naslovnica 2002 e (Converted)-1 - Croatia Airlines · scheduled flight was with Boeing 737-200 Advanced that Croatia Airlines purchased from Lufthansa and phased into its fleet on

2 0 0 2

5 C R O AT I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T4 C R O A T I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T

7 Review by the Chairman

of Supervisory Board

11 Chronicle of Major Events

15 Fact Sheet

21 Business Analysis 2002

27 Environmental Protection

31 Outlook for the 2003 Business Year

37 Financial Results

65 Sales Agents and Offices


Dear Shareholders,

It is with great pleasure that I welcome you on behalf of Croatia Airlines. Allow me to give youa brief overview of our activities during the year 2002.

I believe you share my view that last year Croatia Airlines again had to perform in conditions ofunstable market. Traffic and business results were affected by extremely unfavorableconsequences of crises in the airline industry. As a result costs were additionally increasedand revenues reduced. US dollar exchange rate and the increase of jet fuel price did not helpthe situation. Despite all this our losses were cut four fold compared to the previous year,operational profit was increased and expenditures were mainly related to anticipated costs offleet renewal.

As planned investments in fleet and development projects continued. Utilisation of aircraft andwork productivity improved, and we met high market demands by maintaining all our flightdestinations. Work on the IT and telecommunication integration of the Company continuedand Quality Management was extended to non-operational parts of the company.

Quality of service was enhanced by the introduction of FlyOnLine reservation system enablingpassengers to reserve their flights via Internet. New tariffs introduced in domestic traffic provedvery popular with our passengers.

In May Frankfurt was host of the 10th anniversary marking Croatia Airlines’ first internationalflight that took place on the 5th of April 1992 from Zagreb to Frankfurt.

Technical co-operation with Lufthansa continued. In October an agreement was signed forreinforced flight deck doors to be installed in Lufthansa’s aircraft in our Technical Sector. Theagreement was signed following the authorisation of German aviation authorities (LBA - LuftfahrtBundesamt) for JAR 145 Certificate to be further extended to Croatia Airlines for two moreyears.In passenger traffic we transported a record number of 1.322,284 passengers, the highestever number in the Company’s history. Passenger growth was recorded on domestic andinternational flights.

Allow me to express satisfaction with last year’s results despite a number of unfavorablecircumstances and to thank all employees and management on the results they achieved.

Damir KuπtrakPresident of the Supervisory Board


Supervisory Board

Damir Kuπtrak Damijan MuπtraPresident Member

Æarko KraljeviÊ Drago DurajlijaMember Member

Zlatko GareljiÊ Marija »aËiÊMember Member

Boris ©prem Boæo JusupMember Member

Zdenko MiËiÊ Boπko MatkoviÊMember (since 19.7.2002.) Member

Petar TurkoviÊ Ratimir AndrijaniÊMember Member

Assembly Chairman

Alojz Tuπek(until 19.7.2002.)

Pavao Komadina(since 19.7.2002.)

President& Chief Executive Officer

Ivan MiπetiÊ, M. Sc.

Senior Vice Presidents

Roman Gebauer Miljenko RadiÊSenior Vice President Senior Vice PresidentMaintenance and Engineering Flight Operations

Ante JerkoviÊSenior Vice President Legal Affairs,Administration, Personnel, Finance,Purchase and Supply

C H R O N I C L E

13 C R O A T I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T12 C R O AT I A A I R L I N E S 2 0 0 2 A N N U A L R E P O RT

During the year 2002 Croatia Airlines carried 1.322,284 passengers. This was 6.6 percentmore passengers than the previous year. In scheduled traffic 1.127,000 passengers werecarried. This was 85.3 percent of the total passengers carried and an increase of 6 percent.On domestic flights 391,164 passengers were carried. This accounted for 29.5 percent of thetotal passengers carried and was a climb of 5 percent compared to year 2001.

On 22nd February new FlyOnLine service was launched enabling Croatia Airlines’ passengersto make online bookings for Business and Economy Class. New service can be accessed onwww.croatiaairlines.hr via link FlyOnLine.

On 3rd April a leased Bae 146, popular Jumbolino was phased into the fleet. Bae 146 capacityis 90 seats with the possibility of configuring the number of seats in the Business and EconomyClass on passenger demand. The aircraft has been leased to meet increasing tourism demand.Jumbolino operated both domestic and international scheduled flights.

On 5th April our Frankfurt branch office was host to the 10th anniversary of our first internationalscheduled flight that was flew from Zagreb to Frankfurt on 5th April 1992. Our first internationalscheduled flight was with Boeing 737-200 Advanced that Croatia Airlines purchased fromLufthansa and phased into its fleet on 1st April 1992.

In August we carried a record 169,800 passengers. It was the record number of passengerscarried in company’s history.

On 25th September one-millionth passenger in year 2002 was carried.

On 9th October Croatia Airlines and Lufthansa Technick signed a commercial agreement bywhich Croatia Airlines’ Technical Sector experts installed reinforced flight deck doors infourteen Lufthansa’s Airbus320 aircraft. The agreement was signed following the extensionof Certificate JAR 145 delivered to Croatia Airlines by (LBA - Luftfahrt Bundesamt) on 16th

September 2001. The Certificate gives Croatia Airlines the right for base and line maintenanceof international aircraft in its Technical Sector in Zagreb according to the highest Europeanstandards. Certificate JAR 145 was extended for further two years and expires in October2004. In line with JAR145 regular C-checks were carried in Zagreb on four Lufthansa aircraftlast year.

On 27th October, together with the launch of new winter timetable a new domestic tarrifmodel was introduced; by the year end the number of passengers on domestic flights rose by41 percent.

On 15th November at the annual meeting of the AEA (Association of European Airlines) heldin Amsterdam, Croatia Airlines’ CEO Ivan MiπetiÊ was elected a member of the Presidency fora two-year mandate.

F A C T S H E E T


Croatia Airlines, the Croatian air transport company, was registered as joint stockcompany on 7 August 1989. The Company was entered into the Register of Companieswith Commercial Court in Zagreb under the name Zagreb Airlines d.d. as the first jointcompany registered in Croatia. The Company has been operating under its present namesince 23 July 1990.Croatia Airlines d.d. harmonized its acts in accordance with the Companies Act on 25 January1996 and was entered into the court register under the reference Tt-95/9316-2 and companynumber (MBS) 080037012.

Croatia Airlines’ head office is in Savska cesta 41, ZagrepËanka business tower, 10000 Zagreb.

Croatia Airlines’ shareholders

Capital (kn) Shares %

Adriatic Croatia International Club d.d. 9700 0,001%

HTP Matija Gubec d.d. 9200 0,001%

Tourist Centre MihanoviÊ d.d. 9200 0,001%

Astra International d.d. 368,200 0,042%

Coning Inæenjering d.d. 521,400 0,060%

Enikon d.d. 735,600 0,084%

Hrvatska poπta (Croatian Post) 275,000 0,031%

Croatian Privatisation Fund 14.413,600 1,647%

Bank Rehabilitation and Deposit Insurance Agency 21.315,200 2,436%

Jadranski naftovod d.d. 2.200,000 0,251%

Varteks-Denim d. o. o. 5900 0,001%

Croatian Lottery 400,000 0,046%

Tankerkomerc d.d. 209,000 0,024%

Wolf Lamjana d.d. 19,400 0,002%

Turisthotel d.d. 209,000 0,024%

Private Individuals 8.537,000 0,975%

Croatia Lloyd d.d. 1.027,000 0,117%

Tankerska plovidba d.d. 209,000 0,024%

Vigo d.d. 5200 0,001%

Airport Osijek d.o.o. 19,400 0,002%

Airport Zagreb d.o.o. 1.302,500 0,149%

Republic of Croatia 823.175,000 94,080%

Total 874.975,500 100,000%

Companies inCroatia Airlines’ ownership

Amadeus Croatia d.d., Zagreb, 95% shares

Obzor putovanja d.o.o., Zagreb, 100% owned

Pleso prijevoz, 50% owned

Multihold S.a.r.l., Paris, 99,76% owned - up to 28 December 2002

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B U S I N E S S A N A L Y S I S 2 0 0 2


Unknown reasons (wrong data) 5,3%

Maintenance/Equipment failure 7,0%

Weather 7,0%

Airport/air traffic control 12,6%

Reactionary 60,6%

Pre-flight preparation, load and flight handling 6,5%

Other known reasons 1,0%

TRAFFIC RESULTS IN 2002

Fleet capacity

During 2002 average number of aircraft was 10.76 which was 7.6 up on the previous year.The results of available capacities measured by available seat kilometers were up by 5 percentand measured by available tonne kilometers by 6 percent.

Passengers transported

±2001Total 1.322,284 Share +6%

Scheduled Traffic 1.127,641 85% +6%

Charter Traffic 194,643 15% +9%Domestic Traffic 394,955 30% +4%

International Traffic 927,329 70% +7%

Freight and mail

4930 t -5%

Aircraft utilisation

Airbus A320 8.1 block hoursAirbus A319 7.9 block hours

ATR 42 6.1 block hours

Bae 146 (leased) 7.4 block hours

Total 7.4 block hours

Punctuality

within 15 minutes of scheduled time 79.2 departures 75.9% arrivals

on time (3 minutes from scheduled time) 59.0% departures 49.5% arrivals

Causes of departure delays (share)

TRAFFIC RESULTS 1991 - 2002

Fleet capacity 1991 - 2002 (>9t MTOW)

Item 2002 1991 index 02/91 growth 02/91

Aircraft 10,8 2,0 540 16,57

Passenger Seats 1250 364 343 11,86

Gross Capacity (t) 251 71 354 12,18

Net Capacity (t) 136 40 340 11,77

Available Seat Kilometres (m) 1740 215 809 20,93

Available Tonne Kilometres (m) 191 22 868 21,71

Traffic results 1991 - 2002

growth

Item Unit 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 02/91

Flights (km) 000 13,654 12,640 11,600 10,719 11,377 10,804 10,333 8 698 8 286 5 949 2 819 1 289 27,59

Departures 21,870 20,281 18,745 17,273 18,476 18,704 16,907 14,106 13,668 10,147 4 683 2 548 21,58

Block Hours BH 29,150 26,971 25,035 24,294 26,095 26,377 24,425 20,592 19,660 14,569 6 394 2 712 28,50

Passengers Carried 000 1 322 1 242 1 063 921 919 866 823 679 661 473 238 140 22,64

Freight & Mail Carried t 4 930 5 188 5 010 4 025 4 185 4 216 4 745 4 603 4 431 3 811 1 956 94 -

Passenger Km Flown mln 983 922 763 639 622 546 563 444 444 297 145 66 38,80

Available Seat Km mln 1 740 1 661 1 447 1 249 1 247 1 069 971 874 841 622 298 215 20,93

Passenger LoadFactor (PLF) % 56,5 55,5 52,7 51,2 49,9 51,1 57,9 50,8 52,8 47,8 48,7 30,9 5,65

Tonne Km Flown mln 92 87 72 60 59 52 55 44 44 29 14 6 39,71

Available Tonne Km mln 191 180 158 137 138 123 113 103 101 75 37 22 21,71

Weight LoadFactor (WLF) % 48,2 48,0 45,5 44,0 42,5 42,5 48,9 42,8 43,7 39,1 38,4 27,3 5,33

Aircraft utilisation

1991 2260 block hours per aircraft

2002 2709 block hours per aircraft

Productivity

1991 58,825 t kilometers per employee

2002 87,478 t kilometers per employee

Punctuality

1991 79.0% within 15 minutes from scheduled departure (2548 flights)

2002 79.2% within 15 minutes from scheduled departure (21 780 flights)

Summary

In period 1991 - 2002 Croatia Airlines transported 9.35 million passengers and over47,000 tons of freight and mail while improving its level of aircraft utilisation, workproductivity and punctuality.


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EMPLOYEES

Employees byIATA categories

Year 31.12.2002 31.12.2001 31.12.2000

Pilots and copilots 116 116 111

Cabin crew 163 143 132

Technical and maintenance 210 187 138

Sales & Marketing 264 238 225

Ground services 99 109 88

Others 180 184 184

Total 1051 977 878

Employees by sectors on31.12.2002

Sales 20,5%

Marketing 2,4%

Traffic 14,0%

Technical 19,7%

Finance & Accounts 3,9%

CEO’s Office 4,5%

Yield Management 2,7%

Legal, Personnel & Administrative 2,4%

Services 20,5%

Revenue Accounting 4,1%

Procurement 4,2%

Strategic Planningand Controlling 1,1%

1991 - 2002

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Passengers transported bymonth in 2000, 2001 and 2002

Passenger load factor in(PLF) 2000, 2001 and 2002

Cargo and mail transported bymonth in 2000, 2001 and 2002

E N V I R O N M E N T A L P R O T E C T I O N


Croatia Airlines’ dedication to environmental protection and sustainable development isexpressed in our Quality Policy:

We are strongly committed to environmental protection and sustainable development. By useof modern technology and optimisation of our operations we strive to reduce the negativeimpacts of air transport on the environment and the community.

Over the last 5 years we have seen significant advances in major indicators of environmentalperformance. The overall noise generated by our fleet at landings and take-offs has decreasedsubstantially despite a large increase in passengers carried. This has resulted from investmentin new aircraft which has reduced the average age of our fleet by 7 years, thus reflecting ourdetermination to meet the needs of our customers and minimise our impact on the environment.

The entire Croatia Airlines fleet meets the most stringent noise restriction criteria worldwide.We keep our fleet on the leading edge of environmental technology and the average age ofour 10 aircraft was 6 years at the end of the reporting year 2002.

Croatia Airlines’ fleet at 31 December 2002

Engine Average ICAO No ofAircraft Model Model Age (years) Chapter aircraft

Airbus Industrie A320-211 CFM56-5A1/F 11,25 3 1

Airbus Industrie A320-214 CFM56-5B4/P 3,08 3 2

Airbus Industrie A319-112 CFM56-5B6/P 3,94 3 4

ATR 42-300 P&WC PW120 9,56 3 3

All 6,18 3 10

It has long been recognised that emissions form aircraft engines contribute to the build up ofgreenhouse gases. Aircraft and related ground operations also contribute to the local air quality.The aviation industry is continually looking at initiatives to reduce these emissions throughresearch, development and cooperation.

By operating especially fuel-efficient, low-emission and quiet aircraft, Croatia Airlines hasachieved reduction in fuel consumption per passenger. In the reporting year fuel consumptionwas 55.9 grams per revenue passenger kilometre and was identical to year 2001. In2002 Croatia Airlines’ jets consumed only 6,2 litres of kerosene on average to carry onepassenger over a distance of 100 kilometres.

Croatia Airlines follows current trends and constantly observes the provisions of relevantenvironmental regulations. In all aspects of our operations we endeavour to demonstrate ourcare for the environment and the community and to ensure that our growth is sustainable ineconomic, social and environmental terms.

A great deal of attention is given to the environmental protection.

O U T L O O K F O R T H E 2 0 0 3 B U S I N E S S Y E A R


In 2002 the consequences of global crises in international aviation lead to a worldwide

decline in passenger numbers. Croatia Airline managed to transport 6 percent more

passenegers than the previous year. Very high goals have been set for 2003 including an

increase of 11 percent in passenger and 3 percent in freight and mail traffic with the

engagement in development of internal systems and parallel medium term plans and

demanding development projects.

Our plans for 2003 are to achieve high market goals, maintain existing scheduled traffic

destinations while increasing market share and meeting increased tourism demand

from markets in Austria, Germany, Slovenia, Great Britain, Ireland, Sweden and the Czech

Republic.

Work on IT and telecommunication integration of the Company will continue as well as on

development of Quality Management System in non-operational segments of the company;

also we’ll continue to work on technical maintenance co-operation with international

partners particularly Lufthansa Technik as well as the implementation of planned

organisational changes all within the scope of achieving development goals and to enhance

business activities and the quality of service that we offer to the market.

Timetable for 2003 anticipates a total of 29,564 block-hours and 1.468,440 passengers in

scheduled and charter traffic and 5098 t transported in cargo traffic.

F I N A N C I A L R E S U L T S

38 C R O AT I A A I R L I N E S 2 0 0 0 . G O D I © N J E I Z V J E © ∆ E 39 C R O AT I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Croatia Airlines d.d.

We have audited the accompanying Balance Sheets of Croatia airlines d.d., Zagreb (“theCompany”) as of 31 December 2002 and 2001, and the Profit and Loss Accounts, Statementsof Changes in Equity and Statements of Cash Flows (pages 40-43) for the years then ended.These financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits of the financial statements of the Company in accordance withInternational Standards on Auditing. Those standards require that we plan and perform ouraudit so as to obtain all the information and explanations, which we consider necessary inorder to provide us with sufficient evidence to give reasonable assurance that the financialstatements are free from material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and the significant estimates made byexecutive management as well as evaluating the overall presentation of the financial statements.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements present fairly, in all material respects, the financialposition of the Company as of 31 December 2002 and 2001, and the results of its operations,changes in equity and its cash flows for the years then ended and have been prepared inaccordance with International Financial Reporting Standards and the requirements of theCroatian Accounting Law (National Gazette No. 90/92).

Emphasis of matter:

Without qualifying our opinion, we draw attention to Note 2 concerning the considerationgiven by the Board to the preparation of the financial statements on the going concern basis.The company has incurred significant debt, mostly in foreign currency, in connection with themodernisation of its aircraft fleet. It continues to operate with loss incurring foreign exchangelosses and, as a result, the continued support of its shareholders is required to enable it tocontinue as a going concern and comply with its loan covenants.

As disclosed in Note 2, the Company‘s business has been indirectly affected by the eventsfrom 11 September 2001 and the recent war in the Middle East, since then a considerablenumber of airline companies were unable to continue their business. This trend is likely tocontinue in the near future.

Deloitte & Touche

Zagreb, 28 March 2003

41 C R O AT I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T40 C R O AT I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T

2002 2001Notes HRK ‘000 HRK ‘000

Sales revenue

Passenger traffic 22 1,087.770 1,044.571

Cargo traffic 34,266 35,375

Other 68,321 53,185

Revenue from operating activities 1,190.357 1,133.131

Other income 23 79,699 49,397

Total revenue 1,270.056 1,182.528

Operating expenses

Flying operations (243,225) (220,747)

Maintenance (104,100) (119,846)

Passenger service (112,473) (95,069)

Aircraft and traffic services (266,969) (254,794)

Promotion and sales (199,861) (215,916)

General and administrative expenses (74,392) (60,882)

Depreciation and amortisation (125,848) (118,622)

(1,126.868) (1,085.876)

Profit from operating activities 143,188 96,652

Financial revenue

Interest expense and bank charges 25 (120,966) (162,960)

Investment income/(cost) 769 (4,381)

Foreign exchange differences, net (46,811) (25,880)

Loss from financing activities (167,008) (193,221)

Loss before taxes (23,820) (96,569)

Taxation - -

Net loss for the year (23,820) (96,569)

CROATIA AIRLINES d.d. BALANCE SHEETAs of 31 December 2002 and 2001

2002 2001Notes HRK ‘000 HRK ‘000

Current assets

Cash and cash equivalents 8 27,589 64,332

Accounts receivable 9 136,046 210,032

Short-term financial assets 10 127,130 120,041

Prepaid expenses andaccrued income 11 3,615 7,497

Inventories 12 19,389 19,458

Total current assets 313,769 421,360

Non-current assets

Long-term financial assets 13 83,658 14,000

Long-term receivables 14 1,518 1.362

Property, plant and equipment 15 2,149.691 2,261.061

Intangible assets 15 4,638 5,372

Total non-current assets 2,239.505 2,281.795

Total assets 2,553.274 2,703.155

Current liabilities

Accounts payable andother short-term liabilities 16 94,494 160,079

Liabilities to related parties 5,415 6,137

Short-term loans and leases 17 194,690 221,165

Accruals and deferred income 18 65.566 86,013

Total current liabilities 352,458 452,947

Long-term loans and leases 19 1,623.796 2,010.949

Equity

Shareholders’ equity 20 874,975 701,800

Reserves 21 325,069 358,711

Deferred foreign currency losses 26 (56,083) (278,131)

Retained loss (566,941) (543,121)

Total equity 577,020 239.259

Total liabilities and equity 2,553.274 2,703.155

CROATIA AIRLINES d.d. STATEMENTS OF PROFIT AND LOSSFor the years ended 31 December 2002 and 2001


2002 2001HRK ‘000 HRK ‘000

Operating activities


Adjustments to reconcile result for the yearto the net cash flow from operating activities

Depreciation 125.848 118,622

Net book value of disposed and sold property,plant and equipment and intangible assets 8,362 357

Decrease/Increase in accounts receivable 73,986 (61,626)

Increase/Decrease in long-term receivables (156) 79

Decrease in prepaid expenses and accrued income 3,882 38,015

Decrease in inventories 69 1,368

Decrease/Increase in accounts payable and other short-term liabilities (65,585) 13,967

Decrease/Increase in liabilities to related parties (722) 2,104

Decrease in accruals and deferred income (7,707) (20,448)

Net cash from/(used in) operating activities 114,157 (4,131)

Investing activities

Increase in intangible assets (1,906) (2,137)

Purchase of property, plant and equipment (53,842) (28,761)

Decrease/Increase in hedging reserve 222,048 (24,481)

Net cash from/(used in) investing activities 166,300 (55,379)

Financing activities

Capital contribution 173,175 150,000

Increase/Decrease in short-term financial assets (7,089) 134,143

Increase/Decrease in long-term financial assets (69,658) 3,148

Decrease in long-term loans and leases (387,153) (207,071)

Decrease/Increase in short-term loans and leases (26,475) 3,987

Net cash from/(used in) financing activities (317,200) 84,207

Decrease/Increase in cash and cash equivalents (36,743) 24.697

Cash and cash equivalents at the beginning of the year 64,332 39.635

Cash and cash equivalents at the end of the year 27,589 64.332

Shareholders’ Hedging Retained Loss forequity Reserves reserves loss the year Total

HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000 HRK ‘000

Balance at 31 December 2000 551,800 161,000 - (399,913) (206,708) 106,179

Prior period adjustment(Notes 12, 18 and 26) - - (290.581) - - (290.581)

Balance at 1 January 2001 551,800 161,000 (290,581) (399,913) (206,708) (184,402)

Transfer of loss - - - (206,708) 206,708 -

Transfer to retained earnings(Note 21) - (160,069) - 160,069 - -

Exchange rate differences(Note 26) - - 12,450 - - 12,450

Valuation of aircrafts (Note 4.4) - 357,780 - - - 357,780

Capital contribution 150,000 - - - - 150,000

Loss for the year - - - - (96,569) (96,569)

Balance at 31 December 2001 701,800 358,711 (278,131) (446,552) (96,569) 239,259

Transfer of loss - - - (96,569) 96,569 -

Exchange rate differences(Note 26) - - 222,048 - - 222,048

Valuation of aircraftsand spare engine (Note 4.4) - (33,642) - - - (33,642)


Loss for the year - - - - (23,820) (23,820)


CROATIA AIRLINES d.d. STATEMENTS OF CHANGES IN EQUITYFor the years ended 31 December 2002 and 2001

CROATIA AIRLINES d.d. STATEMENTS OF CASH FLOWSFor the years ended 31 December 2002 and 2001


4.3. Inventories

Material and spare parts are recorded at the cost of purchase. Cost of purchase consists ofpurchase price of purchased inventory increased for costs of conversion. Cost of inventory iscalculated using weighted average method.

Small inventories are written off when put in use.

4.4. Property, plant and equipment and intangible assets

Property, plant and equipment and intangible assets are recorded at cost less accumulateddepreciation. Cost consists of the purchase price and related costs incurred in bringing anasset to its intended use.

Costs incurred in replacing major portions of the company’s facilities that increase theirproductive capacity or substantially extend their useful life are capitalised.

An element of the cost of Airbus aircraft relates to regular maintenance checks. These costsare amortised over the period from the purchase of the aircraft until the time when the checkwill take place. Future periodic checks will be capitalised at the time of expenditure andamortised to the next check.

Rotation spare parts are allocated to the type of aircraft concerned and depreciated over theirestimated useful life.

In connection with the acquisition of certain aircraft and engines, the company receives certaindiscounts. These discounts are deducted from the cost of the aircraft or are deferred andcredited to the statement of profit and loss on a proportional basis over the operational life ofthe aircraft, depending on the nature of the discounts.

Included in the cost of aircrafts is the residual value for each type of aircraft.

Depreciation is charged on a straight-line basis from the first day of the next month after thetangible asset is put in use.

Equipment with useful life over one year and individual cost value over 1 thousand HRK isrecorded as assets. Power generating and equipment of low value used in operating activitiesare recorded as tangible and intangible assets no matter their cost.

The Company engaged the Croatian Society of Professional Valuers, which regulary performingqualified and independent valuation of aircrafts and spare engine. The valuation effects arecredited and charged to revaluation reserve.

Net book value of assets that are sold or otherwise disposed of is included in other expenses,and the revenue from their sale is credited directly to other income.

4.5. Depreciation and amortisation

Depreciation and amortisation are calculated with depreciation rates not higher than thoseregulated by law, that are determined in a way that cost or adjusted value of asset is depreciatedin equal yearly amounts over its estimated useful life.

Depreciation rates used are as follows:

2002 2001

Buildings 2,5 - 10,00 % 3,57 - 10,00 %

Aircrafts 5,00 - 20,00 % 5,00 - 10,00 %

Other 10,00 - 25,00 % 10,00 - 25,00 %

Intagible assets 20,00 % 20,00 %

Based on the new Depreciation and Amortisation Regulation, the Company changed thedepreciation/amortisation rates for 2002.

1. Activity

Main activity of Croatia Airlines d.d., air transport company, Zagreb, Savska 41, (Company) isto provide air services of passenger, postage and cargo traffic (domestic and international).

2. Going concern assumption

The Company has incurred significant debt, mostly in foreign currency, in connection withthe modernisation of its aircraft fleet. It continues to operate with loss incurring foreignexchange losses and, as a result, the continued support of its shareholders is required toenable it to continue as a going concern and comply with its loan covenants, as disclosedin Note 19.

The Croatian Government increased the Company’s capital by HRK 173,175 thousand, whichwas registered at the competent commercial court on 5 December 2002 as IX (ninth)subscription of shares.

In 2003, an additional capital increase by the Croatian Government by a new, tenth issue ofshares in the amount of HRK 75,000 thousand is planned.

The Company‘s business has been indirectly affected by the events from 11 September 2001and the recent war in the Middle East, since then a considerable number of airline companieswere unable to continue their business. This trend is likely to continue in the near future.

Taking into account all the facts, the Board concluded that the Company would be able tosettle its current liabilities on time and comply with the covenants of the loan agreement.Therefore management believes it is reasonable to prepare financial statements on the goingconcern basis.

3. Basis of accounting

The financial statements, given on pages 40-43 have been prepared in accordance withregulations, which comply with International Financial Reporting Standards that are appliedon a consistent basis.

4. Summary of significantaccounting policies

Set out below are significant accounting policies used in the preparation of financial statements:

4.1. Cash and cash equivalents

For the purposes of the Statements of Cash Flows, cash and cash equivalents comprise cashin bank and in hand. Deposits “over weekend” are not included.

4.2. Accounts receivable

Accounts receivable include all receivables for goods sold and services rendered.

A provision is recorded for all accounts receivable whose collectability is doubtful.

NOTES TO THE FINANCIAL STATEMENTSFor the years that ended 31 December 2002 and 2001


Changes in inventory, which is mostly purchased in foreign currencies, are translated into localcurrency using the middle exchange rate of the Croatian National Bank at the transactiondate.

Other non-monetary assets and liabilities denominated in foreign currencies, which are statedat historical cost, are translated into local currency at the foreign exchange rate prevailing atthe date of the transaction.

5. Value added tax

Since 1 January 1998 in Republic of Croatia value added tax (VAT) is used (until then goodsand services turnover tax).

6. Income tax

According to regulations, because of the loss transferred from previous years tax liability isnot established. The Company is able to carryforward the losses incurred in 2002 to offsettaxable income over the next 5 years. No deferred tax asset has been recorded with respectto these net operating loss carryforwards, as the ability to utilize prior to expiry is notconsidered probable.

7. Financial statements inU.S. Dollars

Croatian Law only permits the presentation of the primary financial statements in CroatianKuna. However, the common currency used in the airline industry is US dollars. Therefore, setout below are Balance Sheets, Profit & Loss Accounts, Statements of Cash Flows andStatements of Changes in Equity of the company in US dollars. The translation into US dollarshas been carried out on the basis set out in the accounting policies.

In the preparation of the financial statements as of 31 December 2002 and 2001, the Companyuses Croatian kuna as primary currency for recording transactions. Accordingly, financialstatements as of 31 December 2002 and 2001 are stated in kunas and translated to USDollars as follows:

Year-end exchange rates have been used for all monetary assets and liabilities.

Property, plant and equipment and intangible assets together with related depreciation havebeen stated as follows:

■ assets: stated at their historical cost translated into US dollars at the date of purchase

■ depreciation: calculated on the historical cost, by applying depreciation rates indicated above.

Spare parts are stated at their historical cost translated into US dollars at the date of purchase.

Yearly average exchange rate has been used for all items in the statement of profit and loss.

The resulting translation difference has been charged/credited to equity in the financialstatements translated to US dollars.

Had the Company applied the same rates in 2002 as those for the previous period, the netbook value of property, plant and equipment and intangible assets as at 31 December 2002would have been higher by HRK 3,671 thousand, whereas the depreciation/amortisation chargein the statement of profit and loss for the year then ended would have been lower by the sameamount.

Depreciation is calculated individually by each asset until its net book value amounts to nil.

Aircrafts are depreciated at rates calculated to write down their cost or valuation to the estimatedresidual value at the end of the planned operational lives.

4.6. Passenger revenue

Passenger ticket sales are recorded as revenue when the transportation is provided. Thevalue of unused tickets is included in current liabilities as Air Traffic Liability.

4.7. Government subsidy

According to the regulations, the Company allows passengers discounts, and the authorisedGovernment bodies cover the difference up to the full price for the purpose of promotingtourism. Transactions are credited to revenue as they are realised.

4.8. Frequent Flyer awards

The Company operates a frequent flyer award programme that provides travel awards tomembers based on accumulated mileage. The company does not accrue for incrementalcosts for mileage accumulated related to this programme because the Company believessuch costs are immaterial.

4.9. Production expenses

Production expenses embodied in realised products and services represent expenses incurredin respect of the invoiced goods and services.

4.10. Interest revenue

Interest revenue arising from placements and receivables from operating activities up to theBalance Sheet date is disclosed in the statement of profit and loss under financial income,except for doubtful receivables, which are recorded as off balance sheet items until they arecollected.

4.11. Interest expense

Interest on liabilities, accrued at the balance sheet date, is included in the statement of profitand loss under financial expense, except for those that are capitalised to assets.

4.12. Foreign currency transactions

All foreign currency transactions, except as described in Note 26, are converted into Kuna atthe middle exchange rate of the Croatian National Bank prevailing at the transaction date.Assets and liabilities in foreign currencies are converted into Kuna at the middle exchange rateof the Croatian National Bank at the balance sheet date.

Monetary assets and liabilities denominated in foreign currencies at the balance sheet dateare translated into local currency at the foreign exchange rates prevailing at that date. Realisedand unrealised foreign currency gains and losses on current assets, current liabilities and noncurrent financial assets, as well as realised foreign currency gains and losses on long termloans and leases are recognised in the statement of profit and loss.


7.2. Statements of profit and loss in USD ’000

Notes 2002 2001

Sales revenue

Passenger traffic 22 138,331 125,248

Cargo traffic 4,358 4,242

Other 6,119 6,377

Revenue from operating activities 148,808 135,867

Other income 23 10,135 5,923

Total revenue 158,943 141,790

Operating expenses

Flying operations (30,905) (26,468)

Maintenance (13,239) (14,370)

Passenger service (14,303) (11,399)

Aircraft and traffic services (33,951) (30,551)

Promotion and sales (25,395) (25,889)

General and administrative expenses (9,288) (7,397)

Depreciation and amortisation (15,678) (17,077)

(142,759) (133,151)

Profit from operating activities 16,184 8,639

Financial activities

Interest expense and bank charges 25 (15,381) (19,540)

Investment income/(cost) 98 (525)

Foreign exchange differences, net (3,930) (153)

Loss from financing activities (19,213) (20,218)

Loss after taxation (3,029) (11,579)

Taxation - -

Net (loss) for the year (3,029) (11,579)

7.1. Bilance sheet in USD ’000

Notes 2002 2001

Current assets

Cash and cash equivalents 8 3,861 7,699

Accounts receivable 9 19,038 25,135

Financial assets 10 17,791 14,366

Prepaid expenses andaccrued income 11 506 897

Inventories 12 2,896 2,957

Total current assets 44,092 51,054

Non-current assets

Long-term financial assets 13 10,569 2,281

Long-term receivables 14 195 176

Property, plant and equipment 15 260,743 274,211

Intangible assets 15 566 674

Total non-current assets 272,073 277,342

Total assets 316,165 328,396

Current liabilities

Accounts payable andother short-term liabilities 16 13,223 19,157

Liabilities to related parties 758 735

Short-term loans and leases 17 27,246 26,468

Accruals and deferred income 18 8,097 7,846

Total current liabilities 49,324 54,206

Long-term loans and leases 19 227,240 240,658

Equity

Shareholders’ equity 20 122,447 83,987

Reserves 21 37,643 9,643

Retained loss (76,006) (53,441)

Loss for the financial year (3,029) (11,579)

Exchange rate differences (41,454) 4,922

Total equity 39,601 33,532

Total liabilities and equity 316,165 328.396


7.4. Statements of cash flows USD ’000

2002 2001

Operating activities


Adjustments to reconcile result for the yearto the net cash flow from operating activities

Depreciation 15.678 17,077

Net book value of disposed and sold property,plant and equipmentand intangible assets 973 45

Exchange rate in capital - net (11.184) 6,767

Decrease/Increase in accounts receivable 6.097 (6,937)

Increase/Decrease in long-term receivables (19) 1

Decrease in prepaid expenses and accrued income 391 34

Decrease in inventories 61 263

Decrease/Increase in accounts payable andother short-term liabilities (5,934) 1,241

Increase/Decrease in liabilities to related parties 23 240

Increase/Decrease in accruals and deferred income 251 (2,580)

Net cash from/(used in)operating activities 3.308 4,572

Investing activities

Increase in intangible assets (254) (257)

Purchase of property, plant and equipment (6,774) (3,246)

Net cash from/(used in)investing activities (7,028) (3,503)


Capital contribution 24,235 16,325

Decrease/Increase in short-term financial assets (3,425) 16,802

Increase/Decrease in long term financial assets (8,288) 120

Decrease in long-term loans and leases (13,418) (31,315)

Increase/Decrease in short-term loans and leases 778 (162)

Net cash from/(used in)financing activities (118) 1,770

Decrease/Increase in cash and cash equivalents (3,838) 2,839

Cash and cash equivalents at the beginning of the year 7,699 4,860

Cash and cash equivalents at the end of the year 3,861 7,699

7.3. Statements of changes in equity

in USD ’000

ExchangeShareholders’ Transferred Loss for rate

equity Reserves loss the year differences Total

Balance at 31December 2000 67,662 19,741 (49,037) (24,975) 3,446 16,837

Transfers from/to - - (24,975) 24,975 - -

Transfer toretained earnings(Note 21) - (20,571) 20,571 - - -

Exchange rate differences - 5,291 - - 1,476 6,767

Valuation of aircraft(Note 4.4.) - 5,182 - - - 5,182


Loss for the year - - - (11,579) - (11,579)

Balance at 31December 2001 83,987 9,643 (53,441) (11,579) 4,922 33,532

Transfer of loss - - (11,579) 11,579 - -

Exchange rate differences 14,225 31.953 (10,986) - (46, 376) (11.184)

Valuation of aircraft,spare engine(Note 4.4) - (3.953) - - - (3.953)


Loss for the year - - - (3,029) - (3,029)



Balance at 31 December 2001:

Annual In thousands ofInstitution Note interest rate original currency HRK ‘000 USD ‘000

Deposits:

RijeËka banka d.d. (a) 4.33% EUR 1,944 14,333 1.715

Dresdner Bank A.G. (b) 0.95% USD 2,700 23,933 2.864

Dresdner Bank A.G. (b) 2.6% DEM 313 2,923 350

Privredna banka Zagreb d.d. (c) variable EUR 15,000 56,350 6.744

Barclays Bank 0.7% GBP 30 6,167 738

ABN Amro variable NLG 2,000 84 11

Hypo Vereinsbank variable USD 1,081 8,451 1.011

Loans:

Loans given (net of provision) HRK 1,600 191

Short-term investments

France Telecomm shares (net) (d) USD 740 6,187 740

Other 13 2

At 31 December 2001 120,041 14,366

a) The short-term deposit with Rijecka banka d.d. was transferred in March 2002 on theaccount with Privredna banka Zagreb d.d.;

b) Deposits with Dresdner Bank A.G. represent short-term deposits “over weekend”.

c) Deposits with Privredna banka Zagreb d.d. represent funds for settlement of future liabilities.

d) France Telecomm shares are included in the balance sheet at fair value at 31 December, byapplying the company’s share price. These shares were related to SITA shares as of 31December 2000, but based on strategic agreement between SITA, France Telecomm andEquant, the Company became owner of 18,513 France Telecomm shares, with a value ofUSD 40 per share. In March 2002 those shares were sold.

11. Prepaid expensesand accrued income

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Prepaid expenses 3,505 7,479 491 895

Accrued income 110 18 15 2

Total prepaid expensesand accrued income 3,615 7,497 506 897

HRK 3,505 thousand (2001: HRK 7,479 thousand) are in respect to pilot training expensesthat, according to the Company’s policy, are accrued over a period of 3 years.

12. Inventories

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Consumable spare parts 16,525 14,805 2,154 2,220

Catering, supplies and other 2,864 4,653 741 737

Total 19,389 19,458 2,896 2,957

Consumable spare parts are expensed when used, and rotation spare parts are included infixed assets (see Note 15).

8. Cash and cash equivalents

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

ZAP giro account 3,012 4,663 421 558

Petty cash 429 204 60 24

Foreign currency account 24,148 58,105 3,380 6,954

Other - 1,360 - 163

Total 27,589 64,332 3,861 7,699

9. Accounts receivable

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Receivables from subsidiaries 4,824 6,685 675 800

Trade accounts receivables 120,026 184,065 16,797 22,028

VAT receivable net 7,923 8,410 1,109 1,006

Receivables from employees 650 547 91 65

Receivables from the State 364 215 51 26

Other receivables 2,259 10,110 315 1,210

Total 136,046 210,032 19,038 25,135

Other receivables refer to receivables under guarantees given in the amount of HRK 1,233thousand (2001: HRK 7,624 thousand) and advances to suppliers in the amount of HRK1,026 thousand (2001: HRK 904 thousand).

10. Short-term financial assets

Balance at 31 December 2002:

Annual In thousands ofInstitution Note interest rate original currency HRK ‘000 USD ‘000

Deposits:

Privredna banka Zagreb d.d. (a) LIBOR + 0.75% USD 4,000 28,583 4.000

Privredna banka Zagreb d.d. (b) 2.95% EUR 4,300 32,002 4.478

Privredna banka Zagreb d.d. (b) 3.70% GBP 540 6,184 865

Privredna banka Zagreb d.d. (b) 1.20% USD 1,860 13,291 1.860

Dresdner Bank A.G. (b) 1.90% - 2.20% EUR 1,097 8,160 1.142

Dresdner Bank A.G. (b) variable GBP 216 2,474 346

Dresdner Bank A.G. (b) variable USD 2,392 17,091 2.392

ABN Amro (b) variable NLG 362 2,692 377

Barclays Bank (b) variable GBP 549 6,285 880

Hypo Vereinsbank variable USD 1,092 7,803 1.092

Others 2,565 359

At 31 December 2002 127,130 17,791

At 31 December 2002, short-term financial assets consist mainly of foreign currency depositswith domestic and foreign banks.

a) The deposit with Privredna banka Zagreb d.d., has been placed for 12 months.

b) Deposits with Privredna banka Zagreb d.d., Dresdner banka A.G, ABN Amro Bank A.G andBarclays Bank A.G represent short-term deposits “over weekend”.


13. Long-term financial assets

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Investments in subsidiaries 4,024 4,446 546 605

Investments in shares of HPB d.d., Zagreb 1,507 1,507 268 268

Deposits, loans and guarantees 6,470 7,447 1,034 1,302

Long-term deposits with supplier Lufthansa Technik 69,997 - 8,482 -

Housing deposits 1,000 - 127 -

Bonds 600 600 106 106

Loans to employees 60 - 6 -

Total 83,658 14,000 10,569 2,281

HRK 6,470 thousand (2001: HRK 7,447 thousand) represents a deposit for 6 aircrafts theCompany intended to purchase from Airbus Industrie, Blagnac Cedex, France. The transactionwas not executed and has been postponed by 5 years based on the decision of the Government.

HRK 69,997 thousand represent a deposit with Lufthansa Technik for repairs and maintenanceof Airbus planes purchased in 1998, which will start in 2003. The amount of the deposit hasbeen paid to Lufthansa Technik on a monthly basis since 1998. However, as no maintenanceand repairs took place in the said period, a contract to transfer the funds to a deposit for thefunding of future repairs and maintenance has been concluded. In addition, Lufthansa calculatedinterest on the deposit in the amount of USD 228 thousand and EUR 51 thousand.

13.1. Investments in subsidiaries

InvestmentName of company Activity Amount Shareholding

2002

Obzor putovanja d.o.o. Tourism 20 100%

Amadeus Croatia d.d. Marketing services 104 95%

Pleso prijevoz d.o.o. Passengers transport 3,900 50%

2001

Croatia Reisen G.m.b.H.,Frankfurt, Germany Agency services 155 100%

Obzor putovanja d.o.o. Tourist activity 20 100%

Multihold SARL, Paris, France Agency services 267 99,76%

Amadeus Croatia d.d. Marketing services 104 95%

Pleso prijevoz d.o.o. Passengers transportation 3,900 50%

Investments in subsidiaries are recorded at cost.

The Company’s subsidiaries presented above are incorporated in Croatia, unless otherwisestated. These subsidiaries have been included in the consolidated financial information.

The Company was sole owner of the company Croatia Reisen G.m.b.H., Frankfurt, Germany,which was liquidated on 31 January 2002.

Multihold SARL, Paris, France discontinued its operations on 18 November 2002 withoutliquidation proceedings as a result of the restructuring of the French market and with retainingthe business premises and renting under unmodified conditions. Croatia Airlines was soleowner of the company (2,494 shares and the remaining 6 shares were purchased before theinitiation of the merger process). These assets have been merged into Croatia Airlines.

13.2. Investments in shares

Name of company Activity Shareholding

Hrvatska poπtanska banka d.d. Banking 2,86%

This investment has been recorded at cost less any provision for permanent diminution in value.

14. Long-term receivables

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Long-term receivables for flats 1,518 1,362 195 176

1,518 1,362 195 176

Long-term receivables are related to 32 sold flats to the employees of Company. Due date isfrom 16 to 30 years.

15. Property, plant and equipmentand intangible assets in HRK ’000

TotalSpare parts, Fixed property,

Equipment GSE and assets in plant and IntangibleLand Buildings Aircrafts and other tools progress equipment assets

Cost or valuation

Balance at 31 Dec 2001 6,070 43,678 2,401,373 97,587 71,295 6,558 2,626,561 18,526Additions - 72 14,144 16,757 22,869 - 53,842 1,906Valuation (Note 4,4) - - (25,182) (8,460) - - (33,642) -Disposals - (74) - (2,597) (5,261) (3,143) (11,075) (13)

Balance at 31 Dec 2002 6,070 43,676 2,390,335 103,287 88,903 3,415 2,635.686 20,419

Accumulated depreciation/amortisation

Balance at 31 Dec 2001 - 15,204 309,177 28,155 12,964 - 365,500 13,154Charge for the year - 4,227 103,738 11,829 3,421 - 123,215 2,633Disposals - (14) - (2,408) (298) - (2,720) (6)

Balance at 31 Dec 2002 - 19,417 412,915 37,576 16,087 - 485,995 15,781

Net book value

At 31 Dec 2002 6,070 24,259 1,977,420 65,711 72,816 3,415 2,149,691 4,638

At 31 Dec 2001 6,070 28,474 2,092,196 69,432 58,331 6,558 2,261,061 5,372

15.1. Property, plant and equipmentand intangible assets in USD ’000

TotalSpare parts, Fixed property,

Equipment GSE and assets in plant and IntangibleLand Buildings Aircrafts and other tools progress equipment assets

Cost or valuation

Balance at 31 Dec 2001 1,137 7,581 297,512 13,104 10,496 896 330,726 2,891Additions - 9 1,652 2,312 2,801 - 6,774 254Valuation (Note 4,4) - - (2,941) (1,012) - - (3,953) -Disposals - (10) - (460) (837) (368) (1,675) (1)

Balance at 31 Dec 2002 1,137 7,580 296,223 13,944 12,460 528 331,872 3,144

Accumulated depreciation/amortisationBalance at 31 Dec 2001 - 2,732 47,130 4,530 2,123 - 56,515 2,217Charge for the year - 718 12,296 1,675 628 - 15,317 361Disposals - (3) - (492) (208) - (703) -

Balance at 31 Dec 2002 - 3,447 59,426 5,713 2,543 - 71,129 2,578

Net book value

At 31 Dec 2002 1,137 4,133 236,797 8,231 9,917 528 260,743 566

At 31 Dec 2001 1,137 4,849 250,382 8,574 8,373 896 274,211 674


18. Accruals and deferred income

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Liability for employees litigation 3,912 4,045 547 485

Liability for accrued interest for long term loans 11,972 16,262 1,675 1,946

Concession gains 40,638 43,330 5,687 5,185

Other 1,337 1,929 188 230

Total 57,859 65,565 8,097 7,846

Deferred income in the amount of HRK 40,638 thousand represent income from plant andequipment received from aircraft and engine manufacturers free of charge, which is amortisedover the useful life of an aircraft. The value of the spare parts and spare engine received free ofcharge in connection with the purchase of the Airbus fleet is included in deferred income andcredited to income on a straight-line basis over the estimated useful life of an airbus.

19. Long term loans and leases

19.1. Long-term loans

HRK 400,472 thousand of the above amount of loans are guaranteed by the CroatianGovernment as they were acquired in the same package as the acquisition of aircrafts (Note19.2). These loans are subject to the same covenants as the related leases in Note 19.2.

Fixed interest rates range from 7.5% to 8.775% per annum, while variable rates are in therange from LIBOR to LIBOR +0.832% per annum. As there is no comparable debt in Croatia,it is not practicable to determine with sufficient reliability the fair value of the Company’sborrowings. However, the Board is of the opinion that there is no material difference betweenthe fair value of the Company’s loans and their carrying amounts.

19.2. Long-term leases

The lease periods for Airbus aircrafts are 12 years with 24 semi-annual repayments and theinterest rate included in the rentals are in the range LIBOR+0.532% to LIBOR+0.832% forvariable rentals and 7.51% to 7.9544% for fixed rentals. By repayment of the last rental, title tothe aircraft will pass to the Company. These contracts require the company to maintain a debtto equity ratio of not more than 10:1.

Additionally, in 1998, the Airbus A-320 aircraft was transferred from an operating lease to afinance lease. The lease period is 10 years, payable in monthly instalments, the interest rateincluded in the rental is LIBOR+1% and title to the aircraft will pass to the Company by thepayment of a residual lump sum of USD 4.9 million at the end of lease term.

As there are no comparable leases in Croatia, it is not practicable to determine the fair value ofthe Company’s leases with sufficient reliability. However, the Board is of the opinion that thereis no material difference between the fair value of the Company’s leases and their carryingamounts.

HRK 1,324,481 thousand of the above amount are guaranteed by the Croatian Government,as they were acquired in the same package as the related aircrafts (Note 19.1).

The cost of ATR 42 aircraft is depreciated on a straight-line basis over the period of 20 yearswith no residual value. Airbus aircraft are depreciated on a straight-line basis over the periodof 20 years (except second hand aircraft Airbus 320 which is depreciated over the period of12 years) after making allowance for their estimated residual value.

The Airbus and ATR 42 spare parts are stated at cost and depreciated over the estimateduseful life of the aircraft to which they refer (20 years). Ground Service Equipment (GSE) andtools are stated at cost and depreciated over 16.6 years.

Two ATR 42 aircraft (9A-CTS and 9A-CTT) are under mortgage as collateral for obtaining aloan from Serena Aircraft Limited. One ATR 42 (9A-CTU) aircraft is under mortgage as collateralfor a loan from Tintern Limited. All three ATR’s serve, also, as collateral for London club loansfrom Privredna banka Zagreb. All seven Airbus aircraft are under finance leases (see Note 19)and the title will be passed to the Company when the leases are fully repaid.

Spare parts include parts that are under finance lease from Lufthansa Technik AG. Ownershipof these spare parts will be passed to the Company upon repayment of the lease liability in2005.

Included in the balance sheet are buildings occupied by the Company that are located on theland owned by the Zagreb Airport.

Aircrafts are amortised at a rate of 5%, D-check at a rate of 11.11%, and IL check at the rateof 20%.

16. Accounts payableand other short term liabilities

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Trade accounts payable domestic 44,301 47,768 6,200 5,717

Trade accounts payable foreign 27,127 66,203 3,796 7,923

Air traffic liability 6,369 8,356 891 1,000

Deposits and advances received 1,472 24,336 206 2,912

Salaries 12,919 11,251 1,808 1,346

Other current liabilities 2,306 2,165 322 259

Total 94,494 160,079 13,223 19,157

Domestic and foreign trade payables mostly relate to amounts due to various airports andsuppliers of fuel.

17. Short term loans and leases

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Current portion of long-term leases 58.153 78,710 8.138 9,420

Current portion of long-term loans 136.537 142,455 19.107 17,048

Total 194,690 221,165 27,246 26,468


19. Long term loans and leases

Foreign Foreign Long-term Long-termAmounts exchange exchange Current Current portion at 31 portion at 31

31 Dec. 2001 31 Dec. 2001 repaid gains loses 31 Dec. 2002 31 Dec. 2002 portion portion Dec. 2002 2002Creditor / Lessor Due date (USD ‘000) (HRK ‘000) (HRK ‘000) (HRK ‘000) (HRK ‘000) (HRK ‘000) (USD ‘000) (HRK ‘000) (USD ‘000) (USD ‘000) (HRK ‘000)

Borrowings

PBZ-loan 10125 18.10.06 2,033 16,990 (3,296) (2,310) 872 12,256 1,715 3,054 427 1,288 9,202

PBZ-London Club 31.07.10 10,675 89,205 (11,345) (16,157) 4,510 66,213 9,266 10,791 1,510 7,756 55,422

PBZ-21/97 31.07.02 182 1,523 (1,546) (41) 64 - - - - - -

PBZ-32/97 31.10.02 181 1,507 (1,523) (42) 58 - - - - - -

Serena Air Toulouse 04.05.03 1,772 14,809 (9,629) (2,936) 1,629 3,873 542 3,873 542 - -

Serena Air Toulouse 25.05.03 1,674 13,984 (9,703) (2,821) 1,649 3,109 435 3,109 435 - -

Tintern Limited 30.04.05 3,826 31,974 (8,102) (7,568) 3,653 19,957 2,794 8,060 1,129 1,665 11,897

BLB-A319-1 jun.loan 20.01.10 4,398 36,750 (4,079) (6,612) 1,670 27,729 3,880 3,697 517 3,363 24,032

BLB-A319-2 jun.loan 04.06.10 2,971 24,825 (2,683) (4,803) 1,393 18,732 2,621 2,494 349 2,272 16,238

BLB-A319-3 jun.loan 14.06.11 7,442 62,180 (5,977) (11,082) 2,455 47,576 6,658 5,595 783 5,875 41,981

BLB-A320-4 jun.loan 17.06.11 7,732 64,613 (6,127) (11,501) 2,453 49,438 6,919 5,817 814 6,105 43,621

BLB-A320-5 jun.loan 09.06.12 8,028 67,082 (6,402) (1,683) 2,291 61,288 8,577 6,452 903 7,674 54,836

BLB-A319-6 jun.loan 23.06.12 6,477 54,117 (5,155) (1,356) 1,838 49,444 6,919 5,211 729 6,190 44,233

Total borrowings 57,391 479,559 (75,567) (68,912) 24,535 359,615 50,326 58,153 8,138 42,188 301,462

Leases

Debis Aircraft Leas. 06.07.08 20,436 170,764 (15,546) (31,230) 8,017 132,005 18,473 15,007 2,101 16,372 116,998

BLB-A319-1 eca loan 20.01.10 23,725 198,249 (15,970) (35,691) 8,433 155,021 21,694 15,815 2,213 19,481 139,206

BLB-A319-1 com.loan 20.01.10 3,717 31,057 (3,447) (5,587) 1,411 23,434 3,279 3,126 437 2,842 20,308

BLB-A319-2 eca loan 04.06.10 24,040 200,876 (15,865) (38,256) 10,253 157,008 21,972 15,984 2,237 19,735 141,024

BLB-A319-2 com.loan 04.06.10 3,763 31,448 (3,399) (6,083) 1,763 23,729 3,321 3,159 442 2,879 20,570

BLB-A319-3 eca loan 14.06.10 26,028 217,490 (14,600) (38,965) 8,384 172,309 24,114 14,807 2,072 22,042 157,502

BLB-A319-3 com loan 14.06.10 4,218 35,244 (3,388) (6,283) 1,394 26,967 3,774 3,174 444 3,330 23,793

BLB-A320-4 eca loan 17.06.11 30,092 251,451 (16,651) (45,008) 9,425 199,217 27,879 17,114 2,394 25,485 182,103

BLB-A320-4 com loan 17.06.11 4,876 40,746 (3,864) (7,253) 1,548 31,177 4,363 3,668 513 3,850 27,509

BLB-A320-5 eca loan 11.06.12 30,853 257,813 (16,880) (6,335) 8,735 243,333 34,053 18,279 2,559 31,494 225,054

BLB-A320-5 com. loan 09.06.12 5,197 43,424 (4,144) (1,089) 1,483 39,674 5,552 4,176 584 4,968 35,498

BLB-A319-6 eca loan 25.06.12 27,636 230,931 (15,225) (5,665) 7,785 217,826 30,483 16,366 2,290 28,193 201,460

BLB-A319-6 com.loan 23.06.12 4,557 38,076 (3,628) (954) 1,293 34,787 4,868 3,663 513 4,355 31,124

Lufthansa Technik - 597 4,986 (2,653) (185) 236 2,384 334 2,199 308 26 185

Total leases 209,735 1,752,555 (135,260) (228,584) 70,160 1,458,871 204,159 136,537 19,107 185,052 1,322,334

Total 267,126 2,232,114 (210,827) (297,496) 94,695 1,818,486 254,485 194,690 27,246 227,240 1,623,796


23. Other income

2002 2001 2002 2001HRK ’000 HRK ’000 USD ’000 USD ’000

Income from plant and equipmentreceived free of charge 3,786 2,692 481 323

Tax refund - 1,972 - 236

Interest write-offt 570 2,204 73 264

Income from reserves cancellation - 9,855 - 1,182

Collected bad debts 1,070 5,235 136 628

Reconciliation with LufthansaTechnik for deposit (Note 13) 58,222 - 7,404 -

Other 16,051 27,439 2,041 3,290

Total 79,699 49,397 10,135 5,923

24. Staff costs

2002 2001 2002 2001HRK ’000 HRK ’000 USD ’000 USD ’000

Net wages and salaries 74,815 64,902 9,514 7,782

Tax, pension and healthcontributions from payroll 44,689 39,288 5,683 4,711

Gross wages and salaries 119,504 104,190 15,197 12,493

Employer’s pension and healthcontributions on payroll 27,314 24,709 3,474 2,963

Other employee related costs 35,319 39,306 4,492 4,712

62,633 64,015 7,966 7,675

Total staff costs 182,137 168,205 23,163 20,168

25. Interest expense and bankcharges

2002 2001 2002 2001HRK’000 HRK’000 USD’000 USD’000

Other financial expense 1,946 2,882 245 346

Interest expense 119,020 160,078 15,136 19,194

Total 120,966 162,960 15,381 19,540

20. Shareholders’ equity

Shareholders’ equity represents long-term sources for the Company’s business and is HRK874,976 thousand which is compatible with the Trade Court Registration Excerpt of 5December 2002

The structure of the shareholders is as follows:

Shares of I and II issue are preferred shares without voting rights, but with the right to electfour members of the Supervisory board. Shares of issues III, IV, V, VII, VIII and IX are ordinaryshares.

All shares are fully paid in.

21. Reserves

Revaluation reserves amounting to HRK 160,069 thousands were formed by revaluing ofBoeing aircrafts.

Effect of revaluation of sold aircrafts based on IAS 16 - Property, Plant and Equipment, paragraph39 was directly transferred to retained earnings.

Legal reserve in the amount of HRK 931 thousand may be used for covering of losses if thelosses are not covered from the net income for the year, or if other reserves are not available.

22. Passengers income

2002 2001 2002 2001HRK ‘000 HRK ‘000 USD ‘000 USD ‘000

Scheduled services 947,466 924,430 120,488 110,843

Charter services 140,304 120,141 17,843 14,405

Total 1,087,770 1,044,571 138,331 125,248

Scheduled services include HRK 24,599 thousand (2001: HRK 35,562 thousand) of governmentsubsidies for the support of tourism.

Number ShareIssue I II III III III IV V VI-IX of shares capital %

Face value of share (hrk) 100 100 200 200 200 200 200 200

Shareholder:

State Agency forDeposit Insurance andBank Rehabilitation 2,531 5,485 568 68,000 34,000 - - - 110,584 21,315,200 2.44%

Croatia Lloyd d.d. - - 135 3,000 2,000 - - - 5,135 1,027,000 0.12%

Republic of Croatia - - - - - - - 4,115,875 4,115,875 823,175,000 94.08%

Others 8,621 34,560 46,008 2,000 14,000 45,671 18,022 - 168,882 29,458,300 3.36%

Total 11,152 40,045 46,711 73,000 50,000 45,671 18,022 4,115,875 4,400,476 874,975,500 100.00%


CROATIA AIRLINES GROUP CONSOLIDATED BALANCE SHEETSFor the years ended 31 December 2002 and 2001

31 Dec 2002 31 Dec 2002 31 Dec 2001 31 Dec 2001HRK’000 USD’000 HRK’000 USD’000

Current assets

Cash and cash equivalents 33,473 4,684 67,819 8,116

Accounts receivable 138,352 19,361 201,560 25,142

Short-term financial assets 125,165 17,516 129,045 14,423

Prepaid expenses andaccrued income 4,091 572 7,780 931

Inventories 19,474 2,908 19,461 2,957

Total current assets 320,555 45,041 425,665 51,569

Non-current assets

Long-term financial assets 79,632 10,023 9,028 1,757

Long-term receivables 1,518 195 1,962 176

Property, plant and equipment 2,152,522 261,139 2,264,176 274,584

Intangible assets 5,068 626 8,658 1,067

Total non-current assets 2,238,740 271,983 2,283,824 277,584

Total assets 2,559,295 317,024 2,709,489 329,153

Current liabilities

Accounts payable and othershort-term liabilities 97,390 13,629 193,232 23,125

Short-term loans and leases 194,882 27,272 192,274 23,010

Accruals and deferred income 57,946 8,109 65,981 7,875

Total current liabilities 350,218 49,010 451,487 54,010

Long-term loans and leases 1,623,796 227,240 2,010,976 240,661

Minority interest 3.906 547 3.952 473

Equity

Shareholders’ equity 874,975 122,447 701.800 83.987

Reserves 325,075 37,695 358,627 14,575

Deferred exchange differences (56,083) (41,454) (278,131)

Retained loss (541,423) (75,769) (445,763) (53,346)

Loss for the year (21,169) (2,692) (93,459) (11,207)

Total equity 581,375 40,227 243,254 34,009

Total liabilities and equity 2,559,295 317,024 2,709,489 329,153

26. Deferred foreign exchangegains and losses

It includes realised and unrealised foreign currency gains and losses on current assets, liabilitiesand non current financial assets as well as long term financial assets. It also includes realisedforeign currency gains and losses on long term loans and leasing.

Unrealised foreign currency gains and losses of long term loan and leasing have been deferred(Notes 7 and 18) based on the evaluation of future foreign currency revenues and includeddirectly in equity. Such accounting policy is in compliance with the International AccountingStandards Committee and the approval of the IAS 39 Implementation Guidance Commission.

27. Contingent liabilitiesand commitments

In the opinion of the management, apart from contingent liabilities for which a provision hasbeen recorded in the financial statements (Note 18), there are no other contingencies.

28. Litigation

Litigation of HRK 3,912 thousand (2001: HRK 4,045 thousand) refers to dispute with MatijaKaticic for the indemnity for the breach of contract of employment, and other legal disputeswith former employees of Croatia Airlines (Note 18).

29. Employees

31 December 2002 31 December 2001

Pilots and co-pilots 114 116

Cabin attendants 184 143

Maintenance and overhaul 210 187

Ticket, sales and promotion 264 240

Airport handling 99 102

Other staff 180 189

Total 1,051 979

64 C R O AT I A A I R L I N E S 2 0 0 2 A N N U A L R E P O R T

2002 2002 2001 2001HRK’000 USD’000 HRK’000 USD’000

Sales revenue

Passenger traffic 1,087,770 138,331 1,044,572 125,248

Cargo traffic 34,266 4,358 35,375 4,242

Revenue from operating activities 1,122,036 142,689 1,079,947 129,490

Other income 191,919 21,576 108,967 13,066

Total income 1,313,955 164,265 1,188,914 142,556

Operating expenses

Flying operations (243,225) (30.905) (220,747) (26,468)

Maintenance (104,100) (13,239) (119,846) (14,370)

Passenger service (112,473) (14,303) (95,070) (11,399)

Aircraft and traffic services (266,969) (33,950) (254,795) (30,551)

Promotion and sales (199,861) (25.395) (215,916) (25,889)

General and administrative expenses (88,679) (11.326) (64,520) (7,740)

Depreciation (152,460) (18,580) (120,897) (17,444)

(1,167,767) (147,698) (1,091,791) (133,862)

Profit from operating activities 146,188 16,567 97,123 8,694


Interest expense (120,748) (15,356) (160,085) (19,195)

Investment cost 769 98 (4,381) (157)

Exchange differences (46,833) (3,932) (25,354) (458)

Loss from financing activities (166,812) (19,190) (189,820) (19,810)

Loss before taxation (20,624) (2,623) (92,697) (11,116)

Taxation (545) (69) (762) (91)

Net loss for the year (21,169) (2,692) (93,459) (11,207)

CROATIA AIRLINES GROUP CONSOLIDATED STATEMENTS OF PROFIT AND LOSSFor the years ended 31 December 2002 and 2001

Documents

naslovnica 2002 e (Converted)-1 - Croatia Airlines · scheduled flight was with Boeing 737-200 Advanced that Croatia Airlines purchased from Lufthansa and phased into its fleet on