MAGYAR TELECOM B.V. - invitel.hu · Proposal for Loss Appropriation 87 Events after the Balance Sheet Date 87 Independent Auditor’s Report 88. Page 3 of 89 Director’s Report The

Page 1 of 89

MAGYAR TELECOM B.V.

FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2013

Page 2 of 89

PageDirectors’ Report 3

Consolidated Financial StatementsConsolidated Balance Sheet 16Consolidated Statement of Profit and Loss and Other Comprehensive Income 17Consolidated Cash Flow Statement 18Consolidated Statement of Changes in Equity 19Notes to the Consolidated Financial Statements 20

Parent Company Financial StatementsParent Company Balance Sheet 71Parent Company Statement of Profit and Loss Account 72Notes to the Parent Company Financial Statements 73

Other InformationStatutory Provisions Regarding Appropriation of Results 87Proposal for Loss Appropriation 87Events after the Balance Sheet Date 87Independent Auditor’s Report 88

Page 3 of 89

Director’s Report

The Company

Magyar Telecom B.V. (“the Company” or “Matel”, together with its subsidiaries “the Group”) wasincorporated on December 17, 1996 as a limited liability company under the laws of the Netherlands andregistered with the trade register of the Chamber of Commerce for Amsterdam with company registrationnumber 33286951 and on September 5, 2013 registered as an overseas company at Companies House inthe UK with UK establishment number BR016577, having its head office at 6 St Andrew Street, LondonEC4A 3AE, United Kingdom.

The Company was a wholly owned subsidiary of HTCC Holdco I B.V. (“Holdco I B.V.”) till December12, 2012. After the liquidation of Holdco I B.V., from December 12, 2012 the Company was whollyowned by Hungarian Telecom Cooperatief U.A. (“Coop”). As of December 12, 2013 the shares of Matelwere contributed by Coop to its 100% newly established subsidiary, Hungarian Telecom B.V. OnDecember 12, 2013 Matel completed its restructuring as part of which its former notes were refinanced byissuing new notes and new shares (as described below). As of December 31, 2013, after completion of theresutructuring, Matel was 51% owned by Hungarian Telecom B.V. which is 100% owned by Mid EuropaPartners Limited (“Mid Europa”), through its holding companies and 49% owned by Matel HoldingsLimited, a newly established entity owned by noteholders.

The Company's main activities during the year ended December 31, 2013 were financing, holding andinvesting activities. The Company is engaged in investing in telecommunication related activities inHungary. These are in accordance with the Company’s Articles of Association.

Matel has:

a) issued EUR 150,051 thousand 7.00%/9.00% Senior Secured PIK Toggle Notes due 2018 withadditional 2% compulsory PIK interest (the “2013 Notes”) at a 100% issue price. The 2013 Noteswere issued in exchange for formerly issued notes as described more in these financial statements.

Matel Holdings Limited, a 49% direct owner of Matel, incorporated under the laws of Cayman Islands onOctober 2, 2013 and registered for taxation purposes in the United Kingdom has:

b) issued 150,051,000 ordinary shares with a nominal value of EUR 0.0001 per each ordinary share,representing 100% of its existing issued share capital (the “Shares”).

Each issued as 150,051,000 units each consisting of 1 Share and EUR 1 aggregate principal of 2013 Notesco-issued by Matel and Matel Holdings Limited on December 12, 3013. The 2013 Notes will be stapled tothe Shares for the stapling period, meaning that the 2013 Notes and the Shares are issued in the form of aUnit. The effect of this is that the 2013 Notes and the Shares cannot be traded separately and a transfer ofthe Units will result in a transfer of the 2013 Notes and the Shares.

Matel is a holding company and conducts its operations entirely through its subsidiaries and depends onpayments from its subsidiaries to make payments on the 2013 Notes. The main operational subsidiarythrough which Matel provides its services is Invitel Távközlési ZRt. (“Invitel”). Invitel is a leading fixedline telecommunications, cable TV and broadband internet services provider in Hungary.

The 2013 Notes have been issued pursuant to an indenture (the “Indenture”). The 2013 Notes areintended to be fully and unconditionally guaranteed on a senior basis by Invitel Távközlési Zrt. (“Invitel”),Invitel Technocom Kft. (“ITC”) and Invitel International Holdings B.V. (together, the “Guarantors”).The 2013 Notes will be secured by first-priority security interests over certain assets of Matel and certainGuarantors.

The 2013 Notes are listed on the Official List of the Luxembourg Stock Exchange.

Page 4 of 89

Overview

As of December 31, 2013, Matel had approximately 267,000 telephone lines connected to its networkwithin its historical concession areas to service Residential Voice customers and approximately 57,000active Residential Voice customers outside its historical concession areas connected through Carrier Pre-Selection (“CPS”), Carrier Selection (“CS”) or Local Loop Unbundling (“LLU”). This is compared toDecember 31, 2012 when Matel had approximately 270,000 telephone lines in service within its historicalconcession areas to service Residential Voice customers and approximately 71,000 active Residential Voicecustomers connected through indirect access outside its historical concession areas.

In the Residential Internet & TV segment, as of December 31, 2013, we had approximately 155,000broadband DSL customers, 9,000 WiFi customers, 44,000 IPTV customers and 17,000 DVB-T TVcustomers compared to 145,000 broadband DSL customers, 10,000 WiFi customers, 28,000 IPTVcustomers and 13,000 DVB-T TV customers as of December 31, 2012.

In the Cable segment, as of December 31, 2013, Matel had approximately 83,000 cable TV lines, 55,000cable internet lines and 31,000 cable voice lines compared to 80,000 cable TV lines, 50,000 cable internetlines and 24,000 cable voice lines as of December 31, 2012.

In the Corporate segment, as of December 31, 2013, Matel had approximately 41,000 voice telephonelines within its historical concession areas compared to approximately 42,000 lines as of December 31,2012. Outside its historical concession areas, Matel had approximately 36,000 direct access voicetelephone lines and approximately 6,000 indirect access voice telephone lines as of December 31, 2013,compared to approximately 39,000 direct access voice telephone lines and approximately 7,000 indirectaccess voice telephone lines as of December 31, 2012. Matel had approximately 16,000 DSL lines andapproximately 14,000 leased lines as of December 31, 2013 compared to approximately 16,000 DSL linesand approximately 15,000 leased lines as of December 31, 2012.

In the Wholesale segment, Matel had approximately 230 customers as of December 31, 2013, whichcustomers include incumbent telecommunications services providers, alternative fixed linetelecommunications services providers, mobile operators, cable television operators and internet serviceproviders in Hungary.

Macroeconomic Factors

From late 2010, a sovereign debt crisis developed in some European states, intensifying in early 2011. Thisincluded Eurozone members Greece, Ireland, Italy, Spain and Portugal, and also some non-EurozoneEuropean Union countries. Greece, Ireland and Portugal received bail out packages. Increased concernabout Italy and possible default has weighed heavily on equity markets. The European Union (“EU”) hasbeen unable to come up with a consensus view on how to address the issue which has increaseduncertainty and volatility. Rising government debt levels concerned investors and resulted in a wave ofdowngrades of European government debt.

Significant fluctuations in the global economy had an intense impact within the Hungarian economy andfinancial markets as well. Hungary has taken several measures to combat its financial crisis. Hungaryreduced its debt issuances and lowered its government budget deficit target.

EUR/HUF devalued to over 300 at the end of October 2011, and remained well above that level. TheHUF has been weighed down by concerns about the country’s potential downgrade to junk status.Standard & Poor’s (“S&P”) placed its “BBB-” foreign and local currency sovereign credit ratings onHungary on CreditWatch with negative implications.

In November 2011, Hungary turned to the International Monetary Fund (“IMF”) / EU to take out aPrecautionary Credit Line. The formal negotiations could not be started then because of the EuropeanCommission’s (“EC”) infringement proceedings against Hungary.

Page 5 of 89

In December 2011, S&P downgraded Hungary’s rating from “BBB-“ to “BB+”, with a negative outlookdriven by unpredictable economic policy and government actions that has raised questions about theindependence of oversight institutions and are complicating the operating environment for investors.Analysts’ main criticism over measures in 2011 was that the 2011 budget plan relied heavily on extra taxes,diverted pension transfers and a reduction in public sector employment, while it lacked structuralmeasures.

At the end of April, 2012 the Hungarian Government agreed with EC on the law changes needed and ECis likely to give the go-ahead to Hungary to start the IMF talks once it implements the legal changes.

On May 18, 2012, the parliament passed the law on the new telecom tax through which the state expectsto raise approximately HUF 44 billion additional annual budget revenue. The tax was introduced on July1, 2012 as a consumption tax on all calls and SMS/MMS.

In November 2012, Hungary’s credit rating was lowered to two steps below investment grade to 'BB'from 'BB+ at S&P. S&P has justified its decision with the government’s unorthodox policies whichweaken the predictability of the country’s economy.

In July 2012, the IMF talks have begun that strengthened the HUF against the EUR to 276 HUF/EUR.

In November 2012 the talks with IMF have stopped and on November 23, 2012 the HungarianParliament passed the law on the new utility tax expecting to raise the budget revenue by HUF 37.5billion.

In December 2012 Standard & Poor’s downgraded Hungarian banks’ credit rating from “BB” to “BB-”.The rating company cited the increase of the Hungarian economical risk, impairing of creditability and thedeceleration of the economy. The Hungarian Parliament approved the modified version of the actgoverning the introduction of the Financial Transaction Tax (“FTT”) in Hungary effective January 1,2013. The standard rate of the FTT is 0.2% based on the value of the transaction with the exception ofcash withdrawals when the tax rate is 0.3%. The maximum rate of FTT per transaction is capped at HUF6,000.

In January 2013 Hungary’s parliament mandated a 10% reduction to the retail prices of energy (naturalgas, electricity, district heating) and water/sewer services as of July 2013. The government has signaled itsintention to legislate further utility rate reductions.

In March 2013 the new Hungarian central bank’s governor was appointed. He stressed the central bank’sgoals under the central bank law, i.e. the importance of price stability, financial stability and support of thegovernment’s economic policy. The Prime Minister stated that the government aims to raise domesticownership of the banking sector to at least 50%. The forint weakened above the 305 HUF/EUR level.

On March 21, 2013 S&P put Hungary’s credit rating on negative watch indicating the potential for adowngrade due to recent changes in the Hungarian policy framework may weaken investor confidenceand medium-term economic growth prospects.

In April 2013, the President of the National Bank of Hungary announced a funding for lending program,which is similar to the measures of the Bank of England. The central bank grants two credit lines of HUF250 billion to commercial banks at zero interest. These lines can be used to grant loans for SMEs at amaximum interest of 2% to support their operation and investment and to convert their foreign exchangedenominated loans into HUF.

In June 2013, Hungary was lifted from the EU’s excessive deficit procedure which ensures a wider rangefor economic policy of the country.

Page 6 of 89

In June Unfavorable ECJ rulings in French and Maltese telco sector cases handed down. In September theEC subsequently withdrew complaints against the Hungarian turnover-based telco sector taxes (i.e. the2010-2012 Crisis Tax) from the ECJ docket.

In August 2013 minute-based telco tax rates levied on the Company changed from 2 to 3 HUF per minutefor business customers. Monthly caps also raised on those customers. The tax payable on residentialcustomer minutes remained unchanged at 2 HUF per minute.

Effective August 1, 2013, the interest income of domestic private individuals is subject to a 6% healthcarecontribution in addition to the already applicable 16% personal income tax.

In September 2013 the National Bank of Hungary announced to prolong its funding for growth schemeproviding another HUF 2,000 billion for SME sector until the end of 2014.

In October 2013 the Hungarian Parliament approved the second energy price cut in 2013. Hungary is cutstate-regulated household energy prices by an average 11.1% as of November 1, 2013, including naturalgas, electricity and district heating.

In November 2013 the Hungarian Parliament approved the expansion of foreign currency denominatedloan “rescue program”. From February 2014 those debtors who have more than 90 days delay of themonthly installments, but less than 180 days can step into the existing fixation system, where the loan iscalculated at 180 in case of CHF/HUF and at 250 in case of EUR/HUF for five years.

In 2013 the National Bank of Hungary has continued to cut the prime interest rate monthly. The extentof the rate cut dropped from 0.25% to 0.20% as FED alluded a possible monetary easing slowdown. Theend of December 2013 the interest rate was 3%.

In December 2013 S&P downgraded the EU from the best “AAA” rating to “AA+”. The agency placednegative outlook besides the “AAA” rating in January 2012, and listed loosening cohesion among memberstates, worsening financial standing, and the downgrade of several EU-states (France, Italy, Spain, theNetherlands, etc.) among the causes of the decision.

Effect of Economic and Financial Crisis on Business and Financial Covenant Compliance

The economic crisis has had an impact on all of the Group’s business segments, particularly on theResidential segments. The Residential Voice business continues to be impacted by a decreasing number oftelephone lines and customers migrating to lower cost packages in the historical concession areas as wellas reduced usage both in and outside the historical concession areas. Increasing competition is seen,particularly from cable television operators providing broadband internet services, which impacts the DSLbroadband business. The Corporate segment operations have also been impacted by the economy asbusinesses look to cut expenditures and contract renewals become more competitive.

The Group continues to carefully manage operating costs and capital expenditure. However, managementcannot at this time predict with certainty the impact economic conditions and government measures willcontinue to have on the Group’s business with respect to consumer and business spending on its servicesor on the Group’s ability to repay its debt obligations, even following the Restructuring.

Page 7 of 89

Explanation of Statement of Profit and Loss and Other Comprehensive Income Items

Revenue

Revenue is generated by five principal areas of activity as follows:

Residential Voice — the revenue generated from the fixed line voice and voice-related services provided toResidential customers within our historical concession areas and outside our historical concession areas inHungary. Residential Voice revenue comprises monthly fees charged for accessing the network, timebased fixed-to-mobile, local, long distance and international call charges, interconnect charges on callsterminated in our network, monthly fees for value added services, one-time connection and new servicefees, as well as monthly fees for packages with built-in call minutes.

Residential Internet & TV — the revenue generated from Internet connections and television broadcastprovided to residential customers nationwide both inside and outside the historical concession areas onvarious technologies other than cable. Residential Internet comprises xDSL revenue provided through ourcopper and fiber network; DSL reselling revenue and wireless radio internet revenue all generated througha variety of monthly packages. Residential TV comprises revenue from television services delivered usingInternet Protocol (IPTV) and digital terrestrial television broadcast services (DVB-T) in cooperation withAntenna Hungaria all generated through fixed monthly subscription fees.

Cable — the revenue generated from the provision of cable voice, broadband internet and TV services tocustomers outside the historical concession areas using the cable network acquired in the acquisition ofFibernet in March 2011.

Corporate — the revenue generated from the fixed line voice, data and internet services provided tobusiness, government and other institutional customers nationwide. Corporate revenue comprises accesscharges, monthly fees, time based fixed-to-mobile, local, long distance and international call charges,interconnect charges on calls terminated in our network, monthly fees for value added services, internetaccess packages and regular data transmission services. In addition, Corporate revenue includes revenuefrom leased line, internet and data transmission services which is comprised of fixed monthly rental feesbased on the capacity/bandwidth of the service and the distance between the endpoints of the customers.

Wholesale — the revenue generated from voice and data services is provided on a wholesale basis toresellers to use excess network capacity. Wholesale revenue comprises rental payments for high bandwidthleased line services, which are based on the bandwidth of the service and the distance between theendpoints of the customers, and voice transit charges from other Hungarian and internationaltelecommunications service providers, which are based on the number of minutes transited.

Cost of sales exclusive of depreciation

Cost of sales exclusive of depreciation consists of cost directly attributable to operations of segments suchas interconnect expenses, access type charges, direct sales commissions (segment cost of sales in total) andexpenses which are attributable to all segments such as network operating expenses and direct personnelexpenses.

Page 8 of 89

Operating Expenses

Principal operating expenses consist of:

indirect personnel expenses, including salaries, social security and other contributions, personnelrelated expenses, contracted employees and expatriate costs and bonuses and charges;

headcount related costs, including office, building rental and maintenance, car related and trainingcosts;

advertising and marketing costs, including the costs of advertising campaigns and other publicity andmarket research;

operating and other taxes including utility tax, which was introduced by the Hungarian Governmentin the first quarter of 2013, telecom tax, which was introduced by the Hungarian Government in thesecond quarter of 2012 and crisis tax, which was introduced by the Hungarian Government in thefourth quarter of 2010 with retrospective effect to January 1, 2010 through the end of 2012;

IT costs including IT maintenance, software license and other IT related costs;

bad debt expenses, including provisions for doubtful debts from customers;

collection costs, including bank charges in respect of collecting payments from customers;

legal and audit fees including fees paid to legal advisors and to auditors;

consultant expenses including fees paid to other advisors;

management fee including fees paid to trustees;

non-recurring consulting expenses, which are fees paid to legal and financial advisors relating tostrategic projects; and

other overhead costs, net including other miscellaneous expenses and revenues.

Depreciation and Amortization

Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives ofitems of property, plant and equipment, and major components that are accounted for separately. Assetsleased under finance leases are depreciated over the shorter of the lease term or their useful lives. Landand capital work in progress are not depreciated.

Intangible assets with a finite useful life are amortized on a straight-line basis over the period in which theasset is expected to be available for use.

An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unitexceeds its recoverable amount. For an asset that does not generate largely independent cash flows, therecoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable asset group that generates cash flows that are largelyindependent from other assets and groups.

Page 9 of 89

Net Financial Expenses

Net financial expenses comprise interest income, interest expense, amortization of bond discounts,amortization of deferred borrowing costs calculated using the effective interest rate method, foreignexchange gains and losses, gains and losses resulting from the changes in the fair values of derivativefinancial instruments and net other financial expense.

Income Taxes

Income tax expense comprises current and deferred taxes. Income tax expense is recognized in theincome statement except to the extent that it relates to items recognized directly in equity, in which case itis recognized in equity.

Current tax is the expected corporate income tax and local business tax payable on taxable income for theyear, using tax rates enacted at the balance sheet date and any adjustment to tax payable in respect ofprevious years.

Result for the Year

The following tables provide a summary of the consolidated financial statements of Matel as of and forthe year ended December 31, 2013 and 2012. The summary consolidated financial information presentedhere as of and for the year ended December 31, 2013 and 2012 should be read in conjunction with thenotes to the consolidated financial statements for the year ended December 31, 2013.

From January 1, 2013 the Group has changed its accounting policy with respect to accounting forCorporate segment sales commissions relating to contracts that are managed on a portfolio basis. TheGroup decided to recognize retrospectively these sales commissions as cost of sales instead of theprevious treatment as recognizing these sales commissions as cost of acquiring a customer contract underIAS 38 – “Intangible Assets”. Either treatment of these costs as expenditure through profit or loss asincurred or alternatively capitalization as intangible asset are currently applied policies in the industry. Costincurred by the Group as sales commissions relate to both management of current portfolio of Corporatecustomers and also to acquire new customers. Because of changes in the operating environment, theGroup believes that these costs mainly relate to maintenance of current portfolio and acquisition ofcontract related expenditure is not so significant any more. Accordingly, the Group decided to change theaccounting policy to reflect this change in the nature of the costs. The Group believes that the newaccounting policy provides reliable and more relevant information. In accordance with IAS 8 – “AccountingPolicies, Changes in Accounting Estimates and Errors” the comparative figures have been restated accordingly.

In addition, Management of the Group decided to correct an prior year error with respect to certaingroups of intangible assets. Upon the correction, certain items are reported as part of operating expensesand cost of sales instead of the previous presentation as part of intangible assets. See details in note 2.3. –”Changes in Accounting Policies” in the consolidated financial statements.

Page 10 of 89

As of December 31,

2013 2012

restated( in millions)

Balance Sheet Data:Cash and cash equivalents.............................................................................................. 21.7 13.9Net working capital(4) ...................................................................................................... (16.8) (13.9)Total assets........................................................................................................................ 290.5 314.0Net assets/(liabilities) relating to derivative financial instruments......................... (0.1) 0.1Liabilities relating to finance leases .............................................................................. 3.6 3.9Third party debt(5)............................................................................................................ 151.6 326.6Shareholders’ equity(6) ..................................................................................................... 83.7 (65.1)

For the year ended December 31,

2013 2012


Statement of Profit and Loss and Other Comprehensive Income Data:Residential Voice ............................................................................................................. 30.8 36.5Residential Internet & TV ............................................................................................. 32.0 32.1Cable .................................................................................................................................. 17.6 16.9Corporate .......................................................................................................................... 60.4 58.7

Wholesale .......................................................................................................................... 23.0 29.3

Total operating revenue ............................................................................................. 163.8 173.5

Cost of sales exclusive of depreciation........................................................................ (65.5) (63.8)Operating expenses ......................................................................................................... (48.7) (50.0)Cost of restructuring(1).................................................................................................... (1.3) (3.2)

Depreciation and amortization ..................................................................................... (48.6) (83.9)

Income / (loss) from operations ............................................................................. (0.3) (27.4)Net financial expense(2)................................................................................................... (24.0) (43.8)

Gain on extinguishment of debt(3) ............................................................................... 81.1 -

Income/ (loss) before tax .......................................................................................... 56.8 (71.2)

Income tax benefit/(expense) ....................................................................................... (2.8) (3.7)

Income/ (loss) for the year........................................................................................ 54.0 (74.9)


2013 2012

restated

( in millions)Cash Flow Data:Net cash flow provided by / (used in) operating activities ..................................... 41.8 14.6Net cash flow provided by / (used in) investing activities ...................................... (30.5) (34.7)Net cash flow provided by / (used in) financing activities...................................... (3.9) (1.5)Net increase / (decrease) in cash and cash equivalents ........................................... 7.8 (21.7)Free cash flow before debt service(7)............................................................................ 17.0 (13.6)

Page 11 of 89

(1) Cost of restructuring for the year ended December 31, 2013 and 2012 represents costs related to the reorganizations we have undertakenand mainly includes severance expenses in both years. Expenses relating to the Restructuring (see note 1.1 – “Restructuring” in the notes tothe consolidated financial statements) referred to elsewhere in these financial statements are included in operating expenses in theconsolidated statement of profit and loss and other comprehensive income.

(2) Net financial expense includes interest income, interest expense, amortization of bond discount, amortization of deferred borrowing costs,net foreign exchange gains / (losses), gains / (losses) on extinguishment of debt, gains / (losses) from fair value changes of derivativefinancial instruments and net other financial expense.

(3) For the year ended December 31, 2013 gain on extinguishment of debt includes the gain on the Restructuring which was undertaken by thecompany (see note 1.1 – “Restructuring” in the notes to the consolidated financial statements).

(4) Net working capital is calculated as total current assets (excluding cash and cash equivalents and current assets relating to derivative financialinstruments) less current liabilities (excluding current liabilities relating to derivative financial instruments, the current portion of borrowingsand current portion of liabilities relating to finance leases).

(5) Third party debt for the year ended December 31, 2013 includes the 2013 Notes net of unamortized bond discount and excludes deferredborrowing costs and liabilities related to finance leases. Third party debt for the year ended December 31, 2012 includes the 2009 Notes netof unamortized bond discount and excludes deferred borrowing costs and liabilities related to finance leases.

(6) Shareholders’ equity includes non-controlling interest.(7) Free cash flow before debt service equals net cash flow provided by / (used in) operating activities plus cash interest paid minus net cash

flow used in / (provided by) investing activities. The following table sets forth the reconciliation of net cash flow provided by / (used in)operating activities to free cash flow before debt service:

Risk Factors

The Group’s activities expose it to a variety of risks: customer credit risk, liquidity risk, interest rate riskand foreign currency risk. The Group’s risk management program focuses on the unpredictability of thefinancial markets and seeks to minimize potential adverse effects of the Group’s financial performance.Risk management is carried out by Management under the policies approved by the Board of Directors.For more details refer to note 18 – “Financial Instruments and Financial Risk Management” in the consolidatedfinancial statements.

Risk factors that could affect the Group’s operations include, but are not limited to:

The Group is affected by the wider economy and in particular, the macro-economic condition ofHungary.

The Group has historically been unable to fund its operations through operating cash flow, andthe Group may not be able to fund its operations through operating cash flow in the futurewithout the availability of adequate working capital facilities.

The Group’s revenue and cash flow will be adversely affected if the Hungarian fixed line marketfurther declines and its Residential Voice business declines at a higher rate than expected.

The Group’s failure to increase revenue in the Residential Internet&TV market may adverselyaffect its results of operations and reduce its market share.

The Group’s revenue from the Corporate segment may be adversely affected due to competitionand the economic environment.

The provision of cable services is highly competitive, and may become more competitive in thefuture, which could result in a loss of cable subscribers and revenue.


2013 2012


Net cash flow provided by operating activities.......................................................... 41.8 14.6Cash interest paid ............................................................................................................ 5.7 33.7Net cash flow used in investing activities ................................................................... (30.5) (34.7)

Free cash flow before debt service............................................................................... 17.0 (13.6)

Page 12 of 89

If the Group is not able to manage costs while effectively responding to competition andchanging market conditions, its cash flow may be reduced and its ability to service its debt orimplement its business strategies may be adversely affected.

The Group will be subject to increased competition due to the business strategies of itscompetitors, prevailing market conditions and the effect of E.U. regulation on the Hungariantelecommunications market, which may result in the loss of customers and market share for theGroup.

The ongoing global financial and economic crisis may continue to result in the deterioration ofeconomic conditions in the Group’s operating areas, which may continue to impact demand forits services and affect its ability to obtain additional financing. Austerity measures introduced bythe Hungarian government may similarly impact demand for its services.

A new telecom tax was introduced by the Hungarian Ministry for Economy with a significantimpact on the Group’s traffic revenue.

A new utility tax was introduced by the Hungarian Ministry for Economy with a significantimpact on the Group’s results.

The agreements entered into in relation to the international sales may result in warranty claimsagainst the Group.

The loss of key senior management could negatively affect the Group’s ability to implement itsbusiness strategy and generate revenue.

Technological changes and the shortening life cycles of the Group’s services and infrastructuremay affect its operating results and financial condition and may require it to make unanticipatedcapital expenditures.

Network or system failures could result in reduced revenue, or require unanticipated capital oroperating expenditures, and could harm the Group’s reputation.

Success of the telecommunication business operations requires and depends on continuousupgrading of the existing network infrastructure. Any unanticipated investments required due toexternal or internal factors would require additional unplanned capital expenditure by the Group.

The Group will be dependent on third party vendors for its information, billing and networksystems. Any significant disruption in the Group’s relationship with these vendors could increaseits costs and affect its operating efficiencies.

The Group will depend on third party telecommunications providers over which it has no directcontrol for the provision of certain of its services.

The Group may not be able to fund its operations which require substantial capital expendituresfrom cash generated from its operations or financing facilities.

The Group contains entities organised under the laws of a number of jurisdictions, and localinsolvency laws may vary between jurisdictions. Variations in local insolvency laws may affect therights of creditors upon insolvency.

Page 14 of 89

MAGYAR TELECOM B.V.

CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2013

(PRESENTED IN THOUSAND EUROS)

Page 15 of 89

Page

Consolidated Balance Sheet 15

Consolidated Statement of Profit and Loss and Other Comprehensive Income 16

Consolidated Cash Flow Statement 17

Consolidated Statement of Changes in Equity 18

Notes to the Consolidated Financial Statements 19

Consolidated Balance Sheetas of December 31, 2013

The accompanying notes form an integral part of the consolidated financial statements.

Page 16 of 89

Notes At December 31 At December 31 At January 1

2013 2012 2012

Restated Restated

Note 2.3 Note 2.3

Non-Current Assets

Intangible Assets 10 26 386 29 277 31 597

Property, Plant and Equipment 11 215 285 235 903 257 169

Other Non-Current Financial Assets 90 91 109

241 761 265 271 288 875

Current Assets

Other Current Assets 14 1 122 2 456 1 873

Trade and Other Receivables 13 25 936 32 034 30 386

Derivative Financial Instruments - 304 -

Cash and Cash Equivalents 12 21 702 13 928 35 676

48 760 48 722 67 935

Total Assets 290 521 313 993 356 810

Equity

Capital and Reserves Attributable to Equity Holders of the Parent

Share Capital 16 297 148 92 201 92 201

Capital Reserve 16 274 094 259 094 256 047

Other Reserve 16 (136 246) (16 693) (16 693)Hedging Reserve 16 - 592 -

Cumulative Translation Reserve 16 (70 829) (65 877) (87 114)

Accumulated Losses 16 (280 462) (334 426) (259 514)

83 705 (65 109) (15 073)

Non-Controlling Interest 15 11 13

Total Equity 83 720 (65 098) (15 060)

Liabilities

Non-Current Liabilities

Borrowings 17 151 552 317 246 313 494

Other Non-Current Liabilities 19 11 126 13 101 13 967

162 678 330 347 327 461

Current Liabilities

Trade and Other Payables 21 23 506 25 786 25 423

Derivative Financial Instruments 68 172 825

Accrued Expenses and Deferred Income 22 19 116 19 668 15 740

Accrued Interest 22 568 1 385 1 385

Provisions for Other Liabilities and Charges 20 865 1 733 1 036

44 123 48 744 44 409

Total Liabilities 206 801 379 091 371 870

Total Equity and Liabilities 290 521 313 993 356 810

(in thousands of EUR)

Consolidated Statement of Profit and Loss and Other Comprehensive Income / (Loss)for the year ended December 31, 2013


Page 17 of 89

Notes 2013 2012

Restated

Note 2.3

Revenue 3 163 815 173 493

Cost of Sales, Exclusive of Depreciation 4 (65 513) (63 836)

Depreciation and Amortization 7 (48 608) (83 931)

Operating Expenses 5 (48 678) (50 035)

Cost of Restructuring 8 (1 300) (3 151)

Income / (Loss) from Operations (284) (27 460)

Financial Income 9 2 093 3 416

Financial Expenses 9 (26 080) (47 191)

Gain on Extinguishment of Debt 17 81 110 -

Income / (Loss) Before Tax 56 839 (71 235)

Income Tax (Expense) / Benefit 27 (2 871) (3 679)

Income / (Loss) for the Year 53 968 (74 914)

Other Comprehensive Income / (Loss):

Items that will not be reclassified to Income / (Loss) - -

Items that may be reclassified subsequently to Income / (Loss)

Cash Flow Hedges 16 (592) 592

Change in Cumulative Translation Reserve (4 952) 21 237

Total items that may be reclassified subsequently to Income or Loss (5 544) 21 829

Other Comprehensive Income / (Loss) (5 544) 21 829

Total Comprehensive Income / (Loss) 48 424 (53 085)

Attributable to:

Owners of the Parent 48 420 (53 083)

Non-Controlling Interest 4 (2)

48 424 (53 085)


For the year ended December 31

Consolidated Cash Flow Statementfor the year ended December 31, 2013


Page 18 of 89

Notes 2013 2012

Restated

Note 2.3

Cash Flows from Operating Activities


Adjustments for

Interest Expense / (Income) 9,17 24 886 36 029

Gain on Extinguishment of Debt 17 (81 110) -

Amortization 7,10,11 8 663 12 182

Depreciation 7,10,11 39 945 71 749

Result of Sale of Intangible Assets 10 - (1)

Result of Sale of Property, Plant and Equipment 11 (1 193) (3 283)

Change of Derivative Financial Instruments (583) (425)

Provision for Impairment of Trade Receivables 13 1 555 (2 149)

Provisions (868) 697

Unrealized Foreign Exchange (Gain) / Loss 184 3 130

Other Non-Cash Items 1 001 4 252

Working Capital Changes:

Change in Trade and Other Receivables 5 149 (6 149)

Change in Inventories 1 258 (678)

Change in Prepayments and Accrued Income 1 040 (37)

Change in Trade and Other Payables and Accrued Expenses and Deferred Income (6 857) 7 120

Income Taxes Paid (2 388) (2 905)

Interest Paid (5 733) (33 744)

Net Cash Flow Provided by / (Used in) Operating Activities 41 788 14 553

Cash Flows from Investing Activities

Purchase of Property, Plant and Equipment and Intangible Assets (32 020) (41 105)

Proceeds from Sale of Property, Plant and Equipment and Intangible Assets 1 377 3 680

Interest Received 160 2 702

Net Cash Flow Provided by / (Used in) Investing Activities (30 483) (34 723)

Cash Flows from Financing Activities

Settlement of Derivative Financial Instruments 192 (1 515)

Repurchase of 2013 Notes 17 (14 949) -

Proceeds from issuance of Sponsor debt 17 10 000 -

Owner's Paid-in Capital 16 15 000 -

Refinancing Costs 17 (14 171) -

Net Cash Flow Provided by / (Used in) Financing Activities (3 928) (1 515)

Effect of Exchange Rate Changes on Cash and Cash Equivalents 397 (63)

Net Increase / (Decrease) in Cash and Cash Equivalents 7 774 (21 748)

Cash and Cash Equivalents at the Beginning of the Year 12 13 928 35 676

Cash and Cash Equivalents at the End of the Year 21 702 13 928



Summary of Non-Cash Transactions:

The Group had unpaid capital expenditures in the amount of EUR 10,854 thousand and EUR 12,536thousand as of December 31, 2013 and 2012, respectively.

Other non-cash items for the year ended December 31, 2013 contains EUR 500 thousand reversed MidEuropa management fees relating to the third and fourth quarter of 2012 and EUR 1,501 thousandcapitalized interest relating to the 2013 Notes.

The Group had a loss of EUR 4.5 million for the year ended December 31, 2012 as a result of waiving ofreceivables and liabilities in connection with the liquidation of former holding companies of Matel (seenote 9 – “Financial Income and Expenses”).

Consolidated Statement of Changes in Equityfor the year ended December 31, 2013


Page 19 of 89

Cumulative

Share Capital Other Hedging Translation Accumulated Non-Controlling Total

Notes Capital Reserve Reserve Reserve Reserve Losses Total Interest Equity

Balance at January 1, 2012 (Prior to Restatement) 92 201 256 047 (16 693) - (87 114) (258 830) (14 389) 13 (14 376)

Restatement in Relation to Prior Year Error 2.3 - - - - - (268) (268) - (268)

Restatement in Relation to Accounting Policy 2.3 - - - - - (416) (416) - (416)

Balance at January 1, 2012 (Restated) 92 201 256 047 (16 693) - (87 114) (259 514) (15 073) 13 (15 060)

Hedging of Foreign Currency Items 16 - - - 592 - - 592 - 592

Translation Adjustment for the Year - - - - 21 237 - 21 237 - 21 237

Other Comprehensive Income / (Loss) - - - 592 21 237 - 21 829 - 21 829

Net Result for the Year before Restatement - - - - - (74 316) (74 316) (2) (74 318)

Restatement in Relation to Prior Year Error 2.3 - - - - - (140) (140) - (140)

Restatement in Relation to Accounting Policy 2.3 - - - - - (456) (456) - (456)

Net Result for the Period after Restatement - - - - - (74 912) (74 912) (2) (74 914)

Total Comprehensive Income / (Loss) - - - 592 21 237 (74 912) (53 083) (2) (53 085)

Capitalized Shareholder Loan 16 - 3 047 - - - - 3 047 - 3 047

Balance at December 31, 2012 (Restated) 92 201 259 094 (16 693) 592 (65 877) (334 426) (65 109) 11 (65 098)

Balance at January 1, 2013 92 201 259 094 (16 693) 592 (65 877) (334 426) (65 109) 11 (65 098)

Hedging of Foreign Currency Items 16 - - - (592) - - (592) - (592)

Translation Adjustment for the Year - - - - (4 952) - (4 952) - (4 952)

Other Comprehensive Income / (Loss) - - - (592) (4 952) - (5 544) - (5 544)

Net Result for the Year - - - - - 53 964 53 964 4 53 968

Total Comprehensive Income / (Loss) - - - (592) (4 952) 53 964 48 420 4 48 424

Issuance of B Shares 17 204 947 - (119 553) - - - 85 394 - 85 394

Additional Paid-in Capital 16 - 15 000 - - - - 15 000 - 15 000

Total Transaction with Owners 204 947 15 000 (119 553) - - - 100 394 - 100 394

Balance at December 31, 2013 297 148 274 094 (136 246) - (70 829) (280 462) 83 705 15 83 720


Attributable to Owners of the Parent

Notes to the Consolidated Financial Statementsfor the year ended December 31, 2013


Page 20 of 89

1. General Information

Magyar Telecom B.V. (“the Company” or “Matel”, together with its subsidiaries “the Group”) wasincorporated on December 17, 1996 as a limited liability company under the laws of the Netherlands andregistered with the trade register of the Chamber of Commerce for Amsterdam with company registrationnumber 33286951. On September 5, 2013 the Company was registered as an overseas company at theCompanies House in the UK with UK establishment number BR016577, having its head office at 6 StAndrew Street, London EC4A 3AE, United Kingdom.

Matel is engaged in investing in telecommunication related activities in Hungary. Its telecommunicationsservice provider subsidiaries, Invitel Távközlési Zrt. (“Invitel”) and Invitel Technocom Kft. (“ITC”) areproviding telecommunications services to residential and corporate customers. All subsidiaries aremajority owned and controlled subsidiaries of Matel (collectively, “the Group”).

Matel, through its subsidiaries, is one of the largest fixed line telecommunications services provider inHungary and the incumbent provider of fixed line telecommunications services to residential andcorporate customers in its historical concession areas. The historical concession areas and cable TVnetwork cover an estimated 2.9 million people, representing approximately 29% of Hungary’s population.Matel also provides fixed line telecommunications services as an alternative operator in the remainder ofHungary either by connecting corporate and residential customers to its backbone network and cablenetwork, or through the use of carrier pre-selection or wholesale DSL services for residential customers.

The Company was a wholly owned subsidiary of HTCC Holdco I B.V. (“Holdco I B.V.”) till December12, 2012. After the liquidation of Holdco I B.V., from December 12, 2012 the Company was whollyowned by Hungarian Telecom Cooperatief U.A. (“Coop”). As of October 22, 2013, a new entity,Hungarian Telcom B.V. was established by Coop with a 100% onwnership. As of December 12, 2013 theshares of Matel were contributed by Coop to Hungarian Telecom B.V. On December 12, 2013 Matelcompleted its restructuring as part of which its former notes were refinanced by issuing new notes (seenote 17 – “Borrowings”) and new shares (see note 16 – “Equity”). The new shares were issued to a newlyestablished entity, Matel Holdings Limited. As of December 31, 2013, after completion of theResutructuring, Matel was 51% owned by Hungarian Telecom B.V. which is 100% owned by Mid EuropaPartners Limited (“Mid Europa”), through its holding companies and 49% owned by Matel HoldingsLimited. Mid Europa does not prepare financial statements under IFRS.

In March 2012, due to regulatory changes in Hungary, reorganization took place affecting ITC. A newcompany, MID-NEW Technocom Kft. was established by one of the directors of Mid Europa on March8, 2012. Matel transferred 75% of its membership interest in ITC to MID-NEW Technocom Kft. Thepurchase price was determined at EUR 45,000 by an enterprise value calculation. Matel and MID-NEWTechnocom Kft. accepted a revised Articles of Association of ITC following the transfer. According tothe revised Articles of Association, only Matel is entitled to any distribution of dividends from ITC andthere is a restriction on the transfer of membership interest in ITC whereby such transfer cannot takeplace without the approval of Matel. ITC remained consolidated by the Group.

As of December 31, 2013 the Group includes the following subsidiaries:

Invitel was incorporated on September 20, 1995 as a joint stock company under the laws of Hungary. Theauthorized share capital of Invitel as of December 31, 2013 is HUF 16 billion (approximately EUR 54million).



Page 21 of 89

ITC was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary.The authorized share capital of ITC as of December 31, 2013 is HUF 165 million (approximately EUR556 thousand).

Invitel International Holdings B.V. (“Invitel International Holdings”) was incorporated on March 26,2009 in Amsterdam and has its statutory seat at Herikerbergweg 238, Luna ArenA, 1101CM Zuidoost,The Netherlands. The 100% owner of Invitel International Holdings is Invitel. Invitel InternationalHoldings was the holding company of the Group’s international operations, which was sold on October7, 2010. The authorized share capital of Invitel International Holdings as of December 31, 2013 is EUR18 thousand. Invitel International Holdings had no operations during the years ended December 31,2012 and 2013.

1.1. Restructuring

During 2013 the Group worked with certain of its advisers to prepare a strategic review of the Group andits business on a going concern basis. The strategic review indicated that the Group was significantlyover leveraged and needed to be restructured. One of the most significant adverse impacts on theliquidity of the Group was the amount required to service current debt levels under the 2009 Notes.

The Group commenced negotiations regarding the terms of a Restructuring with an ad hoc committee ofholders of its 2009 Notes in March 2013, with the aim of reducing the financial pressure on the businessof the Group and ensuring that the Group could continue to operate as a going concern in the future. Aspart of this process, holders of approximately 40% of the aggregate principal amount of the 2009 Notesentered into the Restructuring Agreement on July 15, 2013. In light of, and consistent, with theRestructuring, the Company’s Board decided not to make the payment of the June 15, 2013 coupon dueto the holders of the 2009 Notes. By August 19, 2013, holders of over 70% of the aggregate principalamount of the 2009 Notes (the “Consenting Creditors”) had entered into or acceded to the RestructuringAgreement. Pursuant to the terms of the Restructuring Agreement, the Consenting Creditors agreed,amongst other things:

(a) to support the Restructuring and to use all reasonable endeavours to implement theRestructuring in a manner consistent with the terms of the restructuring agreement;

(b) to take all steps that were consistent with, and were reasonably required to implement theRestructuring (including taking all steps necessary to vote in favour of the Restructuring); and

(c) not to take any enforcement action or delay, impede or frustrate the Restructuring.

The Restructuring involved a number of steps designed to facilitate an exchange of the 2009 Notes fornew notes. Under the terms of the Restructuring, EUR 155.0 million of the 2009 Notes were exchangedinto new notes (the “2013 Notes”). The 2013 Notes bear cash interest at 7% (subject to a PIK toggle)and PIK interest of 2%, which accrues from June 15, 2013 and paid semi-annually in arrears onDecember 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interestat a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. The2013 Notes have a maturity date of June 15, 2018.

The remaining EUR 174.0 million of the 2009 Notes, together with all accrued interest were convertedinto 49% of the pro-forma post-restructuring equity in the Group, which is held by Matel HoldingsLimited, a newly formed entity. Matel Holdings Limited’s shares are stapled to the 2013 Notes.

EUR 21.0 million of the 2009 Notes held by the Company in treasury were also cancelled as part of theRestructuring.



Page 22 of 89

Mid Europa invested EUR 25.0 million consisting of EUR 15.0 million as additional cash contributionand EUR 10.0 million as debt (the “Sponsor Notes”), which ranks pari passu with the 2013 Notes. TheEUR 15.0 million new equity investment was used to buy back the 2013 Notes (and corresponding equityentitlement). Upon closing of the Restructuring Mid Europa owned 51% of the pro-forma post-restructuring equity in the Group.

A consent fee of 0.25% of holdings of the 2009 Notes was payable on closing of the Restructuring to thenoteholders that were party to or acceded to the Restructuring Agreement by August 15, 2013.

The Restructuring was implemented via a UK scheme of arrangement (which requires a favorable vote of75% in principal amount and a majority in number of those voting).

To enable the Restructuring to be implemented pursuant to a scheme of arrangement under English law,the Matel Board took the decision to migrate the Center of Material Interest (“COMI”) of Matel to theUK. The steps taken by Matel in order to move its COMI to the UK included (i) appointing a majority ofdirectors resident in the United Kingdom and removing the directors resident in the Netherlands;(ii) registering as an overseas company with the Registrar of Companies at Companies House in the UK;(iii) registering as UK tax resident; (iv) entering into an agreement to occupy premises in the UK;(v) notifying creditors of the transfer of Holdco’s COMI to the UK, (vi) carrying out the administrativefunctions of Holdco in the UK, and (vii) carrying out all principal discussions and negotiations withnoteholder creditors from the UK.

After completion of the Restructuring, Mid Europa has the rights to appoint the majority of the Board ofDirectors of the Company. The noteholders (in their capacity as shareholders) are also able to appointdirectors to the Board (“Noteholder Directors”), whose approval will be required in relation to certainstrategic matters. As of December 31, 2013 the Group is controlled by Mid Europa.

The Company has recorded a gain of EUR 81,110 thousand in relation to this Restructuring, which isrelated to the extinguishment of debt and the issuance of 2013 Notes reduced by the refinancing costspaid.

2. Significant Accounting Policies

The significant accounting policies applied in the preparation of the consolidated financial statements areset out below. These policies have been consistently applied by all Group entities to all periods presentedin these consolidated financial statements, unless otherwise stated. Where it was necessary, accountingpolicies of the subsidiaries were modified to ensure consistency with the policies adopted by the Group.

2.1 Statement of Compliance

The consolidated financial statements have been prepared in accordance with International FinancialReporting Standards (”IFRS”) as adopted by the European Union (“EU”).

These consolidated financial statements for the year ended December 31, 2013 were approved for issueon April 24, 2014 by the Board of Directors.



Page 23 of 89

2.2. Basis of Preparation

The consolidated financial statements are presented in euro (“EUR”) rounded to the nearest thousand ofEUR (“TEUR”).

The preparation of the consolidated financial statements in conformity with IFRS requires the use ofcertain critical accounting estimates. It also requires Management to exercise its judgement in the processof applying the accounting policies. The areas involving a higher degree of judgement or complexity orareas where assumptions and estimates are significant to the consolidated financial statements arediscussed in note 2.25. – ”Critical Accounting Estimates and Judgements”.

The Group has adopted the following new and amended IFRS as of January 1, 2013, which are relevantto the Group’s consolidated financial statements:

Amendments to IAS 1 – “Presentation of Financial Statements” relating to the presentation of items of othercomprehensive income. The amendment requires entities to separate items presented in othercomprehensive income into two groups, based on whether or not they may be recycled to profit or loss inthe future. The amendments are effective for annual periods beginning on or after July 1, 2012. TheGroup has adopted these amendments and made the necessary changes in the presentation of othercomprehensive income by reclassifying the effect of capitalisation of a shareholder loan in 2012 fromother comprehensive income to equity in the amount of EUR 3,047 thousand.

Amendments to IFRS 7 – “Financial Instruments: Disclosures” relating to offsetting financial instruments.The amendments are effective for annual periods beginning on or after January 1, 2013. Adoption of theamendments did not have an impact on the consolidated financial statements of the Group.

Amendments to IFRS 10 – “Consolidated Financial Statements” builds on existing principles by identifyingthe concept of control as the determining factor in whether an entity should be included within theconsolidated financial statements of the parent company. The standard provides additional guidance toassist in the determination of control. Adoption of the amendments did not have an impact on theconsolidated financial statements of the Group.

IFRS 13 – “Fair Value Measurement”, aims to improve consistency and reduce complexity by providing aprecise definition of fair value and a single source of fair value measurement and disclosure requirementsfor use across IFRSs. The requirements, which are largely aligned between IFRS and US GAAP, provideguidance on how fair value accounting should be applied where its use is already required or permitted byother standards within IFRS. Adoption of the new standard has following impact on the consolidatedfinancial statements of the Group: The price within the bid-ask spread that is most representative of fairvalue in the circumstances is used to measure fair value, which management considers is the last tradingprice on the reporting date. Prior to January 1, 2013, the quoted market price used for financial assets wasthe current bid price; the quoted market price for financial liabilities was the current asking price. Thedisclosures included in note 18 – ”Financial Instruments and Financial Risk Management” are in line with therequirements of IFRS 13.

Amendments to IAS 19 – “Employee Benefits” (issued in June 2011, effective for periods beginning on orafter January 1, 2013) makes significant changes to the recognition and measurement of defined benefitpension expense and termination benefits, and to the disclosures for all employee benefits. The standardrequires recognition of all changes in the net defined benefit liability (asset) when they occur, as follows:(i) service cost and net interest in profit or loss; and (ii) remeasurements in other comprehensive income.Adoption of these amendments did not have an impact on the consolidated financial statements of theGroup.



Page 24 of 89

2.3. Changes in Accounting Policies

From January 1, 2013 the Group has changed its accounting policy with respect to accounting for salescommissions relating to Corporate segments that are managed on portfolio basis. Either treatment ofthese costs as expenditure through profit or loss as incur or alternatively capitalization as intangible assetare currently applied policies in the industry. The Group decided to recognize retrospectively these salescommissions as cost of sales. Previously the Group recognized these sales commissions as cost ofacquiring a customer contract under IAS38 – “Intangible Assets”. Cost incurred as sales commission feesrelate to both management of current portfolio of corporate customers and also to acquire newcustomers. Because of changes in the operating environment the Group believes that these costs mainlyrelate to maintenance of current portfolio and acquisition of contract is not so significant any more.Accordingly, the Group decided to change the accounting policy to reflect this change in the nature ofthe cost. Therefore the Group believes that the new accounting policy provides reliable and more relevantinformation.

In accordance with IAS 8 – “Accounting Policies, Changes in Accounting Estimates and Errors” the comparativefigures have been restated accordingly.

In addition, Management has decided to correct an prior year error with respect to certain groups ofintangible assets. Upon the correction, certain items are reported as part of operating expenses instead ofthe previous presentation as part of intangible assets.

The effects of the change in accounting policy and the correction of prior year error are included in thetables below:

At December 31 At December 31

2012 2011

Intangible assets, net at the Beginning of the Year 30 557 32 281

Restatement in Relation to Prior Year Error (140) (268)Restatement in Relation to Accounting Policy Change (456) (416)Cumulative Effect from Prior Years (684) -

Intangible assets, net at the End of the Year 29 277 31 597


At December 31 At December 31

2012 2011

Accumulated losses at the Beginning of the Year (333 146) (258 830)

Restatement in Relation to Prior Year Error (140) (268)

Restatement in Relation to Accounting Policy Change (456) (416)

Cumulative Effect from Prior Years (684) -

Accumulated losses at the End of the Year (334 426) (259 514)




Page 25 of 89

For the year ended

December 31

2012


Cost of Sales, Exclusive of Depreciation before Restatement (62 629)

Restatement in Relation to Accounting Policy Change (1 207)

Cost of Sales, Exclusive of Depreciation after Restatement (63 836)

For the year ended

December 31

2012


Depreciation and Amortization before Restatement (84 817)

Restatement in Relation to Prior Year Error 135

Restatement in Relation to Accounting Policy Change 751

Depreciation and Amortization after Restatement (83 931)

For the year ended

December 31

2012


Operating Expenses before Restatement (49 760)

Restatement in Relation to Prior Year Error (275)

Operating Expenses after Restatement (50 035)

For the year ended

December 31

2012


Net Cash Flow Provided by / (Used in) Operating Activities before Restatement 16 035


Restatement in Relation to Accounting Policy Change (1 207)

Net Cash Flow Provided by / (Used in) Operating Activities after Restatement 14 553

For the year ended

December 31

2012


Purchase of Property, Plant and Equipment and Intangible Assets before Restatement (42 587)

Restatement in Relation to Prior Year Error 275

Restatement in Relation to Accounting Policy Change 1 207

Purchase of Property, Plant and Equipment and Intangible Assets after Restatement (41 105)



Page 26 of 89

2.4. Basis of Consolidation

Subsidiaries are those investees, including structured entities, that the Group controls because the Group(i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) hasexposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability touse its power over the investees to affect the amount of investor’s returns. The existence and effect ofsubstantive rights, including substantive potential voting rights, are considered when assessing whetherthe Group has control over another entity. For a right to be substantive, the holder must have practicalability to exercise that right when decisions about the direction of the relevant activities of the investeeneed to be made. The Group may have power over an investee even when it holds less than majority ofvoting power in an investee. In such a case, the Group assesses the size of its voting rights relative to thesize and dispersion of holdings of the other vote holders to determine if it has de-facto power over theinvestee. Protective rights of other investors, such as those that relate to fundamental changes ofinvestee’s activities or apply only in exceptional circumstances, do not prevent the Group fromcontrolling an investee. Subsidiaries are consolidated from the date on which control is transferred to theGroup (acquisition date) and are deconsolidated from the date on which control ceases.

The acquisition method of accounting is used to account for the acquisition of subsidiaries other thanthose acquired from parties under common control. Identifiable assets acquired and liabilities andcontingent liabilities assumed in a business combination are measured at their fair values at the acquisitiondate, irrespective of the extent of any non-controlling interest.

The Group measures non-controlling interest that represents present ownership interest and entitles theholder to a proportionate share of net assets in the event of liquidation on a transaction by transactionbasis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of theacquiree. Non-controlling interests that are not present ownership interests are measured at fair value.

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the considerationtransferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of aninterest in the acquiree held immediately before the acquisition date. Any negative amount (“negativegoodwill, bargain purchase”) is recognised in profit or loss, after management reassesses whether itidentified all the assets acquired and all liabilities and contingent liabilities assumed and reviewsappropriateness of their measurement.

The consideration transferred for the acquiree is measured at the fair value of the assets given up, equityinstruments issued and liabilities incurred or assumed, including fair value of assets or liabilities fromcontingent consideration arrangements but excludes acquisition related costs such as advisory, legal,valuation and similar professional services. Transaction costs related to the acquisition and incurred forissuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part ofthe business combination are deducted from the carrying amount of the debt and all other transactioncosts associated with the acquisition are expensed.



Page 27 of 89

Intercompany transactions, balances and unrealised gains on transactions between group companies areeliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Company andall of its subsidiaries use uniform accounting policies consistent with the Group’s policies. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interestswhich are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separatecomponent of the Group’s equity.

Business combinations arising from transfers of interests in entities that are under the common control ofthe shareholders that control the Group are accounted for by using predecessor accounting, at the datethat the common control was established. The assets and liabilities are recorded at book values by theacquiree. The components of equity of the acquired entities are added to the same components withinGroup equity except that any share capital of the acquired entities is recognized as part of reserves. Thedifference between the consideration given and the aggregate book value of the assets and liabilities of theacquired entity as of the date of the transaction is recorded as an adjustment to other reserve in equity.No additional goodwill is created by these transactions.

When the group ceases to have control any retained interest in the entity is re-measured to its fair value atthe date when control is lost, with the change in carrying amount recognized in profit or loss. The fairvalue is the initial carrying amount for the purposes of subsequently accounting for the retained interestas an associate, joint venture or financial asset. In addition, any amounts previously recognized in othercomprehensive income in respect of that entity are accounted for as if the group had disposed of therelated assets or liabilities. This may mean that amounts previously recognized in other comprehensiveincome are reclassified to profit or loss.

2.5. Foreign Currency

Items included in the financial statements of each of the Group’s entities are measured using the currencyof the primary economic environment in which the entity operates (the “functional currency”). Thefunctional currency of Matel is the EUR. The functional currency of the Hungarian subsidiaries of Matelis the Hungarian forint (“HUF”), the functional currency of the non-Hungarian subsidiaries of Matel isthe EUR.

The assets and liabilities of operations that are measured in functional currencies other than the EUR aretranslated into EUR at foreign exchange rates in effect at the balance sheet date. Revenues and expensesof transactions measured in currencies other than the EUR are translated into EUR at average rates.Equity amounts are translated at historical exchange rates. Exchange rate translation differences arereported as a component of equity as cumulative translation reserve.



Page 28 of 89

Transactions in foreign currencies are translated to the respective functional currencies at the foreignexchange rate in effect at the dates of the transactions.

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translatedto the functional currency at the foreign exchange rate in effect at that date. The foreign currency gain orloss on monetary items is the difference between amortized cost in the functional currency at thebeginning of the period, adjusted for effective interest and payments during the period, and the amortizedcost in foreign currency translated at the exchange rate at the end of the period. Foreign currencydifferences arising on translation are recognized in the consolidated income statement as net foreignexchange gain / (loss) in financial expenses.

Non-monetary assets and liabilities denominated in foreign currencies other than the functional currencythat are stated at historical cost are translated using the exchange rate at the date of the transaction.

2.6. Cash and Cash Equivalents

Cash and cash equivalents is comprised of cash in bank balances and highly liquid call deposits withoriginal maturities of three months or less and exclude all overdrafts which are shown within borrowingsin current liabilities on the face of the consolidated balance sheet.

2.7. Financial Assets

Financial assets are classified in the following categories: at fair value through profit or loss, loans andreceivables and available for sale. The classification depends on the purpose for which the financial assetwas acquired. The classification of financial assets is determined at initial recognition.

Financial assets at fair value through profit or loss are financial assets held for trading. These financialassets are acquired for the purpose of sale in the short term. Derivative financial instruments are alsoclassified as held for trading unless they are designated hedges. Assets in this category are classified ascurrent assets, except it is expected to be settled in more than twelve months after the balance sheet date,which are classified as non-current assets.Loans and receivables are non-derivative financial assets with fixed or determinable payments that are notquoted in active markets. They are included in current assets, except it is expected to be settled in morethan twelve months after the balance sheet date, which are classified as non-current assets.

Available-for-sale financial assets are defined as financial assets that do not fall into one of the othercategories described above. Gains and losses from revaluation of available-for-sale financial asset arerecognized in other comprehensive income to the extent that any losses are assessed as being permanentand the asset is therefore impaired under IAS 39. If the asset is sold or impaired, the revaluation gain orloss implicit in the transaction is recognized within profit or loss.

Regular sales and purchases of financial assets are recognized on the trade date, the date on which theGroup commits to sell or purchase the financial asset.



Page 29 of 89

A financial asset is considered to be impaired if objective evidence indicators that one or more eventshave had a negative effect on the estimated future cash flows from that asset. An impairment loss inrespect of a financial asset measured at amortized cost is calculated as the difference between its carryingamount, and the present value of the estimated future cash flows discounted at the original effectiveinterest rate.

Individually significant financial assets are tested for impairment on an individual basis. The remainingfinancial assets are assessed collectively in groups that share similar credit risk characteristics.

Financial assets and liabilities are offset and the net amount reported in the consolidated balance sheetwhen there is a legally enforceable right to offset the recognized amounts and there is an intention tosettle on a net basis, or realize the asset and settle the liability simultaneously.

The primary factors that the Group considers in determining whether a financial asset is impaired or notare its overdue status and realisability of related collateral, if any. The following other principal criteria arealso used to determine whether there is objective evidence that an impairment loss has occurred:

a) any portion or instalment is overdue and the late payment cannot be attributed to a delay causedby the settlement systems;

b) the counterparty experiences a significant financial difficulty as evidenced by its financialinformation that the Group obtains;

c) the counterparty considers bankruptcy or a financial reorganisation;

d) there is adverse change in the payment status of the counterparty as a result of changes in thenational or local economic conditions that impact the counterparty; or

e) the value of collateral, if any, significantly decreases as a result of deteriorating market conditions.

The recoverable amount of financial assets carried at amortized cost is calculated as the present value ofexpected future cash flows, discounted at the original effective interest rate inherent in the asset.Receivables with a short duration are not discounted.

The recoverable amount of the cash-generating units is the greater of their fair value less costs to sell andvalue-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their presentvalue using a pre-tax discount rate that reflects current market assessments of the time value of moneyand the risks specific to the asset.

2.8. Derivative Financial Instruments

The Group uses derivative financial instruments to manage its exposure to foreign exchange and interestrate risks arising from operational, financing and investing activities. In accordance with its TreasuryPolicy, the Group does not hold or issue derivative financial instruments for trading purposes.



Page 30 of 89

Derivative financial instruments are initially recognized at fair value and are subsequently re-measured totheir fair value. The fair value of interest rate swaps is the estimated amount that the Group would receiveor pay to terminate the swap at the balance sheet date, taking into account current interest rates and thecurrent creditworthiness of the swap counter-parties. The fair value of forward exchange contracts is theirquoted market price at the balance sheet date, being the present value of the quoted forward price. Thefair value of cross currency interest rate swaps is the estimated amount that the Group would receive orpay to terminate the swap at the balance sheet date, taking into account current interest rates, foreignexchange rates and the current creditworthiness of the swap counter-parties.

The method of recognizing gains or losses resulting from the changes in fair value of financialinstruments depends on whether the derivative is designated as a hedging instrument, and if so, the natureof the hedged item.

The Group designates certain derivative financial instruments as cash flow hedges. The Groupdocuments at the inception of the transaction the relationship between hedging instruments and hedgeditems. The Group also documents its assessment, both at the hedge inception and on an ongoing basis, ofwhether the derivatives that are used in the hedging transactions are highly effective offsetting changes incash flows of the hedged items. The effective portion of the changes in the fair value of cash flow hedgesis recognized in other comprehensive income in equity and the gain or loss relating to the ineffectiveportion is recognized immediately in the income statement. Amounts accumulated in equity arerecognized in the income statement when the hedged item affects profit or loss.

Financial instruments are classified as current or non-current depending on the terms of the contract. Theportion of the financial instruments that is expected to be realized or settled within twelve months of thebalance sheet date or where settlement can not be deferred for at least twelve months after the balancesheet date, is presented as current, the remainder is presented as a non-current financial instrument.

Embedded derivatives are separated from the host contract and accounted for separately if the economiccharacteristics and risks of the host contract and the embedded derivative are not closely related. Changesin the fair value of separable embedded derivatives are recognized immediately in the income statementwithin financial income or expenses.

2.9. Trade and Other Receivables

Receivables are recognized initially at fair value, and subsequently thereafter they are measured atamortized cost using the effective interest rate method less accumulated impairment losses. Receivableswith a short duration are not discounted. The amounts of any impairment losses are included in operatingexpenses.

Trade receivables and payables from other network operators are offset and the net amount is reported inthe consolidated balance sheet when there is a legally enforceable right to offset the recognized amountsand there is an intention to settle on a net basis, or realize the asset and liability simultaneously.

2.10. Trade and Other Payables

Trade and other payables are initially recognized at fair value and subsequently at amortized cost.



Page 31 of 89

2.11. Inventories

Inventories consist of materials to be used in construction and repair of the telephone network.Inventories are carried at the lower of cost and net realizable value. Cost is based on the first-in, first-outprinciple and includes expenditures incurred in acquiring the inventories and bringing them to theirexisting condition and location.

2.12. Intangible Assets

Intangible assets with indefinite useful life are stated at cost less accumulated impairment losses.Intangible assets with indefinite useful life are tested for impairment annually. After initial recognition it isdetermined whether an intangible asset has a finite or an indefinite useful life.

Intangible assets with definite useful life are stated at cost less accumulated amortization and impairmentlosses. The cost of intangible assets with a finite useful life is amortized on a straight-line basis over theperiod in which the asset is expected to be used.The Group has the following types of intangible assets with definite useful lives, which are amortized onstraight line basis over the following estimated useful lives:

Customer relationships 9 yearsSoftware 3 yearsProperty rights 1-43 yearsOther 1-16 years

Customer relationships represent the value of the Group’s cable customer base. The useful life ofcustomer relationships was determined based on the average churn period of such customers.

Software is stated at the cost incurred to acquire and bring to use the specific software assets lessaccumulated amortization and impairment losses.

Property rights represent amounts paid for the right to use third party property for the placement oftelecommunication equipment. Useful lives are determined based on the underlying contracts.

Other intangible assets include subscriber acquisition costs, which are sales commissions paid to internalsales force and third parties in relation to fixed term subscriber contracts. Subscriber acquisition costs areamortized over the term of the related subscriber contracts.

Amortization of intangible assets ceases at the earlier of the date that the asset is classified as held-for-salein accordance with IFRS 5 – “Non-current assets held-for-sale and discontinued operations” and the date the assetis derecognized. The amortization periods are reviewed annually at each financial year-end. Any changesarising from such review are accounted for as a change in an accounting estimate.



Page 32 of 89

2.13. Property, Plant and Equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation and impairmentlosses. The cost of self-constructed assets includes the cost of materials, direct labor and an appropriateproportion of overhead, any other costs directly attributable to bringing the asset to a working conditionfor its intended use, and the cost of dismantling and removing the items and restoring the site on whichthey are located. Where an item of property, plant and equipment comprises major components havingdifferent useful lives, they are accounted for as separate items of property, plant and equipment.

Borrowing costs directly attributable to the acquisition, construction or production of assets thatnecessarily take a substantial period of time to get ready for their intended use or sale, are added to thecost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Capital work in progress is stated at cost less accumulated impairment losses and represents property,plant and equipment in the capital work in progress stage.

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership areclassified as finance leases. An asset acquired by way of a finance lease is measured initially at an amountequal to the lower of its fair value and the present value of the minimum lease payments at inception ofthe lease. Leased assets are depreciated over the shorter of the lease term or their useful lives unless it isreasonably certain that ownership will be obtained by the end of the lease term. Other leases are operatingleases and the leased assets are not recognized in the consolidated balance sheet.

Expenditure incurred to replace a component of an item of property, plant and equipment that isaccounted for separately, including major inspection and overhaul expenditure is included in the carryingamount if it is probable that future economic benefits embodied in that expenditure will flow to theGroup and its cost can be measured reliably. The carrying amount of the replaced part is derecognized.All other expenditures are recognized in the consolidated income statement as an expense as incurred.

Depreciation is charged to the consolidated income statement on a straight-line basis over the estimateduseful lives of items of property, plant and equipment, and major components that are accounted forseparately. Subsequent to initial recognition, the asset is accounted for in accordance with the accountingpolicy applicable to that asset. Land and capital work in progress are not depreciated. The estimateduseful lives are as follows:

Buildings 25-50 yearsNetwork and equipment 3-25 yearsOther equipment 3-7 years



Page 33 of 89

Depreciation of property, plant and equipment ceases at the earlier of the date that the asset is classifiedas held-for-sale in accordance with IFRS 5 – “Non-current assets held-for-sale and discontinued operations” andthe date the asset is derecognized. Depreciation methods, useful lives and residual values are reviewedannually at each financial year-end. Any changes arising from such review are accounted for as a changein an accounting estimate.

2.14. Impairment of Non-Financial Assets

Assets are reviewed at each reporting date to determine whether there is any indication of impairment. Ifany such indication exists, the asset’s recoverable amount is estimated.

For goodwill and intangible assets with an indefinite useful life or not available for use, the recoverableamount is estimated annually, irrespective of whether any indication of impairment exists.

An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unitexceeds its recoverable amount. For an asset that does not generate largely independent cash flows, therecoverable amount is determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable asset group that generates cash flows that are largelyindependent from other assets and groups.

Impairment losses are recognized in the consolidated income statement. Impairment losses recognized inrespect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocatedto the units and then to fixed assets with any residual amount reducing the carrying amount of the otherassets in the unit (group of units) on a pro rata basis.

An impairment loss on non-financial assets other than goodwill is reversed only to the extent that theasset’s carrying amount does not exceed the carrying amount that would have been determined, net ofdepreciation or amortization, if no impairment loss had been recognized.

2.15. Non-Current Assets (or Disposal Groups) Held-for-Sale

Non-current assets (or disposal groups) are classified as held-for-sale when their carrying amount is to berecovered principally through a sale transaction and a sale is considered highly probable. They are statedat the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recoveredprincipally through a sale transaction rather than through continuing use.

2.16. Borrowings

Borrowings are recognized initially at fair value net of transaction costs. Subsequent to initial recognition,borrowings are stated at amortized cost with any difference between initial cost and redemption valuebeing recognized in the consolidated income statement over the period of the borrowings on an effectiveinterest basis.

Costs and expenses directly related to raising funds and borrowings or refinancing are deferred andamortized using the effective interest rate method. Such transaction costs are disclosed in theconsolidated balance sheet as a reduction of borrowings.



Page 34 of 89

2.17. Provisions

Provisions for restructuring costs and legal claims are recognized in the consolidated balance sheet whenthe Group has a legal or constructive obligation as a result of past events that can be measured reliably,and it is probable that an outflow of economic benefits will be required to settle the obligation. Aprovision for restructuring is recognized when a detailed and formal restructuring plan is approved, andthe restructuring has either commenced or has been announced publicly. Provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflects current market assessments ofthe time value of money and, where appropriate, the risks specific to the obligation. Provisions are notrecognized for future operating costs or losses.

2.18. Revenue Recognition

Revenues are primarily earned from providing access to and usage of our networks and facilities. Accessrevenue is billed one month in advance and recognized the following month when earned. Revenuesbased on measured traffic are recognized when the service is rendered. Revenue from connection fees arerecognized upon service activation. Wholesale data revenue from leased lines is based on the bandwidthof the service and the particular route involved and is recognized in the period of usage or when theservice is available to the customer. From time to time, we sell fiber optical assets to othertelecommunications companies. Revenue is recognized as and when the transfer of ownership iscomplete.

Revenue from contracts relating to Indefeasible Rights of Use (“IRU”) comprises installation fees, one-off or up-front fees, monthly fees and maintenance fees. One-off or up-front fees of IRU contracts aredeferred over the term of the related contract. Installation fees, monthly fees and maintenance fees arecharged periodically as specified in the related contract and the revenue is recognized straight-line overthe life of the related contract. Revenues and cost of sales from other network operators for IRUcontracts are shown net where a right of set-off exists and the amounts are intended to be settled on a netbasis.

Third parties using the Group’s telecommunications network include roaming customers of other serviceproviders and other telecommunications providers which terminate or transit calls on the Group’snetwork. These wholesale traffic revenues are recognized in the period of related usage. A proportion ofthe revenue received is often paid to other operators for interconnection for the use of their networks,where applicable. The revenues and costs of these transit calls are stated gross in the consolidatedfinancial statements as the Group is the principal supplier of these services using its own network freelydefining the pricing of the services, and recognized in the period of related usage.The Group’s main operating revenue categories are as follows:

Residential Voice. The revenue generated from the fixed line voice and voice-related services provided toresidential customers in the historical concession areas (“Residential Voice In”) and out of the historicalconcession areas (“Residential Voice Out”). Residential Voice revenue comprises time based call charges,subject to a minimum monthly fee charged for accessing the network and time based fixed-to-mobile,local, long distance and international call charges, interconnect charges on calls terminated in the Group’snetwork, monthly fees for value added services, one-off connection and new service fees, as well asmonthly fees for packages with built-in call minutes. Residential Voice In revenue also includes accesscalls to dial-up ISPs’ networks at local call tariffs and revenue from providing DSL access to other ISPs,but revenue from bundled Internet call and Internet services is recorded under Residential Internet.



Page 35 of 89

Residential Internet & TV. The revenue generated from dial-up and DSL Internet connections provided toresidential customers nationwide both inside and outside the historical concession areas. ResidentialInternet comprises dial-up revenue, which is generated through a combination of time based and accessfees, and DSL revenue, which is generated through a variety of monthly packages.

Cable. The revenue generated from the provision of cable voice, broadband internet and TV services toresidential customers outside our historical concession areas using our cable network acquired in theFibernet acquisition. We charge our Cable voice customers a monthly subscription fee. We generallycharge our Cable TV and internet customers a monthly subscription fee.

Corporate. The revenue generated from the fixed line voice, data and Internet services provided tobusiness, government and other institutional customers nationwide. Corporate revenue comprises accesscharges, monthly fees, time based fixed-to-mobile, local, long distance and international call charges,interconnect charges on calls terminated in the Group’s network, monthly fees for value added services,Internet access packages and regular data transmission services. Corporate revenue includes the samecomponents as Residential Voice In and Residential Internet revenues and includes, in addition, revenuefrom leased line, Internet and data transmission services which is comprised of fixed monthly rental feesbased on the capacity/bandwidth of the service and the distance between the endpoints of the customers.

Wholesale. The revenue generated from voice and data services provided on a wholesale basis to a selectednumber of resellers to use the Group’s excess network capacity. Wholesale revenue comprises rentalpayments for high bandwidth leased line services, which are based on the bandwidth of the service andthe distance between the endpoints of the customers, and voice transit charges from other Hungarian andinternational telecommunications service providers, which are based on the number of minutes transited.

2.19. Pension Costs and Employee Benefits

Contributions are made to the Hungarian pension, health and unemployment schemes at the statutoryrates in force during the year, based on gross salary payments to employees. The cost of social securitypayments is charged to the income statement in the same period when the related salary costs incurred.The Group has no obligation for defined benefit pension or other post employment benefits beyond thegovernment programs.

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as therelated service is provided. A provision is recognized for the amount expected to be paid under short-term cash bonuses or profit-sharing plans if the Group has a present legal or constructive obligation topay this amount as a result of past service provided by the employee and the obligation can be estimatedreliably.

2.20. Share Capital

Incremental costs directly attributable to issue of ordinary shares and share options are recognized as adeduction from equity.

When share capital recognized as equity is repurchased, the amount of the consideration paid, includingdirectly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified astreasury shares and are presented as a deduction from total equity until cancelled.



Page 36 of 89

2.21. Financial Income and Expenses

Financial income includes dividend income, foreign exchange gains, interest income on funds investedand gains resulting from the changes in the fair values of derivative financial instruments. Interest incomeis recognized in the consolidated income statement as it accrues, taking into account the effective yield onthe asset. Dividend income is recognized in the income statement on the date that the Group’s right toreceive payment is established, which in the case of quoted securities is the ex-dividend date.

Financial expenses comprise of interest expense on borrowings, foreign exchange losses, losses resultingfrom the changes in the fair values of derivative financial instruments and impairment losses on financialinvestments.

All borrowing costs directly attributable to the acquisition, construction or production of assets thatnecessarily take a substantial period of time to get ready for their intended use or sale, are added to thecost of those assets, until such time as the assets are substantially ready for their intended use or sale. Allother borrowing costs are recognized in profit or loss in the period in which they are incurred.

2.22. Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor areclassified as operating leases. Payments made in respect of operating leases are charged to the profit orloss on a straight-line basis over the lease term and included in operating expenses.

The Group leases certain property, plant and equipment. Leases of property, plant and equipment, wherethe Group has substantially all the risks and rewards of ownership, are classified as finance leases. Financeleases are capitalized at the lease’s commencement at the lower of the fair value of the leased propertyand the present value of future minimum lease payments. Lease payments made under finance leases areapportioned between the finance expense and the reduction of the outstanding lease liability. The financeexpense is allocated to each period during the lease term so as to produce a constant periodic rate ofinterest on the remaining balance of the liability.

2.23. Current and Deferred Income Taxes

The tax expense for the period comprises current and deferred tax. Tax is recognised in the incomestatement, except to the extent that it relates to items recognised in other comprehensive income ordirectly in equity. In this case, the tax is also recognised in other comprehensive income or directly inequity, respectively.

Current tax is the expected tax payable on taxable income for the year, using tax rates enacted orsubstantially enacted at the balance sheet date in the countries where the Group’s enterprises operate andgenerate income and any adjustment to tax payable in respect of previous years. Management periodicallyevaluates positions taken in tax returns with respect to situations in which the applicable tax regulationsare subject to interpretations. It establishes provisions where amounts are expected to be paid to the taxauthorities. These provisions are classified as other payables in the consolidated balance sheet.



Page 37 of 89

Deferred tax is provided for using the liability method, providing for temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes and the amounts used fortaxation purposes. The amount of deferred tax provided is based on the expected manner of realizationor settlement of the carrying amount of assets and liabilities, using the appropriate tax rate enacted orsubstantively enacted at the balance sheet date and are expected to apply when the related deferredincome tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offsetcurrent tax assets against current tax liabilities and when the deferred income tax assets and liabilitiesrelate to income taxes levied by the same taxation authority on either the taxable entity or differenttaxable entities where there is an intention or permissiability by a tax authority to settle balances on a netbasis. Deferred tax assets are recognized only to the extent that it is probable that future taxable profitswill be available against which the asset can be utilized. Deferred tax assets are reviewed at each reportingdate and reduced to the extent that it is no longer probable that the related tax benefit will be realized.

2.24. Segment Reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chiefoperating decision maker. The chief operating decision maker, who is responsible for allocating resourcesand assessing performance of the operating segments, has been identified as the Executive ManagementTeam. The Group has five operating segments that are identified in the accounting policy relating torevenue in accounting policy note 2.18 – “Revenue recognition”. Allocation of revenues and cost of sales andother segment information into operating segments is based on management information collected in theinformation systems.

2.25. Critical Accounting Estimates and Judgements

The management of the Group makes estimates and assumptions concerning the future. The estimatesand assumptions that have a significant risk of affecting the carrying amounts of assets and liabilities inthe consolidated financial statements are described below.

For the year ended December 31, 2013 revenue and cost of sales includes a transaction recognized ongross basis in the amount of EUR 2,902 thousand and EUR 2,891 thousand respectively. Managementbelieves recognition on gross basis is appropriate because the Group negotiated the relating purchasecontract and consequently had a significant effect on the determination of the margin relating to thistransaction. Furthermore the Group has the capability and intention to provide additional services to thiscustomer. Based on the above analysis the Group has decided to account for this transaction on a grossbasis.

The Group recognizes deferred tax assets in its consolidated balance sheet relating to tax loss carryforwards if certain conditions are met. The recognition of such deferred tax assets is subject to theutilization of tax loss carry forwards. The utilization of such tax loss carry forwards is dependent on theamount of future taxable income of the Group companies. The accounting estimate related to thedeferred tax assets is a critical accounting estimate since it involves assumptions and judgments aboutfuture taxable income of the Group. In light of the expected amount of taxable profits the Group has notrecognised any deferred tax asset.



Page 38 of 89

The Group maintains an impairment provision for doubtful accounts for estimated losses resulting fromcustomers’ or carriers’ failure to make payments on amounts due. These estimates are based on a numberof factors including: 1) historical experience; 2) aging of trade accounts receivable; 3) amounts disputedand the nature of the dispute; 4) bankruptcy; 5) general economic, industry or business information; and6) specific information that we obtain on the financial condition and current credit worthiness ofcustomers or carriers. The estimates used in evaluating the adequacy of the impairment provision fordoubtful accounts receivable are based on the aging of the accounts receivable balances and historicalwrite-off experience, customer credit-worthiness, payment defaults and changes in customer paymentterms. The accounting estimate related to the impairment provision for doubtful accounts receivable is acritical accounting estimate since it involves assumptions about future customer behavior and theresulting future cash collections (see note 13 – “Trade and Other Receivables”).

Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortizedon a straight-line basis over their estimated useful lives. The determination of the useful lives of assets isbased on historical experience with similar assets as well as any anticipated technology evolution andchanges in broad economic or industry factors. The appropriateness of the estimated useful lives isreviewed annually. The accounting estimate related to the determination of the useful lives of assets is acritical accounting estimate since it involves assumptions about technology evolutions in an innovativeindustry. Further, due to the significant weight of long-lived assets in the asset base, the impact of anychanges in these assumptions could be material to the consolidated financial statements. As an example, ifthe Group was to shorten the average useful life of its assets by 10%, this would result in additionalannual depreciation and amortization expense of approximately EUR 5.5 million and EUR 5.9 million forthe years ended December 31, 2013 and 2012, respectively.

3. Revenue

2013 2012

Residential Voice 30 842 36 457

Residential Internet & TV 31 983 32 068

Cable 17 572 16 947

Corporate 60 437 58 654

Wholesale 22 981 29 367

Total Revenue 163 815 173 493





Page 39 of 89

4. Cost of Sales, Exclusive of Depreciation

2013 2012

Restated

Sales commissions (2 636) (2 991)

Interconnect expenses (7 105) (9 301)

Access type charges (8 606) (9 433)

Other cost of sales (18 810) (10 538)

Network operating expenses (18 616) (20 260)

Direct personnel expenses (9 740) (11 313)

Total Cost of Sales,

Exclusive of Depreciation (65 513) (63 836)



Network operating expenses include the maintenance cost of the telecommunication infrastructure of theGroup and its network related support and rental fees. Such support and rental fees amounted to EUR3,131 thousand and EUR 3,482 thousand for the years ended December 31, 2013 and 2012, respectively.

Other cost of sales increased due to higher sales volumes relating to IPTV, ICT and sale of telecom andIT equipment to Residential Internet & TV and Corporate segment customers.

5. Operating Expenses

2013 2012

Restated

Personnel expenses (19 320) (20 089)

Operating and other taxes (12 713) (3 726)

Headcount-related costs (7 775) (10 016)

Advertising and marketing costs (3 754) (3 536)

IT costs (3 670) (4 482)

Collection costs (1 735) (132)

Bad debt expense (1 268) (1 398)

Legal and audit fees (439) (335)

Consultant expenses (158) (353)

Management fees 413 (1 030)

Expenses relating to strategic projects (1 506) (60)

Crisis tax - (9 379)

Other cost, net (234) (670)

(52 159) (55 206)

Less: Capitalised costs 3 481 5 171

Total Operating Expenses (48 678) (50 035)





Page 40 of 89

The increase in operating and other taxes is due to the introduction of a new telecom tax and utility tax bythe Hungarian Government from July 1, 2012 and January 1, 2013, respectively. The new telecom taximposed on fixed and mobile usage and amounts to HUF 2 per minute and HUF 2 per SMS/MMS andfrom January 1, 2013 is capped at HUF 700 per month for individuals and HUF 2 500 per month forcompanies. From August 1, 2013, the cap was changed to HUF 5 000 per month for companies and taximposed on fixed and mobile usage amounts to HUF 3 per minute and HUF 3 per SMS/MMS. Theannual telecom tax liability recorded for 2013 was EUR 3.7 million. The utility tax is effective fromJanuary 1, 2013 and is payable by energy and water utility companies, fixed line telecom service providersand cable operators and amounts to HUF 125 per meter of the owned utility networks. Buried pipes andcables as well as lines on utility poles are also subject to the utility tax. The annual utility tax liability for2013 was recorded by the Company as of January 1, 2013 in the amount of EUR 7.1 million.

Collection costs increased due to the fact that the Group is no longer allowed to pass on the cost ofpostal payments (yellow check fees) to its customers effective from September 1, 2012. This had anincreasing impact on cost of collection of EUR 1,606 thousand for the year ended December 31, 2013.

Management fees relate to costs charged by the trustee of Matel as well as management fee paid to MidEuropa. Based on the Restructuring Agreement signed on July 15, 2013 (see Note 1.1 – “Restructuring”) allaccrued Mid Europa management fees, including third and fourth quarter 2012 fees have been reversedand no further accruals are made. The reversed amount for the year ended December 31, 2013 was EUR1.0 million, from which EUR 0.5 million related to the financial year of 2012.

Expenses relating to strategic projects mainly include legal and financial consulting expenses related tomajor projects of the Group as well as the cost of the management retention programme (see note 15 –”Management Compensation”).

The crisis tax was introduced by the Hungarian Government as of October 20, 2010 with retrospectiveeffect to January 1, 2010 until December 2012. The tax was calculated as a percentage oftelecommunication services revenue based on the following rates: 0% up to HUF 500 million,4.5% between HUF 500 million and HUF 5 billion and 6.5% for excess over HUF 5 billion.

Capitalized costs include labor expenses associated with the construction of property, plant andequipment of the Group.

6. Personnel Expenses

2013 2012

Salaries (10 418) (11 200)

Social security and other contributions (2 977) (3 378)

Personnel related expenses (3 309) (2 644)

Bonuses and charges (2 616) (2 867)

Total Personnel Expenses (19 320) (20 089)



The number of employees of the Group was 1,173 and 1,196 as of December 31, 2013 and 2012,respectively.



Page 41 of 89

7. Depreciation and Amortization

2013 2012

Restated

Amortization (8 663) (10 358)

Depreciation (39 592) (41 953)

Impairment loss (353) (31 620)

Total Depreciation and Amortization (48 608) (83 931)



Non-financial assets that are subject to amortisation are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable. An impairment loss isrecognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of an asset’s value in use and fair value less cost to sell, which considersa number of factors, including, future cash flows, technological obsolescence, discontinuation of servicesand other market evidence. For the purposes of assessing impairment, assets are grouped at the lowestlevels for which there are largely independent cash-generating units. The Group has performedimpairment reviews of its non-financial assets in accordance with its accounting policy for the years endedDecember 31, 2013 and 2012. Upon such review, no impairment charge arose for the year endedDecember 31, 2013. The recoverable amount of all cash generating units has been determined based onfair value less cost to sell calculation. For determining fair value less cost to sell, the Group used theEBITDA multiples method. Based on publicly available transaction data, two different multiples wereused in the model that correspond to the acquisitions of European telecommunications companies in theperiod September 1, 2009 to November 30, 2013. One of the multiples takes the average of the EBITDAmultiples with respect to the recent acquisitions of European incumbent telecommunication companies,and another multiple, specifically based on acquisitions of European cable companies. The latter multiplewas applied to the cable segment and the former one was used for the remaining segments in the model.EBITDA was determined based on the Group’s financial performance and amounted to EUR 48,327thousand for the year ended December 31, 2013. If the EBITDA multiple used in the model had been0.5 units lower, the carrying value of the assets would have equalled to the net recoverable amount withrespect to the wholesale segment. Further lowering the EBITDA multiples would have resulted in animpairment charge for the period ended December 31, 2013. Apart from the annual impairment reviewof non-financial assets, the Group accounted for the following impairment charges in connection withindividual assets due to physical damages and deterioration: impairment charge of EUR 353 thousand forthe period ended December 31, 2013 in relation to the property, plant and equipment.

For the year ended December 31, 2012, in connection with the annual impairment review, an impairmentloss of EUR 31,620 thousand was recognized. The impairment loss realized related to the ResidentialVoice, Residential Internet & TV and Corporate Voice segments of the Group. The estimated value inuse calculates with a 10% pre-tax discount rate, 1% growth rate (in perpetuity) and estimated cash flowsuntil 2018. For determining fair value less cost to sell, the Group used the EBITDA multiples method.The multiples used correspond to recent acquisition transactions of similar companies. EBITDA wasbased on the Group’s annual budget for 2013. The recoverable value of the assets is the higher of the fairvalue less costs to sell and the value in use. The fair value less cost to sell method resulted in a write downof property, plant and equipment and intangible assets by EUR 31,620 thousand for the year endedDecember 31, 2012. If the Group used one time lower EBITDA multiple for each segment in itsimpairment calculation, this would have resulted in an additional impairment charge of EUR 23.2 millionfor the year ended December 31, 2012.



Page 42 of 89

8. Cost of Restructuring

2013 2012

Severance (1 300) (3 032)

Cost of reorganization - (119)

Total Cost of Restructuring (1 300) (3 151)



Severance expense for the years ended December 31, 2013 and December 31, 2012 mainly related toheadcount reductions in Invitel.

9. Financial Income and Expense

2013 2012

Interest income 1 078 2 702

Fair value change of derivative financial instruments 607 714

Net foreign exchange gain 408 -

Financial Income 2 093 3 416

Related party interest expense - (1 173)

Third party interest expense (22 560) (33 249)

Amortization of bond discount (553) (771)

Amortization of deferred borrowing costs (2 250) (2 981)

Other interest expense (601) (557)

Interest expense (25 964) (38 731)

Net foreign exchange loss - (1 796)

Fair value change of derivative financial instruments (32) (1 805)

Other financial expense (84) (4 859)

Financial Expense (26 080) (47 191)



Interest income in 2013 and 2012 relates to cash and cash equivalents.

The unrealized gain on the fair value change of derivative financial instruments amounted to EUR 575thousand for the year ended December 31, 2013 and the unrealized gain on the fair value change ofderivative financial instruments amounted to EUR 1,091 thousand for the year ended December 31,2012.

All related party loan balances have been waived during 2012, therefore no related party interest expensehas been charged for the year 2013 (see note 28 – “Related Party Transactions”).



Page 43 of 89

As of August 18, 2011 Invitel Holdings A/S, the former holding company of the Group, owed EUR3,294 thousand intercompany loan and EUR 1,219 thousand other debt for recharged services to Invitel.The intercompany loans were interest free with maturity of December 31, 2011. An assignmentagreement dated August 18, 2011 was concluded between Hungarian Telecom Cooperatief UA. (“Coop”)one of the current holding companies of the Group and Invitel, according to which the amount owed byInvitel Holdings A/S was overtaken by Coop towards Invitel with the total amount of EUR 4,513thousand. On June 30, 2012 Invitel and Coop declared the forgiveness of the total debt by not requiringany consideration in return and the related expense was recognized in other financial expense for the yearended December 31, 2012 (see note 28 – ”Related Party Transactions”). This amount was recorded as otherfinancial expense for the year ended December 31, 2012.

10. 1Intangible Assets

Movements during the period in the intangible assets of the Group were as follows:

Software

Property

Rights Goodwill Other

Total

Intangible

Assets

Cost at January 1, 2012 (Prior to Restatement) 52 220 35 930 13 991 36 953 139 094

Restatement in Relation to Prior Year Error (298) - - - (298)

Restatement in Relation to Accounting Policy Change - - - (574) (574)

Cost at January 1, 2012 (Restated) 51 922 35 930 13 991 36 379 138 222

Retirement - - (14 944) - (14 944)

Additions during the year 2 255 1 922 - 4 831 9 008

Reclassification - 215 - - 215

Disposals during the year (294) - - - (294)

Restatement in Relation to Prior Year Error (275) - - - (275)

Restatement in Relation to Accounting Policy Change - - - (1 207) (1 207)

Effect of exchange rates 3 714 1 976 953 2 486 9 129

Cost at December 31, 2012 (Restated) 57 322 40 043 - 42 489 139 854

Accumulated amortization at January 1, 2012 (Prior to Restatement) (47 407) (21 130) (13 991) (24 285) (106 813)

Restatement in Relation to Prior Year Error 30 - - - 30

Restatement in Relation to Accounting Policy Change - - - 158 158

Accumulated amortization at January 1, 2012 (Restated) (47 377) (21 130) (13 991) (24 127) (106 625)

Amortization charge for the year (2 932) (2 651) - (5 661) (11 244)

Retirement - - 14 944 - 14 944

Impairment for the year (79) (1 745) - - (1 824)

Reclassification - (215) - - (215)

Disposals during the year 294 - - - 294

Restatement in Relation to Prior Year Error 135 - - - 135

Restatement in Relation to Accounting Policy Change - - - 751 751

Effect of exchange rates (3 381) (962) (953) (1 497) (6 793)

Accumulated amortization at December 31, 2012 (Restated) (53 340) (26 703) - (30 534) (110 577)

Carrying value at January 1, 2012 (Restated) 4 545 14 800 - 12 252 31 597

Carrying value at December 31, 2012 (Restated) 3 982 13 340 - 11 955 29 277

Cost at January 1, 2013 57 322 40 043 - 42 489 139 854

Additions during the year 1 517 1 818 - 3 010 6 345

Reclassification (197) (789) - (886) (1 872)

Effect of exchange rates (1 104) (766) - (815) (2 685)

Cost at December 31, 2013 57 538 40 306 - 43 798 141 642

Accumulated amortization at January 1, 2013 (53 340) (26 703) - (30 534) (110 577)

Amortization charge for the year (2 480) (2 059) - (4 124) (8 663)

Reclassification 197 789 - 886 1 872

Effect of exchange rates 1 013 504 - 595 2 112

Accumulated amortization at December 31, 2013 (54 610) (27 469) - (33 177) (115 256)

Carrying value at January 1, 2013 3 982 13 340 - 11 955 29 277

Carrying value at December 31, 2013 2 928 12 837 - 10 621 26 386

( in thousands of EUR )



Page 44 of 89

From January 1, 2013 the Group has changed its accounting policy with respect to accounting forCorporate segment sales commissions relating to contracts that are managed on a portfolio basis (seenote 2.3 – “Chages in Accounting Policies”).

For the year ended December 31, 2012 the Group accounted for impairment in relation to intangibleassets in the amount of EUR 1,824 thousand (see note 7 - ”Depreciation and Amortization”).

Other intangible assets include capitalized customer acquisition costs (mainly sales commissions) andcustomer relationship in the amount EUR 2,416 thousand and EUR 8,204 thousand as of December 31,2013. The net book value of capitalized subscriber acquisition costs which are internally generatedamount to EUR 2,416 thousand and EUR 3,107 thousand as of December 31, 2013 and 2012,respectively.

11. Property, Plant and Equipment

Movements in property, plant and equipment of the Group were as follows:

Land and

Buildings

Network and

EquipmentOther

Capital Work

In Progress

Total

Property,

Plant and

Equipment

Cost at January 1, 2012 4 983 650 152 14 593 14 292 684 020

Additions during the year - - - 33 251 33 251

Transfers from capital WIP 485 37 021 1 293 (38 799) -

Disposals during the year (1) (1 453) (710) - (2 164)

Effect of exchange rates 321 45 835 1 109 1 009 48 274

Cost at December 31, 2012 5 788 731 555 16 285 9 753 763 381

Accumulated depreciation at January 1, 2012 (2 074) (412 488) (12 289) - (426 851)

Depreciation charge for the year (467) (39 917) (1 569) - (41 953)

Impairment for the year (363) (29 429) (4) - (29 796)

Disposals during the year - 1 062 705 - 1 767

Effect of exchange rates (127) (29 567) (951) - (30 645)

Accumulated depreciation at December 31, 2012 (3 031) (510 339) (14 108) - (527 478)

Carrying value at January 1, 2012 2 909 237 664 2 304 14 292 257 169

Carrying value at December 31, 2012 2 757 221 216 2 177 9 753 235 903

Cost at January 1, 2013 5 788 731 555 16 285 9 753 763 381

Additions during the year - - - 23 993 23 993

Reclassification - (6) 91 - 85

Transfers from capital WIP 47 23 447 1 171 (24 665) -

Disposals during the year (957) (639) (35) - (1 631)

Retirement 201 - - - 201

Effect of exchange rates (106) (14 256) (442) (185) (14 989)

Cost at December 31, 2013 4 973 740 101 17 070 8 896 771 040

Accumulated depreciation at January 1, 2013 (3 031) (510 339) (14 108) - (527 478)

Depreciation charge for the year (421) (37 862) (1 309) - (39 592)

Impairment for the year (224) (87) (42) - (353)

Reclassification - 6 (91) - (85)

Disposals during the year 956 457 34 - 1 447

Retirement (201) - - - (201)

Effect of exchange rates 57 10 044 406 - 10 507

Accumulated depreciation at December 31, 2013 (2 864) (537 781) (15 110) - (555 755)

Carrying value at January 1, 2013 2 757 221 216 2 177 9 753 235 903

Carrying value at December 31, 2013 2 109 202 320 1 960 8 896 215 285

( in thousands of EUR )



Page 45 of 89

Network and equipment includes all tangible assets associated with the telecommunications network andrelated equipment of the Group. Network and equipment also includes the cost of assets where theGroup is the lessee under finance leases in the amount of EUR 2,849 thousand and EUR 2,904 thousandand accumulated depreciation of EUR 400 thousand and EUR 323 thousand as of December 31, 2013and 2012, respectively.

Other assets include other non-telecom equipment, fixtures and fittings, vehicles and computers.

Capital work in progress includes property, plant and equipment in the course of construction. Aftercompletion, such assets are put into operation (capitalized) and are transferred to the appropriate fixedasset categories. No depreciation is charged on capital work in progress.

The impairment of EUR 29,796 thousand for the year ended December 31, 2012 relates to the writedown of assets as a result of the annual review of impairment (see note 7 – “Depreciation andAmortization”).

12. Cash and Cash Equivalents

2013 2012

Cash on hand and in banks 21 702 13 928

Cash deposits - -

Total Cash and Cash Equivalents 21 702 13 928

At December 31

(in thousand of EUR)

Out of the total of cash and cash equivalents of EUR 21,702 thousand as of December 31, 2013, theEUR denominated part is EUR 9,356 thousand or 43%, the USD denominated part is EUR 8 thousandor 1%, the HUF denominated part is EUR 12,072 thousand or 55% and the GBP denominated part isEUR 266 thousand or 1%.

Out of the total of cash and cash equivalents of EUR 13,928 thousand as of December 31, 2012, theEUR denominated part is EUR 5,464 thousand or 39%, the USD denominated part is EUR 1 thousandor 1% and the HUF denominated part is EUR 8,463 thousand or 60%.

The 2013 Notes Indenture (see note 17 – ”Borrowings”) limits time deposits to be placed to banks havingat a rating of ”A” or better by Standard & Poor’s and ”A2” or better by Moody’s. Following the bankdowngrades in June 2012 none of the Group’s existing banks fulfilled the above requirement thereforethe Group could no more invest its free cash into time deposits. As no such limitation applies for thecash kept on current accounts, the Group continued to keep free cash on the current accounts of itsexisting banks.



Page 46 of 89

The Group keeps its free cash at the following banks rated by Moody’s as follows:

2013 2012

K&H Bank - subsidiary of KBC Bank N.V. A3 A3

MKB Bank - subsidiary of Bayerische Landesbank Baa1 Baa1

Unicredit Bank - subsidiary of Unicredit Bank Austrisa AG Baa1 A3

Raiffeisen Bank - subsidiary of Raiffeisen Bank International AG A2 A2

BNP Paribas A2 A2

ING Bank – Branch of ING Bank N.V. A2 A2

CIB Bank - Intesa Sanpaolo Spa Baa2 Baa2

OTP Bank Ba2 Ba2

At December 31

In 2013, out of its cash and cash equivalents, the Group held EUR 5,391 thousand in banks rated A2;EUR 5,065 thousand in banks rated A3; EUR 11,188 thousand in banks rated Baa1; EUR 33 thousand inbanks rated Ba2 and EUR 25 thousand in non-rated banks or in other form (e.g. petty cash). The Grouphas no cash and cash equivalents in banks rated Baa2 as at December 31, 2013.

In 2012, out of its cash and cash equivalents, the Group held EUR 547 thousand in banks rated A2; EUR10,564 thousand in banks rated A3; EUR 2,512 thousand in banks rated Baa1; EUR 41 thousand in banksrated Baa2; EUR 56 thousand in banks rated Ba2 and EUR 208 thousand in non-rated banks or in otherform (e.g. petty cash).

13. Trade and Other Receivables

2013 2012

Trade accounts receivable 25 087 32 925

Provision for impairment of trade receivables (5 447) (6 667)

Other receivables 6 296 5 776

Total Trade and Other Receivables 25 936 32 034

At December 31


Other receivables as of December 31, 2013 mainly include advances given relating to deposits in theamount of EUR 901 thousand, prepaid rental fees in the amount of EUR 1,478 thousand as well ascorporate income tax and VAT receivables in the amount of EUR 1,130 thousand.

Other receivables as of December 31, 2012 mainly include advances given relating to deposits in theamount of EUR 1,804 thousand, prepaid rental fees in the amount of EUR 2,174 thousand as well ascorporate income tax and VAT receivables in the amount of EUR 1,646 thousand.



Page 47 of 89

The carrying amounts of trade and other receivables are denominated in the following currencies:

2013 2012

Currency

in HUF 22 832 30 108

in EUR 3 104 1 926

Total Trade and Other Receivables 25 936 32 034

At December 31


The aging analysis of trade receivables of the Group are as follows:

2013 2012

Not past due 12 226 14 953

past due by less than 30 days 5 882 7 873

past due by 30-90 days 1 713 3 110

past due by 91-180 days 803 1 576

past due by 181-360 days 1 017 1 393

past due by over 360 days 3 446 4 020

Total Trade Accounts Receivable 25 087 32 925

At December 31


The vast majority of past due trade receivables are partly or fully provided for depending on the period ofdelay of payments. Only insignificant amounts of past due trade receivables are not provided for based onpast experience of payment behavior of certain business customers. As these amounts are not significant,these are not disclosed separately.

Non past due receivables are not assessed collectively for impairment, but in case of bankruptcy of thecustomer non past due receivables may have to be partly or fully provided for, the amount of which isnot significant, therefore, not disclosed separately. The non past due trade receivables representapproximately one month of revenue. The Group has no collateral related to its trade receivables.

The Group’s not past due receivables are rated as follows:

2013 2012

Aa3 81 65

A2 266 4

A3 417 1 599

Baa1 1 175 549

Baa2 57 62

Ba3 138 237

Residential - non-rated 1 553 1 749

Corporate & Wholsale - non-rated 7 832 9 945

Other operating receivable 707 743

Total Not Past Due 12 226 14 953


At December 31



Page 48 of 89

Movements in the provision for impairment of trade receivables of the Group are as follows:

2013 2012

Opening at January 1 (6 667) (10 672)

Provision for receivables impairment (1 555) (2 149)

Receivables written off during the year as uncollectible 2 575 6 912

Amounts reversed 73 -

Effect of exchange rates 127 (758)

Closing at December 31 (5 447) (6 667)


The creation and release of provision for impaired receivables are included in bad debt expense withinoperating expenses in the consolidated income statement. Amounts of impairment provision are generallywritten off when there is no expectation of recovering additional cash.

14. Other Current Assets

2013 2012

Inventories 561 1 785

Prepayments and accrued income 561 671

Total Other Current Assets 1 122 2 456


At December 31

15. Management Compensation

A Management Incentive Plan (“MIP”) was introduced to the Executive Management Team of Invitel inQ2 of 2012 but was subsequently cancelled in Q3 of 2012 due to the Restructuring. The MIP wasreplaced by a management retention programme in 2013 (the “Retention Programme”), which forms partof the management’s employment/service contracts. Under the Retention Programme, each member ofthe Executive Management Team is entitled to a bonus payment of up to 150% of their annual salary (the“Bonus Amount”).



Page 49 of 89

The terms of the Bonus Amount vary according to the provisions of each member’s employmentcontract. For certain members, 40% of the Bonus Amount has been designated as a guaranteed payment(the “Guaranteed Amount”), which will be paid from an escrow account to the respective member onJanuary 15, 2014, provided that their employment was not terminated for cause (e.g. because of continuedunderperformance) before December 31, 2013. The remaining 60% of the Bonus Amount has beendesignated as a quarterly performance component (“QPC”), whereby payment is contingent uponsatisfactory completion of certain performance targets, which the CEO of Invitel (in case of the CEO theowner) sets and evaluates each quarter. If the Executive Management Team member successfully attainsthe set targets at the end of each quarter following evaluation, they will receive the QPC payment. 50% ofthe QPC is paid directly to the Executive Management Team member, while the remaining 50% is paidinto an escrow account and will be paid with, and based on the same terms and conditions as, theGuaranteed Amount. For the other Executive Management Team members, there is no GuaranteedAmount and, instead, 100% of the Bonus Amount has been designated as a QPC. As above, if theExecutive Management Team member successfully achieves the required targets, as set and evaluatedeach quarter by the CEO, they will receive the QPC payment.

As of December 31, 2013 there is no Bonus Amount, MIP or Retention Programme planned beyondJanuary 1, 2014. The amount recorded as operating expense in relation to management compensationRetention Programme for the year ended December 31, 2013 was EUR 1,476 thousand.

16. Equity

As of December 31, 2012 the authorized share capital of Matel was EUR 408,600,000 divided into90,000,000 shares with a par value of EUR 4.54 each. As of December 31, 2012 the issued share capital ofMatel was EUR 92,201 thousand being 20,308,640 issued shares.

During the 2013 December Refinancing, 20,308,640 shares have been split and converted into9,220,122,560 ”A” shares with a nominal value of EUR 0.01 each, leaving the total issued share capital ofMatel unchanged with respect to ”A” shares. Immediately after the 2013 December Refinancing20,494,639,650 ”B” shares were issued with a nominal value of EUR 0.01 each, amounting to a totalissued capital of ”B” shares of EUR 204,947 thousand. As of December 31, 2013 all ”A” shares areowned by Mid Europa, representing 51% of the share capital of Matel and all ”B” shares are owned byMatel Holdings Limited, a newly formed entity owned by the noteholders, representing 49% of the totalshare capital of Matel. The issued capital is fully paid in.

The balance of capital reserve includes the amounts of share capital of former legal entities merged intoMatel in the amount of EUR 122.1 million and a capitalized shareholder loan that was provided to theGroup during 2009 in the amount of EUR 133.9 million. Additional shareholder loan was capitalizedduring 2012 in the amount of EUR 3.0 million relating to the waiving of receivables and liabilities withrelated parties in connection with the liquidations of former holding companies of Matel. These includebalances with Matel Holdings N.V. and Holdco I B.V. During 2013 MEP paid in additional capital ofEUR 15 million recorded as capital reserve as part of the Restructuring as described in note 1.1 –“Restructuring”. There are no restrictions for distribution regarding these amounts.

The hedging reserve contained during 2012 and 2013 the effective portion of the mark-to-marketrevaluation of derivative financial instruments used for cash-flow hedging of the interest payments of the2009 Notes. At the end of 2013 there are no open cash-flow hedges for the interest payments of the 2013Notes.



Page 50 of 89

The balance of other reserves as of December 31, 2013 and 2012 includes the equity adjustment relatingto the acquisition of Hungarotel and Pantel by Matel on April 27, 2007 with EUR 16,693 thousand. Thisacquisition was accounted for as a transaction between entities under common control at predecessorvalue and the equity adjustment represents the difference between the value of the investment and the netassets acquired by Matel. As of December 12, 2013 in connection with the 2013 December RefinancingMatel recorded an adjustment of EUR 119,553 thousand to other reserve to reflect the fair value of theequity instrument issued to noteholders (the ”B” shares) in exchange for EUR 173,956 thousand of the2009 Notes.

The balance of cumulative translation reserve comprises all foreign exchange differences arising from thetranslation into EUR of the financial statements of foreign operations whose functional currency is notEUR.

As of December 31, 2013 and 2012 the non-controlling interest related to the 0.01% investments held inInvitel by local municipalities.

17. Borrowings

2013 2012

2009 Notes net of bond discount - 347 688

2009 Notes re-purchased - (21 041)

2009 Notes - 326 647

2013 Notes 151 552 -

Deferred borrowing costs of 2009 Notes - (9 401)

Total Borrowings 151 552 317 246


At December 31

On July 15, 2013 Matel entered into an agreement to implement a Restructuring of its balance sheet withan informal group (the “Noteholder Group”) of holders of the net outstanding EUR 329 million 2009Notes due 2016 (the “2009 Notes”).

Under the terms of the Restructuring, EUR 155.0 million of the 2009 Notes was exchanged into newnotes (the “2013 Notes”). The 2013 Notes were issued by Matel on December 12, 2013, in the principalamount of EUR 150,051,000 at 100% issue price. Mid Europa invested EUR 25.0 million consisting ofEUR 15.0 million as additional cash contribution (see note 16 – „Equity”) and EUR 10.0 million as debt(the “Sponsor Notes”), which ranks pari passu with the 2013 Notes. The EUR 15.0 million new equityinvestment was used to buy back 2013 Notes (and corresponding equity entitlement). The remainingEUR 174.0 million of the 2009 Notes, together with all accrued interest, was converted into 49% of thepro-forma post-Restructuring equity in the Group which is held by Matel Holdings Limited, a newlyformed entity. Matel Holdings Limited’s shares are stapled to the 2013 Notes. Mid Europa retained 51%of the post-restructuring equity in the Group. EUR 21.0 million of the 2009 Notes held by the Group intreasury were cancelled as part of the Restructuring.



Page 51 of 89

A gain on extinguishment of debt of EUR 81,110 thousand was recorded in the consolidated statementof profit and loss and other comprehensive income in connection with the 2013 December Refinancing,comprising of: (i) the gain of EUR 88,563 arising from the difference between the extinguishment of the2009 Notes and the fair value of equity instrument issued to the noteholders, (ii) the write-off of accruedinterest on the 2009 Notes relating to the period until June 15, 2013 in the amount of EUR 15,625thousand, reduced by (iii) the write-off of transaction costs and bond discount relating to the 2009 Notesin the amount of EUR 8,907 thousand and (iv) refinancing costs in the amount of EUR 14,171 thousand.The fair value of the equity instruments issued to the Noteholders was determined using the EBITDAmultiple method (see note 7 – ”Depreciation and Amortization”).

On December 12, 2013, Matel issued senior secured notes in the principal amount of EUR 150,051,000(the “2013 Notes”). The 2013 Notes mature in 2018 and are subject to the indenture dated December 12,2013 (the “2013 Notes Indenture”). The 2013 Notes are listed on the Luxembourg Stock Exchange, andare governed by New York law.

The Notes are fully and unconditionally guaranteed on a senior basis by Invitel, ITC and InvitelInternational Holdings. The guarantees are subject to contractual and legal limitations, and may bereleased under certain circumstances. The 2013 Notes are secured by first-priority security interests overcertain assets of Matel and certain Guarantors. The security interests are subject to limitations underapplicable laws and may be released under certain circumstances.

The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accruesfrom June 15, 2013 and is paid semi-annually in arrears on December 15 and June 15. The PIK toggleallows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary tomaintain a minimum liquidity level of EUR 10 million.

Matel may redeem the 2013 Notes at any time at a redemption price of 100% plus accrued and unpaidinterest, if any to the date of redemption. Subject to retaining a minimum cash balance and certain otherrequirements as set out in the 2013 Notes Indenture, Matel must redeem the 2013 Notes at a redemptionprice of 100% plus accrued and unpaid interest, if any to the date of redemption with the proceeds ofcertain asset sales. If Matel undergoes a change of control, Matel may be required to make an offer topurchase the 2013 Notes.

The 2013 Notes Indenture contains covenants restricting Matel’s ability to, among other things, (i) incuradditional indebtedness or issue preferred shares, (ii) make investments and certain other restrictedpayments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on thepayment of dividends by subsidiaries or the making of loans, (v) enter into transactions with affiliates,(vi) create certain liens, (vii) transfer or sell assets, (viii) merge, consolidate, amalgamate or combine withother entities, (ix) designate subsidiaries as unrestricted subsidiaries, (x) de-list the notes, (xi) impair anysecurity interests and (xii) engage in any business other than specifically enumerated activities. The 2013Notes Indenture also contains customary events of default, including non-payment of principal, interest,or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidityof any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, andinvalidity or unenforceability of any security document or security interest.

Capitalized interest on the 2013 Notes as of December 31, 2013 amounted to EUR 1,501 thousand.



Page 52 of 89

The Notes are secured by first-priority liens over the assets described below:

No. Document Security Provider Secured Assets Governing law

1 Stand Alone Pledge of Bank Accounts Technocom Hungarian accounts Hungarian

2 Stand Alone Floating Charge Technocom All assets of business Hungarian

3 Stand Alone Security Deposit Technocom Shares in Invitel Hungarian

4 Pledge Agreement Technocom Intra-group loans Hungarian

5 Stand Alone Pledge of Bank Accounts Matel Hungarian accounts Hungarian

6 Stand Alone Security Deposit Matel Shares in Invitel Hungarian

7 Stand Alone Quota Pledge Matel & MID-New Technocom Quotas in Technocom Hungarian

8 Stand Alone Pledge of Bank Accounts Invitel Hungarian accounts Hungarian

9 Stand Alone Floating Charge Invitel All assets of business Hungarian

10 Pledge Agreement Invitel Intra-group loans Hungarian

11 First Ranking Pledge of Intra-Group Rights and Claims Matel Intra-group loans Dutch

12 First Ranking Pledge over Shares Hungarian Telecom B.V. Shares in Matel Dutch

13 First Ranking Pledge over Shares Matel Holdings Limited Shares in Matel Dutch

14 First Ranking Pledge over Shares Invitel Shares in International Holdings B.V. Dutch

15 Bank Account Charge Matel UK accounts English

Hungarian Security

Dutch Security

English Security

On December 9, 2009 Matel issued senior secured notes in the principal amount of EUR 345,000,000(the “2009 Notes”). The 2009 Notes matured in 2016 and were subject to the indenture dated December16, 2009 (the “2009 Notes Indenture”). The 2009 Notes were listed on the Luxembourg Stock Exchange,and were governed by New York law. The proceeds from the issuance of the 2009 Notes were used torefinance certain indebtedness including redeeming the remaining of the 2004 Notes and to make aconsent payment to the holders of the 2007 Notes who consented to certain proposed waivers andamendments to the 2007 Notes Indenture.

Interest on the 2009 Notes was payable semi-annually at an annual rate of 9.50% on June 15 andDecember 15 of each year, beginning on June 15, 2010. The 2009 Notes were guaranteed, by some ofMatel’s subsidiaries, which guarantee ranked senior in right of payment to any existing and futureguarantee of Matel and the subsidiary guarantors that was subordinated in right of payment to the 2009Notes (including the 2007 Notes). The obligations of Matel and the subsidiary guarantors were secured byfirst priority liens over, inter alia, all shares or quotas (as applicable), bank accounts and assets of certainof our subsidiaries.

Prior to December 15, 2012, Matel had the option to redeem all or part of the 2009 Notes by paying amake-whole amount specified in the 2009 Notes Indenture and following such date at the redemptionprices set forth in the 2009 Notes Indenture. In the event of a change of control at any time, Matel wasrequired to offer to repurchase the 2009 Notes at a purchase price equal to 101% of the aggregateprincipal amount thereof, plus accrued and unpaid interest to the date of the purchase. Matel was alsorequired to offer to purchase the 2009 Notes with the excess proceeds following certain asset sales at apurchase price equal to 100% of the principal amount thereof.



Page 53 of 89

The 2009 Notes Indenture contained covenants restricting Matel’s ability to, among other things, (i) incuradditional indebtedness or issue preferred shares, (ii) make investments and certain other restrictedpayments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on thepayment of dividends by subsidiaries or the making of loans, (v) enter into transactions with affiliates,(vi) create certain liens, (vii) transfer or sell assets, (viii) enter into sale and leaseback transactions,(ix) merge, consolidate, amalgamate or combine with other entities, (x) designate subsidiaries asunrestricted subsidiaries, (xi) de-list the notes, (xii) impair any security interests and (xiii) engage in anybusiness other than specifically enumerated activities. The 2009 Notes Indenture also containedcustomary events of default, including non-payment of principal, interest, premium or other amounts,violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee,material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity orunenforceability of any security document or security interest.

On March 30, 2011 Matel issued EUR 80 million Senior Secured Notes (the “Additional 2009 Notes”),which had the same obligations as the 2009 Notes. In June, September and December 2011, Matelrepurchased 2009 Notes in the aggregate principal amount of EUR 21.0 million at a total purchase priceof EUR 17.6 million.

On December 12, 2013 Matel completed the Restructuring (see note 1.1 – “Restructuring”). Under theRestructuring, EUR 155.0 million of the 2009 Notes was exchanged for the 2013 Notes and theremaining EUR 174.0 million of the 2009 Notes, together with all accrued interest, were converted into49% of the pro-forma post-restructuring equity in the Group which is held by Matel Holdings Limited, anewly formed entity.

As of December 2012, Matel has been in compliance with all of the covenants defined in the 2009 NotesIndenture. As of December 2013 Matel has been in compliance with all of the covenants defined in the2013 Notes Indenture.

In order to reflect the new obligations under the 2013 Notes and establish the relative rights of certaincreditors under Matel’s financing arrangements (including priority of claims and subordination) a newIntercreditor Deed was concluded (the “Intercreditor Agreement”). The Intercreditor Agreement wasconcluded with, among others, the security trustee, the trustee for the 2013 Notes and certain others. TheIntercreditor Agreement provides that if there is an inconsistency between the provisions of theIntercreditor Agreement (regarding subordination, turnover, ranking and amendments only), and certainother documents, including the 2013 Notes Indenture governing the 2013 Notes, the IntercreditorAgreement will prevail.

The Group’s borrowings are repayable as of December 31, 2013 and 2012 as follows:

2013 2012

1 Year or Less - -

1-4 Years - 326 647

4-5 Years 151 552 -

Total Borrowings 151 552 326 647

Deferred borrowing costs of 2009 Notes - (9 401)

Total 151 552 317 246


At December 31



Page 54 of 89

18. Financial Instruments and Financial Risk Management

Financial instruments carried on the consolidated balance sheet include cash and cash equivalents, tradeand other receivables, other non-current financial assets and borrowings. The Group also has derivativefinancial instruments that reduce the exposure to fluctuations in foreign currency exchange and interestrates and manage credit risk.

The Group’s financial instruments by category are as follows as of December 31, 2013:

December 31, 2013

Assets as per consolidated balance sheet

Trade and other receivables - 25 936 - 25 936

Other non-current financial assets - 90 - 90

Cash and cash equivalents - 21 702 - 21 702

Total - 47 728 - 47 728

Liabilities as per consolidated balance sheet

2013 Notes - 151 552 151 552

Trade and Other Payables - 23 506 23 506

Derivative financial instruments 68 - 68

Total 68 175 058 175 126

Assets at fair value

through the profit

and loss

Loans and

receivablesAvailable-for-sale Total


Liabilities at fair

value through the

profit and loss

Total


Other financial

liabilities

The Group’s financial instruments by category are as follows as of December 31, 2012:

December 31, 2012

Assets as per consolidated balance sheet

Trade and other receivables - 32 034 - 32 034

Other non-current financial assets - 91 - 91

Derivative financial instruments 304 - - 304

Cash and cash equivalents - 13 928 - 13 928

Total 304 46 053 - 46 357

Liabilities as per consolidated balance sheet

2009 Notes - 326 647 326 647

Trade and Other Payables - 25 786 25 786

Derivative financial instruments 172 - 172

Total 172 352 433 352 605

Total



Liabilities at fair

value through the

profit and loss

Other financial

liabilitiesTotal

Assets at fair value

through the profit

and loss

Loans and

receivablesAvailable-for-sale



Page 55 of 89

The Group’s activities expose it to a variety of financial risks: customer credit risk, liquidity risk, interestrate risk and foreign currency risk. The Group’s risk management programs focuses on theunpredictability of the financial markets and seeks to minimize potential adverse effects of the Group’sfinancial performance. Risk management is carried out by the Executive Management Team under thepolicies approved by the Board of Directors.

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis.Credit evaluations are performed on all customers requiring credit over a certain amount. The Groupgenerally does not require collateral in respect of financial assets. The Group is not exposed to anysignificant concentration of credit risk as its customer base is widely spread.

Investments are allowed in EUR or HUF denominated securities, which are freely negotiable, marketableand (1) are rated at least “AA” by Standard & Poor’s Corporation or “Aa2” by Moody’s or (2) are issuedby the Republic of Hungary. Transactions involving derivative financial instruments are with counter-parties with whom the Group has a signed netting agreement as well as high credit ratings. Given theirhigh credit ratings, management does not expect any counter-party to fail to meet its obligations withrespect to its derivative financial instruments.

The Group has made provisions of EUR 5,447 thousand and EUR 6,667 thousand for overduereceivables as of December 31, 2013 and 2012, respectively. Besides the risk on receivables the maximumexposure to credit risk is represented by the carrying amount of each financial asset, including derivativefinancial instruments, in the consolidated balance sheet. Due to the nature of the services provided by theGroup there are no significant concentrations of credit risk. Management does not expect any losses fromnon-performance of the financial institutions.

The Group’s investments in fixed-rate debt securities and its fixed-rate borrowings are exposed to a riskof change in their fair value due to changes in interest rates. The Group’s investments in variable-ratedebt securities and its variable-rate borrowings are exposed to a risk of change in cash flows due tochanges in interest rates.

As of December 31, 2013, all borrowings of the Group bear fixed rate interest, thus the Group has nomore interest rate risk.

The majority of the Group’s recurring revenue is denominated in Hungarian forint, but its debt is 100%euro denominated. To limit the impact of fluctuations between the HUF and the EUR, the Group fromtime to time enters into foreign exchange forward agreements, to receive EUR and pay HUF, therebycreating the equivalent of HUF debt obligations (see note 2.8 – “Derivative Financial Instruments”).



Page 56 of 89

In accordance with the Treasury Policy of the Group as approved by the Board of Directors, prudentliquidity management is maintained by means of holding sufficient amounts of cash that are available formaking all operational and debt service related payments when those become due. Investments are onlykept in highly liquid assets, which are readily convertible into cash.

The table below provides the information on the Group’s financial liabilities classified into relevantmaturity groupings based on the remaining period to the contractual maturity date as of December 31,2013 and 2012. The amounts disclosed in the table are contractual undiscounted cash flows.

December 31, 2013 Total 1 year or Less 2-3 years 4-5 years After 5 years

Borrowings and interest payments 215 444 10 662 21 971 182 811 -

Finance lease liabilities 3 573 219 557 693 2 104

Derivative financial instruments 68 38 30 - -

Trade and other payables 23 506 23 506 - - -

December 31, 2012 Total 1 year or Less 2-3 years 4-5 years After 5 years

Borrowings and interest payments 482 996 33 250 66 499 383 247 -

Finance lease liabilities 3 854 207 515 631 2 501

Derivative financial instruments 172 171 - 1 -

Trade and other payables 25 786 25 786 - - -



The carrying amounts of financial assets including cash and cash equivalents, trade and other receivablesand trade and other payables reflect reasonable estimates of fair value due to the relatively short period tomaturity of the instruments.

The Group estimates the fair values of derivative financial instruments by using a model which discountsfuture contractual cash-flows determined based on market conditions (foreign exchange rates, yieldcurves in the functional currency and in the foreign currency) prevailing on the date of the valuation. Themodel is regularly tested against third party prices for reasonableness. The fair value represents theestimated amounts that the Group would pay or receive to terminate the contracts as of December 31,2013 and 2012. The amounts ultimately realized upon settlement of these financial instruments, togetherwith the gains and losses on the underlying exposures, will depend on actual market conditions during theremaining life of the instruments.

The fair market value of the 2013 Notes approximately equals the carrying value as of December 31,2013. Because the 2013 Notes have been issued in the Luxembourg Stock Exchange on December 12,2013 the impact of discounting is not significant.

The fair value of financial instruments that are not traded in an active market is determined by usingvaluation techniques. These valuation techniques maximize the use of observable market data where it isavailable and rely as little as possible on entity specific estimates. If all significant inputs required to fairvalue an instrument are observable, the instrument is included in level 2.



Page 57 of 89

Fair value of current and non-current derivative financial instruments is presented in the consolidatedbalance sheet as of December 31, 2013 and 2012 are as follows:

2013 2012

Fair value of fx forward contracts - current - 304

Current Derivative Financial Instruments - Assets - 304

At December 31


The tables below provide a reconciliation of the fair value of the derivative contracts outstanding as ofDecember 31, 2012. The fair value of derivatives were recognized in the consolidated balance sheet asderivative financial instruments among current assets, non-current assets, current liabilities or non-currentliabilities depending on the maturity of the contracts.

Asset Liability Net

Fair value of foreign currency forward contracts - current 304 - 304

304 - 304


At December 31, 2012

The following table shows the sensitivity of debt instruments and derivatives of the Group and therelated transactions to foreign currency exchange rate and interest rate changes as of December 31, 2013and 2012:

2013 Notional amount

1% p.a. increase in

EURIBOR

20% increase in

HUF/EUR fx rate

Debt

2013 Notes 151 552 - (2 132)

Total 151 552 - (2 132)


1% p.a. increase in

EURIBOR

20% increase in

HUF/EUR fx rate

Debt

2009 Notes 349 997 - (6 650)

Total 349 997 - (6 650)


1% p.a. increase in

EURIBOR

20% increase in

HUF/EUR fx rate

Derivatives

Forward deals 16 000 (71) 2 611

Total 16 000 (71) 2 611

Net profit impact on debt services



Net profit impact on debt services


Net profit impact on related derivatives



Page 58 of 89

The above table shows the impact of a 1% increase in interest rates (e.g. BUBOR and EURIBOR) and a20% increase in the EUR/HUF exchange rate on the interest payable on the notes and the fair value ofderivative financial instruments as of December 31, 2013 and 2012.

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a goingconcern (see note 1.1 – “Restructuring”).

19. Other Non-Current Liabilities

2013 2012

Deferred income 7 325 8 855

Financial lease liabilities (Note 24) 3 354 3 647

Other non-current liabilities 447 599

Total Other Non-Current Liabilities 11 126 13 101


At December 31

Deferred income includes the long-term part of deferred income related to IRU contracts.

Out of the total of deferred income of EUR 7,325 thousand as of December 31, 2013, the EURdenominated part is EUR 319 thousand or 4% and the HUF denominated part is EUR 7,006 thousand or96%.

Out of the total of deferred income of EUR 8,855 thousand as of December 31, 2012, the EURdenominated part is EUR 325 thousand or 4% and the HUF denominated part is EUR 8,530 thousand or96%.

20. Provisions for Other Liabilities and Charges

2013 2012

Provision for restructuring 52 921

Other provisions 813 812

Total Provisions for Other Liabilities and Charges 865 1 733


At December 31

Other provisions as of December 31, 2013 mostly relate to provisions made in connection with tax auditscarried out at subsidiaries of the Group. Other provisions as of December 31, 2012 relates to provisionsfor legal cases of the Group. The amount of provisions made approximates the expected outflows ofeconomic benefits.



Page 59 of 89

Movements in the balance of provisions were as follows:

2013 2012

At January 1 1 733 1 036

Additions to provisions 765 1 699

Used during the year (1 600) (1 072)

Exchange differences (33) 70

At December 31 865 1 733


21. Trade and Other Payables

2013 2012

Trade payables 16 763 18 344

Other payables 6 743 7 442

Total Trade and Other Payables 23 506 25 786

At December 31


Other payables as of December 31, 2013 mainly include VAT and other taxes payables in the amount ofEUR 5,167 thousand and a liability due to the minority shareholders of the International Business sold in2010 in the amount of EUR 844 thousand.

Other payables as of December 31, 2012 mainly include VAT and other taxes payables in the amount ofEUR 6,004 thousand and a liability due to the minority shareholders of the International Business sold in2010 in the amount of EUR 661 thousand.

22. Accrued Expenses and Deferred Income

2013 2012

Accrued expenses 16 834 16 770

Accrued interest 568 1 385

Deferred income 2 282 2 898

Total Accrued Expenses and Deferred Income 19 684 21 053

At December 31


Accrued expenses are mainly related to access type charges and accruals for operating expenses.



Page 60 of 89

23. Operating Leases

The Group leases various telecommunication network equipment and rights and other equipment undernon-cancellable operating lease agreements.

Non-cancellable future operating lease rental payments are as follows:

2013 2012

1 year or less 5 301 5 454

2-3 years 10 031 10 462

4-5 years 6 232 7 479

After 5 years 6 596 11 059

Total Non-Cancellable Future Lease Payments 28 160 34 454

At December 31


24. Finance Leases

As of December 31, 2013 and 2012 the present value of the minimum finance lease payments of theGroup are as follows:

2013 2012

1 year or less 219 207

2-3 years 557 515

4-5 years 693 631

After 5 years 2 104 2 501

Total Non-cancellable Finance Leases Payable 3 573 3 854

Less Current Portion (219) (207)

Non-Current Portion of Non-cancellable

Finance Leases Payable 3 354 3 647

At December 31




Page 61 of 89

25. Commitments

During the year ended December 31, 2013 and 2012 the Group entered into several purchase contractsand commitments for future capital expenditures (including the purchase of new equipment or upgradingexisting equipment). Current projects to which such capital commitments relate to investments ininformation systems and customer service related infrastructure, number portability compliance, data andvoice transmission equipment, and access network construction. Capital commitments are expected to berealized during the course of the following year. The value of such capital commitments was EUR 1,987thousand as of December 31, 2013 and EUR 6,510 thousand as of December 31, 2012.

Guarantees and claims arise during the ordinary course of business from relationships with suppliers andcustomers when the Group requests its bankers to guarantee its performance if specified triggering eventsoccur. Non-performance under a contract could trigger an obligation for the Group. These potentialclaims can arise from late or non-payment to suppliers (“payment guarantees”) and/or late or incompletedelivery of services to customers (“performance guarantees”). The Group also provides bid guarantees tonew or existing customers in connection with bids on commercial projects.

Potential future payments of the Group under these guarantees as of December 31, 2013 and 2012 aresummarized as follows:

2013 2012

Payment guarantees 180 2 065

Total Guarantees 180 2 065


At December 31

26. Contingencies

Relating to the Holdco I B.V. liquidation, a shareholder loan with accrued interest was eliminated as ofMay 31, 2012. The Mid Europa subsidiary, Hungarian International Finance Ltd. (“HIFL”) assigned itsEUR 430.2 million receivable against Holdco I B.V. to another Mid Europa subsidiary, HungarianTelecom LP (“HTLP”) in exchange for a Promissory Note in the same amount. HTLP contributed thereceivable against Holdco I B.V. to another entity controlled by Mid Europa, Hungarian TelecomCooperatief U.A. (”Coop”). After liquidation of Invitel Holdings A/S, a former holding company of theGroup, Holdco I B.V. issued 10 additional shares to Coop by way of set-off against all obligations owedunder the EUR 430.2 million receivable owed by Holdco I B.V. to Coop. After the set-off, nooutstanding loan balances remained outstanding between the Group and Mid Europa as of December 31,2012.



Page 62 of 89

The Group is involved in legal proceedings in the normal course of business. Based on legal advice,management made appropriate provisions in its December 31, 2013 consolidated balance sheet for thepotential future cash outflows relating to certain ongoing legal matters.

The Group accounts for termination services provided by mobile operators at regulated interconnectionrates. The mobile service providers have ongoing legal cases against the regulator with respect to suchtermination fees. Management of the Group believes that the outcome of such disputes will not have asignificant impact on the consolidated financial statements of Matel, and accordingly no provision hasbeen recorded in the consolidated financial statements for the possible return of amounts arising fromreduced regulated interconnection rates.

In 2005, T-Com requested the Economic Competition Office (“ECO”) to establish that Hungarotel (alegal predecessor of Invitel) was in breach of the regulation of its carrier selection obligation, hindering itssubscribers’ right to carrier selection and thus distorting competition. The ECO established the violationand imposed a fine of HUF 150 million on Hungarotel. In the judicial review proceedings initiated byInvitel, the Court, accepting Invitel’s petition, annulled the decision of the ECO based on proceduralgrounds.

The ECO appealed against Court’s decision. In November 2008, the Budapest Tribunal confirmed thedecision of the lower court annulling the decision of the ECO and requesting the ECO to commence anew proceeding based on the aspects specified in the judgment. In the repeated process, in March 2011,the ECO again determined the violation by Hungarotel and imposed a fine of HUF 200 million (EUR673 thousand). The fine was paid, as the request for the suspension of the payment was rejected.

Invitel requested a judicial review of the ECO’s decision. The Court (both first and second instance)verified the violation by Hungarotel, but annulled the decision in respect of the amount of the fine (e.g.,violation was by a legal predecessor, violation occurred approximately 10 years ago, and suchcircumstances no longer exist on the market) and ordered the ECO to re-conduct the procedure withrespect to the setting of the fine. Based on the decision of the Budapest Tribunal Court, the ECOrefunded the HUF 200 million plus interest to Invitel on April 3, 2013 and the ECO turned to the Curia(Supreme Court) against the decision for an extraordinary judicial review. The review hearing before theCuria was held on January 29, 2014. The Curia nullified both the second and first instance Courtdecisions and ordered the first instance Court to repeat its procedure. The Company is waiting for thewritten resolution to be published by the Curia setting out the steps of the process to be repeated. TheGroup recorded a provision in the amount of HUF 150 million (EUR 505 thousand) in connection withthis legal case during 2013 (see note 20 – “Provisions for Other Liabilties and Charges”).

COMPASS Kft. (“Compass”) filed a claim against Fibernet, a legal predecessor of Invitel for EUR 16.5million plus expenses (allegedly 10% of Fibernet's purchase price by Invitel in 2011). Compass’ legalargument is based on a draft contract sent to Fibernet’s CEO and on the fact that he did not respond(according to their argument he accepted the contract with all its terms and conditions). The argument ofCompass is that an agreement came into effect which in principle was not tied to the fulfillment of anyconcrete task by Compass, only the requirement that Compass contribute to a sale being concluded.(Compass has not been able to demonstrate that it had contributed in any manner to the sale.)



Page 63 of 89

The first instance Court dismissed the petition on October 24, 2012. In its ruling the Court orderedCompass to pay Invitel an amount of app. HUF 17 million in legal costs. The Court’s decision wasappealed by Compass. The second instance Court Decision approved the first instance decision andordered Compass to pay HUF 20 million to Invitel. The sentence is final.

In December 2008, Hungarian Telephone & Cable Corp. (“HTCC USA”), one of the former parentcompanies of the Group, transferred the shares of its direct subsidiary HTCC Holdco I B.V. to a thennewly formed subsidiary of the Group, Invitel Hungary Holdings Kft. as part of the Group’s move ofdomicile from the United States. HTCC USA recognized the difference between the fair market value ofthe shares transferred and its cost base as taxable capital gain. The fair market value of the sharestransferred was determined based on a valuation study prepared by an independent third party valuationfirm.

The United States Internal Revenue Service (”IRS”) began a standard audit of HTCC USA’s 2008Corporate Income Tax filing in 2011. At the end of the audit process, on October 17, 2012, the IRSissued a Revenue Agent Report (”RAR”) describing the audit findings and a supplemental IRS EconomistReport in which the IRS disputes HTCC USA’s fair market valuation of the shares of HTCC Holdco IB.V.

The independent third party valuation firm examined the counter-points raised in the IRS reports, andfound the arguments supporting a higher valuation unconvincing, a position held to this day. Based onthis assessment, as well as the Group’s assessment that its original valuation is proper, the Companyappealed against the RAR and a Protest was submitted on November 14, 2012.

The IRS issued its Rebuttal and the case was transferred to the IRS Appeals Division for consideration,which issued a Notice of Deficiency (“ND”) addressed to Hungarian Telephone and Cable Corp. Theappeal closed on August 1, 2013. Successor in Interest to Hungarian Telephone and Cable Corp., whichwas received by the accountants that had been representing HTCC USA before the IRS. The Groupengaged a specialist tax counsel in relation to this matter. Such outside specialist tax counsel retained inthe matter, believe that the IRS issued an ineffective ND, as the ND issued was to HTCC USA (taxpayer)and Invitel Holdings A/S (successor), both entities being non existent. Because Invitel Holdings A/S isno longer in existence and it has no assets in the United States against which the IRS could file a lien orlevy, recovery by the IRS would be through a claim of transferee liability. Thus, outside specialist taxcounsel retained in the matter, believe that a valid and effective ND has not been issued to any existingentity.

The Company is currently awaiting the start of the appeals process. Based on the merits of the valuationcase, as well as the procedural issues noted above based on outside counsel advice, the Group currentlycontinue to believe that the likelihood of monetary penalty in this case is not probable.

On the effective date of the Restructuring, an agreement came into effect by which Matel wouldindemnify Hungarian Telecom Cooperatief U.A. (”Coop”) from: (a) the lesser of 50% of all taxesrequired to be paid pursuant to a settlement or final determination in relation to the IRS’s claim referredto above (the “Due Taxes”); and (b) $2,500,000; and in relation to a demand by Coop that is made; (i)after the Stapling Period; or (ii) during the Stapling Period and is accompanied by evidence that theaggregate value of the Units then outstanding exceeds the aggregate principal amount of the 2013 Notesthen outstanding, the lesser of (i) all Due Taxes; and (ii) $2,500,000.



Page 64 of 89

The Group is involved in various other legal actions arising in the ordinary course of business. TheGroup is contesting these legal actions in addition to the actions noted above; however, the outcome ofindividual matters is not predictable with assurance. Although the ultimate resolution of these actions(including the actions discussed above) is not presently determinable, management believes that anyliability resulting from the current pending legal actions, in excess of amounts provided therefore, will nothave a material effect on the consolidated financial position, results of operations or liquidity of theGroup.

27. Taxation

2013 2012

Corporate tax (20) (16)

Local business tax (2 851) (3 663)

Total income tax benefit / (expense) (2 871) (3 679)


At December 31

Matel was resident for tax purposes in the Netherlands until September 4, 2013 and was subject to Dutchcorporate income tax on its net worldwide income. For the year ended December 31, 2012 and the periodended September 4, 2013 the corporate income tax rate for Matel was 25.5%. Since Matel’s subsidiariesare subject to the participation exemption in Article 13 of the Dutch Corporate Income Tax Act,dividends received from the subsidiaries will not be subject to Dutch corporate income tax upon meetingthe relevant criteria. Matel is required to remit 8.3% withholding tax on dividends paid to its shareholders.

As part of the Restructuring (see note 1.1 – ”Restructuring”), from September 5, 2013 Matel has moved itsCOMI to the UK. As part of this move, Matel became tax resident in the UK. For the period afterSeptember 5, 2013 the corporate income tax rate for Matel was 23%. In the UK, effective from April 1,2013, the corporation tax main rate is 23%, applicable for companies whose profits exceed GBP 1.5million, whereas a marginal relief is deducted from the main rate for companies whose profits rangebetween GBP 300,000 and GBP 1.5 million. Below GBP 300,000 the applicable tax rate is 20%.

Invitel and ITC are tax residents in Hungary. From January 1, 2010, the corporate income tax rate inHungary was 19%. From July 1, 2010 the corporate income tax rate was changed to 10% up to HUF 250million of the positive corporate income tax base and the tax base above this limit is subject to 19%corporate income tax. From January 1, 2011 the limit to apply the 10% corporate income tax rate waschanged to HUF 500 million.

The law on the determination of local business tax has changed effective from January 1, 2013. Inaccordance with the new rules, the amount of tax deductible items in the local business tax calculationcan be taken into account only to the extent as set out in the law. Bands were set up in the law based onthe amount of tax deductible items. These bands determine the extent to which the tax deductible itemcan be included in the tax base. Furthermore, the local business tax base is required to be determined inaggregate by adding up the tax base of all related parties according to the amendments made to the localbusiness tax law.



Page 65 of 89

Local business tax as of December 31, 2013 mainly include municipality taxes in the amount of EUR2,217 thousand, innovation contribution in the amount of EUR 466 thousand and witholding taxes in theamount of EUR 168 thousand. Local business tax as of December 31, 2012 mainly include municipalitytaxes in the amount of EUR 3,161 thousand and innovation contribution in the amount of EUR 502thousand.

Deferred tax assets and liabilities are determined by the legal entities of the Group. Deferred tax iscalculated at the respective statutory tax rates where the entities of the Group are tax resident. A deferredtax asset is recognized on deductible temporary differences only to an extent that offset deferred taxliabilities on taxable temporary difference.

For Hungarian corporate income tax purposes, the Group had unused net operating tax loss carryforwards of approximately EUR 243,299 thousand as of December 31, 2013 and EUR 282,595 thousandas of December 31, 2012. Such tax losses are not subject to any statutory expiry limitations. In view ofthe expected taxable profits the Group has not recognised any deferred tax asset.Deferred tax assets and liabilities as of December 31, 2013 and 2012 are attributable to the followingitems:

December 31, 2013 December 31, 2012 December 31, 2013 December 31, 2012

Tax loss carried forward - 862 - -

Derivative financial instruments - 13 - 13

Interest bearing borrowings - - - 835

Trade and other receivables 58 - 58 -

Property, plant and equipment 612 1 337 612 1 337

Intangible assets - - - 27

670 2 212 670 2 212

Net Deferred Tax Assets - -

Assets Liabilities


Reconciliation of effective tax rate is as follows:

2012

Net profit / (loss) before tax 56 839 (71 235)

Income tax using the parent company corporate tax rate (11 935) 18 013

Tax losses for which no deferred tax asset was recognized (8) (14 729)

Effect of different tax rates in foreign jurisdictions 4 106 (3 597)

Tax on non-taxable income 3 546 2 402

Tax on non-deductible expenses (351) (2 437)

Movement in deferred tax allowance relating to tax losses on

which no deferred tax asset was recognized previously 4 109 -

Local business and other taxes paid, net of tax benefit (2 587) (3 297)

Under /(over) provided in prior years 249 (34)

Income Tax (Expense) / Benefit (2 871) (3 679)


2013




Page 66 of 89

Tax losses for which no deferred tax was recognized include the current year’s tax losses made by Mateland Invitel International Holdings B.V. as there is uncertainty if these entities are able to generate enoughtaxable income in the future against which these tax losses could be utilized.

28. Related Party Transactions

Related parties as of December 31, 2013 and 2012 include the Group’s subsidiaries, as well as MidEuropa, Holdco I B.V., Hungarian Telecom B.V., Matel Holdings Limited and key managementpersonnel of the Group.

Salaries and other short-term employee benefits paid to key management personnel (members of theexecutive management team) amounted to EUR 4,734 thousand and EUR 3,039 thousand for the yearsended December 31, 2013 and 2012, respectively. Termination benefits paid to key managementpersonnel amounted to EUR nil and EUR 381 thousand for the year ended December 31, 2013 and 2012,respectively. There have been no share based compensation, post-employment benefits or other long-term benefits paid to key management personnel during the years ended December 31, 2013 and 2012.There have been no loans or guarantees provided to key management personnel during the years endedDecember 31, 2013 and 2012.

Based on the Restructuring Agreement (see note 1.1 – “Restructuring”) all accrued Mid Europamanagement fees, including third and fourth quarter 2012 fees have been reversed and no further accrualswill be made. The reversed amount for the period ended December 31, 2013 was EUR 0.5 million.

On February 21, 2011 Invitel provided a loan to Holdco I B.V. in the amount of EUR 20,313 thousandfor the redemption of the 2006 PIK Notes. Related party receivables and payables have been netted offas of December 31, 2011 based on contractual rights and the intention to settle the outstanding amountson a net basis. In connection with the liquidation of Holdco I B.V. the following transactions took placeduring the year ended December 31, 2012 with respect to such receivables: As of May 31, 2012 EUR28,881 thousand principal loan and EUR 1,844 thousand accrued interest was owed by Matel to Holdco IB.V. The EUR 1,844 thousand interest accrual was capitalised as of May 31, 2012. As of May 31, 2012Invitel had EUR 20,535 thousand receivables against Holdco I B.V. Holdco I B.V. assigned the sameamount of its outstanding receivable from Matel to Invitel in full satisfaction of the receivables owed byHoldco I B.V. to Invitel. The remaining liability against Holdco I B.V. amounted to EUR 10,190thousand. Matel owed to Holdco I B.V. EUR 249 thousand beside the remaining EUR 10,190 thousandloan. Holdco I B.V. owed EUR 7,392 thousand loan to Matel. The remaining Holdco I B.V. loan and duereceivables in the amount of EUR 10,439 thousand and Matel debt in the amount of EUR 7,392thousand was satisfied in full and the due receivables was reduced to EUR 3,047 thousand.Holdco I B.V.contributed the remaining receivables of EUR 3,047 thousand owed by Matel to Holdco I B.V. to thecapital reserve of Matel, resulting in an extinguishment of that receivable by operation of law. Theamount was credited to the capital reserve of Matel (see note 16 – “Equity”).

As of August 18, 2011 Invitel Holdings A/S owed EUR 3,294 thousand intercompany loan and EUR1,219 thousand other debt for recharged services to Invitel. The intercompany loans were interest freewith maturity of December 31, 2011. An assignment agreement dated August 18, 2011 was concludedbetween Coop and Invitel, according to which the amount owed by Invitel Holdings A/S was overtakenby Coop towards Invitel with the total amount of EUR 4,513 thousand. On June 30, 2012 Invitel andCoop declared the forgiveness of the total debt by not requiring any consideration in return and therelated expense was recognized in other financial expense for the year ended December 31, 2012 (seenote 9 – “Financial Income and Expense”).



Page 67 of 89

29. Segment Reporting

The chief operating decision maker considers the Group from a revenue service perspective and assessesthe performance based on segment gross margin. This measurement primarily focuses on the variablecosts associated with this business. Other fixed and non-cash charges are excluded from this measure.Segment liabilities are not regularly reviewed by the chief operating decision maker.

2013 2012

Restated

Revenue



Cable 17 572 16 947

Corporate 61 501 60 298

Wholesale 23 244 29 531

Inter-segment elimination (1 327) (1 808)

Total Revenue 163 815 173 493

Segment Cost of Sales

Residential Voice (2 762) (3 660)

Residential Internet & TV (8 371) (6 365)

Cable (4 774) (4 322)

Corporate (18 226) (14 290)

Wholesale (4 297) (5 377)

Inter-segment elimination 1 273 1 751

Total Segment Cost of Sales (37 157) (32 263)



Total Cost of Sales, exclusive of Depreciation (65 513) (63 836)

Segment Gross Margin



Cable 12 798 12 625

Corporate 43 275 46 008

Wholesale 18 947 24 154

Inter-segment elimination (54) (57)

Total Segment Gross Margin 126 658 141 230



Depreciation and amortization (48 608) (83 931)

Operating expenses (48 678) (50 035)

Cost of restructuring (1 300) (3 151)

Financial Income 2 093 3 416

Financial Expenses (26 080) (47 191)

Gain on Extinguishment of Debt 81 110 -






Page 68 of 89

30. Subsequent Events

On January 8, 2014 Coop sold its 100% ownership interest in Hungarian Telecom B.V. to MID-NEWTechnocom Kft.

On January 8, 2014 MID-NEW Technocom Kft. sold its 75% ownership interest in ITC to Matel. Thepurchase price of the ownership interest was set at EUR 45,000, which equals the amount of the loanMatel has provided to MID-NEW Technocom Kft. when it has purchased the 75% ownership interest inITC. This loan became payable on January 8, 2014 when Matel exercised its call option to buy the 75%ITC ownesrship interest fom MID-NEW Technocom Kft. The purchase price and the loan payable werenetted against each other, as it was stated in the call option deed between the companies.

These transactions do not have any significant accounting implications on the consolidated financialstatements of the Group as of December 31, 2013.

The accompanying notes form an integral part of the financial statements.

Page 69 of 89

MAGYAR TELECOM B.V.

PARENT COMPANY FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2013

Parent Company Balance Sheet(before appropriation of result)

as of December 31, 2013


Page 70 of 89

Notes At December 31 At December 31 At January 1

2013 2012 2012

Restated Restated

Non-Current Assets

Financial Fixed Assets 3 222 506 346 656 398 955

222 506 346 656 398 955

Current Assets

Other Current Assets 6 5 348 5 582 5 694

Trade and Other Receivables 5 1 931 516 400

Cash and Cash Equivalents 4 7 418 645 144

14 697 6 743 6 238

Total Assets 237 203 353 399 405 193

Equity

Capital and Reserves Attributable to Equity Holders of the Company

Share Capital 7 297 148 92 201 92 201

Capital Reserve 7 274 094 259 094 256 047

Other Reserve 7 (136 246) (16 693) (16 693)

Hedging Reserve 7 - 592 -

Cumulative Translation Reserve 7 (70 829) (65 877) (87 114)

Accumulated Losses 7 (280 462) (334 426) (259 514)

83 705 (65 109) (15 073)

Liabilities

Non-Current Liabilities

Borrowings 8 151 552 326 304 354 327

151 552 326 304 354 327

Current Liabilities

Trade and Other Payables 9 743 18 331 14 007

Borrowings 8 - 65 383 45 318

Accrued Expenses and Deferred Income 10 1 203 8 490 6 614

1 946 92 204 65 939

Total Liabilities 153 498 418 508 420 266

Total Equity and Liabilities 237 203 353 399 405 193


Parent Company Statement of Profit and Loss Accountfor the year ended December 31, 2013


Page 71 of 89

2013 2012

Restated

Share of Result of Investments after Tax 40 288 (65 351)

Other Income and Expense after Tax 13 676 (9 561)

Result for the Year 53 964 (74 912)



Other informationfor the year ended December 31, 2013


Page 72 of 89

1. General Information

Magyar Telecom B.V. (“the Company” or “Matel”, together with its subsidiaries “the Group”) wasincorporated on December 17, 1996 as a limited liability company under the laws of the Netherlands andregistered with the trade register of the Chamber of Commerce for Amsterdam with company registrationnumber 33286951. During the year 2013 the Company carried out a Restructuring (see note 1.1 –“Restructuring” in the consolidated financial statements) as part of which the Company moved its COMI tothe UK. On September 5, 2013 the Company was registered as an overseas company at the CompaniesHouse in the UK with UK establishment number BR016577, having its head office at 6 St Andrew Street,London EC4A 3AE, United Kingdom.

Matel is engaged in investing in telecommunication related activities in Hungary. Its telecommunicationsservice provider subsidiaries, Invitel Távközlési Zrt. (“Invitel”) and Invitel Technocom Kft. (“ITC”) areproviding telecommunications services to residential and corporate customers. All subsidiaries aremajority owned and controlled subsidiaries of Matel (collectively, “the Group”).

Matel, through its subsidiaries, is one of the largest fixed line telecommunications services provider inHungary and the incumbent provider of fixed line telecommunications services to residential andcorporate customers in its historical concession areas. The historical concession areas and cable TVnetwork cover an estimated 2.9 million people, representing approximately 29% of Hungary’s population.Matel also provides fixed line telecommunications services as an alternative operator in the remainder ofHungary either by connecting corporate and residential customers to its backbone network and cablenetwork, or through the use of carrier pre-selection or wholesale DSL services for residential customers.

The Company was a wholly owned subsidiary of HTCC Holdco I B.V. (“Holdco I B.V.”) till December12, 2012. After the liquidation of Holdco I B.V., from December 12, 2012 the Company was whollyowned by Hungarian Telecom Cooperatief U.A. (“Coop”). As of October 22, 2013, a new entity,Hungarian Telcom B.V. was established by Coop with a 100% onwnership. As of December 12, 2013 theshares of Matel were contributed by Coop to Hungarian Telecom B.V. On December 12, 2013 Matelcompleted its restructuring asd part of which its former notes were refinanced by issuing new notes andnew shares (see note 17 – “Borrowings” in the consolicated financial statements). The new shares wereissued by a newly established entity, Matel Holdings Limited. As of December 31, 2013, after completionof the Resutructuring, Matel was 51% owned by Hungarian Telecom B.V. which is 100% owned by MidEuropa Partners Limited (“Mid Europa”), through its holding companies and 49% owned by MatelHoldings Limited.

As of December 31, 2013 the Group includes the following subsidiaries:

Invitel was incorporated on September 20, 1995 as a joint stock company under the laws of Hungary. Theauthorized share capital of Invitel as of December 31, 2013 is HUF 16 billion (approximately EUR 54million).

ITC was incorporated on September 28, 2001 as a limited liability company under the laws of Hungary.The authorized share capital of ITC as of December 31, 2013 is HUF 165 million (approximately EUR556 thousand).

Invitel International Holdings B.V. (“Invitel International Holdings”) was incorporated on March 26,2009 in Amsterdam and has its statutory seat at Herikerbergweg 238, Luna ArenA, 1101CM Zuidoost,The Netherlands. The 100% owner of Invitel International Holdings is Invitel. Invitel InternationalHoldings was the holding company of the Group’s international operations, which was sold on October7, 2010. The authorized share capital of Invitel International Holdings as of December 31, 2013 is EUR18 thousand. Invitel International Holdings had no operations during 2012 and 2013.



Page 73 of 89

2. Significant Accounting Policies

2.1 Basis of Preparation

The parent company financial statements of the Company have been prepared in accordance with Part 9,Book 2 of the Dutch Civil Code.

In accordance with subarticle 8 of article 362, Book 2 of the Dutch Civil Code, the Company’s financialstatements are prepared based on the accounting principles of recognition, measurement anddetermination of profit, as applied in the consolidated financial statements. These principles also includethe classification and presentation of financial instruments, being equity instruments or financial liabilities.

As the financial data of the Company are included in the consolidated financial statements, the incomestatement in the parent company financial statements is presented in its condensed form (in accordancewith article 402, Book 2 of the Dutch Civil Code).

In case no other policies are mentioned, the company applies the accounting policies as described in theaccounting policies section in the consolidated financial statements. For an appropriate interpretation, theparent company financial statements of the Company should be read in conjunction with theconsolidated financial statements.

All amounts are presented in thousands of EUR, unless stated otherwise.

The Company prepared its consolidated financial statements in accordance with the InternationalFinancial Reporting Standards (“IFRS”) as adopted by the European Union.

2.2 Changes in Accounting Policies

From January 1, 2013 the Group has changed its accounting policy with respect to accounting for salescommissions relating to Corporate segments that are managed on portfolio basis. Either treatment ofthese costs as expenditure through profit or loss as incur or alternatively capitalization as intangible assetare currently applied policies in the industry. The Group decided to recognize retrospectively these salescommissions as cost of sales. Previously the Group recognized these sales commissions as cost ofacquiring a customer contract under IAS38 – “Intangible Assets”. Cost incurred as sales commission feesrelate to both management of current portfolio of corporate customers and also to acquire newcustomers. Because of changes in the operating environment the Group believes that these costs mainlyrelate to maintenance of current portfolio and acquisition of contract is not so significant any more.Accordingly, the Group decided to change the accounting policy to reflect this change in the nature ofthe cost. Therefore the Group believes that the new accounting policy provides reliable and more relevantinformation.

In accordance with IAS 8 – “Accounting Policies, Changes in Accounting Estimates and Errors” the comparativefigures have been restated accordingly.

In addition, Management has decided to correct an prior year error with respect to certain groups ofintangible assets. Upon the correction, certain items are reported as part of operating expenses instead ofthe previous presentation as part of intangible assets.



Page 74 of 89

The effects of the changes in accounting policy and the correction of prior year error on the currentnumbers are included in the schedules below. Changes in accounting policy and the correction of prioryear error affected only financial fixed assets of Matel because these costs arise in the subsidiariesexclusively.

2012 2011

Financial Fixed Assets, net at the Beginning of the Year 347 936 399 639

Restatement in Relation to Prior Year Error (140) (268)Restatement in Relation to Accounting Policy Change (456) (416)Cumulative Effect from Prior Years (684) -

Financial Fixed Assets, net at the End of the Year 346 656 398 955

2012 2011

Accumulated losses at the Beginning of the Year (333 146) (258 830)

Restatement in Relation to Prior Year Error (140) (268)

Restatement in Relation to Accounting Policy Change (456) (416)

Cumulative Effect from Prior Years (684) -

Accumulated losses at the End of the Year (334 426) (259 514)

For the year ended

December 31

2012


Share of Result of Investments After Tax before Restatement (64 755)


Restatement in Relation to Accounting Policy Change (456)

Share of Result of Investments After Tax after Restatement (65 351)



At December 31

At December 31

2.3 Investment in Subsidiaries

Subsidiaries are entities (including intermediate subsidiaries and special purpose entities) over which thecompany has control, i.e. the power to govern the financial and operating policies, generallyaccompanying a shareholding of more than one half of the voting rights. Investment in subsidiaries isrecognised from the date on which control is transferred to the Company or its intermediate holdingentities and is derecognised from the date that control ceases.

The Company applies the acquisition method to account for acquiring subsidiaries, consistent with theapproach identified in the consolidated financial statements. The consideration transferred for theacquisition of a subsidiary is the fair value of assets transferred, liabilities incurred to the former ownersof the acquiree and the equity interests issued by the company. The consideration transferred includes thefair value of any asset or liability resulting from a contingent consideration arrangement. Identifiableassets acquired and liabilities and contingent liabilities assumed in an acquisition are measured initially attheir fair values at the acquisition date, and are subsumed in the net asset value of the investment insubsidiaries. Acquisition-related costs are expensed as incurred.



Page 75 of 89

Investments in subsidiaries are measured at net asset value. Net asset value is based on the measurementof assets, provisions and liabilities and determination of profit based on the principles applied in theconsolidated financial statements.

When an acquisition of an investment in a subsidiary is achieved in stages, any previously held equityinterest is remeasured to fair value on the date of acquisition. The remeasurement against the book valueis accounted for in the income statement.

When the Company ceases to have control over a subsidiary, any retained interest is remeasured to its fairvalue, with the change in carrying amount accounted for in the income statement.

When parts of investments in subsidiaries are bought or sold, and such transaction does not result in theloss of control, the difference between the consideration paid or received and the carrying amount of thenet assets acquired or sold, is directly recognised in equity.

When the Company’s share of losses in an investment equals or exceeds its interest in the investment,(including separately presented goodwill or any other unsecured non-current receivables, being part of thenet investment), the Company does not recognise any further losses, unless it has incurred legal orconstructive obligations or made payments on behalf of the investment. In such case the Company willrecognise a provision.

Unrealised gains on transactions between the Company and its subsidiaries are eliminated in full, basedon the consolidation principles. Unrealised losses are also eliminated unless the transaction providesevidence of an impairment of the assets transferred.

Amounts due from investments are stated initially at fair value and subsequently at amortised cost.Amortised cost is determined using the effective interest rate.

3. Financial Fixed Assets

2013 2012

Restated

Invitel Távközlési Zrt. 59 228 24 484

Invitel Technocom Kft. 4 068 4 068

Investments 63 296 28 552

Intercompany loans - Invitel 159 210 318 104

Other Non-Current Financial Assets 159 210 318 104

Total Financial Fixed Assets 222 506 346 656

At December 31




Page 76 of 89

Movements in financial fixed assets during the years ended December 31, 2013 and 2012 were as follows:

InvestmentsOther Non-Current

Financial AssetsTotal

At January 1, 2012 (Prior to Restatement) 72 803 326 836 399 639

Restatement in Relation to Prior Year Error (268) - (268)

Restatement in Relation to Accounting Policy Change (416) - (416)

At January 1, 2012 (Restated) 72 119 326 836 398 955

Translation adjustment for the year 21 237 - 21 237

Hedging of foreign currency items 592 - 592

Share of profit of invetsments after tax (64 755) - (64 755)-

Restatement in Relation to Prior Year Error (140) - (140)

Restatement in Relation to Accounting Policy Change (456) - (456)

Repayment to Holdco I. B.V. - (7 392) (7 392)

Repayment to Invitel - (1 385) (1 385)

Sale of ITC shares financed via intercompany loan (45) 45 -

(43 567) (8 732) (52 299)

At December 31, 2012 (Restated) 28 552 318 104 346 656

Translation adjustment for the year (4 952) - (4 952)

Hedging of foreign currency items (592) - (592)

Share of profit of invetsments after tax 40 288 - 40 288

Loan provided to Invitel - 159 139 159 139

Capitalised interest on loan provided to Invitel - 26 26

Repayment of intercompany loans to Invitel - (232 749) (232 749)

Waived intercompany loans of Invitel - (85 310) (85 310)

34 744 (158 894) (124 150)

At December 31, 2013 63 296 159 210 222 506


Intercompany loans as of December 31, 2013 and 2012 comprise of the following:

2013 2012

Borrower Interest rate Maturity

Invitel 7,25%+2,00% PIK 2018.06.15 159 165 -

Invitel 9,61% 2016.12.15 - 131 322

Invitel 9,61% 2016.12.15 - 90 797

Invitel 9,61% 2016.12.15 - 69 412

Invitel 9,61% 2016.12.15 - 15 850

Invitel 9,61% 2016.12.15 - 10 678

MID New Technocom 0,0% 2062.03.08 45 45

Total 159 210 318 104

At December 31




Page 77 of 89

As part of the Restructuring (see note 1.1 – “Restructuring” in the consolidated financial statements), theCompany and Invitel set off receivables and liabilities owing to each other and certain intercompany loansas well as the Company waived certain of its rights and claims under certain other intercompany loans.Also, the Company’s certain existing intercompany loans were refinanced pursuant to a newintercompany loan agreement (the “Refinancing Intercompany Loan Agreement”).

The Refinancing Intercompany Loan Agreement

The Refinancing Intercompany Loan Agreement’s terms are matched to the newly issued 2013 Notes (seenote 17 – “Borrowings” in the consolidated financial statements). The Refinancing Intercompany LoanAgreement expires in 2018 and bears cash interest at 7% (subject to a PIK toggle) and PIK interest of2%, which accrues from December 12, 2013 and is paid semi-annually in arrears on December 15 andJune 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% tothe extent necessary to maintain a minimum liquidity level of EUR 10 million.

4. Cash and Cash Equivalents

2013 2012

Cash on hand and in banks 7 418 645

Total Cash and Cash Equivalents 7 418 645

At December 31


Cash and cash equivalents of the Company are denominated in EUR.

The 2013 Notes Indenture limits time deposits to be placed to banks having at a rating of ”A” or betterby Standard & Poor’s and ”A2” or better by Moody’s. Following the bank downgrades in June 2012 noneof the Group’s existing banks fulfilled the above requirement therefore the Group could no more investits free cash into time deposits. As no such limitation applies for the cash kept on current accounts, theGroup continued to keep free cash on the current accounts of its existing banks.

5. Trade and Other Receivables

2013 2012

Receivables from related parties 1 132 394

Other receivables 799 122

Total Trade and Other Receivables 1 931 516

At December 31




Page 78 of 89

Receivables from related parties as of December 31, 2013 include receivables from Invitel in the amountof EUR 848 thousand relating to recharged services in connection with the 2013 December Refinancing.

Receivables from related parties as of December 31, 2012 include receivables from Invitel.

All receivables included fall due in less than one year.

6. Other Current Assets

2013 2012

Prepaid expenses 45 40

Accrued income - Related party 5 303 5 459

Accrued income - Interest - 83

Total Other Current Assets 5 348 5 582


At December 31

Related party accrued income includes accrued interest on intercompany loans and recharged refinancingexpenses to Invitel for both periods.

Related party accrued income as of December 31, 2013 contains EUR 4,655 thousand unsettled intereston intercompany loans and EUR 648 thousand accrued management fees. As of December 31, 2013certain interests on intercompany loans towards Invitel with a total amount of EUR 6,709 thousand havebeen waived.

All current assets included fall due in less than one year.

7. Equity

As of December 31, 2012 the authorized share capital of Matel was EUR 408,600,000 divided into90,000,000 shares with a par value of EUR 4.54 each. As of December 31, 2012 the issued share capital ofMatel was EUR 92,201 thousand being 20,308,640 shares.

During the 2013 December Refinancing, 20,308,640 shares have been split and converted into9,220,122,560 ”A” shares with a nominal value of EUR 0.01 each, leaving the total issued share capital ofMatel unchanged with respect to ”A” shares. Immediately after the 2013 December Refinancing20,494,639,650 ”B” shares were issued with a nominal value of EUR 0.01 each, amounting to a totalissued capital of ”B” shares of EUR 204,947 thousand. As of December 31, 2013 all ”A” shares areowned by Mid Europa, representing 51% of the share capital of Matel and all ”B” shares are owned byMatel Holdings Limited, a newly formed entity owned by the noteholders, representing 49% of the totalshare capital of Matel. The issued capital is fully paid in.



Page 79 of 89

The balance of capital reserve includes the amounts of share capital of former legal entities merged intoMatel in the amount of EUR 122.1 million and a capitalized shareholder loan that was provided to theGroup during 2009 in the amount of EUR 133.9 million. Additional shareholder loan was capitalizedduring 2012 in the amount of EUR 3.0 million relating to the waiving of receivables and liabilities withrelated parties in connection with the liquidations of former holding companies of Matel. These includebalances with Matel Holdings N.V. and Holdco I B.V. During 2013 Mid Europa paid in additional capitalof EUR 15 million during the Restructuring described in note 1.1 – “Restructuring” in the consolidatedfinancial statements. There are no restrictions for distribution regarding these amounts.

The balance of other reserves as of December 31, 2013 and 2012 includes the equity adjustment relatingto the acquisition of Hungarotel and Pantel by Matel on April 27, 2007 with EUR 16,693 thousand. Thisacquisition was accounted for as a transaction between entities under common control at predecessorvalue and the equity adjustment represents the difference between the value of the investment and the netassets acquired by Matel. As of December 12, 2013 in connection with the 2013 December RefinancingMatel recorded an adjustment of EUR 119,553 thousand to other reserve to reflect the fair value of theequity instrument issued to noteholders (the ”B” shares) in exchange for EUR 173,957 thousand of the2009 Notes.

The hedging reserve containes the effective portion of the mark-to-market revaluation of derivativefinancial instruments used for cash-flow hedging of the interest payments of the 2009 Notes. At the endof 2013 there are no open cash-flow hedges in relation to the interest payments of the 2013 Notes.

The balance of cumulative translation reserve comprises all foreign exchange differences arising from thetranslation into EUR of the financial statements of foreign operations whose functional currency is notEUR.

The movements in equity during the year ended December 31, 2013 are as follows:Cumulative

Share Capital Other Hedging Translation Accumulated

Notes Capital Reserve Reserve Reserve Reserve Losses Total Equity

Balance at January 1, 2012 (Prior to Restatement) 92 201 256 047 (16 693) - (87 114) (258 830) (14 389)

Restatement in Relation to Prior Year Error 2.3 - - - - - (268) (268)

Restatement in Relation to Accounting Policy Change 2.3 - - - - - (416) (416)

Balance at January 1, 2012 (Restated) 92 201 256 047 (16 693) - (87 114) (259 514) (15 073)

Capitalized Shareholder Loan - 3 047 - - - - 3 047

Hedging of Foreign Currency Items - - - 592 - - 592

Translation Adjustment for the Year - - - - 21 237 - 21 237

Other Comprehensive Income / (Loss) - - - 592 21 237 - 21 829

Net Result for the Year before Restatement - - - - - (74 316) (74 316)

Restatement in Relation to Prior Year Error 2.3 - - - - - (140) (140)

Restatement in Relation to Accounting Policy Change 2.3 - - - - - (456) (456)

Net Result for the Period after Restatement - - - - - (74 912) (74 912)

Total Profit and Loss Account - 3 047 - 592 21 237 (74 912) (50 036)

Balance at December 31, 2012 (Restated) 92 201 259 094 (16 693) 592 (65 877) (334 426) (65 109)

Hedging of Foreign Currency Items - - - (592) - - (592)Translation Adjustment for the Year - - - - (4 952) - (4 952)Other Comprehensive Income / (Loss) - - - (592) (4 952) - (5 544)

Net Result for the Year - - - - - 53 964 53 964

Total Comprehensive Income / (Loss) - - - (592) (4 952) 53 964 48 420

Issuance of B Shares 204 947 - (119 553) - - - 85 394

Additional Paid-in Capital - 15 000 - - - - 15 000

Total Transaction with Owners 204 947 15 000 (119 553) - - - 100 394

Balance as of December 31, 2013 297 148 274 094 (136 246) - (70 829) (280 462) 83 705




Page 80 of 89

8. Borrowings

2013 2012

2013 Notes 151 552 -

Related party loan - 65 383

2009 Notes - 347 688

2009 Notes purchased back - (21 041)

2009 Notes - 326 647

Deferred borrowing costs - (343)Total Borrowings 151 552 391 687


At December 31

The Company’s borrowings are repayable as of December 31, 2013 and 2012 as follows:

2013 2012

1 Year or Less - 65 383

1-4 Years - 326 647

4-5 Years 151 552 -

151 552 392 030

Deferred borrowing costs - (343)

Total 151 552 391 687

At December 31


Under the terms of the Restructuring (see note 1.1 – ”Restructuring” in the consolidated financialstatements), EUR 155.0 million of the 2009 Notes was exchanged into new notes (the “2013 Notes”).The 2013 Notes were issued by Matel on December 12, 2013, in the principal amount of EUR150,051,000 at 100% issue price. Mid Europa invested EUR 25.0 million consisting of EUR 15.0 millionas equity (see note 16 – „Equity” in the consolidated financial statements) and EUR 10.0 million as debt(the “Sponsor Notes”), which ranks pari passu with the 2013 Notes. The EUR 15.0 million new equityinvestment was used to buy back 2013 Notes (and corresponding equity entitlement). The remainingEUR 174.0 million of the 2009 Notes, together with all accrued interest was converted into 49% of thepro-forma post-Restructuring equity in the Group which in held by Matel Holdings Limited, a newlyformed entity. Matel Holdings Limited’s shares are stapled to the 2013 Notes. Mid Europa retained 51%of the post-Restructuring equity in the Company. EUR 21.0 million of the 2009 Notes held by theCompany was cancelled as part of the Restructuring.

A gain on extinguishment of debt of EUR 81,110 thousand was recorded in the consolidated statementof profit and loss and other comprehensive income in connection with the 2013 December Refinancing,comprising of: (i) the gain of EUR 88,563 arising from the difference between the extinguishment of2009 Notes and the fair value of equity instrument provided to the noteholders, (ii) the write-off ofaccrued interest on the 2009 Notes relating to the period until June 15, 2013 in the amount of EUR15,625 thousand, reduced by (iii) the write-off of transaction costs and bond discount relating to the 2009Notes in the amount of EUR 8,907 thousand and (iv) refinancing costs in the amount of EUR 14,171thousand.



Page 81 of 89

On December 12, 2013, Matel issued senior secured notes notes in the principal amount of EUR150,051,000 (the “2013 Notes”). The 2013 Notes mature in 2018 and are subject to the indenture datedDecember 12, 2013 (the “2013 Notes Indenture”). The 2013 Notes are listed on the Luxembourg StockExchange, and are governed by New York law.

The Notes are fully and unconditionally guaranteed on a senior basis by Invitel, ITC and InvitelInternational Holdings. The guarantees are subject to contractual and legal limitations, and may bereleased under certain circumstances. The 2013 Notes are secured by first-priority security interests overcertain assets of Matel and certain Guarantors. The security interests are subject to limitations underapplicable laws and may be released under certain circumstances.

The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accruesfrom June 15, 2013 and is paid semi-annually in arrears on December 15 and June 15. The PIK toggleallows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary tomaintain a minimum liquidity level of EUR 10 million.

Matel may redeem the 2013 Notes at any time at a redemption price of 100% plus accrued and unpaidinterest, if any to the date of redemption. Subject to retaining a minimum cash balance and certain otherrequirements as set out in the 2013 Notes Indenture, Matel must redeem the 2013 Notes at a redemptionprice of 100% plus accrued and unpaid interest, if any to the date of redemption with the proceeds ofcertain asset sales. If Matel undergoes a change of control, Matel may be required to make an offer topurchase the 2013 Notes.

The 2013 Notes Indenture contains covenants restricting Matel’s ability to, among other things, (i) incuradditional indebtedness or issue preferred shares, (ii) make investments and certain other restrictedpayments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on thepayment of dividends by subsidiaries or the making of loans (v) enter into transactions with affiliates,(vi) create certain liens, (vii) transfer or sell assets, (viii) merge, consolidate, amalgamate or combine withother entities, (ix) designate subsidiaries as unrestricted subsidiaries, (x) de-list the notes, (xi) impair anysecurity interests and (xii) engage in any business other than specifically enumerated activities. The 2013Notes Indenture also contains customary events of default, including non-payment of principal, interest,or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidityof any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, andinvalidity or unenforceability of any security document or security interest.

Capitalized interest on the 2013 Notes as of December 31, 2013 amounted to EUR 1,501 thousand.

On December 9, 2009 Matel issued senior secured notes in the principal amount of EUR 345,000,000(the “2009 Notes”). The 2009 Notes matured in 2016 and were subject to the indenture dated December16, 2009 (the “2009 Notes Indenture”). The 2009 Notes were listed on the Luxembourg Stock Exchange,and were governed by New York law. The proceeds from the issuance of the 2009 Notes were used torefinance certain indebtedness including redeeming the remaining of the 2004 Notes and to make aconsent payment to the holders of the 2007 Notes who consented to certain proposed waivers andamendments to the 2007 Notes Indenture.



Page 82 of 89

Interest on the 2009 Notes was payable semi-annually at an annual rate of 9.50% on June 15 andDecember 15 of each year, beginning on June 15, 2010. The 2009 Notes were guaranteed, by some ofMatel’s subsidiaries, which guarantee ranked senior in right of payment to any existing and futureguarantee of Matel and the subsidiary guarantors that was subordinated in right of payment to the 2009Notes (including the 2007 Notes). The obligations of Matel and the subsidiary guarantors were secured byfirst priority liens over, inter alia, all shares or quotas (as applicable), bank accounts and assets of certainof our subsidiaries.

Prior to December 15, 2012, Matel had the option to redeem all or part of the 2009 Notes by paying amake-whole amount specified in the 2009 Notes Indenture and following such date at the redemptionprices set forth in the 2009 Notes Indenture. In the event of a change of control at any time, Matel wasrequired to offer to repurchase the 2009 Notes at a purchase price equal to 101% of the aggregateprincipal amount thereof, plus accrued and unpaid interest to the date of the purchase. Matel was alsorequired to offer to purchase the 2009 Notes with the excess proceeds following certain asset sales at apurchase price equal to 100% of the principal amount thereof.

The 2009 Notes Indenture contained covenants restricting Matel’s ability to, among other things, (i) incuradditional indebtedness or issue preferred shares, (ii) make investments and certain other restrictedpayments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on thepayment of dividends by subsidiaries or the making of loans (v) enter into transactions with affiliates,(vi) create certain liens, (vii) transfer or sell assets, (viii) enter into sale and leaseback transactions,(ix) merge, consolidate, amalgamate or combine with other entities, (x) designate subsidiaries asunrestricted subsidiaries, (xi) de-list the notes, (xii) impair any security interests and (xiii) engage in anybusiness other than specifically enumerated activities. The 2009 Notes Indenture also containedcustomary events of default, including non-payment of principal, interest, premium or other amounts,violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee,material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity orunenforceability of any security document or security interest.

On March 30, 2011 Matel issued EUR 80 million Senior Secured Notes (the “Additional 2009 Notes”),which had the same obligations as the 2009 Notes.

In June, September and December 2011, Matel repurchased 2009 Notes in the aggregate principalamount of EUR 21.0 million at a total purchase price of EUR 17.6 million. The Company accounted forthese transactions as an extinguishment of debt and realised a gain of EUR 3.4 million.

On December 12, 2013 Matel completed the Restructuring (see note 1.1 – ”Restructuring” in theconsolidated financial statements). Under the terms of the Restructuring, EUR 155.0 million of the 2009Notes was exchanged into the 2013 Notes and the remaining EUR 174.0 million of the 2009 Notes,together with all accrued interest, was converted into 49% of the pro-forma post-Restructuring equity inthe Group, which is held by Matel Holdings Limited, a newly formed entity.

As of December 31, 2012 Matel was in compliance with all of the covenants defined in the 2009 NotesIndenture. As of December 31, 2013 Matel was in compliance with all of the covenants defined in the2013 Notes Indenture.



Page 83 of 89

In order to reflect the new obligations under the 2013 Notes and establish the relative rights of certaincreditors under Matel’s financing arrangements (including priority of claims and subordination) a newIntercreditor Deed was concluded (the “Intercreditor Agreement”). The Intercreditor Agreement wasconcluded with, among others, the security trustee, the trustee for the 2013 Notes and certain others. TheIntercreditor Agreement provides that if there is an inconsistency between the provisions of theIntercreditor Agreement (regarding subordination, turnover, ranking and amendments only), and certainother documents, including the 2013 Notes Indenture governing the 2013 Notes, the IntercreditorAgreement will prevail.

9. Trade and Other Payables

2013 2012

Payables to related parties 144 589

Cash pool liability to related parties - 17 347

Total liability to related parties 144 17 936

Trade payables 352 389

Other payables 247 6

Total liability to third parties 599 395

Total Trade and Other Payables 743 18 331

At December 31


The Company and Invitel have a cash-pooling arrangement with Unicredit Bank since 2007. OnNovember 25, 2013, as part of the Restructuring, the cash-pool balance was refinanced by anintercompany loan in its entirety. The parties agreed to suspend the use of the cash-pool and maintain nilbalance until the closing of the Restructuring. Following the closing of the Restructuring, partiescontinued to avoid use of the cash-pool and to keep its balance at nil.



Page 84 of 89

10. Accrued Expenses and Deferred Income

2013 2012

Accrued expenses 635 950

Accrued interest 568 7 540

Total Accrued Expenses and Deferred Income 1 203 8 490

At December 31


Accrued expenses as of December 31, 2013 include accruals related to professional fees in the amount ofEUR 588 thousand and other expenditures in the amount of EUR 47 thousand. Accrued expenses as ofDecember 31, 2012 include accruals related to professional fees in the amount of EUR 500 thousand,personnel related expenses in the amount of EUR 378 thousand, audit fees in the amount of EUR 60thousand, and other expenditures in the amount of EUR 12 thousand.

Accrued interest as of December 31, 2013 includes the interest accrued under the 2013 Notes in theamount of EUR 568 thousand. Accrued interest as of December 31, 2012 includes the interest accruedunder the 2009 Notes in the amount of EUR 1,385 thousand, the interest of the Related PartySubordinated Loan in the amount of EUR 6,076 thousand and Cash-pool interest of EUR 79 thousand.

All liabilities included fall due in less than one year.

11. Audit Fees

PricewaterhouseCoopers Accountants N.V. and firms of the world-wide network ofPricewaterhouseCoopers firms (collectively, “PwC”) served as the Company’s independent auditor forthe audit of the financial statements for the years ended December 31, 2013 and 2012.

The following table presents fees for professional audit services rendered by PwC for the audit of thefinancial statements for the years ended December 31, 2013 and 2012 and fees for other servicesrendered by PwC during that period.

2013 2012

Audit of the financial statements 320 271

Audit-related services 172 -

Other non-audit services - 9

Total 492 280





Page 85 of 89

The fees listed above relate to the procedures applied to the Company and its consolidated Group entitiesby esternal auditors(PwC) as referred to in Article 1(1) of the Dutch Accounting Firms Oversight Act(Dutch acronym: Wta).

Services rendered by PwC in connection with fees presented above were as follows.

For the years ended December 31, 2013 and 2012, fees for audit of the financial statements included feesassociated with the annual audit of the consolidated financial statements and statutory and regulatoryfilings.

Audit-related sevice fees consist of fees for assurance and related services that are reasonably related tothe performance of the audit or review of the financial statements but not reported under “Audit of theFinancial Statements”. The Audit-Related Services provided by PwC for the year ended December 31,2013 inlcuded the services provided in connection with the issue of the 2013 Notes.

Other non-audit service fees for the year ended December 31, 2013 related to the migration ofaccounting and billing systems of Fibernet.

12. Directors’ Remuneration

The current directors and those who served the Company during the year ended December 31, 2013 are:

Nikolaus Bethlen (Chairman) appointed on May 1, 2013

Thierry Baudon appointed on July 12, 2013

Robert Chlemar appointed on December 12, 2013

Mark Nelson-Smith appointed on December 12, 2013

Jan Vorstermans appointed on December 12, 2013

David Blunck appointed on December 12, 2013

David McGowan appointed on December 12, 2013

TMF Management B.V. and Clear Management Company B.V. were resigned from the Board of directorson September 5, 2013. Fees for directorial services paid to directors for the years ended December 31,2013 and 2012 amounted to EUR 90 thousand and EUR 30 thousand, respectively. The Company doesnot have any employees.

13. Contingencies

The Company is not involved in any legal proceedings nor have any other contingencies.



Page 87 of 89

Statutory Provisions Regarding Appropriation of Results

Under article 13 of the Company’s Articles of Association, the result is at the disposal of the GeneralMeeting of shareholders, after approval of the financial statements.The Company can only make payments to the shareholders and other parties entitled to the distributableprofit insofar as the shareholders’ equity is greater than the paid-up and called-up part of the capital plusthe legally required reserves.

Dutch law stipulates that distributions may only be made to the extent the Company’s equity is in excessof the reserves it is required to maintain by law and its Articles of Association. Moreover, no distributionsmay be made if the Management Board is of the opinion that, by such distribution, the Company will notbe able to fulfill its financial obligations in the foreseeable future.

Proposal for Appropriation of Results

The Board of Directors proposes that the net profit for the year ended December 31, 2013 be added toaccumulated losses.

Events after Balance Sheet Date

On January 8, 2014 Coop sold its 100% ownership interest in Hungarian Telecom B.V. to MID-NEWTechnocom Kft.

On January 8, 2014 MID-NEW Technocom Kft. sold its 75% ownership interest in ITC to Matel. Thepurchase price of the ownership interest was set at EUR 45,000, which equals the amount of the loanMatel has provided to MID-NEW Technocom Kft. when it has purchased the 75% ownership interest inITC. This loan became payable on January 8, 2014 when Matel exercised its call option to buy the 75%ITC ownesrship interest fom MID-NEW Technocom Kft. The purchase price and the loan payable werenetted against each other, as it was stated in the call option deed between the companies.

These transactions do not have any significant accounting implications on the financial statements ofMatel as of December 31, 2013.

Independent Auditors Report

The independent auditor’s report is set out on the next two pages.

Documents

MAGYAR TELECOM B.V. - invitel.hu · Proposal for Loss Appropriation 87 Events after the Balance Sheet Date 87 Independent Auditor’s Report 88. Page 3 of 89 Director’s Report The