements) as part of which the Company moved its COMI to the UK. On September 5, 2013 the Company was registered as an overseas company at the Companies House in the UK with UK establishment number BR016577, having its head office at 6 St Andrew Street, London EC4A 3AE, United Kingdom. Matel is engaged in investing in telecommunication related activities in Hungary. Its telecommunications service provider subsidiaries, Invitel Távközlési Zrt. ( Invitel ) and Invitel Technocom Kft. ( ITC ) are providing telecommunications services to residential and corporate customers. All subsidiaries are majority owned and controlled subsidiaries of Matel (collectively, the Group ). Matel, through its subsidiaries, is one of the largest fixed line telecommunications services provider in Hungary and the incumbent provider of fixed line telecommunications services to residential and corporate customers in its historical concession areas. The historical concession areas and cable TV network cover an estimated 2.9 million people, representing approximately 29% of Hungary s population. Matel also provides fixed line telecommunications services as an alternative operator in the remainder of Hungary either by connecting corporate and residential customers to its backbone network and cable network, or through the use of carrier pre-selection or wholesale DSL services for residential customers. The Company was a wholly owned subsidiary of HTCC Holdco I B.V. ( Holdco I B.V. ) till December 12, After the liquidation of Holdco I B.V., from December 12, 2012 the Company was wholly owned by Hungarian Telecom Cooperatief U.A. ( Coop ). As of October 22, 2013, a new entity, Hungarian Telcom B.V. was established by Coop with a 100% onwnership. As of December 12, 2013 the shares of Matel were contributed by Coop to Hungarian Telecom B.V. On December 12, 2013 Matel completed its restructuring asd part of which its former notes were refinanced by issuing new notes and new shares (see note 17 Borrowings in the consolicated financial statements). The new shares were issued by a newly established entity, Matel Holdings Limited. As of December 31, 2013, after completion of the Resutructuring, Matel was 51% owned by Hungarian Telecom B.V. which is 100% owned by Mid Europa Partners Limited ( Mid Europa ), through its holding companies and 49% owned by Matel Holdings Limited. As of December 31, 2013 the Group includes the following subsidiaries: Invitel was incorporated on September 20, 1995 as a joint stock company under the laws of Hungary. The authorized share capital of Invitel as of December 31, 2013 is HUF 16 billion (approximately EUR 54 million). ITC was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary. The authorized share capital of ITC as of December 31, 2013 is HUF 165 million (approximately EUR 556 thousand). Invitel International Holdings B.V. ( Invitel International Holdings ) was incorporated on March 26, 2009 in Amsterdam and has its statutory seat at Herikerbergweg 238, Luna ArenA, 1101CM Zuidoost, The Netherlands. The 100% owner of Invitel International Holdings is Invitel. Invitel International Holdings was the holding company of the Group s international operations, which was sold on October 7, The authorized share capital of Invitel International Holdings as of December 31, 2013 is EUR 18 thousand. Invitel International Holdings had no operations during 2012 and The accompanying notes form an integral part of the financial statements. Page 72 of 89

73 Other information 2. Significant Accounting Policies 2.1 Basis of Preparation The parent company financial statements of the Company have been prepared in accordance with Part 9, Book 2 of the Dutch Civil Code. In accordance with subarticle 8 of article 362, Book 2 of the Dutch Civil Code, the Company s financial statements are prepared based on the accounting principles of recognition, measurement and determination of profit, as applied in the consolidated financial statements. These principles also include the classification and presentation of financial instruments, being equity instruments or financial liabilities. As the financial data of the Company are included in the consolidated financial statements, the income statement in the parent company financial statements is presented in its condensed form (in accordance with article 402, Book 2 of the Dutch Civil Code). In case no other policies are mentioned, the company applies the accounting policies as described in the accounting policies section in the consolidated financial statements. For an appropriate interpretation, the parent company financial statements of the Company should be read in conjunction with the consolidated financial statements. All amounts are presented in thousands of EUR, unless stated otherwise. The Company prepared its consolidated financial statements in accordance with the International Financial Reporting Standards ( IFRS ) as adopted by the European Union. 2.2 Changes in Accounting Policies From January 1, 2013 the Group has changed its accounting policy with respect to accounting for sales commissions relating to Corporate segments that are managed on portfolio basis. Either treatment of these costs as expenditure through profit or loss as incur or alternatively capitalization as intangible asset are currently applied policies in the industry. The Group decided to recognize retrospectively these sales commissions as cost of sales. Previously the Group recognized these sales commissions as cost of acquiring a customer contract under IAS38 Intangible Assets. Cost incurred as sales commission fees relate to both management of current portfolio of corporate customers and also to acquire new customers. Because of changes in the operating environment the Group believes that these costs mainly relate to maintenance of current portfolio and acquisition of contract is not so significant any more. Accordingly, the Group decided to change the accounting policy to reflect this change in the nature of the cost. Therefore the Group believes that the new accounting policy provides reliable and more relevant information. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors the comparative figures have been restated accordingly. In addition, Management has decided to correct an prior year error with respect to certain groups of intangible assets. Upon the correction, certain items are reported as part of operating expenses instead of the previous presentation as part of intangible assets. The accompanying notes form an integral part of the financial statements. Page 73 of 89

74 Other information The effects of the changes in accounting policy and the correction of prior year error on the current numbers are included in the schedules below. Changes in accounting policy and the correction of prior year error affected only financial fixed assets of Matel because these costs arise in the subsidiaries exclusively. At December Financial Fixed Assets, net at the Beginning of the Year Restatement in Relation to Prior Year Error (140) (268) Restatement in Relation to Accounting Policy Change (456) (416) Cumulative Effect from Prior Years (684) - Financial Fixed Assets, net at the End of the Year At December Accumulated losses at the Beginning of the Year ( ) ( ) Restatement in Relation to Prior Year Error (140) (268) Restatement in Relation to Accounting Policy Change (456) (416) Cumulative Effect from Prior Years (684) - Accumulated losses at the End of the Year ( ) ( ) For the year ended December Share of Result of Investments After Tax before Restatement (64 755) Restatement in Relation to Prior Year Error (140) Restatement in Relation to Accounting Policy Change (456) Share of Result of Investments After Tax after Restatement (65 351) 2.3 Investment in Subsidiaries Subsidiaries are entities (including intermediate subsidiaries and special purpose entities) over which the company has control, i.e. the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. Investment in subsidiaries is recognised from the date on which control is transferred to the Company or its intermediate holding entities and is derecognised from the date that control ceases. The Company applies the acquisition method to account for acquiring subsidiaries, consistent with the approach identified in the consolidated financial statements. The consideration transferred for the acquisition of a subsidiary is the fair value of assets transferred, liabilities incurred to the former owners of the acquiree and the equity interests issued by the company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in an acquisition are measured initially at their fair values at the acquisition date, and are subsumed in the net asset value of the investment in subsidiaries. Acquisition-related costs are expensed as incurred. The accompanying notes form an integral part of the financial statements. Page 74 of 89

75 Other information Investments in subsidiaries are measured at net asset value. Net asset value is based on the measurement of assets, provisions and liabilities and determination of profit based on the principles applied in the consolidated financial statements. When an acquisition of an investment in a subsidiary is achieved in stages, any previously held equity interest is remeasured to fair value on the date of acquisition. The remeasurement against the book value is accounted for in the income statement. When the Company ceases to have control over a subsidiary, any retained interest is remeasured to its fair value, with the change in carrying amount accounted for in the income statement. When parts of investments in subsidiaries are bought or sold, and such transaction does not result in the loss of control, the difference between the consideration paid or received and the carrying amount of the net assets acquired or sold, is directly recognised in equity. When the Company s share of losses in an investment equals or exceeds its interest in the investment, (including separately presented goodwill or any other unsecured non-current receivables, being part of the net investment), the Company does not recognise any further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the investment. In such case the Company will recognise a provision. Unrealised gains on transactions between the Company and its subsidiaries are eliminated in full, based on the consolidation principles. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the assets transferred. Amounts due from investments are stated initially at fair value and subsequently at amortised cost. Amortised cost is determined using the effective interest rate. 3. Financial Fixed Assets At December Restated Invitel Távközlési Zrt Invitel Technocom Kft Investments Intercompany loans - Invitel Other Non-Current Financial Assets Total Financial Fixed Assets The accompanying notes form an integral part of the financial statements. Page 75 of 89

76 Other information Movements in financial fixed assets during the years ended December 31, 2013 and 2012 were as follows: Investments Other Non-Current Financial Assets Total At January 1, 2012 (Prior to Restatement) Restatement in Relation to Prior Year Error (268) - (268) Restatement in Relation to Accounting Policy Change (416) - (416) At January 1, 2012 (Restated) Translation adjustment for the year Hedging of foreign currency items Share of profit of invetsments after tax (64 755) - (64 755) - Restatement in Relation to Prior Year Error (140) - (140) Restatement in Relation to Accounting Policy Change (456) - (456) Repayment to Holdco I. B.V. - (7 392) (7 392) Repayment to Invitel - (1 385) (1 385) Sale of ITC shares financed via intercompany loan (45) 45 - (43 567) (8 732) (52 299) At December 31, 2012 (Restated) Translation adjustment for the year (4 952) - (4 952) Hedging of foreign currency items (592) - (592) Share of profit of invetsments after tax Loan provided to Invitel Capitalised interest on loan provided to Invitel Repayment of intercompany loans to Invitel - ( ) ( ) Waived intercompany loans of Invitel - (85 310) (85 310) ( ) ( ) At December 31, Intercompany loans as of December 31, 2013 and 2012 comprise of the following: Borrower Interest rate Maturity At December Invitel 7,25%+2,00% PIK Invitel 9,61% Invitel 9,61% Invitel 9,61% Invitel 9,61% Invitel 9,61% MID New Technocom 0,0% Total The accompanying notes form an integral part of the financial statements. Page 76 of 89

77 Other information As part of the Restructuring (see note 1.1 Restructuring in the consolidated financial statements), the Company and Invitel set off receivables and liabilities owing to each other and certain intercompany loans as well as the Company waived certain of its rights and claims under certain other intercompany loans. Also, the Company s certain existing intercompany loans were refinanced pursuant to a new intercompany loan agreement (the Refinancing Intercompany Loan Agreement ). The Refinancing Intercompany Loan Agreement The Refinancing Intercompany Loan Agreement s terms are matched to the newly issued 2013 Notes (see note 17 Borrowings in the consolidated financial statements). The Refinancing Intercompany Loan Agreement expires in 2018 and bears cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from December 12, 2013 and is paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. 4. Cash and Cash Equivalents At December (in thousand of EUR) Cash on hand and in banks Total Cash and Cash Equivalents Cash and cash equivalents of the Company are denominated in EUR. The 2013 Notes Indenture limits time deposits to be placed to banks having at a rating of A or better by Standard & Poor s and A2 or better by Moody s. Following the bank downgrades in June 2012 none of the Group s existing banks fulfilled the above requirement therefore the Group could no more invest its free cash into time deposits. As no such limitation applies for the cash kept on current accounts, the Group continued to keep free cash on the current accounts of its existing banks. 5. Trade and Other Receivables At December Receivables from related parties Other receivables Total Trade and Other Receivables The accompanying notes form an integral part of the financial statements. Page 77 of 89

78 Other information Receivables from related parties as of December 31, 2013 include receivables from Invitel in the amount of EUR 848 thousand relating to recharged services in connection with the 2013 December Refinancing. Receivables from related parties as of December 31, 2012 include receivables from Invitel. All receivables included fall due in less than one year. 6. Other Current Assets At December (in thousand of EUR) Prepaid expenses Accrued income - Related party Accrued income - Interest - 83 Total Other Current Assets Related party accrued income includes accrued interest on intercompany loans and recharged refinancing expenses to Invitel for both periods. Related party accrued income as of December 31, 2013 contains EUR 4,655 thousand unsettled interest on intercompany loans and EUR 648 thousand accrued management fees. As of December 31, 2013 certain interests on intercompany loans towards Invitel with a total amount of EUR 6,709 thousand have been waived. All current assets included fall due in less than one year. 7. Equity As of December 31, 2012 the authorized share capital of Matel was EUR 408,600,000 divided into 90,000,000 shares with a par value of EUR 4.54 each. As of December 31, 2012 the issued share capital of Matel was EUR 92,201 thousand being 20,308,640 shares. During the 2013 December Refinancing, 20,308,640 shares have been split and converted into 9,220,122,560 A shares with a nominal value of EUR 0.01 each, leaving the total issued share capital of Matel unchanged with respect to A shares. Immediately after the 2013 December Refinancing 20,494,639,650 B shares were issued with a nominal value of EUR 0.01 each, amounting to a total issued capital of B shares of EUR 204,947 thousand. As of December 31, 2013 all A shares are owned by Mid Europa, representing 51% of the share capital of Matel and all B shares are owned by Matel Holdings Limited, a newly formed entity owned by the noteholders, representing 49% of the total share capital of Matel. The issued capital is fully paid in. The accompanying notes form an integral part of the financial statements. Page 78 of 89

79 Other information The balance of capital reserve includes the amounts of share capital of former legal entities merged into Matel in the amount of EUR million and a capitalized shareholder loan that was provided to the Group during 2009 in the amount of EUR million. Additional shareholder loan was capitalized during 2012 in the amount of EUR 3.0 million relating to the waiving of receivables and liabilities with related parties in connection with the liquidations of former holding companies of Matel. These include balances with Matel Holdings N.V. and Holdco I B.V. During 2013 Mid Europa paid in additional capital of EUR 15 million during the Restructuring described in note 1.1 Restructuring in the consolidated financial statements. There are no restrictions for distribution regarding these amounts. The balance of other reserves as of December 31, 2013 and 2012 includes the equity adjustment relating to the acquisition of Hungarotel and Pantel by Matel on April 27, 2007 with EUR 16,693 thousand. This acquisition was accounted for as a transaction between entities under common control at predecessor value and the equity adjustment represents the difference between the value of the investment and the net assets acquired by Matel. As of December 12, 2013 in connection with the 2013 December Refinancing Matel recorded an adjustment of EUR 119,553 thousand to other reserve to reflect the fair value of the equity instrument issued to noteholders (the B shares) in exchange for EUR 173,957 thousand of the 2009 Notes. The hedging reserve containes the effective portion of the mark-to-market revaluation of derivative financial instruments used for cash-flow hedging of the interest payments of the 2009 Notes. At the end of 2013 there are no open cash-flow hedges in relation to the interest payments of the 2013 Notes. The balance of cumulative translation reserve comprises all foreign exchange differences arising from the translation into EUR of the financial statements of foreign operations whose functional currency is not EUR. The movements in equity during the year ended December 31, 2013 are as follows: Cumulative Share Capital Other Hedging Translation Accumulated Notes Capital Reserve Reserve Reserve Reserve Losses Total Equity Balance at January 1, 2012 (Prior to Restatement) (16 693) - (87 114) ( ) (14 389) Restatement in Relation to Prior Year Error (268) (268) Restatement in Relation to Accounting Policy Change (416) (416) Balance at January 1, 2012 (Restated) (16 693) - (87 114) ( ) (15 073) Capitalized Shareholder Loan Hedging of Foreign Currency Items Translation Adjustment for the Year Other Comprehensive Income / (Loss) Net Result for the Year before Restatement (74 316) (74 316) Restatement in Relation to Prior Year Error (140) (140) Restatement in Relation to Accounting Policy Change (456) (456) Net Result for the Period after Restatement (74 912) (74 912) Total Profit and Loss Account (74 912) (50 036) Balance at December 31, 2012 (Restated) (16 693) 592 (65 877) ( ) (65 109) Hedging of Foreign Currency Items (592) - - (592) Translation Adjustment for the Year (4 952) - (4 952) Other Comprehensive Income / (Loss) (592) (4 952) - (5 544) Net Result for the Year Total Comprehensive Income / (Loss) (592) (4 952) Issuance of B Shares ( ) Additional Paid-in Capital Total Transaction with Owners ( ) Balance as of December 31, ( ) - (70 829) ( ) The accompanying notes form an integral part of the financial statements. Page 79 of 89

80 Other information 8. Borrowings At December Notes Related party loan Notes Notes purchased back - (21 041) 2009 Notes Deferred borrowing costs - (343) Total Borrowings The Company s borrowings are repayable as of December 31, 2013 and 2012 as follows: At December Year or Less Years Years Deferred borrowing costs - (343) Total Under the terms of the Restructuring (see note 1.1 Restructuring in the consolidated financial statements), EUR million of the 2009 Notes was exchanged into new notes (the 2013 Notes ). The 2013 Notes were issued by Matel on December 12, 2013, in the principal amount of EUR 150,051,000 at 100% issue price. Mid Europa invested EUR 25.0 million consisting of EUR 15.0 million as equity (see note 16 Equity in the consolidated financial statements) and EUR 10.0 million as debt (the Sponsor Notes ), which ranks pari passu with the 2013 Notes. The EUR 15.0 million new equity investment was used to buy back 2013 Notes (and corresponding equity entitlement). The remaining EUR million of the 2009 Notes, together with all accrued interest was converted into 49% of the pro-forma post-restructuring equity in the Group which in held by Matel Holdings Limited, a newly formed entity. Matel Holdings Limited s shares are stapled to the 2013 Notes. Mid Europa retained 51% of the post-restructuring equity in the Company. EUR 21.0 million of the 2009 Notes held by the Company was cancelled as part of the Restructuring. A gain on extinguishment of debt of EUR 81,110 thousand was recorded in the consolidated statement of profit and loss and other comprehensive income in connection with the 2013 December Refinancing, comprising of: (i) the gain of EUR 88,563 arising from the difference between the extinguishment of 2009 Notes and the fair value of equity instrument provided to the noteholders, (ii) the write-off of accrued interest on the 2009 Notes relating to the period until June 15, 2013 in the amount of EUR 15,625 thousand, reduced by (iii) the write-off of transaction costs and bond discount relating to the 2009 Notes in the amount of EUR 8,907 thousand and (iv) refinancing costs in the amount of EUR 14,171 thousand. The accompanying notes form an integral part of the financial statements. Page 80 of 89

81 Other information On December 12, 2013, Matel issued senior secured notes notes in the principal amount of EUR 150,051,000 (the 2013 Notes ). The 2013 Notes mature in 2018 and are subject to the indenture dated December 12, 2013 (the 2013 Notes Indenture ). The 2013 Notes are listed on the Luxembourg Stock Exchange, and are governed by New York law. The Notes are fully and unconditionally guaranteed on a senior basis by Invitel, ITC and Invitel International Holdings. The guarantees are subject to contractual and legal limitations, and may be released under certain circumstances. The 2013 Notes are secured by first-priority security interests over certain assets of Matel and certain Guarantors. The security interests are subject to limitations under applicable laws and may be released under certain circumstances. The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from June 15, 2013 and is paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. Matel may redeem the 2013 Notes at any time at a redemption price of 100% plus accrued and unpaid interest, if any to the date of redemption. Subject to retaining a minimum cash balance and certain other requirements as set out in the 2013 Notes Indenture, Matel must redeem the 2013 Notes at a redemption price of 100% plus accrued and unpaid interest, if any to the date of redemption with the proceeds of certain asset sales. If Matel undergoes a change of control, Matel may be required to make an offer to purchase the 2013 Notes. The 2013 Notes Indenture contains covenants restricting Matel s ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries or the making of loans (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets, (viii) merge, consolidate, amalgamate or combine with other entities, (ix) designate subsidiaries as unrestricted subsidiaries, (x) de-list the notes, (xi) impair any security interests and (xii) engage in any business other than specifically enumerated activities. The 2013 Notes Indenture also contains customary events of default, including non-payment of principal, interest, or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. Capitalized interest on the 2013 Notes as of December 31, 2013 amounted to EUR 1,501 thousand. On December 9, 2009 Matel issued senior secured notes in the principal amount of EUR 345,000,000 (the 2009 Notes ). The 2009 Notes matured in 2016 and were subject to the indenture dated December 16, 2009 (the 2009 Notes Indenture ). The 2009 Notes were listed on the Luxembourg Stock Exchange, and were governed by New York law. The proceeds from the issuance of the 2009 Notes were used to refinance certain indebtedness including redeeming the remaining of the 2004 Notes and to make a consent payment to the holders of the 2007 Notes who consented to certain proposed waivers and amendments to the 2007 Notes Indenture. The accompanying notes form an integral part of the financial statements. Page 81 of 89

82 Other information Interest on the 2009 Notes was payable semi-annually at an annual rate of 9.50% on June 15 and December 15 of each year, beginning on June 15, The 2009 Notes were guaranteed, by some of Matel s subsidiaries, which guarantee ranked senior in right of payment to any existing and future guarantee of Matel and the subsidiary guarantors that was subordinated in right of payment to the 2009 Notes (including the 2007 Notes). The obligations of Matel and the subsidiary guarantors were secured by first priority liens over, inter alia, all shares or quotas (as applicable), bank accounts and assets of certain of our subsidiaries. Prior to December 15, 2012, Matel had the option to redeem all or part of the 2009 Notes by paying a make-whole amount specified in the 2009 Notes Indenture and following such date at the redemption prices set forth in the 2009 Notes Indenture. In the event of a change of control at any time, Matel was required to offer to repurchase the 2009 Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of the purchase. Matel was also required to offer to purchase the 2009 Notes with the excess proceeds following certain asset sales at a purchase price equal to 100% of the principal amount thereof. The 2009 Notes Indenture contained covenants restricting Matel s ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries or the making of loans (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets, (viii) enter into sale and leaseback transactions, (ix) merge, consolidate, amalgamate or combine with other entities, (x) designate subsidiaries as unrestricted subsidiaries, (xi) de-list the notes, (xii) impair any security interests and (xiii) engage in any business other than specifically enumerated activities. The 2009 Notes Indenture also contained customary events of default, including non-payment of principal, interest, premium or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. On March 30, 2011 Matel issued EUR 80 million Senior Secured Notes (the Additional 2009 Notes ), which had the same obligations as the 2009 Notes. In June, September and December 2011, Matel repurchased 2009 Notes in the aggregate principal amount of EUR 21.0 million at a total purchase price of EUR 17.6 million. The Company accounted for these transactions as an extinguishment of debt and realised a gain of EUR 3.4 million. On December 12, 2013 Matel completed the Restructuring (see note 1.1 Restructuring in the consolidated financial statements). Under the terms of the Restructuring, EUR million of the 2009 Notes was exchanged into the 2013 Notes and the remaining EUR million of the 2009 Notes, together with all accrued interest, was converted into 49% of the pro-forma post-restructuring equity in the Group, which is held by Matel Holdings Limited, a newly formed entity. As of December 31, 2012 Matel was in compliance with all of the covenants defined in the 2009 Notes Indenture. As of December 31, 2013 Matel was in compliance with all of the covenants defined in the 2013 Notes Indenture. The accompanying notes form an integral part of the financial statements. Page 82 of 89

83 Other information In order to reflect the new obligations under the 2013 Notes and establish the relative rights of certain creditors under Matel s financing arrangements (including priority of claims and subordination) a new Intercreditor Deed was concluded (the Intercreditor Agreement ). The Intercreditor Agreement was concluded with, among others, the security trustee, the trustee for the 2013 Notes and certain others. The Intercreditor Agreement provides that if there is an inconsistency between the provisions of the Intercreditor Agreement (regarding subordination, turnover, ranking and amendments only), and certain other documents, including the 2013 Notes Indenture governing the 2013 Notes, the Intercreditor Agreement will prevail. 9. Trade and Other Payables At December Payables to related parties Cash pool liability to related parties Total liability to related parties Trade payables Other payables Total liability to third parties Total Trade and Other Payables The Company and Invitel have a cash-pooling arrangement with Unicredit Bank since On November 25, 2013, as part of the Restructuring, the cash-pool balance was refinanced by an intercompany loan in its entirety. The parties agreed to suspend the use of the cash-pool and maintain nil balance until the closing of the Restructuring. Following the closing of the Restructuring, parties continued to avoid use of the cash-pool and to keep its balance at nil. The accompanying notes form an integral part of the financial statements. Page 83 of 89

84 Other information 10. Accrued Expenses and Deferred Income At December Accrued expenses Accrued interest Total Accrued Expenses and Deferred Income Accrued expenses as of December 31, 2013 include accruals related to professional fees in the amount of EUR 588 thousand and other expenditures in the amount of EUR 47 thousand. Accrued expenses as of December 31, 2012 include accruals related to professional fees in the amount of EUR 500 thousand, personnel related expenses in the amount of EUR 378 thousand, audit fees in the amount of EUR 60 thousand, and other expenditures in the amount of EUR 12 thousand. Accrued interest as of December 31, 2013 includes the interest accrued under the 2013 Notes in the amount of EUR 568 thousand. Accrued interest as of December 31, 2012 includes the interest accrued under the 2009 Notes in the amount of EUR 1,385 thousand, the interest of the Related Party Subordinated Loan in the amount of EUR 6,076 thousand and Cash-pool interest of EUR 79 thousand. All liabilities included fall due in less than one year. 11. Audit Fees PricewaterhouseCoopers Accountants N.V. and firms of the world-wide network of PricewaterhouseCoopers firms (collectively, PwC ) served as the Company s independent auditor for the audit of the financial statements for the years ended December 31, 2013 and The following table presents fees for professional audit services rendered by PwC for the audit of the financial statements for the years ended December 31, 2013 and 2012 and fees for other services rendered by PwC during that period. For the year ended December Audit of the financial statements Audit-related services Other non-audit services - 9 Total The accompanying notes form an integral part of the financial statements. Page 84 of 89

85 Other information The fees listed above relate to the procedures applied to the Company and its consolidated Group entities by esternal auditors(pwc) as referred to in Article 1(1) of the Dutch Accounting Firms Oversight Act (Dutch acronym: Wta). Services rendered by PwC in connection with fees presented above were as follows. For the years ended December 31, 2013 and 2012, fees for audit of the financial statements included fees associated with the annual audit of the consolidated financial statements and statutory and regulatory filings. Audit-related sevice fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements but not reported under Audit of the Financial Statements. The Audit-Related Services provided by PwC for the year ended December 31, 2013 inlcuded the services provided in connection with the issue of the 2013 Notes. Other non-audit service fees related to the migration of accounting and billing systems of Fibernet. 12. Directors Remuneration The current directors and those who served the Company during the year ended December 31, 2013 are: Nikolaus Bethlen (Chairman) appointed on May 1, 2013 Thierry Baudon appointed on July 12, 2013 Robert Chlemar appointed on December 12, 2013 Mark Nelson-Smith appointed on December 12, 2013 Jan Vorstermans appointed on December 12, 2013 David Blunck appointed on December 12, 2013 David McGowan appointed on December 12, 2013 TMF Management B.V. and Clear Management Company B.V. were resigned from the Board of directors on September 5, Fees for directorial services paid to directors for the years ended December 31, 2013 and 2012 amounted to EUR 90 thousand and EUR 30 thousand, respectively. The Company does not have any employees. 13. Contingencies The Company is not involved in any legal proceedings nor have any other contingencies. The accompanying notes form an integral part of the financial statements. Page 85 of 89

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87 Other information Statutory Provisions Regarding Appropriation of Results Under article 13 of the Company s Articles of Association, the result is at the disposal of the General Meeting of shareholders, after approval of the financial statements. The Company can only make payments to the shareholders and other parties entitled to the distributable profit insofar as the shareholders equity is greater than the paid-up and called-up part of the capital plus the legally required reserves. Dutch law stipulates that distributions may only be made to the extent the Company s equity is in excess of the reserves it is required to maintain by law and its Articles of Association. Moreover, no distributions may be made if the Management Board is of the opinion that, by such distribution, the Company will not be able to fulfill its financial obligations in the foreseeable future. Proposal for Appropriation of Results The Board of Directors proposes that the net profit be added to accumulated losses. Events after Balance Sheet Date On January 8, 2014 Coop sold its 100% ownership interest in Hungarian Telecom B.V. to MID-NEW Technocom Kft. On January 8, 2014 MID-NEW Technocom Kft. sold its 75% ownership interest in ITC to Matel. The purchase price of the ownership interest was set at EUR 45,000, which equals the amount of the loan Matel has provided to MID-NEW Technocom Kft. when it has purchased the 75% ownership interest in ITC. This loan became payable on January 8, 2014 when Matel exercised its call option to buy the 75% ITC ownesrship interest fom MID-NEW Technocom Kft. The purchase price and the loan payable were netted against each other, as it was stated in the call option deed between the companies. These transactions do not have any significant accounting implications on the financial statements of Matel as of December 31, Independent Auditors Report The independent auditor s report is set out on the next two pages. The accompanying notes form an integral part of the financial statements. Page 87 of 89

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