Crnogorski Telekom 2009 Annual Report
Transcription
Crnogorski Telekom 2009 Annual Report
Life is for sharing. 1 Our Mission / Our Vision Crnogorski Telekom 2009 Annual Report Contents: Our Mission Our Vision Our Strategy To our Shareholders Letter to our shareholders Crnogorski Telekom’s Board of Directors The Management Committee of Crnogorski Telekom Introduction General information Competition Regulatory environment Human resources Corporate responsibility The lines of business Wireline services Mobile services The financial year 2009 Management report for the 2009 financial year Financial statements: Independent Auditor’s Report Statement of financial position Statement of comprehensive income Statement of cash flows Statements of Changes in Equity Notes to the Financial Statements 1 Our Mission / Our Vision Further information 2 Our Mission We are the favorite choice for communication and infotainment. We guarantee persistent customer focus, reliability and continuous innovation. Crnogorski Telekom remains the best place to work at in Montenegro. We create an organization that encourages innovation and rewards performance. We lead Montenegro towards an information society. We stretch boundaries, create and capture new opportunities and continuously strive for profitability and operational excellence. • • • • • • • We will become and remain market leader in whatever we do. Serving customers is our culture. We develop and deliver broadband products everywhere to everyone. We persistently improve efficiency. We look after company money as if it was our own. As one team, we build a company that we love and are proud working for. We deliver high quality and innovative services. Our Vision 3 Our Mission / Our Vision We make your life better by connecting and entertaining you, wherever you are, whatever you do. Life is for sharing. 4 Our strategy In 2009, we have solidified our position in the broadband market and have achieved the highest growth in the TV segment in Montenegro. Despite the difficulties in the economy, we have continuously been investing in innovation by improving the reach and coverage of our network. As the first operator in the country, we have started to roll out a fiber optical network for the households and launched HDTV. We have also started to offer innovative IP-based voice services (Max Telefonija), and have continued mobilizing the internet with appealing devices such as the iPhone exclusively available to T-Mobile customers and mobile internet-ready netbooks. We have, once again, demonstrated our commitment to Corporate Social Responsibility by reinforcing our Increasing Internet Penetration program, which has been recognized by the Iskra philanthropy award as the best project in 2009. The foundation for our four strategic goals – “One Company” The strategy of Crnogorski Telekom relies on four objectives. The foundation of those four objectives is the “One Company” concept. 5 Our strategy The meaning of “One Company” stretches far beyond the legal merger of 2009 which unified the three former entities of the Crnogorski Telekom Group. “One Company” will constitute the framework for the attitude of the employees of Crnogorski Telekom towards our Customers, and the way they will act as One Team – regardless which of the three former legal entities was employing them previously. 1. Improve efficiency In our industry, in order to guarantee that the resources necessary for the development of the business are available, challenging constantly the status quo of the cost and operating structure of the business is indispensible. To ensure that Crnogorski Telekom delivers its promises to its Stakeholders in terms of profitability, innovation and business development in a sustainable manner, we have decided to launch a multi-year program, Save for Service. The Save for Service project has created a blueprint for a series of significant shifts of paradigm in all functional areas. Every single unit within the Company will perform more efficiently in the coming years, with maintained or improved quality of services towards their internal and external Customers. 2. Superior Customer experience We believe that one of the fundamentals for Superior Customer Experience is the way our Employees relate to Customers. We are, in 2010, launching a three-year program targeted at improving this attitude even further. The Cultural Change Program will rely on the introduction of five guiding principles, each item being co-sponsored by chief officers of our organization. Those guiding principles are: • • • • • Customer delight drives our action Respect and integrity guide our behavior Team together –Team apart Best place to perform and grow I am T –Count on me We are convinced that our Customers will start perceiving the benefits of this program very early. We will also continue reforming our sales channels, and introduce new forms of interaction with our Clients, to improve the accessibility of our products for their convenience and satisfaction. 3. Market leadership Our claim is simple: we strive to become market leaders in whatever we do. We have, in 2009, solidified our leadership in fixed voice and fixed broadband services. T-Mobile has in 2009 significantly improved its overall market position compared to the two competitors in both overall revenue and SIM share terms, and we have reinforced our postpaid dominance. We have overtaken the second position in Television by producing the highest growth in new customers compared to all of our competitors. These achievements were strongly supported by the extremely successful launch of Pleme, our mobile tariff plan targeted at youngsters, 3Play packages (which were acclaimed by the market and generated better than expected results), the Max Telefonija offer (targeted at businesses) and our programs targeted to grow Mobile Internet supported by our exclusive iPhone and netbook offers. 6 4. Capture broadband potential The expansion of services which rely on broadband technology remains a core element of our business strategy. In 2009, we have grown solidly our presence on the broadband access market and have connected 43.5 thousand ADSL customers, and have registered close to 9 thousand mobile internet package users. We have achieved the highest growth in Television segment with Extra TV, exceeding very significantly the growth of each of our Competitors. Our ongoing efforts to destroy barriers in front of internet literacy in the country have been widely recognized by the Society and various organizations. We believe that Public-Private Partnerships (projects in cooperation with the Government) will be a significant step forward to overcome remaining challenges in terms of providing infrastructure to areas in the country where a broadband infrastructure is not yet available. The extension of our mobile broadband network and the continuation of the rollout of fiber infrastructure remain a priority in 2010. We expect that the penetration of IP telephony based services will increase significantly. Shareholder value Superior Customer Experience Improve Efficiency Capture Broadband Potential One Company 7 Our strategy Market Leadership Dear Shareholders, It is my pleasure to inform you about the highlights of the business operations of Crnogorski Telekom in 2009. Despite very difficult year that was predominantly characterized by the global economic crisis and its effects to the Montenegrin economy, our company succeeded in achieving key operational and financial targets, which we see as a proof that our strategy and its slogan 3 screens, 2 brands, 1 company was a very successful one. 2009 was the year of significant internal organizational change in which we finished several-year ongoing integration process – as of 1st of May we have been operating as one company – there was a legal merger of the former three entities (Crnogorski Telekom, T-Mobile Crna Gora and Internet Crna Gora) into one company called Crnogorski Telekom A.D. Podgorica. This major project was successfully ended and it resulted in simplified, faster and more efficient and effective operations which will enable us to serve our customers even better. As for the 2009 business achievements, Crnogorski Telekom not only kept its overall leading position in the Montenegrin telecommunications industry, but managed to make significant progress in certain segments. In fixed line of business, we managed to maintain a stable customer base in voice segment, further improve our position in broadcasting market with our Extra TV service and exceed expectations with regards to the sale of ADSL. When it comes to mobile segment of our business, we further strengthened leadership in the postpaid market, the most valuable part of the operations, and at the end of the year we got closer to number one position in the overall mobile market for the first time during nine years of existence of T-Mobile in Montenegro. However, in line with our expectations, revenues of the company were under significant pressure due to changes in regulatory regime, fixed-to-mobile substitution and regional alliances of the competitors. Hence, the overall revenues of the company suffered 7% drop compared to 2008. It is necessary to underscore that we were ready to react to such developments and as a consequence we managed to have drop in EBITDA without special impacts of only €1.86 million, i.e. 4% compared to 2008. We experienced a heavier reduction in mobile revenues than in fixed segment of operations. It is very important to point out that we managed mainly to offset the aforementioned drop in revenues on company level by a significant increase in ADSL and Extra TV sales results. In the summer of 2009 we launched major cost control program (Save4Service in Crnogorski Telekom) which was already contributing to this year’s results, but major impact is still to come in the coming years – apart from inevitable financial effects, the program will improve efficiency and result in leaner internal organization which will be even more responsive to the customers’ needs. 8 As for T-Com, the overall fixed operations are very stable with significantly slower churn in voice segment than in other European countries. Thanks to the strong focus on our strategic broadband services, the number of ADSL customers was higher than 43,500 (56% increase compared to 2008), whereas Extra TV service had almost 30,000 customers at the end of the year (71% growth year over year). It is very important to point out that Extra TV had by far the highest number of new customers in the market during the year, thus proving its superior quality. In addition, for the first time we launched 3play offer which has been a real success on the market. 2009 was one more year of a very intensive competition in Montenegrin mobile market. However, T-Mobile managed to increase its overall customer base to 36.7% (compared to 36.1% in 2008), maintaining stable leadership in the postpaid segment - 44.5% of market share in postpaid segment compared to 42.9% in 2008. All in all, T-Mobile got closer to the overall market leading position then ever. When it comes to our dividend policy payment, 2009 will definitely be remembered as the historic year – a year in which we paid out the highest amount of dividend in the history of the country amounting to € 59.800.000. We also continued being number one company in corporate social responsibility aspect for which we received an official award – it was the first time such award was given in the country and we are very proud to receive this public recognition for our activities. The aforementioned activities, inter alia, contributed to the fact that Crnogorski Telekom’s TRI*M results (customer satisfaction) are on the highest level in MT Group, but we are going to strive for even better achievements in this regard as well. I would also like to use this opportunity to thank our employees for their commitment and contribution to the successes of the company. They are definitely considered as a key asset of the company and therefore we are going to carry on working on their further improvement and education which is essential for the forthcoming challenges. Dear Shareholders Last but no least, I would like to thank you, our shareholders, for the shown trust. We are confident that with our customer focus, permanent innovations, investments in both fixed and mobile networks and constant increase in efficiency, we are going to achieve operational excellence and sustainable profitability on a long run. However, in order to achieve the aforementioned, we need to take one step at the time. We all already see that the year of 2010 will not be an easy year in many aspects, but similarly to what I said at the very beginning of my letter, I am convinced that our 2010 strategy and its slogan – one company, one team, one mission – will bring even better results than those we had in 2009. Daniel Szasz Chairman of the Board of Directors 9 Crnogorski Telekom’s Board of Directors Dániel Szász Gereon Hammel Tripko Krgović Gábor Pál Hans-Peter Schultz János Szabó Dénes Szluha Dániel Szász, Chairman of the Board of Directors of Crnogorski Telekom a.d. Szasz Daniel, age 38, is an economist. He started his career at General Motors Group, where he held various managerial and treasury leadership positions since 1994 at Opel companies in Hungary and Germany. He delivered tasks of GM Daewoo Central and Eastern Europe managing director from 2002. He was appointed Chief Financial Officer of T-Online Hungary Plc. effective of January 1, 2004. In 2007, he was appointed Chairman of the Board of Directors and Chairman of the Management Committee of Crnogorski Telekom. Gereon Hammel was born in May 1968 and holds a business degree. In 1989 he started his professional career at the Bayer AG Group in the Fast Moving Consumer Goods business unit. From 1992 he managed the Household Detergent business of Bayer Italy. In 1994 he moved back to Germany and was appointed as regional manager for the Bayer subsidiaries in Scandinavia, Poland and Africa. In 2000 he built up a Regional Financial Controlling and participated as a member of the national management team in the development of an international head office based in the UK for the UK, Scandinavia, Finland, France, Poland, Russia and Africa. In 2001 he joined Michael Page Frankfurt an international recruitment consultancy and was responsible for the Executive Search of Finance positions. In August 2002 he moved to T-Mobile International and was responsible for projects in the South Eastern European region (SEE). Between 2006 and 2009 he holds the position of a Vice President for T-Mobile International’s Joint Venture Management in Hungary, Montenegro and for projects in SEE. Today he works as Senior Expert within Deutsche Telekom’s SEE Marketing department. Tripko Krgović 10 is born in 1977, in Belgrade. He finished his basic and master studies on Faculty of Economics in Podgorica. His professional carrier began in 1996 in family business. From 2004 he works in Securities Commission, in market supervision department. In 2005 he holds position of Investment manager in Moneta Investment Fund. From 2006-2008 he was the Chief Executive Officer of Moneta Broker-Diler AD Podgorica, where he is still a Board member. Beside Crnogorski Telekom, he is Board member of Otrantkomerc, AD Ulcinj. He is the member of Minority Shareholders Council and a represent of minority shareholders in several Montenegrin companies. Gábor Pál - Born in Budapest, 1968. Earned his degree at the Finance and Logistics Management faculty of the Budapest University of Economics in 1993, followed by a second degree at the Programmer Mathematician faculty of Eötvös Lóránd University in 1994. He participated in the PhD program of the Budapest University of Economics from 1996. He started to work for NN Hungary Insurance Company as insurance mathematician in 1993, followed by his employment by Westel Mobile Co. Ltd. from 1994 as financial analyst. In 2000 he was promoted director of finance of the company, and became executive director of finance as of January 1, 2004 at Westel and the renamed on May 3, 2004 company, T–Mobile Hungary Ltd. After the merge of T-Mobile Hungary with Magyar Telekom Plc. in March 2006, he is director of finance and controlling of the Mobile Services Line of Business at Magyar Telekom. Since January 2008 Strategy, Planning and Control director of Consumer Business Unit of Magyar Telekom Plc. Participated in several Magyar Telekom acquisition projects in the region. Former member of the BoD of Mobimak in Macedonia, currently member of the BoD at Crnogorski Telekom, Makedonski Telekom. Member of the BoD of M Factory Zrt, Budapest. Hans-Peter Schultz was born in 1958. He graduated as Electrical engineer in 1981. After joining Deutsche Telekom in 1985 he was working in different positions and projects in DT’s international business. Until 2001 he was responsible for both international affairs and projects mainly in South-East Europe. In 1996 he joined Deutsche Telekom’s Moscow Office where he managed the restructuring of DT’s satellite business, the integration of regional mobile businesses into DT’s affiliate “Mobile TeleSystems” and the introduction of Global One Russia. In 2002 Hans-Peter Schultz moved back to Deutsche Telekom in Bonn were he was responsible for DT’s business in Israel in the “Region CEE, Middle East”. In the headquarters of T-Home (until 2009) and in the new division “Southern and Eastern Europe” of Deutsche Telekom (since 2010) he manages T-Home’s fixed line business of the Group in Slovakia. János Szabó was born in Hódmezovásárhely (Hungary) in 1961. He qualified with a degree at the Budapest University of Economics in 1986 majoring in international relations. After working in foreign services for three years, he continued in various finance and consultant positions in the private business sector. He became Director Finance of Delco Remy Hungary (subsidiary of a US based automotive supplier) in 1995. Later he was deputy general manager of the operation, responsible for sales, purchasing and operations. In 1998 he was moved to the position of Director Finance Europe in charge of the finance activities and acquisitions of the European operations. Later he has become CFO and managing director of a joint venture between Delco Remy and Hitachi. From April, 2003 he was the director finance of the Wireline Services LOB of Magyar Telekom/ later T-Com. The role was extended to fixed line network and IT operations in 2006. Since January 2008 he is Director of Group Planning & Controlling of Magyar Telekom Group. He is member of the BoD of MakTel and TMMK companies, and chairman of AC of MakTel Group. 11 Dear Shareholders Dénes Szluha was born in Budapest in 1968. He qualified with a degree at the Szent István Universtity, Gödöllő in 1994, majoring in economics. His career started at the marketing department of Shell Gas Hungary than continued at the advisory firm Deloitte. In 1998 he joined the leading Hungarian private equity fund manager with investors such as EBRD, Bank Vontobel, Dresdner Kleinwort Wasserstein. He was responsible as an investment manager for acquisitions, portfolio management and sale of major investments in primarily the IT and telecommunications industry. In 2002 he joined Matáv (today Magyar Telekom or MT) as senior project manager. Currently he holds the position of Portfolio Management Director. In his current capacities his team is responsible for managing international and domestic portfolio companies, as well as working on the acquisition strategy. He is Board member in Makedonski Telekom, T-Mobile Macedonia and Crnogorski Telekom. The Management Committee of Crnogorski Telekom Chairman of the Board of Directors, Dániel Szász Chief Executive Officer/COO of fixed LoB of Crnogorski Telekom a.d.,Slavoljub Popadić CMO/COO of mobile LoB of Crnogorski Telekom a.d., Georg Mündl Strategy and Business Development Officer, Zoltan Pinkola Chief Human Resources Officer, Beata Prisztacs Chief Technical Officer, Eva Ulićević Chief Financial Officer, Manfred Knapp Regulatory, Government Relations and Legal Officer, Tibor Vidos Chief Sales Officer, Milija Zeković Daniel Szasz, Chairman of the Board of Directors and Chairman of the Management Committee of Crnogorski Telekom Szasz Daniel, age 38, is an economist. He started his career at General Motors Group, where he held various managerial and treasury leadership positions since 1994 at Opel companies in Hungary and Germany. He delivered tasks of GM Daewoo Central and Eastern Europe managing director from 2002. He was appointed Chief Financial Officer of T-Online Hungary Plc. effective of January 1, 2004. In 2007, he was appointed Chairman of the Board of Directors and Chairman of the Management Committee of Crnogorski Telekom. 12 Slavoljub Popadić , Chief Executive Officer/COO of fixed LoB of Crnogorski Telekom a.d. Born in 1965. He holds a degree in electronic and telecommunication from University of Montenegro. He started his career in 1991 at Republic Secretariat for Development, Podgorica, first as a main network and system engineer and then as a Leader of development of network and IT systems of Governmental bodies in Montenegro. In 2001 he joined Crnogorski Telekom group as a CEO of Internet Crna Gora. In April 2005, after the acquisition of Crnogorski Telekom by the Magyar Telekom, he became a Group network development director and Management Committee member of Crnogorski Telekom. In August 2006 he was appointed as a CEO of Crnogorski Telekom responsible for fixed business in the Company (T-Com). In 2008 he became the Member of the International Marketing Board of T-Com. As of December 2008 he is Vice chairman of the Management Committee and as of May 2009, after the legal merger in one Company, he started to work as a CEO of merged Company and as a COO of fixed line of business. Georg Mündl, CMO/COO of mobile LoB of Crnogorski Telekom a.d. Dear Shareholders Born in 1965. He holds a Master of Science degree in Electrical Engineering from Technical University of Vienna. In 1991 he joined Siemens AG Austria, where he held various positions in different Company divisions. In 1996 he joined Max Mobil Telekommunikations Service GMBH, as Deputy Sales Director, and from 1998 as Director of Residential Sales. In 2000 he became Executive Director International Business, responsible for SE-Europe operations. In 2000 he moved to Croatia, joining HT Hrvatske Telekomunikacije d.d, where he was delegated by T-Mobile International to build the Mobile Unit of Croatian Telecom. In 2001 he became the Member of the International Marketing Board of T-Mobile International and later that year, the Executive Director and Member of the Board for the mobile Business & CMO. In 2004 he joined T-Mobile Austria GmbH as Member of Management Board and CMO. In 2007, he moved to Montenegro, where he was appointed CMO in Crnogorski Telekom. In 2008 he was appointed CEO of T-Mobile Crna Gora. After legal merger in May 2009 he was appointed COO of mobile LoB of Crnogorski Telekom a.d. Podgorica. 13 Zoltan Pinkola , Strategy and Business Development Officer Born in 1972. Holds a degree in economics. Started his career with an international audit and financial advisory firm, Mazars in Budapest where he managed statutory audits, due diligence reviews of privatized companies and lead miscellaneous financial consultancy assignments through four years. He joined HBO Europe in 1997, holding various managerial positions initially in the Finance area, successively transferring to Business Development, managing projects related to the territorial expansion of HBO in Central Europe and to the launch of new pay TV channels and services in the region. He has joined Magyar Telekom in March 2006, and Crnogorski Telekom in July 2006. He has been a member of the Management Committee of the Group and has fulfilled various executive positions since then. He holds the position of Strategy and Business Development Officer since October 2007. Beata Prisztacs, Chief Human Resources Officer Beata Prisztacs was born in 1970 in Pecs, Hungary. She graduated in 1993 on the Economics Faculty of Pecs University. She started her career in the Tourist Office of County Baranya in Pecs, first as marketing manager and later as director of the company. In 1998 she joined Magyar Telekom and while working in different areas of the company she gained experience in the field of Controlling, Sales and Human Resources. In 2003 she moved to Skopje, to the Macedonian subsidiary of Magyar Telekom as senior consultant to the CHRLO, later as director of the HR Area. Eva Ulićević, Chief Technical Officer of Crnogorski Telekom Born in 1970. She holds a degree in Mathematical Science and Master of Mathematical Science. She started her career on 1993 at Mathematical Faculty of Montenegro University in Podgorica, as the Assistant to the Professor. From 1996 she worked in ProMonte GSM Podgorica as Deputy of CIO. In 2000 she was engaged as the Team Leader of Oracle Academic Initiative Project while 2001 she worked in SEMA (LHS) Communications Systems Inc, Miami Florida USA as Senior Software Analyst Engineer for BSCS. From 2002 she is working for Crnogorski Telekom Group at the several executive positions: CIO of T-Mobile, IT Director of Crnogorski Telekom Group (2005) and currently as CTO of Crnogorski Telekom Group (2006). 14 Manfred Knapp, Chief Financial Officer Manfred Knapp holds a degree in Business Administration and Management from Fachhochschule für Wirtschaft, Berlin. Before joining Deutsche Telekom Group in 1997, Manfred Knapp covered several senior Controlling and Finance Management positions in different industries where he gained broad management experience in all areas of Finance Management. Mr. Knapp joined Deutsche Telekom in 1997. In 1998 Manfred Knapp was assigned to the mobile operator Wind in Italy as Controlling Director. From 1999 he managed the controlling area of Deutsche Telekom Carrier Services Business. In 2001 Manfred Knapp joined Slovak Telekom as Controlling Director and Deputy CFO. Since May 1, 2009 Manfred Knapp is responsible for the Finance area of Crnogorski Telekom as CFO. Tibor Vidos, Regulatory & Government Relations and Legal Officer Born in 1954. He holds a degree in physics and a doctorate in biology from the Eötvös University of Sciences in Budapest. In 1989 after having spent several years in academic research he became the executive secretary of a political party during the democratic transition of Hungary. In 1991 he established the Hungarian subsidiary of the then market leading British lobby firm GJW Government Relations which he managed until 2000. Between 2000 and 2003 he assisted the democratic development of Indonesia by working there as the Director of Political Party Programs of the National Democratic Institute (NDI). Between 2003 and 2004 he was the Chief External Relations Officer of Invitel; one of the incumbent fixed line telephone operators in Hungary. He joined Crnogorski Telekom in April 2005 as Regulatory and Government Relations Director. He holds his current position since January 2008. Milija Zeković, Chief Sales Officer Dear Shareholders Born in 1971. He holds a degree in Economics from University of Montenegro. After completing studies in 1995 he started his career at „Kartonka“, Podgorica, as production and sales manager. He started to work as Sales manager in T-Mobile (formerly Monet) in 2000.. In 2006 he became the Director of Sales for residential customers and small and medium enterprises. In July 2008 he was appointed CSO of Crnogorski Telekom. 15 16 Introduction General information Crnogorski Telekom (CT) is the biggest telecommunication company in Montenegro. It provides full range of fix, mobile and internet telecommunication services. Crnogorski Telekom is the main fixed line service provider in Montenegro. Its exclusive rights expired in 2003. Crnogorski Telekom provides local, national and international services, in addition to a wide range of telecommunications services involving leased line circuits and data networks. On April 1 2005, Magyar Telekom obtained 76.53 percent interest in Crnogorski Telekom and thus became the majority owner of the Company. Deutsche Telekom AG holds 59.21% of the Magyar Telekom shares. Deutsche Telekom and Magyar Telekom have a number of subsidiaries worldwide, with whom Crnogorski Telekom has regular transactions. Related party transaction details are given in the company’s Financial Statements, Note 34. For the past five years, Crnogorski Telekom’s major operational goals were to finalize digitalization of the fixed line network and to increase the capacity and reliability of data network, consequently creating conditions for increase of subscribers of broadband and voice services. The digitalization rate reached 100 percent by the end of 2007 and ADSL coverage exceeded 94% of PSTN customer base by the end of 2009. In December 2007 Crnogorski Telekom started IPTV services. In 2006, T-Com and T-Mobile brands were launched. T-Mobile Crna Gora is the second entrant in the mobile market in Montenegro and by YE 2009 it held 36.7% of mobile market (SIM card) share. From the foundation in 2000, T-Mobile has always offered innovative and advanced services to the Montenegrin market and has been experiencing dynamic growth. T-Mobile uses all advanced technologies such as UMTS, HSDPA, GPRS, EDGE. 3G network was launched in 2007. Introduction On May 1, 2009 Crnogorski Telekom a.d., T-Mobile Crna Gora d.o.o and Internet Crna Gora d.o.o were merged into one legal entity, Crnogorski Telekom a.d. The services are marketed under T-Com and T-Mobile brands. 17 Competition T-Com T-Mobile By 2009, only 2 out of 10 licensed VoIP operators started with operations. Agreements on interconnection/access were signed with both operators. According to these contracts outgoing call services to CT customers through carrier selection and freephone service are offered. In 2009, T-Mobile increased SIM market share by 0,6pp to 36,7 percent and remained market leader in the postpaid segment with 44,5 percent market share. In 2007, the third mobile operator entered into the Montenegrin telecommunications market, as one of the licensed operators for development and exploitation of WiMAX-based network. In 2008 it launched fixed voice and broadband internet services. Nine Multichannel Multipoint Distribution Service (“MMDS”) and CATV licenses were awarded in 2007. First broadband internet services were offered in Q4 2009. CT underground infrastructure is currently used by the competitors to a limited extent. Strong competition is developing in wholesale segment. In 2009, CT could increase pay TV customer market share by 8pp, to a market share of 26,9%. In September 2009, Crnogorski Telekom started commercially with voice over IP services for business customers, using IP Centrex platform. 18 T-Mobile started its commercial operations as the second mobile telecommunications service provider in Montenegro in 2000, four years after the first mobile provider started its operations. In 2007, a third mobile operator entered the Montenegrin mobile market. Competition in mobile services is intense and driven by pricing, subscription options, subsidized handsets, coverage, as well as quality and portfolio of services offered. The goal of T-Mobile is to increase its market share by introducing segment-oriented price plans, continuously offering new attractive handsets, exploiting synergies of Deutsche Telekom, and maintaining existing customer relations and community involvement as a sponsor of important social, cultural, sports and educational events. Regulatory environment Following the privatization of Crnogorski Telekom, the gradual liberalization of the telecommunications markets in Montenegro has started and this process has become more intense in recent years. The competition law came into force on January 2006 and the consumer protection law was adopted in May 2007. The Law on Electronic Communications was adopted in July 2008. According to the expectations of the government the law will speed up the development of electronic communications networks and services; stimulate competition; provide open and equal access to networks and electronic communications services; improve efficiency and introduce new technologies and services; provide efficient customer protection; provide easy access to information on tariffs and services; stimulate Internet usage and encourage investment in the telecommunications sector. The Agency for Electronic Communications has initiated a market analysis to identify operators that are significant market players (SMP) in order to prescribe SMP operators to introduce remedies as defined by the relevant EU directives. Until SMP operators are identified it shall be considered that Crnogorski Telekom is an operator with SMP in the markets of fixed voice telephony network and services, including the market of access to network for data transfer and leased lines, while all telephone network operators (including T-Mobile Crna Gora) are operators with SMP in markets of termination of calls in their respective networks. The law on Electronic Communications however does not prescribe what obligations the SMP operators have to fulfill before the first market analysis is completed. The Agency for Electronic Communication and Postal Services adopted the Rule Book on Number Portability, according to which providing of the service will start until August 2011 at the latest. Mobile operators will have to start to register prepaid users as of 1 March 2010 but have time to register the existing ones until May 2011 Regulatory fees Under the new regulatory regime Crnogorski Telekom pays fees for market supervision, numeration and the usage of radio frequencies. These fees are higher than the ones paid under the previous law when a flat 1 percent gross revenue fee was paid. Carrier selection RIO of CT has not been updated since April 2008. Carrier Selection was already included in that version of RIO. Up to now, only one operator signed interconnection agreement with Crnogorski Telekom in July 2008, with Carrier Selection included. Sharing of infrastructure The RIO also defines terms and conditions of collocation, for the purpose of interconnection realized at Crnogorski Telekom’s premises. This includes renting of space at buildings, masts and ducts as well. RIO conditions are valid only for operators looking or interconnection/access while usage of infrastructure by operators for other purposes is subject to commercial negotiations. Fixed termination fee (“FTR”) has been reduced by 10 percent in July, 2008 to level of 0.027 EUR/min. Termination of international calls in Crnogorski Telekom’s network transited by domestic operators is still subject of commercial negotiations with competitors. Mobile termination fee („MTR“) has not been changed since May 2007, when it was set on current level of 0.10 EUR/min. In May 2009, inter-operator SMS/MMS termination fees have been introduced for the first time at Montenegrin mobile market. Reduction of FTR and MTR and the intention to equalize fees regardless of traffic origin have been announced by the Agency for Electronic Communications together with the introduction of cost-based termination in the forthcoming period. Local governments and state owned companies have repeatedly attempted to force CT to pay extremely high fees or charges based on various legal pretexts. CT has successfully challenged most of these attempts. Montenegro and the European Union Montenegro became independent in 2006 and signed a Stabilization and Association Agreement with the European Union at the end of 2007. The Interim Stabilization and Association Agreement came into force on January 1, 2008. Montenegro has submitted its application for membership in the EU in December 2008. 19 Introduction Termination of calls 20 Human resources Legal integration – merging our strengths On the May 1, 2009 the integration process has successfully finished with the merger of T-Mobile CG and Internet CG into Crnogorski Telekom. This resulted in the transfer of the employees. All employees of TMCG and ICG accepted the transfer and became employees of Crnogorski Telekom. The Collective Bargaining Agreements (CBA) of the predecessor companies stay valid for the employees for additional one year. During this period the Employer need to harmonize with the Trade Union the new, modern and integrated CBA of the integrated company. On the way to performance based culture The performance management system supports the understanding and the implementation of the strategy. It supports the motivation of the employees, gives a transparent and documented evaluation of results by the manager and an objective self evaluation of performance by the employee. It creates also the objective basis for the implementation and further evolution of staff development programs and remuneration schemes. Innovation program – Our competitive advantage Learning from the results of a survey means taking visible and consistent actions. This was in focus during the review of the results of the Employee Survey conducted in the last quarter of 2008. The “Innovation Management” program was established in 2009 as a direct response to the employee feedback. With the program, the Company was seeking to gain a competitive edge by mobilizing the innovation potential, commitment and ideas of its employees, who were really encouraged to make an extra effort and to utilize their innovative potential. The program showed clearly the real innovative potential of the company and the commitment and the loyalty of the employees. This was opportunity to capitalize the human resource potential in the company, as real sustainable competitive advantage. Many ideas were reviewed and analyzed, and the winning ideas are already in the process of implementation. By this program, innovation becomes part of the corporate DNA. 21 Human resources In company’s HR strategy the creation of a performance-based corporate culture plays an outstanding role. Performance is the real measure of value, both for the company and for the individual contribution to the company’s success. As part of the extended performance management system, individual target settings and evaluation was introduced as a pilot project, with the participation of all functional areas. 22 Corporate responsibility The concept of Corporate Social Responsibility is important for Crnogorski Telekom. As one of the leading companies in the country, Crnogorski Telekom is proactively involved in all areas important for Montenegrin society. Following the codes of business ethics and corporate governance, as well as by understanding the needs of the community, Crnogorski Telekom gives its contribution to the development of the Montenegrin society. Corporate social responsibility CT supports educational initiatives, sports, culture and public health by sponsorships and donations. 23 ISKRA Philanthropy Award In 2009 Crnogorski Telekom received the ISKRA Philanthropy Award for the best national project, given by NGO Fund for Active Citizenship, in partnership with Montenegrin Chamber of Commerce and the Office for sustainable development of the Government of Montenegro. It was the first time this kind of award was awarded in Montenegro, with the goal to promote development of the values such as solidarity, humanity and social responsibility, and Crnogorski Telekom received it for already several years ongoing project on increasing IT literacy in the country, thus contributing to the overall progress of Montenegrin society. The ISKRA award was a recognition for Company’s dedication to the principles of sustainable growth and its striving to make a good balance between economic and social goals, by contributing in achieving higher life standards in the community. Development of information society in Montenegro Being the leading broadband provider in the country, Crnogorski Telekom is responsible to be the first country’s partner on its way to becoming an information society. In order to enable internet to become a part of everyday lives of majority of Montenegrin citizens, together with the Government of Montenegro, the Company initiated a project aiming to increase the level of informatics literacy and internet penetration in Montenegro. The goal of the project, which started in 2008 and is planned to last until 2012, is increasing the computer literacy, increasing the level of knowledge and using the internet, raising the general level of awareness on the importance of the Internet and promoting information culture in Montenegro. All primary and secondary schools in Montenegro got their own websites. For the third year in a row, Crnogorski Telekom enables free internet access via ADSL to all elementary and high schools in the country. The project was implemented together with Ministry of education and science. 24 Cooperation with universities During 2009, Crnogorski Telekom continued its cooperation with several universities in Montenegro, through offering internship opportunities for students, awarding talents and investing in programs and events that stimulate knowledge sharing. Internship programs that were developed together with Faculty of Mathematical science and Faculty for electrical engineering offered students the opportunity to develop their knowledge and skills by working on specific projects within the Company. Self sufficient base stations Education and development of information society, sports, culture, health and ecology were identified as five focus areas for sponsorship and donation activities. Beside strategic partnerships that Crnogorski Telekom has with important institutions, the company cooperates with numerous NGOs that protect the interests of persons with disabilities, as well as with organizations that work on development of civil society in Montenegro. In 2009, Crnogorski Telekom installed two base stations run only by renewable energy sources, using the power of wind and sun. The self-sufficient base station project is a part of larger Company’s initiative on improving energy efficiency. Corporate social responsibility Sponsorships and donations In Company’s sponsorship strategy, sports have a special place, since this is an important area for developing a healthy, modern and advanced society. T-Com is the golden sponsor of Montenegrin national football team, Football Club Budućnost and the general sponsor of T-Com First Montenegrin Football League. For the seventh year in a row, T-Mobile has been the sponsor of Woman’s Handball Club Budućnost T-Mobile, one of the most successful sports clubs in the country. T-Mobile supported the organization of the Fair of college education »T-Mobile Open Days«, a project which was organized by NGO Center for Efficient Development of College Education and Ministry of education and science. 25 26 The lines of business Wireline services Telephony Flat and OCP packages In 2008, T-Com introduced flat voice packages (Komfor and Komfor+) offering unlimited calls towards the T-Com fixed network in Montenegro and 100 extra minutes for calls within the fixed network in Serbia (Komfor+). These packages were launched to prevent churn. In December 2009 new semi-flat voice packages Komfor Veče (free on net calls in off peak) and Komfor Vikend (free on net calls in off peak and during the weekend) were launched with good success. 3PLAY In September 2009, first 3Play offer on the Montenegrin market was launched with great success. It consists of two packages, Extra Trio Mini and Extra Trio Flat, which combine Voice, ADSL and Extra TV services. At the end of 2009, more than 6.100 customers subscribed for the offer. IP Centrex solution In September 2009 Crnogorski Telekom started Max telephony service for business customers, based on IP Centrex solution. Fiber to the home (FTTH) project In 2009, CT invested in most advanced FTTH technology in selected locations. ADSL In 2009, CT could increase number of ADSL customers by more than 15.6 thousand (or by 56%) to 43,6 thousand customers. ADSL penetration by household reached 23% by YE 2009 and is comparable to the ADSL penetration of neighboring countries. Extra TV Extra TV launch was very successful and IPTV penetration is the highest in DT Group. At the end of 2009, there were almost 30.000 customers connected. The customer satisfaction of Extra TV users is very high. ExtraTV had the most significant customer market share increase in Montenegro in 2009, with share of 29% at the end of year (increase of 8pp). Number of Extra TV customers increased by 71% YoY. Two more channel packages have been added in 2009 (sport and entertainment). There is also a long list of Extra TV additional features implemented through developed applications in 2009 (new weather forecast, classifieds, Extra TV Chat, Extra TV SMS). Other Implementation of new Montenegrin numbering plan was successfully finished and parallel usage of new and old national area and short codes finished in 2009. Implementation of new national Internet domain (.me) was successfully implemented during 2008. Also, parallel usage (12 months) of public mail addresses and web domains finished in 2009. 27 The lines of business Loyalty program In 2008, “Ritam Klub” was introduced, the first joined fix and mobile loyalty program. In Ritam klub customers can collect and spend points for: traffic, subscriptions, handsets, ADSL Modems, video cams, mp3 players and other goods. At the end of 2009, more than 28.6 thousand of either fix or mobile customers joined the club. Mobile services Total T-Mobile customers increased YoY by 58,9 thousand (14,2%) to 474,6 thousand. Postpaid customer number increased by 17,5 thousand (14,6%) to 136,9 thousand. Prepaid customer number increased by 41,5 thousand (14,0%) to 337,6 thousand. Total SIM market share increased from 36,1% to 36,7%. Market share in postpaid increased from 42,9% to 44,5% and T-Mobile remained market leader in that segment. Prepaid SIM market share was 34,2% by YE 2009 (33,4% in 2008). SIM card penetration is among the highest in Europe with 208%. In January 2009, T-Mobile introduced “Dueti”, a combined postpaid and prepaid service. In March 2009, T-Mobile launched exclusively iPhone in Montenegro. In March 2009 T-Mobile, together with T-Com, executed refreshment of Ritam Club. In April, Smart Family was introduced, an addition to the most successful postpaid package (Smart) on the market. In May, Dupli Net was launched – ADSL and Mobile Internet in one package, first joint product of T-Mobile and T-Com. Also in May, T-Mobile started with strong campaign for youth segment based on youth oriented prepaid tariff “Pleme”. Till the end of the 2009, more than 90.000 prepaid customers joined. At the beginning of summer season, T-Mobile launched Holiday prepaid package in order to offer calling and SMS benefits to tourists. In September, T-Mobile introduced the upgrade of Mobile Internet packages. This upgrade was based on more GB for a lower price. In November, T-Mobile introduced the new version of Smart (residential) and Smart Team (business) postpaid tariff models. These tariff models offer additional benefits: more minutes included into subscription, free SMS. In 2009 T-Mobile continued to improve coverage and to extend capacities in 2G and 3G networks. 16 new base stations were implemented in 2G network, while in 3G the existing capacity was extended for more than 40%. 28 Crnogorski Telekom has developed different sales channels in order to provide best services to its residential and business customers. Crnogorski Telekom’s direct sales channels consist of own shop network of 14 T-Centers, Key Account Managers, SME Coordinators and Call Center. Crnogorski Telekom’s indirect sales channels include the partner shop’s network (consisted of 14 exclusive Partner Shops which use a similar design to the own shops), dealers, web sales and “door to door” sales. Dealers’ network consists of approximately 1,400 contracted points of sale for prepaid vouchers and SIM cards. Business customers are served by Key Account Managers taking care of the top 400 clients and SME Coordinators who are in charge for SME and SOHO companies. Top clients are segmented by industries (e.g. banks, hotels, large manufacturers, government, etc.) and small companies are divided by regions. 29 The lines of business Sales channels 30 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. The financial year 2009 2009 was financially and operationally a challenging year, because of the economic downturn and the difficult market conditions. Crnogorski Telekom was mainly focused on expanding the broadband services in both fixed and mobile segments and on the stabilization of voice services. In fix voice segment we experienced moderate customer churn, while ADSL and Extra TV customer numbers significantly increased. In mobile segment we kept postpaid leadership and increased market share. Even though the number of customers developed positively, we experienced revenue decline of 7,2%, and revenues reached 122,9 million. Decrease of voice services revenues, both retail and wholesale and both in fix and mobile segment was the major driver of YoY decline. This trend could not be completely offset by strong broadband Internet and TV revenues growth. During 2009 we successfully launched multiyear cost efficiency program that resulted in YoY cost reduction of EUR 7.6 million* (-9.0%). YoY EBITDA* decrease was limited to 3,9% and EBITDA of 45,7 million was achieved. Highlights • Revenues decreased by 7,2% to amount of 122,9 million, mainly driven by development of voice revenues • EBITDA* decreased by 3,9%, to 45,7 million, and an EBITDA margin of 37% was achieved • Capital expenditure was 17,6 million, out of which 11,8 million in T-Com (greater part was related to IPTV and to development of access and broadband infrastructure) and 5,8 million in T-Mobile (investments into core and radio networks represent the major share) • Dividend for 2008 in amount of 9,8 million was paid out in June, while 50,0 million of advance dividend (related to retained earnings of former T-Mobile Crna Gora and Internet Crna Gora) was paid out in July * Excluding special effects 31 The financial year 2009 Management report for the 2009 financial year Revenue contribution by segment (after consolidation) T-Mobile 47% T-Com 53% Milions EBITDA excluding SI development 50 47,5 45 45,7 40 35 30 25 20 15 10 5 0 2008 32 2009 The financial year 2009 EBITDA contribution by segment (after consolidation) T-Mobile 47% T-Com 53% T-Com T-Com achieved revenues of 71,7 million, a decrease of 4,3 million (-5,7%). Major contributors to this development are voice revenues, both retail (-2,6 million; -8,0%) and wholesale (-3,9 million; -17,0%). Moderate decrease of customers and decrease of usage caused voice retail revenues decrease, while decreased traffic volumes (mainly of transit traffic) are the reason for voice wholesale revenues decrease YoY. Fixed line customer churn was moderate with 4,1 thousand (2,4%). CT Fixed line revenues and customers development is better than the international trends. 33 Milions T-Com Revenue structure (before consolidation) 80 70 60 50 40 30 20 10 0 2008 Retail voice 2009 Wholesale voice Internet & TV Data Other Internet&TV revenues continued to strongly increase. ADSL revenues increased significantly YoY (2,6 million; 48.0%) driven by customer base increase of 15,7 thousand or by 56,2%. IPTV revenues increased by 24,0%, mainly due to customer increase of 12,4 thousand YOY or by 70,7%. Thousands Based on the cost efficiency project, OPEX* decrease of 3,1 million (-6.0%) YoY could compensate a significant part of revenue decline. Therefore EBITDA* decrease was limited to 5,0% YoY and reached 23,7million. 180 170,2 166,1 160 140 120 100 80 60 43,5 40 29,9 27,8 17,5 20 0 Fix voice customers ADSL customers 2008 * Excluding special effects 34 2009 Extra TV customers T-Mobile Revenues of T-Mobile for the year 2009 amounted to 65,1 million and decreased by 9.9% compared to 2008. This trend is primarily the result of the continuing decrease of voice revenues as result of intensive competition and economic crisis. Another driver was significant decrease of visitors revenues (YoY decrease 2,9 million, -36%). EBITDA* for the year 2009 decreased by 2,7% to 21,9 million. The financial year 2009 Milions T-Mobile Revenue structure (before consolidation) 80 70 60 50 40 30 20 10 0 2008 Voice revenues 2009 Non-voice revenues Handset and activation Other Thousands By YE 2009, 474,5 thousand customers used T-Mobile services (+12,4% YoY). In this period, the customer number growth compared to last year mainly was driven by gain in both prepaid and postpaid segments. Trend in the 2009 was the gradual reduction of prices of calls and services. Customers could enjoy more call minutes, messages or data, which was demonstrated in the significant traffic growth as well as higher discounts. 474,6 500 450 415,7 400 337,6 350 296,2 300 250 200 150 119,5 137,0 100 50 0 Postpaid subscribers Prepaid customers 2008 Mobile penetration in Montenegro (%) (**) T-Mobile Crna Gora’s market share (%) (**) * Excluding special effects ** Data published by the Montenegrin Agency for Electronic communications and postal activities. 2008 186 36,1 Total customers 2009 2009 209 36,7 35 36 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. The financial year 2009 CRNOGORSKI TELEKOM A.D. PODGORICA International Financial Reporting Standards Financial Statements and Independent Auditor’s Report For the year ended 31 December 2009 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 37 CONTENTS Independent Auditor’s Report Statement of financial position Statement of comprehensive income Statement of cash flows Statements of Changes in Equity Notes to the Financial Statements 38 Page 39 41 42 43 44 45-116 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 39 The financial year 2009 40 STATEMENT OF FINANCIAL POSITION In EUR Notes ASSETS Non current assets Intangible assets Goodwill Property and equipment Available for sale financial assets Investments in associates Deferred income tax asset Long term loans and other receivables Total non current assets Current assets Cash and cash equivalents Short term bank deposits Trade and other receivables Advances and prepayments Current income tax prepayment Inventories Restricted cash Total current assets 5 6 7 8 9 23 10 14.031.941 941.624 118.655.551 25.374 9.429 8.362.434 142.026.353 15.301.380 941.624 121.748.147 25.374 225.389 7.971 6.726.871 144.976.756 11 12 13 14 3.181.592 45.200.000 19.365.120 53.553.167 2.923.783 461.903 124.685.565 17.147.736 62.150.000 21.669.927 3.633.145 928.583 3.649.258 600.449 109.779.098 266.711.918 254.755.854 14.219.104 10.220.593 1.538.321 1.801.966 27.779.984 16.656.790 12.334.872 60.892 5.194.542 34.247.096 2.656.551 766.773 3.293 3.426.617 2.663.012 1.150.788 3.142 3.816.942 31.206.601 38.064.038 140.996.394 5.644.103 88.864.820 235.505.317 140.996.394 5.058.637 70.636.785 216.691.816 266.711.918 254.755.854 15 16 Total assets LIABILITIES Current liabilities Trade and other payables Accrued liabilities and advances Current income tax payable Provision for liabilities and charges Total current liabilities Non current liabilities Deferred income tax liability Provision for liabilities and charges Other long term liabilities Total non current liabilities 20 21 22 23 22 Total liabilities EQUITY Capital and reserves attributable to the equity holders of the company Share capital Statutory reserves Retained earnings Total shareholders’ equity 2008 18 19 Total liabilities and equity The financial year 2009 At December 31, 2009 The accompanying notes on pages 45 to 116 are an integral part of these financial statements. These financial statements have been approved for issue by the Board of Directors of Crnogorski Telekom A.D. on April 15, 2010 and on their behalf are signed by Slavoljub Popadic Chief Executive Officer Manfred Knapp Chief Financial Officer Miloš Radović Accounting Director This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 41 STATEMENT OF COMPREHESIVE INCOME In EUR Notes For the year ended December 31, 2009 2008 Revenues Fixed line and Internet revenues Mobile lines revenues Total revenues 24 a 24 b 64.988.950 57.801.956 122.790.906 67.486.452 64.861.659 132.348.111 Other income 25 365.345 211.441 26 27 28 (21.311.304) (21.882.988) (23.578.578) (5.192.165) (24.602.791) (96.567.826) (26.048.892) (21.637.264) (27.393.589) (5.167.529) (30.841.122) (111.088.396) 26.588.425 21.471.156 5.786.068 (536.670) 5.249.398 6.850.074 (880.810) 5.969.264 31.837.823 27.440.420 (3.224.322) (2.799.353) Total comprehensive income for the year 28.613.501 24.641.067 Attributable to: Equity holders of the company 28.613.501 24.641.067 0,6053 0,6053 0,5213 0,5213 Operating expenses Employee related expenses Depreciation, amortization and impairment Payments to other network operators Cost of telecommunications equipment sales Other operating expenses Total operating expenses 29 Operating profit Finance income Finance costs Finance income – net 30 30 Profit before income tax Income tax expenses 31 Earnings per share of the Company during the period (expressed in EUR per share) -basic -diluted The accompanying notes on pages 45 to 116 are an integral part of these financial statements. 42 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. STATEMENT OF CASH FLOW (In EUR) Note For the year ended December 31, 2009 2008 Cash generated from operations Interest paid Income tax paid Net cash generated from operating activities 39 30 23 43.819.047 (16.937) (826.228) 42.975.882 38.453.063 (3.114) (5.797.610) 32.652.339 5,7 12 30 5,7 10 (17.320.523) 16.950.000 4.630.903 154.612 (1.635.563) 2.779.429 (14.990.517) (22.050.000) 5.393.760 1.856.059 1.053.177 (28.737.521) Dividends paid to shareholders and minority interest Net cash used in financing activities (59.721.455) (59.721.455) (21.440.415) (21.440.415) Net decrease in cash and cash equivalents (13.966.144) (17.525.597) 17.147.736 3.181.592 34.673.333 17.147.736 Cash flows from investing activities Purchase of tangible and intangible assets Short term bank deposits Interest received Proceeds from disposal of associates Long term loans and other receivables Net cash used in investing activities The financial year 2009 Cash flows from operating activities Cash flows from financing activities Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period 11 The accompanying notes on pages 45 to 116 are an integral part of these financial statements. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 43 STATEMENT OF CHANGES IN EQUITY Share Capital Statutory reserves Retained earnings Total Balance at January 1, 2008 Dividends Allocation of retained earnings (Note 19) Total comprehensive income for the year 2008 Balance at December 31, 2008 140.996.394 140.996.394 2.919.357 2.139.280 5.058.637 70.134.998 (22.000.000) (2.139.280) 24.641.067 70.636.785 214.050.749 (22.000.000) 24.641.067 216.691.816 Balance at January 1, 2009 Dividends Allocation of retained earnings (Note 19) Total comprehensive income for the year 2009 Balance at December 31, 2009 140.996.394 140.996.394 5.058.637 585.466 5.644.103 70.636.785 (9.800.000) (585.466) 28.613.501 88.864.820 216.691.816 (9.800.000) 28.613.501 235.505.317 The accompanying notes on pages 45 to 116 are an integral part of these financial statements. 44 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 1. GENERAL INFORMATION The Company is the principal provider of fixed telephony services in the Republic of Montenegro, as well as of local, national and international telephony services, in addition to a wide range of other telecommunication services involving leased circuits, data networks, telex and telegraph services. In accordance with the Republic of Montenegro Telecommunications Law, the Company’s market position as an exclusive supplier of fixed-line telephony services was officially terminated on December 31, 2003. Crnogorski Telekom A.D., Podgorica was founded and registered with the Commercial Court of Podgorica under Decision numbered Fi. 5490/98 of December 31, 1998, subsequent to the completion of the ownership transformation and separation processes of the telecommunication and postal businesses of the Public Enterprise of Post, Telegraph and Telecommunications of the Republic of Montenegro (“JP PTT Crna Gora”). In accordance with the Republic of Montenegro Company Law, the Company was re-registered on November 6, 2002 into the Central Register of the Commercial Court of Podgorica under registration entry numbered 4-0000618/001. During 2000, Telekom rolled out a GSM 900 mobile network and in May 2000 launched its commercial operation as a provider of mobile telephony. On July 28, 2000 Telekom registered Monet D.O.O. (which was later renamed to T-mobile CG d.o.o.) as it’s fully owned subsidiary and subsequently transferred the mobile telephony business to Monet. The Montenegro mobile telephony market is liberalized and Crnogorski Telekom (T-mobile CG d.o.o., as its subsidiary before merging date) competes with other operators “Pro Monte” D.O.O. and M tel D.O.O. Crnogorski Telekom A.D. (Internet Crna Gora d.o.o., as its subsidiary before merging date) also operates in the area of provisioning of web services, line leases, reproduction of computer media, consulting services and in development of computer software. Following a successful privatization tender Crnogorski Telekom A.D. was acquired by Magyar Telekom NyRt. (hereinafter referred to as Magyar Telekom). Magyar Telekom obtained control of Crnogorski Telekom on March 31, 2005 and by the end of 2005 it had a 76.53% stake which did not change by 31 December 2009. Deutche Telekom AG is the ultimate controlling owner of Magyar Telekom holding 59.21% of the issues shares. As of April 30, 2009, the Company owned 100% of the capital of T-mobile CG d.o.o., the Montenegrin mobile company and 100% of the share capital of Internet Crna Gora.. On April 30, 2009 the General Assembly of Crnogorski Telekom A.D made decision about merging of previously existed three companies: Crnogorski telekom A.D., and it’s subsidiaries T Mobile d.o.o. and Internet d.o.o., into one unique legal entity “Crnogorski Telekom A.D.”. The merger was registered on May 11, 2009 at the Court of Registrar of the Republic of Montenegro under registration number 4-0000618/028. Telekom is domiciled in Podgorica, in the Republic of Montenegro at the following street address: Moskovska 29. As at December 31, 2009 the Company had 917 employees (31 December 2008: 949 employees). This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 45 The financial year 2009 Crnogorski Telekom A.D. Podgorica (“Telekom” or the “Company”) provides fixed line, mobile, internet and other telecommunication services in Montenegro. 1. GENERAL INFORMATION (continued) Investigation into certain consultancy contracts As previously disclosed, in the course of conducting their audit of Magyar Telekom’s 2005 financial statements, PricewaterhouseCoopers Könyvvizsgáló és Gazdasági Tanácsadó Kft. (“PWC”) identified two contracts the nature and business purposes of which were not readily apparent to them. In February 2006, Magyar Telekom’s Audit Committee retained White & Case (the “independent investigators”), as its independent legal counsel, to conduct an internal investigation into whether the Magyar Telekom and/or any of its affiliates had made payments under those, or other contracts, potentially prohibited by U.S. laws or regulations, including the Foreign Corrupt Practices Act (“FCPA”), or internal company policy. The Audit Committee also informed the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”), and the Hungarian Supervisory Financial Authority of the internal investigation. On December 2, 2009, the Audit Committee provided Magyar Telekom’s Board of Directors with a “Report of Investigation to the Audit Committee of Magyar Telekom Nyrt.” dated November 30, 2009 (the “Final Report”). The Audit Committee indicated that it considers that, with the preparation of the Final Report based on currently available facts, White & Case has completed its independent internal investigation. The Final Report includes the following findings and conclusions, based upon the evidence available to the Audit Committee and its counsel: As previously disclosed, with respect to Montenegrin contracts, there is “insufficient evidence to establish that the approximately EUR 7 million in expenditures made pursuant to four consultancy contracts ... were made for legitimate business purposes”, and there is “affirmative evidence that these expenditures served improper purposes.” These contracts were not appropriately recorded in the books and records of Magyar Telekom and its relevant subsidiaries. In 2007 the Supreme State Prosecutor of the Republic of Montenegro informed the Board of Directors of Crnogorski Telekom, of her conclusion that the contracts subject to the internal investigation in Montenegro included no elements of any type of criminal act for which prosecution would be initiated in Montenegro. Hungarian authorities also commenced their own investigations into Magyar Telekom’s activities in Montenegro. The Hungarian National Bureau of Investigation has informed Magyar Telekom that it closed its investigation as of May 20, 2008 without identifying any criminal activity. United States authorities commenced their own investigations concerning the transactions which were the subject of the internal investigation to determine whether there have been violations of U.S. law. We cannot predict when the ongoing investigations will be concluded, what the final outcome of those investigations may be, or the impact, if any, they may have on our financial statements or results of operations. The authorities could seek criminal or civil sanctions, including monetary penalties, against us or our affiliates, as well as additional changes to our business practices and compliance programs. 46 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies The financial statements of the Crnogorski Telekom A.D. have been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and effective at the time of preparing the financial statements and with the requirements of the Law on Accounting and Auditing of Montenegro. The financial statements have been prepared under historical cost convention. The Company maintains its accounting records and prepares its financial statements in accordance with the Accounting and Auditing Law of the Republic of Montenegro (Official Gazette of the Republic of Montenegro, numbered No 69/2005) and in particular, based on the relevant legal decision defining the mandatory application of IFRS in the Republic of Montenegro (Official Gazette of the Republic of Montenegro, numbered 69/2002). In conformity with these provisions, the IFRS were applied for the first time as the primary accounting basis for the reporting year commencing January 1, 2003. The official currency in the Republic of Montenegro and the functional currency of Crnogorski Telekom A.D. is the Euro (EUR). These financial statements of the Company were approved for issue by the Company’s Board of Directors (the Board), however, the Annual General Meeting (AGM) of the owners, authorized to accept these financials, has the right to require amendments before acceptance. As the controlling shareholders are represented in the Board of the Company that approved these financial statements for issuance, the probability of any potential change required by the AGM is extremely remote, and has never happened in the past. Standards, amendments and interpretations effective and initially adopted by the Company in 2009 In the current period, the Company has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2009. The initial application of these pronouncements did not have a material impact on the Company’s results of operations, financial position or cash flows. Listed below are those new or amended standards or interpretations: - IAS 1 (revised) - Presentation of Financial Statements. Revised IAS 1 introduces overall requirements for the presentation of financial statements, guideline for their structure and minimum requirements for their contents. The revised standard prohibits the presentation of items of income and expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. All non-owner changes in equity are required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period The amendment also clarifies that some rather than all financial assets and liabilities classified as held for trading in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’ are examples of current assets and liabilities respectively. The amendments did not have any effect on financial statements of the Company. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 47 The financial year 2009 2.1. Basis of Preparation 2. summary of significant accounting policies (continued) 2.1. Basis of Preparation (continued) - IAS 19 (Amendment), ‘Employee benefits (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. IAS 37, ‘Provisions, contingent liabilities and contingent assets, requires contingent liabilities to be disclosed, not recognized. The application of the amendments did not have a material effect on the financial statements of the Company. - IAS 23 (revised) - Borrowing costs - Under the revised IAS 23 an entity must capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The definition of borrowing costs has also been amended so that interest expense is calculated using the effective interest method defined in IAS 39 ‘Financial instruments: Recognition and measurement’. This eliminates the inconsistency of terms between IAS 39 and IAS 23. Crnogorski Telekom A.D. applied IAS 23 as of January 1, 2009, which did not have an impact on the financial statements since the Company did not have any borrowed funds in the reported periods. - IFRS 2 (amended) Share-based Payment. Main change and clarifications include references to vesting conditions and cancellations. The changes to IFRS 2 must be applied in periods beginning on or after January 1, 2009. The Company applied IFRS 2 as of January 1, 2009, which had immaterial impact on the financial statements as the Company has no significant share based compensations. - IFRS 7 (amended) Financial Instruments: Disclosures (Improving Disclosures about Financial Instruments). The amendment requires enhanced disclosures about fair value measurements and liquidity risk in the wake of the recent financial crisis. The entity is required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity further has to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. As the Company does not have issued financial guarantees nor financial derivatives, there is no effect on the financial statements of the Company. 48 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) - IFRS 8, Operating Segments. Under IFRS 8, segments are components of an entity regularly reviewed by an entity’s chief operating decision-maker. The new standard requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. IFRS 8 also sets out requirements for related disclosures about products and services, geographical areas and major customers. The Company adopted IFRS 8 as of January 1, 2009, which resulted in the reporting of two instead of three operating segments. Fixed line and Internet, which were considered as a separate operating segment in previous years, have been combined into one operating segment starting form January 1, 2009, as these are considered together for management decision making. - IFRIC 13 Customer Loyalty Programmes. This Interpretation addresses accounting by entities that grant loyalty award credits to customers who buy other goods or services. Specifically, it explains how such entities should account for their obligations to provide free or discounted goods or services to customers who redeem award credits. The Company applied this Interpretation from January 1, 2009, but the effect was immaterial for the Company’s financial statements. Standards, amendments and interpretations effective in 2009 but not relevant for the Company - IAS 20 (Amendment), ‘Accounting for government grants and disclosure of government assistance’. The benefit of a below- market rate government loan is measured as the difference between the carrying amount in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’, and the proceeds received with the benefit accounted for in accordance with IAS 20. The amendment does not have an impact on the Company’s operations as there are no loans received or other grants from the government. - IAS 32 (amended) Financial Instruments; Presentation. The IASB amended IAS 32 with respect to the Statement of financial position classification of puttable financial instruments and obligations arising only on liquidation. As a result of the amendments, some financial instruments that previously meet the definition of a financial liability need to be classified as equity. The amendments have detailed criteria for identifying such instruments. The amendments of IAS 32 are applicable for annual periods beginning on or after January 1, 2009. As the Company currently does not have such instruments that would be affected by the amendments, the amendments to the standard did not have any impact on the Company’s financial statements. - IFRS 1 First-time Adoption of IFRS (revised). The IASB issued the revised version of IFRS1. As the Company has been reporting according to IFRS for many years, neither the original standard, nor any revisions to that are relevant for the Company. - IFRIC 15 Agreements for the Construction of Real Estate. IFRIC 15 refers to the issue of how to account for revenue and associated expenses by entities that undertake the construction of real estate and sell these items before construction is completed. The interpretation defines criteria for the accounting in accordance with either IAS 11 or with IAS 18. IFRIC 15 shall be applied for annual periods beginning on or after January 1, 2009. As the Company is not involved in such constructions, IFRIC 15 is not relevant for the Crnogorski Telekom. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 49 The financial year 2009 2.1. Basis of Preparation (continued) 2. summary of significant accounting policies (continued) 2.1. Basis of Preparation (continued) - IFRIC 16 Hedges of a Net Investment in a Foreign Operation. IFRIC 16 refers to the application of Net Investment Hedges. Mainly, the interpretation states which risk can be defined as the hedged risk and where within the group the hedging instrument can be held. Hedge Accounting may be applied only to the foreign exchange differences arising between the functional currency of the foreign operation and the parent entity’s functional currency. A derivative or a non-derivative instrument may be designated as a hedging instrument. The hedging instrument(s) may be held by any entity or entities within the group (except the foreign operation that itself is being hedged), as long as the designation, documentation and effectiveness requirements of IAS 39.88 that relate to a net investment hedge are satisfied. IFRIC 16 shall be applied for annual periods beginning on or after October 1, 2008. As the Crnogorski Telekom does not apply such hedges and does not apply hedge accounting, IFRIC 16 will have no impact on the Company’s accounts. - IFRIC 9 and IAS 39 In March 2009 the IASB published amendments to IFRIC 9 (Reassessment Embedded Derivatives) and IAS 39 (Financial Instruments: Recognition and Measurement). As a result, entities are required to: assess whether an embedded derivative is required to be separated from a host contract when the entity reclassifies a hybrid (combined) financial asset out of the fair value through profit or loss category make such an assessment on the basis of the circumstances that existed when the entity first became a party to the contract, or, if later, when there was a change in the contract that significantly modified the cash flows determine whether the fair value of the separated embedded derivative can be measured reliably; if not, the entire hybrid (combined) financial asset must remain in the fair value through profit or loss category. When an entity performs the assessment as required by the amendments it does not apply paragraph (c) of IAS 39, which states that separation of an embedded derivative from the host contract is required only if the hybrid (combined) instrument is not measured at fair value through profit or loss. The amendments are applicable for annual periods ending on or after June 30, 2009. The Crnogorski Telekom has no hybrid financial assets, therefore, the amended standard and interpretation did not have any effect on the Company’s financial statements. Standards, amendments and interpretations issued that are not yet effective and have not been early adopted by the Company - IAS 24 (revised). In November 2009, the IASB issued a revised version of IAS 24 Related Party Disclosures. Until now, if a government controlled, or significantly influenced, an entity, the entity was required to disclose information about all transactions with other entities controlled, or significantly influenced by the same government. The revised standard still requires disclosures that are important to users of financial statements but eliminates requirements to disclose information that is costly to gather and of less value to users. It achieves this balance by requiring disclosure about these transactions only if they are individually or collectively significant. Furthermore the IASB has simplified the definition of related party and removed inconsistencies. The revised standard shall be applied retrospectively for annual periods beginning on or after January 1, 2011. Earlier application is permitted. Governments have no ownership in Crnogorski Telekom A.D., therefore, the revised standard will not have a significant impact on the disclosures in the Company’s financial statements. - IAS 27, IFRS 3 (amended). In January 2008 the IASB published the amended Standards IFRS 3 - Business Combinations and IAS 27 Consolidated and Separate Financial Statements. The major changes compared to the current version of the standards are summarized below: 50 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) With respect to accounting for non-controlling interest an option is added to IFRS 3 to permit an entity to recognize 100% of the goodwill of the acquired entity, not just the acquiring entity’s portion of the goodwill (‘full goodwill’ option) or to measure non-controlling interest at its fair value. This option may be elected on a transaction-by-transaction basis. In a step acquisition, the fair values of the acquired entity’s assets and liabilities, including goodwill, are measured on the date when control is obtained. Accordingly, goodwill will be measured as the difference at the acquisition date between the fair value of any investment the business held before the acquisition, the consideration transferred and the net asset acquired. A partial disposal of an investment in a subsidiary while control is retained is accounted for as an equity transaction with owners, and gain or loss is not recognized. A partial disposal of an investment in a subsidiary that results in loss of control triggers re-measurement of the residual interest to fair value. Any difference between fair value and carrying amount is a gain or loss on the disposal, recognized in profit or loss. Acquisition related costs will be accounted for separately from the business combination, and therefore, recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability for any contingent purchase consideration. If the amount of contingent consideration accounted for as a liability changes as a result of a post-acquisition event (such as meeting an earnings target), it will be recognized in accordance with other applicable IFRSs, as appropriate rather than as an adjustment of goodwill. The revised standards require an entity to attribute their share of losses to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. In contrast to current IFRS 3, the amended version of this standard provides rules for rights that have been granted to the acquiree (e.g. to use its intellectual property) before the business combination and are re-acquired with the business combination. The revised IFRS 3 brings into scope business combinations involving only mutual entities and business combinations achieved by contracts alone. The amended version of IFRS 3 has to be applied for Business Combinations with effective dates in annual periods beginning on or after July 1, 2009. Early application is allowed but restricted on annual periods beginning on or after June 30, 2007. The changes to IAS 27 must be applied in periods beginning on or after July 1, 2009. Early application is allowed. Early application of any of the two standards requires early application of the other standard, respectively. We believe that that the amended standards will not have a significant impact on the Company’s comprehensive income, financial position or cash flows. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 51 The financial year 2009 2.1. Basis of Preparation (continued) 2. summary of significant accounting policies (continued) 2.1. Basis of Preparation (continued) - IFRS 2 (amended) Share-based Payment. The amendments related to Group Cash-settled Share-based Payment Transactions were published in June 2009. Currently effective IFRSs require attribution of group share-based payment transactions only if they are equitysettled. The amendments resolve diversity in practice regarding attribution of cash-settled share-based payment transactions and require an entity receiving goods or services in either an equity-settled or a cash-settled payment transaction to account for the transaction in its separate or individual financial statements. The Company has no significant share based compensations; therefore, we do not expect the amended standard to have a significant effect on the Company when applied. Amendments to IFRS 2 shall be applied retrospectively for annual periods beginning on or after January 1, 2010. - IFRS 9 Financial Instruments. The standard forms the first part of a three-phase project to replace IAS 39 (Financial Instruments: Recognition and Measurement) with a new standard, to be known as IFRS 9 Financial Instruments. IFRS 9 prescribes the classification and measurement of financial assets. At initial recognition, IFRS 9 requires financial assets to be measured at fair value. After initial recognition, financial assets continue to be measured in accordance with their classification under IFRS 9. Where a financial asset is classified and measured at amortized cost, it is required to be tested for impairment in accordance with the impairment requirements in IAS 39. IFRS 9 defines the below rules for classification. IFRS 9 requires that financial assets are classified as subsequently measured at either amortized cost or fair value. There are two conditions needed to be satisfied to classify financial assets at amortized cost: (1) The objective of an entity´s business model for managing financial assets has to be to hold assets in order to collect contractual cash flows; and (2) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Where either of these conditions is not satisfied, financial assets are classified at fair value. Faire Value Option: IFRS 9 permits an entity to designate an instrument, that would otherwise have been classified in the amortized cost category, to be at fair value through profit or loss if that designation eliminates or significantly reduces a measurement or recognition inconsistency (‘accounting mismatch’). Embedded derivatives: The requirements in IAS 39 for embedded derivatives have been changed by no longer requiring that embedded derivatives be separated from financial asset host contracts. Reclassification: IFRS 9 requires reclassification between fair value and amortized cost when, and only when there is a change in the entity’s business model. The ‘tainting rules’ in IAS 39 have been eliminated. An entity shall apply IFRS 9 for annual periods beginning on or after January 1, 2013. Earlier adoption is permitted. For entities that adopt IFRS 9 for periods before January 1, 2012 the IFRS provides transition relief from restating comparative information. The adoption of the new standard will likely result in changes in the financial statements of the Company, the exact extent of which we are currently analyzing. 52 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) - IFRIC 18, Transfers of Assets from Customers. The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. The Company does not have such transactions, therefore, we do not expect the amended standard to have a significant effect on the Company when applied from 2010. Standards, amendments and interpretations that are not yet effective and not relevant for the Company’s operations - IAS 32 (amended) - The IASB published an amendment to IAS 32 Financial Instruments: Presentation in October 2009. The amendment clarifies the classification of rights issues as equity or liabilities for rights issues that are denominated in a currency other than the functional currency of the issuer. These rights issues are recorded as derivative liabilities before the amendment. The amendment requires that such right issues offered pro rate to all of an entity’s existing shareholders are classified as equity. The classification is independent of the currency in which the exercise price is denominated. The application of the amendment is required for annual periods beginning on or after February 1, 2010. An earlier application is permitted. The amendment will have no impact on the Company’s financial statements as Crnogorski Telekom has no such instruments. - IAS 39 (amended) - The IASB published an amendment in August 2008 to IAS 39 with respect to hedge accounting. The amendment clarifies that it is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge. The definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading is also amended. This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit taking is included in such a portfolio on initial recognition. The amendment of IAS 39 shall be applied retrospectively for annual periods beginning on or after July 1, 2009. The amendment does not have any impact on Crnogorski Telekom’s accounts as the Company does not apply hedge accounting. - IFRS 1 Additional Exemptions for First-time Adopters. The IASB issued the amendments to IFRS 1 in July 2009. As the Crnogorski Telekom has been reporting according to IFRS for many years, neither the original standard, nor any revision to that is relevant for the Company. - IFRIC 14 (amended) IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. In November 2009, the IASB issued an amendment to IFRIC 14, which corrects an unintended consequence of IFRIC 14. Without the amendments, in some circumstances entities are not permitted to recognize some voluntary prepayments for minimum funding contributions as an asset. The amendment permits such an entity to treat the benefit of such an early payment as an asset. The amendments are effective for annual periods beginning January 1, 2011. The amendments must be applied retrospectively to the earliest comparative period presented. The amended interpretation is not applicable to Crnogorski Telekom A.D. as the Company has no funded defined post-retirement benefit schemes. - IFRIC 17 Distributions of Non-cash Assets to Owners. This interpretation issued in November 2008 refers to the issue when to recognize liabilities accounted for non-cash dividends payable (e.g. property, plant, and equipment) and how to measure them. In addition, the interpretation refers to the issue how to account for any difference between the carrying amount of the assets distributed and the carrying amount of the dividend payable. The interpretation shall be applied for annual periods beginning on or after July 1, 2009. As the Company does not distribute non-cash dividends, IFRIC 17 will have no impact on the Company’s financial statements. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 53 The financial year 2009 2.1. Basis of Preparation (continued) 2. summary of significant accounting policies (continued) 2.1 Basis of Preparation (continued) - IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. This interpretation issued in November 2009 clarifies the requirements of IFRSs when an entity renegotiates the terms of a financial liability with its creditor and the creditor agrees to accept the entity’s shares or other equity instruments to settle the financial liability fully or partially. The interpretation is effective for annual periods beginning on or after July 1, 2010 with earlier application permitted. The interpretation shall be applied retrospectively. The interpretation is not applicable to Crnogorski Telekom as the Company does not extinguish any of its financial liabilities with equity instruments. - IFRS for Small and Medium-sized Entities. In July 2009 the IASB issued its IFRS for Small and Medium-sized Entities, which is not relevant for Crnogorski Telekom. 2.2. Consolidation 2.2.1 Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Company 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 Company. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company. The cost of acquisition is measured as the fair value of the asset given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in business combination are measured initially at fair value at the acquisition date, irrespective of the extent of any minority interest. The excess or the costs of acquisition over the fair value or the Company’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in Profit for the year (Other 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 Company. Transactions with non-controlling interests are treated as third party transactions. Gains or losses arising on disposals to non-controlling interests are recorded in the Profit for the year. Purchases from Non-controlling interests result in goodwill (or other income), being the difference between any consideration transferred and the relevant share acquired of the carrying value of the net assets of the subsidiary. At the end of previous financial year, December 31, 2008, Crnogorski Telekom A.D. had two subsidiaries: T Mobile d.o.o and Internet d.o.o., which were consolidated in accordance with described accounting treatment. Due to decision about merging of Crnogorski telekom A.D. and its subsidiaries: T Mobile d.o.o and Internet d.o.o, made by General Assembly of Crnogorski Telekom A.D., as of April 30, 2009, for the financial year ended as at December 31, 2009, the Company does not have any subsidiary, which requires to be consolidated. As all of the combining entities were ultimately controlled by the same party (Crnogorski Telekom) both before and after the business combination, merging transaction was between entities under common control and out of scope of IFRS 3. There is no transfer of consideration, both subsidiaries were 100% owned by the acquire (Crnogorski Telekom AD) prior to this combination. Therefore, the company used predecessor values to account for merger. 54 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.2. Consolidation (continued) The Company did not restate assets and liabilities to their fair values. Instead, the Company incorporated the assets and liabilities at the amounts recorded in the books of the acquired company (the predecessor carrying values) adjusted only to achieve harmonisation of accounting policies. The acquirees’ (T-mobile CG’s and Internet CG’s) book values were those in the consolidated financial statements of the highest entity that has common control for which consolidated IFRS financial statements are prepared. No goodwill has arisen in the predecessor accounting. Goodwill presented on the face of the statement of financial position of these financial statements had arisen on the prior purchase of minority shareholding of Internet CG and T mobile in previous years. These financial statements incorporate the acquired entities’ results as if the three entities had had always been combined. Consequently, the financial statements reflect three entities’ full year’s results, even though the business combination has occurred during 2009. In addition, the corresponding amounts for the previous year also reflect the combined results of three entities, even though the transaction did not occur until the current year. 2.2.2 Associates Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Company’s investment in associates includes goodwill arising on acquisition, and net of any accumulated impairment loss. The Company’s share of its associates’ post-acquisition profits or losses is recognized in the statement of comprehensive income in the Profit for the year. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company’s share of losses in an associate equals of exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Company and its associates are eliminated to the extent of the Company’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 2.3. Segment reporting The Company adopted IFRS 8 in 2009, which did not have significant impact on the Company’s segment disclosure. The Companies Chief Operating Decision maker regularly reviews the operating results of the identified operating segments in order to make decisions about resources to be allocated to the segments and to assess its performance. The operating segments were identified based on the nature of the business activities and based on the manner provided internally to the chief operating decision maker, the Management Committee (MC) of Crnogorski Telekom A.D. The accounting policies and measurement principles of the operating segments are the same as those applied for the Company described in the Summary of significant accounting policies (Note 2). Depending on internal reporting, decision making process and nature of product there are two identifiable segments in Crnogorski Telekom: Fixed Line and Internet and Mobile Line. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 55 The financial year 2009 The principles of predecessor accounting used are: 2. summary of significant accounting policies (continued) 2.3. Segment reporting (continued) The operating segments’ revenues comprise revenues from external customers. Fixed line and internet segment provides fixed line services as well as web services, line leases, reproduction of computer media, etc to its’ customers, while Mobile line segment derivates its’ revenue mainly from mobile line services provided to external customers. The operating segments’ depreciation, amortization and impairment expenses include these expenses related to the intangible assets and PPE operating in the segments. Costs incurred in, or charged to, the operating segments comprise third party costs occurred. The measure that the MC uses to monitor the segments’ operating results is primarily EBITDA (Earnings before interest, tax, depreciation and amortization), which is defined by the Group as Operating Profit before Depreciation and Amortization. As virtually all PPE and Intangible Assets are managed at the operating segment level, the related depreciation and amortization expense is also considered part of the segments’ results, therefore, Operating Profit is also a measure of the segments’ results. The financial results, the share of associates’ profits and tax expenses are not monitored on segment level, but managed at Company level. Assets operating in the operating segments exclude Cash and cash equivalents, Other current financial assets and Non current financial assets and Current and Deferred tax assets, which are monitored and managed at Company level. All other assets are included in the group of assets monitored at segment level. Jointly used assets are not allocated to various segments, they are included in the segment that owns or manages those assets. Crnogorski Telekom operates in more than one segment. However, since it is one legal entity, there are no cross-charges implemented for shared use of an asset. Liabilities incurred by the operating segments exclude Financial liabilities and Current and Deferred tax liabilities, which are monitored and managed at Company level. All other liabilities are included in the group of liabilities monitored at segment level. There are no material liabilities used jointly by the segments. Another important KPI monitored at segment level is capital expenditure (Capex), which is defined as additions to PPE and Intangible assets in the normal course of business, excluding additions due to business combinations and asset retirement obligations. There are no asymmetrical allocations to operating segments. For example, if a tangible asset is included in one segment, the depreciation is also included in the expenses of the same segment, or, if the revenue from a customer is included in a segment, the receivable from that customer will also be included in the same segment. 2.4. Critical accounting estimates and judgements The presentation of the financial statements requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as at the statement of financial position date, and income and expenses arising during the accounting period. Estimates and judgments 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. In some cases the Company relies on independent expert opinion.The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual result. The estimates and assumption that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are outlined below: 56 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.4. Use of Estimates (continued) The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. We believe that this is a critical accounting estimate since it involves assumptions about technological development in an innovative industry and heavily dependent on the investment plans of the Company. Further, due to the significant weight of long-lived assets in our total assets, the impact of any changes in these assumptions could be material to our financial position, and results of operations. As an example, if the Crnogorski Telekom was to shorten the average useful life of its assets by 10%, this would result in additional annual depreciation and amortization expense of approximately EUR 2,18 million. See Note 5 and Note 7 for the changes made to useful lives in 2009. b) Estimated impairment of property and equipment and intangibles We assess the impairment of identifiable property, plant, equipment and intangibles whenever there is a reason to believe that the carrying value may materially exceed the recoverable amount and where impairment of value is anticipated. The calculations of recoverable amounts are primarily determined by value in use calculations, which use a broad range of estimates and factors affecting those. Among others, we typically consider future revenues and expenses, technological obsolescence, discontinuance of services and other changes in circumstances that may indicate impairment. If impairment is identified using the value in use calculations, we also determine the fair value less cost to sell (if determinable), to calculate the exact amount of impairment to be charged. As this exercise is highly judgmental, the amount of a potential impairment may be significantly different from that of the result of these calculations. c) Estimated impairment of goodwill Goodwill is tested for impairment annually or more frequently. The recoverable amounts of the cash generating units (CGU) are calculated based on fair value less cost to sell determined by the discounted cash flows of the CGU over the next ten years with a terminal value. This is highly judgmental, which carries the inherent risk of arriving at materially different recoverable amounts if estimates used in the calculations would prove to be inappropriate. The Company has an implemented policy to make the impairment test based on a 10-year cash flow projection on reasonable and supportable assumptions that present the management’s best estimate on market participants’ assumptions and expectations, and also considering recent similar transactions and industry benchmarks. In order to determine the recoverable amounts of the CGU, the Company calculates the CGU fair values less cost to sell. In the calculations, Crnogorski Telekom uses weighted average cost of capital (WACC) before tax which is determined based on CAPM (capital asset pricing model) using the average beta of the peer group, 10 year zero coupon yields and a debt ratio in line with the usual indebtedness of listed peer telecommunications companies. The perpetual growth rate (“PGR”) is in line with the long-term average growth rate for the telecommunications sector. Key assumptions used for fair value less cost to sell calculations: EBITDA Growth rate Discount rate Fix line and Internet Mobile 28% 2% 10% 32.1% 2% 10% This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 57 The financial year 2009 a) Useful lives of assets 2. summary of significant accounting policies (continued) 2.4. Use of Estimates (continued) c) Estimated impairment of goodwill (continued) The table below includes a sensitivity analysis that shows how much impairment should be recognized as at December 31, 2009 for the CGU if we had used 33% lower cash flows than used in the calculations, or a WACC of 14% or a PGR of -8.5% for Fixed Line and Internet or 78% lower cash flows or a WACC of 37% for Mobile Line, leaving the other assumptions unchanged (ceteris paribus). Any combination of these hypothetical changes would result in higher amounts of impairment. The percentages disclosed in the sensitivity analyses are the first round decimal percentages where impairment would occur (e.g. while impairment would occur using a 14% WACC, no impairment occurs yet using a 13% WACC). Sensitivity analysis of Fixed Line and Internet CGU impairment calculations in 2009 (in EUR) Cashflows (-33%) WACC (14%) PGR (-8,5%) Fixed Line and Internet (788) (6.893) (534) Sensitivity analysis of Mobile Line CGU impairment calculations in 2009 (in EUR) Cashflows (-78%) WACC (37%) PGR (N/A) Mobile Line (1.374) (357) N/A d) Impairment of trade and other receivables We calculate impairment for doubtful accounts based on estimated losses resulting from the inability of our customers to make required payments. We base our estimate on the aging of our account receivables balance and our historical write-off experience, customer credit-worthiness and recent and expected changes in our customer payment terms. These factors are reviewed periodically, and changes are made to the calculations when necessary. The estimates also involve assumptions about future customer behaviour and the resulting future cash collections. If the financial condition of our customers were to deteriorate, actual write-offs of currently existing receivables may be higher than expected and may exceed the level of the impairment losses recognized so far. Included in long-term receivables are specific receivables from the Government of the Republic of Montenegro (Note 10) which the Company estimates that are entirely recoverable and where impairment in value was not anticipated. This estimate is based on a past history of repayments. e) Provisions Provisions in general are highly judgmental, especially in the cases of legal disputes. The Company assesses the probability of an adverse event as a result of a past event to happen and if the probability is evaluated to be more than fifty percent, the Company fully provides for the total amount of the liability. Due to the high level of uncertainty, in some cases the evaluation may not prove to be in line with the eventual outcome of the case. f) Employee benefits Employee benefits such as Retirement and Jubilee Anniversary obligations, are calculated based on actuarial assumptions of expected average remaining working lives. Due to the high level of uncertainty, in some cases the evaluation may not prove to be in line with the eventual outcome of the case. 58 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. These financial statements are presented in EUR which is functional currency of the Company. 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 recognized in the Profit for the year (Finance income / loss). 2.6. Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets of the Company include cash and cash equivalents, equity instruments of another entity (available-for-sale) and contractual rights to receive cash (loans, trade and other receivables). Financial liabilities of the Company include liabilities that originate from contractual obligations to deliver cash or another financial asset to another entity (non-derivatives). Financial liabilities, in particular, include liabilities to banks and related parties and trade payables. 2.6.1. Financial assets The Company classifies its financial assets in the two categories: - loans and receivables - available for sale (AFS) The classification depends on the purpose for which the financial asset was acquired. Management determines the classification of financial assets at their initial recognition. Regular way purchases and sales of financial assets are recognized on the trade-date, the date on which the Company commits to purchase or sell the asset. Investments are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. The Company assesses at each financial statement date whether there is objective evidence that a financial asset is impaired. There is objective evidence of impairment if as a result of loss events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 59 The financial year 2009 2.5. Foreign currency translation 2. summary of significant accounting policies (continued) 2.6. Financial instruments 2.6.1 Financial assets (continued) Impairment losses of financial assets are recognized in the Profit for the year against allowance accounts to reduce the carrying amount until the derecognition of the financial asset, at which time the net carrying amount (including any allowance for impairment) is derecognized from the Statement of financial position. Any gains or losses on derecognition are calculated and recognized as the difference between the proceeds form disposal and the (net) carrying amount derecognized. Financial assets are derecognized when the rights to receive cashflows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. 2.6.1.1 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Receivables are included in current assets, except those with maturities over 12 months after the financial statement date. These are classified as non-current assets. The following items are assigned to the “loans and receivables” measurement category. - cash and cash equivalents - short term bank deposits - trade receivables - employee loans - other receivables Loans and receivables are initially recognized at fair value and subsequently carried at amortized cost using the effective interest method, less any impairment. The carrying amount of loans and receivables, which would otherwise be past due, whose terms have been renegotiated is not impaired if the collectability of the renegotiated cashflows are considered ensured. a) Cash and cash equivalent Cash and cash equivalents include cash on hand and in banks and all highly liquid deposits and securities with original maturities of three months or less. b) Short term bank deposits Short term bank deposits are deposits with a maturity of more than three months up to twelve months at their amortized costs. Interest receivables on bank deposits are presented separately within the Statement of financial position as other receivables. The associated interest revenues are presented in the Statement of comprehensive income within other operating income as incurred. c) Trade and other receivable 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 trade receivables is established when there is objective evidence that the Company 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 or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. 60 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.6. Financial instruments 2.6.1. Financial assets (continued) c) Trade and other receivable (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 original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the Profit for the year (Other operating expenses – Bad debt expense). The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. Provision on accounts receivable balances are calculated based on Company’s best estimates or their deemed recoverability, by taking into consideration the historical data of customers payment. If no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, Crnogorski Telekom includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is recognized are not included in a collective assessment of impairment. The Company’s benchmark policy for collective assessment of impairment is based on the aging of the receivables due to the large number of relatively similar type of customers. When a trade receivable is established to be uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against Other operating expenses – Bad debt, in the statement of comprehensive income. Amounts due to, and receivable from, other network operators are shown net where a right of set-off exists and the amounts are settled on a net basis (such as interconnection receivables and payables). d) Employee loans Long-term loans to employees for residential housing purposes, which bear an interest rate significantly below the prevailing market rates of interest, or interest free loans, are initially recognised at fair value, being determined as the present value of all future cash receipts discounted using the prevailing market rate of interest for a similar instrument (similar as to currency, term, type of interest rate and other factors) with a similar credit rating. The difference between cash transfer and fair value is treated as employee remuneration recognized in the Statement of comprehensive income over the shorter of the term of the loan and the expected service life of the employee. The Company is required to write-off the remaining outstanding amount of the special employee housing loan, when following two conditions are met: 1) 25% of the principal owed has been repaid and 2) the employee has been an employee of the Company for a minimum loyalty period; The Company assesses the probability of employees compliance with the stipulated loyalty period (taking into account that principally, during the loyalty period, 25% of granted loan is paid off). For those employees expected not to be in compliance with loyalty period, the Company initially recognizes loan receivables at fair value being the present value of consideration paid discounted using the prevailing market interest rate (and subsequently decreased for any impairment losses resulting from expected future cash receipts). The difference between lower-contracted-interest rate and market-interest rates represents the fair value of the Company’s provision to its employee with low-interest finance. This expense is treated as employee remuneration and recognized in Statement of comprehensive income over the shorter of the term of the loan and the expected service life of the employee. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 61 The financial year 2009 2.6.1.1 Loans and receivables (continued) 2. summary of significant accounting policies (continued) 2.6. Financial instruments (continued) 2.6.1 Financial assets (continued) 2.6.1.1 Loans and receivables (continued) d) Employee loans (continued) For employees expected to be in compliance with the loyalty period, 25% of the loan originated is recognized as described in previous paragraph. 75% of the loan originated is treated as prepayments of employee benefits and amortized on a straight-line basis over the loyalty period until the benefits become vested (as an employee renders service which increases the employee’s entitlement to future benefits). This is because the Company expects future economic benefit embodied in that asset to flow to the Company over the loyalty period, or otherwise, breach of the contract by employees (in a sense of termination of employment contract before expiration of the stipulated loyalty period) will lead to a cash refund under the concluded contract. Amortization of prepaid employee benefits is recognized in Statement of comprehensive income within Other personnel costs. The amount of provision for impaired loans is based on management’s appraisals of these assets at the Statement of financial position date after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. The market in Montenegro for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. 2.6.1.2 Available for sale (AFS) Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the Statement of financial position date. Available for sale financial assets (current and non-current) consist of the Company’s participation in the share capital of foreign entities. Purchases and sales of investments are recognized on the trade-date – the date on which the Company commits to purchase or sell the asset. Subsequent to initial recognition all available-for-sale assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses. Gains and losses arising from changes in fair value are recognised directly in equity in the investments revaluation reserve with the exception of impairment losses which are recognised directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investments revaluation reserve is included in profit or loss for the period. The fair value is determined on an actively traded market (current bid prices), or otherwise in the absence of an active market, by Telekom’s best estimate of the investment’s fair value using the discounted cash flow model or by relying on independent expert opinion. There were no material changes in fair value valuation of available for sale financial assets for year ended December 31, 2009. 62 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.6. Financial instruments (continued) 2.6.2 Financial liabilities Financial liabilities carried at amortized cost 2.6.2.1 Financial liabilities carried at amortized cost The measurement category for “financial liabilities measured at amortized cost” includes all financial liabilities not classified as “at fair value through profit or loss”. a) Loans and other borrowings Borrowings are recognized initially at fair value less transaction costs, and subsequently measured at amortized costs using the effective interest rate method. Any difference between the proceeds and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest rate method. b) Trade and other payables Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. The carrying values of trade and other payables approximate their fair values due to their short maturity. 2.7. Inventories Inventories are stated at the lower of cost or net realizable value, and are valued on a weighted average method. Net realizable value represents the amount at which inventories can be realized in the ordinary course of business, as decreased by the costs of sales. Provisions that charged to “Other operating expenses” are made where appropriate in order to reduce the carrying value of such inventories to their net realizable values. Mobile handsets are often sold for less than cost in connection with promotions to obtain new subscribers with minimum commitment periods. Such loss on the sale of equipment is only recorded when the sale occurs if the cost of the handsets exceeds the normal resale price. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 63 The financial year 2009 There is one category for financial liabilities used by the Company: 2. summary of significant accounting policies (continued) 2.8. Intangible Assets Intangible assets acquired by the Company are stated at cost less accumulated amortization and impairment losses. As of the Statement of financial position date, intangible assets include: acquired computer software rights provided these costs do not form part of the hardware acquisition costs, telecommunication and other licenses, intangible assets in progress and goodwill. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use. These costs are amortized over the estimated useful life of the software. Costs associated with developing or maintaining computer software programs and annually paid license fees are generally recognized as an expense as incurred. Costs directly associated with the production of identifiable and unique software products controlled by the Company, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee related costs. Computer software development costs recognized as assets are amortized over their estimated useful lives. As these assets represent an immaterial portion of all software, these are not disclosed separately. Costs associated with the acquisition of long term telecommunication and other licenses are capitalized including any related borrowing costs. The useful lives of these licenses are determined based on the underlying agreements and are amortized on a straight line basis over the period from availability of the frequency for commercial use until the end of the initial license term. No renewal periods are considered in the determination of useful life. Intangible assets in progress include third-party and internally generated services for intangible assets not yet completed. This item discloses investments made (but not yet completed) in the current and/or previous financial year(s). Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is classified as part of ‘intangible assets’. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Amortization is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives. On an annual basis, Crnogorski Telekom reviews the useful lives for consistency with current development and replacement plans and advances in technology. For further details on the groups of assets impacted by the most recent useful life revisions refer to Note 5. In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 - Property, Plant and Equipment or as an intangible asset under IAS 38 – Intangible Assets, management uses judgment to assess which element is more significant and recognizes the assets accordingly. 64 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.8. Intangible Assets (continued) The most significant licences and availability period of commercial use are listed as follows: The Agency for Telecommunications of the Republic of Montenegro issued to Telekom, a Fixed-Line License that is valid as of January 1, 2002 for a period of twenty-five years. In accordance with the Guidelines on the Changes and Amendments to the Rules on the Determination of Registration and Licensing Fees for Telecommunication Operators and Service Providers dated November 5, 2004, the Government of Montenegro, Ministry of the Economy prescribed a special one-time fee for the provision of international traffic services, to be assessed for each year comprising the entire validity period of the telecommunications license. The aforementioned fee was paid in one instalment in the amount determined by the Agency for Telecommunications of the Republic of Montenegro. License for provision of international traffic services is granted for a period of twenty-three years. In October 2007, the Broadcasting agency of the Republic of Montenegro issued to Telekom a license for building and usage of distribution radio and TV program to customer (IPTV license) for a period of ten years. According to Rules about issuing and condition for usage license for distribution radio and TV programs Company is obliged to pay one-time fee for registration. The expenditure to acquire the IPTV license has been capitalized and amortized on a straight-line basis over its estimated useful life. The expenditure to acquire the telecommunication licenses has been capitalized and amortized on a straight-line basis over its estimated useful life. Mobile Telephony Telecommunication License The Agency for Telecommunications of the Republic of Montenegro issued a mobile telecommunication license GSM 900 MHz for the territory of the Republic of Montenegro valid as of January 1, 2002 for a period of fifteen years. At the expiration of this period, the Crnogorski Telekom shall have the option to extend the license for an additional period of ten years at a price equal to nominal cost. License for Web Services The license for Web Services is a general license for the provision of web services covering the territory of the Republic of Montenegro, with an additional value received from the Agency for Telecommunications of the Republic of Montenegro for a period of five years, commencing on January 16, 2002. This web service license grants rights for the provision of the following types of services: electronic data exchange, mail, conversion of protocol, access to databases or web services for data management, voice mail, videoconferencing capabilities and other forms of telecommunication services. This licence was renewed on February 13, 2007, for a period of 10 years. The Company is obligated to pay to the Republic of Montenegro, Agency for Telecommunications, an annual fee calculated at 1% of the annual income earned from fixed and mobile telephony services. Such amounts paid to the Agency for Telecommunications of the Republic of Montenegro are stated in the Company’s Statement of comprehensive income as “Other operating expenses”. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 65 The financial year 2009 Fixed Telephony Telecommunication License 2. summary of significant accounting policies (continued) 2.9 Property and Equipment Property and equipment of the Company are stated at cost less accumulated depreciation and impairment losses. The cost of an item of PPE comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Cost in the case of telecommunications equipment comprises of all expenditures including the cabling within customers’ premises and interest on related loans. Subsequent costs are included in the assets carrying amount or recognized as a separate assets, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliable. All other maintenance and repairs are charged to the Statement of comprehensive income during the financial period in which they are incurred. When assets are scrapped, the cost and accumulated depreciation are removed from the accounts and the loss is recognized in the Profit for the year as depreciation expense. When assets are sold, the cost and accumulated depreciation are removed from the accounts and any related gain or loss is recognized in the Profit for the year (Other operating income). Construction in progress includes third-party and internally generated services for property, plant, and equipment not yet completed. This item discloses investments made (but not yet completed) in the current and/or previous financial year(s). After completion of such property and equipment, the related amounts carried under advance payments or construction in progress must be capitalized and reposted to the relevant other Statement of financial position items for property, plant, and equipment. Depreciation is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives. On an annual basis, Crnogorski Telekom reviews the useful lives and residual values for consistency with current development plans and advances in technology. For further details on the groups of assets impacted by the most recent useful life revisions refer to Note 7. 66 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.10. Depreciation and Amortization a) Amortization of Intangible Assets The amortization of intangible assets is computed on a straight-line basis in order to fully write off the cost of the assets over their estimated useful lives. The assets and useful lives are reviewed, and adjusted if appropriate, at each Statement of financial position date. The useful lives of intangible assets acquired during the year are determined in accordance with the usage agreement on intangible assets. When there is no agreement which established the useful life of the asset, which is in case of software, the Company estimated the useful life for 5 years. The applicable rates are summarized below: Useful Life (Years) Intangible Assets Telecommunication license of: - Fixed telephony a) Telecommunication license - (public fixed telephony services) b) Telecommunication license - (international traffic) c) IPTV licence - mobile telephony - internet – web services Purchased computer software Microsoft license 25 23 10 15 5 5 5 b) Depreciation Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost less residual values over their useful lives. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each Statement of financial position date. If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate and calculation of depreciation costs for the current and the forthcoming period is properly adjusted. Major Categories of Property and Equipment Buildings Access networks Optical connectors Exchanges Transmission system equipment Computer equipment Mipnet network Routers and switches Estimated Useful Life (in years) 40 20 20 7 10 3 5, 6 5, 7 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 67 The financial year 2009 Intangible assets are amortized over their respective economic lives. 2. summary of significant accounting policies (continued) 2.11 Impairment of PPE and intangible asset Non – financial assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized 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 purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash – generating unit). Crnogorski Telekom’s management monitors goodwill on operating segment level, consequently, the impairment testing is conducted at this level. The Company performed impairment test separately for fixed and mobile segment as Cash generating units as at December 31, 2009. CGU is tested for impairment annually or more frequently if circumstances indicate that impairment may have occurred. The recoverable amounts of the business units and reportable segments are calculated based on fair value less cost to sell determined by the discounted projected cash flows of units over the next ten years with a terminal value. This is highly judgmental, which carries the inherent risk of arriving at materially different recoverable amounts if estimates used in the calculations would prove to be inappropriate. The Company has an implemented policy to make the impairment test based on a 10-year cash flow projection on reasonable and supportable assumptions that present the management’s best estimate on market participants’ assumptions and expectations considering recent similar transactions and industry benchmarks. In order to determine the recoverable amounts of the segments, the Company calculates the segments’ fair values less cost to sell. In the calculations, Crnogorski Telekom uses a weighted average cost of capital (WACC) before tax and Perpetual growth rate (PGR) estimates for Montenegro and the sub-sector of telecommunications. The WACC is determined based on CAPM (capital asset pricing model) using the average beta of the peer group, 10 year zero coupon yields and a debt ratio in line with the usual indebtedness of listed peer telecommunications companies, while the PGRs used are in line with the long-term average growth rate for the telecommunications sector. Change in assumptions is caused with significant increase of estimated cash flow ratio in the last two years of 10 years projections. On the group level this ratio is 1.7% and 1.6%, while in the last year it was negative value. Following assumptions are used in the fair value calculations in order to determine whether the segments have been impaired. Cash generating unit Fixed line and Internet Mobile line WACC (%) PGR (%) 2008 2009 2008 2009 10.74 11.07 10.00 10.00 -1.0 0.5 2.00 2.00 Impairment test explained above has shown that recoverable amounts of the Company’s CGUs are greater than their book value and hence no impairment of non-financial assets should be recorded. 68 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.12. Provisions and contingent liabilities Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. The Management of the Company has reviewed all significant contracts in order to determine the amount of Asset Retirement Obligation. Based on review performed and valid legislation in Montenegro, Management has concluded that there is no current obligation of the Company related to ARO. No provision is recognized for contingent liabilities. A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. 2.13. Employee benefits a) Employee Taxes and Contributions for Social Security In accordance with the regulations prevailing in the Republic of Montenegro, the Company has an obligation to pay contributions to various State Social Security Funds. These obligations involve the payment of contributions on behalf of the employee, by the employer in an amount calculated by applying the specific, legally-prescribed rates. The Company is also legally obligated to withhold contributions from gross salaries to employees, and on behalf of the employees, to transfer the withheld portions directly to government funds. These contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise, and have been included under “Employee related expenses”. The Company has no further obligation in respect of these contributions towards the employees apart from the payment of the monthly pension contributions. b) Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed to either terminate 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. Benefits falling due more than 12 months after Statement of financial position date are discounted to present value. Employee benefits payable regardless of the reason for the employee’s departure are treated as post employment benefits. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 69 The financial year 2009 Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses. 2. summary of significant accounting policies (continued) 2.13. Employee benefits (continued) c) Obligations for Retirement Benefits The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate of high-quality corporate bonds of 6,38% (2008: 3% p.a.). Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the grater of 10% of the value of plan assets or 10% of the defined benefit obligations are charged or credited to income over the employees’ expected average remaining working lives. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. d) Obligations for Jubilee Anniversary Pursuant to the signed collective bargaining agreements (CBAs) in the Company, Crnogorski Telekom is obligated to pay a severance payment in an amount equal to ten minimal, monthly salaries earned in the Company companies respectively, and between three and nine minimal, monthly salaries to be paid out as a jubilee anniversary award. The number of minimal monthly salaries for jubilee anniversary awards corresponds to the total number of years of service of the employee as presented in the table below: Total Number of Service Years 10 20 30 34 (women) 39 (men) Number of Minimal Wages 3 5 7 9 9 Obligations for jubilee anniversary are accounted for in the same manner as defined benefit plans (as disclosed in 2.13. c)), except that any actuarial gains and losses on jubilee payments as well as past service cost are recognized directly in the Statement of comprehensive income in the period in which they occurred. d) Mid term incentive plan (MTIP) In 2007 Crnogorski Telekom launched a Mid Term Incentive Plan (MTIP) for its top and senior management, whereby the targets to be achieved are based on the performance of the company’s share. The MTIP is a cash settled long term incentive instrument which was planned to cover five years, with a new package being launched in each year, and with each tranche lasting for three years. At the beginning of the plan each participant has an offered bonus. This bonus will be paid out at the end of the plan, depending on the achievement of the two fixed targets, an absolute company share specific and a relative Index target. Provision is calculated depending on probability of achievement targets set. 2.14. Accrued liabilities and advances Accrued liabilities and advances are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. The carrying values of accruals and advances approximate their fair values due to their short maturity. 70 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 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. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted by the Statement of financial position date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations is subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. The Company’s uncertain tax positions are reassessed by the Company’s management at every Statement of financial position date. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the Statement of financial position date and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the Statement of financial position date. 2.16.Taxes, contributions and other duties not related to operating results Taxes, contributions and other duties that are not related to the Company’s operating results, include property taxes, employer contributions on salaries, and various other taxes and contributions paid pursuant to state and municipal regulations. All of the aforementioned types of taxes and contributions are included in the Statement of comprehensive income under “Other operating expenses”. 2.17. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 2.18. Dividends Dividends payable to the Company’s shareholders and to Non-controlling shareholders are recorded as a liability and debited against equity (Retained earnings) in the Company’s financial statements in the period in which the dividends are approved by the shareholders. 2.19. Revenue Revenues for all services and equipment sales (Note 24) are shown net of VAT and discounts. Revenue is recognized when the amount of the revenue can be reliably measured, and when it is probable that future economic benefits will flow to the Company and all other specific recognition criteria of IAS18 on the sale of goods and rendering of services are met for the provision of each of the Company’s services and sale of goods. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 71 The financial year 2009 2.15. Deferred income tax and current income tax 2. summary of significant accounting policies (continued) 2.19. Revenue (continued) Revenue is primarily derived from services provided to subscribers and other third parties using the fixed and mobile telecommunication networks. Revenues are recognized when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity, and specific criteria are met for each of the groups activities described below. Customer subscriber arrangements typically include an activation fee, equipment sale, subscription fee and monthly charge for the actual airtime used. The Company considers the various elements of these arrangements to be separate earnings processes for IFRS purposes and classifies the revenue for each of the deliverables into the categories as disclosed in Note 24 using residual method. 2.19.1 Revenue from fixed telephony 2.19.1.1 Subscription, connections and other charges The subscription is a fee charged for telephone line usage. Monthly subscription fees are charged to the Company’s customers and recognized as revenue at the end of the month for the previous month irrespective of their use of the Telekom network. Connections and other charges present other services which are recognized at the moment when services are provided. 2.19.1.2 Outgoing Domestic and International Traffic Revenue Income from calls within Montenegro, and from outgoing international calls are collected from Telekom’s customers, and are recorded at its invoiced value less any effective discounts and VAT, at the moment of the provision of the contracted services. 2.19.1.3 Incoming Domestic and International Traffic Revenue Revenues from incoming international calls include the income arising from international traffic. Revenues from direct international traffic include the income generated from all incoming and outgoing international calls realized in countries having direct international connection with Telekom. A portion of such income earned incurred is measured and recorded at an estimated value arrived at based on the internal settlement accounting of telephony traffic. Revenues from incoming domestic traffic relates primarily to domestic interconnection revenue, whose nature and valuation is explained in the note bellow (Note 2.19.1.4). 2.19.1.4 Other revenues from Telecommunication Services Other income primarily includes the lease of telephony capacities, i.e., telephone lines, dial up services to business customers, web presentation and hosting, ADSL revenue, Montenegrin IP Network (MIPNET) services revenue, IPTV services, revenues from sold internet access, equipment sales revenue, voice machines, call listings, voice mail, telegram, and other services. The aforementioned revenues are shown net of VAT and discounts in the accounting period when the related services are performed. Revenue is recognized when the amount of the revenue can be reliably measured, and when it is probable that future economic benefits will flow to the Company and all other specific recognition criteria of IAS18 on the sale of goods and rendering of services are met for the provision of each of the Company’s services and sale of goods. 72 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) 2.19. Revenue (continued) 2.19.2. Revenue from Mobile Telephony A) Outgoing traffic revenue Outgoing traffic represents customer and third party use of Company’s telecommunications network. Customers and third parties are charged for outgoing traffic based on their actual use of our network multiplied by a contractually agreed rate. The revenue from usage is recognized in the period in which service is provided to our customers or third parties. B) Monthly Subscriptions The post-paid subscription is a fee for the use of the mobile telecommunication network. Subscriptions for new post-paid subscribers are invoiced and recognized for the current month, or specifically, for the month in which the subscriptions are activated. For existing subscribers, subscriptions are recognized in the period they relate to. 2.19.2.2 Prepaid services Revenues from the sale of mobile phone cards are recognized when used by the customer or when the cards expired with unused units. 2.19.2.3 Sales of hand sets Sales of mobile phones are recorded at the moment of sale. Cost of goods sold includes the amount of sold mobile phones, and is recognized at the moment of sale. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 73 The financial year 2009 2.19.2.1 Postpaid services 2. summary of significant accounting policies (continued) 2.19. Revenue (continued) 2.19.2. Revenue from Mobile Telephony 2.19.2.4 Roaming Revenue and Expenses Revenue and expenses arising from incoming and outgoing roaming with foreign mobile operators that has entered into the International GSM roaming Agreement with the Company are recorded in the amounts invoiced to and from mobile network operators. Roaming revenue is recognized at the time of the usage, and presented on a gross basis Cybernet, a financial clearing house, records reconciled traffic that has been confirmed by Syniverse, a technical clearing house and on behalf of the Company, Cybernet collects and makes payments with respect to the reconciled receivables from, and payables to the mobile telephony operators. 2.19.2.5 Interconnection revenue and expenses Interconnection revenue includes revenue earned on incoming telephone traffic originated via the mobile networks of ProMonte GSM d.o.o., Podgorica and M-tel d.o.o. Podgorica but specifically those that have been transmitted through, or terminated on the Crnogorski Telekom’s network. The interconnection expenses include expenses from outgoing telephone traffic that is routed from the Company to the individual mobile and fixed line companies in the country, and foreign incoming traffic that that have been transmitted through, or terminated on the other mobile companies networks in the country. Since the Company is only terminating and initiating traffic in and from its network, it is acting as a principal, and therefore the revenues and costs of these traffics are stated gross in these financial statements. Interconnection income and expenses are recorded at the moment in which the contracted services have been provided. Revenues are presented at fair values of consideration received or receivable. Revenues are shown net of VAT and discounts. 2.19.2.6 Other Revenue from Telecommunication Services Other revenue primarily includes the lease of telephony capacities, i.e., telephone lines, call listings, voice mail, telegram and other services. The aforementioned revenue is recognized and recorded in the accounting period during which it arises. The bills for new customer connections are recorded in the period in which the user is connected. 74 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 2. summary of significant accounting policies (continued) Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating leases relate to the rental of internet, lines, premises, warehouses and other rental expenses. Payments made under operating leases (net of any incentives received from the lessor) are charged to the Statement of comprehensive income on a straight-line basis over the period of the lease. 2.21. Interest Income/Expense and Other Borrowing Costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Borrowing costs include interest and other costs that the Company incurs in connection with the borrowing of funds. The borrowing costs eligible for capitalization are capitalized applying the weighted average of the borrowing costs applicable to the general borrowings of the Company that are outstanding during the period. A qualifying asset is an asset that necessarily takes a substantial period of time, in general over 12 months, to get ready for its intended use. Interest expenses and other borrowing costs, that are not qualified for capitalisation, are recognized in the Statement of comprehensive income in the accounting period in which they arise, using the effective interest method. Interest incomes are recognized in the Statement of comprehensive income in the accounting period in which they arise, using the effective interest method. 2.22. Income from Long-Term Investments Dividends are recognised when the Company’s right to receive payment is established. 2.23. Comparative information Where necessary, comparative figures have been adjusted to conform to changes in presentation in the current period. The effects of reclassifications are not material to the Company’s financial statements. Due to merging of Crnogorski Telekom A.D. with 100% owned subsidiaries T-Mobile d.o.o. and Internet d.o.o. in May 2009, comparative figures represent consolidated financial statements of Crnogorski Telekom A.D. while current year figures represent financial statements of one legal entity. However, in substance, figures are comparable, since all intercompany transactions were excluded from consolidated financial statements for the previous financial year end. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 75 The financial year 2009 2.20. Operating leases 2. summary of significant accounting policies (continued) 2.24. Fair Value The Company’s management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may have not been realized, it recognizes a provision. In the opinion of management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The nominal value less impairment provision of trade receivables and payables are assumed to approximate their fair values, based on historical data on charging rate of mentioned receivables in previous period. 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 Company for similar financial instruments. 3. Financial risk management 3.1 Financial risk factors The Company’s activities expose it to a variety of financial risks, including credit risk, liquidity risk, foreign currency exchange risk and interest rate risk. The Company does not use derivative financial instruments or any other form of hedges against these risks. There is no formal risk management framework implemented in the Company. The Board of Directors focuses mainly on credit risk and liquidity risk and acts on a case by case basis to mitigate risks and minimize losses. Operating environment of the Company The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2008 has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector, the wider economy, and at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other financial sector participants and to bank rescues in the United States of America, Western Europe, Montenegro 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. The global economic crisis is significantly affecting the Montenegrin market due to its rather small size and it having only two pillars of the economy –tourism and the aluminum factory. The Central Bank imposed restrictive monetary measures which will downsize domestic investment potential. In December 2008, the Government approved EUR 44 million loan to Prva Banka bank for overcoming liquidity problems. However, public confidence in the banking sector remains fragile. The industrial production in Montenegro experienced a 32.9% decrease in January –November 2009 in comparison with the same period last year. Price decreases of raw materials on the world markets and a drop in demand may endanger production plans of big exporting companies (aluminum plant in Podgorica, steel smelter in Niksic, and bauxite miners). The aluminum production is already halved and a cutback of 1700 workers was announced. Supporting and depending industries may suffer in production decline and headcount reduction as well. The tourism industry reported that the number of guests in January – November 2009 was 4% lower than in the same period last year. Management is unable to reliably estimate the effects of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets on the Company’s financial position. Management believes it is taking all the necessary measures to support the sustainability and growth of the Company’s business in the current circumstances. 76 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 3. Financial risk management 3.2 Credit risk The Board of directors of the Company decided which commercial bank will be a partner of the Company, taking into consideration the following risk aspects: evaluation factors, total assets, market share, and safety of funds. Credit risk management principles are reconciled with the risk policy of the Company’s parent company. In order to avoid credit risk concentration, cash and cash equivalents and short term bank deposits are placed in six different banks. According to risk policy of the parent company, deposits in banks are additionally guaranteed by bank guarantees given by foreign banks in order to provide appropriate safety of funds. Management of the Company believes that it has adequately assessed the recoverability of Company’s bank deposits. Management of credit risk includes detailed monthly treasury reporting to senior management with all necessary information about cash and short term bank deposits. If customers are independently rated, these ratings are used. Otherwise, if there is no independent rating, risk control assesses the credit quality of the customer, taking into account past experience in collection and other factors. The Company has no significant concentrations of credit risk due to its diverse customer base save for cumulative exposure the Company uses a system of reminders leading to discontinuance of its service as the main tool to collect overdue receivables. Also, according to balance and number of outstanding bills, the Company uses instruments of litigation of customers. However, debtors of the Company may be affected by the lower liquidity situation due to the recent volatility in the global and Montenegrin financial markets, which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for customers 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 have properly reflected revised estimates of expected future cash flows in their impairment assessments. In order to manage credit risk related to collection, senior management on twice monthly basis consider reporting prepared by Treasury, and according to reporting results decide to take action for the future. Maximum exposure to credit risk related to customers amounts 74.279 thousand EUR. 3.3 Liquidity risk Liquidity risk is the risk that an entity may encounter difficulty in meeting obligations associated with financial liabilities Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close our market position. The volume of wholesale financing has significantly reduced recently. Such circumstances may affect the ability of the Company to obtain new borrowings if the need would arise for that. Capital expenditure projects are often undertaken with the assistance of supplier credits to manage liquidity. Company has no external loans and borrowings. Further more, all liabilities which require cash flow are matured maximum up to one year (trade payables).The Company has limited exposure to liquidity risk because it posses significant amount of cash and cash equivalents. Additionally, according to contracts for short term bank deposits, any time, short tem bank deposits can be withdrawn and used for payments of liabilities. On monthly basis, senior management considers liquidity reporting prepared by Treasury, comparing to planned and realized cash flow activities and takes decisions for future actions. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 77 The financial year 2009 Credit risk arises from cash and cash equivalents and deposits with banks, as well as credit exposures to customers. It is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. 3. Financial risk management 3.4 Foreign exchange risk The Company operates internationally and is exposed to some foreign exchange risk arising from various currency exposures primarily with respect to Special Drawing Rights and US dollars used to settle its international traffic revenue and expenses. At December 31, 2009, if EUR had strengthened / weakened by 20% against the SDR with all other variables held constant, post-tax profit for the year would have been EUR 41.087 higher/lower (December 31, 2008: EUR 42.246), mainly as a result of foreign exchange gains /losses on translation of SDR denominated trade receivables and trade payables. At December 31, 2009, if EUR had strengthened / weakened by 20% against the USD with all other variables held constant, post-tax profit for the year would have been EUR 19.052 higher/lower (December 31, 2008: EUR 12.965), mainly as a result of foreign exchange gains /losses on translation of USD other assets and payables. 3.5 Interest rate risk The Company has limited interest bearing landings. Its interest bearing assets includes loans provided to employees on a fixed interest rate basis (for more details about terms and conditions, please see Note 2.6.1.1). As an example, if the Company applied an increased discount interest rate amount of 9 % on long term employee loans this would result in additional annual expense of approximately EUR 0.335 million (2008: EUR 0.315 million). Related to short term bank deposits, credit risk is minimized with fixed interest rate, which can not be changed during the contracted period. Additionally, if Company would like to withdraw funds before maturity, interest rate would stay the same for the whole period of time; there is no any penalty interest or decreasing initial interest rate. Management of interest rate risk includes detailed monthly treasury reporting to senior management with all necessary information. 3.6 Capital risk management The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. The Company’s management proposes to the owners (through the Board) of the Company to approve dividend payments or adopt other changes in the Company’s equity capital in order to optimize the capital structure of the Company. This can be effectuated primarily by adjusting the amount of dividends paid to shareholders, or alternatively, by returning capital to shareholders by capital reductions, selling or buying own shares. Also, the Company monitors that its capital is kept above minimum legal requirement. Because the Company has been profitable, there is no risk that its capital may fall below minimum legal requirement. The Company does not have borrowings and therefore does not monitor gearing ratio. The equity capital, which the Company manages, amounted to EUR 235.504.936 as at 31 December 2009 (EUR 216.691.816 as at 31 December 2008). 78 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 4. Segment information Primary reporting format – business segments The segment information provided to the Management Committee for the reportable segments for the year ended 31 December 2009 is as follows: (In EUR) Fixed line and Internet Mobile line Total Segment revenue Inter-segment revenue Revenue from external customers 72.988.010 (7.999.061) 64.988.949 64.970.005 (7.168.048) 57.801.957 137.958.015 (15.167.109) 122.790.906 EBITDA Special influences: Release of legal case provision Severance payments and other one time expenses (legal merge expenses etc) Adjusted EBITDA Depreciation and amortisation Income tax expense 24.519.891 20.987.522 45.507.413 3.500.000 - 3.500.000 (536.000) - (536.000) 27.483.891 (12.074.451) (1.919.197) 20.987.522 (9.808.537) (1.305.125) 48.471.413 (21.882.988) (3.224.322) Segment asset Inter segment assets Total segment assets 158.337.551 (1.226.720) 157.110.831 60.752.855 (971.690) 59.781.165 219.090.405 (2.198.409) 216.891.996 Segment liabilities Inter segment liability Total segment liability 18.875.608 (1.403.792) 17.471.816 10.334.531 (794.618) 9.539.913 29.210.139 (2.198.410) 27.011.729 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 79 The financial year 2009 The management considers two operating segments: 1 Fixed line services and Internet; and 2 Mobile services; 4. SEGMENT INFORMATION (continued) The segment information provided to the Management Committee for the reportable segments for the year ended 31 December 2008 is as follows: (In EUR) Total 151.508.340 (19.160.229) 132.348.111 Fixed line and Internet 79.295.845 (11.809.393) 67.486.452 Mobile line 72.212.495 (7.350.836) 64.861.659 24.743.467 22.440.953 47.184.420 (3.898.533) 20.844.934 11.404.565 (1.387.962) (177.467) 22.263.486 10.232.698 (1.411.391) (4.076.000) 43.108.420 21.637.263 (2.799.353) Segment asset Inter segment assets Total segment assets 125.237.868 (4.071.922) 121.165.946 53.444.629 (1.881.847) 51.562.782 178.682.497 (5.953.769) 172.728.728 Segment liabilities Inter segment liability Total segment liability 27.357.530 (2.802.700) 24.554.830 13.936.371 (3.151.067) 10.785.304 41.293.901 (5.953.768) 35.340.134 Segment revenue Inter-segment revenue Revenue from external customers EBITDA Special influences: Severance payments Adjusted EBITDA Depreciation and amortisation Income tax expense A reconciliation of adjusted EBITDA to profit before income tax is provided as follows: Total adjusted EBITDA for reportable segments Depreciation Amortisation Finance income net Total profit before income tax 80 December 31, 2009 (In EUR) December 31, 2008 48.471.413 (19.525.728) (2.357.260) 5.249.398 43.108.420 (19.257.137) (2.380.126) 5.969.264 31.837.823 27.440.421 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 4. SEGMENT INFORMATION (continued) Reportable segment’s assets are reconciled to total assets as follows: (In EUR) December 31, 2008 Segment assets for reportable segments Unallocated Goodwill Available for sale financial assets Investment in associate Deferred income tax assets Cash and cash equivalents Short term financial assets Income tax receivable Other assets (restricted cash) 216.891.996 172.728.728 941.624 25.374 9.429 3.181.592 45.200.000 461.903 941.624 25.374 225.389 7.971 17.147.736 62.150.000 928.583 600.449 Total assets per statement of financial position 266.711.918 254.755.854 The financial year 2009 December 31, 2009 Reportable segment’s liabilities are reconciled to total liabilities as follows: December 31, 2009 (In EUR) December 31, 2008 Segment liabilities for reportable segments Unallocated: Income tax payable Deferred income tax liabilities 27.011.729 35.340.134 1.538.321 2.656.551 60.892 2.663.012 Total liabilities per statement of financial position 31.206.601 38.064.038 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 81 4. SEGMENT INFORMATION (continued) Balance of receivables impairment of reportable segments as at December 31, 2009 and December 31, 2008 is as follows: December 31, 2009 Fixed line and Internet Mobile Line Total impairment allowance of the Company (In EUR) December 31, 2008 8.714.213 6.604.488 11.779.326 7.819.488 15.318.701 19.598.814 Balance of bad debt expense of reportable segments as at December 31, 2009 and December 31, 2008 is as follows: December 31, 2009 (In EUR) December 31, 2008 Fixed line and Internet Mobile Line 443.673 1.123.573 586.619 2.026.243 Total bad debt expense of the Company 1.567.246 2.612.862 The capital expenditure of reportable segments as at December 31, 2009 and December 31, 2008 are as follows: December 31, 2009 (In EUR) December 31, 2008 Fixed line and Internet Mobile Line 11.759.560 5.846.548 9.483.828 5.637.761 Total capital expenditure of the Company 17.606.108 15.121.589 82 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 5. INTANGIBLE ASSETS In EUR Licenses Software Intangible Assets in progress Cost Balance January 1, 2008 Additions Transfers Disposals / write off Balance December 31, 2008 15.962.198 201.039 479.295 (30.852) 16.611.680 9.592.574 250.123 211.907 (2.281.438) 7.773.166 137.950 752.708 (262.867) 627.791 25.692.722 1.203.870 428.335 (2.312.290) 25.012.637 Accumulated amortization Balance January 1, 2008 Charge for the year (Note 27) Disposal / write off Balance December 31, 2008 3.763.855 962.549 (27.346) 4.699.058 5.876.061 1.417.576 (2.281.438) 5.012.199 - 9.639.916 2.380.125 (2.308.784) 9.711.257 11.912.622 12.206.275 2.760.967 3.717.582 627.791 128.949 15.301.380 16.052.806 Net Book Value December 31, 2008 December 31, 2007 The financial year 2009 Total In EUR Licenses Software Intangible Assets in progress Cost Balance January 1, 2009 Additions Transfers Disposals / write off Balance December 31, 2009 16.611.680 338.704 196.532 (172.500) 16.974.416 7.773.166 490.733 725.584 (61.460) 8.928.023 627.791 132.904 (716.136) 44.559 25.012.637 962.341 205.980 (233.960) 25.946.998 Accumulated amortization Balance January 1, 2008 Charge for the year (Note 27) Disposal / write off Balance December 31, 2009 4.699.058 1.070.767 (92.000) 5.677.825 5.012.199 1.286.493 (61.460) 6.237.232 - 9.711.257 2.357.260 (153.460) 11.915.057 11.296.591 11.912.622 2.690.791 2.760.967 44.559 627.791 14.031.941 15.301.380 Net Book Value December 31, 2009 December 31, 2008 Total This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 83 5. INTANGIBLE ASSETS (continued) Included in the Company’s license balance is a Fixed-Line license, granted for a period of twenty five years, with net book value as of December 31, 2009 of EUR 4.247.640 (December 31, 2008 of EUR 4.483.620) issued by the Agency for Telecommunications of the Republic of Montenegro (“the Agency”). Net book value of International traffic service license included in the Company’s license balance, granted for a period of twenty-three years, amounts to EUR 2.040.000 at December 31, 2009 (EUR 2.190.000 as at December 31, 2008) issued by the Agency. Included in the Company’s license balance is a special license for the installation, maintenance and operation of the public telecommunication network with net book value as at December 31, 2009 EUR 2.052.136 (as at December 31, 2008 of EUR 2,414,301) issued by the Agency as at January 1, 2002. This license grants rights to the Company to provide services via the public mobile telecommunication network, in accordance with the Telecommunications Law. This license is valid on the territory of the Republic of Montenegro for a period of fifteen years. Regarding these licenses, the Company has an existing obligation to pay annual fees to the Agency which are calculated based on the amount of one percent of the Company’s total income in the previous reporting year. The expenses with respect to this obligation to the Agency are stated in the statement of comprehensive income under “Other operating expenses”. In October 2007, the Broadcasting agency of the Republic of Montenegro issued to the Company a license for the developing and use of distribution radio and TV programs to customers (IPTV license) for a period of ten years. According to the Rules about issuing and conditions for use of the license for distribution radio and TV programs the Company is obliged to paid one-time fee for registration in amount of EUR 75.000. On March 28, 2007, the Agency awarded a 3G license to the Company valid for a period of fifteen years. In April 2007, the Company made a payment of EUR 2.400.042 for the 3G license acquisition. Net book value of this licence at December 31, 2009 amounted to EUR 1.973.368 (December 31, 2008 EUR 2.133.371). On March 12, 2007, the Agency awarded fixed wireless license to the Company for a period of five years. The Company settled its liabilities for fixed wireless license in the amount of EUR 172.500 in April 2007. In December 2009, the Company sold fixed wireless license for the amount of EUR 140.000. At the moment of sale, net book value of this licence was EUR 80.500 and the Company achieved capital gain of EUR 59.500. In accordance with the IFRS and Company’s Accounting Manual, review of intangible assets was performed during the year 2009. Revision resulted in extension of MSTV restricted and unrestricted IPTV licences useful life from five to seven years, which is in accordance with terms and conditions under which licences are obtained. Impact of change in useful life on financial statement is as follows: In EUR 2009 2010 2011 2012 Increase / (decrease) in amortisation (11.187) (11.187) (11.187) (11.187) 84 After 2012 44.746 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 6. GOODWILL In accordance with the Company’s Board of Directors’ Resolution of March 7, 2005 (February 19, 2004) Telekom, utilizing its pre-emptive share purchase rights, entered into a Purchase Agreement for the Acquisition of a Portion of the Equity Capital of Internet CG in the amount of EUR 435.700 (EUR 1.750.000 for year 2004), and became the owner of 100 percent (buying the remained 15 percent) of the capital in the Internet CG. Fixed Line and Internet Mobile Line December 31, 2009 564.974 376.650 941.624 The financial year 2009 An operating segment-level summary of the goodwill allocation is presented below: (In EUR) December 31, 2008 564.974 376.650 941.624 As at December 31, 2008 and December 31, 2009 goodwill was allocated to the Company’s cash-generating units (CGU) identified according to business segment. The recoverable amount of a CGU was determined based on fair value less cost to sell calculations. These calculations use cash flow projections based on financial budgets approved by management covering a ten-year period. Cash flows beyond the ten-year period are extrapolated using the estimated growth rates. The growth rate does not exceed the long-term average growth rate for the telecommunication business in which the CGU operates. Management determined budgeted gross margin based on past performance and its expectations for the market development. The weighted average growth rates used were consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 85 7. PROPERTY AND EQUIPMENT Land Buildings Equipment and other Assets Construction in progress In EUR Total Cost Balance January 1, 2008 Additions Transfers Disposals /write -offs Balance December 31, 2008 2.959.682 2.959.682 78.001.684 316.130 734.576 79.052.390 108.574.358 6.829.571 12.103.288 (1.010.896) 126.496.321 13.872.763 6.772.018 (13.266.200) 7.378.581 203.408.487 13.917.719 (428.336) (1.010.896) 215.886.974 Accumulated Depreciation Balance January 1, 2008 Charge for the year Disposals /write -offs Balance December 31, 2008 - 16.481.089 3.415.684 19.896.773 59.245.090 15.841.453 (882.326) 74.204.217 37.837 37.837 75.764.016 19.257.137 (882.326) 94.138.827 2.959.682 2.959.682 59.155.617 61.520.595 52.292.104 49.329.268 7.340.744 13.834.926 121.748.147 127.644.471 Land Buildings Net Book Value December 31, 2008 December 31, 2007 Equipment and Other Assets Construction in progress Total Cost Balance January 1, 2009 Additions Transfers Disposals /write –offs Balance December 31, 2009 2.959.682 2.959.682 79.052.390 407.148 1.543.325 (85.637) 80.917.226 126.496.321 8.143.196 5.777.066 (1.248.232) 139.168.351 7.378.581 8.093.423 (7.526.371) (72.872) 7.872.761 215.886.974 16.643.767 (205.980) (1.406.741) 230.918.020 Accumulated Depreciation Balance January 1, 2009 Charge for the year Impairment Disposals /write –offs Balance December 31, 2009 - 19.896.773 3.542.294 (85.679) 23.353.388 74.204.217 15.926.400 (1.243.535) 88.887.082 37.837 57.034 (72.872) 21.999 94.138.827 19.468.694 57.034 (1.402.086) 112.262.469 2.959.682 2.959.682 57.563.838 59.155.617 50.281.269 52.292.104 7.850.762 7.340.744 118.655.551 121.748.147 Net Book Value December 31, 2009 December 31, 2008 86 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 7. PROPERTY AND EQUIPMENT (continued) Impairment, which resulted in reduction of construction in progress, relates to spare and unused parts of previously activated investments. Based on stock count committee proposal mentioned assets are written of, as of December 31, 2009. In accordance with the IFRS and Company’s Accounting Manual, review of tangible assets is performed during the year 2009. As a result of regular yearly revision useful life of base station, Montenegrin IP Network (MIPNET) equipment and aggregates is extended. Extension is done mainly due to the fact that mentioned equipment is used for period longer than its useful life in history, expectation regarding technical development, budgets and plans for the upcoming years etc. Impact of change in useful life on financial statement is as follows: In EUR Increase / (decrease) in depreciation 8. 2009 2010 2011 2012 After 2012 (529.858) (524.250) (374.124) 151.238 1.276.995 AVAILABLE FOR SALE FINANCIAL ASSETS December 31, 2009 (In EUR) December 31, 2008 Investments Available for Sale Investments in Foreign Satellite Associations - Intelsat Ltd. - New Skies Satellites N.V. % 0.0061 0.0061 24.799 575 25.374 24.799 575 25.374 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 87 The financial year 2009 Included in the net book value of land and buildings are land of EUR 150.200 and buildings of EUR 185.708 for which the Company does not possess complete documentation in connection with their titles. The Company is in the process of obtaining titles for the land and building, but effectively has control over these items. 9. INVESTMENTS IN ASSOCIATES PTT Standard d.o.o. Podgorica Service centre for electronic operations E - Mon d.o.o., Podgorica Less: Allowance participation in % December 31, 2009 (In EUR) December 31, 2008 20.00 345.924 345.924 35.00 345.924 (345.924) 225.389 571.313 (345.924) - 225.389 In accordance with its Board of Directors’ Resolution with respect to the Establishment of a Service Center for Electronic Banking dated October 14, 2004, Telekom, in partnership with the entity, Pexim d.o.o, Belgrade, has founded a Service Center for Electronic Banking, E-Mon d.o.o., Podgorica. Telekom’s participation has been contributed in the form of infrastructure and telecommunication capacities. In accordance with Management Committee Decision, dated 14th January 2009, the Company has sold its’ stake in a Service Center for Electronic Banking, E-Mon d.o.o., Podgorica. In accordance with the contract made as of October 15, 2009, Telekom’s stake in E-Mon d.o.o., Podgorica was sold to Pexim d.o.o, Belgrade, which is majority owner of the E-Mon d.o.o. Since, the Company’s stake in associate was sold for the amount higher than its’ net book value of investment, Crnogorski Telekom obtained capital gain in amount of EUR 154.611 (see Note 25). Taking into consideration of losses and bankruptcy of the company, investment in PTT Standard is fully impaired. PTT Standard is not deleted from the court registration, which is the reason why it is included in financial statements. 88 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 10. LONG TERM LOANS AND OTHER RECEIVABLES Employee loans Long term receivables Prepaid employee benefits Prepaid rent for the GSM locations Other prepayments 3.860.695 2.385.917 1.668.592 444.028 3.202 8.362.434 (In EUR) December 31, 2008 2.339.529 2.882.115 1.006.740 495.199 3.288 6.726.871 The financial year 2009 December 31, 2009 The fair values of employee loans and long term receivables approximate their carrying amounts. Employee loans Contracted maturities of undiscounted long-term employee loans are presented below: -from two to five years -over five years December 31, 2009 1.490.113 4.435.292 5.925.405 (In EUR) December 31, 2008 1.047.336 3.098.843 4.146.179 Long-term loans and receivables in the amount of EUR 5.925.405 represent undiscounted amount of the loans granted to the Company’s employees. Such loans were approved for repayment periods of 5, 7, 10 and 20 years, and were issued at an annual interest rates ranging from 1.5% to 2% The total amount of the approved loans per employee ranges from EUR 5.000 to EUR 50.000. For certain employees, the loan liability has been reduced by 0.5% for each year of employment service up to December 31, 1993. The percentage of this reduction ranges from 3.5 to 14.5 percent of the total amount of the loan. These employees obtained such liability reduction rights based on allocations of their contributions towards residential housing construction up to financial year 1993. The effective interest rate on these employee loans was 7.5 % in 2009 and 2008, corresponding to the rate used by an independent valuation expert. During 2007, in accordance with the Company’s Statute, and the Rules on the Fulfilment of Employee Residential Housing Requirements, Company’s Operative committee decided to grant housing loans to employees in total amount of EUR 1.282.000 free of interest. These loans were issued for a period of 20 years in order to keep key employees in the Company. The total amount of the loan extended per employee ranges from EUR 28.000 up to EUR 42.000. Condition for realization of these loans is that the employees have to stay employed in the Company for a loyalty period of minimum three years. If employee left the Company before mentioned term, it is obliged to repay one-time total outstanding amount. If employee would not repaid his liability, the Company has right to activate pledge and collect its receivables. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 89 10. LONG TERM LOANS AND OTHER RECEIVABLES (continued) Employee loans (continued) The Company obtained mortgages on the residential housing units occupied by the loan beneficiaries, in order to secure timely loan repayments. In accordance with the terms of the relevant residential loan agreements, upon the completion of the purchase and/or construction of the housing unit, the employee is obligated to register ownership rights in the Company’s name, and to establish a pledging right, namely a mortgage naming the Company the first to collect on the real estate that has been purchased and/or constructed in the amount of the loan liability. The employee is obligated to deliver within the first five-month period from the date of the first loan payment, the documentation detailing the registration of pledging rights. On almost all these loans, Crnogorski Telekom has obtained security in the form of mortgages of which they are the named beneficiary in the event of default. The total value of obtained mortgages for approved housing loans is amounted to EUR 8.063.198. The total amount of loans, for which the companies did not receive mortgages and which are therefore not registered in the applicable court register is EUR 147.086, thus the total exposure of Company to credit risk arisen from loan not covered by pledge amounted to EUR 147.086 (2008: EUR 181.734). However, the market in Montenegro for many types of collateral, especially real estate, has been severely affected by the recent volatility in global financial markets resulting in there being a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may differ from the value ascribed in estimating allowances for impairment. Long –term receivables Maturities of undiscounted long-term receivables are presented below: from 2 to 5 years over 5 years December 31, 2009 (In EUR) December 31, 2008 2.962.625 2.962.625 2.962.625 740.656 3.703.281 Receivables from the Government of the Republic of Montenegro in the EUR 2.962.625 (EUR 3.703.281 as of December 31, 2008) represent undiscounted amount of expected future cash flows which the Company would realize in accordance with the Share Transfer Agreement delineating the transfer of foundation rights in the Radio difuzni centar d.o.o., Podgorica (RDC) entered into on December 10, 2004 between Telekom Crne Gore and the Government of the Republic of Montenegro. According to this agreement, the RDC became the property of the state. Pursuant to a relevant decision of the Company’s management, the bases for computing the current value of expected future cash flows equals the application of an annual interest rate of 7.5%, corresponding to the rate used by the independent valuation expert. The effect of income recognized using the effective interest method for the period from January 1 to December 31, 2009 amounted 244.458 (December 31, 2008: EUR 273.702). In accordance with the terms of the aforementioned agreement, the Government of the Republic of Montenegro is obligated to pay the Company a selling price as defined under the Share Transfer Agreement, in the amount of EUR 5.943.937 within a period of ten years from the date of execution of the Agreement, setting forth a grace period of 18 months during which interest is not to be calculated. As further defined in this Agreement, at the expiration of the grace period, by the termination of the second year from the execution date of the Agreement, the Government of the Republic of Montenegro is obligated to pay the Company the amount of EUR 300.000 in equal monthly instalments on the first day of the month for the coming month. During the third and the fourth year of the payment schedule, the Government of the Republic of Montenegro is obligated to remit to the Company a total annual amount of EUR 600.000 in equal monthly instalments on the first day of the month for the coming month. 90 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 10. LONG TERM LOANS AND OTHER RECEIVABLES (continued) Long –term receivables (continued) Prepaid employee benefits Prepaid employee benefits of EUR 1.668.592 (2008: EUR 1.006.740) relate to discount on employees loans calculated using the effective interest rate and to 75% loans write-offs that have been extended to a certain number of employees in accordance with Article 39 of the Company’s Statutes, and Article 41 of the Rules on the Fulfilment of Employee Residential Housing Requirements. Discount is treated as employee remuneration recognized in Statement of Comprehensive Income over the shorter of the term of the loan and the expected service life of the employee, while 75% of loan write-offs are treated prepayments of employee benefits amortized over the loyalty period (Note 2.15. (ii)). 11. CASH AND CASH EQUIVALENTS December 31, 2009 Cash on hand Cash in banks Short term deposits with maturity up to 3 months 7.577 3.174.015 3.181.592 (In EUR) December 31, 2008 6.655 4.591.081 12.550.000 17.147.736 Significant decrease of short term deposits as at December 31, 2009, which represent deposits placed with domestic banks for a period up to three months, is caused with payment of advance dividend during the year 2009 (for details please see Note 14). Cash and cash equivalents are denominated in EUR. The Company has active gyro accounts in Crnogorska Komercijalna Banka, NLB Montenegro Banka, Prva Banka, Atlasmont banka, Podgoricka banka and Hypo Alpe Adria banka. 12. SHORT TERM BANK DEPOSITS December 31, 2009 Guaranteed short term deposit by credit institution Credit rating A1 Credit rating A3 Credit rating Aa3 Credit rating Aa2 Credit rating Baa1 Credit rating Baa2 10.200.000 31.000.000 4.000.000 45.200.000 (In EUR) December 31, 2008 46.750.000 8.200.000 7.200.000 62.150.000 Short term bank deposits represent deposits with maturity from three months up to one year and average interest rate of 8.00 % (2008: 7.27 %). All short term bank deposits were denominated in EUR. In the period ended December 31, 2009, total amount of deposits are additionally guaranteed by a credit institution with credit ratings A1, Baa1, Baa2 (2008: credit institution with credit ratings A3, Aa3, Aa2). Short term bank deposits are placed in Crnogorska komercijalna banka, NLB Montenegro banka and Hypo Alpe Adria banka. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 91 The financial year 2009 The remaining portion of the selling price, the Government of the Republic of Montenegro shall pay to the Company in the ensuing six years in 72, equal monthly instalments to be paid on the first day of the month for the coming month. 13. TRADE AND OTHER RECEIVABLES December 31, 2009 Domestic trade receivables Foreign trade receivables Receivables from Magyar Telekom Group companies (Note 34) Receivables from Deutsche Telekom Group companies (Note 34) Current portion of employee loans receivable (Note 10) Current portion of long term receivables (Note 10) Other receivables Allowance for impairment loss (In EUR) December 31, 2008 28.762.587 1.633.705 27.067 1.271.956 390.173 712.357 1.885.976 34.683.821 (15.318.701) 33.428.848 5.333.788 27.356 607.479 225.794 712.357 933.119 41.268.741 (19.598.814) 19.365.120 21.669.927 Trade and other receivables are denominated in the following currencies: December 31, 2009 EUR SDR 18.255.630 1.109.490 19.365.120 (In EUR) December 31, 2008 20.625.697 1.044.230 21.669.927 The structure of other receivable as of December 31 2009 and 2008 is as follows: Receivables for local municipality fees Receivables for dividend paid (private individuals) Receivables for overpaid taxes and contributions Receivables for interest income on term deposits Other receivables 92 December 31, 2009 574.911 494.656 444.735 310.254 61.420 1.885.976 (In EUR) December 31, 2008 463. 607 215.337 173.415 80.760 933.119 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. TRADE AND OTHER RECEIVABLES (continued) December 31, 2009 Domestic trade receivables Foreign trade receivables Receivables from Magyar Telekom Group companies (Note 34) Receivables from Deutsche Telekom Group companies (Note 34) Current portion of employee loans receivable (Note 10) Current portion of long term receivables (note 10) Other receivables 13.879.387 1.198.204 27.067 1.271.956 390.173 712.357 1.885.976 19.365.120 (In EUR) December 31, 2008 14.330.516 4.833.306 27.356 607.479 225.794 712.357 933.119 21.669.927 The financial year 2009 13. Ageing analysis of receivables that are past due as at the reporting date but not impaired is presented below: December 31, 2009 1-30 days 31-90 days over 90 days 2.367.506 1.353.170 1.804.492 5.525.168 December 31, 2009 1-30 days 31-90 days over 90 days 1.689.196 1.249.760 1.638.861 4.577.817 December 31, 2008 3.341.426 1.507.723 1.505.278 6.354.427 Domestic December 31, 2008 2.955.886 1.277.396 1.007.395 5.240.677 Foreign December 31, 2009 December 31, 2008 678.310 103.411 165.631 947.352 385.540 230.327 497.882 1.113.749 Movements in allowance for impairment loss of receivables during the year ended December 31, 2009 and 2008 are summarized below: 2009 Balance, January 1 Charged during the year (Note 29) Provision related to receivables collected during the year (Note 29) Effects of changes in exchange rates Penalties charged to customers Receivable write off Balance, December 31 19.598.815 2.430.349 (863.103) (3.539) 630.517 (6.474.338) 15.318.701 (In EUR) 2008 17.488.572 2.612.862 (508.977) 6.357 19.598.814 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 93 13. TRADE AND OTHER RECEIVABLES (continued) Movements in allowance for impairment loss of individual receivables are summarized below: Domestic Balance, January 1 Charged during the year Provision related to receivables collected during the year Effects of exchange rate Penalties charged to customers Receivable write offs Balance, December 31 Foreign 2009 2008 2009 2008 19.084.173 2.256.349 (613.503) 630.517 (6.474.337) 14.883.199 16.810.448 2.796.861 (508.977) - 514.641 174.000 (249.600) (3.539) - 678.124 (183.999) 6.357 - 19.098.332 435.502 500.482 Provision for domestic receivables is based on the aging structure of the receivables as at the due date. Provisions for domestic receivables are made on the basis of collectability, according to the previous history of the collection of receivables updated yearly. The most recent collectability rates, which are not significantly affected by the financial crisis, are comparable to the historical collectability. Provisions for foreign receivables are made individually on the basis of the management’s estimate of collectability, according to the previous history of the collection from foreign partners. Allowance for receivable impairment does not include any allowance for receivable from Magyar or Deutche Telekom Group, as intercompany receivables are considered to be fully recoverable. The most significant part of the provision relates to Community of Yugoslav PTT of EUR 188.660 (2008: 188.660) and Ellite 214.076 (2008: 214.076). In accordance with Management Committee decision number 02-29858, dated November 11, 2009 receivables in amount of EUR 6,474 thousand have been written off. Receivables are written off in accordance with management expectation of their recoverability. The whole amount of written off receivables were fully provisioned previously, in accordance to which mentioned write off did not have impact on statement of comprehensive income balances. Receivables past due but not impaired reconciliation: Receivables net of impairment Receivables past due but not impaired Receivables neither past due nor impaired (Note 17) 94 December 31, 2009 domestic foreign 13.879.387 1.198.204 (4.577.817) (947.352) 9.301.570 250.852 December 31, 2008 domestic foreign 14.330.516 4.833.306 (5.240.677) (1.113.749) 9.089.839 3.719.557 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. Estimated receivables for international incoming calls Estimated receivables from Magyar Telekom Group (Note 34) Estimated receivables from Deutsche Telekom Group (Note 34) Advance dividend payment Advances paid for current assets Advance paid for fixed assets Prepayments for lease of GSM locations Accrued revenues from interconnection Other prepayments December 31, 2009 42.247 36.480 1.024.430 49.921.460 251.662 363.674 981.204 932.010 (In EUR) December 31, 2008 953.212 25.055 525.008 83.501 4.000 350.417 992.873 699.079 53.553.167 3.633.145 The financial year 2009 ADVANCES AND PREPAYMENTS On June 17, 2009 Extraordinary Shareholder’s Assembly made Resolution on Approval of distribution of 2009 retained earnings of Crnogorski Telekom A.D. via advance dividend payment, in amount of EUR 50.000.000. The amount of EUR 49.921.460 (as of December 31, 2009) represents advance payment to shareholders which will be recovered either through receiving it back from the shareholders or through compensating the amount against future dividend payment. Other prepayments include prepayments towards Health Fund in amount of EUR 214 thousand, prepayments towards the Agency in amount of EUR 175 thousand, accrued revenues for MIPNET services towards Ministry of Information in amount of EUR 117 thousand, prepayments for insurance services amounted to EUR 106 thousands etc. The fair value of advances and prepayments equals their carrying amounts. All advances and prepayments are denominated in EUR. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 95 15. INVENTORIES December 31, 2009 (In EUR) December 31, 2008 Cables wires and other materials Inventory for resale 1.840.714 1.667.181 3.507.895 2.399.766 2.088.312 4.488.078 Less allowances for obsolete inventory (584.112) (838.820) 2.923.783 3.649.258 Movements in the provision for inventories for year ended December 31, 2009 and 2008 are summarized in the table below: (In EUR) 2009 Balance, January 1 Charged during the period (Note 29) Reversal for the period Balance, December 31 2008 838.819 257.393 (512.100) 1.557.430 1.691.562 (2.410.172) 584.112 838.820 The amount of cost of inventories recognized as expense is EUR 257.393 (2008: 1.691.562 EUR), while the amount of EUR 512.100 (2008: 2.410.172 EUR) represents reversal during the year. This resulted in reversal of expense in the amount of EUR 254.707, as of December 31, 2009 (2008: 718.610) mainly as a result of completion of certain construction in progress for which purpose inventories had been acquired in previous years. 96 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 16. RESTRICTED CASH Restricted cash in Community of Yugoslav PTT Restricted cash in clearing house Cybernet Total 307.026 154.877 461.903 (In EUR) December 31, 2008 312.265 288.184 600.449 The financial year 2009 December 31, 2009 Restricted cash is denominated in following currencies: In EUR December 31, 2009 EUR USD Total 154.877 307.026 461.903 December 31, 2008 288.184 312.265 600.449 Restricted cash deposited with the Community of the JPTT (comprised of entities that provide telecommunication services from the Republics of the former Yugoslavia) in amount of EUR 307.026 (440.244 USD) for period ended as at December 31, 2009 and EUR 312.265 (440.244 USD) for 2008, respectively, are anticipated for special purposes and are used for the settlement of liabilities for international telecommunication traffic realized prior to July 1, 2002 via the Community of the JPTT. Restricted cash deposited with the Clearing house “Cybernet” in amount of EUR 154.877 and EUR 288.185 for December 31, 2009 and December 31, 2008, respectively, are provided and kept for special purposes and are used for the settlement of liabilities for roaming. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 97 17. FINANCIAL INSTRUMENTS a) Financial instruments by categories The accounting policies for financial instruments have been applied to the line items below: Loans and receivables Assets as per Statement of financial position Available for sale financial assets Long term loans and receivables Short term bank deposits Trade and other receivables Restricted cash Cash and cash equivalents Total December 31, 2009 December 31, 2008 25.374 6.246.612 45.200.000 19.163.103 461.903 3.181.592 74.278.584 25.374 5.221.644 62.150.000 21.577.719 600.449 17.147.736 106.722.922 December 31, 2009 December 31, 2008 Liabilities valued at amortised cost Liabilities as per Statement of financial position Trade and other payables Total 13.636.376 13.636.376 15.817.985 15.817.985 b) Credit quality of financial assets The credit quality of financial assets that are neither past due nor impaired is presented below: Long –term loans and receivables Counterparty with external credit rating Ba3 Counterparty without credit rating 98 December 31, 2009 2.385.917 3.860.695 6.246.612 December 31, 2008 2.882.115 2.339.529 5.221.644 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 17. FINANCIAL INSTRUMENTS (continued) Guaranteed short term deposit by credit institution Credit rating A1 Credit rating A3 Credit rating Aa3 Credit rating Aa2 Credit rating Baa1 Credit rating Baa2 Cash and cash equivalents without credit rating December 31, 2009 10.200.000 31.000.000 4.000.000 3.181.592 48.381.592 (In EUR) December 31, 2008 46.750.000 8.200.000 7.200.000 17.147.736 79.297.736 The financial year 2009 Cash and cash equivalents Trade receivables December 31, 2009 Counterparty without external credit rating Domestic (Note 13) Foreign (Note 13) 9.301.570 250.852 9.552.422 (In EUR) December 31, 2008 9.089.839 3.719.557 12.809.396 Restricted cash December 31, 2009 Counterparty without external credit rating 461.903 461.903 (In EUR) December 31, 2008 600.449 600.449 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 99 18. SHARE CAPITAL At December 31, 2009 Number of Shares % Value Subscribed and paid in capital - Magyar Telekom 36.177.950 76,53 107.902.165 Privatization Funds 378.249 0,80 1.128.143 Other companies 5.186.052 10,97 15.467.605 Retail (citizens) 5.531.689 11,70 16.498.481 47.273.940 100 140.996.394 At December 31, 2008 Number of Shares % Value 36.177.950 76,53 107.902.165 248.921 0,53 742.417 6.878.023 14,55 20.513.975 3.969.046 8,40 11.837.837 47.273.940 100 140.996.394 As at December 31, 2009 and 2008 the par value of an individual share was EUR 2,98254. Telekom’s shares are publicly listed on the NEX Montenegro Stock Exchange. The market price of an individual share as at December 31, 2009 was EUR 2,7000 (December 31, 2008: EUR 2,4727). 19. Statutory reserves Under local statutory legislation, the Company is required to set aside 5 percent of its gross statutory profit for the year in a statutory reserve until the level of the reserve reaches 1/10 of the share capital. These reserves are used to cover losses and are not distributable to share holders except in the case of bankruptcy of the Company. 20. TRADE AND OTHER PAYABLES Domestic trade payables Foreign trade payables Salaries and wages Other taxes and social security Payables to Magyar Telekom Group (Note 34) Payables to Deutsche Telekom Group (Note 34) Other payables December 31, 2009 5.173.882 5.926.876 60.934 582.728 248.917 1.753.251 472.516 14.219.104 (In EUR) December 31, 2008 5.973.577 7.302.711 124.849 1.398.390 407.371 1.107.576 342.316 16.656.790 Trade payables are denominated in the following currencies: December 31, 2009 EUR SDR USD HUF GBP (In EUR) December 31, 2008 13.519.453 680.786 17.918 947 - 15.523.328 833.001 299.752 14.219.104 16.656.790 709 The fair value of trade and other payables is equal to their carrying amounts. Contracted maturity of trade and other payables is up to 45 days. 100 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 21. ACCRUED LIABILITIES AND ADVANCES Accrued liabilities for international outgoing calls Accrued expenses to Magyar Telekom Group (Note 34) Accrued expenses to Deutsche Telekom Group (Note 34) Accrued liability for dividends (private individuals) Accrued liability for dividends (legal entities) Advances received for mobile phone cards Prepayment from internet hours Amounts received in advance and prepayment Other accrued liabilities (In EUR) December 31, 2008 525 82.834 186.039 548.368 18.341 405.009 273.154 296.492 8.409.831 10.220.593 412.394 590.192 64.423 517.319 42.266 628.922 263.004 375.298 9.441.054 12.334.872 December 31, 2009 1.101.450 535.307 1.417.444 244.510 237.770 1.319.059 657.006 605.138 1.001.696 400.062 562.177 328.212 8.409.831 (In EUR) December 31, 2008 1.266.540 687.574 1.916.429 182.674 241.362 1.573.703 463.803 405.923 1.523.235 230.166 103.856 618.093 227.696 9.441.054 The financial year 2009 December 31, 2009 The structure of other accrued liabilities and expenses is as follows: Accrued expenses for local municipality fees Accrued marketing expenses Accrued expenses for interconnection Accrued expenses for post services Accrued expenses for electricity Accrued expenses for bonuses Accrued expenses for maintenance Accrued liabilities for non geographical codes Accrued liabilities for fixed assets and maintenance Accrued liabilities for IPTV services Accrued costs for estimated traffic with roaming partner Accrued revenues Other accrued liabilities Accrued liabilities and advances are denominated in the following currencies: EUR USD SDR December 31, 2009 December 31, 2008 9.803.479 193.847 223.267 10.220.593 12.283.395 51.477 12.334.872 The fair values of accrued liabilities and advances equal their carrying amounts. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 101 22. PROVISIONS FOR LIABILITIES AND CHARGES Movements in provisions for liabilities and charges for the year ended December 31, 2009 and 2008 are summarized in the table below: 2009 Balance, January 1 Additions during the year (Note 29) Amounts utilized / retired during the year (Note 29) Balance, December 31 Less: non current portion (In EUR) 2008 6.345.330 238.508 (4.015.099) 2.568.739 6.033.356 4.442.899 (4.130.925) 6.345.330 766.773 1.150.788 1.801.966 5.194.542 Movements in provisions for liabilities and charges per type of provision are summarized in the table below: January 1, 2008 Charged during the year Used during the year December 31, 2008 4.991.607 277.975 (356.268) 4.913.314 383.158 3.671.662 (3.722.890) 331.930 658.591 429.651 (51.766) 1.036.476 Mid term incentive plan (MTIP) 63.611 63.611 January 1, 2009 Charged during the year Used during the year December 31, 2009 4.913.314 30.310 (3.669.558) 1.274.066 331.930 331.930 1.036.476 (336.386) 700.090 63.611 208.198 (9.155) 262.653 6.345.330 238.508 (4.015.099) 2.568.739 Less: non current portion Current provision 1.274.066 (148.092) 183.838 (618.681) 81.409 262.653 (766.773) 1.801.966 Legal cases 102 Severance payments Employee benefits Total 6.033.356 4.442.899 (4.130.925) 6.345.330 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 22. PROVISIONS FOR LIABILITIES AND CHARGES (continued) Employee Benefits Total 658.591 429.651 (51.766) 1.036.476 January 1, 2009 Additions Amounts utilized / retired December 31, 2009 620.953 (142.821) 478.132 415.523 (193.565) 221.958 1.036.476 (336.386) 700.090 Less: non current portion (417.542) (201.139) (618.681) 60.590 20.819 81.409 Current provision The financial year 2009 January 1, 2008 Additions Amounts utilized / retired December 31, 2009 Jubilee award obligations Retirement obligations 395.904 262.687 276.815 152.836 (51.766) 620.953 415.523 Provisions for employee benefits are stated at the present value of expected future payments to employees with respect to employment anniversary awards and retirement benefits which are described in the Collective Bargaining Agreement of the Company. According to the Collective Bargaining Agreement: The employer is obliged to pay the equivalent of ten times the minimum base salary established at the Company upon the retirement to pension of the employee. The payment is due on the day of the retirement, but not later than 30 days after the last working day of the employee. The employer shall pay an employment anniversary (jubilee) award to employees according to the following: For 10 years of service life with the Company the amount equivalent to 3 times the minimum base salary established at the Company; For 20 years of service life with the Company the amount equivalent to 5 times the minimum base salary established at the Company; For 30 years of service life with the Company the amount equivalent to 7 times the minimum base salary established at the Company; For 39 years of service life with the Company the amount equivalent to 9 times the minimum base salary established at the Company. Payments to defined contribution pension and other welfare plans of the State of Montenegro are recognized as an expense in the period in which they are earned by the employees. Management other employee benefits are payable regardless of the reason for the employee’s departure (Note 34). This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 103 22. PROVISIONS FOR LIABILITIES AND CHARGES (continued) b) Provision for legal cases Provision for legal cases is created depending of expected outcome (as described in Note 2.12.), which is discussed with external lawyers previously. There has been release of the highest provision for legal case in the amount of 3.500.000, during the year ended December 31, 2009. Former Voluntary Leave Programme (VLP) applicants claim that they were intentionally brought into „mismatch/confusion“ by statement of the company management that the better offer will not occur in the future in regard to the amount of compensation to be paid them for termination of the employment contract. A year and a half later higher amounts have been offered by the Company to the employees to voluntary terminate they employment contract. Based on the above reasoning former VLP applicants claimed the difference. The High Court of Montenegro dismissed the complaint and brought Decision in a favour of sued party - Crnogorski Telekom A.D. Since, according to Court Decision, the Company has no further obligation related to this legal proceeding, provision in amount of EUR 3.500.000 is released. 23. DEFERRED INCOME TAX ASSETS AND LIABILITIES Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities. a) Deferred tax assets Balance, December 31, 2007 Intangible assets Property and equipment Total (538) 7.460 6.922 Statement of Comprehensive Income effect (641) 1.690 1.049 Balance, December 31, 2008 (1.179) 9.150 7.971 Statement of Compre- Balance, hensive Income effect December 31, 2009 210 1.248 1.458 (969) 10.398 9.429 Deferred tax assets relate to temporary differences between the property and equipment and intangible assets base recognized in the tax statement, and the carrying amount of property and equipment and intangible assets as recorded in the Company’s financial statements. A taxable temporary difference arises and result in a deferred tax asset if tax depreciation is less rapid than accounting depreciation. As at December 31, 2009, the Company did not have any tax losses available for future years. b) Deferred Tax Liabilities Balance, December 31, 2007 Intangible assets Property and equipment Total Statement of Comprehensive Income effect Balance, December 31, 2008 Statement of Compre- Balance, hensive Income effect December 31, 2009 914.532 - 914.532 322.350 592.182 1.736.951 11.529 1.748.480 (315.889) 2.064.369 2.651.483 11.529 2.663.012 6.461 2.656.551 Deferred tax liabilities relate to temporary differences between the property and equipment and intangible assets base recognized in the tax statement, and the carrying amount of property and equipment and intangible assets as recorded in the Company’s financial statements. A taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is accelerated. 104 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 24. REVENUES December 31, 2009 (In EUR) December 31, 2008 Subscriptions connections and other charges 10.934.665 11.354.269 Outgoing domestic traffic revenues Outgoing international traffic revenues Total outgoing traffic revenues 11.585.668 2.581.463 14.167.131 14.889.307 2.988.798 17.878.105 Incoming domestic traffic revenues Incoming international traffic revenues Total incoming traffic revenues 1.781.907 18.495.478 20.277.385 1.343.388 20.941.320 22.284.708 Leased lines and data transmission Dial up services to business customers Web presentation and hosting ADSL revenues MIPNET revenues IPTV revenues Revenues from sold internet access Equipment sales Other revenues Total other revenue 4.273.485 137.297 84.315 7.321.227 2.346.208 2.974.933 725.742 852.784 893.778 19.609.769 3.483.201 316.206 119.348 5.468.473 1.904.921 2.398.298 641.495 917.107 720.321 15.969.370 Total fixed line and internet services revenues 64.988.950 67.486.452 b) Mobile line services December 31, 2009 Post-paid revenues - outgoing domestic and international calls - monthly subscriptions The financial year 2009 a) Fixed line and Internet services In EUR December 31, 2008 14.207.475 6.576.158 20.783.633 16.004.241 5.284.683 21.288.924 Prepaid services Sale of handsets Revenue from roaming 18.271.343 1.595.173 5.138.951 25.005.467 21.264.057 1.500.003 8.038.210 30.802.270 Revenue from interconnection fees Other revenue Total mobile line service revenues 12.005.405 7.451 57.801.956 12.338.690 431.775 64.861.659 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 105 25. Other operating income December 31, 2009 Gain from sale of E-Mon share Revenues from penalties collected Capital gains of sold intangible assets Recoveries of damages Other income (In EUR) December 31, 2008 154.612 15.074 52.708 1.527 141.424 12.355 26.449 172.637 365.345 211.441 26. EMPLOYEE RELATED EXPENSES December 31, 2009 Net salaries and benefits Taxes on salaries State pension contributions Social security and other contributions Severance pay jubilee awards and planned early retirement of management (Note 22) Provisions for retirement and jubilee benefits (Note 22) Other personal costs (In EUR) December 31, 2008 12.146.083 2.474.445 3.393.393 2.092.956 11.288.263 2.906.039 3.290.527 2.219.267 118.757 3.805.400 (137.344) 1.223.014 21.311.304 441.496 2.097.900 26.048.892 Other personal costs include travelling cost amounted to EUR 276 thousands, employees use of mobile phone amounted to EUR 171 thousand, part time contracts expenses amounted to EUR 250 thousand, etc. 27. DEPRECIATION, AMORTIZATION AND IMPAIRMENT December 31, 2009 Depreciation (Note 7) Impairment charged (Note 7) Amortization (Note 5) 106 19.468.694 57.034 2.357.260 21.882.988 (In EUR) December 31, 2008 19.257.138 2.380.126 21.637.264 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 28. PAYMENTS TO OTHER NETWORK OPERATORS Payments to domestic fixed and mobile network operators Payments to foreign fixed and mobile network operators 16.991.238 6.587.340 23.578.578 (In EUR) December 31, 2008 18.420.138 8.973.451 27.393.589 The financial year 2009 December 31, 2009 29. OTHER OPERATING EXPENSES Materials maintenance and service fees Marketing Increase in provision for impairment of trade r eceivable recognised in profit or loss (Note 13) Rental fees Licence fee for the Agency Sponsorships Municipality fees and charges Fees and levies Consulting services Decrease in allowances for inventories recognised in profit or loss (Note 15) Decrease in provisions for liabilities and charges during the period (Note 22) Other expenses December 31, 2009 (In EUR) December 31, 2008 9.032.418 3.502.982 9.298.396 5.249.873 1.567.246 2.103.885 2.678.145 1.933.192 891.479 1.153.849 1.117.620 1.291.477 (254.707) (3.639.247) 5.328.337 24.602.791 2.753.622 1.695.864 1.006.308 1.348.322 866.293 1.965.731 (718.610) 129.521 5.141.917 30.841.122 Expenses for sponsorships amounted to 891.479 EUR (2008: 1.006.308 EUR) and relate mostly to sponsoring the basketball and women’s handball team “Budućnost”. The rest of sponsorship expenses in the respective periods were given for culture, sports and education purposes. The expenses of local municipality fees and charges refer to fees for buildings, telecommunication networks, pits and poles that are placed on the municipalities’ land. During the year 2007 the Government adopted “The law of local government finance” which allows every municipality to define these mentioned fees at their own will. Consulting expenses relates to audit and other consultancy services. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 107 30. FINANCE INCOME AND COSTS -NET December 31, 2009 Finance income Interest income from cash and cash equivalents short term bank deposits employee loans Interest income from unwinding of discount for long –term receivables Foreign exchange gains Other financial income Finance cost Interest expenses Foreign exchange losses Other finance cost Finance income net (In EUR) December 31, 2008 619.568 3.849.794 88.221 641.735 513.429 73.321 5.786.068 1.982.949 3.352.530 55.324 423.973 1.035.298 6.850.074 16.883 519.733 54 536.670 3.114 873.147 4.549 880.810 5.249.398 5.969.264 31. income tax expense Current income tax Deferred income tax, (release)/ expense Total December 31, 2009 3.232.241 (7.919) 3.224.322 (In EUR) December 31, 2008 2.788.873 10.480 2.799.353 Reconciliation of the Theoretical Income Taxes and Actual Income Taxes The reconciliation of the Company’s theoretical income tax and actual income tax is provided in the table below: December 31, 2009 Profit before tax Income tax at a rate of 9% Non-deductible costs Other adjustments 108 (In EUR) December 31, 2008 31.837.823 27.440.420 2.865.404 132.414 226.466 2.469.644 139.825 189.884 3.224.322 2.799.353 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 32. EARNINGS PER SHARE Weighted-average number of issued ordinary shares Number of ordinary shares Basic earning per share - from ordinary business operations Basic earnings per share, net (In EUR) December 31, 2008 24.641.067 47.273.940 47.273.940 47.273.940 47.273.940 0,6053 0,5212 0,5212 0,6053 The financial year 2009 Profit attributable to equity holders of the Company December 31, 2009 28.613.501 The Company does not potentially have any amounts of diluted shares. 33. DIVIDEND PER SHARE During 2009, profit related dividend for 2008, totalling EUR 9.800.000 (2008: EUR 22.000.000) were declared. The dividend per share amounted to EUR 0,2073 (2008: EUR 0,46537). Also, during the year, profit related advanced dividend for 2009, totalling EUR 50.000.000 was declared. The dividend per shared amounted to EUR 1,0577. 34. RELATED PARTY TRANSACTIONS Crnogorski Telekom A.D, Podgorica was acquired by Magyar Telekom NyRt. (MT). MT obtained control of Crnogorski Telekom on March 31, 2005 and by the end of 2006 and 2005 it held a 76.53% stake. Deutsche Telekom AG is the ultimate controlling owner of Magyar Telekom holding 59.21% of the issued shares. Deutsche Telekom (DT) Group and Magyar Telekom Group have a number of fixed line and mobile telecom service provider subsidiaries worldwide, with whom the Company has regular transactions. The ultimate parent of the Company is Deutsche Telekom AG (incorporated in Germany). Shareholders of Deutsche Telekom AG are Institutional investors (57%), KfW Bankengruppe (17%), Federal Republic of Germany (15%), and Retail investors (11%). Other related parties with which the Company had transactions in the period January 1 to December 31, 2009 and 2008 include: Makedonski telekomunikacii (subsidiary of Magyar Telekom), OTE (associate to Deutsche Telekom), and Hrvatski Telekom (subsidiary of Deutsche Telekom). All transactions with related parties arise in the normal course of business and their value is not materially different from the terms and conditions that would prevail in arms-length transactions. Transaction with related parties includes provision and supply of telecommunication services and leased lines. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 109 34. RELATED PARTY TRANSACTIONS (CONTINUED) I Liabilities December 31, 2009 Magyar Telekom Interconnections with fixed line of service Mobile phone service Consulting services Other (In EUR) December 31, 2008 58.649 150.895 122.207 331.751 127.414 750.000 94.257 971.671 331.751 25.892 997.563 1.070.142 736.822 45.000 1.851.964 365.258 630.466 Ote Telekom Interconnections Leased lines 15.313 28.996 75.890 - T - Hrvatski telekom Interconnections with fixed line of service Leased lines 39.217 3.800 100.385 - Total - Deutsche Telekom Group 1.939.290 1.171.999 Total 2.271.041 2.169.562 Makedonski telekomunikacii Interconnections with fixed line of service Total - Magyar Telekom Group Deutsche Telekom Interconnections with fixed line of service Mobile telephony services Leased lines 110 995.724 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 34. RELATED PARTY TRANSACTIONS (continued) II Receivables Magyar Telekom Mobile phone service Leased lines Other Makedonski telekomunikacii Interconnections with fixed line of service Total - Magyar Telekom Group Deutsche Telekom Interconnections with fixed line of service Mobile telephony services Ote Telekom Interconnections Leased lines T – Hrvatski telekom Interconnections with fixed line of service Leased lines Total – Deutsche Telekom Group Total (In EUR) December 31, 2008 25.697 36.480 1.370 63.547 8.940 1.369 10.309 63.547 42.102 52.411 2.051.618 210.028 2.261.646 328.722 118.076 446.798 27.240 58.907 - 7.500 2.296.386 2.359.933 626.782 The financial year 2009 December 31, 2009 1.132.487 1.184.898 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 111 34. RELATED PARTY TRANSACTIONS (continued) III Revenues Magyar Telekom Interconnections Mobile line services Makedonski telekomunikacii Interconnections Total - Magyar Telekom Group Deutsche Telekom Interconnections Mobile line services Ote Telekom Interconnections Leased lines Hrvatski telekom Interconnections Leased lines Total - Deutsche Telekom Group Total 112 December 31, 2009 (In EUR) December 31, 2008 36.480 145.177 181.657 30.137 226.206 256.343 128 223.293 181.785 479.636 12.392.322 259.552 12.651.874 1.893.472 777.020 2.670.492 27.071 594.693 - 756.174 15.645 13.450.764 13.632.549 8.700 3.710.279 6.984.164 7.463.800 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 34. RELATED PARTY TRANSACTIONS (continued) Expenses Magyar Telekom Interconnections Consulting services Mobile line services Makedonski telekomunikacii Interconnections Total - Magyar Telekom Group Deutsche Telekom Interconnections Leased lines Mobile line services Ote Telekom Interconnections Leased lines T - Hrvatski telekom Interconnections Leased lines Total - Deutsche Telekom Group Total December 31, 2009 (In EUR) December 31, 2008 258.836 31.476 290.312 3.109 802.474 1.644 291.956 156.556 962.139 3.432.065 45.000 200.494 3.677.559 142.109 243.840 385.949 3.833 6.045 9.878 129.223 13.299 142.522 38.481 61.273 99.754 3.787.191 4.079.147 299.405 145.041 444.446 972.917 1.935.056 The financial year 2009 IV 805.583 In 2009 the Company rewarded short term employee benefits to management, which amounted to EUR 977.501 (2008: 543.319 EUR) for net salaries and bonuses to key management, who are members or permanent invitees of the Management Committee of Crnogorski Telekom, and EUR 569.661 (2008: 302.214 EUR) for related taxes and contributions. In addition, the Company rewarded severance payments to management, which amounted to EUR 58.800 (2008: 60.024) for net amount and EUR 38.616 (2008: 45.185 EUR) for taxes and contributions. These amounts were directly charged to operating expenses, and were not provisioned previously as conditions and other necessary information were not known as of the previous year end. There was no employee loan granted to these employees. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 113 34. RELATED PARTY TRANSACTIONS (continued) Agreements with the Company’s Senior Management In October of 2004, Annexes to some Senior Management Employment Contracts were concluded. According to the rules set out in these Annexes upon termination of the employment (even in the case the termination is the decision of the employee) or cessation of the employee’s management position, the employee has the following options: - Receive a compensation for the termination of the employment with the amount equivalent to twelve monthly salaries (the monthly salary corresponding to the net amount paid out in the preceding month before the termination or the established net salary); or - Enter into an Employment Agreement in another position, corresponding to the employee’s educational level, for an undefined period. In accordance with the above-described, the Company’s maximum obligation arising on the cessation or termination of the aforementioned Annexes and Contracts, should the Company’s senior management elect to receive the compensation, would amount to approximately EUR 630.807 and EUR 449.242 as at December 31, 2009 and December 31, 2008 retrospectively. As the possibility that all key management leave the Company during the year is bellow 50%, only partial amount is reflected to financial statements as provision. In 2008 and 2007, in the case of some senior executives the Company has set up a loyalty bonus scheme, according to which, key management is entitled to certain bonuses if stays with the Company for two years from the date of contract signature. Taking into consideration conditions prevailing as at December 31, 2009, the Company would have incurred approximately EUR 144.212 costs in respect to this commitment, if key management had left the Company. 35. CONTINGENT LIABILITIES Potential onerous contract In accordance with the Share Sale – Purchase Agreement dated 15 March 2005 concluded between the Government of the Republic of Montenegro and the Employment Bureau of Montenegro, as Sellers, and Magyar Telekom, as the Purchaser, the Purchasers undertake to cause the Company to enter into contracts with the Radio Diffusion Centre to lease of optical fibber capacities for transmission of TV and radio signals and the University of Montenegro to provide of connection capacities. In both cases it is envisaged that the counterparties shall not pay any compensation for the use of these capacities. As at December 31, 2009, either no contracts had been signed or it was not possible to determine the value of the proposed services. Based on the information available, the Management was unable to assess the amount and impact of the agreement with the Radio Diffusion Centre and the University of Montenegro. Environmental matters Environmental regulations are developing in the Republic of Montenegro and the Company has not recorded any liability at December 31, 2009 and December 31 2008 for any anticipated costs, including legal and consulting fees, site studies, the design and implementation of remediation plans, related to environmental matters. Management does not consider the costs associated with environmental issues to be significant. 114 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 36. CONTINGENT assets The total amount of potential damages arising from legal actions filed by the Company equals EUR 8.383.906 (2008: EUR 8.709.977). Such lawsuits have been filed by the Company against its subscribers, citizens and businesses in attempts to collect past due receivables. a) Operating lease commitments – Company as lessee The Company leases various retail and business offices and warehouses, internet access, lines, under operating lease agreements. The lease terms are between one year up to unlimited term, and the majority of lease agreements are renewable at the end of the lease period at market rate. The lease expenditure charged to the Statement of comprehensive income during the year is disclosed in Note 29. b) Other commitments Expenditures committed up to the Statement of financial position date, which has not been recognized in the financial statements are as follows: December 31, 2009 Contracted liabilities on: The purchase of property and equipment The purchase of intangible assets Maintenance and support services Marketing and Sponsorships The long term lease of office space Handsets Other operating expenditure commitments Total 885.607 4.651.000 153.449 376.149 21.000 100.000 407.356 6.594.561 (In EUR) December 31, 2008 1.750.987 5.514.584 156.415 214.280 197.160 1.151.987 8.985.413 c) Use permits According to the management information, future expenses will occur in connection with the acquiring of already required permits for use of networks, optics, transmission and other equipment. In addition, based on the Share Sale – Purchase agreement dated March 15, 2005 concluded between the Government of the Republic of Montenegro and the Employment Bureau of Montenegro, as Sellers, and Matav Hungarian Telecommunication Group, as the Purchaser, the Sellers undertake to cause the Company to submit, thorough and complete applications to the relevant Public Authority to obtain all outstanding permits for the continued i) conduct of their respective business and/or ii) ownership and/or operation of their respective assets existing on the date of the signing of this Agreement. It has not been possible to quantify the potential expenditure required in connection with this matter. This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. 115 The financial year 2009 37. COMMITMENTS 38. EXCHANGE RATES The official exchange rates for major currencies used in the translation of Statement of financial position items denominated in foreign currencies, into Euros as at December 31, 2009 and December 31, 2008 respectively are as follows: December 31, 2009 SDR USD December 31, 2008 1.0882 0.6974 1.1068 0.7093 39. CASH GENERATED FROM OPERATIONS Notes Profit for the period Adjustments for: Income tax expense Net financial income Depreciation amortization and impairment Interest income Increase/(decrease) of allowances for inventories recognized in profit or loss Increase/(decrease) of allowances for bad debt recognized in profit or loss Change in working capital: Change in payables Change in inventory Change in receivables Decrease in provision for legal cases Provision for Employee benefits Change in restricted cash Other non-cash items 27 30 30 29 Cash generated from operations 40. December 31, 2009 December 31, 2008 (in EUR) 28.613.501 24.641.067 3.224.322 23.660 21.882.988 (5.249.398) (254.707) 1.567.246 2.799.353 (204.091) 21.637.264 (5.969.264) (718.610) 2.612.862 (4.551.963) 980.183 2.306.245 (3.639.247) (336.386) 138.546 (885.941) (714.119) 419.890 (7.080.468) (78.293) 376.029 357.248 374.195 43.819.047 38.453.063 POST BALANCE SHEET EVEnt No post balance sheet events identified as of the date of creation of these financial statements. 116 This version of our report/ the accompanying documents is a translation from the original, which was prepared in Montenegrin. 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. The financial year 2009 Further information Further information Contacts Crnogorski Telekom Moskovska 29 81000 Podgorica Montenegro Tel: + 382 20 433 433 Fax: + 382 20 225 752 e-mail: [email protected] www.telekom.me Crnogorski Telekom stock symbol: NEX Montenegro: TECG Stock trading information: Nova berza hartija od vrijednosti Crne Gore a.d. - NEX Montenegro Miljana Vukova bb 81000 Podgorica Montenegro Tel.: + 382 20 23 06 90 Fax:+ 382 20 23 06 40 E-mail: [email protected] www.nex.co.me Published by: ©Crnogorski Telekom, 2010 Life is for sharing.