METRONET TELEKOMUNIKACIJE d.d. INDEPENDENT AUDITOR S REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2014

Transcription

1 INDEPENDENT AUDITOR S REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2014

2 Contents Responsibility for the financial statements 2 Independent Auditor's Report 3 Statement of comprehensive income 5 Balance sheet 6 Statement of changes in shareholders' equity 7 Cash flow statement 8 Notes to the financial statements 9

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4 Independent Auditor s Report To the Shareholders and Management of Metronet telekomunikacije d.d. We have audited the accompanying financial statements of Metronet telekomunikacije d.d. and its subsidiaries (the ) and of Metronet telekomunikacije d.d. (the ), which comprise the balance sheet as at 31 December 2014 and the statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted in the European Union, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the and the as at 31 December 2014, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted in the European Union. Other Legal and Regulatory Requirements We have read the accompanying Annual Report of the and the for the year ended 31 December 2014 set out on pages 51 to 57. We have verified that the information included in the Annual Report which describes matters that are also presented in the financial statements is consistent, in all material respects, with the financial statements referred to above. PricewaterhouseCoopers d.o.o. Zagreb, 28 April 2015 PricewaterhouseCoopers d.o.o., Ulica kneza Ljudevita Posavskog 31, Zagreb, Croatia T: +385 (1) , F:+385 (1) , Commercial Court in Zagreb, no. Tt-99/7257-2, Reg. No.: ; ID No.: ; Founding capital: HRK 1,810,000.00, paid in full; Management Board: Hrvoje Zgombic, President; J. M. Gasparac, Member; S. Dusic, Member; T. Macasovic, Member; Giro-Account: Raiffeisenbank Austria d.d., Petrinjska 59, Zagreb, IBAN: HR

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6 BALANCE SHEET AS AT 31 DECEMBER 2014 (all amounts are expressed in thousands of HRK) Note ASSETS Non-current assets Plant & equipment , , , ,198 Intangible assets 12 11,055 8,709 11,055 8,709 Investments in subsidiaries Deposits 15 4,330 3,030 4,330 3, , , , ,054 Current assets Trade and other receivables 15 54,993 56,748 55,729 56,412 Cash and cash equivalents 16 10,217 14,756 9,658 14,589 65,210 71,504 65,387 71,001 Total assets 324, , , ,055 SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity Share capital ,251 75, ,251 75,063 Treasury shares 17 - (6,146) - (6,146) Capital reserves 17 70,241 76,387 70,241 76,387 Capital loss 17 (11,732) - (11,732) - Accumulated losses (297,096) (426,534) (297,008) (426,446) (13,336) (281,230) (13,248) (281,142) Non-current liabilities Borrowings , , , ,355 Finance lease liabilities 19 12,698 5,455 12,698 5,455 Deferred revenue 21 3,435-3, , , , ,810 Current liabilities Borrowings 18 19, ,729 19, ,729 Finance lease liabilities 19 5,198 17,943 5,198 17,943 Trade payables 20 26, ,845 26, ,837 Accrued and other liabilities 21 13,509 16,388 13,186 15,878 64, ,905 65, ,387 Total liabilities 337, , , ,197 Total shareholders equity and liabilities 324, , , ,055 The notes on pages 10 to 50 are an integral part of these financial statements. 6

7 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (all amounts in thousands of HRK) Note Share capital Treasury shares Capital reserves Capital loss Accumulated losses Total equity At 1 January ,063 (4,350) 76,387 - (432,432) (285,332) Purchase of treasury shares 17 - (1,796) (1,796) Total comprehensive income ,898 5,898 At 31 December ,063 (6,146) 76,387 - (426,534) (281,230) At 1 January ,063 (6,146) 76,387 - (426,534) (281,230) Capital increase 150, ,188 Assignment of treasury shares 4a - 6,146 (6,146) Capital loss (11,732) - (11,732) Total comprehensive income , ,438 At 31 December ,251-70,241 (11,732) (297,096) (13,336) The notes on pages 10 to 50 are an integral part of these financial statements. 7

8 STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (all amounts in thousands of HRK) Note Share capital Treasury shares Capital reserves Capital loss Accumulated losses Total equity At 1 January ,063 (4,350) 76,387 - (432,358) (285,258) Purchase of treasury shares 17 - (1,796) (1,796) Total comprehensive income ,912 5,912 At 31 December (6.146) ,446) (281,142) At 1 January ,063 (6,146) 76,387 - (426,446) (281,142) Capital increase 4a 150, ,188 Assignment of treasury shares 17-6,146 (6,146) Capital loss (11,732) - (11,732) Total comprehensive income , ,438 At 31 December ,251-70,241 (11,732) (297,008) (13,248) The notes on pages 10 to 50 are an integral part of these financial statements. 8

9 CASH FLOW STATEMENT (all amounts are expressed in thousands of HRK) Note Cash generated from operations 22 61,455 58,235 61,442 59,065 Interest paid (11,968) (10,004) (11,965) (9,999) Net cash from operating activities 49,487 48,231 49,477 49,066 Cash flows from investing activities Purchase of intangible assets 12 (5,367) (4,185) (5,367) (4,185) Purchase of property, plant and equipment (40,381) (32,960) (40,381) (32,960) Proceeds from sale of tangible assets 364 6, ,705 Interest received 1,371 1, Net cash used in investing activities (44,013) (29,436) (44,396) (29,448) Cash flows from financing activities Proceeds from borrowings 1,600 9,746 1,600 8,868 Repayments of borrowings (6,111) (4,208) (6,110) (4,208) Repayments of finance lease (5,502) (11,421) (5,502) (11,421) Purchase of treasury shares 17 - (1,796) - (1,796) Net cash used in financing activities (10,013) (7,679) (10,012) (8,557) Net increase in cash (4,539) 11,116 (4,931) 11,061 Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 14,756 3,640 14,589 3, ,217 14,756 9,658 14,589 The notes on pages 10 to 50 are an integral part of these financial statements. 9

10 NOTE 1 GENERAL INFORMATION The Metronet (the ) is a wire line network telecommunications service provider and the first in Croatia to have developed an all-ip network for the provision of the following services: local and long distance telephone services with enhanced communication features, broadband services which include high speed internet and high capacity data transmission. The is an emerging provider of advanced and innovative telecommunication services targeted to business customers. The s proprietary service network (voice, data and Internet) is currently offered in all of the major cities located throughout the 21 counties in the Republic of Croatia. The parent of the is Metronet Telekomunikacije d.d. (the or Metronet ), a joint stock company registered under the laws and jurisdictions of the Republic of Croatia. The was established on 13 May 2005 and started operations in June The registered address of the is Ulica grada Vukovara 269d, Zagreb. The Metronet includes the and its subsidiaries. The business activity of all subsidiaries is telecommunication services. A listing of the s subsidiaries is presented in Note 13. General authorization for the provision of electronic communications networks and services In June 2005, Metronet obtained the necessary licences to provide services in the Republic of Croatia, from the Croatian Telecommunication Agency as prescribed by the Telecommunications Act. In July 2008, the Electronic Communications Act (ECA) became effective, under which operators under general authorization can perform all of electronic communications network activities and services, after sending the notice to the relevant regulatory body - the Croatian Agency for Post and Electronic Communications Agency (HAKOM) on activities carried out and no longer need a special permit. (In line with the amendments of the ECA from 2014, the relevant regulatory body changed its name to Croatian Regulatory Agency for Network Activities.) According to the verification of HAKOM on receiving the notice for the provision of electronic communications network activities and services, Metronet provides the following electronic communications services: - Publicly available telephone services in fixed electronic communications network, - Provision of electronic communications networks and/or lines, - Services of image transfer, voice and sound transfer through electronic communications networks (which excludes broadcasting services), - Value added services, - Internet access services, - A voice over the Internet, - Providing access to and sharing of the electronic communications infrastructure and associated facilities. The annual fee paid to HAKOM is 0.20% of the total annual gross revenues realized in the provision of electronic communications network activities and services in the market. 10

11 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 2.1 Basis of preparation The s consolidated financial statements, as well as the s standalone financial statements have been prepared in accordance with International Financial Reporting Standards as adopted in the EU (IFRS). Accordingly, the financial statements also comply with the Croatian Accounting Act, which refers to IFRSs as adopted in the EU. The financial statements have been prepared under the historical cost convention, other than financial assets at fair value through profit or loss, as stated below in the accounting policies. The financial statements have been prepared in Croatian kuna (HRK). All amounts disclosed in the financial statements are expressed in thousands of HRK unless otherwise stated. Management is also required to exercise its judgment in the process of applying the s accounting policies. The areas where assumptions and estimates are significant to the financial statements are disclosed in Note Changes in accounting policies and disclosures (a) New and amended standards adopted by the The and the have adopted the following new and amended IFRS and IFRIC interpretations during the year which were endorsed by the EU. When the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the and the, its impact is described below. Below is a list of standards/interpretations that have been issued and are effective for periods beginning on or after 1 January 2014 IFRS 10 Consolidated Financial Statements (effective for annual periods beginning on or after 1 January 2014) The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entity (an entity that controls one or more other entities) to present consolidated financial statements. It defines the principle of control, and establishes controls as the basis for consolidation. It sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee. It also sets out the accounting requirements for the preparation of consolidated financial statements. This standard did not have a significant impact on The and The s financial position or performance. 11

12 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) (a) New and amended standards adopted by the (continued) IFRS 12 Disclosures of Interests in Other Entities (effective for annual periods beginning on or after 1 January 2014) IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. This standard did not have a significant impact on The and The s financial position or performance. IAS 27 (revised 2011) Separate Financial Statements (effective for annual periods beginning on or after 1 January 2014) IAS 27 (revised 2011) includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included in the new IFRS 10. Amendment to IFRSs 10, 11 and 12 on Transition Guidance (effective for annual periods beginning on or after 1 January 2014) These amendments provide additional transition relief to IFRSs 10, 11 and 12, limiting the requirement to provide adjusted comparative information to only the preceding comparative period. For disclosures related to unconsolidated structured entities, the amendments will remove the requirement to present comparative information for periods before IFRS 12 is first applied. The amendment did not have a significant impact on The and The s financial position or performance. Amendment to IAS 32, Financial instruments: Presentation, on asset and liability offsetting (effective for annual periods beginning on or after 1 January 2014) These amendments are to the application guidance in IAS 32, Financial instruments: Presentation, and clarify some of the requirements for offsetting financial assets and financial liabilities on the balance sheet. The amendment did not have a significant impact on The and The s financial position or performance. Amendment to IAS 36, Impairment of assets on recoverable amount disclosures (effective for annual periods beginning on or after 1 January 2014) This amendment addresses the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. The amendment did not have a significant impact on The and The s financial position or performance. 12

13 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) (b) Standards and interpretations issued but not yet effective Below is a list of standards/interpretations that have been issued and are not effective for periods starting on 1 January 2014, but will be effective for later periods IFRS 9, Financial instruments (effective for annual periods beginning on or after 1 January 2018) Earlier application is permitted. If an entity elects to early apply it must apply all of the requirements at the same time with the following exception: Entities with a date of initial application before 1 February 2015 continue to have the option to apply the standard in phases. The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. 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 present changes in fair value in OCI. 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 other comprehensive income, 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 and The s operations are complex, and The and The has already started the necessary efforts to develop and implement new accounting policies, estimates and processes to comply with this new standard. Such effort is expected to continue until As a result, at this time, it is not possible to make a reasonable quantitative estimate of the effects of this new standard on The and The s financial statements. IFRS 15, Revenue from contracts with customers. (effective for annual periods beginning on or after 1 January 2017) This is the converged standard on revenue recognition. It replaces IAS 11, Construction contracts, IAS 18, Revenue and related interpretations. Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps: 13

14 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) (b) Standards and interpretations issued but not yet effective (continued) Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation IFRS 15 also includes a cohesive set of disclosure requirements that will result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity s contracts with customers. The and The s operations are complex, and The and The has already started the necessary efforts to develop and implement new accounting policies, estimates and processes to comply with this new standard. Such effort is expected to continue until As a result, at this time, it is not possible to make a reasonable quantitative estimate of the effects of this new standard on The and The s current revenue recognition policies. Amendment to IAS 16, Property, plant and equipment and IAS 38, Intangible assets regarding depreciation and amortisation. (effective for annual periods beginning on or after 1 January 2016) This amendment clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. This has also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. The presumption may only be rebutted in certain limited circumstances. These are where the intangible asset is expressed as a measure of revenue; or where it can be demonstrated that revenue and the consumption of the economic benefits of the intangible asset are highly correlated. The and The plans to adopt this new amendment on the effective date as of and when endorsed by EU. The and The is still assessing the impact on this amendment, but it is not expected to have a significant impact on The and The s financial statements. Amendment to IAS 19, Employee benefits regarding employee or third party contributions to defined benefit plans (effective for annual periods beginning on or after 1 July 2014) The amendment applies to contributions from employees or third parties to defined benefit plans and clarifies the treatment of such contributions. The amendment distinguishes between contributions that are linked to service only in the period in which they arise and those linked to service in more than one period. The objective of the amendment is to simplify the accounting for contributions that are independent of the number of years of employee service, for example employee contributions that are calculated according to a fixed percentage of salary. Entities with plans that require contributions that vary with service will be required to recognise the benefit of those contributions over employee s working lives. The and The plans to adopt this new amendment on the effective date as of and when endorsed by EU. The and The is still assessing the impact on this amendment, but it is not expected to have a significant impact on The and The s financial statements. 14

15 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) (b) Standards and interpretations issued but not yet effective (continued) Amendment to IAS 27, Separate financial statements regarding the equity method (effective for annual periods beginning on or after 1 January 2016) The amendment allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. The and The plans to adopt this new amendment on the effective date as of and when endorsed by EU. The and The is still assessing the impact on this amendment, but it is not expected to have a significant impact on The and The s financial statements. Annual improvements 2012 (effective for annual periods beginning on or after 1 July 2014) These annual improvements amend standards from the reporting cycle. It includes changes to: IFRS 2, Share based payments, and clarifies the definition of a vesting condition and separately defines performance condition and service condition. IFRS 3, Business combinations, and clarifies that an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or equity, on the basis of the definitions in IAS 32, Financial instruments: Presentation. It also clarifies that all non-equity contingent consideration is measured at fair value at each reporting date, with changes in value recognised in profit and loss. IFRS 8, Operating segments which is amended to require disclosure of the judgements made by management in aggregating operating segments. It is also amended to require a reconciliation of segment assets to the entity s assets when segment assets are reported. IFRS 13, Fair value which amended the basis of conclusions to clarify that it did not intend to remove the ability to measure short term receivables and payables at invoice amounts where the effect of discounting is immaterial. IAS 16, Property, plant and equipment and IAS 38, Intangible assets are amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24, Related party disclosures is amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity (the management entity ). Disclosure of the amounts charged to the reporting entity is required. The and The plans to adopt this annual improvement on the effective date as of and when endorsed by EU. The and The is still assessing the impact on this amendment, but it is not expected to have a significant impact on The and The s financial statements. 15

16 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) (b) Standards and interpretations issued but not yet effective (continued) Annual improvements 2013 (effective for annual periods beginning on or after 1 July 2014) These annual improvements amend standards from the reporting cycle. It includes changes to: IFRS 1, First time adoptions of IFRSs, basis of conclusions is amended to clarify that where a new standard is not mandatory but is available for early adoption a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3, Business combinations is amended to clarify that IFRS 3 does not apply to the accounting for the formation of any joint venture under IFRS 11. IFRS 13, Fair value measurement is amended to clarify that the portfolio exception in IFRS 13 applies to all contracts (including non-financial contracts) within the scope of IAS 39 or IFRS 9. IAS 40, Investment property is amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. IAS 40 assists users to distinguish between investment property and owner-occupied property. Preparers also need to consider the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The and The plans to adopt this annual improvement on the effective date as of and when endorsed by EU. The and The is still assessing the impact on this amendment, but it is not expected to have a significant impact on The and The s financial statements. 16

17 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) (b) Standards and interpretations issued but not yet effective (continued) Annual improvements 2014 (effective for annual periods beginning on or after 1 July 2016) These annual improvements amend standards from the reporting cycle. It includes changes to: IFRS 7, Financial instruments: Disclosures There are two amendments: - Servicing contracts If an entity transfers a financial asset to a third party under conditions which allow the transferor to derecognise the asset, IFRS 7 requires disclosure of all types of continuing involvement that the entity might still have in the transferred assets. The standard provides guidance about what is meant by continuing involvement. The amendment is prospective with an option to apply retrospectively. There is a consequential amendment to IFRS 1 to give the same relief to first time adopters. - Interim financial statements the amendment clarifies that the additional disclosure required by the amendments to IFRS 7, Disclosure Offsetting financial assets and financial liabilities is not specifically required for all interim periods unless required by IAS 34. This amendment is retrospective. IAS 19, Emplyee benefits The amendment clarifies that, when determining the discount rate for post-employment benefit obligations, it is the currency that the liabilities are denominated in that is important, not the country where they arise. The assessment of whether there is a deep market in high-quality corporate bonds is based on corporate bonds in that currency, not corporate bonds in a particular country. Similarly, where there is no deep market in high-quality corporate bonds in that currency, government bonds in the relevant currency should be used. The amendment is retrospective but limited to the beginning of the earliest period presented. IAS 34, Interim financial reporting the amendment clarifies what is meant by the reference in the standard to information disclosed elsewhere in the interim financial report. The amendment also amends IAS 34 to require a cross-reference from the interim financial statements to the location of that information. The amendment is retrospective. The and The plans to adopt this annual improvement on the effective date as of and when endorsed by EU. The and The is still assessing the impact on this amendment, but it is not expected to have a significant impact on The and The s financial statements. 17

18 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Consolidation Subsidiaries are all entities over which the has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the and are de-consolidated from the date that control ceases. The uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred, Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest s proportionate share of the acquiree s net assets. The recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis at the non-controlling interest s proportionate share of the recognised amounts of acquiree s identifiable net assets. Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment. The excess of consideration transferred the amount of any non-controlling interest in the acquire and acquisition-date fair value of any previous equity interest in the acquire over the fair value of the s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of bargain purchase, the difference is recognised directly in the statement of comprehensive income. Inter-company transactions, balances and unrealised gains on transactions between companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the. 2.3 Investments in subsidiaries Investments in subsidiaries in which the has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations are recorded at cost less impairment losses, if any in the standalone financial statements. Impairment is tested annually whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Dividend income is recorded in the statement of comprehensive income when the decides to declare it. 18

19 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4 Foreign currencies (a) Functional and presentation currency Items included in the financial statements are presented in Croatian Kuna (HRK) which the currency of the primary economic environment in which the and the operate ( the functional currency ). (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. 2.5 Plant and equipment Plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. The initial estimate of the costs of dismantling and removing an asset and restoring the site on which it is located is also included in the cost of the asset if a related obligation exists. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the and the and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the statement of comprehensive income during the financial period in which they are incurred. Assets under construction are not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost over their estimate useful lives. Depreciation is calculated for each asset until the asset is fully depreciated or to its residual values. Annual depreciation rates are as follows: Telecom network Indefeasible rights of use (IRU) Telecom equipment Tools, vehicles, IT and office equipment 30 years years 5 years 3 5 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (Note 2.7). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income. 19

20 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Intangible assets (a) Computer software Acquired computer software, licences and rights are carried at cost less accumulated amortisation. Computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is calculated using the straight-line method over the estimated useful life (4 to 5 years) starting from the point when the asset is available for use. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. (b) Contractual customer relationships (customer list) Contractual customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relationships had finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationship (5 years). (c) Other intangibles Separately acquired licences and other rights are shown at historical cost. Other intangibles are acquired in a business combination and are recognised at fair value at the acquisition date. They have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of other intangibles over their estimated useful lives of 3 to 5 years. Assets under construction are not amortised. 2.7 Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 20

21 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8 Leases Leases of vehicles and equipment, where the 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 fair value of the leased property or the present value of minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in liabilities. The interest element of the finance costs is charged to the statement of comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Assets acquired under finance leases are depreciated over the shorter of the useful life or the lease term. Leases in which a significant portion of risks and rewards of ownership are not retained by the are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the period of the lease. 2.9 Trade and loan receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as noncurrent assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income within other operating expenses, net of collected receivables previously written off Cash and cash equivalents Cash includes cash in hand, deposits held at call with banks and deposits held with banks with original maturities of three months or less and investment in high liquidity cash investment funds. Overdrafts of bank accounts are included as part of cash and cash equivalents for purposes of the cash flow statement and are shown within borrowings in the balance sheet. 21

22 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.11 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Preference shares, which are convertible to ordinary shares, are classified as equity. Where any company purchases the s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the s equity holders until the shares are cancelled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the s equity holders Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. Borrowing costs that are directly attributable to purchase or construction of assets are capitalised during the period necessary for bringing the asset to working condition. Other borrowing costs are charged to the statement of comprehensive income. Borrowings are classified as current liabilities unless the has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 22

23 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14 Current and deferred income tax The current income tax charge is calculated on the basis of the tax law enacted at the balance sheet date in Croatia. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and consider establishing provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investment in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the and it is probable that the temporary difference will not reverse in foreseeable future Value added tax (VAT) The Tax Authorities require the settlement of VAT on a net basis. VAT related to sales and purchases is recognised and disclosed in the balance sheet on a net basis. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT Employee benefits (a) Pension obligations and post-employment benefits In the normal course of business through salary deductions, the makes payments to mandatory pension funds on behalf of its employees as required by law. All contributions made to the mandatory pension funds are recorded as salary expense when incurred. The does not have any other pension scheme and consequently, has no other obligations in respect of employee pensions. In addition, the is not obliged to provide any other post-employment benefits. (b) Termination benefits Termination benefits are payable when employment is terminated by the before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (c) Short-term employee benefits Short-term employee benefits are recognised as a current expense in the period when employees render their services. These benefits include wages, social security contributions, bonuses, annual vacations, other benefits and related taxes thereon. 23

24 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.17 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Management Board, who is responsible for allocating resources and assessing performance of the operating segments Revenue recognition Revenue is primarily derived from data, internet and voice services provided to the s customers and other third parties using the s telecommunications network. Revenue is shown, net of value-added tax and discounts, and recognised when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the. The customer arrangements typically include a monthly fixed fee and monthly charge for the actual usage. (a) Monthly fees Monthly fees consist of fixed fee for data, internet and voice services. Monthly fees are recognised as revenue in the period the service is provided, in accordance with contractual terms and conditions. (b) Traffic and interconnection revenue Revenue from internal, incoming and outgoing calls is recognised in the period of the related usage. Interconnection revenue includes income earned on incoming traffic originating outside the s network that has been transmitted through or terminated in the s network. Interconnection expenses include expenses from outgoing traffic that is routed externally from the s network. The revenue and expenses of transit traffic is stated gross in the financial statements as the is acting as the principal. The enters into bilateral agreements with other operators, bears credit risk, and has full discretion in determining the routing of the call. (c) Value added-services (VAS) Value added-services consist of telecommunication services rendered in conjunction with other content. Contracts signed with other content providers include revenue share arrangements. Revenue is recognised in the same manner as traffic and interconnection services. Revenue from value-added services is presented on a gross basis in the financial statements. (d) Sale of goods Sales of equipment and optical cable are recognised when the goods are delivered to the customer, risk of loss has transferred to the customer, and the customers have accepted the delivery of the goods. 24

25 NOTE 3 FINANCIAL RISK MANAGEMENT 3.1 Financial risk factors The s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The does not have a written risk management programme, but overall risk management in respect of these risks is carried out by the s management. Management focuses mainly on liquidity and credit risk, and acts on a case basis to mitigate all financial risks. (a) Market risk (i) Foreign exchange risk Some of the s borrowings and payables are agreed with a currency clause, i.e. they are mainly linked to the EURO. Any movement in exchange rates between the EURO and Croatian kuna will have an impact on the s operating results and future cash flow. As at 31 December 2014, if the EURO had weakened/strengthened by 1% (2013: 1%) against the HRK, with all other variables held constant, the net profit of the for the reporting period would have been HRK 359 thousand (2013: HRK 2,537 thousand) higher/lower, mainly as a result of foreign exchange gains/(losses) on translation of EURO-denominated trade receivables, trade payables, foreign cash funds, deposits and borrowings. (ii) Cash flow and fair value interest rate risk The has no significant interest-bearing assets. The s interest rate risk arises from longterm liabilities. Finance lease liabilities stated at variable rates expose the to cash flow interest rate risk. Borrowings issued at fixed rates expose the to fair value interest rate risk. The finance department monitors cash flow on a daily basis, while realised results are compared to planned results on a monthly basis. As at 31 December 2014, if the interest rate on borrowings and finance lease had increased/decreased by 1% (2013: 0.30%) on an annual level, with all other variables held constant, the net profit of the for the reporting period would have been HRK 81 thousand (2013: HRK 606 thousand) lower/higher as a result of increased/decreased interest expense. As at 31 December 2014, if the market interest rate on borrowings and finance lease had increased/decreased by 1% (2013: 1%) on an annual level, with all other variables held constant, the fair value of borrowings would have been HRK 844 thousand lower/higher in relation to the book value. (b) Credit risk The has concentrations of credit risk related to key customers. As at 31 December 2014, the top five customers comprise 14% (2013: 13%) of trade receivables. The has policies in place to monitor the credit quality of customers taking in account the customer s financial position and past experience. The uses a system of reminders leading to discontinuance of its service as the main tool to collect overdue receivables. For more details on credit risk see Note 14b and Note

26 NOTE 3 FINANCIAL RISK MANAGEMENT (continued) 3.1 Financial risk factors (continued) (c) Liquidity risk As part of the liquidity risk management procedures, the Finance department regularly monitors available cash resources and prepares monthly and annual liquidity projections on the basis of the expected cash flow. Trade and other payables, and liabilities for short-term borrowings mature within 12 months after the balance sheet date, while the maturity of long-term borrowings is set out in Notes 18 and 19. The table below analyses the s and s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date: (in thousands of HRK) Less than 1 year Between 1-2 years Between 2-5 years Over 5 years 31 December 2014 Borrowings 33,727 21, , ,318 Finance lease 5,952 5,448 8,061 - Trade and other payables 26, ,128 26, , ,318 (in thousands of HRK) Less than 1 year Between 1-2 years Between 2-5 years Over 5 years 31 December 2013 Borrowings 169,493 62, ,698 32,394 Finance lease 18,717 3,384 2,228 - Trade and other payables 114, ,055 66, ,926 32,394 (in thousands of HRK) Less than 1 year Between 1-2 years Between 2-5 years Over 5 years 31 December 2014 Borrowings 33,727 21, , ,318 Finance lease 5,952 5,448 8,061 - Trade and other payables 26, ,626 26, , ,318 Less than 1 year Between 1-2 years Between 2-5 years Over 5 years 31 December 2013 Borrowings 169,493 62, ,698 32,394 Finance lease 18,717 3,384 2,228 - Trade and other payables 114, ,047 66, ,926 32,394 26

27 NOTE 3 FINANCIAL RISK MANAGEMENT (continued) 3.2 Capital risk management The monitors capital only on the basis of Croatian laws and regulations that require minimum paid in capital of HRK 200 thousand for joint stock companies. There are no specific objectives required by the owners in managing capital. In addition, there are no internally or externally monitored capital objectives, other than the long-term plan of keeping the capital positive. Total capital for 2014 is HRK 283,760 thousand; the share capital of HRK 225,251 thousand and HRK 70,241 thousand of capital reserves (2013: share capital of HRK 75,063 thousand and HRK 76,387 thousand of preference share premium). At the s General Assembly held on 4 March 2014, the decision was made to increase the share capital by issuing ordinary shares as shares in rights and decisions on the abolition of preference shares. The law also forbids payment of dividend before accumulated losses are settled. The incurred an accumulated loss of HRK 297,008 thousand (2013: HRK 426,446 thousand). 3.3 Fair value estimation The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short maturity. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the for similar financial instruments. NOTE 4 CRITICAL ACCOUNTING ESTIMATES Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Going concern In accordance with the Financial Operations and Pre-Bankruptcy Settlement Act, in June 2013 the Management entered into pre-bankruptcy proceedings aiming at the operational and financial restructuring of the business. Creditors have supported the s plan and on 19 March 2014, the creditors and the signed a final agreement. Total effects from the pre-bankruptcy settlement are as follows: 1) founding capital increased by HRK 150,188 thousand 2) capital loss in the amount of HRK 11,732 thousand 3) profit in the amount of HRK 16,824 thousand arising from the write-off of interest payables due 4) one-off gain from the difference at the recognition of new liabilities where repayment terms have been substantially altered in the amount of HRK 78,234 thousand. 27

28 NOTE 4 CRITICAL ACCOUNTING ESTIMATES (continued) Pursuant to the Plan, in June 2014 the s capital increase process was completed and an amount of HRK 150,188 thousand of debt incurred from bonds, commercial papers and a large supplier was converted into equity by issuing ordinary shares. Thereby, the share capital increased from HRK 75,063 thousand to HRK 225,251 thousand. The debt was rescheduled for a longer period of time at a more favourable interest rate, the amount of HRK 16,824 thousand of interest payable is written-off. The decrease in debt and changes in maturity while reducing the cost of financing had a beneficial effect on liquidity and solvency and contributed to the stabilization of the business. The consolidated financial statements and the s standalone financial statements have been prepared under the assumption that the and the will continue its operating activities according to the going concern principle. As at 31 December 2014, the accumulated losses of the amount to HRK 297,096 thousand (2013: HRK 426,535 thousand), and current assets exceed current liabilities by HRK 241 thousand (2013: current liabilities exceed current assets by HRK 224,385 thousand). After completing the pre-bankruptcy settlement, the is able to properly and timely service its obligations to creditors and suppliers. Accordingly, Management considers the liquidity risk and the related uncertainty to be significantly reduced. As a result, these financial statements have been prepared on a going concern basis. (b) Useful lives of property and equipment The determined the useful lives of telecom plant and machinery (primarily related to the network) based on industry experience and market practice in regards to similar assets and anticipated technological development. The believes that the accounting estimate related to the determination of the useful lives of these assets is a critical accounting estimate since it involves assumptions about the technological development in an innovative industry. Due to the significant weight of fixed assets in the balance sheet, the impact of any changes in these assumptions could be material to the financial statements. For example, if the would shorten the average useful life by 10%, this would result in an additional depreciation expense of approximately HRK 3,163 thousand for 2014 (2013: HRK 3,355 thousand). (c) Estimated impairment of plant and equipment Impairment of plant and equipment is assessed whenever there is a reason to believe that the carrying value may materially exceed the recoverable amount and where impairment in value is anticipated. The factors considered include future revenue and expenses, technological obsolescence, changes in services and other similar circumstances that may indicate impairment. As at 31 December 2014, the performed an impairment analysis of plant and equipment. The recoverable amount was determined using the discounted cash flow method, which involves assumptions such as estimates of future cash flows, discount rates and growth rates. Future cash flow projections are based on financial budgets approved by Management for the next five years and extrapolated estimated growth rates for all subsequent periods. The applied discount rate is based on market rates adjusted to reflect risks specific to the telecommunications segment. The growth rate assumption is based on Management's expectations of market development. 28

29 NOTE 4 CRITICAL ACCOUNTING ESTIMATES (continued) It was established that the calculated recoverable amount exceeds the carrying value of plant and equipment and in 2014, no impairment was recorded. Since this assumption is based solely on judgment, the amount of potential impairment may differ significantly from Management's estimate, which could have a negative impact on future operating results. If revenue growth was consistently 2%, this would not have resulted in impairment of assets. If the projected EBITDA was 25% lower, there would also not have been any impairment. (d) Legal claims and disputes In respect of the regulatory uncertainty regarding the lease of underground network ducts (Note 23), Management has determined this matter will not result in future losses after consultation with legal counsel. However, it is reasonably possible that the future outcome of this matter will be different from Management assumptions of probable future losses. (e) Deferred tax asset The did not recognise any deferred tax asset arising from taxable losses carried forward because it considers that it is not probable that future taxable profit will be available against which it can be utilised (Note 10). 29

30 NOTE 5 REVENUE (in thousands of HRK) Monthly subscription fee 154, , , ,012 Traffic revenues 41,373 40,589 41,001 40,249 Interconnection revenues 9,791 10,999 10,023 11,352 VAS revenues 4,609 11,981 4,633 12,004 Other services /i/ 2,453 2,635 2,424 2, , , , ,252 /i/ Other services relate to income from rent of fibre, rent of IP phones and other equipment, integration and consulting services revenue, maintenance revenue, fee for early termination of contract, income from telephone packages and other similar services. Segment information Metronet is a telecommunications service provider focused on providing business solutions mainly to business customers in the Republic of Croatia. The s investments and expenditures do not relate to a certain geographical area or to a particular customer group or particular services. Sales are provided to business customers who do not have specific and identifiable risks and benefits. Similarly, expenditures and investments cannot be reasonably allocated, except through arbitrary allocations, which would not improve reporting considering the telecommunications sector as a whole. From a geographical perspective, Metronet operates exclusively on the Croatian market. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Management Board that makes strategic decisions. Key performance indicators are total revenue and EBITDA. In 2014, the s EBITDA amounts to HRK 87,745 thousand, which is 8% higher compared to 2013 (2013: HRK 81,320 thousand). The s EBITDA in 2014 amounts to HRK 87,394 thousand, which is 7% higher compared to 2013 (2013: HRK 81,340 thousand). (in thousands of HRK) Business customers 193, , , ,065 Residential customers 4,505 6,832 4,505 6,832 Interconnection and VAS revenue 14,400 22,980 14,656 23, , , , ,252 30

31 NOTE 5 REVENUE (continued) The Management of the does not monitor assets and liabilities by segments and therefore this information has not been disclosed. In 2014 the realised revenues from residential customers of HRK 4,505 thousand (2013: HRK 6,832 thousand) and these revenues decreased by 34% compared to 2013 as a consequence of abandoning the residential business and the s focus to improve profit margins. NOTE 6 OTHER OPERATING REVENUE (in thousands of HRK) Revenue from collection reminders 678 1, ,160 Gain on disposals of equipment Revenue from liabilities write-off Revenue from technical support and technical solutions implementation Other revenue ,330 2,539 1,428 2,230 NOTE 7 STAFF COSTS (in thousands of HRK) Net salaries /i/ 22,106 18,961 20,869 17,871 Taxes and contributions /ii/ 17,600 13,951 16,766 13,244 Other employee benefits /iii/ 420 (3) 403 (3) Termination benefits /iv/ ,149 32,970 38,061 31,173 /i/ As at 31 December 2014, the had 230 employees (2013: 208), and the had 248 employees (2013: 224). /ii/ Taxes and contributions include defined pension contributions paid into obligatory pension funds in the amount of HRK 6,599 thousand by the and HRK 6,244 thousand by the (2013: HRK 5,714 thousand by the and HRK 5,402 thousand by the ). /iii/ Other employee benefits comprise rewards and obligations arising from accumulated unused vacation days or the reversal of the related accruals for unused amounts. /iv/ Termination benefits are related to those employees who left the, based on the terms of their employment contracts. 31

32 NOTE 8 OTHER OPERATING EXPENSES (in thousands of HRK) Rental expense /i/ 34,606 30,811 34,388 30,545 Interconnection & VAS expenses 2,272 9,464 3,047 9,826 Marketing and advertising 3,911 4,822 3,911 4,822 Maintenance costs 2,753 2,686 2,732 2,642 Memberships, licences and permits 1,672 1,963 1,664 1,961 Communication expenses 2,322 2,719 2,318 2,670 Local loop services (LLU) 1,834 1,920 1,834 1,920 Provision for impairment of trade receivables net (Note 15) 511 4, ,753 Municipal and energy costs 2,741 2,463 2,741 2,463 Representation and entertainment 2,468 1,450 2,462 1,445 Travel and other costs reimbursed to employees 2,138 2,002 2,002 1,844 Professional fees 1,349 1,096 1, Insurance Bank charges Office materials and supplies Education costs External customer connection costs Other operating expenses 3,848 3,297 3,733 3,141 65,657 72,045 65,770 71,577 /i/ Rental expense is comprised of operating lease agreements for the rental of locations for network equipment, the rental of office premises and vehicles. Operating lease agreements for vehicles are generally non-cancellable 5-year agreements that can be terminated only with the consent of the leasing company. NOTE 9 FINANCE REVENUE / (COSTS) NET Note (in thousands of HRK) Interest revenue 1,371 1, Foreign exchange gains 3,770 6,710 3,769 6,710 Other finance revenue /i/ 1, , Interest write-off revenue /ii/ 4a 16,824-16,824 - Profit from debt revaluation /ii/ 4a 78, , ,050 8, ,666 8,439 Interest expense (13,404) (26,829) (13,399) (26,823) Foreign exchange losses (2,843) (9,294) (2,843) (9,294) Correction of depreciable debt cost (7,178) (4,900) (7,178) (4,900) Loss on issuing bonds - (4,393) - (4,393) Loss on bonds withdrawal - (567) - (567) Other finance costs (1,920) (618) (1,920) (618) (25,345) (46,601) (25,340) (46,595) Finance revenue / (costs) net (76,705) (38,149) 76,326 (38,156) 32

33 NOTE 9 FINANCE REVENUE / (COSTS) NET (continued) /i/ Other finance revenue is mostly related to the gain from the purchase of own bonds. /ii/ Interest write-off revenue and profit from debt revaluation are one-off revenues resulting from prebankruptcy proceeding. Discount from the debt revaluation will be amortized over the debt repayment period and will be reported in line correction of depreciable debt cost. NOTE 10 INCOME TAX A reconciliation of the effective tax expense per the income statement and taxation at the statutory rate is detailed in the table below: (in thousands of HRK) Profit before tax 129,444 5, ,438 5,912 Tax calculated at a rate of 20% 25,889 1,181 25,888 1,182 Effect of non-deductible expenses 919 1, ,422 Effect of non-taxable revenues (81) (158) (81) (158) Effect of utilisation of previously unrecognized tax losses available for carry forward (26,721) (2,442) (26,721) (2,446) Tax charge Deferred tax assets in the amount of HRK 4,353 thousand (2013: HRK 31,074 thousand) arising from the tax losses available for carry forward are not recognised in these financial statements due to the uncertainty of future taxable profits. Accumulated tax losses can be carried forward as follows: (in thousands of HRK) , , ,765 29,419 21, ,369 In accordance with regulations in the Republic of Croatia, the Tax Authority may at any time inspect the s books and records within 3 years following the year in which the tax liability is reported, may impose additional tax assessments and penalties. The s Management is not aware of any circumstances, which may give rise to a potential material liability in this respect. 33

34 NOTE 11 PLANT AND EQUIPMENT The carrying value of plant & equipment under finance leases is as follows: and (in thousands of HRK) Purchase cost 95,192 96,081 Accumulated depreciation (87,996) (84,880) Net book value 7,196 11,201 (in thousands of HRK) Telecom network IRU Telecom equipment Tools, vehicles, IT and office equipment Assets under construction Total At 1 January 2013 Cost 196,487 23, ,238 30,238 7, ,244 Accumulated depreciation (45,982) (5,752) (244,571) (25,562) - (321,867) Net book amount 150,505 17,439 59,667 4,827 7, ,377 Year ended 31 December 2013 Opening balance 150,505 17,439 59,667 4,827 7, ,377 Additions ,097 35,097 Transfers 5, , (28,161) - Reclassification (991) Disposals - - (6,195) (484) - (6,677) Depreciation (6,603) (1,910) (23,002) (2,038) - (33,553) At 31 December ,469 15,680 52,962 3,256 14, ,242 At 31 December 2013 Cost 201,519 23, ,519 20,929 14, ,185 Accumulated depreciation (53,050) (7,663) (252,557) (17,673) - (330,943) Net book amount 148,469 15,680 52,962 3,256 14, ,242 Year ended 31 December 2014 Opening balance 148,469 15,680 52,962 3,256 14, ,242 Additions ,381 40,381 Transfers 6,532 4,187 23,472 1,493 (35,684) - Reclassification (283) Disposals - - (247) (56) - (303) Depreciation (6,896) (1,911) (21,019) (1,808) - (31,634) At 31 December ,388 17,956 54,885 2,885 19, ,686 At 31 December 2014 Cost 210,830 27, ,448 22,329 19, ,710 Accumulated depreciation (62,442) (9,575) (270,563) (19,444) - (362,024) Net book amount 148,388 17,956 54,885 2,885 19, ,686 34

35 NOTE 11 PLANT AND EQUIPMENT (continued) (in thousands of HRK) Telecom plant network IRU Telecom equipment Tools, vehicles, IT and office equipment Assets under construction Total At 1 January 2013 Cost 196,487 23, ,238 30,219 7, ,075 Accumulated depreciation (45,983) (5,753) (244,571) (25,469) - (321,776) Net book amount 150,504 17,438 59,667 4,750 7, ,299 Year ended 31 December 2013 Opening balance 150,504 17,438 59,667 4,750 7, ,299 Additions ,096 35,096 Transfers 5, , (28,161) - Reclassification (991) Disposals - - (6,195) (483) - (6,678) Depreciation (6,603) (1,910) (23,002) (2,004) - (33,519) At 31 December ,468 15,679 52,962 3,214 14, ,198 At 31 December 2013 Cost 201,518 23, ,519 20,762 14, ,016 Accumulated depreciation (53,050) (7,663) (252,557) (17,548) - (330,818) Net book amount 148,468 15,679 52,962 3,214 14, ,198 Year ended 31 December 2014 Opening balance 148,468 15,679 52,962 3,214 14, ,198 Additions ,380 40,380 Transfers 6,533 4,188 23,472 1,490 (35,683) - Reclassification (283) Disposals - - (247) (56) - (303) Depreciation (6,895) (1,911) (21,019) (1,787) - (31,612) At 31 December ,389 17,956 54,885 2,861 19, ,663 At 31 December 2014 Cost 210,831 27, ,448 22,159 19, ,541 Accumulated depreciation (62,442) (9,575) (270,563) (19,298) - (361,878) Net book amount 148,389 17,956 54,885 2,861 19, ,663 In 2014, assets under construction at the and the included telecom equipment of HRK 12,884 thousand (2013: HRK 11,099 thousand). At 31 December 2014, the net book value of equipment pledged as collateral for borrowings amounted to HRK 7,196 thousand (2013: HRK 11,201 thousand). 35

36 NOTE 12 INTANGIBLE ASSETS and (in thousands of HRK) Computer software Other intangibles Customer list Investment in progress Total At 1 January 2013 Cost 33,125 8,329 8,911 1,062 51,427 Accumulated amortisation (28,829) (6,459) (7,871) - (43,159) Net book amount 4,296 1,870 1,040 1,062 8,268 Year ended 31 December 2013 Opening net book amount 4,296 1,870 1,040 1,062 8,268 Additions ,185 4,185 Transfer 3, (3,945) - Disposals - (11) - - (11) Amortisation (1,617) (1,076) (1,040) - (33,642) Closing net book amount 5,897 1,510-1,302 8,709 At 31 December 2013 Cost 34,318 6,731-1,302 42,351 Accumulated amortisation (28,421) (5,221) - - (33,642) Net book amount 5,897 1,510-1,302 8,709 Year ended 31 December 2014 Opening net book amount 5,897 1,510-1,302 8,709 Additions ,367 5,367 Transfer 5,560 1,109 - (6,669) - Disposals Amortisation (2,071) (950) - - (3,021) Closing net book amount 9,386 1, ,055 At 31 December 2014 Cost 39,878 6, ,659 Accumulated amortisation (30,492) (5,112) - - (35,604) Net book amount 9,386 1, ,055 Other intangible assets mainly consist of acquired rights for carrier pre-selection and interconnection services. 36

37 NOTE 13 INVESTMENTS IN SUBSIDIARIES As at 31 December the investments in the s subsidiaries were as follows: (in thousands of HRK) Opening balance Investment (8) - Foreign exchange differences - 2 Balance at 31 December In 2007, the established two wholly owned subsidiaries: Metronet telekomunikacije d.o.o. for telecommunication services Mostar and Metronet telekomunikacije d.o.o. Ljubljana. The subsidiary Mostar was liquidated on 20 May 2014 in line with the decision of the Municipal Court in Mostar. To date, these entities had no business activities.. In 2009, the established a wholly owned subsidiary Metronet d.o.o. which provides telecom services to customers. NOTE 14a FINANCIAL INSTRUMENTS BY CATEGORY The reconciliation of classes of financial instruments with measurement categories defined in IAS 39, Financial Instruments: Recognition and Measurement, is as follows: (in thousands of HRK) Loans and receivables Trade receivables 45,924 43,356 47,006 43,513 Deposits 5,652 8,518 5,573 8,466 Loan receivables 3,659 1,342 3, Interest receivables 25 1, ,025 Cash 10,217 14,756 9,658 14,589 65,477 68,997 65,775 68,513 Other financial liabilities Borrowings 276, , , ,084 Financial lease liabilities 17,896 23,398 17,896 23,398 Trade payables 26, ,845 26, , , , , ,319 37

38 NOTE 14 b CREDIT QUALITY OF FINANCIAL ASSETS The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to historical information about counterparty default rates. (in thousands of HRK) New customers 1,904 3,227 1,904 3,227 Existing customers some defaults in the past 9,843 7,559 9,843 7,559 Existing customers within maturity period 14,860 13,528 14,105 13,283 Interconnection telecom operators 774 2,552 1,297 3,015 27,381 26,866 27,149 27,084 The mainly deposits its cash at local banks that are members of banking groups with the following credit ratings by Standard & Poor s: (in thousands of HRK) A A AA B BBB BBB - 6,625-6,463 BBB- 4,851-4,296 - Without rating 5,334 8,111 5,330 8,106 10,217 14,756 9,658 14,589 38

39 NOTE 15 TRADE AND OTHER RECEIVABLES (in thousands of HRK) Trade receivables 54,925 52,537 56,007 52,694 Provision for impairment of trade receivables (9,001) (9,181) (9,001) (9,181) 45,924 43,356 47,006 43,513 Prepaid expenses 3,661 4,311 3,662 4,297 Deposits /i/ 5,652 8,518 5,573 8,466 Loans 3,659-2,653 - Supplier advances Interest receivables 25 1, ,025 Receivables from state Loans to related parties - 1, Other receivables Less: Non-current portion of deposits (4,330) (3,030) (4,330) (3,030) 54,993 56,748 55,729 56,412 /i/ The long-term deposit of HRK 3,200 thousand bears a fixed interest rate of 4% and matures in 2016 and the rest of long-term deposits bears no interest. Deposits are generally given for participating in tenders and most of them are due in the second half of Deposits, with the exception of one long-term deposit, bear no interest. As at 31 December 2014, trade receivables of HRK 18,543 thousand (2013: HRK 16,490 thousand) were past due but not impaired. These relate to a number of smaller slower paying customers with no recent history of default. The aging structure of these receivables is as follows: (in thousands of HRK) Up to one month 6,983 5,912 6,955 5,794 One to two months 3,376 3,528 3,376 3,528 Two to three months 1,604 1,911 1,604 1,911 Over three months 6,580 5,139 7,922 5,196 18,543 16,490 19,857 16,429 As at 31 December 2014, the s and the s trade receivables in the amount of HRK 9,001 thousand (2013: HRK 9,181thousand) were impaired and provided for. The individually impaired receivables mainly related to customers who were in difficult economic situations and collection was not expected. 39

40 NOTE 15 TRADE AND OTHER RECEIVABLES (continued) The carrying amounts of the s and s trade and other receivables are denominated in the following currencies: (in thousands of HRK) HRK 50,851 48,352 51,639 48,458 EUR 4,408 5,889 4,478 5,466 55,259 54,241 56,117 53,924 Balances and movements on the provision for impairment of trade receivables are as follows: (in thousands of HRK) At beginning of year 9,181 5,306 9,181 5,306 Written-off during the year as uncollectible (691) (877) (691) (878) Provision for receivables impairment (Note 8) 1,412 5,387 1,412 5,495 Collected receivables previously written off (Note 8) (901) (635) (901) (742) At end of year 9,001 9,181 9,001 9,181 The creation and release of provision for impairment of collected receivables previously written off is included in the statement of comprehensive income within Other operating expenses (Note 8). The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The does not hold any collateral as security. NOTE 16 CASH AND CASH EQUIVALENTS (in thousands of HRK) Investment in cash investment fund /i/ 5,141 8,055 5,141 8,055 Cash with banks in Croatian kuna 4,858 6,669 4,303 6,511 Foreign currency account Cash in hand ,217 14,756 9,658 14,589 /i/ The has part of its available funds invested in a cash investment fund. The investment is recognised at fair value and unrealised gains/losses are presented in the statement of comprehensive income. Most of the assets in which the fund invests are highly liquid short-term financial assets, shares in the fund may be charged within three days, and changes in value of the fund do not fluctuate significantly. 40

41 NOTE 16 CASH AND CASH EQUIVALENTS (continued) The carrying amounts of cash are denominated in the following currencies: (in thousands of HRK) HRK 10,037 14,738 9,478 14,575 EUR Other ,217 14,756 9,658 14,589 NOTE 17 SHAREHOLDERS EQUITY An overview of issued shares is presented in the table below: Ordinary Treasury shares Preference Series R-A Series R-A Series P-A Series P-B 1 January ,128 (16,000) 6, Purchase of treasury shares - (6,650) December ,128 (22,650) 6, January ,128 (22,650) 6, Capital increase 1,501, Termination of preference shares Assignment of treasury shares 7,500 - (6,600) (900) - 22, December ,252, In 2014, all of the s preference shares became ordinary shares. All ordinary shares have a nominal value of HRK 100 per share. All issued shares are fully paid. The has assigned the treasury shares to the s Management Board members. Capital reserves as of 31 December 2014 amount to HRK 70,241 thousand and the capital loss amounts to HRK 11,732 thousand. The capital loss was incurred due to the pre-bankruptcy process and the fair valuation of bonds whose nominal value at the time of conversion into equity was reduced by a discount of HRK 11,732 thousand. 41

42 NOTE 17 SHAREHOLDERS EQUITY (continued) The ownership structure of the as at 31 December 2014 is as follows: Quaestus Private Equity Kapital 21% 62% King ICT d.o.o. 10% - Hita-vrijednosnice d.d. trustee account 10% - Quaestus private equity d.o.o. 8% - The Slavonian Closed Investment Fund with public offering 8% - Christian Panjol-Tuflija 6% - Zlatko Dodić 5% - Quaestus Partneri d.o.o. 2% 18% Stipo Matić 5% 15% Metronet telekomunikacije d.d. treasury shares - 3% Small shareholders 24% 2% 100% 100% Quaestus Private Equity Kapital ( Quaestus ), an open-ended venture capital investment fund with private offering, is a Croatian private equity fund managed by Quaestus Private Equity d.o.o. As part of the pre-bankruptcy settlement HRK 150,188 thousand of debt was converted into share capital which led to changes in the s shareholder structure. 42

43 NOTE 18 BORROWINGS Effective interest rate (in thousands of HRK) Non-current Bonds 4.50% 42, ,765 42, ,765 Bank borrowings 4.50 % 189, , , ,504 Equipment borrowings from suppliers - 13,472-13,472 - Related party borrowing - 8,440-8,440 - Liabilities to the state 4.50 % 3,200 1,086 3,200 1, , , , ,355 Current Commercial papers ,958-52,958 Bonds 4.50% 183 4, ,437 Equipment borrowings from suppliers - 8, , Bank borrowings 4.50% 1,234 83,749 1,234 83,749 Related party borrowing - 6, , Short-term borrowing 3.00% 1,600-1,600 - Liabilities to the state 4.50% 1,301 4,446 1,301 4,446 19, ,729 19, , , , , ,084 Commercial papers In accordance with the pre-bankruptcy settlement signed in March 2014, in June 2014 commercial papers were fully converted into the s equity in the amount of HRK 52,737 thousand. Bonds During 2013, based on the fact that the related party Hospitalija trgovina d.o.o. realised the lien, the recognised bonds in the amount of HRK 5,888 thousand. As a result of the low realised value of HRK 1,495 thousand, a loss was realised of HRK 4,393 thousand. According to the pre-bankruptcy settlement Decision from March 2014, in June % of the principal on bonds was converted into the s share capital, and the remaining 50% will be paid within a period of 8 years with a grace period of 3 years at an interest rate of 4.5%. Interest payables of HRK 4,437 thousand were written off. The conversion of bonds into equity was measured at fair value, which resulted in the formation of capital loss in the amount of HRK 11,732 thousand. Management estimated that the market rate for the is at the level of 10% which led to the difference between the nominal and fair value of bonds in the amount of HRK 17,037 thousand and therefore HRK 5,208 thousand was recognized as a gain from bonds revaluation. 43

44 NOTE 18 BORROWINGS (continued) Bank borrowings In accordance with the adopted pre-bankruptcy restructuring plan, the syndicated loan was replaced by individual loans to participating banks and every bank loan will be repaid within 11 years with a grace period of 3 years and an interest rate of 4.5%. Interest payables in the amount of HRK 5,265 thousand were written off. This change of conditions resulted in the re-evaluation of the liability under the assumption that the 's market rate is 10% and a one-time gain was recognised in the amount of HRK 48,701 thousand. The loan debt with a commercial bank in the amount of HRK 55,500 thousand was reprogrammed with the same repayment terms as the syndicated loan, and a one-time gain was recognised of HRK 13,912 thousand. On the basis of this loan, interest payables of HRK 1,129 thousand were written off. Borrowings from suppliers The increase in the borrowing from suppliers in the financial statements as at 31 December 2014 is a result of the reclassification of trade payables to the position of borrowings from suppliers in the amount of HRK 22,305 thousand (2013: HRK 834 thousand). Reclassified liabilities are reprogrammed to the repayment period of 2 to 5 years without interest. The adjustment to fair value assuming a market rate of 9% resulted in a one-time gain in the amount of HRK 4,147 thousand. Loan to related party The increase in the borrowing from a related party in the financial statements as at 31 December 2014 is a result of the reclassification of trade payables to the position of loans to a related party in the amount of HRK 15,104 thousand (2013: HRK 305 thousand). Reclassified liabilities are reprogrammed over the repayment period of 3 years without interest. The adjustment to fair value assuming a market rate of 9% resulted in a one-time gain in the amount of HRK 2,025 thousand. Liabilities to the state In accordance with the adopted pre-bankruptcy restructuring plan, liabilities to the state were reprogrammed over the repayment period of 4 years with an interest rate of 4.5%. The adjustment to fair value assuming a market rate of 9% resulted in a one-time gain in the amount of HRK 415 thousand. The exposure of the s and s borrowings to interest rate changes at the balance sheet date is as follows: (in thousands of HRK) Fixed rate Up to one year 19,816 65,083 19,816 65, years 256, , , ,965 Total fixed rate 276, , , ,048 Variable rate Up to 3 months - 251, , , , , ,084 44

45 NOTE 18 BORROWINGS (continued) The maturity of long-term borrowings is as follows: (in thousands of HRK) Between 1 and 2 years 7,372 44,180 7,372 44,180 Between 2 and 5 years 97, ,483 97, ,483 Over 5 years 152,045 30, ,045 30, , , , ,355 The s and s borrowings are denominated in the following currencies: (in thousands of HRK) HRK 229, , , ,707 EUR 46, ,377 46, , , , , ,084 Borrowings with currency clauses in EUR are stated in EUR. As at 31 December 2014, the fair value of borrowings approximates the book value as its fair value was determined at the pre-bankruptcy settlement date. NOTE 19 FINANCE LEASE LIABILITIES The leases equipment under finance leases for a period of 2 to 5 years. In 2014, the effective interest rate on the finance lease is 4.5% (2013: 7.07%). Lease liabilities are effectively secured as the rights to the lease asset revert to the lessor in the event of default. In accordance with the adopted pre-bankruptcy restructuring plan, a part of finance lease liabilities was reprogrammed over the repayment period of 4 years with an interest rate of 4.5%. The adjustment to fair value assuming a market rate of 9% resulted in a one-time gain in the amount of HRK 1,885 thousand. The present value of the finance lease liabilities is as follows: (in thousands of HRK) Current portion (no later than 1 year) 5,198 17,943 5,198 17,943 Later than 1 and not later than 5 years 12,698 5,455 12,698 5,455 17,896 23,398 17,896 23,398 45

46 NOTE 19 FINANCE LEASE LIABILITIES (continued) Minimum lease payments under finance lease agreements are as follows: (in thousands of HRK) No later than 1 year 5,952 18,717 5,952 18,717 Later than 1 and not later than 5 years 13,509 5,612 13,509 5,612 19,460 24,329 19,460 24,329 Future finance charges on finance lease (1,564) (931) (1,564) (931) Present value of finance lease liability 17,896 23,398 17,896 23,398 As at 31 December 2014, finance lease liabilities in the amount of HRK 11,268 thousand are in HRK and the rest finance lease liabilities are in EUR. As at 31 December 2013, all finance lease liabilities were in EUR. NOTE 20 TRADE PAYABLES (in thousands of HRK) Trade payables domestic suppliers 25, ,577 26, ,563 Trade payables foreign suppliers 648 1, ,274 26, ,845 26, ,837 The decrease in trade payables is a result of the reclassification of trade payables to the position of borrowings from suppliers in the amount of HRK 37,409 thousand and conversion of liabilities in the amount of HRK 22,839 thousand to equity in accordance with the adopted pre-bankruptcy restructuring plan. Also, interest liabilities in the amount of HRK 5,843 thousand were written off. The carrying values of the s and the s trade payables are denominated in the following currencies: (in thousands of HRK) HRK 25, ,577 26, ,562 EUR USD , ,845 26, ,837 46

47 NOTE 21 ACCRUED AND OTHER PAYABLES (in thousands of HRK) Salaries and wages payable 1,997 1,596 1,886 1,501 Taxes and contributions related to salaries 1,475 1,190 1,403 1,127 Accrual for unused vacation Accrued expenses /i/ 5,695 6,641 5,695 6,437 VAT liability 2,265 4,088 2,130 3,950 Deferred revenue /ii/ 3,879 1,145 3,879 1,145 Liabilities for received advances Other current liabilities 887 1, ,072 Less: Long-term deferred revenue (3,435) - (3,435) - 13,509 16,388 13,186 15,878 /i/ Accrued expenses refer to expenses whose time of payment is not determined yet. /ii/ Deferred revenue refers to the contracted annual service fees which the invoiced to customers. 47

48 NOTE 22 CASH GENERATED FROM OPERATIONS (all amounts are expressed in thousands of HRK) Note Cash flows from operating activities Profit before tax 129,444 5, ,438 5,912 Adjustments for: Depreciation and amortisation 11, 12 34,655 37,286 34,633 37,252 Gain on sale of plant and equipment 6 (61) (16) (61) (16) Interest income 9 (1,371) (1,004) (988) (992) Interest expense 9 13,403 26,829 13,399 26,823 Provision for impairment of trade receivables , ,752 Foreign exchange differences (926) 2,654 (926) 2,654 Gain from bonds refinancing 9 (78,234) (681) (78,234) (681) Correction of depreciable bonds cost 9 7,178 4,900 7,178 4,900 Loss from own bonds 9 (1,697) 4,960 (1,697) 4,960 Gain on liabilities write-off 6 (16,824) (546) (16,824) (546) Changes in working capital: Trade and other receivables (44,284) (12,664) (45,355) (11,684) Trade and other payables 19,661 (14,140) 20,368 (14,269) Cash generated from operations 61,455 58,235 61,442 59,065 48

49 NOTE 23 CONTINGENCIES AND COMMITMENTS Rental of ducts One regulatory uncertainty relevant to the is the leasing of underground network ducts ( ducts ). Although diligent efforts have been made by government authorities seeking resolution of this uncertainty, the manner of usage and ultimate ownership of the ducts is still outstanding and unresolved. Several legal disputes involving the exist in respect of this uncertainty. Based on advice of legal counsel, management believes that this uncertainty will be resolved in the future, but will not result in any retrospective liabilities for the. As a result, no payments or provisions have been made in this respect. Other legal claims In the ordinary course of operations, the was plaintiff and defendant in several other legal disputes. Management and its external legal counsel believe that these legal disputes will not result in significant losses. Contract commitments As at 31 December 2014 and 2013, the has no contractual commitments. NOTE 24 RELATED PARTY TRANSACTIONS Related parties of the include Quaestus Private Equity Kapital Fund ( Quaestus Fund ), companies owned by the Quaestus Fund, KING ICT and companies owned by the s Management. The ultimate parent and controlling party is the investment fund Quaestus Private Equity Kapital. The balances resulting from related party transactions are as follows: (in thousands of HRK) Balance sheet Trade payables 1, ,628 1,017 Borrowings 17, , Accrued and other liabilities Plant & equipment 4,362 3,984 4,362 3,984 Intangible assets 2,705 2,641 2,705 2,641 Trade and other receivables 955 1,347 3,157 1,689 Statement of comprehensive income Traffic revenues Monthly subscription fee 940-1,386 - Interconnection and VAS revenues Other services Other finance revenues 1,318-1,318 - Other operating revenue Interest revenue - (15) - (14) Interconnection expenses Interest expense Other finance costs Other operating expenses (160) 49

50 NOTE 24 RELATED PARTY TRANSACTIONS (continued) In 2014, key management had compensation in the form of salaries and bonuses of HRK 2,953 thousand (2013: HRK 1,224 thousand). Pension contributions paid into obligatory pension funds amounted to HRK 294 thousand (2013: HRK 212 thousand). Key management consist of 4 members of the Management Board (2013: 4). 50

51 ANNUAL REPORT for 2014 (consolidated, audited) Zagreb, 27 April 2015

52 1. Metronet telekomunikacije d.d. About us Date of incorporation: 3 May 2005 Date of registration: 13 May 2005 Commercial Court: Commercial Court in Zagreb; Headquarter of the : Zagreb, Ulica grada Vukovara 269/d; Identification Court number: VAT number: Telephone number: Summary of business activities Metronet operates in the fixed telephony market, where, in addition to public voice services offered via the fixed telecommunications network, it offers data transmission services, broadband services, ISP services, data center services and IT services on demand as well as cloud computing services. Metronet offers these services both to business and residential customers, with a focus on sales of services to business customers. Metronet also operates in the wholesale market, offering services to other telecommunications operators. Metronet sales activities are the s leading activities, from building networks and connecting users to marketing activities and customer operations. During the first 3 years of operations, Metronet was focused on completing its large capital investments and setting up its network. In the next years investments will be channelled to new customer connections and the development of new services. Management focus is on operating margin and profitability. Market description The most important segment for Metronet is business customers, while the wholesale and residential markets are perceived as secondary markets. Business market Metronet has achieved the second position on the market by revenue and number of customers directly behind the incumbent. Metronet has achieved significant results in the segment of large and medium-sized companies, while with small companies, on which Metronet has been less focused, the market share is still somewhat lower. In the coming period Metronet will continue its strategy, which is strongly focused on the business customer segment, with special emphasis on the growth of market share in the segment of medium-sized and small companies. Residential market - In April, 2007 Metronet started offering broadband Internet access services and fixed telephony services to residential customers. Initially, Metronet offered services through 30 T- Com colocation switches, and was available in 235,000 households, representing 13% of the total number of households in Croatia. Given the strategic focus on providing services to business customers and gradually exiting the residential market segment, in July 2013 Metronet sold Vipnet a part of its residential customer base and fiber infrastructure (FTTH) intended to provide services to residential customers. 52

53 Wholesale market Metronet provides telco services to large entities, other local and international telecoms, mainly data/voice transit, data connectivity, and internet. Metronet cooperates with international telecom operators and sells capacities to them. The wholesale business is complementary to the core focus of Metronet provision of services to the business customer segment. The wholesale business is high volume and low margin, i.e. not a focus area for Metronet management. Other than Metronet telekomunikacije d.d. members of the Metronet are the following subsidiaries: Metronet telekomunikacije, družba za telekomunikacijske storitve d.o.o. with headquarters in Ljubljana, Slovenia, founded and registered at the Commercial Court in Ljubljana on 26 October Metronet d.o.o. with headquarters in Zagreb, Croatia, founded and registered at the Commercial Court in Zagreb on 13 May By the end of 2014, the subsidiary in Ljubljana had no significant business activity, while Metronet d.o.o. provides services to business customers and in 2014 achieved an operating income of HRK 2.4 million. Metronet telekomunikacije d.o.o. za telekomunikacijske usluge Mostar with headquarters in Mostar, Bosnia and Herzegovina, founded and registered at the Ministry of foreign trade and economic affairs on 9 October 2007 and at the Public Court in Mostar on 14 November 2007 was liquidated on 20 May From the day of foundation until the day of liquidation, this subsidiary had no significant business activity. In 2014 the Management Board is as follows: Željko Lukač Dennis Allan Rukavina Sanjin Katinić Zdenko Vrdoljak Chief Executive Officer Chief Financial Officer Chief Marketing & Sales Officer Chief Technical Officer The Supervisory Board is as follows: Borislav Škegro Plamenko Barišić Ante Lučić Tanja Rukavina Vjenceslav Terzić President Member Member Member Member 53

54 Metronet through history From foundation until the end of 2014 the most significant achievements by the are as follows: 54