METRONET TELEKOMUNIKACIJE d.d. - · PDF filemetronet telekomunikacije d.d. independent auditor’s report and financial statements 31 december 2014

METRONET TELEKOMUNIKACIJE d.d.

INDEPENDENT AUDITOR’S REPORT AND

FINANCIAL STATEMENTS

31 DECEMBER 2014

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

PricewaterhouseCoopers d.o.o., Ulica kneza Ljudevita Posavskog 31, 10000 Zagreb, Croatia T: +385 (1) 6328 888, F:+385 (1) 6111 556, www.pwc.hr Commercial Court in Zagreb, no. Tt-99/7257-2, Reg. No.: 080238978; Company ID No.: 81744835353; 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: HR8124840081105514875.

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 “Group”) and of Metronet telekomunikacije d.d. (the “Company”), 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 Group and the Company 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 Group and the Company 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


BALANCE SHEET

AS AT 31 DECEMBER 2014

The notes on pages 10 to 50 are an integral part of these financial statements.

6

Group Company

(all amounts are expressed in

thousands of HRK) Note 2014 2013 2014 2013

ASSETS

Non-current assets

Plant & equipment 11 243,686 235,242 243,663 235,198

Intangible assets 12 11,055 8,709 11,055 8,709

Investments in subsidiaries 13 - - 109 117

Deposits 15 4,330 3,030 4,330 3,030

259,071 246,981 259,157 247,054

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 324,281 318,485 324,544 318,055

SHAREHOLDERS’ EQUITY

AND LIABILITIES

Shareholders’ equity

Share capital 17 225,251 75,063 225,251 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 18 256,512 298,355 256,512 298,355

Finance lease liabilities 19 12,698 5,455 12,698 5,455

Deferred revenue 21 3,435 - 3,435 -

272,645 303,810 272,645 303,810

Current liabilities

Borrowings 18 19,816 146,729 19,816 146,729

Finance lease liabilities 19 5,198 17,943 5,198 17,943

Trade payables 20 26,449 114,845 26,947 114,837

Accrued and other liabilities 21 13,509 16,388 13,186 15,878

64,972 295,905 65,147 295,387

Total liabilities 337,617 599,715 337,792 599,197

Total shareholders’ equity and

liabilities 324,281 318,485 324,544 318,055


STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2014


7

Group

(all amounts in thousands of HRK) Note Share

capital

Treasury

shares

Capital

reserves

Capital loss Accumulated

losses

Total

equity

At 1 January 2013 75,063 (4,350) 76,387 - (432,432) (285,332)

Purchase of treasury shares 17 - (1,796) - - - (1,796)

Total comprehensive income - - - - 5,898 5,898

At 31 December 2013 75,063 (6,146) 76,387 - (426,534) (281,230)

At 1 January 2014 75,063 (6,146) 76,387 - (426,534) (281,230)

Capital increase 150,188 - - - - 150,188

Assignment of treasury shares 4a - 6,146 (6,146) - - -

Capital loss 17 - - - (11,732) - (11,732)

Total comprehensive income 17 - - - - 129,438 129,438

At 31 December 2014 225,251 - 70,241 (11,732) (297,096) (13,336)


STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY



8

Company

(all amounts in thousands of HRK) Note Share

capital

Treasury

shares

Capital

reserves Capital loss

Accumulated

losses

Total

equity

At 1 January 2013 75,063 (4,350) 76,387 - (432,358) (285,258)

Purchase of treasury shares 17 - (1,796) - - - (1,796)


At 31 December 2013 75.063 (6.146) 76.387 - 426,446) (281,142)

At 1 January 2014 75,063 (6,146) 76,387 - (426,446) (281,142)

Capital increase 4a 150,188 - - - - 150,188

Assignment of treasury shares 17 - 6,146 (6,146) - - -

Capital loss 17 - - - (11,732) - (11,732)


At 31 December 2014 225,251 - 70,241 (11,732) (297,008) (13,248)


CASH FLOW STATEMENT



9

Group Company



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 6,705 364 6,705

Interest received 1,371 1,004 988 992

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 14,756 3,640 14,589 3,528

Cash and cash equivalents, end of

period 16 10,217 14,756 9,658 14,589


NOTES TO THE FINANCIAL STATEMENTS


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NOTE 1 – GENERAL INFORMATION

The Metronet Group (the Group) 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 Group is an emerging provider of

advanced and innovative telecommunication services targeted to business customers. The Group’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 Group is Metronet Telekomunikacije d.d. (the ‘Company’ or ‘Metronet’), a joint

stock company registered under the laws and jurisdictions of the Republic of Croatia. The Company

was established on 13 May 2005 and started operations in June 2005. The registered address of the

Company is Ulica grada Vukovara 269d, Zagreb.

The Metronet Group includes the Company and its subsidiaries. The business activity of all

subsidiaries is telecommunication services. A listing of the Group’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.




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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 Group’s consolidated financial statements, as well as the Company’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 Group’s

accounting policies. The areas where assumptions and estimates are significant to the financial

statements are disclosed in Note 4.

2.1.2 Changes in accounting policies and disclosures

(a) New and amended standards adopted by the Group

The Group and the Company 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 Group

and the Company, 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 Group and The Company’s financial position

or performance.




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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1.2. Changes in accounting policies and disclosures (continued)

(a) New and amended standards adopted by the Group (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 Group and The Company’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 Group and The Company’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 Group and The Company’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 Group and The Company’s financial position or performance.




13



(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 Group and The Company’s operations are complex, and The Group and The Company 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 2017. 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 Group and The Company’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:




14



(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 Group and The Company’s operations are complex, and The Group and The Company 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 2016. 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 Group and The Company’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 Group and The Company plans to adopt this new amendment on the effective date as of and when

endorsed by EU. The Group and The Company is still assessing the impact on this amendment, but it

is not expected to have a significant impact on The Group and The Company’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.







15




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.




Annual improvements 2012 (effective for annual periods beginning on or after 1 July 2014)

These annual improvements amend standards from the 2010 – 2012 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 Group and The Company plans to adopt this annual improvement on the effective date as of and

when endorsed by EU. The Group and The Company is still assessing the impact on this amendment,

but it is not expected to have a significant impact on The Group and The Company’s financial

statements.




16






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 Group and The Company plans to adopt this annual improvement on the effective date as of

and when endorsed by EU. The Group and The Company is still assessing the impact on this

amendment, but it is not expected to have a significant impact on The Group and The Company’s

financial statements.




17






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 Group and The Company plans to adopt this annual improvement on the effective date as

of and when endorsed by EU. The Group and The Company is still assessing the impact on

this amendment, but it is not expected to have a significant impact on The Group and The

Company’s financial statements.




18


2.2 Consolidation

Subsidiaries are all entities over which the Group 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 Group controls another entity. Subsidiaries are fully

consolidated from the date on which control is transferred to the Group and are de-consolidated from

the date that control ceases.

The Group 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 Group. 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 Group 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 Group 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

Group’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 Group 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 Group.

2.3 Investments in subsidiaries

Investments in subsidiaries in which the Company 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 Company decides to declare it.




19


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 Group and the Company 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 Group and the Company 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:

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.

Telecom network 30 years

Indefeasible rights of use (IRU) 10 – 15 years

Telecom equipment 5 years

Tools, vehicles, IT and office equipment 3 – 5 years




20


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 Group, 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.




21


2.8 Leases

Leases of vehicles and equipment, where the Group has substantially all the risks and rewards of

ownership, are classified as finance leases. Finance leases are capitalized at the lease’s commencement

at the lower of 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 Group

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 non-

current 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 Group 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.

2.10 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.




22


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 Group company purchases the Company’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 Company’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 Company’s equity holders.

2.12 Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using

the effective interest method.

2.13 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 Group has an unconditional right to defer

settlement of the liability for at least 12 months after the balance sheet date.




23


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

Group and it is probable that the temporary difference will not reverse in foreseeable future.

2.15 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.

2.16 Employee benefits

(a) Pension obligations and post-employment benefits

In the normal course of business through salary deductions, the Group 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 Group does not have any other

pension scheme and consequently, has no other obligations in respect of employee pensions. In

addition, the Group is not obliged to provide any other post-employment benefits.

(b) Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal

retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.

The Group 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.




24


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.

2.18 Revenue recognition

Revenue is primarily derived from data, internet and voice services provided to the Group’s customers

and other third parties using the Group’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 Group.

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 Group’s

network that has been transmitted through or terminated in the Group’s network.

Interconnection expenses include expenses from outgoing traffic that is routed externally from the

Group’s network.

The revenue and expenses of transit traffic is stated gross in the financial statements as the Group is

acting as the principal. The Group 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.




25

NOTE 3 – FINANCIAL RISK MANAGEMENT

3.1 Financial risk factors

The Group’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 Group

does not have a written risk management programme, but overall risk management in respect of these

risks is carried out by the Company’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 Group’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 Group’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 Group 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 Group has no significant interest-bearing assets. The Group’s interest rate risk arises from long-

term liabilities. Finance lease liabilities stated at variable rates expose the Group to cash flow interest

rate risk. Borrowings issued at fixed rates expose the Group 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

Group 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 Group 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 Group has policies in place to

monitor the credit quality of customers taking in account the customer’s financial position and past

experience. The Group 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 15.




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 Group’s and Company’s financial liabilities into relevant maturity

groupings based on the remaining period at the balance sheet date to the contractual maturity date:

Group

(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 21,146 131,006 173,318

Finance lease 5,952 5,448 8,061 -

Trade and other payables 26,449 - - -

66,128 26,594 139,067 173,318


year

Between 1-2

years

Between 2-5

years

Over 5

years

31 December 2013

Borrowings 169,493 62,976 252,698 32,394

Finance lease 18,717 3,384 2,228 -


303,055 66,360 254,926 32,394

Company


year

Between 1-2

years

Between 2-5

years

Over 5

years

31 December 2014

Borrowings 33,727 21,146 131,006 173,318

Finance lease 5,952 5,448 8,061 -


66,626 26,594 139,067 173,318

Less than 1

year

Between 1-2

years

Between 2-5

years

Over 5

years

31 December 2013

Borrowings 169,493 62,976 252,698 32,394

Finance lease 18,717 3,384 2,228 -


303,047 66,360 254,926 32,394




27

NOTE 3 – FINANCIAL RISK MANAGEMENT (continued)

3.2 Capital risk management

The Company 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 Company’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 Company 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 Group 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 Group

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

Company Management entered into pre-bankruptcy proceedings aiming at the operational and

financial restructuring of the business. Creditors have supported the Company’s plan and on 19 March

2014, the creditors and the Company 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.




28

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES (continued)

Pursuant to the Plan, in June 2014 the Company’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 Company’s standalone financial statements have been

prepared under the assumption that the Group and the Company will continue its operating activities

according to the going concern principle. As at 31 December 2014, the accumulated losses of the

Group 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 Company 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 Group 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 Group 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 Group 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 Group 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.




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 Group 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).




30

NOTE 5 – REVENUE

Group Company

(in thousands of HRK) 2014 2013 2014 2013

Monthly subscription fee 154,563 141,846 153,065 140,012

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 2,635

212,789 208,050 211,146 206,252

/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 Group’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 Company’s EBITDA amounts to HRK 87,745 thousand, which is 8% higher

compared to 2013 (2013: HRK 81,320 thousand). The Group’s EBITDA in 2014 amounts to HRK

87,394 thousand, which is 7% higher compared to 2013 (2013: HRK 81,340 thousand).

Group Company


Business customers 193,884 178,238 191,985 176,065

Residential customers 4,505 6,832 4,505 6,832

Interconnection and VAS revenue 14,400 22,980 14,656 23,355

212,789 208,050 211,146 206,252




31

NOTE 5 – REVENUE (continued)

The Management of the Group does not monitor assets and liabilities by segments and therefore this

information has not been disclosed.

In 2014 the Company 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 Company’s focus to improve profit margins.

NOTE 6 – OTHER OPERATING REVENUE

Group Company


Revenue from collection reminders 678 1,160 678 1,160

Gain on disposals of equipment 61 16 60 16

Revenue from liabilities write-off 43 546 43 546

Revenue from technical support and

technical solutions implementation 436 345 436 345

Other revenue 112 472 211 163

1,330 2,539 1,428 2,230

NOTE 7 – STAFF COSTS Group Company


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/ 23 61 23 61

40,149 32,970 38,061 31,173

/i/ As at 31 December 2014, the Company had 230 employees (2013: 208), and the Group 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 Group and HRK 6,244 thousand by the Company

(2013: HRK 5,714 thousand by the Group and HRK 5,402 thousand by the Company).

/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 Company, based on the terms of

their employment contracts.




32

NOTE 8 – OTHER OPERATING EXPENSES

Group Company


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 4,752 511 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 1,213 958

Insurance 864 974 864 970

Bank charges 485 951 478 944

Office materials and supplies 883 521 872 519

Education costs 324 120 324 120

External customer connection costs 676 34 676 34

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 Group Company


Interest revenue 1,371 1,004 988 992

Foreign exchange gains 3,770 6,710 3,769 6,710

Other finance revenue /i/ 1,851 57 1,851 56

Interest write-off revenue /ii/ 4a 16,824 - 16,824 -

Profit from debt revaluation /ii/ 4a 78,234 681 78,234 681

102,050 8,452 101,666 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)




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 pre-

bankruptcy 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:

Group Company


Profit before tax 129,444 5,905 129,438 5,912

Tax calculated at a rate of 20% 25,889 1,181 25,888 1,182

Effect of non-deductible expenses 919 1,426 914 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 6 7 - -

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) 2014 2013

2014 - 78,077

2015 - 47,873

2016 21,765 29,419

21,765 155,369

In accordance with regulations in the Republic of Croatia, the Tax Authority may at any time inspect

the Company’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 Company’s Management is not

aware of any circumstances, which may give rise to a potential material liability in this respect.




34

NOTE 11 – PLANT AND EQUIPMENT

The carrying value of plant & equipment under finance leases is as follows:

Group and Company


Purchase cost 95,192 96,081

Accumulated depreciation (87,996) (84,880)

Net book value 7,196 11,201

Group

(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 23,191 304,238 30,238 7,939 562,244

Accumulated depreciation (45,982) (5,752) (244,571) (25,562) - (321,867)

Net book amount 150,505 17,439 59,667 4,827 7,939 240,377

Year ended 31 December

2013

Opening balance 150,505 17,439 59,667 4,827 7,939 240,377

Additions - - - - 35,097 35,097

Transfers 5,558 151 21,501 951 (28,161) -

Reclassification (991) - 991 - - -

Disposals - - (6,195) (484) - (6,677)

Depreciation (6,603) (1,910) (23,002) (2,038) - (33,553)

At 31 December 2013 148,469 15,680 52,962 3,256 14,875 235,242

At 31 December 2013

Cost 201,519 23,343 305,519 20,929 14,875 566,185


Net book amount 148,469 15,680 52,962 3,256 14,875 235,242

Year ended 31 December

2014

Opening balance 148,469 15,680 52,962 3,256 14,875 235,242

Additions - - - - 40,381 40,381

Transfers 6,532 4,187 23,472 1,493 (35,684) -

Reclassification 283 - (283) - - -

Disposals - - (247) (56) - (303)

Depreciation (6,896) (1,911) (21,019) (1,808) - (31,634)

At 31 December 2014 148,388 17,956 54,885 2,885 19,752 243,686

At 31 December 2014

Cost 210,830 27,531 325,448 22,329 19,572 605,710


Net book amount 148,388 17,956 54,885 2,885 19,572 243,686




35

NOTE 11 – PLANT AND EQUIPMENT (continued)

Company

(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 23,191 304,238 30,219 7,940 562,075


Net book amount 150,504 17,438 59,667 4,750 7,940 240,299

Year ended 31 December 2013

Opening balance 150,504 17,438 59,667 4,750 7,940 240,299

Additions - - - - 35,096 35,096

Transfers 5,558 151 21,501 951 (28,161) -

Reclassification (991) - 991 - - -

Disposals - - (6,195) (483) - (6,678)

Depreciation (6,603) (1,910) (23,002) (2,004) - (33,519)

At 31 December 2013 148,468 15,679 52,962 3,214 14,875 235,198

At 31 December 2013

Cost 201,518 23,342 305,519 20,762 14,875 566,016


Net book amount 148,468 15,679 52,962 3,214 14,875 235,198


Opening balance 148,468 15,679 52,962 3,214 14,875 235,198

Additions - - - - 40,380 40,380

Transfers 6,533 4,188 23,472 1,490 (35,683) -

Reclassification 283 - (283) - - -

Disposals - - (247) (56) - (303)

Depreciation (6,895) (1,911) (21,019) (1,787) - (31,612)

At 31 December 2014 148,389 17,956 54,885 2,861 19,572 243,663

At 31 December 2014

Cost 210,831 27,531 325,448 22,159 19,572 605,541


Net book amount 148,389 17,956 54,885 2,861 19,572 243,663

In 2014, assets under construction at the Group and the Company 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).




36

NOTE 12 – INTANGIBLE ASSETS

Group and Company

(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


Opening net book amount 4,296 1,870 1,040 1,062 8,268 Additions - - - 4,185 4,185 Transfer 3,218 727 - (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


Opening net book amount 5,897 1,510 - 1,302 8,709

Additions - - - 5,367 5,367

Transfer 5,560 1,109 - (6,669) -

Disposals - - - - -

Amortisation (2,071) (950) - - (3,021)

Closing net book amount 9,386 1,669 - - 11,055

At 31 December 2014

Cost 39,878 6,781 - - 46,659

Accumulated amortisation (30,492) (5,112) - - (35,604)

Net book amount 9,386 1,669 - - 11,055

Other intangible assets mainly consist of acquired rights for carrier pre-selection and interconnection

services.




37

NOTE 13 – INVESTMENTS IN SUBSIDIARIES

As at 31 December the investments in the Company’s subsidiaries were as follows:


Opening balance 117 115

Investment (8) -

Foreign exchange differences - 2

Balance at 31 December 109 117

In 2007, the Group 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 Group 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:

Group Company


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 3,513 920

Interest receivables 25 1,025 25 1,025

Cash 10,217 14,756 9,658 14,589

65,477 68,997 65,775 68,513

Other financial liabilities

Borrowings 276,328 445,084 276,328 445,084

Financial lease liabilities 17,896 23,398 17,896 23,398

Trade payables 26,449 114,845 26,947 114,837

320,673 583,327 321,171 583,319




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.

Group Company


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 Group mainly deposits its cash at local banks that are members of banking groups with the

following credit ratings by Standard & Poor’s:

Group Company


A - 7 - 7

A- 19 10 19 10

AA+ 4 1 4 1

B - - 2 - 2

BBB+ 9 - 9 -

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




39

NOTE 15 – TRADE AND OTHER RECEIVABLES

Group Company


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 205 750 205 750

Interest receivables 25 1,025 25 1,025

Receivables from state 13 50 5 48

Loans to related parties - 1,342 860 920

Other receivables 184 426 70 423

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

2015. 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:

Group Company


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 Group’s and the Company’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.




40

NOTE 15 – TRADE AND OTHER RECEIVABLES (continued)

The carrying amounts of the Group’s and Company’s trade and other receivables are denominated in

the following currencies:

Group Company


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:

Group Company


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 Group does not hold any collateral as security.

NOTE 16 – CASH AND CASH EQUIVALENTS

Group Company


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 180 18 180 14

Cash in hand 38 14 34 9

10,217 14,756 9,658 14,589

/i/ The Company 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.




41

NOTE 16 – CASH AND CASH EQUIVALENTS (continued)

The carrying amounts of cash are denominated in the following currencies:

Group Company


HRK 10,037 14,738 9,478 14,575

EUR 178 15 178 11

Other 2 3 2 3

10,217 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 2013 743,128 (16,000) 6,600 900

Purchase of treasury shares - (6,650) - -

31 December 2013 743,128 (22,650) 6,600 900

1 January 2014 743,128 (22,650) 6,600 900

Capital increase 1,501,880 - - -

Termination of preference

shares 7,500 - (6,600) (900)

Assignment of treasury

shares - 22,650 - -

31 December 2014 2,252,508 - - -

In 2014, all of the Company’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 Company has assigned the treasury shares to the Company’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.




42

NOTE 17 – SHAREHOLDERS’ EQUITY (continued)

The ownership structure of the Company as at 31 December 2014 is as follows:

2014 2013

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 Company’s shareholder structure.




43

NOTE 18 – BORROWINGS

Effective interest rate Group Company

(in thousands of HRK) 2014 2014 2013 2014 2013

Non-current

Bonds 4.50% 42,293 125,765 42,294 125,765

Bank borrowings 4.50 % 189,106 171,504 189,106 171,504

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 1,086

256,512 298,355 256,512 298,355

Current

Commercial papers - - 52,958 - 52,958

Bonds 4.50% 183 4,437 183 4,437

Equipment borrowings

from suppliers

- 8,834 834 8,834 834

Bank borrowings 4.50% 1,234 83,749 1,234 83,749

Related party borrowing - 6,664 305 6,664 305

Short-term borrowing 3.00% 1,600 - 1,600 -

Liabilities to the state 4.50% 1,301 4,446 1,301 4,446

19,816 146,729 19,816 146,729

276,328 445,084 276,328 445,084

Commercial papers

In accordance with the pre-bankruptcy settlement signed in March 2014, in June 2014 commercial

papers were fully converted into the Company’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

Company 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 2014 50% of the

principal on bonds was converted into the Company’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 Company 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.




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

Company'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 Group’s and Company’s borrowings to interest rate changes at the balance sheet date is as follows:

Group Company


Fixed rate

Up to one year 19,816 65,083 19,816 65,083

1-5 years 256,512 128,965 256,512 128,965

Total fixed rate 276,328 194,048 276,328 194,048

Variable rate

Up to 3 months - 251,036 - 251,036

276,328 445,084 276,328 445,084




45

NOTE 18 – BORROWINGS (continued)

The maturity of long-term borrowings is as follows:

Group Company


Between 1 and 2 years 7,372 44,180 7,372 44,180

Between 2 and 5 years 97,095 223,483 97,095 223,483

Over 5 years 152,045 30,692 152,045 30,692

256,512 298,355 256,512 298,355

The Group’s and Company’s borrowings are denominated in the following currencies:

Group Company


HRK 229,337 257,707 229,337 257,707

EUR 46,991 187,377 46,991 187,377

276,328 445,084 276,328 445,084

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 Group 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:

Group Company


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




46

NOTE 19 – FINANCE LEASE LIABILITIES (continued)

Minimum lease payments under finance lease agreements are as follows:

Group Company


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

Group Company


Trade payables – domestic suppliers 25,801 113,577 26,299 113,563

Trade payables – foreign suppliers 648 1,268 648 1,274

26,449 114,845 26,947 114,837

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 Group’s and the Company’s trade payables are denominated in the

following currencies:

Group Company


HRK 25,801 113,577 26,299 113,562

EUR 486 872 486 879

USD 162 396 162 396

26,449 114,845 26,947 114,837




47

NOTE 21 – ACCRUED AND OTHER PAYABLES

Group Company


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 722 640 722 640

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 24 6 24 6

Other current liabilities 887 1,082 882 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 Company invoiced to

customers.




48

NOTE 22 – CASH GENERATED FROM OPERATIONS

Group Company



Cash flows from operating

activities

Profit before tax 129,444 5,905 129,438 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 8 511 4,752 511 4,752

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




49

NOTE 23 – CONTINGENCIES AND COMMITMENTS

Rental of ducts

One regulatory uncertainty relevant to the Group 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 Company 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 Group. As a result, no payments or provisions

have been made in this respect.

Other legal claims

In the ordinary course of operations, the Group 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 Group has no contractual commitments.

NOTE 24 – RELATED PARTY TRANSACTIONS

Related parties of the Group include Quaestus Private Equity Kapital Fund (“Quaestus Fund”),

companies owned by the Quaestus Fund, KING ICT and companies owned by the Company’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: Group Company


Balance sheet

Trade payables 1,105 982 1,628 1,017

Borrowings 17,129 305 17,129 305

Accrued and other liabilities - 107 - 107

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 815 144 815 560

Monthly subscription fee 940 - 1,386 -

Interconnection and VAS revenues - - 256 375

Other services 147 - 147 -

Other finance revenues 1,318 - 1,318 -

Other operating revenue 13 - 117 99

Interest revenue - (15) - (14)

Interconnection expenses - - 87 191

Interest expense - 9 - 16

Other finance costs - - 59 -

Other operating expenses 75 19 551 (160)




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).

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 Company: Zagreb, Ulica grada Vukovara 269/d;

Identification Court number: 080523351

VAT number: 23269006802

Telephone number: 01 6327 000

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 Company’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.

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 Group 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

2007.

Metronet d.o.o. with headquarters in Zagreb, Croatia, founded and registered at the Commercial

Court in Zagreb on 13 May 2009.

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

2014. 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 Chief Executive Officer

Dennis Allan Rukavina Chief Financial Officer

Sanjin Katinić Chief Marketing & Sales Officer

Zdenko Vrdoljak Chief Technical Officer

The Supervisory Board is as follows:

Borislav Škegro President

Plamenko Barišić Member

Ante Lučić Member

Tanja Rukavina Member

Vjenceslav Terzić Member

54

Metronet through history

From foundation until the end of 2014 the most significant achievements by the Company are

as follows:

55

2. Key facts of business in 2014

The completion of the pre-bankruptcy process had a significant impact on the positive financial result

in 2014.

In June 2014 the debt/equity process was concluded and HRK 150,188 thousand of debt was

converted into equity. As a result, share capital rose from HRK 75,063 thousand to HRK 225,251

thousand.

Decrease of 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. After completing the pre-

bankruptcy procedure, the Group is able to properly and timely service its obligations to creditors and

suppliers.

The Company continuously works on the further optimization of all its work processes in order to

reduce costs and increase margins.

As a result of negative macroeconomic indicators and switching to new technologies, in 2014 the

declining trend in fixed telephone services continued, while the broadband Internet access and data

services revenues continued to grow. Despite unfavourable circumstances, Metronet in these markets

achieved positive results. In 2014, the Group’s key facts are:

- Growth of income from business customers by 9% compared to 2013

-

- Growth in operating results by HRK 6,054 thousand compared to the same period last year

and EBITDA at a level of HRK 87,394 thousand (2013: HRK 81,340 thousand)

- In 2014, the Group achieved a net profit in the amount of HRK 129,438 thousand which

represents an increase by HRK 123,541 thousand compared to the previous period (2013:

HRK 5,898 thousand). This result is mostly due to the successful completion of the pre-

bankruptcy process which led to an interest write-off in the amount of HRK 16,824 thousand and pursuant to the revaluation of liabilities in accordance with International Accounting

Standards a one-time gain was realised in the amount of HRK 78,234 thousand.

- 80% of CAPEX investments in 2014 was customer based (“success-based”)

56

Income statement

Metronet’s core focus of providing services to business customers enjoyed growth by 9% compared to

2013 and revenues amounted to HRK 190,436 thousand. The Group’s audited financial statements

state that the amount of revenue from business customers is at level of HRK 193,884 thousand which

includes revenues from wholesale customers.

Due to the fact that the Group's strategy is focused on increasing the market share in the business

segment and gradually leaving the residential segment, revenues from residential customers decreased

by 34% compared to 2013.

VAS revenues decreased by 61% and wholesale revenues increased by 46%. This has not affected the

operating result, considering that these services are with low margins.

Total operating revenues rose by HRK 3,530 thousand or 2% compared to the same period 2013.

Operating expenses in the reporting period decreased by HRK 2,524 thousand compared to the same

period in the prior year.

The operating profit or EBITDA increased in 2014 and is at a level of HRK 87,394 thousand (2013:

HRK 81,340 thousand). The achievement is driven by the business segment and Management

continued focus on profitability. Metronet’s strategy to be dependent on its own infrastructure is the

key success factor to future profitability.

The depreciation expense in 2014 decreased by 7% compared to the prior year.

Financial revenues increased by 93.598 thousand HRK due to the successfully completed pre-

bankruptcy process which led to interest write-off and debt revaluation according to International

Accounting Standards resulting with one-time gain recognition in the amount of HRK 78,234

thousand.

As a result of financial restructuring, financial expenses in 2014 are 46% or HRK 21,256 thousand

lower than in the same period in the prior year.

Balance sheet

Total assets as of 31 December 2014 amounted to HRK 324,281 thousand and are by HRK 5,796

thousand higher than at 31 December 2013, whereby fixed assets increased by 5% and current assets

decreased by 9%.

Non-current assets comprise 80% of the Group’s assets, which increased by 5% or by HRK 12,090

thousand compared to 2013.

Investments in 2014 increased by 23% compared to the prior year and are at a level of HRK 45,748

thousand or 21% of total revenue. Approximately 80% of total investments (CAPEX) are success

based and incurred only on connection of new network and IT services.

Current assets comprise 20% of the Group’s assets and amounts to HRK 65,210 thousand, which is by

9% or 6.294 thousand HRK lower compared to 2013.

Total non-current and current liabilities decreased by 44% or by 262.099 thousand HRK due to debt

into equity conversion, interest write-off and debt revaluation. Non-current liabilities decreased by

10%, while current liabilities decreased by 78% due to changes in maturity.

57

Statement of changes in equity

In accordance with the restructuring plan in June 2014 the process of debt/equity conversion was

completed and the share capital was increased by HRK 150,188 thousand or by 200% and amounts to

HRK 225,251 thousand.

The share capital increase, positive financial effects of the pre-bankruptcy proceedings and net profit

achieved in 2014 led to a decrease in negative equity by HRK 267,894 thousand which represents an

improvement by 95%.

Capital reserves as of 31 December 2014 amounts 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.

3. Corporate governance code

The Group accepts and seeks to comply with the recommendations of the Corporate governance code

published on the Zagreb Stock Exchange website taking into account all the circumstances and

specifics of its business organisation. The Company has fulfilled and published the Annual corporate

governance code questionnaire on the Zagreb Stock Exchange website, the Company’s website and

the Official register of prescribed information.

4. Financial instruments and financial risk factors

The Group’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 Group

does not have a written risk management programme, but overall risk management in respect of these

risks is carried out by the Company’s Management. Management focuses mainly on liquidity and

credit risk, and acts on a case basis to mitigate all financial risks.

The Group does not use financial instruments which would be significant for assessing the

financial position and business performance.

Documents

METRONET TELEKOMUNIKACIJE d.d. - · PDF filemetronet telekomunikacije d.d. independent auditor’s report and financial statements 31 december 2014