MAGYAR TELECOM B.V. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014

Transcription

1 MAGYAR TELECOM B.V. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014

2 Table of contents Page Directors Report 3 Consolidated Financial Statements Consolidated Balance Sheet 17 Consolidated Statement of Profit and Loss and Other Comprehensive Income 18 Consolidated Cash Flow Statement 19 Consolidated Statement of Changes in Equity Parent Company Financial Statements Parent Company Balance Sheet 69 Parent Company Statement of Profit and Loss Account 70 Notes to the Parent Company Financial Statements 71 Other Information Statutory Provisions Regarding Appropriation of Results 84 Proposal for Loss Appropriation 84 Events after the Balance Sheet Date 84 Independent Auditor s Report 85 Page 2 of 86

3 Directors 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 a restructuring as part of which its former notes were refinanced by issuing new notes and new shares. As of December 31, 2013, after completion of the restructuring and as of December 31, 2014 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, on entity owned by noteholders. The Company's main activities during the year ended December 31, 2014 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 are 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 fully and unconditionally guaranteed on a senior basis by Invitel, Invitel Technocom Kft. ( ITC ) and Invitel International Holdings B.V. (together, the Guarantors ). The 2013 Notes are secured by first-priority security interests over certain assets of Matel and the Guarantors. The 2013 Notes are listed on the Official List of the Luxembourg Stock Exchange. Page 3 of 86

4 Overview As of December 31, 2014, Matel had approximately 263,000 telephone lines connected to its network within its historical concession areas to service Residential Voice customers and approximately 43,000 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, 2013 when Matel had approximately 267,000 telephone lines in service within its historical concession areas to service Residential Voice customers and approximately 57,000 active Residential Voice customers connected through indirect access outside its historical concession areas. In the Residential Internet & TV segment, as of December 31, 2014, Matel had approximately 163,000 broadband DSL customers, 8,000 WiFi customers, 56,000 IPTV customers and 16,000 DVB-T TV customers compared to 155,000 broadband DSL customers, 9,000 WiFi customers, 44,000 IPTV customers and 17,000 DVB-T TV customers as of December 31, In the Cable segment, as of December 31, 2014, Matel had approximately 85,000 cable TV lines, 59,000 cable internet lines and 40,000 cable voice lines compared to 83,000 cable TV lines, 55,000 cable internet lines and 31,000 cable voice lines as of December 31, In the Corporate segment, as of December 31, 2014, Matel had approximately 40,000 voice telephone lines within its historical concession areas compared to approximately 41,000 lines as of December 31, Outside its historical concession areas, Matel had approximately 34,000 direct access voice telephone lines and approximately 6,000 indirect access voice telephone lines as of December 31, 2014, compared to approximately 36,000 direct access voice telephone lines and approximately 6,000 indirect access voice telephone lines as of December 31, Matel had approximately 16,000 DSL lines and approximately 13,000 leased lines as of December 31, 2014 compared to approximately 16,000 DSL lines and approximately 14,000 leased lines as of December 31, In the Wholesale segment, Matel had approximately 200 customers as of December 31, 2014 and 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. Dataneum Zrt Acquisition On August 28, 2014 Invitel acquired 100% of the share capital of Dataneum Adatközpont Zrt. ( Dataneum Zrt ). Dataneum Zrt provides, primarily to Invitel, data center infrastructure services at its main data center in Budapest, under a 10 year asset rental and services contract signed in Before the acquisition in August, from March 2014, Invitel took over the operation of the infrastructure (i.e. power, cooling, and backup assets) at the data center. The Tier 3 equivalent data center, which has nearly 1,200 m2 of built-out data center space as well as additional expansion capacity, was built out in 2009 to Invitel s specification. With the acquisition, Invitel will save approximately EUR 1 million annually in rental and service fees. The EUR 5.5 million purchase price has been funded from existing cash balances. Macroeconomic Factors GDP and Prices Hungarian GDP grew by 1.5% in 2013 and a further 3.6% in 2014, on the back of revived consumer demand, increased investment and growth in net exports. Several factors boosted the recovery in consumer demand over the past years. Page 4 of 86

5 In January 2013 the Hungarian Parliament mandated a 10% reduction to the retail prices of energy (natural gas, electricity, district heating) and water/sewer services as of July In October 2013 the Hungarian Parliament approved the second energy price cut in Hungary cut state-regulated household energy prices by an average 11.1% as of November 1, 2013, including natural gas, electricity and district heating. The labor market has shown improvements which is partly due to economic growth seen in 2014 but is also a result of the increased reliance on subsidized job creation in the public sector. The unemployment rate remained over 10% during , but fell to 7.5% in The Hungarian Parliament approved the expansion of foreign currency denominated loan rescue program in November 2013 to ease the burden of higher mortgage payments of consumers who had taken on foreign currency mortgages in earlier years. Consumer price inflation fell to 0.2% in 2014, which was driven by regulated and utility price cuts, falling oil prices and imported disinflation. Credit and Interest Rates 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. In this program, the National Bank of Hungary granted 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 September 2013 the National Bank of Hungary announced an extension of its funding for growth scheme providing another HUF 2,000 billion for SME sector until the end of Monetary easing continued from August 2012 bringing down the base interest rate form 7% to 2.1% in July In March and April 2015 the Monetary Council of the Hungarian Central Bank cut the base interest rate by 0.15% each time, to the current rate of 1.8%, a historical low. Government Finances Following the exit from the Excessive Deficit Procedure in 2013, Hungary's general government deficit has been held within EU bounds. The deficit of the general government sector was HUF billion, 2.6% of GDP in 2014, which was HUF 95.4 billion more, or 0.1 percentage point higher as a proportion of GDP compared to the same period of Hungary's government debt ratio stood at 77.3% of GDP in The government debt ratio was reduced by 3.6 bps between 2011 and In March 2015 Standard & Poor s upgraded the rating of Hungary (from BB to BB+ ) citing reduced vulnerability to external shocks and a pickup in economic growth. Hungary s long-term rating from Moody s is Ba1, and the outlook has changed from negative to stable in November Main drivers of the change are the improving medium-term economic outlook, the government s commitment to maintaining the headline government deficit below 3% of GDP and improved resilience to external shocks as reflected in persistent current account surpluses. Taxation In October 2010, the Hungarian Parliament passed a law imposing a so-called crisis tax for the years on each of the retail, energy and telecommunications sectors, with the aim of restoring balance to the national budget. The base of the crisis tax was net sales revenue realized from providing electronic communicational services. The rate of the crisis tax was set at 0% payable on the part of the tax base between zero and HUF 100 million, 2.5% payable on the part of the tax base between HUF 100 million and HUF 500 million, 4.5% payable on the part of the tax base between HUF 500 million and HUF 5 billion and 6.5% payable on the part of the tax base exceeding HUF 5 billion. Page 5 of 86

6 The crisis tax expired in Two sector taxes are currently in force: a per minute telecom tax and a per meter tax on utility cables. On May 18, 2012, the Hungarian Parliament passed the law on the telecom tax. The tax was introduced on July 1, 2012 as a consumption tax on all calls and SMS/MMS and amounted to HUF 2 per minute and HUF 2 per SMS/MMS and was capped at HUF 700 per month for individuals and HUF per month for companies. From August 1, 2013, for companies the tax imposed on fixed and mobile usage was changed to HUF 3 per minute and HUF 3 per SMS/MMS and the cap was changed to HUF per month. The tax payable for residential customer minutes and the cap remained unchanged. As of January 1, 2013 the Hungarian Parliament imposed a so-called utility tax payable by the owners of utility networks, including telecommunications networks. The tax base is the length of network (parallel pathways to be regarded as one). The tax rate is HUF 125 / meter with reduced rates for network lengths of less than 300,000 meters. In mid-october 2014, the Hungarian government proposed a per-gigabyte charge on internet traffic as part of an omnibus tax bill and draft budget. The announcement resulted in large-scale public protests in Hungary. On October 31, 2014 the Prime Minister announced the withdrawal of the proposed internet tax. Government officials have indicated on several occasions that they expect the sector taxes to be withdrawn over time should the economy generate higher tax receipts from other sources. These remarks have been general in nature as pertains to telecom sector taxes. No specific telecommunications sector tax reduction has been proposed. However, the government has specifically committed itself to reduce the banking sectorial taxes in stages beginning in 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 revenue from broadband services 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 Hungarian 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, internet and ICT services and products provided to business, government and other institutional customers nationwide. Corporate voice revenue comprises access charges, monthly fees, time based call charges of switched and IP voice solutions and, interconnect charges on calls terminated in our network. Page 6 of 86

7 In addition, Corporate revenue includes revenue from leased line data services, VPN networks, DSL and leased line broadband, internet services which are comprised of access charges and fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Corporate ICT revenue comprises one-time and monthly recurring revenues from hardware sales, customized IT solutions, infrastructure related services, and server and hosting solutions. Wholesale the revenue generated from voice and data services is provided on a wholesale basis to resellers to utilize excess network capacity. Wholesale revenue comprises rental payments for dark fiber, managed 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. 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; 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. Page 7 of 86

8 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 definite 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. 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. Page 8 of 86

9 Result for the Year The following tables provide a summary of the consolidated financial statements of Matel as of and for the years ended December 31, 2014 and The summary consolidated financial information presented here as of and for the years ended December 31, 2014 and 2013 should be read in conjunction with the notes to the consolidated financial statements. For the year ended December 31, ( 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... (56.5) (65.5) Operating expenses... (48.3) (48.7) Cost of restructuring... (0.4) (1.3) Depreciation and amortization... (44.0) (48.6) Income / (loss) from operations (0.3) Net financial expense (1)... (14.7) (24.0) Gain on extinguishment of debt (2) Income/ (loss) before tax... (14.4) 56.8 Income tax benefit/(expense)... (2.6) (2.8) Income/ (loss) for the year... (17.0) 54.0 As of December 31, ( in millions) Balance Sheet Data: Cash and cash equivalents Net working capital (3)... (15.4) (16.8) Total assets Net assets/(liabilities) relating to derivative financial instruments... (0.2) (0.1) Liabilities relating to finance leases Third party debt (4) Shareholders equity (5) Page 9 of 86

10 For the year ended December 31, ( in millions) Cash Flow Data: Net cash flow provided by / (used in) operating activities Net cash flow provided by / (used in) investing activities... (29.0) (30.5) Net cash flow provided by / (used in) financing activities... - (3.9) Net increase / (decrease) in cash and cash equivalents... (0.9) 7.8 Free cash flow before debt service (6) (1) 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. (2) 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 The Restructuring in the notes to the consolidated financial statements). (3) 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). (4) Third party debt for the year ended December 31, 2013 and 2014 includes the 2013 Notes and excludes liabilities related to finance leases and liabilities related to derivative financial instruments. (5) Shareholders equity includes non-controlling interest. (6) 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: Comparison of the Year ended December 31, 2014 and the Year ended December 31, 2013 Residential Voice Our Residential Voice revenue was EUR 25.9 million compared to EUR 30.8 million for the year ended December 31, 2013, representing a decrease of EUR 4.9 million or 16%. This decrease is mainly due to the decrease in the number of our Residential Voice customers as well as decrease in ARPU. Residential Internet & TV Our Residential Internet & TV revenue was EUR 30.9 million compared to EUR 32.0 million for the year ended December 31, 2013, representing a EUR 1.1 million or 3% decrease. This decrease is due to the deteriorating HUF/EUR exchange rate as Residential Internet & TV revenue increased in HUF terms. The lower ADSL ARPU was offset by the increase in the number of internet customers and TV subscribers. Cable For the year ended December 31, ( in millions) Net cash flow provided by operating activities Cash interest paid Net cash flow used in investing activities... (29.0) (30.5) Free cash flow before debt service Our Cable revenue was EUR 18.3 million compared to EUR 17.6 million for the year ended December 31, 2013, representing an increase of EUR 0.7 million or 4%. This increase was mainly due to the increase in our customer base. Page 10 of 86

11 Corporate Our Corporate segment revenue was EUR 54.8 million compared to EUR 60.4 million for the year ended December 31, 2013, representing a EUR 5.6 million or 9% decrease. This decrease is mainly due to decreasing Corporate voice, data, and internet revenue as a result of decreasing traffic as well as price erosion due to intense competition and a decrease in ICT revenue due to a high-volume low-margin software sale business to a single customer in 2013 that did not occur in Wholesale Our Wholesale revenue was EUR 19.6 million compared to EUR 23.0 million for the year ended December 31, 2013, representing a EUR 3.4 million or 15% decrease. This decrease is primarily attributable to the decrease in data revenue, mainly in low bandwidth leased lines. 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 19 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 macroeconomic condition of Hungary. The Group s revenue and cash flow will be adversely affected if the Hungarian fixed line market further declines. 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. 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 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. Page 11 of 86

12 The telecom tax was introduced by the Hungarian Ministry for Economy with a significant impact on the Group s traffic revenue. The utility tax was introduced by the Hungarian Ministry for Economy with a significant impact on the Group s results. 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 for the provision of certain of its services over which providers it has no direct control. 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 organized 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 86

13 Directors The directors of the Company as of December 31, 2014 are: Nikolaus Bethlen non-executive Chairman appointed on May 1, 2013 Thierry Baudon non-executive Board Member appointed on July 12, 2013 Robert Chmelar non-executive Board Member appointed on December 12, 2013 Mark Nelson-Smith non-executive Board Member appointed on December 12, 2013 Jan Vorstermans non-executive Board Member appointed on December 12, 2013 David Blunck executive Board Member and CFO appointed on December 12, 2013 David McGowan executive Board Member and CEO appointed on December 12, 2013 The Company has taken notice of the legislation effective from January 1, 2013 as a consequence of which a large company, when nominating or appointing members of the Board, should take into account as much as possible a balanced composition of these Board in terms of gender, to the effect that at least 30 percent of the positions are held by women and at least 30 percent by men. The current composition of the Board deviates from the above-mentioned percentages. With regards to future appointments, the Board will take gender diversity objectives into account as much as possible. Employees Matel had no employees in the years ended December 31, 2014 and Future developments Management expects the Company to continue with its holding and financing activities in the future. Change in Board of Directors As of January 14, 2015 David McGowan resigned as the CEO and Executive Board Member of Matel. As of the effective date, David Blunck, became the new CEO of Matel. Robert Chmelar resigned as nonexecutive Board Member from the Board of Matel effective as of January 29, 2015 and was replaced by Tas Tóbiás as of the effective date. Page 13 of 86

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15 MAGYAR TELECOM B.V. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014 (PRESENTED IN THOUSAND EUROS) Page 15 of 86

16 CONSOLIDATED FINANCIAL STATEMENTS Table of contents Page Consolidated Balance Sheet 17 Consolidated Statement of Profit and Loss and Other Comprehensive Income 18 Consolidated Cash Flow Statement 19 Consolidated Statement of Changes in Equity Page 16 of 86

17 Consolidated Balance Sheet as of December 31, 2014 Notes At December 31 At December Non-Current Assets Intangible Assets 11 25,123 26,386 Property, Plant and Equipment , ,285 Other Non-Current Financial Assets , ,761 Current Assets Other Current Assets 15 1,329 1,122 Trade and Other Receivables 14 19,412 25,936 Cash and Cash Equivalents 13 20,823 21,702 41,564 48,760 Total Assets 254, ,521 Equity Capital and Reserves Attributable to Equity Holders of the Parent Share Capital , ,148 Capital Reserve , ,094 Other Reserve 17 (136,246) (136,246) Cumulative Translation Reserve 17 (83,300) (70,829) Accumulated Losses 17 (297,449) (280,462) 54,247 83,705 Non-Controlling Interest Total Equity 54,259 83,720 Liabilities Non-Current Liabilities Borrowings , ,552 Other Non-Current Liabilities 20 9,614 11, , ,678 Current Liabilities Trade and Other Payables 22 18,378 23,506 Derivative Financial Instruments Accrued Expenses and Deferred Income 23 16,195 19,116 Accrued Interest Provisions for Other Liabilities and Charges 21 1, ,469 44,123 Total Liabilities 200, ,801 Total Equity and Liabilities 254, ,521 Page 17 of 86

18 Consolidated Statement of Profit and Loss and Other Comprehensive Income/(Loss) For the year ended December 31 Notes Revenue 4 149, ,815 Cost of Sales, Exclusive of Depreciation 5 (56,517) (65,513) Depreciation and Amortization 8 (43,991) (48,608) Operating Expenses 6 (48,259) (48,678) Cost of Restructuring 9 (429) (1,300) Income / (Loss) from Operations 287 (284) Financial Income ,093 Financial Expenses 10 (14,881) (26,080) Gain on Extinguishment of Debt 18-81,110 Income / (Loss) Before Tax (14,432) 56,839 Income Tax (Expense) / Benefit 28 (2,558) (2,871) Income / (Loss) for the Year (16,990) 53,968 Other Comprehensive Income / (Loss): Items that may be reclassified subsequently to Income / (Loss) Cash Flow Hedges 17 - (592) Change in Cumulative Translation Reserve 17 (12,471) (4,952) Total items that may be reclassified subsequently to Income or Loss (12,471) (5,544) Other Comprehensive Income / (Loss) (12,471) (5,544) Total Comprehensive Income / (Loss) (29,461) 48,424 Attributable to: Owners of the Parent (29,458) 48,420 Non-Controlling Interest (3) 4 (29,461) 48,424 Page 18 of 86

19 Consolidated Cash Flow Statement Cash Flows from Operating Activities Notes Income / (Loss) Before Tax (14,432) 56,839 Adjustments for Interest Expense / (Income) 10 14,139 24,886 Gain on Extinguishment of Debt 18 - (81,110) Amortization 8,11,12 7,364 8,663 Depreciation 8,11,12 36,627 39,945 Result of Sale of Intangible Assets 3 - Result of Sale of Property, Plant and Equipment (1,512) (1,193) Change of Derivative Financial Instruments 111 (583) Provision for Impairment of Trade Receivables 1,229 1,555 Provision for Obsolete Inventory Provisions (868) Unrealized Foreign Exchange (Gain) / Loss Other Non-Cash Items 2,894 1,001 Working Capital Changes: Change in Trade and Other Receivables 4,008 5,149 Change in Inventories (6) 1,258 Change in Prepayments and Accrued Income (214) 1,040 Change in Trade and Other Payables and Accrued Expenses and Deferred Income (8,654) (6,857) Income Taxes Paid (2,912) (2,388) Interest Paid (10,662) (5,733) Net Cash Flow Provided by / (Used in) Operating Activities 28,891 41,788 Cash Flows from Investing Activities For the year ended December 31 Purchase of Property, Plant and Equipment and Intangible Assets (26,394) (32,020) Proceeds from Sale of Property, Plant and Equipment and Intangible Assets 1,672 1,377 Purchase of subsidiaries, net of cash acquired 3 (4,433) - Interest Received Net Cash Flow Provided by / (Used in) Investing Activities (28,994) (30,483) Cash Flows from Financing Activities Settlement of Derivative Financial Instruments Repurchase of 2013 Notes 18 - (14,949) Proceeds from issuance of Sponsor debt 18-10,000 Owner's Paid-in Capital 17-15,000 Refinancing Costs 18 - (14,171) Net Cash Flow Provided by / (Used in) Financing Activities - (3,928) Effect of Exchange Rate Changes on Cash and Cash Equivalents (776) 397 Net Increase / (Decrease) in Cash and Cash Equivalents (879) 7,774 Cash and Cash Equivalents at the Beginning of the Year 13 21,702 13,928 Cash and Cash Equivalents at the End of the Year 20,823 21,702 Summary of Non-Cash Transactions: The Group had unpaid capital expenditures in the amount of EUR 8,350 thousand and EUR 10,854 thousand as of December 31, 2014 and 2013, respectively. Other non-cash items for the year ended December 31, 2013 contain EUR 500 thousand reversed Mid Europa management fees relating to the third and fourth quarter of 2012 and EUR 1,501 thousand capitalized interests relating to the 2013 Notes. Other non-cash items for the year ended December 31, 2014 contains capitalized interest in the amount of EUR 3,046 thousand and contingent consideration in the amount of EUR 200 thousand. Page 19 of 86

20 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, , ,094 (16,693) 592 (65,877) (334,426) (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 ,964 53, ,968 Total Comprehensive Income / (Loss) (592) (4,952) 53,964 48, ,424 Issuance of B Shares ,947 - (119,553) ,394-85,394 Additional Paid-in Capital 17-15, ,000-15,000 Total Transaction with Owners 204,947 15,000 (119,553) , ,394 Balance at December 31, , ,094 (136,246) - (70,829) (280,462) 83, ,720 Balance at January 1, , ,094 (136,246) - (70,829) (280,462) 83, ,720 Translation Adjustment for the Year (12,471) - (12,471) - (12,471) Other Comprehensive Income / (Loss) (12,471) - (12,471) - (12,471) Net Result for the Year (16,987) (16,987) (3) (16,990) Total Comprehensive Income / (Loss) (12,471) (16,987) (29,458) (3) (29,461) Balance at December 31, , ,094 (136,246) - (83,300) (297,449) 54, ,259 Page 20 of 86

21 1. General Information Magyar Telecom B.V. ( Matel or the Company together with its subsidiaries the Group ) was incorporated in the Netherlands 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 ) and Dataneum Adatközpont Zártkörűen Működő Részvénytársaság ( Dataneum Zrt ) 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 Telecom B.V. was established by Coop with a 100% ownership. 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 18 Borrowings ) and new shares (see note 17 Equity ). The new shares were issued to a newly established entity, Matel Holdings Limited. After completion of the Restructuring as of December 31, 2014 and 2013 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. In the framework of the Management Incentive Plan (the MIP ) (see note 16 - "Management Compensation"), on July 31, 2014, the general meeting of Matel issued 16 non-voting C shares in the capital of the Company. Each C share has a nominal value of one euro cent (EUR 0.01). Holders of the C shares will be entitled to certain distributions if certain conditions are met. The shares were acquired by Stichting Administratiekantoor MTBV ( Stichting ), a special-purpose Dutch foundation whose beneficiaries are the MIP participants. Stichting is controlled by the Company. As part of the MIP Stichting issued depositary receipts for shares acquired. As of December 31, 2014 and 2013 the Group is controlled by Mid Europa. Mid Europa does not prepare financial statements under IFRS. On August 28, 2014 the Group acquired 100% of the share capital of Dataneum Zrt. Dataneum Zrt provides data center infrastructure services (see note 3 Business Combinations ). Page 21 of 86

22 As of December 31, 2014 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, 2014 is HUF 16 billion (approximately EUR 51 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, 2014 is HUF 165 million (approximately EUR 524 thousand). Dataneum Zrt was incorporated on November 12, 2009 as a joint stock company under the laws of Hungary. The authorized share capital of Dataneum Zrt as of December 31, 2014 is HUF 500 million (approximately EUR 1,588 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, 2014 is EUR 18 thousand. Invitel International Holdings had no operations during the years ended December 31, 2014 and The Restructuring During 2013 the Group worked with certain of its advisers to prepare a strategic review of the Group. 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 debt levels under the 2009 Notes. The Group commenced negotiations regarding the terms of a Restructuring, and 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 endeavors 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 favor 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, Page 22 of 86

23 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. 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 investments were 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 and 2014 the Group is controlled by Mid Europa. The Company has recorded a gain of EUR 81,110 thousand in relation to this Restructuring for the financial year ended December 31, 2013, 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 ). Page 23 of 86

24 These consolidated financial statements were approved for issue on April 24, 2015 by the Board of Directors Basis of Preparation The consolidated financial statements are presented in euro ( EUR ) rounded to the nearest thousands 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 judgment in the process of applying the accounting policies. The areas involving a higher degree of judgment or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are discussed in note Critical Accounting Estimates and Judgments Changes in accounting policy and disclosures a) New standards, amendments and interpretations adopted by the group The following standards have been adopted by the group for the first time for the financial year beginning on or after January 1, 2014 and have a material impact on the group: Amendment to IAS 32 Financial instruments: Presentation on offsetting financial assets and financial liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment did not have a significant effect on the group financial statements. Amendments to IAS 36 Impairment of assets, on the recoverable amount disclosures for non-financial assets. This amendment removed certain disclosures of the recoverable amount of CGUs which had been included in IAS 36 by the issue of IFRS 13. Amendment to IAS 39 Financial instruments: Recognition and measurement on the novation of derivatives and the continuation of hedge accounting. This amendment considers legislative changes to over-thecounter derivatives and the establishment of central counterparties. Under IAS 39 novation of derivatives to central counterparties would result in discontinuance of hedge accounting. The amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument meets specified criteria. The group has applied the amendment and there has been no significant impact on the group financial statements as a result. Other standards, amendments and interpretations which are effective for the financial year beginning on January 1, 2014 are not material to the group. Page 24 of 86

25 b) New standards, amendments and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after January 1, 2014, and have not been applied in preparing these consolidated financial statements. The management has considered the effect of the following new standards and amendments: IFRS 9 Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, fair value through other comprehensive income ( OCI ) and fair value through profit or loss. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to Notes to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in OCI, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after January 1, Early adoption is permitted. The Group is assessing the impact of IFRS 9 on its consolidated financial statements. IFRS 15 Revenue from contracts with customers deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. In May 2014 the IASB and the US FASB jointly issued a converged Standard on the recognition of revenue from contracts with customers. The core principle of the new Standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new Standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and new guidance for multiple-element arrangements. The application of the new standard is required for annual periods beginning on or after January 1, Earlier application is permitted. The adoption of the new standard will result in significant changes in the financial statements of the Group, primarily in respect of the timing of revenue recognition and in respect of capitalization of costs of obtaining a contract with a customer and contract fulfilment costs. The timing of revenue recognition and the classification of our revenues as either service or equipment revenue will be affected due to the allocation of consideration in multiple element arrangements (solutions for our customers that may involve the delivery of multiple services and products occurring at different points in time and/or over different periods of time). Our operations and associated systems are complex and the currently estimated time and effort necessary to develop and implement the accounting policies, estimates, judgments and processes to comply with the new standard is expected to span a substantial time. As a result, at this time, it is not possible to make reasonable quantitative estimates of the effects of the new standard. The European Union has not yet endorsed the new standard. Page 25 of 86

26 Amendments to IFRS 10, IFRS 12 and IAS 27 - Investment entities (issued on October 31, 2012 and effective for annual periods beginning January 1, 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity is required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities. IFRS 12 was amended to introduce new disclosures, including any significant judgments made in determining whether an entity is an investment entity and information about financial or other support to an unconsolidated subsidiary, whether intended or already provided to the subsidiary. IFRIC 21 Levies, sets out the accounting for an obligation to pay a levy if that liability is within the scope of IAS 37 Provisions. The interpretation addresses what the obligating event is that gives rise to pay a levy and when a liability should be recognized. The Group is not currently subjected to significant levies so the impact on the Group is not material. It is effective for annual periods beginning after June 17, None of other standards and amendments has significant impact on the consolidated financial statements of the Group Basis of Consolidation Subsidiaries 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 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. Page 26 of 86

27 Goodwill 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 recognized 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 Transactions eliminated on consolidation Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated; unrealized 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 Transactions with entities under common control 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 Disposal of subsidiaries 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. Page 27 of 86

28 2.4. Foreign Currency Translation of financial statements of foreign operations 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 Transactions and balances 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. Page 28 of 86

29 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. 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. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) in the event of default and (iii) in the event of insolvency or bankruptcy. 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 reorganization; 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. Page 29 of 86

30 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. 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 cannot 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. Page 30 of 86

31 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 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 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 definite or an indefinite useful life Intangible assets with definite 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 definite 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: Software Customer relationships Property rights Other 3 years 9-15 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. Page 31 of 86

32 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 Property, Plant and Equipment Owned assets 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 Leased assets 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 Subsequent expenditure on property, plant and equipment Expenditure incurred to replace and/or acquire 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 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. Page 32 of 86

33 The estimated useful lives are as follows: Buildings Network and equipment Other equipment years 3-25 years 3-7 years 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. Page 33 of 86

34 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 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. 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. Page 34 of 86

35 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. 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. Page 35 of 86

36 2.19. 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 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 recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. Page 36 of 86

37 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. 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 permissibility 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 2.17 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 Judgments 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 Deferred tax assets 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 recognized any deferred tax asset. Page 37 of 86

38 Impairment provision for doubtful accounts 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 14 Trade and Other Receivables ) Depreciation and amortization 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 4.9 million and EUR 5.5 million for the years ended December 31, 2014 and 2013, respectively. The Group recognizes customer relationships in its consolidated balance sheet. Customer relationships are recorded at fair value and amortized over the expected life of the customer base. If the Group was to shorten the average useful life the customer relationship it would result in additional annual amortization expense of EUR 142 thousand and EUR 148 thousand for the years ended December 31, 2014 and 2013, respectively. 3. Business Combinations On June 30, 2014, Invitel, the Group s main operating entity signed a Share Purchase Agreement ( SPA ) with the owner of Dataneum Adatközpont Zártkörűen Működő Részvénytársaság ( Dataneum Zrt ) for the acquisition of 100% of the share capital of Dataneum Zrt. On August 28, 2014 the Group completed the acquisition of the entire share capital of Dataneum Zrt and as a result obtained operational control over the data center assets. Dataneum Zrt operates a data center and provides data center infrastructure services. The main customer of Dataneum Zrt is Invitel. The Tier 3 equivalent data center, which has nearly 1,200 m2 of built-out data center space as well as additional expansion capacity, was built out in 2009 to Invitel s specification. As a result of the acquisition Invitel will save approximately EUR 1 million in rental and service fees on an annual basis. Page 38 of 86

39 The total purchase consideration and its components as of the date of the acquisition were as follows: August 28, 2014 Purchase Consideration: Purchase price 5,500 Less: Net of current assets and current/non-current liabilities (441) Rental collateral (424) Total Purchase Consideration 4,635 Cash consideration transferred 4,435 Retained purchase consideration 200 Total Purchase Consideration 4,635 From the purchase price EUR 200,000 was retained by the Group as a guarantee for the obligations undertaken by the seller in the SPA, mainly relating to future losses or financial obligations arising from past events prior to acquisition. The retained purchase price will be payable to the seller of Dataneum Zrt on the fifth anniversary of the closing of the transaction. Matel used its own free cash to acquire the shares of Dataneum Zrt. Acquisition related transaction cost in the amount of EUR 195 thousand were charged to operating expenses. In accordance with IFRS 3 revised - Business Combinations, the Group accounts for acquisitions based on fair values of the identifiable assets acquired and liabilities and contingent liabilities assumed. The following table presents the purchase price allocation based on the fair values of Dataneum Zrt s assets acquired and liabilities assumed as of August 28, 2014: August 28, 2014 Acquired Net Assets at Fair Value: Cash and cash equivalents 2 Property, plant and equipment 2,532 Trade and other receivables 92 Prepayments and other current assets 179 Trade and other payables (1,032) Other non-current liabilitites (2) Customer relationships (included in intangibles) (see note 11) 39 Non-compete agreements (included in intangibles) (see note 11) 88 Total Identifiable Net Assets 1,898 Goodwill 2,737 Total 4,635 Page 39 of 86

40 The goodwill is primarily attributable to the significant synergies and combined cost savings expected to arise. The goodwill is allocated to the Corporate segment. The goodwill will not be deductible for tax purposes in future periods. Dataneum Zrt contributed revenue of EUR 48 thousand and loss of EUR 34 thousand to the Group for the period from the date of acquisition to December 31, If the acquisition had occurred on January 1, 2014, Group revenue for the years ended December 31, 2014 would have been EUR 149,551 thousand and the net loss for the years ended December 31, 2014 would have been EUR 16,808 thousand. 4. Revenue For the year ended December Residential Voice 25,927 30,842 Residential Internet & TV 30,881 31,983 Cable 18,312 17,572 Corporate 54,826 60,437 Wholesale 19,537 22,981 Total Revenue 149, , Cost of Sales, Exclusive of Depreciation For the year ended December Sales commissions (2,496) (2,636) Interconnect expenses (6,222) (7,105) Access type charges (6,908) (8,606) Other cost of sales (16,193) (18,810) Network operating expenses (16,897) (18,616) Direct personnel expenses (7,801) (9,740) Total Cost of Sales, Exclusive of Depreciation (56,517) (65,513) 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 2,742 thousand and EUR 3,131 thousand for the years ended December 31, 2014 and 2013, respectively. Page 40 of 86

41 6. Operating Expenses For the year ended December Operating and other taxes (11,790) (12,713) Personnel expenses (19,838) (19,320) Headcount-related costs (6,992) (7,775) IT costs (3,346) (3,670) Advertising and marketing costs (3,780) (3,754) Collection costs (1,389) (1,735) Bad debt expense (813) (1,268) Legal and audit fees (306) (439) Consultant expenses (423) (158) Management fees (13) 413 Expenses relating to strategic projects (1,516) (1,506) Other cost, net (1,568) (234) (51,774) (52,159) Less: Capitalised costs 3,515 3,481 Total Operating Expenses (48,259) (48,678) Operating and other taxes include the telecom tax and the utility tax. The telecom tax is effective from July 1, 2012 and is imposed on fixed and mobile usage and amounts to HUF 3 per minute and HUF 3 per SMS/MMS and is capped at HUF 700 per month for individuals and HUF per month for companies. 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. The annual utility tax liability for 2014 and 2013 was recorded by the Company as of January 1, 2014 and 2013 in the amount of HUF 2.1 billion (EUR 6.7 million) and HUF 2.1 billion (EUR 7.1 million), respectively. Management fees relate to costs charged by the trustee of Matel. In 2013 management fees also include accrued management fees to Mid Europa. Based on the Restructuring Agreement signed on July 15, 2013 (see note 1.1 The Restructuring ) all accrued Mid Europa management fees, including third and fourth quarter 2012 fees were reversed in the second quarter of The reversed amount in the second quarter of 2013 was EUR 1.0 million, from which EUR 0.5 million related to the financial year of Expenses relating to strategic projects include legal and financial consulting expenses of major projects of the Group. For the year ended December 31, 2014 these expenses mainly included advisory fees related to strategic projects. For the year ended December 31, 2013 these expenses mainly included management retention expenses. Capitalized costs include labor expenses associated with the construction of property, plant and equipment of the Group. Other cost, net mainly include legal provision amounted to EUR 278 thousand, non-deductible VAT amounted to EUR 236 thousand, expenses relating to Dataneum acquisition amounted to EUR 195 thousands and board members fee in the amount of EUR 161 thousands. Page 41 of 86

42 7. Personnel Expenses For the year ended December Salaries (10,705) (10,418) Social security and other contributions (3,030) (2,977) Personnel related expenses (3,227) (3,309) Bonuses and charges (2,876) (2,616) Total Personnel Expenses (19,838) (19,320) The number of employees of the Group was 1,173 and 1,173 as of December 31, 2014 and 2013, respectively. 8. Depreciation and Amortization For the year ended December Amortization (7,315) (8,663) Depreciation (35,641) (39,592) Impairment loss (1,035) (353) Total Depreciation and Amortization (43,991) (48,608) Non-financial assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized 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 and goodwill acquired as part of Dataneum acquisition in accordance with its accounting policy for the years ended December 31, 2014 and Upon such review, no impairment charge arose and 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. Page 42 of 86

43 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 budgeted financial performance and amounted to EUR 41,937 thousands in the impairment assessment for the year ended 2014 and EUR 48,327 thousand for the year ended December 31, Further lowering the EBITDA multiples would have resulted in an impairment charge and 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, deterioration and shortage identified as part of physical count of non-financial assets: impairment charge of EUR 1,035 thousand and EUR 353 thousand and December 31, 2013, respectively, in relation to the property, plant and equipment and intangible assets. 9. Cost of Restructuring For the year ended December Cost of restructuring (429) (1,300) Total Cost of Restructuring (429) (1,300) Severance expense for the years ended December 31, 2014 and December 31, 2013 mainly related to headcount reductions as a result of operational reorganizations in Invitel. 10. Financial Income and Expense Interest income in 2014 and 2013 relates to cash and cash equivalents. For the year ended December Interest income 162 1,078 Fair value change of derivative financial instruments Net foreign exchange gain Financial Income 162 2,093 Third party interest expense (13,719) (22,560) Amortization of bond discount - (553) Amortization of deferred borrowing costs - (2,250) Other interest expense (582) (601) Interest expense (14,301) (25,964) Net foreign exchange loss (425) - Fair value change of derivative financial instruments (111) (32) Other financial expense (44) (84) Financial Expense (14,881) (26,080) Page 43 of 86

44 Third party interest expense includes the accrued, paid and capitalized interest expense of the 2013 Notes (see note 18 Borrowings ). Third party interest expense for the year ended December 31, 2013 includes the accrued, paid and capitalized interest expense of the 2013 Notes (see note 18 Borrowings ) and 2009 Notes Intangible Assets Movements during the year 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, ,322 40,043-42, ,854 Additions during the year 1,517 1,818-3,010 6,345 Reclassification (197) (789) - (886) (1,872) Effect of exchange rates (1,104) (766) - (815) (2,685) Cost at December 31, ,538 40,306-43, ,642 Accumulated amortization at January 1, 2013 (53,340) (26,703) - (30,534) (110,577) Amortization charge for the year (2,480) (2,059) - (4,124) (8,663) Reclassification ,872 Effect of exchange rates 1, ,112 Accumulated amortization at December 31, 2013 (54,610) (27,469) - (33,177) (115,256) Carrying value at January 1, ,982 13,340-11,955 29,277 Carrying value at December 31, ,928 12,837-10,621 26,386 Cost at January 1, ,538 40,306-43, ,642 Additions during the year 1,117 1,283-2,288 4,688 Acquisition of subsidiaries - - 2, ,864 Reclassification Disposals during the year (25,327) (7,993) - - (33,320) Effect of exchange rates (2,816) (2,169) (13) (2,599) (7,597) Cost at December 31, ,512 31,427 2,724 43, ,277 Accumulated amortization at January 1, 2014 (54,610) (27,469) - (33,177) (115,256) Amortization charge for the year (2,003) (1,932) - (3,380) (7,315) Impairment for the year (10) (39) - - (49) Reclassification Disposals during the year 25,324 7, ,317 Effect of exchange rates 2,665 1,463-2,021 6,149 Accumulated amortization at December 31, 2014 (28,634) (19,984) - (34,536) (83,154) Carrying value at January 1, ,928 12,837-10,621 26,386 Carrying value at December 31, ,878 11,443 2,724 9,078 25,123 Other intangible assets include capitalized customer acquisition costs (mainly sales commissions) and customer relationship in the amount EUR 2,468 thousand and EUR 6,527 thousand as of December 31, 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, Page 44 of 86

45 12. 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, , ,555 16,285 9, ,381 Additions during the year ,993 23,993 Reclassification - (6) Transfers from capital WIP 47 23,447 1,171 (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, , ,101 17,070 8, ,040 Accumulated depreciation at January 1, 2013 (3,031) (510,339) (14,108) - (527,478) 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 ,447 Retirement (201) (201) Effect of exchange rates 57 10, ,507 Accumulated depreciation at December 31, 2013 (2,864) (537,781) (15,110) - (555,755) Carrying value at January 1, , ,216 2,177 9, ,903 Carrying value at December 31, , ,320 1,960 8, ,285 Cost at January 1, , ,101 17,070 8, ,040 Additions during the year ,201 19,201 Reclassification Acquisition of subsidiaries 234-2,298-2,532 Transfers from capital WIP 33 18,909 1,177 (20,119) - Disposals during the year (110) (73,322) (8,094) - (81,526) Retirement Effect of exchange rates (272) (41,201) (849) (490) (42,812) Cost at December 31, , ,389 11,602 7, ,337 Accumulated depreciation at January 1, 2014 (2,864) (537,781) (15,110) - (555,755) Depreciation charge for the year (340) (33,819) (1,482) - (35,641) Impairment for the year (40) (904) (42) - (986) Reclassification - (909) - - (909) Disposals during the year ,164 8,092-81,366 Effect of exchange rates , ,798 Accumulated depreciation at December 31, 2014 (2,978) (470,341) (7,808) - (481,127) Carrying value at January 1, , ,320 1,960 8, ,285 Carrying value at December 31, , ,048 3,794 7, ,210 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 2,687 thousand and EUR 2,849 thousand and accumulated depreciation of EUR 447 thousand and EUR 400 thousand as of December 31, 2014 and 2013, 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. Page 45 of 86

46 13. Cash and Cash Equivalents At December (in thousand of EUR) Cash on hand and in banks 20,823 21,702 Total Cash and Cash Equivalents 20,823 21,702 Out of the total of cash and cash equivalents of EUR 20,823 thousand as of December 31, 2014, the EUR denominated part is EUR 11,249 thousand or 54%, the USD denominated part is EUR 15 thousand or 1%, the HUF denominated part is EUR 9,398 thousand or 44% and the GBP denominated part is EUR 161 thousand or 1%. 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%. The 2013 Notes Indenture (see note 18 Borrowings ) limits time deposits to be placed to banks having at a rating of A or better by S&P 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. 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. A2 A3 MKB Bank A3 Baa1 Unicredit Bank - subsidiary of Unicredit Bank Austrisa AG Baa2 Baa1 Raiffeisen Bank - subsidiary of Raiffeisen Bank International AG Baa1 A2 BNP Paribas A1 A2 ING Bank Branch of ING Bank N.V. A2 A2 CIB Bank - Intesa Sanpaolo Spa Baa2 Baa2 OTP Bank Ba2 Ba2 Sberbank Ba1 Baa1 In 2014, out of its cash and cash equivalents, the Group held EUR 3,334 thousand in banks rated A2; EUR 1,754 thousand in banks rated A3; EUR 12,437 thousand in banks rated Baa2; EUR 3,147 thousand in banks rated A1 and EUR 151 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 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, Page 46 of 86

47 14. Trade and Other Receivables At December Trade accounts receivable 19,374 25,087 Provision for impairment of trade receivables (4,007) (5,447) Receivables from related parties 27 - Other receivables 4,018 6,296 Total Trade and Other Receivables 19,412 25,936 Other receivables as of December 31, 2014 mainly include advances given relating to deposits in the amount of EUR 1,436 thousand, bank guarantee in the amount of EUR 930 thousand, prepaid rental fees in the amount of EUR 168 thousand as well as corporate income tax and VAT receivables in the amount of EUR 1,038 thousand. 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. The carrying amounts of trade and other receivables are denominated in the following currencies: Currency At December in HUF 17,186 22,832 in EUR 1,917 3,104 in USD in GBP 78 - Total Trade and Other Receivables 19,412 25,936 The aging analysis of trade receivables of the Group are as follows: At December Not past due 10,605 12,226 past due by less than 30 days 4,290 5,882 past due by days 931 1,713 past due by days past due by days 798 1,017 past due by over 360 days 2,347 3,446 Total Trade Accounts Receivable 19,374 25,087 Page 47 of 86

48 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 A3 1, Baa ,175 Baa Ba Residential - non-rated 927 1,553 Corporate & Wholsale - non-rated 6,205 7,832 Other operating receivable 1, Total Not Past Due 10,605 12,226 Movements in the provision for impairment of trade receivables of the Group are as follows: Opening at January 1 (5,447) (6,667) Addition due to acquisition of enterprises (1) - Provision for receivables impairment (1,229) (1,555) Receivables written off during the year as uncollectible 2,341 2,575 Amounts reversed Effect of exchange rates Closing at December 31 (4,007) (5,447) 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. Page 48 of 86

49 15. Other Current Assets At December Inventories Prepayments and accrued income Total Other Current Assets 1,329 1, Management Compensation A management retention programme was introduced in 2013 (the Retention Programme ), which formed part of the management s employment/service contracts. Under the Retention Programme, each member of the Executive Management Team was entitled to a bonus payment of up to 150% of their annual salary (the Bonus Amount ). 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 was to 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 was designated as a quarterly performance component ( QPC ), whereby payment was contingent upon satisfactory completion of certain performance targets, which the CEO of Invitel (in case of the CEO the owner) set and evaluated each quarter. If the Executive Management Team member successfully attained the set targets at the end of each quarter following evaluation, they received the QPC payment. 50% of the QPC was paid directly to the Executive Management Team member, while the remaining 50% was paid into an escrow account and was to be paid with, and based on the same terms and conditions as, the Guaranteed Amount. For the other Executive Management Team members, there was no Guaranteed Amount and, instead, 100% of the Bonus Amount was designated as a QPC. As above, if the Executive Management Team member successfully achieved the required targets, as set and evaluated each quarter by the CEO, they received the QPC payment. The amount recorded as operating expense for the on Retention Programme for the year ended December 31, 2013 was EUR 1,476 thousand. On May 19, 2014 the Board of Directors of Matel approved the introduction of a Management Incentive Plan (the MIP ). Each Equityco Director as well the full Board approved the MIP, in accordance with the Company s Shareholder Agreement. In the framework of the MIP, on July 31, 2014, the general meeting of Matel issued 16 non-voting C shares in the capital of the Company. Each C share has a nominal value of one euro cent (EUR 0.01). Holders of the C shares will be entitled to certain distributions if certain conditions are met. The shares were acquired by Stichting Administratiekantoor MTBV, a special-purpose Dutch foundation whose beneficiaries are the MIP participants. As of December 31, 2014 no amount was recorded in relation to management compensation, as it is the management s assessment that those conditions are not probable as of the date of these consolidated financial statements. Page 49 of 86

50 The Board has empowered a subcommittee consisting of one Sponsor Director and one Equityco Director to propose amended MIP conditions. Management will re-examine the MIP liability provision once amended MIP conditions are approved and in place. 17. Equity During the 2013 December Refinancing, all 20,308,640 issued 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 Restructuring 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 and 2014 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, on owned by the noteholders, representing 49% of the total share capital of Matel. The issued capital is fully paid in. On July 31, 2014, the general meeting of Matel issued 16 non-voting C shares in the capital of the Company. Each C share has a nominal value of one euro cent (EUR 0.01), and are numbered C1 up to and including C16. Holders of the C shares will be entitled to certain distributions in the case of a sale of all, or substantially all of the assets of Matel. 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. There are no restrictions for distribution regarding these amounts. The balance of other reserves as of December 31, 2014 and 2013 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 Restructuring 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. The hedging reserve contained during 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 2014 and 2013 there are no open cash-flow hedges for the interest payments of the 2013 Notes. As of December 31, 2014 and 2013 the non-controlling interest related to the 0.01% investments held in Invitel by local municipalities. Page 50 of 86

51 18. Borrowings At December Notes 154, ,552 Total Borrowings 154, ,552 The 2013 December Refinancing 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 17 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. 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. The 2013 Notes 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 2013 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. Page 51 of 86

52 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, 2014 and 2013 amounted to EUR 4,547 thousand and EUR 1,501 thousand, respectively. The 2013 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 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 As of December 2014 and 2013 Matel has been in compliance with all of the covenants defined in the 2013 Notes Indenture. Page 52 of 86

53 The Intercreditor Agreement 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 between 4-5 years as of December 31, 2014 and 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, 2014: Assets at fair value through the profit and loss Loans and receivables (in thousand of EUR) Available-for-sale December 31, 2014 Assets as per consolidated balance sheet Trade and other receivables - 18,495-18,495 Other non-current financial assets Cash and cash equivalents - 20,823-20,823 Total - 39,361-39,361 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 - 154, ,598 Trade and other payables - 14,128 14,128 Finance lease - 3,130 3,130 Derivative financial instruments Total , ,029 Total Page 53 of 86

54 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 - 25,210-25,210 Other non-current financial assets Cash and cash equivalents - 21,702-21,702 Total - 47,002-47,002 Total Liabilities at fair value through the profit and loss Other financial liabilities (in thousand of EUR) Total Liabilities as per consolidated balance sheet 2013 Notes - 151, ,552 Trade and other payables - 18,339 18,339 Finance lease - 3,573 3,573 Derivative financial instruments Total , ,532 For the financial assets and liabilities subject to enforceable netting arrangements, each agreement between the Group and the counterparty (typically roaming and interconnect partners) allows for net settlement of the relevant trade receivable and payable when both elect to settle on a net basis. In the absence of such an election, the trade receivables and payables will be settled on a gross basis, however, each party to the netting agreement will have the option to settle all such amounts on a net basis in the event of default of the other party. The following financial assets were subject to offsetting agreements: December 31, 2014 Gross amounts of recognized financial assets Gross amounts of recognized financial liabilities set off in the balance sheet (in thousand of EUR) Net amounts of financial assets presedted in the balance sheet Trade and other receivables 1,484 (226) 1,258 Total 1,484 (226) 1,258 December 31, 2013 Gross amounts of recognized financial assets Gross amounts of recognized financial liabilities set off in the balance sheet (in thousand of EUR) Net amounts of financial assets presedted in the balance sheet Trade and other receivables 2,380 (726) 1,654 Total 2,380 (726) 1,654 Page 54 of 86

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. Customer credit risk 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 4,007 thousand and EUR 5,447 thousand for overdue receivables as of December 31, 2014 and 2013, 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. Interest rate risk 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, 2014, all borrowings of the Group bear fixed rate interest, thus the Group has no more interest rate risk. Foreign currency 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 2.7 Derivative Financial Instruments ). Liquidity risk 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. Page 55 of 86

56 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, 2014 and The amounts disclosed in the table are contractual undiscounted cash flows. December 31, 2014 Total 1 year or Less 2-3 years 4-5 years After 5 years (in thousand of EUR) Borrowings and interest payments 204,781 10,876 22, ,493 - Finance lease liabilities 3, ,897 Derivative financial instruments Trade and other payables 18,378 18, 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 215,444 10,662 21, ,811 - Finance lease liabilities 3, ,104 Derivative financial instruments Trade and other payables 23,506 23, Fair values 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, 2014 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 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. The fair market value of the 2013 Notes approximately equals the carrying value as of December 31, The measurement category of the 2013 Notes is level 2. Page 56 of 86

57 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, 2014 and 2013: 2014 Notional amount 1% p.a. increase in EURIBOR 20% increase in HUF/EUR fx rate Debt Net profit impact on debt services 2013 Notes 154,598 - (2,154) Total 154,598 - (2,154) 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 151,552 - (2,132) Total 151,552 - (2,132) 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, 2014 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 The Restructuring ). 20. Other Non-Current Liabilities At December Deferred income 6,225 7,325 Financial lease liabilities 2,893 3,354 Other non-current liabilities Total Other Non-Current Liabilities 9,614 11,126 Deferred income includes the long-term part of deferred income mainly related to IRU contracts. Out of the total of deferred income of EUR 6,225 thousand as of December 31, 2014, the EUR denominated part is EUR 216 thousand or 3% and the HUF denominated part is EUR 6,010 thousand or 97%. 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%. Page 57 of 86

58 21. Provisions for Other Liabilities and Charges At December Provision for restructuring Other provisions 1, Total Provisions for Other Liabilities and Charges 1, Other provisions as of December 31, 2014 mostly relate to penalties levied in relation to legal proceedings. Other provisions as of December 31, 2013 mostly relate to provisions made in connection with tax audits carried out at subsidiaries of the Group. The amount of provisions made approximates the expected outflows of economic benefits. Movements in the balance of provisions were as follows: At January ,733 Additions to provisions Used during the year (109) (1,600) Exchange differences (50) (33) At December 31 1, Trade and Other Payables At December Trade payables 12,752 16,763 Other payables 5,626 6,743 Total Trade and Other Payables 18,378 23,506 Other payables as of December 31, 2014 mainly include VAT and other taxes payables in the amount of EUR 4,250 thousand and a liability due to the minority shareholders of the International Business sold in 2010 in the amount of EUR 881 thousand. 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 881 thousand. Page 58 of 86

59 23. Accrued Expenses and Deferred Income At December Accrued expenses 14,612 16,834 Accrued interest Deferred income 1,583 2,282 Total Accrued Expenses and Deferred Income 16,775 19,684 Accrued expenses are mainly related to access type charges and accruals for operating expenses. 24. 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 5,256 5, years 8,092 10, years 4,008 6,232 After 5 years 9,830 6,596 Total Non-Cancellable Future Lease Payments 27,186 28,160 Page 59 of 86

60 25. Finance Leases As of December 31, 2014 and 2013 the present value of the minimum finance lease payments of the Group are as follows: At December year or less years years 2, After 5 years - 2,104 Total Non-cancellable Finance Leases Payable 3,130 3,573 Less Current Portion (237) (219) Non-Current Portion of Non-cancellable Finance Leases Payable 2,893 3, Commitments Capital commitments During the year ended December 31, 2014 and 2013 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 1,242 thousand as of December 31, 2014 and EUR 1,987 thousand as of December 31, Performance guarantees and payment guarantees 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. Page 60 of 86

61 Potential future payments of the Group under these guarantees as of December 31, 2014 and 2013 are summarized as follows: At December Payment guarantees Total Guarantees Contingencies Legal Proceedings 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, 2014 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. GVH proceeding In 2005, Magyar Telekom requested the Economic Competition Office ( ECO ) to establish that Hungarotel (a legal predecessor of Invitel) was in breach of the regulation of its CS obligation, hindering its subscribers right to CS 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, ordered the ECO to re-conduct the procedure with respect to the setting of the fine and to refund the HUF 200 million plus interest to Invitel on April 3, The ECO turned to the Supreme Court against the decision for an extraordinary judicial review. On January 29, 2014 the Supreme Court nullified both the second and first instance Court decisions and ordered the first instance Court to repeat its procedure. Page 61 of 86

62 On July 9, 2014 the Court of first instance rejected Invitel s claim and ordered Invitel to pay the HUF 200 million fines. Invitel submitted an appeal and a request for stay regarding the payment obligation. The second instance court accepted Invitel s request and ordered the suspension of the payment obligation in respect of the imposed HUF 200 million fine. On February 18, 2015 the second instance court finally rejected the appeal. Invitel paid the fine on March 18, As of December 31, 2014 the Group recorded a provision for this legal case of HUF 200 million and HUF 150 million as of December 31, US Tax Investigation 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. 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. Page 62 of 86

63 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. Other 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. 28. Taxation At December Corporate tax (3) (20) Local business tax (2,555) (2,851) Total income tax benefit / (expense) (2,558) (2,871) 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 The 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, 2014, the corporation tax main rate is 21% (23% from April 2013 to March 2014), 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. Page 63 of 86

64 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. Local business tax as of December 31, 2014 mainly include municipality taxes in the amount of EUR 2,197 thousand, innovation contribution in the amount of EUR 354 thousand and other taxes in the amount of EUR 4 thousand. Local business tax as of December 31, 2013 mainly include municipality taxes in the amount of EUR 2,217 thousand and innovation contribution in the amount of EUR 466 thousand and withholding taxes in the amount of EUR 168 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 253,479 thousand as of December 31, 2014 and EUR 243,299 thousand as of December 31, In view of the expected taxable profits the Group has not recognized any deferred tax asset. According to the recent changes on the carry forward loss utilization, tax losses generated after January 1, 2015 can be utilized within 5 tax years from the tax year of origin. All tax losses generate before January 1, 2015 can be utilized based on the rules effective in the tax year of origin, but no later than the tax year ending December 31, Deferred tax assets and liabilities as of December 31, 2014 and 2013 are attributable to the following items: Assets Liabilities December 31, 2014 December 31, 2013 December 31, 2014 December 31, 2013 Tax loss carried forward Derivative financial instruments Interest bearing borrowings Trade and other receivables Property, plant and equipment Intangible assets Net Deferred Tax Assets - - Page 64 of 86

65 Reconciliation of effective tax rate is as follows: For the year ended December 31 Net profit / (loss) before tax (14,432) 56,839 Income tax using the parent company corporate tax rate (20%) 2,886 (11,935) Tax losses for which no deferred tax asset was recognized (4,981) (8) Effect of different tax rates in foreign jurisdictions 2,389 4,106 Tax on non-taxable income 390 3,546 Tax on non-deductible expenses (1,205) (351) Movement in deferred tax allowance relating to tax losses on which no deferred tax asset was recognized previously 2,094 4,109 Local business and other taxes paid, net of tax benefit (2,304) (2,587) Under /(over) provided in prior years (1,827) 249 Income Tax (Expense) / Benefit (2,558) (2,871) Tax losses for which no deferred tax was recognized include the current year s tax losses made by Matel, Invitel 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. 29. Related Party Transactions Related parties as of December 31, 2014 and 2013 include the Group s subsidiaries, as well as Mid Europa, 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 2,809 thousand and EUR 4,734 thousand for the years ended December 31, 2014 and 2013, respectively. Termination benefits paid to key management personnel amounted to EUR nil thousand for both years ended December 31, 2014 and There have been no share based compensation, post-employment benefits or other long-term benefits paid to key management personnel during the years ended December 31, 2014 and There have been no loans or guarantees provided to key management personnel during the years ended December 31, 2014 and Based on the Restructuring Agreement (see note 1.1 The Restructuring ) all accrued Mid Europa management fees, including third and fourth quarter 2012 fees have been reversed and no further accruals were made. The reversed amount for the year ended December 31, 2013 was EUR 0.5 million. There has been no Mid Europa management fees incurred and accrued. 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 ownership interest from 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. There was no change to the control over ITC as a result of the transaction. Other transactions with related parties are disclosed in note 16 Management compensation. Page 65 of 86

66 30. 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 Revenue Residential Voice 25,927 30,842 Residential Internet & TV 30,881 31,983 Cable 18,313 17,572 Corporate 55,623 61,501 Wholesale 19,839 23,244 Inter-segment elimination (1,100) (1,327) Total Revenue 149, ,815 Segment Cost of Sales Residential Voice (2,032) (2,762) Residential Internet & TV (7,829) (8,371) Cable (4,958) (4,774) Corporate (13,958) (18,226) Wholesale (4,098) (4,297) Inter-segment elimination 1,056 1,273 Total Segment Cost of Sales (31,819) (37,157) Network operating expenses (16,897) (18,616) Direct personnel expenses (7,801) (9,740) Total Cost of Sales, exclusive of Depreciation (56,517) (65,513) Segment Gross Margin Residential Voice 23,894 28,080 Residential Internet & TV 23,052 23,612 Cable 13,354 12,798 Corporate 41,665 43,275 Wholesale 15,741 18,947 Inter-segment elimination (42) (54) Total Segment Gross Margin 117, ,658 Network operating expenses (16,897) (18,616) Direct personnel expenses (7,801) (9,740) Depreciation and amortization (43,991) (48,608) Operating expenses (48,259) (48,678) Cost of restructuring (429) (1,300) Financial income 162 2,093 Financial expenses (14,881) (26,080) Gain on extinguishment of debt - 81,110 Income / (Loss) Before Tax (14,432) 56,839 Page 66 of 86

67 31. Subsequent Events No significant subsequent events to the consolidated financial statements as of December 31, 2014 have been identified. Page 67 of 86

68 MAGYAR TELECOM B.V. PARENT COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2014 The accompanying notes form an integral part of the financial statements. Page 68 of 86

69 Parent Company Balance Sheet (after appropriation of result) as of December 31, 2014 Notes At December 31 At December Non-Current Assets Financial Fixed Assets 3 197, , , ,506 Current Assets Other Current Assets 6 5,462 5,348 Trade and Other Receivables 5 4,245 1,931 Cash and Cash Equivalents 4 3,492 7,418 13,199 14,697 Total Assets 210, ,203 Equity Capital and Reserves Attributable to Equity Holders of the Company Share Capital 7 297, ,148 Capital Reserve 7 274, ,094 Other Reserve 7 (136,246) (136,246) Cumulative Translation Reserve 7 (83,300) (70,829) Accumulated Losses 7 (297,449) (280,462) Liabilities 54,247 83,705 Non-Current Liabilities Borrowings 8 154, , , ,552 Current Liabilities Trade and Other Payables Accrued Expenses and Deferred Income 10 1,243 1,203 1,491 1,946 Total Liabilities 156, ,498 Total Equity and Liabilities 210, ,203 The accompanying notes form an integral part of the financial statements. Page 69 of 86

70 Parent Company Statement of Profit and Loss Account For the year ended December Restated Share of Result of Investments after Tax (16,097) 40,288 Other Income and Expense after Tax (890) 13,676 Result for the Year (16,987) 53,964 The accompanying notes form an integral part of the financial statements. Page 70 of 86

71 Notes to the Parent Company Financial Statements 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 The 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 ) and Dataneum Adatközpont Zártkörűen Működő Részvénytársaság ( Dataneum Zrt ) 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 Telecom B.V. was established by Coop with a 100% ownership. 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 ads part of which its former notes were refinanced by issuing new notes and new shares (see note 18 Borrowings in the consolidated financial statements). The new shares were issued by a newly established entity, Matel Holdings Limited. After completion of the Restructuring as of December 31,2014 and 2013 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. On July 31, 2014, the general meeting of Matel issued 16 non-voting C shares in the capital of the Company. Each C share has a nominal value of one euro cent (EUR 0.01). Holders of the C shares will be entitled to certain distributions if certain conditions are met. The shares were acquired by Stichting Administratiekantoor MTBV, a special-purpose Dutch foundation whose beneficiaries are the MIP participants. As of December 31, 2014 and 2013 the Group is controlled by Mid Europa. Mid Europa does not prepare financial statements under IFRS. Page 71 of 86

72 Notes to the Parent Company Financial Statements On August 28, 2014 the Group acquired 100% of the share capital of Dataneum Zrt. Dataneum Zrt provides data center infrastructure services (see note 3 Business Combinations in the consolidated financial statements). As of December 31, 2014 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, 2014 is HUF 16 billion (approximately EUR 51 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, 2014 is HUF 165 million (approximately EUR 524 thousand). Dataneum Zrt was incorporated on November 12, 2009 as a joint stock company under the laws of Hungary. The authorized share capital of Dataneum Zrt as of December 31, 2014 is HUF 500 million (approximately EUR 1,588 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, 2014 is EUR 18 thousand. Invitel International Holdings had no operations during 2014 and 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 ( EU ). Page 72 of 86

73 Notes to the Parent Company Financial Statements 2.2 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 recognized from the date on which control is transferred to the Company or its intermediate holding entities and is derecognized 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. 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 recognized 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 recognize 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 recognize a provision. Unrealized gains on transactions between the Company and its subsidiaries are eliminated in full, based on the consolidation principles. Unrealized 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 amortized cost. The amortized cost is determined using the effective interest rate. Page 73 of 86

74 Notes to the Parent Company Financial Statements 3. Financial Fixed Assets At December Invitel Távközlési Zrt. 30,660 59,228 Invitel Technocom Kft. 4,113 4,068 Investments 34,773 63,296 Intercompany loans - Invitel 162, ,210 Other Non-Current Financial Assets 162, ,210 Total Financial Fixed Assets 197, ,506 Movements in financial fixed assets during the years ended December 31, 2014 and 2013 were as follows: Investments Other Non-Current Financial Assets Total At January 1, , , ,656 Translation adjustment for the year (4,952) - (4,952) Hedging of foreign currency items (592) - (592) Share of profit of investments after tax 40,288-40,288 - Loan provided to Invitel - 159, ,139 Capitalised interest on loan provided to Invitel Repayment of intercompany loans to Invitel - (232,749) (232,749) Waived intercompany loans of Invitel - (85,310) (85,310) 34,744 (158,894) (124,150) At December 31, , , ,506 Translation adjustment for the year (12,471) - (12,471) Share of profit of investments after tax (16,097) - (16,097) Capitalised interest on loan provided to Invitel - 3,199 3,199 Repurchase of ITC shares financed via intercompany loan 45 (45) - (28,523) 3,154 (25,369) At December 31, , , ,137 Page 74 of 86

75 Notes to the Parent Company Financial Statements Intercompany loans as of December 31, 2014 and 2013 comprise of the following: Borrower Interest rate Maturity At December Invitel 7,25%+2,00% PIK , ,165 MID New Technocom 0.0% Total 162, ,210 As part of the Restructuring (see note 1.1 The 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 ) in The Refinancing Intercompany Loan Agreement The Refinancing Intercompany Loan Agreement s terms are matched to the newly issued 2013 Notes (see note 18 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 3,492 7,418 Total Cash and Cash Equivalents 3,492 7,418 Cash and cash equivalents of the Company are denominated in EUR. The 2013 Notes Indenture (see note 18 Borrowings in the consolidated financial statements) 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 75 of 86

76 5. Trade and Other Receivables Magyar Telecom B.V. Notes to the Parent Company Financial Statements At December Receivables from related parties 4,226 1,132 Other receivables Total Trade and Other Receivables 4,245 1,931 Receivables from related parties as of December 31, 2014 include receivables from Invitel in the amount of EUR 198 thousand relating to recharged services and in the amount of EUR 4,000 thousand intercompany loans. 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. 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 5,345 5,303 Total Other Current Assets 5,462 5,348 Related party accrued income includes accrued interest on intercompany loans and recharged refinancing expenses to Invitel for both years. Related party accrued income as of December 31, 2014 contains EUR 4,667 thousand unsettled interest on intercompany loans and EUR 678 thousand recharged services. 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. Page 76 of 86

77 Notes to the Parent Company Financial Statements 7. Equity During the Restructuring all 20,308,640 issued 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 Restructuring 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, 2014 and 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, on entity owned by the noteholders, representing 49% of the total share capital of Matel. The issued capital is fully paid in. On July 31, 2014, the general meeting of Matel issued 16 non-voting "C" shares in the capital of the Company. Each "C" share has a nominal value of one euro cent (EUR 0.01). Holders of the "C" shares will be entitled to certain distributions if certain conditions are met. The shares were acquired by Stichting Administratiekantoor MTBV, a special-purpose Dutch foundation whose beneficiaries are the MIP participants. Stichting is controlled by the Company. 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 The Restructuring in the consolidated financial statements. There are no restrictions for distribution regarding these amounts. The balance of other reserves as of December 31, 2014 and 2013 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 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. Management has selected the accounting policy not to recognize costs relating to share based payment arrangements if the vesting conditions such as the completion of the disposals are not probable. Page 77 of 86

78 Notes to the Parent Company Financial Statements The movements in equity during the year ended December 31, 2014 are as follows: Cumulative Share Capital Other Hedging Translation Accumulated Notes Capital Reserve Reserve Reserve Reserve Losses Total Equity Balance at January 1, 2013 (Restated) 92, ,094 (16,693) 592 (65,877) (334,426) (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 ,964 53,964 Total Comprehensive Income / (Loss) (592) (4,952) 53,964 48,420 Issuance of B Shares 7 204,947 - (119,553) ,394 Additional Paid-in Capital 7-15, ,000 Total Transaction with Owners 204,947 15,000 (119,553) ,394 Balance at December 31, , ,094 (136,246) - (70,829) (280,462) 83,705 Balance at January 1, , ,094 (136,246) - (70,829) (280,462) 83,705 Translation Adjustment for the Year (12,471) - (12,471) Other Comprehensive Income / (Loss) (12,471) - (12,471) Net Result for the Year (16,987) (16,987) Total Comprehensive Income / (Loss) (12,471) (16,987) (29,458) Balance as of December 31, , ,094 (136,246) - (83,300) (297,449) 54, Borrowings At December Notes 154, ,552 Total Borrowings 154, ,552 The 2013 December Refinancing 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 equity (see note 17 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 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 Company. EUR 21.0 million of the 2009 Notes held by the Company was cancelled as part of the Restructuring. Page 78 of 86

79 Notes to the Parent Company Financial Statements 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 fair value of the equity instruments issued to the Noteholders was determined using the EBITDA multiple method. The 2013 Notes 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, 2014 and 2013 amounted to EUR 4,547 thousand and EUR 1,501 thousand, respectively. As of December 31, 2014 and 2013 Matel was in compliance with all of the covenants defined in the 2013 Notes Indenture. Page 79 of 86

80 Notes to the Parent Company Financial Statements The Intercreditor Agreement 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 Company s borrowings are repayable between 4-5 years as of December 31, 2014 and Trade and Other Payables At December Payables to related parties Total liability to related parties Trade payables Other payables Total liability to third parties Total Trade and Other Payables Accrued Expenses and Deferred Income At December Accrued expenses Accrued interest Total Accrued Expenses and Deferred Income 1,243 1,203 Accrued expenses as of December 31, 2014 include accruals related to professional fees and other expenditures in the amount of EUR 663 thousand. 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 interest as of December 31, 2014 includes the interest accrued under the 2013 Notes in the amount of EUR 580 thousand. Accrued interest as of December 31, 2013 includes the interest accrued under the 2013 Notes in the amount of EUR 568 thousand. All liabilities included fall due in less than one year. Page 80 of 86

81 Notes to the Parent Company Financial Statements 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, 2014 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, 2014 and 2013 and fees for other services rendered by PwC during that year. For the year ended December Audit of the financial statements Audit-related services Total The fees listed above relate to the procedures applied to the Company and its consolidated Group entities by external auditors (PwC) as referred to in Article 1(1) of the Dutch Accounting Firms Services rendered by PwC in connection with fees presented above were as follows. Audit of the Financial Statements For the years ended December 31, 2014 and 2013, 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 Services Audit-related service 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 included the services provided in connection with the issue of the 2013 Notes. Page 81 of 86

82 12. Directors Remuneration Magyar Telecom B.V. Notes to the Parent Company Financial Statements The directors and those who served the Company during the year ended December 31, 2014 are: Nikolaus Bethlen non-executive Chairman appointed on May 1, 2013 Thierry Baudon non-executive Board Member appointed on July 12, 2013 Robert Chmelar non-executive Board Member appointed on December 12, 2013 Mark Nelson-Smith non-executive Board Member appointed on December 12, 2013 Jan Vorstermans non-executive Board Member appointed on December 12, 2013 David Blunck executive Board Member and CFO appointed on December 12, 2013 David McGowan executive Board Member and CEO 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, 2014 and 2013 amounted to EUR 20 thousand and EUR 90 thousand, respectively. The Company does not have any employees. Change in Board of Directors As of January 14, 2015 David McGowan resigned as the CEO and Executive Board Member of Matel. As of the effective date, David Blunck, became the new CEO of Matel. Robert Chmelar resigned as nonexecutive Board Member from the Board of Matel effective as of January 29, 2015 and was replaced by Tas Tóbiás as of the effective date. 13. Contingencies The Company is not involved in any legal proceedings nor have any other contingencies. Page 82 of 86

83