Metronet 2010 eng · Republic of Croatia 16 May 2011 . PricewaterhouseCoopers d.o.o., Alexandera von Humboldta 4, 10000 Zagreb, Croatia ... beginning of period 9,837 (9,458) 9,802

METRONET TELEKOMUNIKACIJE d.d. INDEPENDENT AUDITOR’S REPORT AND FINANCIAL STATEMENTS 31 DECEMBER 2010

Contents

Responsibility for the financial statements 1

Independent Auditor's Report 2

Statement of comprehensive income 5

Balance sheet 6

Statement of changes in shareholders' equity 7

Cash flow statement 8

Notes to the financial statements 9

RESPONSIBILITY FOR THE FINANCIAL STATEMENTS

Pursuant to the Croatian Accounting Law, the Management Board is responsible for ensuring that the Group’s consolidated financial statements are prepared for each financial year in accordance with International Financial Reporting Standards (the ”IFRS”) which give a true and fair view of the state of affairs and results of Metronet telekomunikacije d.d. (the “Company”) and Metronet Telekomunikacije d.d. and its subsidiaries (the “Group”) for that year. After making enquiries, the Management Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the Management Board continues to adopt the going concern basis in preparing the financial statements. In preparing these financial statements, the responsibilities of the Management Board include ensuring that: suitable accounting policies are selected and then applied consistently; judgments and estimates are reasonable and prudent; the applicable accounting standards are followed, subject to any material departures disclosed and

explained in the financial statements and the financial statements are prepared on the going concern basis unless it is inappropriate to

presume that the Group will continue in business. The Management Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Group and must also; ensure that the financial statements comply with the Croatian Accounting Law. The Management Board is also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Signed on behalf of the Management Board: President of the Management Board Chief Financial Officer

Željko Lukač Dennis Allan Rukavina

Metronet telekomunikacije d.d. Vukovarska 269 d 10 000 Zagreb Republic of Croatia 16 May 2011

PricewaterhouseCoopers d.o.o., Alexandera von Humboldta 4, 10000 Zagreb, Croatia T: +385 (1) 6328 888, F:+385 (1)6111 556, www.pwc.com/hr Commercial Court in Zagreb, Tt-99/7257-2, Reg. No.: 080238978; Company ID No.: 81744835353; Founding capital: HRK 1,810,000.00, paid in full; Management Board: F. Mattelaer, President, I. Bijelic, Member; Giro-Account: Raiffeisenbank Austria d.d., Petrinjska 59, Zagreb, giro account no.: 2484008-1105514875

Independent auditor’s report To the shareholders of Metronet telekomunikacije d.d. We have audited the accompanying financial statements of Metronet telekomunikacije d.d. and its subsidiaries (the ‘Group’) and Metronet telekomunikacije d.d. (the ‘Company’) comprising the balance sheet as of 31 December 2010 and the statements of comprehensive income, changes in equity and cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Basis for Qualified Opinion

As discussed in Note 2.18(c) to the financial statements, revenue from value-added services earned by the Company is presented on a gross basis in the financial statements. Management considers that although the Company is acting as an agent in these transactions, gross presentation is justified in accordance with local market practices. Such practice, in our opinion, is not in accordance with International Accounting Standard 18 ‘Revenue’, which would require the revenue from value-added services to be presented on a net basis. Accordingly, the impact on both the Group and Company financial statements for the year ended 31 December 2010 is an overstatement of revenue and expenses by HRK 15,348 thousand.

Qualified Opinion In our opinion, except for the effects of the matter described in the preceding paragraph, the accompanying financial statements present fairly, in all material respects, the financial position of the Group and the Company as of 31 December 2010 and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of Matter

Without further qualifying our opinion, we draw attention to Note 4(a) to the financial statements which describe the Group’s and Company’s accumulated losses, liquidity risk and actions taken by management to mitigate this risk. These conditions, along with other matters as set forth in Note 3.1(c) and Note 4(a), indicate the existence of a material uncertainty which may cast significant doubt about the Group and Company's ability to continue as a going concern. PricewaterhouseCoopers d.o.o. Zagreb, 1 June 2011 This version of our report is a translation from the original, which was prepared in Croatian language. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation.

METRONET TELEKOMUNIKACIJE d.d. BALANCE SHEET AS AT 31 DECEMBER 2010

The notes on pages 9 to 44 are an integral part of these financial statements.

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Group Company (all amounts are expressed in thousands of HRK)

Note 2010 2009 2010 2009

ASSETS

Non-current assets Plant & equipment 11 253,399 282,845 253,322 282,746 Intangible assets 12 12,229 20,412 12,229 20,412 Investments in subsidiaries 13 - - 83 82 Deposits 15 2,627 2,526 2,627 2,526 268,255 305,783 268,261 305,766

Current assets

Trade and other receivables 15 54,373 58,386 54,465 58,470 Cash 16 1,847 9,837 1,812 9,803 56,220 68,223 56,277 68,273

Total assets 324,475 374,006 324,538 374,039

SHAREHOLDERS’ EQUITY AND LIABILITIES

Shareholders’ equity Share capital 17 75,063 75,063 75,063 75,063 Treasury shares 17 (4,050) (4,050) (4,050) (4,050)Preference share premium 17 76,387 76,387 76,387 76,387 Accumulated losses (413,459) (357,490) (413,394) (357,448) (266,059) (210,090) (265,994) (210,048) Non-current liabilities Borrowings 18 314,165 339,841 314,165 339,841 Finance lease liabilities 19 33,864 55,706 33,864 55,706 348,029 395,547 348,029 395,547 Current liabilities Borrowings 18 97,402 59,890 97,402 59,890 Financial lease liabilities 19 24,151 22,216 24,151 22,216 Trade payables 20 107,152 95,054 107,150 95,045 Accrued and other liabilities 21 13,800 11,389 13,800 11,389 242,505 188,549 242,503 188,540

Total liabilities 590,534 584,096 590,532 584,087

Total shareholders’ equity and liabilities

324,475 374,006 324,538 374,039

METRONET TELEKOMUNIKACIJE d.d. STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010


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Group

(all amounts in thousands of HRK) Share

capitalTreasury

shares

Preference share

premium

Accumulated losses

Total Equity

Balance at 1 January 2009 75,063 (4,050) 76,387 (278,400) (131,000)Total comprehensive loss - - - (79,090) (79,090)Balance at 31 December 2009 75,063 (4,050) 76,387 (357,490) (210,090) Balance at 1 January 2010 75,063 (4,050) 76,387 (357,490) (210,090)Total comprehensive loss - - - (55,969) (55,969)

Balance at 31 December 2010 75,063 (4,050) 76,387 (413,459) (266,059)

Company

(all amounts in thousands of HRK) Share

capitalTreasury

shares

Preference share

premium

Accumulated losses

Total Equity

Balance at 1 January 2009 75,063 (4,050) 76,387 (278,384) (130,984)Total comprehensive loss - - - (79,064) (79,064)


Balance at 1 January 2010 75,063 (4,050) 76,387 (357,448) (210,048)Total comprehensive loss - - - (55,946) (55,946)


METRONET TELEKOMUNIKACIJE d.d. CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2010


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Note 2010 2009 2010 2009

Cash from operations 22 67,634 26,298 67,641 26,208

Interest paid (41,376) (38,431) (41,376) (38,431) Net cash (used in) /from operating activities

26,258 (12,133) 26,265 (12,223)

Cash flows from investing activities

Purchase of intangible assets (278) (2,825) (278) (2,825) Purchase of tangible assets (23,276) (23,681) (23,275) (23,568) Proceeds from sale of tangible assets

954 668 954 668

Incorporation of subsidiaries 13 - - - (20)

Interest received 791 646 783 646 Net cash used in investing activities

(21,809) (25,192) (21,816) (25,099)

Cash flows from financing activities

Proceeds from borrowings 26,825 74,971 26,825 74,971

Repayment of borrowings (21,490) (7,648) (21,490) (7,648)

Repayment of finance lease (19,741) (10,703) (19,741) (10,703) Net cash from /(used in) financing activities

(14,406) 56,620 (14,406) 56,620

Net increase /(decrease) in cash (9,957) 19,295 (9,957) 19,298

Cash, beginning of period 9,837 (9,458) 9,802 (9,495)

Cash, end of period (120) 9,837 (155) 9,803

For the purpose of the cash flow statement, cash balance consists of:

Cash at banks 1,847 9,837 1,812 9,803

Bank overdraft 18 (1,967) - (1,967) -

Cash balance (120) 9,837 (155) 9,803

METRONET TELEKOMUNIKACIJE d.d. NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010

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NOTE 1 – GENERAL INFORMATION

The Metronet Group (the Group) is a wire line network telecommunications service provider and the first in Croatia to have developed an all-IP network for the provision of the following services: local and long distance telephone services with enhanced communication features, broadband services which include high speed internet and high capacity data transmission. The Group is an emerging provider of advanced and innovative telecommunication services targeted to business customers. The Group’s proprietary service network is currently offered in all of the major cities located throughout the 21 counties in the Republic of Croatia. The parent of the Group is Metronet Telekomunikacije d.d. (the ‘Company’ or ‘Metronet’), a joint stock company registered under the laws and jurisdictions of the Republic of Croatia. The Company was established on 13th May 2005 and started operations in June 2005. The registered address of the Company is Ulica grada Vukovara 269d, Zagreb. The Metronet Group includes the Company and its subsidiaries. The business activity of all subsidiaries is telecommunication services. A listing of the Group’s subsidiaries is presented in Note 13. Public service licenses

In June 2005, Metronet obtained the necessary licences to provide services in the Republic of Croatia, from the Croatian Telecommunication Agency (“the CTA”) as prescribed by the Telecommunications Act. The required licences are as follows: Duration of licence Public voice services 30 years Lease of telecom lines 30 years

Internet access, VoIP, Value added services and multi video-conferencing Renewed on annual

basis The licenses can be extended under the same conditions, and the terms may be revised upon agreement of both parties. The initial license fee for public voice services and lease of telecom lines was HRK 30 thousand, and the annual license fees for other services is 0.1% percent of gross annual revenue. In February 2006, based on the inspection of the Croatian Telecommunication Agency, the Company received approval to start providing public voice services on a commercial basis in Croatia.


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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 2.1 Basis of preparation The Group’s financial statements are prepared in accordance with International Financial Reporting Standards under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. (a) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the Group (although they may affect the accounting for future transactions and events)

The following standards and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2010 or later periods, but are currently not relevant for the Group. - IFRS 2 (amendments), Group cash-settled share-based payment transactions, effective from 1

January 2010. In addition to incorporating IFRIC 8, Scope of IFRS 2, and IFRIC 11, IFRS 2 – Group and treasury share transactions, the amendments expand on the guidance in IFRIC 11 to address the classification of Group arrangements that were not covered by that interpretation.

- IFRIC 9, Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition

and measurement, effective 1 July 2009. This amendment to IFRIC 9 requires an entity to assess whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the ‘fair value through profit or loss’ category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the Group is unable to make this assessment, the hybrid instrument must remains classified as at fair value through profit or loss in its entirety.

- IFRIC 16, Hedges of a net investment in a foreign operation effective 1 July 2009. This

amendment states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the Group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of IAS 39 that relate to a net investment hedge are satisfied. In particular, the Group should clearly document its hedging strategy because of the possibility of different designations at different levels of the Group. IAS 38 (amendment), Intangible assets, effective 1 January 2010. The amendment clarifies guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives.


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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) - IFRIC 17, Distribution of non-cash assets to owners effective on or after 1 July 2009. The

interpretation was published in November 2008. This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. IFRS 5 has also been amended to require that assets are classified as held for distribution only when they are available for distribution in their present condition and the distribution is highly probable.

- IFRIC 18, Transfers of assets from customers, effective for transfer of assets received on or after 1

July 2009. This interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both).

- IAS 1 (amendment), Presentation of financial statements. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time.

- IFRS 5 (amendment), Non-current assets held for sale and discontinued operations. The

amendment clarifies that IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirement of IAS 1 still apply, in particular paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1.

- IAS 36 (amendment), Impairment of assets, effective 1 January 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, Operating segments (that is, before the aggregation of segments with similar economic characteristics).

- IFRS 3 (revised), Business combinations, and consequential amendments to IAS 27, Consolidated and separate financial statements, IAS 28, Investments in associates, and IAS 31, Interests in joint ventures, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.

The revised standard continues to apply the acquisition method to business combinations but with some significant changes compared with IFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently remeasured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs are expensed.


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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1. Basis of preparation (continued)

- IAS 27 (revised) requires the effects of all transactions with non-controlling interests to be

recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. IAS 27 (revised) has had no impact on the current period, as none of the non-controlling interests have a deficit balance; there have been no transactions whereby an interest in an entity is retained after the loss of control of that entity, and there have been no transactions with non-controlling interests.

- Eligible Hedged Items – Amendment to IAS 39, Financial instruments: Recognition and Measurement effective with retrospective application for annual periods beginning on or after 1 July 2010.

- IAS 38 (amendment), Intangible assets, effective 1 January 2010. The amendment clarifies

guidance in measuring the fair value of an intangible asset acquired in a business combination and permits the grouping of intangible assets as a single asset if each asset has similar useful economic lives.

(b) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2010 and not early adopted The Group’s assessment of the impact of these new standards and interpretations is set out below.

- IFRS 9, Financial instruments, issued in November 2009. This standard is the first step in the process to replace IAS 39, Financial instruments: recognition and measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets, and it will probably have an impact on the accounting for the Group’s financial assets. This standard is not applicable until 1 January 2013, but it may be early adopted.

The Group is yet to assess IFRS 9’s full impact. However, initial indications are that it may affect the Group’s accounting for its debt available-for-sale financial assets, as IFRS 9 only permits the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available-for-sale debt investments, for example, will therefore have to be recognised directly in profit or loss. Currently the Group does not have such investments.

- Revised IAS 24 (revised), Related party disclosures issued in November 2009. It supersedes IAS

24, Related party disclosures, issued in 2003. IAS 24 (revised) is mandatory for periods beginning on or after 1 January 2011. Earlier application, in whole or in part, is permitted. The revised standard clarifies and simplifies the definition of a related party and removes the requirement for government-related entities to disclose details of all transactions with the government and other government-related entities. The Group will apply the revised standard from 1 January 2011. When the revised standard is applied, the Group will need to disclose any transactions between its subsidiaries and its associates. Currently the Group does not have subsidiaries or associates.


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NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) 2.1. Basis of preparation (continued) - Classification of rights issues (amendment to IAS 32), issued in October 2009. The amendment

applies to annual periods beginning on or after 1 February 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment applies retrospectively in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. The Group will apply the amendment as of 1 January 2011.

- IFRIC 19, Extinguishing financial liabilities with equity instruments, effective 1 July 2010. The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognised in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extinguished. The Group will apply this interpretation as of 1 January 2011. It is not expected to have any impact on the Group’s consolidated financial statements.

- Prepayments of a minimum funding requirement (amendments to IFRIC 14). The amendments correct an unintended consequence of IFRIC 14, IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction. Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct this. The amendments are effective for annual periods beginning 1 January 2011. Earlier application is permitted. The amendments should be applied retrospectively to the earliest comparative period presented. The Group will apply these amendments for the financial reporting period beginning on 1 January 2011.

2.2 Consolidation Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.


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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.2 Consolidation (continued) Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment. The excess of consideration transferred the amount of any non-controlling interest in the acquiree and acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of bargain purchase, the difference is recognised directly in the statement of comprehensive income. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. 2.3 Investments in subsidiaries

Investments in subsidiaries in which the Company has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations are recorded at cost less impairment losses, if any in the standalone financial statements.. Impairment is tested annually whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Dividend income is recorded in the statement of comprehensive income when the Company decides to withdraw it. 2.4 Foreign currencies (a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Croatian Kuna (HRK), which is the Company’s functional and the Group’s presentation currency. (b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. 2.5 Plant and equipment (PE)

Plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. The initial estimate of the costs of dismantling and removing an asset and restoring the site on which it is located is also included in the cost of the asset if a related obligation exists.


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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.5 Plant and equipment (PE) (continued) Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the statement of comprehensive income during the financial period in which they are incurred.

Assets under construction are not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost over their estimate useful lives. Depreciation is calculated for each asset until the asset is fully depreciated or to its residual values. In 2010, the Group adjusted depreciation rates for customer premise equipment and indefeasible rights of use to their useful lives. The effects of these changes are disclosed in Note 11. Annual depreciation rates are as follows:

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.7). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income.

2.6 Intangible assets (a) Computer software Acquired computer software, licences and rights are carried at cost less accumulated amortisation. Computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is calculated using the straight-line method over the estimated useful life (4 to 5 years) starting from the point when the asset is available for use. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

2010 2009 Telecom plant and machinery 5 - 7 years 5 - 7 years Network (presented within telecom plant and machinery)

30 years 30 years

Customer premise equipment (telephones & switches) 5 years 3 years Indefeasible rights of use (IRU) 10 – 15 years 10 years Tools, vehicles, IT and office equipment 3 - 5 years 3 - 5 years


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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6 Intangible assets (continued)

(b) Contractual customer relationships (customer list)

Contractual customer relationships acquired in a business combination are recognised at fair value at the acquisition date. The contractual customer relations have finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected life of the customer relationship (5 years).

2.7 Impairment of PE and intangibles

Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

2.8 Leases

Leases of vehicles and equipment, where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of fair value of the leased property or the present value of minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in liabilities. The interest element of the finance costs is charged to the statement of comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Assets acquired under finance leases are depreciated over the shorter of the useful life or the lease term.

Leases in which a significant portion of risks and rewards of ownership are not retained by the Group are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the period of the lease.

2.9 Trade and loan receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non current assets.

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy, and default or delinquency in payments are considered indicators that the trade receivable is impaired.


17

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.9 Trade and loan receivables (continued) The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income within “other operating expenses”, net of collected receivables previously written off. 2.10 Cash and cash equivalents Cash includes cash in hand, deposits held at call with banks and deposits held with banks with original maturities of three months or less. Overdrafts of bank accounts are included as part of cash and cash equivalents for purposes of the cash flow statement and are shown within borrowings in the balance sheet. 2.11 Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Preference shares, which are convertible to ordinary shares, are classified as equity. Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. 2.12 Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 2.13 Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. Borrowing costs that are directly attributable to purchase or construction of assets are capitalised during the period necessary for brining the asset to working condition. Other borrowing costs are charged to the statement of comprehensive income. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.


18

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14 Current and deferred income tax The current income tax charge is calculated on the basis of the tax law enacted at the balance sheet date in Croatia. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and consider establishing provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.

However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investment in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in foreseeable future. 2.15 Value added tax (VAT) The Tax Authorities require the settlement of VAT on a net basis. VAT related to sales and purchases is recognised and disclosed in the balance sheet on a net basis. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT. 2.16 Employee benefits (a) Pension obligations and post-employment benefits

In the normal course of business through salary deductions, the Group makes payments to mandatory pension funds on behalf of its employees as required by law. All contributions made to the mandatory pension funds are recorded as salary expense when incurred. The Group does not have any other pension scheme and consequently, has no other obligations in respect of employee pensions. In addition, the Group is not obliged to provide any other post-employment benefits. (b) Termination benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy.


19

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.16 Employee benefits (continued)

(c) Short-term employee benefits

Short-term employee benefits are recognised as a current expense in the period when employees render their services. These benefits include wages, social security contributions, bonuses, annual vacations, other benefits and related taxes thereon.

2.17 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Management Board, who is responsible for allocating resources and assessing performance of the operating segments.

2.18 Revenue recognition

Revenue is primarily derived from data, internet and voice services provided to the Group’s customers and other third parties using the Group’s telecommunications network. Revenue is shown, net of value-added tax and discounts, and recognised when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Group.

The customer arrangements typically include a monthly fixed fee and monthly charge for the actual usage.

(a) Monthly fees

Monthly fees consist of fixed fee for data, internet and voice services. Monthly fees are recognised as revenue in the period the service is provided, in accordance with contractual terms and conditions.

(b) Traffic and interconnection revenue

Revenue from internal, incoming and outgoing calls is recognised in the period of the related usage.

Interconnection revenue includes income earned on incoming traffic originating outside the Group’s network that has been transmitted through or terminated in the Group’s network.

Interconnection expenses include expenses from outgoing traffic that is routed externally from the Group’s network.

The revenue and expenses of transit traffic is stated gross in the financial statements as the Group is acting as the principal. The Group enters into bilateral agreements with other operators, bears credit risk, and has full discretion in determining the routing of the call.

(c) Value added-services

Value added-services consist of telecommunication services rendered in conjunction with other content. Contracts signed with other content providers include revenue share arrangements. Revenue is recognised in the same manner as traffic and interconnection services. Revenue from value-added services is presented on a gross basis in the financial statements.

(d) Sale of goods Sales of equipment and optical cable are recognised when the goods are delivered to the customer, risk of loss has transferred to the customer, and the customers have accepted the delivery of the goods.


20

NOTE 3 – FINANCIAL RISK MANAGEMENT 3.1 Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk and cash flow interest rate risk), credit risk and liquidity risk. The Group does not have a written risk management programme, but overall risk management in respect of these risks is carried out by the Company’s management. Management focuses mainly on liquidity and credit risk, and acts on a case basis to mitigate all financial risks.

(a) Market risk

(i) Foreign exchange risk

Some of the Group’s payables and equipment loans are agreed with a currency clause, i.e. they are mainly linked to the EURO. Any movement in exchange rates between the EURO and Croatian kuna will have an impact on the Group’s operating results and future cash flow.

As at 31 December 2010, if the EURO had weakened/strengthened by 1.1% (2009: 0.4%) against the HRK, with all other variables held constant, the net profit of the Group for the reporting period would have been HRK 2.345 thousand (2008: HRK 965 thousand) higher/lower, mainly as a result of foreign exchange gains/losses on translation of EURO-denominated trade receivables, trade payables, foreign cash funds, deposits and borrowings.

(ii) Cash flow and fair value interest rate risk

The Group has no significant interest-bearing assets. The Group’s interest rate risk arises from long-term liabilities. Financial leasing liabilities stated at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The finance department monitors cash flow on a daily basis, while realised results are compared to planned results on a monthly basis.

As at 31 December 2010, if the interest rate on borrowings and finance lease had increased/decreased by 0.22% (2009: 3,43%) on an annual level, with all other variables held constant, the net profit of the Group for the reporting period would have been HRK 445 thousand (2009: HRK 7.459 thousand) lower/higher as a result of increased/decreased interest expense. (b) Credit risk The Group has concentrations of credit risk related to key customers. As at 31 December 2010, the top five customers comprise 23% (2009: 26%) of trade receivables. The Group has policies in place to monitor the credit quality of customers taking in account the customer’s financial position and past experience. The Group uses a system of reminders leading to discontinuance of its service as the main tool to collect overdue receivables. (c) Liquidity risk As part of the liquidity risk management procedures, the Finance department regularly monitors available cash resources and prepares monthly and annual liquidity projections on the basis of the expected cash flow.

Trade and other payables, and liabilities for short-term borrowings mature within 12 months after the balance sheet date, while the maturity of long-term borrowings is set out in Note 18 and 19.


21

NOTE 3 – FINANCIAL RISK MANAGEMENT (continued) 3.1 Financial risk factors (continued) The table below analyses the Group’s and Company’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. Group

(in thousands of HRK) Less than 1

year

Between 1-2 years

Between 2-5

years

Over 5 years

31 December 2010 Borrowings 132,111 65,764 282,036 24,591 Finance lease 27,990 20,276 15,234 1,930 Trade and other payables 107,152 - - - 267,253 86,040 297,270 26,521


year

Between 1-2 years

Between 2-5

years

Over 5 years


Company


year

Between 1-2 years

Between 2-5

years

Over 5 years


Less than 1

year

Between 1-2 years

Between 2-5

years

Over 5 years



22

NOTE 3 – FINANCIAL RISK MANAGEMENT (continued) 3.1 Financial risk factors (continued) As stated in the Note 18, based on the loan terms, the Company is obliged to maintain specific financial covenants including net debt to EBITDA ratio from 2010 onwards. As at 31 December 2010 the Company is in breach of the stated covenants which will according to the loan terms result in increase of interest margin by 0,25% and have effect on future cash flows of the Company. 3.2 Capital risk management

The Company monitors capital only on the basis of Croatian laws and regulations that requires minimum paid in capital of HRK 200 thousand for joint stock companies. There are no specific objectives required by the owners in managing capital. In addition, there are no internally or externally monitored capital objectives. Total capital for 2010 is HRK 151.5 million; share capital of HRK 75 million and HRK 76.5 million of preference share premium ( 2009: share capital of HRK 75 million and HRK 76,5 million of preference share premium ). The law also forbids payment of dividend before accumulated losses are settled. 3.3 Fair value estimation

The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short maturity.

The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Going concern

The consolidated financial statements have been prepared under the assumption that the Group will continue its operating activities according to the going concern principle. As at 31 December 2010, the cumulative losses of the Group amount to HRK 413 million (2009: HRK 357 million), and current liabilities exceed current assets by HRK 186 million (2009: HRK 120 million).

Cash flow forecasts for 2011 indicate that further funding will be needed to finance capital expenditures and working capital. Management plans to secure these funds through additional debt financing.

In achieving these goals, management believes that the shareholders will provide future support as needed as a result of their long-term investment strategy for the Group. Therefore, management considers that the above factors have minimized liquidity risk and related uncertainty, and these financial statements have been prepared on a going concern basis.


23

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES (continued) (b) Useful lives of property and equipment

The Group determined the useful lives of telecom plant & machinery based on industry experience and market practice in regards to similar assets and anticipated technological development. The Group believes that the accounting estimate related to the determination of the useful lives of these assets is a critical accounting estimate since it involves assumptions about the technological development in an innovative industry. Due to the significant weight of fixed assets in the balance sheet, the impact of any changes in these assumptions could be material to the financial statements. For example, if the Group would shorten the average useful life by 10%, this would result in additional depreciation expense of approximately HRK 1,898 thousand for 2010 (2009: HRK 2,242 thousand). (c) Estimated impairment of plant and equipment

Impairment of plant and equipment is assessed whenever there is a reason to believe that carrying value may materially exceed the recoverable amount and where impairment in value is anticipated. The factors considered include future revenue and expenses, technological obsolescence, changes in services and other similar circumstances that may indicate impairment. As at 31 December 2010, the Group performed an impairment analysis of plant and equipment. The recoverable amount was determined using the discounted cash flow method, which incorporates assumptions such as estimation of future cash flows, discount rates and growth rates. Future cash flow projections were based on the financial budget approved by management for the next five years and extrapolated estimated growth rates for all subsequent periods. The discount rate used was based on market rates adjusted to reflect specific risks for the telecommunications segment. The growth rate assumption was based on management’s expectations for market development. The calculated recoverable amount was determined to be higher than the carrying value of plant and equipment, and no impairment was recorded in 2010. However, as estimates used to calculate the recoverable amount are highly judgmental, the amount of potential impairment may be significantly different from that of management’s estimate, which could adversely affect the future operating results. If projected revenue growth would have been 1% lower, recoverable amount would have been HRK 42,912 thousand lower. If projected EBITDA growth would have been 1% lower, recoverable amount would have been HRK 15,185 thousand lower, but none of them would result in impairment of assets. (d) Legal claims and disputes

In respect to the regulatory uncertainty regarding the leasing of underground network ducts (Note 23), management has determined this matter will not result in future losses after consultation with legal counsel. However, it is reasonably possible that the future outcome of this matter will be different from management assumptions of probable future losses.


24

NOTE 4 – CRITICAL ACCOUNTING ESTIMATES (continued) (e) Financial crisis impact The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector, and, at times, higher interbank lending rates and very high volatility in stock markets. The uncertainties in the global financial markets have also led to bank failures and bank rescues in the United States of America, Western Europe, Russia and elsewhere. Indeed the full extent of the impact of the ongoing financial crisis is proving to be impossible to anticipate or completely guard against. Such circumstances could affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The customers of the Group may also be affected by the lower liquidity situation which could in turn impact their ability to repay their outstanding debts. Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has reflected revised estimates of expected future cash flows in their impairment assessments. Management is unable to reliably estimate the effects on the Group's financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Group’s business in the current circumstances. (f) Deferred tax asset The Group did not recognise any deferred tax asset arising from taxable losses carried forward because it considers that it is not probable that future taxable profit will be available against which it can be utilised (Note 10).


25

NOTE 5 – REVENUE

Group Company (in thousands of HRK) 2010 2009 2010 2009 Monthly subscription fee 108,221 103,903 108,221 103,903 Traffic revenues 46,750 40,118 46,750 40,118 Interconnection revenues 56,915 30,719 56,915 30,719 VAS revenues 16,884 24,619 16,884 24,619 Other services /i/ 8,345 9,008 8,345 9,008

237,115 208,367 237,115 208,367

/i/ Other services related to income from rent of fibre, rent of IP phones and other equipment, maintenance revenue, fee for early termination of contract and other similar services.

Segment Information

Metronet is a telecommunications service provider focused on providing business solutions mainly to business customers in the Republic of Croatia. The Group’s investments and expenditures do not relate to a certain geographical area or to a particular customer group or particular services. Sales are provided to business customers who do not have specific and identifiable risks and benefits. Similarly, expenditures and investments cannot be reasonably allocated, except through arbitrary allocations, which would not improve reporting considering the telecommunications sector as a whole. From a geographical perspective, Metronet operates exclusively on the Croatian market. Management has determined the operating segments based on the reports reviewed by the Management of the Metronet telekomunikacije Group that are used to make strategic decisions. Key performance indicators are total revenue and EBIDTA. Company’s EBITDA amounts to HRK 61,065 thousand, which is 42.51% higher compared to 2009 (2009: 42,849). Group’s EBITDA amounts to HRK 61,064 thousand, which is 42.55% higher compared to 2009 (2009: 43,837).

Group Company (in thousands of HRK) 2010 2009 2010 2009 Business customers 147,730 133,571 147,730 133,571 Residential customers 15,587 19,458 15,587 19,458 Interconnection and VAS revenue 73,798 55,338 73,798 55,338

237,115 208,367 237,115 208,367

The Management of the Group does not monitor assets and liabilities by segments and therefore this information has not been disclosed.


26

NOTE 6 – OTHER OPERATING REVENUE

Group Company (in thousands of HRK) 2010 2009 2010 2009 Revenue from sale of goods 288 42 288 42 Gain on disposals of property and equipment 674 346 674 346

Sponsorship revenue 105 198 105 198 Income from collection reminders 681 498 681 498 Other revenue 212 179 212 179

1,960 1,263 1,960 1,263

NOTE 7 – FINANCE COSTS - NET Group Company (in thousands of HRK) 2010 2009 2010 2009 Interest revenue 1,241 646 1,241 646 Foreign exchange gains 419 1,374 419 1,374

1,660 2,020 1,660 2,020

Interest expense (50,252) (48,738) (50,252) (48,737)Foreign exchange losses (3,570) (475) (3,570) (475)Other finance costs (647) - (647) -

(54,469) (49,213) (54,469) (49,212)

Finance costs – net (52,809) (47,193) (52,809) (47,192)

NOTE 8 – STAFF COSTS Group Company (in thousands of HRK) 2010 2009 2010 2009 Net salaries /i/ 16,977 16,941 16,977 16,941 Taxes and contributions /ii/ 14,550 14,750 14,550 14,750 Termination benefits /iii/ 20 91 20 91 Other employee benefits /iv/ 52 (28) 52 (28)

31,599 31,754 31,599 31,754

/i/ As at 31 December 2010, the number of persons employed by the Group and the Company was

196 (2009: 186).

/ii/ Taxes and contributions include defined pension contributions paid into obligatory pension funds in the amount of HRK 5,407 thousand by the Group and by the Company (2009: HRK 5,422 thousand by the Group and by the Company).

/iii/ Termination benefits are related to those employees who left the Company, based on terms of their employment contracts.

/iv/ Other employee benefits comprise obligations arising from accumulated unused vacation days or reversal of the related accruals for unused amounts.


27

NOTE 9 – OTHER OPERATING EXPENSES Group Company (in thousands of HRK) 2010 2009 2010 2009

Rental expense /i/ 26,191 27,845 26,191 27,845 Interconnection & VAS expenses 10,963 18,758 10,963 18,758 Marketing and advertising 5,147 5,638 5,147 5,638 External customer connection costs 72 1,818 72 1,818 Maintenance costs 2,678 3,855 2,678 3,855 Municipal and energy costs 1,931 1,980 1,931 1,980 Bank charges 541 461 541 461 Professional fees 963 1,465 963 1,465 Office materials and supplies 347 876 347 876 Communication expenses 2,368 2,640 2,368 2,640 Representation and entertainment 1,215 1,133 1,215 1,133 Travel and other costs reimbursed to employees 938 734 938 734

Memberships, licences and permits 2,529 2,460 2,529 2,460 Education costs 174 84 174 84 Insurance 902 797 902 797 Local loop services (LLU) 3,273 3,597 3,273 3,597 Provision for impairment of trade receivables – net (Note 15)

1,626 2,542 1,626 2,542

Other operating expenses 4,781 5,743 4,781 5,732

66,639 82,426 66,639 82,415

/i/ Rental expense is comprised of operating lease agreements for the rental of locations for network

equipment, the rental of office premises and vehicles. Operating lease agreements for vehicles are generally non-cancellable 5-year agreements that can be terminated only with the consent of the leasing company. If the leasing company gives its consent, the Company is released of all obligations and is not required to pay any contractual penalty. If the leasing company does not give its consent, the Company can stop paying for rental and the leasing company will sell the vehicles and charge Metronet the difference between the residual value of vehicles and contract value.

NOTE 10 – INCOME TAX

A reconciliation of the effective tax expense per the income statement and taxation at the statutory rate is detailed in the table below:

Group Company (in thousands of HRK) 2010 2009 2010 2009

Loss before tax (55,969) (79,090) (55,946) (79,064)

Tax calculated at a rate of 20% (11,194) (15,818) (11,189) (15,813) Effect of non-deductible expenses 1,972 593 1,972 593 Effect of non-taxable revenues (325) - (325) -

Tax losses for which no deferred income tax asset was recognised

9,547 15,225 9,542 15,220

Tax charge - - - -


28

NOTE 10 – INCOME TAX (continued) Deferred tax assets in the amount of HRK 78,105 thousand (2009: HRK 71,266 thousand) arising from the tax losses available for carry forward are not recognised in these financial statements due to the uncertainty of future taxable profits. Cumulative tax losses can be carried forward as follows: (in thousands of HRK) 2010 2009 2010 - 13,513 2011 61,423 61,423 2012 110,299 110,299 2013 93,017 94,996 2014 78,077 76,097 2015 47,708 -

390,524 356,328

In accordance with regulations in Republic of Croatia, the Tax Authority may at any time inspect the Company’s books and records within 3 years following the year in which the tax liability is reported, may impose additional tax assessments and penalties. The Company’s management is not aware of any circumstances, which may give rise to a potential material liability in this respect. NOTE 11 – PLANT AND EQUIPMENT The value of plant & equipment under financial leases is as follows:


Purchase cost 116,251 113,837 116,251 113,837 Accumulated depreciation

(58,157) (64,524) (58,157) (64,524)

Net book value 58,094 49,313 58,094 49,313


29

NOTE 11 – PLANT AND EQUIPMENT (continued) Group

(in thousands of HRK) Telecom

plant and machinery

Customer premise

equipment IRU

Tools, vehicles, IT

and office equipment

Construction

in progress Total

At 1 January 2009 Cost 306,008 71,145 19,389 28,309 40,134 464,985Accumulated depreciation (90,757) (35,638) (1,859) (13,219) - (141,473)

Net book value 215,251 35,507 17,530 15,090 40,134 323,512

For the year ended 31 December 2009

Opening balance 215,251 35,507 17,530 15,090 40,134 323,512Additions (2) 118 - 241 26,027 26,384Transfer from intangible assets

15,905 27,509 - 330 (43,744) -

Disposals (244) (32) - (42) (4) (322)Depreciation (29,498) (31,026) (1,777) (4,428) - (66,729)

At 31 December 2009 201,412 32,076 15,753 11,191 22,413 282,845 At 31 December 2009 Cost 317,233 98,495 19,389 28,346 22,413 485,876Accumulated depreciation (115,821) (66,419) (3,636) (17,155) - (203,031)

Net book value 201,412 32,076 15,753 11,191 22,413 282,845


Opening balance 201,412 32,076 15,753 11,191 22,413 282,845Additions - - - - 26,598 26,598Transfers 30,490 11,185 5,367 900 (47,942) -Disposals (79) (180) - (14) - (273)Depreciation (29,958) (21,291) (1,631) (2,891) - (55,771)

At 31 December 2010 201,865 21,790 19,489 9,186 1,069 253,399

At 31 December 2010 Cost 347,629 109,235 21,847 28,299 1,069 508,079Accumulated depreciation (145,764) (87,445) (2,358) (19,113) - (254,680)

Net book value 201,865 21,790 19,489 9,186 1,069 253,399


30

NOTE 11 – PLANT AND EQUIPMENT (continued) Company

(in thousands of HRK)

Telecom plant and

machinery

Customer premise

equipment IRU

Tools, vehicles, IT

and office equipment

Construction

in progressTotal

At 1 January 2008 Cost 306,008 71,145 19,389 28,309 40,134 464,985 Accumulated depreciation (90,757) (35,638) (1,859) (13,219) - (141,473)

Net book value 215,251 35,507 17,530 15,090 40,134 323,512


Opening balance 215,251 35,507 17,530 15,090 40,134 323,512 Transfer from intangible asset (114) 118 - 241 26,027 26,272 Additions 15,905 27,509 - 330 (43,744) - Disposals (244) (32) - (42) (4) (322)Depreciation (29,485) (31,026) (1,777) (4,428) - (66,716)At 31 December 2009 201,313 32,076 15,753 11,191 22,413 282,746 At 31 December 2009 Cost 317,122 98,495 19,389 28,346 22,413 485,765 Accumulated depreciation (115,809) (66,419) (3,636) (17,155) - (203,019)

Net book value 201,313 32,076 15,753 11,191 22,413 282,746


Opening balance 201,313 32,076 15,753 11,191 22,413 282,746 Additions - - - - 26,597 26,597 Transfers 30,489 11,185 5,367 900 (47,941) - Disposals (79) (180) - (14) - (273)Depreciation (29,935) (21,291) (1,631) (2,891) - (55,748)

At 31 December 2010 201,788 21,790 19,489 9,186 1,069 253,322

At 31 December 2010 Cost 347,517 109,235 21,847 28,299 1,069 507,967 Accumulated depreciation (145,729) (87,445) (2,358) (19,113) - (254,645)

Net book value 201,788 21,790 19,489 9,186 1,069 253,322

In 2009, construction-in-progress represents infrastructure of HRK 1,755 thousand, telecomunication equipment (switches) in amount of HRK 15,290 thousand and IRU Slovenija extension in amount of HRK 5,367 thousand. In 2010, construction-in-progress represents infrastructure of HRK 1,069 thousand (2009: HRK 1,755 thousand). At 31 December 2010, net book value of plant and equipment pledged as collateral for borrowings amounted to HRK 62 million (2009: HRK 37 million) of which 40 million refers to telecom plant and machinery and 22 million to customer premise equipment.

In 2010, effect of lower depreciation rates, based on new estimate of useful life of equipment based at customers and irrevocable rights of use, resulted in lower depreciation expense in amount of HRK 12,580 thousand.


31

NOTE 12 – INTANGIBLE ASSETS

Group

(in thousands of HRK) Computer

software Other

intangibles Customer

list

Investment in

Progress Total

At 1 January 2009

Cost 26,387 2,531 8,911 344 38,173

Accumulated amortisation (10,345) (1,493) (743) - (12,581)

Net book amount 16,042 1,038 8,168 344 25,592


Opening net book amount 16,042 1,038 8,168 344 25,592

Additions 1,516 6 - 1,303 2,825

Transfer 1,487 - - (1,487) -

Amortisation (5,625) (598) (1,782) - (8,005)

Closing net book amount 13,420 446 6,386 160 20,412

At 31 December 2009

Cost 29,386 2,542 8,911 160 40,999

Accumulated amortisation (15,966) (2,096) (2,525) - (20,587)

Net book amount 13,420 446 6,386 160 20,412


Opening net book amount 13,420 446 6,386 160 20,412

Additions - - - 278 278

Transfer 278 - - (278) -

Disposals (8) - - - (8)

Amortisation (6,295) (376) (1,782) - (8,453)


At 31 December 2010

Cost 29,642 2,519 8,911 160 41,232

Accumulated amortisation (22,247) (2,449) (4,307) - (29,003)

Net book amount 7,395 70 4,604 160 12,229


32

NOTE 12 – INTANGIBLE ASSETS (continued)

Company

(in thousands of HRK) Computer

software Other

intangibles Customer

list

Investment in

Progress Total

At 1 January 2009 Cost 26,387 2,531 8,911 344 38,173Accumulated amortisation (10,345) (1,493) (743) - (12,581)

Net book amount 16,042 1,038 8,168 344 25,592


Opening net book amount 16,042 1,038 8,168 344 25,592Additions 1,516 6 - 1,303 2,825Transfer 1,487 - - (1,487) -Amortisation (5,625) (598) (1,782) - (8,005)Closing net book amount 13,420 446 6,386 160 20,412 At 31 December 2009 Cost 29,386 2,542 8,911 160 40,999Accumulated amortisation (15,966) (2,096) (2,525) - (20,587)

Net book amount 13,420 446 6,386 160 20,412


Opening net book amount 13,420 446 6,386 160 20,412Additions - - - 278 278Transfer 278 - - (278) -Disposal (8) - - - (8)Amortisation (6,295) (376) (1,782) - (8,453)


At 31 December 2010 Cost 29,642 2,519 8,911 160 41,232Accumulated amortisation (22,247) (2,449) (4,307) - (29,003)

Net book amount 7,395 70 4,604 160 12,229

Other intangible assets mainly consist of acquired rights for carrier pre-selection and interconnection services. At the 31 December 2010, net book value of software pledged as collateral for equipment loans amounted to HRK 1,472 thousand (2009: HRK 4,491 thousand).


33

NOTE 13 – INVESTMENT IN SUBSIDIARIES As at 31 December the investment in subsidiaries of the Company is as follows:

(in thousands of HRK) 2010 2009 Opening balance 82 62 Foundation of subsidiaries - 20 Foreign exchange differences 1

Balance at 31 December 83 82

In 2007, the Group established two wholly owned subsidiaries: Metronet telekomunikacije d.o.o. za telekomunikacijske usluge Mostar and Metronet telekomunikacije d.o.o. Ljubljana. To date, these entities had no business activities. In 2009, the Group established one wholly owned subsidiary Metronet Plavi d.o.o., which had no activity to date. NOTE 14a – FINANCIAL INSTRUMENTS BY CATEGORY

The reconciliation of classes of financial instruments with measurement categories defined in IAS 39, Financial Instruments: Recognition and Measurement, is as follows:


Loans and receivables Trade receivables 46,964 49,204 47,022 49,251 Deposits 2,688 2,587 2,688 2,587 Loan receivables - - 34 37 Cash 1,847 9,837 1,812 9,803 51,499 61,628 51,556 61,678 Other financial liabilities Borrowings 411,567 399,731 411,567 399,731 Financial lease liabilities 58,015 77,922 58,015 77,922 Trade payables 107,151 95,054 107,149 95,045 Accrued and other payables 1 1,216 1 1,216

576,734 573,923 576,732 573,914


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NOTE 14 b – CREDIT QUALITY OF FINANCIAL ASSETS

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to historical information about counterparty default rates.


New customers 1,899 2,008 1,899 2,008Existing customers – some defaults in the past 9,954 9,039 9,954 9,039

Existing customers – within maturity period 8,577 8,046 8,577 8,046

Interconnection – telecom operators 8,215 9,111 8,273 9,158

28,645 28,204 28,703 28,251 The Group mainly deposits its cash at local banks that are members of banking groups with the following credit ratings by Standard & Poor’s:

Group Company (in thousands of HRK) 2010 2009 2010 2009 A 14 7,042 14 7,042AA - 1,782 2,652 1,765 2,632Without rating 51 143 33 129

1,847 9,837 1,812 9,803


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NOTE 15 – TRADE AND OTHER RECEIVABLES Group Company (in thousands of HRK) 2010 2009 2010 2009 Trade receivables 52,712 53,581 52,770 53,628Provision for impairment of trade receivables

(5,748) (4,377) (5,748) (4,377)

46,964 49,204 47,022 49,251 VAT receivables 559 2,856 559 2,856Loans to related parties - - 34 37Deposits 2,688 2,587 2,689 2,587Prepaid expenses 5,988 5,481 5,988 5,481Supplier advances 54 40 54 40Other receivables 746 744 747 744 Less: Non-current portion of deposits (2,627) (2,526) (2,627) (2,526)

54,373 58,386 54,465 58,470

Deposits are warranty deposits for received bank guarantee. They bear fixed interest rate of 5.95% and mature in 2017.

As of 31 December 2010, trade receivables of HRK 18,319 thousand (2009: HRK 21,000 thousand) were past due but not impaired. These relate to a number of smaller slower paying customers with no recent history of default. The aging structure of these receivables is as follows: Group Company (in thousands of HRK) 2010 2009 2010 2009 Up to one month 6,609 6,288 6,609 6,288One to two months 2,649 3,178 2,649 3,178Two to three months 2,266 2,430 2,266 2,430Over three months 6,795 9,104 6,795 9,104

18,319 21,000 18,319 21,000

During 2010, trade receivables in the amount of HRK 5,748 thousand (2009: HRK 4,377 thousand) were impaired and provided for. The individually impaired receivables mainly related to customers who were in difficult economic situations and collection was not expected. The carrying amounts of the Group’s and Company’s trade and other receivables are denominated in the following currencies:

Group Company (in thousands of HRK) 2010 2009 2010 2009 HRK 42,375 44,280 42,409 44,317EUR 7,277 7,511 7,336 7,558

49,652 51,791 49,745 51,875


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NOTE 15 – TRADE AND OTHER RECEIVABLES (continued) Balances and movements on the provision for impairment of trade receivables are as follows: Group Company (in thousands of HRK) 2010 2009 2010 2009 At beginning of year 4,377 2,224 4,377 2,224Written-off during the year as uncollectible

(255) (389) (255) (389)

Provision for receivables impairment (Note 9)

3,002 3,066 3,002 3,066

Collected receivables previously written off (Note 9)

(1,376) (524) (1,376) (524)

At end of year 5,748 4,377 5,748 4,377

The creation and release of provision for impairment of collected receivables previously written off is included in the statement of comprehensive income within “Other operating expenses” (Note 9). The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above. The Group does not hold any collateral as security. NOTE 16 – CASH Group Company (in thousands of HRK) 2010 2009 2010 2009 Cash with banks in Croatian kuna 1,280 9,608 1,263 9,588Foreign currency account 557 223 539 209Cash in hand 10 6 10 6

1,847 9,837 1,812 9,803

The carrying amounts of the cash are denominated in the following currencies: Group Company (in thousands of HRK) 2010 2009 2010 2009 HRK 1,290 9,614 1,273 9,594EUR 546 219 537 209Other 11 4 2 -

1,847 9,837 1,812 9,803


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NOTE 17 – SHAREHOLDERS’ EQUITY Ordinary Preference Series R-A Series P-A Series P-B 1 January 2008 193,500 6,600 900 Issue of new shares 549,628 - -

Purchase of treasury shares (15,000) - -

31 December 2008 728,128 6,600 900 1 January 2009 728,128 6,600 900

31 December 2009 728,128 6,600 900

1 January 2010 728,128 6,600 900

31 December 2010 728,128 6,600 900

All ordinary and preference shares have a nominal value of HRK 100 per share and have the same voting rights. Preference share premium equals the amount of paid-in contributions in excess of the nominal value of the related preference shares. Premium per preference share is HRK 12 thousand. All issued shares are fully paid. In October 2008, the Company purchased 15.000 own shares at price of HRK 270 per share, which was shown as decrease within equity.

Preference shares are convertible into ordinary shares. Holders of preference shares have the right to a 12% cumulative preferred dividend from the date of establishment of the Company until the date of payment. Preferred dividends will be paid before any other dividends. The Company has an unconditional right to declare or not declare dividends to both holders of preference shares and ordinary shares. As at 31 December 2010, the potential cumulative preference share dividends not recognised and not declared amount to HRK 25,766 thousand (2009: HRK 21,194 thousand). The ownership structure of the Company as at 31 December 2010 and 2009 is as follows: Quaestus Private Equity Kapital 63% Quaestus Partneri d.o.o. 18% Mr. Stipo Matić 15% Metronet telekomunikacije d.d. –treasury shares 2% Small shareholders 2% 100%

Quaestus Private Equity Kapital (“Quaestus”), an open-ended venture capital investment fund with private offering, is a Croatian private equity fund managed by Quaestus Private Equity d.o.o. The institutional investors are unrelated Croatian companies that have individual ownership from 3% to 18% in Metronet through Quaestus. Small shareholders are current and former employees of the parent Company.


38

NOTE 18 – BORROWINGS

Group Company

(in thousands of HRK) Effective

interest rate 2010 2009 2010 2009

Non-current Bonds 12.00 % 143,840 142,059 143,840 142,059Bank loan 7.35 % 170,102 187,189 170,102 187,189Equipment loans from suppliers

7.00 % 223 10,593 223 10,593

314,165 339,841 314,165 339,841

Current Commercial papers 12.00 % 39,557 21,192 39,557 21,192Bonds – interest 12.00 % 8,836 8,729 8,836 8,729Related party loans 11.75 % 5,200 4,200 5,200 4,200Equipment loans from suppliers

10.20 % 18,079 17,818 18,079 17,818

Bank loans 8.6 % 23,763 7,951 23,763 7,951Bank overdraft 11.00 % 1,967 - 1,967 - 97,402 59,890 97,402 59,890

411,567 399,731 411,567 399,731

Commercial papers

In September 2008, the Company issued commercial papers in the nominal amount of HRK 50 million listed on the Zagreb stock exchange. The commercial papers were issued with a discount of HRK 5,145 thousand and matured in September 2009. In July 2009, as part of the debt re-financing the commercial paper obligation was settled prior to maturity at market price. As a result, gain in the amount of HRK 583 thousand was realised, presented within interest expense (Note 7). In last quarter of 2009 the Company issued HRK 23,380 thousand in new commercial papers with a discount of HRK 2.188 thousand and maturity in the last quarter of 2010. During second and third quarter of 2010, the Company issued, increased existing commercial papers in the nominal amount of HRK 16,100 thousand and with a discount of HRK 1,413 thousand.


39

NOTE 18 – BORROWINGS (continued) Bonds In July 2009 the Company issued a new EURO bond in the amount of EUR 19,8 million (HRK 144,967 thousand). The bond was issued with a discount of HRK 449 thousand and carries a coupon rate of 12% with interest payable semi-annually. The bond matures in July 2013 with a lump sum principal repayment at maturity. Related party loans As at 31 December 2010 loans from related parties amount to HRK 5,2 million (2009: HRK 4,2 million) of which Quaestus Private Equity HRK 4,2 million (2009: HRK 4,2 million) with interest rate at 11,5% and Quaestus Partneri HRK 1 million (2009: 0) with interest rate at 12%. Loans are not secured. Bank loans

In August 2007, the Company obtained a syndicated loan repayable in quarterly instalments over 7 years with a two-year grace period. The loan is secured by bills of exchange, promissory notes, insurance policies; partial pledged ordinary shares and pledged telecommunication equipment (Note 11). Based on the terms of the syndicated loan, the Company is obliged to maintain specific financial covenants from 2008 onwards, including: EBITDA levels, debt to EBITDA ratio and dividend restrictions. In July 2009 the Company re-financed the syndicated loan liability and increased it to HRK 192,158 thousand and obtained a further two year grace period. Loan is repayable in quarterly instalments over 7 years with first principal repayment at end of third quarter in 2011. Security for the loan has not changed from the original agreement. Based on the terms of the syndicated loan, the Company is obliged to maintain specific financial covenants from 2010 onwards including debt to EBITDA ratio. As at 31 December 2010, the Company was in breach of all debt covenants, which will result in 25% interest margin increase with effect on future cash flows of the Company (Note 3.1). The loan is secured by bills of exchange, promissory notes, insurance policies; partial pledged ordinary shares and pledged telecommunication equipment (Note 11). Equipment loan from supplier

Equipment loan from suppliers relates to the purchase of equipment. The loan is secured with promissory notes.

The exposure of the Group’s Company’s borrowings to interest rate changes at the balance sheet date are as follows:

Group Company (in thousands of HRK) 2010 2009 2010 2009 Fixed rate 218,874 204,591 218,874 204,591 Up to 3 months 192,693 195,140 192,693 195,140

411,567 399,731 411,567 399,731


40

NOTE 18 – BORROWINGS (continued)

Equipment loan from supplier (continued)

The maturity of long-term borrowings is as follows:


Between 1 and 2 years 36,825 28,893 36,825 28,893 Between 2 and 5 years 253,644 288,466 253,644 288,466 Over 5 years 23,696 22,482 23,696 22,482

314,165 339,841 314,165 339,841

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


HRK 218,028 226,251 218,028 226,251 EUR 193,539 173,480 193,539 173,480

411,567 399,731 411,567 399,731

Borrowings with currency clauses are included in the loans denominated in HRK.

As at 31 December 2010, the fair value of bonds based on market quoted price amounts to HRK 144,214 thousand (2009: HRK 144,214 thousand). The fair value of remaining borrowings approximates their carrying value, based on cash flows discounted using a borrowing rate of 10.14% (2009: 11.96%). The fair value of equipment loan from supplier is HRK 11,590 thousand (2009: HRK 11,590 thousand). Fair value of short term borrowings approximately equals to the book value due to their short term nature. NOTE 19 – FINANCE LEASE LIABILITIES

The Group leases vehicles and equipment under finance leases for periods of 3 to 5 years. In 2010, the effective interest rate on the financial lease is 6.42% (2009: 7.05%).

Lease liabilities are effectively secured as the rights to the lease asset revert to the lessor in the event of default.

The present value of the finance lease liabilities is as follows:

Group Company (in thousands of HRK) 2010 2009 2010 2009 Current portion (no later than 1 year) 24,151 22,216 24,151 22,216 Later than 1 and not later than 5 years 32,022

53,879 32,022 53,879

Later than 5 years 1,842 1,827 1,842 1,827

58,015 77,922 58,015 77,922


41

NOTE 19 – FINANCE LEASE LIABILITIES (continued) Minimum lease payments under the finance lease agreement are as follows: Group Company (in thousands of HRK) 2010 2009 2010 2009 No later than 1 year 27,990 27,776 27,990 27,776 Later than 1 and not later than 5 years 35,510 60,949 35,510 60,949

Later than 5 years 1,930 1,913 1,930 1,913 65,430 90,638 65,430 90,638 Future finance charges on finance lease

(7,415) (12,716) (7,415) (12,716)

Present value of finance lease liability

58,015 77,922 58,015 77,922

As at 31 December 2010, finance lease liabilities are in EUR. At the end of 2009 the Company had finance lease liabilities in EUR and in CHF amounting HRK 584 thousand. NOTE 20 – TRADE PAYABLES

Group Company (in thousands of HRK) 2010 2009 2010 2009 Trade payables – domestic suppliers (denominated in HRK) 105,738 91,608 105,736 91,599

Trade payables – foreign suppliers (denominated in EUR) 1,414 3,446 1,414 3,446

107,152 95,054 107,150 95,045

Trade payables are denominated in following currencies: Group Company (in thousands of HRK) 2010 2009 2010 2009 HRK 105,738 91,608 105,736 91,599EUR 1,057 2,816 1,057 2,816USD 356 630 357 630

107,152 95,054 107,150 95,045


42

NOTE 21 – ACCRUED AND OTHER PAYABLES

Group Company (in thousands of HRK) 2010 2009 2010 2009 Interest payable 1 1,216 1 1,216Salaries and wages payable 1,529 1,400 1,529 1,400Taxes and contributions related to salaries

2,451 3,505 2,451 3,505

Accrual for unused vacation 505 554 505 554Accrued expenses 3,244 2,935 3,244 2,935Deferred revenue /i/ 4,531 901 4,531 901Other current liabilities 1,539 878 1,539 878

13,800 11,389 13,800 11,389

/i/ Deferred revenue relates to deferred annual service fees invoiced to customers. NOTE 22 – CASH GENERATED FROM OPERATIONS


Note 2010 2009 2010 2009

Cash flows from operating activities

Loss before tax (55,969) (79,090) (55,946) (79,064)

Adjustments for:

Depreciation and amortisation 11,12 64,224 74,734 64,201 74,721 Gain on sale of tangible and intangible assets

(674) (346) (674) (346)

Interest income (1,241) (646) (1,241) (646)

Interest expense 50,899 48,738 50,899 48,737 Provision for impairment of receivables

15 1,626 2,542 1,626 2,542

Foreign exchange differences on borrowings

3,152 899 3,152 899

Changes in working capital:

Trade and other receivables 2,735 (5,785) 2,736 (5,907)

Trade payables 5,097 (13,254) 5,103 (13,263)

Accruals and other payables (2,215) (1,494) (2,215) (1,465)

Cash generated from operations 67,634 26,298 67,641 26,208


43

NOTE 23 – CONTINGENCIES AND COMMITMENTS Rental of ducts

One regulatory uncertainty relevant to the Group is the leasing of underground network ducts (“ducts’). Although diligent efforts have been made by government authorities seeking resolution of this uncertainty, the manner of usage and ultimate ownership of the ducts is still outstanding and unresolved. Several legal disputes involving the Company exist in respect of this uncertainty. Based on advice of legal counsel, management believes that this uncertainty will be resolved in the future, but will not result in any retrospective liabilities for the Group. As a result, no payments or provisions have been made in this respect. Other legal claims

In the ordinary course of operations, the Group was plaintiff and defendant in several other legal disputes. Management and its external legal counsel believe that these legal disputes will not result in significant losses. Contract commitments As at 31 December 2010 and 2009, the Group has a no contractual commitments. NOTE 24 – RELATED PARTY TRANSACTIONS

Related parties of the Group include Quaestus, companies owned by Quaestus and the Group’s management. As a commitment of their long-term strategy, Quaestus has provided management with a support letter for future assistance to the Group in achieving their goals (Note 2.1). Ultimate parent and controlling party is Quaestus.

The balances resulting from related party transactions with Quaestus are as follows:

Group Company (in thousands of HRK) 2010 2009 2010 2009 Balance sheet Trade payables 1,276 - 1,276 - Interest payable - 519 - 519 Loan payables 5,200 4,200 5,200 4,200 Trade and other receivables 10 9 10 9 Statement of comprehensive income Traffic revenues 100 83 100 83 Interest expense 594 422 594 422 Other operating expenses 41 - 41 -


44

NOTE 24 – RELATED PARTY TRANSACTIONS (continued)

The balances resulting from related party transactions with entities owned by Quaestus (in respect to the Group) and subsidiaries (in respect to the Company) are as follows: Group Company (in thousands of HRK) 2010 2009 2010 2009 Balance sheet Trade payables and other payables - 166 - 166 Trade receivables and other receivables 631 570 631 570 Statement of comprehensive income Interconnection revenues - 1,111 - 1,111 Traffic revenues 311 2,200 311 2,200 VAS revenue - 646 - 646 Interconnection expenses - 1,958 - 1,958 Other operating expense 9 157 9 157

In 2010, key management had compensation in the form of salary of HRK 1,238 thousand (2009: HRK 1,230 in total). Pension contributions paid into obligatory pension funds amounted to HRK 211 thousand (2009: HRK 210 thousand). Key management consists of 4 members of the Management Board (2009: 4).

Documents

Metronet 2010 eng · Republic of Croatia 16 May 2011 . PricewaterhouseCoopers d.o.o., Alexandera von Humboldta 4, 10000 Zagreb, Croatia ... beginning of period 9,837 (9,458) 9,802