Crnogorski Telekom 2013 AnnuAl RepoRt izvjestaj 2013 engl.pdf · I am happy to report that, ......

Crnogorski Telekom2013 AnnuAl RepoRt

1our mission / our Vision

ConTenTs: to ouR ShAReholdeRSAbout Crnogorski TelekomSelected Financial and Operational Data of Crnogorski TelekomLetter to Our Shareholders

MAnAgeMent RepoRtManagement Report for the Financial Year 2013Crnogorski Telekom’s Management Board of Directors Executive Management BoardVision and StrategyRegulatory EnvironmentPromotions and Offers

huMAn ReSouRceS

coRpoRAte ReSponSibility

FinAnciAl StAteMentSIndependent Auditor’s ReportStatement of Financial PositionStatement of Comprehensive IncomeStatement of Cash FlowsStatements of Changes in EquityNotes to the Financial Statements

FuRtheR inFoRMAtion


To our shareholdersAbout cRnogoRSki telekoM

Crnogorski Telekom (CT) is the largest telecommunications company in Montenegro. It provides a full range of fixed and mobile telecommunica-tion services (voice, messaging, internet, TV, leased-line circuits, data networks and ICT solutions).

Crnogorski Telekom fully digitalised the fixed-line network in 2007 and brought ADSL coverage of PSTN customers close to a 100% base by the end of 2012. In December 2007, Crnogorski Telekom started an IPTV service. At the end of 2011 CT started offering ICT solutions, promoted under the name “Integris”.

CT was the second entrant into the mobile market in Montenegro. From its founding in 2000, it has always offered innovative and advanced services to the Montenegrin market and has been experiencing dynamic growth. Telekom uses mobile technologies such as UMTS, HSDPA, GPRS and EDGE. A 3G network was launched in the summer of 2007. A 4G service was softly launched in 2012, while wider coverage was brought to the market in 2013.

In 2006, the T-Com and T-Mobile brands were launched.

In May 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.

In 2012, the T-Com and T-Mobile brands were replaced by the Telekom brand, under which all products are now marketed.

On 1 April 2005, Magyar Telekom obtained a 76.53% interest in Crno-gorski Telekom. Deutsche Telekom AG holds 59.21% of the Magyar Telekom shares. Deutsche Telekom and Magyar Telekom have a number of subsidiaries worldwide, with which Crnogorski Telekom has regular transactions. Details of related party transactions are given in the com-pany’s Financial Statements, Note 28.


odabrani finansijski i operaTiVni podaCi Crnogorskog Telekoma

Main financial KPIs (€ million) 2012 2013 Δ Δ%

Revenues and Other income 114,3 110,2 -4,1 -4

EBITDA w/o SI 44,1 43,3 -0,8 -2

EBITDA w/o SI margin (%) 38,6 39,3 0,7

EBITDA 42,7 39,8 -2,9 -7

EBITDA margin (%) 37,3 36,1 -1,2

Operating profit 21,1 20,1 -1,0 -5

Net profit 19,9 18,8 -1,1 -5

Total Assets 200,7 198,2 -2,5 -1

CAPEX 14,5 14,5 -0,1 -1

Number of employees (closing FTE) 729 651 -78 -11

Fixed line operation KPIs (in thousands)* 31 Dec 2012 31 Dec 2013 Δ Δ%

Fixed-voice customers, Total 167.8 167.2 −0.7 0

Fixed-voice market share (%) 98.1 98.3 0.1

ADSL customers, Total 69.6 74.4 4.7 7

BB internet market share (%) 82.6 81.8 −0.8

IPTV customers, Total 56.3 61.8 5.5 10

Pay TV market share (%) 42.0 41.6 −0.4

Mobile line operation KPIs (in thousands)* 31 Dec 2012 31 Dec 2013 Δ Δ%

Number of customers, Total 340.0 352.8 12.8 4

Prepaid 203.4 214.8 11.4 6

Postpaid 136.7 138.1 1.4 1

Mobile customers market share (%) 34.3 35.5 1.2

Mobile internet customer numbers 87.1 96.9 9.8 11

Mobile internet customers market share (%) 39.6 40.6 1.0

Mobile penetration (%) 160 160 0.5

* Source: Montenegro Agency for Electronic Communications and Postal Services

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dear shareholders,

As always at this time of the year, I have the pleasure of sharing with you our view about Crnogorski Telekom’s most significant moments in 2013 when it comes to business developments. This year can be summarised in a few words: facing remarkable challenges, we achieved remarkable success. I am happy to report that, despite negative macroeconomic developments, characterised by constant state budget deficits, failure to achieve the projected growth rate, risks caused by social pressure, high economic illiquidity, decreased FDI inflow, still causing additional pres-sure on economic stability in 2013, Crnogorski Telekom has managed to preserve its market superiority, stable financial performance and has had significant achievements on its transformational path. Speaking of financial achievements, let me inform you that our revenues, amounting to €110.2 million, exceeded the Budget by €8.2 million (8%), driven by Wholesale revenues, equipment/handset sales and ICT revenues, while service revenues deteriorated (€−2.2million). Furthermore, EBITDA was €0.25 million higher and solid oFCF performance was successfully maintained.

The business year 2013 was fairly successful and pretty much in line with our expectations, which, in our view, results from the full commit-ment of our management to the already proclaimed strategic framework based on three strategic layers (Stand 4 Broadband – capturing and retaining customers and outperform competition; Transform 2 Out-perform – full focus on e-Business, e-Company, One Billing/CRM and

Save2Invest initiatives and New Way 2 Play – growing revenue streams in ICT/Cloud and Retailer No.1 initiatives, new business development and exploring partnering concepts, and the transformation program DELFIN, in order to achieve operational, financial and market excellence.

Not surprisingly, the year 2014 will be full of challenges for all industries, particularly for such fast-developing and changing ones such as tele-communications, in which operators are under high pressure in today’s business climate and facing revenue decline every year. The fact is that these changes create opportunities but there is also increasing competi-tion in every market segment, especially in fixed-line telephony, driven by aggressive rollout, lower broadband prices and content advantages compared to CT. Tension also comes from operators’ pressure to provide services which are attractive enough, in terms of both price and quality, to keep the existing customers and acquire new ones, smartly targeting different customer segments with adequate and unique proposals. It is unbelievable how quickly technological disruptions change customers’ behaviour and expectations, as they see operators as the means for con-nectivity and a convenient lifestyle, providing them with everything on demand and on whichever device. At the same time, operating costs need to be brought under control and all operators are planning efficiency improvements. As you well know, we have been very active and innovative in that regard for years, constantly thinking about how we can simplify our daily operations in order to increase efficiency and save at all levels, so that we can provide funds to invest in our resources in new products and services. Our newest invention when it comes to efficiency improvement is so called the Save to Invest (S2I) program, through which saving initiatives were developed and executed, aimed at reaching financial and indirect cost targets. Our cost saving target was defined at the level of €2.4 million and almost the entire amount has already been covered by our initiatives. But we will not stop there. We will be constantly looking for additional saving opportuni-ties, and cost control will definitely remain one of our watchwords in the upcoming period. We must tightly manage our cost base to ensure we are efficient and focused only on delivering what matters to our custom-ers. However, we must also have an ambitious plan for long-term growth. We as a company have never been interested in improving our efficiency simply through cutting costs. What we need is to be winning in key markets and being innovative enough to deliver growth through the rev-enue base as well. I am also very focused on ensuring we have the right leadership capability across the organisation. This company has many talented and passionate people who are keen to deliver great solutions and service to our customers. It is also being proved through numerous transfers of knowledge that we introduced in 2013, and through which a constantly increasing number of our colleagues are being recognised as the most qualified and most preferred people for demanding positions at DT Headquarters. Hard and dedicated work always pays dividends.

As I said, a very demanding year is again ahead of us, also due to unpre-dictable new taxes and fees creating an additional financial burden and legal issues (local taxes, the new method of VAT treatment, new personal income tax, VAT increase, tourist tax increase, etc.) and constantly increasing regulatory requirements. However, we are confident that, with our customer focus, constant innovations, investments in both fixed-line and mobile networks searching for new revenue potentials, we will improve our performance at all levels, develop to be stronger and better able to serve customers and maintain solid profitability.

As in previous years, we continued to maintain a very substantial volume of investments of €14.5 million. We achieved good business results

7dear shareholders

and invested significantly in the latest technology. Crnogorski Telekom further improved substantially the technological basis of the company and continued modernisation of the fixed-line and mobile network with state-of-the-art technology, with special emphasis on the IT infrastructure and access to the broadband network (One Billing &CRM system, FTTH rollout, IPTV, IMS etc.)

Speaking of other 2013 achievements, last year provided a good response to our efforts aimed at development of new markets and new products. We were focused on launching the LTE network, intensive FTTH rollout, expanding ICT business, One Billing project implementa-tion, launching the Hybrid Access project, the IPTV Upgrade project, minimising negative effects of the extensive regulatory changes and continuation of the Delfin transformation program. With regards to Crnogorski Telekom as an ICT company, I am happy to inform you that the positive trend launched in 2012 is continuing also in 2013 and that we are exceeding a 100% revenue growth rate compared to 2012, sig-nificantly contributed to by the hotel and resort segment, securing also strong potential for the years to come. In that particular area we targeted €4 million of ICT revenues for 2014.

Our wholesale business, despite huge challenges, delivered good results in 2013. Revenue plans have been exceeded in all business seg-ments. Mitigated regulation of international voice termination and good roaming results marked this year of wholesale business. Just before the end of the year a deal worth €2. 3 million for the long-term lease of opti-cal fibres with Telenor was signed.

Working in such a challenging environment, we at Crnogorski Telekom are continuously looking for new revenue opportunities. One of them that has proved to be successful is selling devices. Compared to our ini-tial 2013 plans for equipment revenue in the consumer segment (€820 thousand), we can report nearly 100% overachievement (€1.63 million). The most significant contribution to consumer financing revenue in 2013 comes from laptop and TV sales (76%). Sales results in this segment place Crnogorski Telekom as a significant market player in retail in Montenegro.

Regarding development of the fibre story, I point out that our teams have already provided access to fibre optic data transfer for almost 28 households in Montenegro. We gained 3,400 new fibre users, and 7,000 users in total, which means that in 2013 we almost doubled the number of fibre users in 2012 + 2011, since at the end of 2012 we had around 3,600 customers! At the end of 2013 the utilisation rate amounted to 25%, i.e. every fourth user in the zones covered by the fibre network uses some of our services. Speaking of the LTE Rollout (4G), this year eighteen 4G base stations were installed in seven cities. Over the next four years in our develop-ment plans we have foreseen installation of one hundred 4G base stations, hoping thereby to increase customer satisfaction by fulfilling growing demand for quality, coverage and speed. In that regard we have also offered them a wide selection of devices supporting 4G. Our 4G implementation offers superior features and, combined with our superior mobile hardware portfolio, this allows us to offer the best broadband experience on the move.

Let me continue the story of our success with a short reminder of the outcome of the second benchmark survey “The best company to work for in Montenegro” 2013/2014, according to which Crnogorski Telekom received an award for the Best Company to Work for in Montenegro –

first place in the large companies category (Main Award) and The Most Attractive Employer – first place in the survey among university students, which I particularly like, since it indicates that young people consider that our company meets the challenges of the modern business environ-ment in the best possible way.These prestigious awards belong to all of us because we deserved it through our joint efforts, personal, professional and business values that we have embedded in our company culture, as well as through fighting for high quality in each and every segment of our business operations.

We have been investing significant effort in increasing employee satisfaction, seeing our employees as a key factor in our success. In that regard I am happy to inform you about the closing of the housing loan distribution process, enabling 148 employees to permanently resolve this particularly important issue for themselves and their family mem-bers. I am also very happy that we further improved cooperation with the Trade Union, which also resulted in a successfully organised and implemented Voluntary Leave Program (VLP).

We have also been investing significant efforts in increasing customer satisfaction. Crnogorski Telekom’s strong commitment to continuously improve customer service is reflected in positive development of cus-tomer loyalty indices. Special attention in 2013 was paid to the TRI*M (customer satisfaction) index, which resulted in the first increase of fixed and mobile line TRI*M results after 2 years of decline, with special em-phasis on the fact that those exceeded the main competitor’s average. But this is only the beginning. We already developed the main recom-mendation for improving results in 2014 for both segments.

Crnogorski Telekom experienced a limited YoY decrease of Earnings before Interest, Tax and Depreciation (EBITDA) before special impacts of €0.8 million (−2%) to a level of €43.3 million. The Net Profit achieved by Crnogorski Telekom in 2013 amounted to €18.8 million, which represents a YoY decrease of €1.1 million (−5%). In 2013 the company paid out dividends of €22.9 million and the dividend yield amounted to 10.9%.

I would like to take the opportunity to thank all of our employees for their dedicated and skilled efforts in 2013, which are the basis on which we can achieve our objectives during the coming years.

Finally, dear shareholders, let me also thank you, for the third time already, for your contribution to the success of our company. Your trust and confidence have always been a great support for us and we will feel free to keep counting on it.

Rüdiger J. SchulzChief Executive Director

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managemenT reporTMAnAgeMent RepoRt FoR the FinAnciAl yeAR 2013

Highlights

The decrease in revenue was limited to 3.6%, with a total revenue of €110.2 million mainly driven by the development of voice revenues, both retail and wholesale, and partly offset by the increase in internet, TV, ICT and equipment sales revenues.

EBITDA excluding special influences decreased by 1.9% to €43.3 million, with an achieved margin of 39.3%. Net profit decreased YoY, by €1.1 million, or 5.5%, to €18.8 million. Capital expenditure was €14.5 million. It mainly related to: One Billing & CRM, fibre-optic network roll-out, IPTV and IMS. Dividends of the amount of €22.9 million were paid out.

Revenues and profitability Although 2013 was operationally and financially very challenging, due to the economic downturn and the difficult market conditions, Crnogorski Telekom was focused on expanding its broadband services, on fibre-optic access roll-out, on expansion of the ICT service (Integris) and on the im-provement of voice services. In the fixed-line voice segment, CT kept a stable customer base, while ADSL and Extra TV customer numbers increased. In the mobile segment CT retained both total postpaid and business segment postpaid leadership and further strengthened its leadership position regarding the mobile internet market.

Even though the development in the number of customers was mainly positive, CT experienced a moderate revenue decline. By limiting the YoY de-crease to only 3.6%, CT performed better than most of its peers. Revenues reached €110.2 million. The retail revenue decrease was limited to 1.7%, while wholesale revenues decreased by 11%. Major revenue downsides, compared to 2012, related to: interconnection revenues (−14%), which was a consequence of decreased mobile termination rates and lower incoming traffic, fixed-line voice retail revenues (−7%), influenced by decreasing usage, and mobile prepaid revenues (−11%), influenced by the 1EUR Tax, introduced in 2012, and generally lower usage.Such development was partly compensated by higher: ADSL revenues (+3%), driven by higher customer numbers, IPTV revenues (+8%), driven by higher customer numbers, data services revenues (+6%), driven by the growth of CT’s Integris service, and equipment sales revenues (+51%), boosted by sales of TVs/laptops and handsets sale.

As a result of continuous successful efforts to increase efficiency and improve the cost base, operating expenses excluding special effects at the same time decreased YoY by €3.3 million (−5%), to the level of €66.9 million.

The limited YoY revenue decrease and cost efficiency resulted in a moderate YoY decrease of EBITDA excluding special influences of 1.9%, to the amount of €43.3 million.

Operating profit (EBIT) decreased YoY by €1.0 million to €20.1 million, mainly due to higher severance payments in 2013. Net profit decreased by €1.1 million to €18.8 million.

9dear shareholders

Main Non-Financial KPIs In 2013, the fixed-line voice customer number was stable. The ADSL revenue increase was driven by a customer base increase of 4,700 or 7%. IPTV revenues also increased due to a customer number increase of 5,500 YoY or 10%.

Fixed-line operations KPIs (in thousands)* 31 Dec 2012 31 Dec 2013 Δ Δ%

Fixed-voice customers, Total 167.8 167.2 −0.7 0

Residential 145.8 145.5 −0.3 0

Business 22.0 21.7 −0.4 −2

Fixed-voice market share (%) 98.1 98.3 0.1

ADSL customers, Total 69.6 74.4 4.7 7

Residential 62.4 66.7 4.3 7

Business 7.2 7.7 0.4 6

BB internet market share (%) 82.6 81.8 −0.8

IPTV customers, Total 56.3 61.8 5.5 10

Residential 54.4 59.7 5.3 10

Business 1.8 2.0 0.2 11

Pay TV market share (%) 42.0 41.6 −0.4

By the year end of 2013, 352,800 customers were using Telekom’s mobile services, 12,800 more than at the end of 2012, an increase of 4%, whereas both Prepaid and Postpaid segments were growing. The main driver of such development is an increase of the Prepaid customer base of 11,400 or 1%. At the same time, the Prepaid SIM market share increased by 2pp, to 32.1%. Although Postpaid customer numbers increased by 1%, to 138,100, the Postpaid SIM market share decreased by 0.8pp, to 42.5%. Still, Crnogorski Telekom remains the market leader in that segment. Consequently, the total SIM market share increased by 1.2pp, to 32.1%. The number of mobile customers using the internet at YE 2013 increased by 9,800 or 11% YoY.

Mobile line operation KPIs (in thousands)* 31 Dec 2012 31 Dec 2013 Δ Δ%

Number of customers, Total 340.0 352.8 12.8 4

Prepaid 203.4 214.8 11.4 6

Postpaid, Total 136.7 138.1 1.4 1

Postpaid Residential 34.1 36.7 2.6 8

Postpaid Business 102.6 101.4 −1.2 −1

Mobile customers market share (%) 34.3 35.5 1.2

Mobile internet customer number 87.1 96.9 9.8 11

Mobile internet customers market share (%) 39.6 40.6 1.0

Mobile penetration (%) 160 160 0.5

* Source: Montenegro Agency for Electronic Communications and Postal Services

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Main investments In 2013, CT started major investment in One Billing/CRM (Customer Relations Management), with total budget of €12.2 million, of which €3.2 million was spent in 2013 (22% of total CAPEX spent). The new billing system will replace the current three separate billing systems. It will increase market competitiveness, by enabling fully convergent offers to the market (prepaid/postpaid and fixed/mobile) and it will enable real-time rating, which will fulfil certain regulatory requirements (“bill shock” prevention). It will also support CT’s way towards becoming an e-company, which is DT Group’s strategic direction.

Following its Mobile Access Strategy, after successful RAN Modernisation, in 2013 investments in the mobile network were focused on new technolo-gies. The major project finished in 2013 was the LTE commercial launch. After the successful LTE soft launch in Podgorica and Kotor in November 2012, roll-out of eighteen new base stations in seven cities, implementation of the new Evolved Packet Core (EPC) and its integration with the billing and provisioning system were completed in the first half of 2013. With this, the LTE network reached a coverage of 38% of the population providing download speeds of up to 100 Mbps and upload speeds of up to 50 Mbps. LTE technology supports packet-based services, however in CT’s LTE architecture, implemented CSFB (circuit switched fall back) function-ality enables continuous voice services on LTE.

In 2013, a major upgrade of the IPTV platform, which started in 2012, was successfully finished in July 2013. Besides the improvement in stability and performance, this upgrade brought some new features: TVTeka offers content from 10 local channels available for the past 48 hours without manual recording, the VOD storefront offers a completely new look & feel. All of this gives us a competitive advantage in the area of TV. On the content side, the number of channels in 2013 was increased to 115 channels with standard definition and 6 channels with high definition. Also, the TV Shared Service Centre hosted by Magyar Telekom has been up and running since 2013 as a joint Deutsche Telekom Europe operators initiative to consoli-date TV expertise and bring an additional decrease in costs and accelerated time-to-market for TV products. Crnogorski Telekom was involved in its establishment and starts participation from 2014. Following the Fixed Access Strategy, we continued with investments in the FTTH network during 2013. The focus was on new zones. Plans for 2013 were exceeded. Year end results were as follows: 27,642 households covered by the fibre network and 6,971 homes actually connected to the net-work, which gives a utilisation rate of 25%. After the successful implementations of the IMS platform in 2011, in 2013 we have continued with customer migration, in parallel with a platform upgrade. We have exceeded our 2013 target and finished the year with more than 48 thousand IMS customers, or more than 30% of active voice customers were using IP-based voice technology.

The changeover of the existing Mobile Packet Core Network to the Evolved Packet Core (EPC) was executed. The main reasons for the changeover were: to support mobile data traffic growth, to make the network LTE-ready and update HW/SW. The project was successfully finished in July 2013. All users were migrated without any problem. This project was a precondition for LTE implementation in the CT mobile network.

Last but not least, CT is first operator in the country to introduce HD voice technology. Mobile HD voice, based on AMR (Adaptive Multi Rate) Wide-band technology (W–AMR) enables high-quality voice calls in mobile 2G and 3G networks and an improved user experience. It provides significantly higher voice quality for calls between mobile phones supporting the feature.

11dear shareholders

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Crnogorski Telekom’s board of direCTors János Szabo - Chairman, Susanne KrogmannMelinda Szabo, Tripko KrgovićPéter ZsomThilo KuschMihály Németh

jános szabóJános Szabó was born in Hódmezovásárhely (Hungary) in 1961. He graduated at the Budapest University of Economics in 1986, majoring in international relations.After working in foreign affairs for three years, he continued in various finance and consultant positions in the private business sector. He became Director of Finance at Delco Remy Hungary (a subsidiary of the US-based automotive supplier) in 1995. Later he became Deputy General Manager of the operation, responsible for sales, purchasing and operations. In 1998 he moved to the position of Director of Finance for Europe, in charge of the finance activities and acquisitions of European operations. Later he became CFO and Managing Director of a joint venture between Delco Remy and Hitachi. From April 2003 he was the Finance Director of the Wireline Services LOB of Magyar Telekom (later T-Com). The role was extended to the fixed-line network and IT opera-tions in 2006. Since January 2008, he has been the Director of Group Planning & Controlling of the Magyar Telekom Group. He is a member of the BoD of Crnogorski Telekom, MakTel and TMMK.

susanne krogmannSusanne Krogmann, born in 1964, holds a diploma in economics from Georg-August-University in Göttingen, Germany. After graduating, she went on to study European Integration at the College of Europe, Bruges, Belgium. She started her career at the Treuhandanstalt, the state-owned agency responsible for the privatisation of the enterprises and assets of the former Democratic Republic of Germany. During her five years at the Treuhandanstalt, Susanne Krogmann worked in the controlling and con-tract management departments. For the last 2 years there she held the position of Key Account Manager for several companies in the chemical industry. Susanne Krogmann joined Deutsche Telekom in 1999. For more than 8 years she worked in different positions in the Regulatory and Public Affairs division, especially in the field of regulatory econom-ics and regulatory strategy. She then took over the position as head of the Corporate Responsibility Strategy and Controlling group, where she developed a new Corporate Responsibility strategy for the DT group. Following increasing awareness of data security and data protection at Deutsche Telekom, she then worked on a data security project with a personal focus on customer data security. Since the end of 2009 she has held the position of Vice President of Corporate Governance Europe within Board Area Europe at Deutsche Telekom. Since 2011 she has been a member of the Board of Directors of Crnogorski Telekom.

melinda szaboMelinda Szabo was born in Budapest, 1971. She graduated from the College of Trade & Catering in 1994, followed by a second Bachelor’s degree in marketing at the College of Foreign Trade in 1997. She com-pleted a Masters in Business Administration at WEBSTMBA in 2007.She started to work for Westel Mobile Co. Ltd. in 1999 as a marketing manager. During the past 10 years she has managed different projects in the area of consumer marketing. After several career steps she was promoted to Deputy Marketing Director in 2005. From January 2008, she was Deputy Marketing Director of the Consumer Segment Market-ing Unit of Magyar Telekom, responsible for the T-Home and T-Mobile brands. She was appointed as Director of Consumer Segment Marketing Directorate effective from 1 July 2010.She has been a member of the Supervisory Board of Origo Media and Communication Services Provider Co. Ltd. (member of the Telekom Group) since August 2010.

13dear shareholders

péTer zsomPeter Zsom was born in Budapest, Hungary in 1973. He gained his first degree in Germanic Studies at ELTE University in 1999. Afterwards he received a second degree in economics at the College of Foreign Trade in Budapest in 2003. He started his career working for the Hungarian Tax Authorities in the PR department. He joined Westel in 1999 and first worked in customer relations. From 2002, he led various sales and product development projects as Project Manager, participated in the T-Mobile re-branding project in 2005 and was the head of the Integrated Sales Campaign Management Department in 2008. After that he worked for Deutsche Telekom in Germany as Senior Launch & Lifecycle Manager responsible for international product management within the DT Group. After returning to Magyar Telekom in 2010, Peter led various strategic projects. In April 2011 he joined Area Management MT at Deutsche Telekom and has been responsible for Magyar Telekom ever since.

Thilo kusChThilo Kusch (born in 1965) graduated from the Technische Universität Berlin in Business Administration and Electrical Engineering, specialis-ing in corporate finance and communication engineering. At the begin-ning of his career he worked as consultant/manager at Arthur D. Little Ltd. in London, then from 1998–2001 at Dresdner Kleinwort Wasserstein in London, first as a Telecom Equity Analyst in the position of Assistant Director, then as an Telecom Marketing Analyst in the position of Direc-tor.In 2001 he joined Deutsche Telekom, T-Mobile International where he held the position of Head of Investor Relations. In 2002 he became Head of Investor Relations in Headquarters of Deutsche Telekom in Bonn where he was responsible for communications with equity markets and in 2006 became Chief Financial Officer and a member of the Board of Directors in Magyar Telekom Nyrt. In his current position, he is responsible for group finance (controlling, accounting, tax, treasury, M&A, IR, procurement, real estate, shared ser-vices). In 2008 and 2009 he received an award for best investor relations and as the best corporate governance officer.

mihály némeThMihály Németh (born in 1974) graduated as a certified economist at the Budapest University of Economy, then as a certified lawyer at the ELTE Law Institute of Higher Education. In 2005 he became a CFA charterholder (certified financial analyst), which is a highly recognised designation in the field of investment profession. At the beginning of his career he worked as an equity analyst at BudaCash, then at the K&H Brokerage Company in Hungary. He joined MATÁV Rt., the predecessor of Magyar Telekom, in 1998. Initially he worked in the telecommunica-tions company as a business analyst, then from 2000 as Head of the Business Planning Department and from 2004 as Deputy Controlling Di-rector. In 2008 he was appointed as Director of Magyar Telekom Group Headquarters, Finance Directorate. Between 2010 and 2012 he worked as the director of the company’s Central Services Directorate. This organ-isation operated as the multifunctional service centre of the holding. Since January 2013 he has held the position of Strategic Asset Manage-ment Director. In this function he is responsible for subsidiary portfolio management, M&A, Treasury, Working Capital management and Partner Settlement functions of Magyar Telekom. In recent years he has taken various positions in the boards of directors and supervisory boards of various companies. He is currently the Chairman of Origo Zrt’s Supervi-sory Board and a member of the Board of Directors of Vidanet Zrt.

Tripko krgoVićTripko Krgović was born in 1977 in Belgrade. He finished his undergrad-uate and Master’s studies at the Faculty of Economics in Podgorica. His professional career began in 1996 at his family business. From 2004 he worked in the Securities Commission, in the Market Supervision Depart-ment. In 2005, he held the position of Investment Manager in Moneta Investment Fund. From 2006 to 2008, he was the Chief Executive Officer of Moneta Broker–Diler AD, Podgorica. From 2008 to 2011, he was a member of the Board of Directors of the Moneta privatisation fund and of Otrantkomerc AD, Ulcinj. He is a representative of the minority share-holders in some of Montenegro’s largest companies. He was elected a member of Crnogorski Telekom’s Board of Directors, Audit Committee and Compensation Committee in 2008.

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The exeCuTiVe managemenT board of Crnogorski Telekom

15dear shareholders

Rüdiger Schulz, Chief Executive Officer and Chairman of the Executive Management BoardDr. Gabor Altmann, Chief Commercial Officer Residential Endre Horanyi, Chief Human Resources OfficerVladan Peković, Chief Technology and Information OfficerManfred Knapp, Chief Financial OfficerVladimir Beratović, Chief Corporate Affairs Officer Milija Zeković, Chief Commercial Officer Business

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endre horanyiChief Human Resources Officer Endre Horanyi was previously an HR Partner of the Consumer Business Unit at Magyar Telekom. According to the MT organisational model, he was in charge of more than 4 000 people. From that position Mr. Horanyi joined Magyar Telekom in 2003. His professional development in the field of HR management mainly relates to his career path within MT. From 2003 until now, he has covered several positions related to HR functions such as: Senior HR Operational Development Manager, Head of HR Operational Development, HR Director of the Mobile Business Unit and most recently: HR Partner of the Customer Business Unit. Since June 2010, he has been working as Chief Human Resources Officer at Crnogorski Telekom.

Vladan pekoVićChief Technology and Information Officer

Vladan Peković took over the position of Chief Technology and Informa-tion Officer in January 2014. He came from T-Mobile Poland, where he was Technology and Platforms Director and Chairman of the Supervi-sory Board of Networks.Before joining DT group in 2009, he gained vast experience during long-lasting international carrier working for major telco companies on projects of development, implementation and management of telecom-munications networks in the Czech Republic, Mexico and the USA.

rüdiger sChulz Chief Executive Officer and Chairman of the Executive Management Board

Rüdiger Schulz, who is an internationally experienced business leader, completed his studies in electrical engineering at the University of Ham-burg and business management studies at the University of Koblenz. His professional career began with service in the German Navy as Chief Engineer on Vessels, after which he joined Deutsche Telekom Group in 1991. To begin with, he was responsible for technology platforms, and later became responsible for marketing and sales in the residential and corporate segment. In 2005, he began working for T-Systems as Senior Executive Vice President of Business Customers and Large Enterprises in the north-eastern region of Germany, one of six in the country and de-veloped his experience in the area of IT. He joined Slovak Telekom in No-vember 2006, taking over the position of Senior Executive Vice President for Marketing, Sales and Technology/COO and was a member of the Executive Management Board being responsible for T-Com’s product and service portfolio in the business, residential and wholesale segment. In July 2010 he was appointed Chief Operating Officer for Networks and IT of Slovak Telekom. From October 2011 he joined Crnogorski Telekom in his current position.

dr gabor alTmannChief Commercial Officer for Residential Area Dr. Gabor Altman joined Crnogorski Telekom in January 2013, when he took over the position of Chief Commercial Officer for Residential Area. He came from Makedonski Telekom, from the position of Chief Sales Officer.In the last 10 years he has covered different positions within Magyar Telekom Group including Makedonski Telekom, T-Mobile Macedonia, T Systems and T-Mobile Hungary. His professional experience at previous positions mainly relate to sales and customer service activities, market-ing, portfolio management and strategy.

17dear shareholders

manfred knapp Chief Financial Officer Born in 1955 in Frankfurt am Main, Germany. He holds a degree in Busi-ness Administration and Management. Before joining Deutsche Telekom Group in 1997, Manfred Knapp covered several senior controlling and finance management positions in different industries where he gained broad experience in all areas of finance management, mergers and acquisitions and turnaround management. In 1998, Manfred Knapp was assigned to the mobile operator Wind, in Italy, as Controlling Director. From 1999, he managed the controlling department of the Deutsche Telekom Carrier Services Business. In 2001, he joined Slovak Telekom as Controlling Director and Deputy CFO. Since May 2009, he has been responsible for the Finance Department of Crnogorski Telekom as CFO.

Vladimir beraToVićChief Corporate Affairs Officer

Born in 1970 in Podgorica, he graduated in international management, and is currently undertaking postgraduate studies. His 17-year-long ca-reer in telecommunications started in the Montenegrin mobile operator Promonte (today’s Telenor). During his last 10 years at Telenor, he held various directorial positions and was a member of the top-level manage-ment. He left Telenor as Chief Corporate Affairs Officer, in charge of government relations, legal, regulatory, interconnection and wholesale and corporate communication departments. His career at Crnogorski Telekom started in September 2010 as advisor to the Chairman of the Board. He was appointed Corporate Affairs Officer in November 2010. He currently holds the position of Chief Corporate Affairs Officer, which includes the wholesale area.

milija zekoVićChief Commercial Officer for Business Area

Born in 1971, he holds a degree in economics from the University of Montenegro. After completing his studies in 1995, he started his career at “Kartonka”, Podgorica as Production and Sales Manager. He started working 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 as the CSO of Crnogorski Telekom. He currently holds the position of Chief Commercial Officer for Business customers.

18

our Vision

In a fast changing world,we are your first choice to live in a fully digital lifestyle wherever you are, whatever you do; by aspiring to be the best in class.

our sTraTegy CT continues with the successful implementation of our corporative strategy based on three strategic layers: Broadband, Transformation and Innovation.

StAnd FoR bRoAdbAndIn order to offer unique customer experience of ultrafast internet and to keep our position of the technology leader, we continue with progres-sive migration of customers to the IMS platform, while at the same time improving the mobile network through 3G and 4G technologies and spreading the coverage of our fibre network. Our goal is to keep and to improve our competitive advantage in ADSL, Extra TV, Extra Trio and mobile internet and to respond effectively to the increasing demands of customers in terms of multimedia content and digital services.

19inTroduCTion

tRAnSFoRM to outpeRFoRMAt the centre of the transformation program is the process of developing a modern e-company with simplified internal operations for our employ-ees and establishing e-business operations, with more effective online channels and e-care services for our customers. Transformation initiatives and consolidation strategies should enable All-IP cost-effective network architecture, cost optimisation, service convergence, a multichannel business model and a faster and flexible Go-2-Market.

new wAy to plAyAs a result of increasing regulatory requirements and competitive pres-sure, we are facing a decline in revenues, particularly for traditional fixed and mobile services. Because of that we are intensively exploring new market possibilities and new business models. Through customised ICT and cloud solutions, CT meets the demands of modern businesses. Fur-ther extension of our content offer and interactivity features will ensure added value for evolving customer needs. Successful customer financing model enables further broadening of our business portfolio and opens up partnering possibilities.

21inTroduCTion

RegulAtoRy enviRonMent

The recent regulatory environment has been characterised by imple-mentation of the new Law on Electronic Communications based on the EU regulatory 2009 framework, which is dedicated to ensuring competi-tiveness in the market. In 2013, the new products placed in the market, based on the resolutions on SMP operators from 2010 and 2013, had still not been put into operation due to a lack of interest from other par-ties. The only interest was shown for duct rental. The Cost Accounting and Accounting Separation Methodology for the fixed network was implemented in 2012 and the National Regulatory Agency (NRA) approved the 2012 regulatory reports in September 2013. Additionally, the Cost Accounting and Accounting Separation Methodol-ogy was also applied in mobile and the first Mobile Regulatory revised reports (for 2012) were approved also in September 2013.

In 2012, the NRA completed second round of market analysis of seven standard EU relevant markets already analysed in 2010. CT was identi-fied as an SMP in all seven markets again. Additionally the NRA applied three criteria test on two retail markets: broadband and mobile service as to find out if those markets are susceptible for ex ante regulation. Retail market of mobile services was found sufficiently competitive, which was not the case with retail BB, where CT was designated as SMP. Upon approval of 2013 Regulatory reports for fixed network the NRA is going to enter in retail price regulation of BB service on cost orientation basis. Based on three SMP resolutions (from 2012 and 2013) the NRA entered, at the end of 2013, in retail price regulation of access to the fixed network, as well as fixed voice service (local, national and international calls). Price adjustment based on cost model implies price decrease in voice services.

Universal service

Universal service (US) was commercially launched in December 2011, but without significant interest from the customers’ side for the US service (especially for voice services and Internet access). Interest for US Inquiry and Directory Service is also not so remarkable; therefore Mon-tenegrin operators compensated a rather significant net cost to USO) for the years 2011 and 2012.

The Number Portability service was commercially launched on 1 De-cember 2011. The first years of implementation of the service showed that around 50% of numbers are ported in the CT network (while there was limited interest for porting numbers in the fixed-line segment). The new Rulebook on Number Portability adopted in 2013 provides for fewer restrictions for the porting of numbers.

Regulatory fees

Under the regulations currently in effect, Crnogorski Telekom pays fees for market supervision, numeration and the usage of radio frequencies.

Carrier Selection

Carrier Selection was already included in the Reference Interconnection Offer (RIO) published in 2008. In accordance with the NRA’s Resolution on Designating CT as an SMP in the relevant market, the updated RIO also includes Carrier Pre-selection. Only two operators have signed inter-connection agreements with Crnogorski Telekom with Carrier Selection included.

Sharing of infrastructure

The RIO also defines the terms and conditions of collocation, for the purpose of interconnection realised in Crnogorski Telekom’s premises. This includes renting of space in buildings, masts and ducts. The RIO’s conditions are valid only for operators looking for interconnection/ac-cess, while usage of infrastructure by operators for other purposes is subject to commercial negotiations. Apart from the RIO, the Reference Unbundling Offer defines the terms and conditions of collocation for the purpose of local loop unbundling, including also rental of collocation space in CT premises and ducts. Regulated prices for duct rental do not encourage investments in new duct deployment.

Termination of calls

The mobile termination rate (MTR) for voice traffic was decreased to 4 cents as of 1 January 2013, down from 7.06 cents in 2012. The decrease was based on the international benchmark results of the National Regu-latory Agency. Fixed termination rates did not change during 2013.

Future regulatory developments

In the process of implementation of the new Law on Electronic Commu-nications the NRA and the responsible ministry are supposed to adopt 45 bylaws by the end of August 2014. The bylaws will be subject to a public consultation process.

23inTroduCTion

promoTions and offersReSidentiAl cuStoMeRS

Postpaid The beginning of the year was marked by a campaign in which all new and existing customers had the possibility to buy a mobile device in instalments, along with three months free subscription. In Q1, CT introduced postpaid Duets, targeted at customers buying Smart pack-ages for two subscribers, with special benefits. Promotions continued in May, with a campaign offering three months free subscription to all new customers, accompanied by new smartphones on offer. In October 2013, CT introduced a new campaign offering additional benefits for all new customers. Benefits included free calls and SMSs, along with free internet for a three-month period.

PrepaidIn order to better match the needs of its younger customers, CT launched NRG, a new prepaid tariff. NRG is specifically designed to sat-isfy the needs of the young population and is offering relevant benefits: free internet, music streaming access and favourable SMS prices avail-able to the customer with each top-up. Mobile internet customers had access to the best offer on the market: an MI USB Stick, along with 10 GB of data for only €9.

Fixed telephonyIMS (IP Multimedia Subsystem) migration, a key technical transformation project, continued in 2013. The new system is based on IP protocols and will set the stage for the new generation of fixed services, with new functionalities for customers. At the end of 2013 48.000 customers had been migrated to the new system.

Extra TVExtra TV customers had an exciting year in 2013, with new promotions throughout the year, along with new product and content offers. Extra TV was available as a bundle with free minutes in the fixed network, enabling customers to call their loved ones for free during the promotion. The number of channels on Extra TV was increased significantly with inclusion of the new Pink package, with over 35 channels available to customers. A major new feature was TVTeka, enabling customers to ac-cess the previous 48 hours of the most popular channels as part of their regular subscription.

At the end of 2013, there were 61,800 customers, which is an increase of 5.5% compared to the previous year. The company maintained its leading position in the market with a market share of 41.6%.

ADSLStrong marketing campaigns marked the entire year helping to increase the ADSL customer base to 74,400 customers, which is an increase of 7% compared to the previous year base. As a result of the various marketing and promotional activities, CT holds a 81.8% market share in the broadband internet market.

Fibre to the home (FTTH) project Crnogorski Telekom continued its strong development of its fibre infra-structure resulting in utilisation reaching 25%. The number of customers of fibre networks doubled, increasing for 3,400 to almost 7,000 in 2013. In addition to the existing benefits available to fibre customers, such as very high internet speeds, the possibility of connecting up to five TV sets to the IPTV service, and a free additional phone line, fibre customers can now also enjoy full HD channels.

Sales of consumer goods

In 2013, Crnogorski Telekom continued the development and expan-sion of partnership with major retail chains. A wide portfolio of electronic consumer goods is offered.

Loyalty program

Premium program activities in 2013 were focused on expanding the number of partners and companies supporting the program. From initially 35 companies that gave discounts to Telekom customers, more than 70 companies were added to the list by December 2013. The total number of T-Cards issued at the end of 2013 was around 10,000.

24

buSineSS cuStoMeRS

Postpaid

The promotional offer for SMEs was launched in March 2013, in order to improve CT’s position in this segment. The offer consisted of three months free subscription for 24-month contracts, free-of-charge CUG calls, handsets purchased in instalments with internet options included in order to push data usage. In September, CT launched its ATL campaign with the main focus on the SME and SOHO segment with a postpaid offer as one of the main drivers for boosting revenues. Key elements were additional discounts for services bundled with HW in instalments. In order to push revenues and increase market share in SOHO segment, the “DoorToDoor” sales channel was introduced.

Roaming

In order to protect customers using services in roaming we continued with internet roaming cards for data usage throughout 2013. The number of activated daily and weekly roaming cards increased by 138% compared to 2012.

Convergent offers The Business Calculator as a promotional offer was continued during 2013. It presented CT as a full telecommunication provider for business customers by integrating all services and equipment into one offer with a shorter sale cycle. The campaign was accompanied by a web calcula-tor, a special web tool that enables customers to combine services and choose the best offer on their own.

The Business Summer Offer was launched in April 2013 and targets SMEs that are oriented towards summer-season business and have no need for internet connections for the entire year. It consists of fixed/mo-bile data services with a minimal contract duration of three months. Also, purchase of HW (TVs, laptops, mobile phones) in instalments was a part of the promotional offer.

Integris (ICT)

Integris continued its successful story during 2013. Great progress in the hotel/resort segment and retail area is helping us to achieve YoY revenue growth of more than 100%. In November 2013, CT signed the largest ICT contract, with the investor for the Hilton Hotel in Podgorica, the value of which is €1.4 million and will be implemented in the next two years. Also one of the important achievements is a pilot project with the Ministry of Justice for home detention monitoring which should be monetised in years to come.

25human resourCes

huMAn ReSouRceS

HR strategy development

In line with Crnogorski Telekom’s renewed corporate strategy and three-year-long business transformation, the HR Area decided to redefine its HR mission and strategic priorities. The ambition of the three-year-based HR strategy (2013–2016) is to align the organisation with new business challenges, to accelerate the changes in workforce alloca-tion, to strengthen the adaptability of business mindset and to create a performance-based culture. Consequently, the main HR focuses in 2013 have been the following: To fortify the strengths and competitive advantages of our human

resources Performance and leadership culture New training and development landscape A lean company – using simplicity, standardisation and lean manage-

ment principles to achieve MORE with LESS.

Survey management & employer positioning The most valuable outcome of the survey management in the last several years is a strong consequence management which implies different kinds of improvement measures. We are creating a liveable and likeable workplace, which is satisfactory for our employees and attractive to the labour market, continuously mak-ing efforts to be among the top three employers in Montenegro. Finally this has been proved by the outcomes of the second benchmark survey “The best company to work for in Montenegro” in 2013/2014, in which Crnogorski Telekom won three prizes:

Best Company to work for in Montenegro – main award The Most Attractive Employer – first place in the survey among uni-

versity students Special prize: Fair Play Award

Commitment to ONE Deutsche Telekom Europe (ONE DT EU) CT has actively used its employee survey results to leverage employee satisfaction, engagement, motivation, strategy awareness and com-mitment to ONE DT EU. According to Pulse Check in 2013, we have recorded the best results in the Group relating to: Collaboration – 80%; Heard about ONE DT/EU – 72%; Connected with DT Group – 67%.

Social dialogue & employee benefits Following the Agreement with the Trade Union, HR started to implement programs for resolving the housing needs of the employees. 148 em-ployees (20% of the overall number) gained the right to take out housing loans. Other benefits realised in cooperation with our social partners are numerous sport and recreation offers for employees; medical checkups for employees and their children including annual systematic checkups while advanced health insurance is under negotiation. Both the quality and quantity of extended offers of employee benefits in 2013 have been highly appreciated by our employees. Performance-based culture Following our intention to extend the Performance Management System, we made a decisive step ahead in 2013 in comparison with the previ-ous year (only 16% of employees, i.e. managers, were covered by the bonus system). By introducing the Employee Bonus Scheme and Shop Incentive Scheme, all employees of Crnogorski Telekom are covered by adequate financial motivation schemes. Finally, we created preconditions for performance-based remuneration for all employees in the company. Optimisation of training and development offer The leadership development programs offered through the Manage-ment Academy in 2013 were targeted at increasing knowledge and skills related to competence management and collaboration and at increasing the capabilities for self-driven development and self-assessment. Since the Employee Training Catalogue which was accepted extraordi-narily well – we have continued to meet the expectations and the needs of our employees related to project management, finance for non-finance, communication skills, time management, etc. In 2013, for the first time, HR introduced its Expert Excellence Program as the third pillar in the Training and Development Landscape. The Sales Academy which is entering the third year of its lifecycle is still supported to a high extent by HR.

Lean company

To support the implementation of leaner organisation and efficient business operations, HR has started to create a framework for further reduction of the complexity and pressure of work: regulation and process review, standardisation of HR processes, and primarily e-initiatives which enable provision of traditional HR services on-line. The E-HR Archive, the most strategic guided project, has been started up as an example of extraordinary cooperation with Magyar Telekom. The aim of the project is to automate and digitalise handling of paper-based documents prescribed by the law.To support and enhance the idea of simplicity in our day-to-day work, HR also developed a unique application (Leave Your Mark!) to collect the strategic-related ideas coming from employees. In this way HR has contributed to business transformation into an e-company.

27Corp. soCial responsibiliTy

coRpoRAte ReSponSibility

Corporate responsibility has been part of our corporate culture for many years; it involves and is an integral component of all our business activities. As one of the leading companies in the country, Crnogorski Telekom aims to be involved in all areas that are important to Montene-grin society. Besides striving to offer the most advanced telecommuni-cation services for our customers, we wish to actively contribute to the development of the community in which we do business and of which we are a part.

In April 2013 the Montenegrin Chamber of Commerce awarded Crnogo-rski Telekom the Annual Award for Social Responsibility in 2012.

At the traditional Iskra Annual Award Ceremony for Philanthropy in December 2013, Telekom received special recognition for corporate philanthropy. The Iskra Award Ceremony for Philanthropy is organised in cooperation with the Active Citizenship Fund, the Montenegrin Chamber of Commerce, the Ministry of Sustainable Growth and Tourism and the Diaspora Administration in the Ministry of Foreign Affairs and European Integration.

Telekom is a company that has always maintained a balance between economic and social goals while being accountable to the community and positioning itself in a socially responsible manner. The areas on which we are focusing are education, health and the environment, culture and community support.

Development of an information society in MontenegroBeing the leading broadband provider in the country, Crnogorski Tele-kom has the responsibility of being the country’s first partner on its way to becoming an information society.

For the seventh year in a row, Crnogorski Telekom is enabling free inter-net access via ADSL to all elementary and high schools in the country. During 2013, around 150 Montenegrin schools benefitted from this. The project was implemented together with the Ministry of Education and Science.

For two consecutive years, Telekom has supported the organisation of Hakaton, a competition for young developers. In 2013 the company supported the National Electronics Competition for high school students in Podgorica.

Sports, music and culture move people Our sponsoring platform focuses on sports, music and culture – which is perfect for underlining our brand promise “Life is for sharing” and giving a wide range of memorable moments to share.

Within the company’s sponsorship strategy, sports have a special place since this is an important area for developing a healthy, modern and ad-

vanced society. The company is the golden sponsor of the Montenegrin national football team and general sponsor of the Telekom Montenegrin Football First League. Additionally, in 2013 Telekom supported and sponsored Budućnost Basketball Club.

Regarding music as one of the main areas within the sponsorship strategy, as every year, we sponsored numerous musical events and activities, since music is considered to be the universal language for all generations. We partnered with organisations across Montenegro and supported the Asfaltiranje Hip-Hop Festival in Podgorica, the Southern Soul Festival in Ulcinj as well as the Sergej Ćetković concert tour.

In the field of culture, Crnogorski Telekom partnered with several organisations in order to support different projects, with the focus being on youth and education. The activities of these organisations were vital to the Montenegrin art scene.

In 2013, the company continued to support the City Theatre in Pod-gorica and thus was the sponsor of the theatre season 2013/2014. The company was also the sponsor of the Telekom Underhill Fest, an international documentary film festival which featured a series of concerts, film projects and lectures in Podgorica. Telekom supported the International TV Festival in Bar, the International Fashion Festival in Kotor, the International Puppetry Festival in Podgorica and the Durmitor Eko Festival in Žabljak.

Environment protection and energy efficiency In 2013, Crnogorski Telekom continued implementing a range of mea-sures to save energy and make their operations more energy-efficient. Energy consumption was reduced through a number of different mea-sures in the reporting period.

In March 2013, the company participated in the Earth Hour and Earth Day global campaigns with the aim of raising awareness about climate change issues. The company is constantly promoting usage of sustain-able solutions among its customers and employees, e.g. promoting e-mail bills, online registration, etc.

Crnogorski Telekom owns three base stations that use renewable energy sources. These are state-of-the art equipment that use the power of the sun and wind. The project is part of a broader company initiative to ad-dress global warming issues and protect the environment.

Community supportIn 2013 Telekom supported a number of NGOs and other organisations dealing with problems of socially vulnerable groups or promoting good causes and initiatives for society. Some of the main donations in 2013 were: donating two fully equipped vehicles to the Institute for Urgent Healthcare of Montenegro, donation of TV sets and free-of-charge IPTV subscription for kindergartens in cooperation with the NGO Roditelji, joining the fundraising campaign for the purchase of a mammography device for the public hospital in Cetinje, supporting the project for test-ing blood-sugar levels among kids in the elementary schools in several municipalities (in cooperation with the Association of Diabetes and Heart Disease patients), supporting the Food Bank of Montenegro initiatives, joining the campaign for early diagnosis and preventive examinations initiated by the Ministry of Health and supporting the national Breast Cancer Awareness Month Campaign in Montenegro.

28

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.

Crnogorski Telekom a.d. podgoriCaInternational Financial Reporting StandardsFinancial Statements For the year ended 31 December 2013


30


contentS

PageIndependent Auditor’s Report 29Statement of Financial Position 31Statement of Comprehensive Income 32Statement of Cash Flow 33Statement of Changes in Equity 34 Notes to the Financial Statements 35-85

31The finanCial year 2013


sTaTemenT of finanCial posiTion

As atNotes 31. decembar 2013. 31. decembar 2012.

ASSETS Non current assets Property, plant and equipment 5 88,326,493 96,161,284Intangible assets 6 17,517,186 14,894,183Long term loans and other receivables 7 8,420,618 6,686,993 Total non current assets 114,264,297 117,742,460

Current assets Inventories 8 2,277,817 2,615,203Trade and other receivables 9 23,940,228 21,906,579Short term investments 10 54,000,000 32,000,000Cash and cash equivalents 11 3,684,312 26,438,865Total current assets 83,902,357 82,960,647Total assets 198,166,654 200,703,107

EQUITY AND LIABILITIESEquity and reserves attributable to the equity holders of the companyShare capital 13 140,996,394 140,996,394Retained earnings 24,823,321 28,878,790Total shareholders’ equity 165,819,715 169,875,184

LIABILITIESNon-current liabilitiesDeferred income tax liability 17 2,076,700 2,105,814Provision for liabilities and charges 16 757,642 635,382Total non-current liabilities 2,834,342 2,741,196Total liabilities 32,346,939 30,827,923

Current liabilities Trade and other payables 15 26,270,623 22,868,789Current income tax payable 2,315,364 2,615,564Provision for liabilities and charges 16 926,610 2,602,374Total current liabilities 29,512,597 28,086,727

Total equity and liabilities 198,166,654 200,703,107

The notes on pages 35 do 85 are an integral part of these financial statements.

These financial statements were authorised for issue by the Board of Directors of Crnogorski Telekom A.D. on April 19, 2014 and were signed on its behalf by

Ruediger Schulz Manfred KnappChief Executive Officer Chief Financial Officer

32


sTaTemenT of ComprehesiVe inCome

For the year ended 31 DecemberNote 2013 2012

Revenue

Revenue from fixed lines and Internet 18 a 61,721,861 63,123,809 Revenue from mobile lines 18 b 47,227,529 50,953,125 Total revenue 108,949,390 114,076,934

Other operating income 19 1,241,336 249,665

Operating expensesEmployee related expenses 20 (22,671,829) (20,674,655)Depreciation, amortization and impairment 21 (19,491,584) (21,432,308)Payments to other network operators 22 (14,972,947) (18,237,414)Cost of equipment sold (6,779,225) (5,784,610)Other operating expenses 23 (26,136,462) (27,097,037)Total operating expenses (90,052,047) (93,226,024)

Operating profit 20,138,679 21,100,575

Finance income 24 1,290,640 2,855,494Finance costs 24 (298,536) (845,260)Finance income – net 992,104 2,010,234

Profit before income tax 21,130,783 23,110,809

Income tax expense 25 (2,286,252) (3,170,805)

Profit for the year 18,844,531 19,940,004

Other comprehensive income for the year - -Total comprehensive income for the year 18,844,531 19,940,004

Attributable to:

Equity holders of the company 18,844,531 19,940,004

Earnings per share of the Company during the year (expressed in EUR per share)

- basic and diluted 26 0.40 0.42




sTaTemenT of Cash floW

For the year ended 31 DecemberNote 2013 2012

Cash flows from operating activities

Cash generated from operations 31 35,919,610 41,629,270Interest paid 24 (11,252) (144,634)Income tax paid 25 (2,615,564) (3,080,020)Net cash generated from operating activities 33,292,794 38,404,616

Cash flows from investing activitiesPurchase of tangible and intangible assets 5,6 (10,753,989) (13,898,095)Short term bank deposits inflow 19,000,000 26,900,000Short term bank deposits outflow (41,000,000) (13,700,000)Interest received 1,147,798 2,507,882Proceeds from disposal of non current assets 174,544 252,685Long term loans and other receivables 7 (1,733,625) 383,683Net cash generated from/used in investing activities (33,165,272) 2,446,155

Cash flows from financing activitiesDividends paid to shareholders 27 (22,882,076) (16,504,600)Net cash used in financing activities (22,882,076) (16,504,600)

Net increase/decrease in cash and cash equivalents (22,754,554) 24,346,171

Cash and cash equivalents, beginning of period 26,438,865 2,093,407Exchange gains/(losses) on cash and cash equivalents 1 (713)Cash and cash equivalents, end of period 11 3,684,312 26,438,865


34


sTaTemenT of Changes in eQuiTy

Share Capital Statutory reserves Retained earnings Total

Balance at January 1, 2012 140,996,394 8,046,359 17,392,427 166,435,180

Dividends - - (16,500,000) (16,500,000)

Allocation of statutory reserves (Note 14) - (8,046,359) 8,046,359 -

Profit for the year - - 19,940,004 19,940,004

Other comprehensive income for the year - - - -

Balance at December 31, 2012 140,996,394 - 28,878,790 169,875,184

Balance at January 1, 2013 140,996,394 - 28,878,790 169,875,184Dividends (Note 27) - (22,900,000) (22,900,000)Profit for the year - 18,844,531 18,844,531Other comprehensive income for the year - - -

Balance at December 31, 2013 140,996,394 - 24,823,321 165,819,715




1. general informaTion

Crnogorski Telekom A.D. Podgorica (also referred to as “Telekom” or the “Company”) is a principal provider of fixed telephony services in Montene-gro, as well as of local, national and international telephony services, in addition to a wide range of other telecommunication services involving mobile network, internet, leased circuits, data networks, cable television services and other telecommunication services in Montenegro.

The Company is a shareholding company listed on the Montenegro Stock Exchange (TECG). The Company was acquired in 2005 by Magyar Telekom Nyrt. (hereinafter referred to as “Magyar Telekom”) with 76.53% of ownership interest. On April 30, 2009, the General Assembly of Crnogorski Tele-kom A.D decided to merge T Mobile d.o.o. and Internet Crna Gora d.o.o., into Crnogorski Telekom A.D..

Deutsche Telekom AG (“DTAG”) is the ultimate controlling owner of Magyar Telekom Plc. holding 59.21% of the issued shares. Deutsche Telekom (“DT”) Group has a number of fixed lines, mobile and IT service provider subsidiaries worldwide, with whom Magyar Telekom Group has regular transactions.

Telekom is domiciled in Montenegro at the following address: Moskovska 29, Podgorica. As at December 31, 2013 the Company had 687 employees (774 employees as at 31 December 2012).

Investigation into certain consultancy contracts

As previously disclosed, in the course of conducting their audit of Magyar Telekom’s 2005 financial statements, PricewaterhouseCoopers Könyv-vizsgáló 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 LLP (the “independent investigators” or “White & Case”), as its independent legal counsel, to conduct an internal investigation into whether 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 Financial Supervisory 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 delivery of the Final Report based on currently available facts, White & Case has completed its independent internal investigation.

36


1. general informaTion (ConTinued)

Investigation into certain consultancy contracts (continued)

The Final Report includes the following findings and conclusions, based upon the evidence available to the Audit Committee and its counsel:

The information obtained by the Audit Committee and its counsel in the course of the investigation “demonstrates intentional misconduct and a lack of commitment to compliance at the most senior levels of Magyar Telekom, Crnogorski Telekom, and Makedonski Telekom during the period under investigation.”

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. Two of these contracts, amounting to EUR 2.88 million in total, were entered into by Crnogorski Telekom and a sub-sidiary thereof, while two others were entered into by other affiliates in the Group.

In 2007 the Supreme State Prosecutor of Montenegro informed the Board of Directors of Crnogorski Telekom, of its 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 Mon-tenegro. However, since 2007, the Supreme State Prosecutor of Montenegro has been provided with all new data and/or documents which became available for Crnogorski Telekom.

Additionally, the Ministry of Interior of the Republic of Macedonia and the Hungarian Central Investigating Chief Prosecutor’s Office commenced investigations into certain of the activities that were the subject of the internal investigation. These governmental investigations are continuing, and relevant affiliates of Crnogorski Telekom continue to cooperate with these investigations.

The DOJ and the SEC also commenced investigations into the activities that were the subject of the internal investigation. In 2011, Magyar Telekom entered into final settlements with the DOJ and the SEC to resolve the DOJ’s and the SEC’s investigations relating to Magyar Telekom. The settlements concluded the DOJ’s and the SEC’s investigations relating to Magyar Telekom. On January 24, 2014 SEC instructed their defence counsel not to pursue further the allegations regarding corruption in Montenegro.

As of 31 December, 2013 the above mentioned investigations had no impact on financial statements of the Company.

2. summary of signifiCanT aCCounTing poliCies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1. Basis of Preparation

The financial statements of Crnogorski Telekom A.D. have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations as issued by the International Accounting Standards Board (IASB) and effective at the time of preparing the financial statements, and in accordance with requirements of the Law on Accounting and Auditing of Montenegro. The financial statements have been prepared under the historical cost convention as modified by the revaluation of available-for-sale financial assets.



2. summary of signifiCanT aCCounTing poliCies (ConTinued)

2.1. Basis of Preparation (continued)

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or com-plexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.

The Company maintains its accounting records in accordance with the Accounting and Auditing Law of Montenegro (“Official Gazette of the Republic of Montenegro”, No. 69/2005 and “Official Gazette of Montenegro”, no. 80/08 and 32/11) 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”, No. 69/2002).

These financial statements of the Company are authorised for issue by the Company’s Board of Directors (BoD), 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 Directors (BoD) that approves 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.

The official currency in Montenegro and the functional currency of the Company is Euro (EUR).

2.1.1. Comparative information

Comparative information represents audited financial statements of the Company for the year ending 31 December 2012.

2.1.2. Changes in accounting policies and disclosures

a) Standards, amendments and interpretations effective and adopted by the Company in 2013

IAS 1 (amended) – The IASB published amendments to IAS 1 Presentation of Financial Statements in June 2011. The amendments to IAS 1 retain the ‘one or two statement’ approach at the option of the entity and only revise the way other comprehensive income is presented: requiring separate subtotals for those elements which may be reclassified to the profit or loss section of the income statement (recycled) and those elements that will not. The Company adopted the amended standard as of January 1, 2013. The amended standard did not have any significant impact on the disclosures in the Company’s financial statements.

IAS 19 (amended) – The IASB published amendments to IAS 19 – Employee Benefits in June 2011. The amendments mostly focus on areas which are not relevant for the Company (defined benefit plans), while the ones relevant for the Company did not result in any change in the recognition, measurement or disclosure of employee benefits.

IFRS 7 (amended) – The IASB published amendments to IFRS 7 – Amendments to IFRS 7 Financial Instruments: Disclosures in December 2011. The IASB and the Financial Accounting Standards Board (FASB) issued common disclosure requirements that are intended to help assessing better the effect or potential effect of offsetting arrangements on a company’s financial position. The common disclosure requirements also improve transparen-cy in the reporting of how companies mitigate credit risk, including disclosure of collateral pledged or received. The Company adopted the amended standard as of January 1, 2013. The amended standard did not have a significant impact on the disclosures in the Company’s financial statements.

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b) Standards, amendments and interpretations effective in 2013 but not relevant for the Company (continued)

IFRS 10 replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). Under IFRS 10, control is based on whether an investor has

b) Standards, amendments and interpretations effective in 2013 but not relevant for the Company

IFRIC 20 - In October 2011, the IASB published IFRIC 20 – Stripping Costs in the Production Phase of a Surface Mine. As Crnogorski Telekom does not have mining activity, the interpretation did not have any impact on the Company’s financial statements.

IFRS 1 - In 2012, the IASB published amendments to IFRS 1. As Crnogorski Telekom has already adopted IFRS, the amendments did not have any impact on the Company’s financial statements.

IAS 32 (amended) – The IASB published amendments to IAS 32 – Financial Instruments: Presentation in December 2011. The amendments to IAS 32 clarify the IASB’s requirements for offsetting financial instruments. The amendments address inconsistencies in current practice when applying the offsetting criteria in IAS 32. The pronouncement clarifies: the meaning of “currently has a legally enforceable right of set off the recognized amounts”; and that some gross settlement systems may be considered equivalent to net settlement.

The application of the amendment is required for annual periods beginning on or after January 1, 2014. A reporting entity must apply the amended standard retrospectively. We do not expect that the adoption of the amended standard would result in significant changes in the financial statements of the Company. The European Union has endorsed the amendment of the standard.

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 and liabilities. The remaining phases of this project, dealing with the impairment of financial instruments and hedge accounting, as well as a further project regarding derecognition, are in progress.

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.

Fair 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’).

Equity instruments: The default category for equity instruments is at fair value through profit or loss. However, the standard states that an entity can make an irrevocable election at initial recognition to present all fair value changes for equity investments not held for trading in other comprehensive income. These fair value gains or losses are not reported as part of a reporting entity’s profit or loss, even when a gain or loss is realized. Only divi-dends received from these investments are reported in profit or loss.

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.

Financial liabilities – IFRS 9 “Financial Instruments” sets the requirements on the accounting for financial liabilities and replaces the respective rules in IAS 39 “Financial Instruments: Recognition and Measurement”. The new pronouncement

Carries forward the IAS 39 rules for the recognition and derecognition unchanged. Carries forward most of the requirements in IAS 39 for classification and measurement. Eliminates the exception from fair value measurement for derivative liabilities that are linked to and must be settled by delivery of an unquoted

equity instrument. Changes the requirements related to the fair value option for financial liabilities to address own credit risk.

The IASB issued amendments to IFRS 9 in December 2011 and in November 2013 and deferred the mandatory effective date of IFRS 9. The deferral will make it possible for all phases of the IFRS 9 project to have the same mandatory effective date. The amendments also provide relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9. This relief was originally only available to companies that chose to apply IFRS 9 prior to 2012. Instead, additional transition disclosures will be required to help investors understand the effect that the initial ap-plication of IFRS 9 has on the classification and measurement of financial instruments. 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. The European Union has not yet endorsed either the standard or its amendments.

IFRS 10, IFRS 11, IFRS 12, IAS 27 (amended) and IAS28 (amended) – The IASB published IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements, IFRS 12 – Disclosures of Interests in Other Entities and amendments to IAS 27 – Separate Financial Statements and IAS 28 – Investments in Associates and Joint Ventures in May 2011.

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IFRS 10 replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). Under IFRS 10, control is based on whether an investor has

power over the investee; exposure, or rights, to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect the amount

of the returns.

IFRS 11 introduces new accounting requirements for joint arrangements, replacing IAS 31 – Interests in Joint Ventures. The option to apply the pro-portional consolidation method when accounting for jointly controlled entities is removed. Additionally, IFRS 11 eliminates jointly controlled assets to now only differentiate between joint operations and joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities. A joint venture is a joint arrangement, whereby the parties that have joint control have rights to the net assets.

IFRS 12 will require enhanced disclosures about both consolidated entities and unconsolidated entities in which an entity has involvement. The objec-tive of IFRS 12 is to require information so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated structured entities and non-controlling interest holders’ involvement in the activities of consolidated entities.

The requirements relating to separate financial statements are unchanged and are included in the amended IAS 27 – Separate Financial Statements. The other portions of IAS 27 are replaced by IFRS 10.

IAS 28 – Investments in Associates and Joint Ventures is amended for conforming changes based on the issuance of IFRS 10, IFRS 11 and IFRS 12.

The IASB issued amendments to IFRS 10, IFRS 11 and IFRS 12 in June 2012. The amendments clarify the transition guidance in IFRS 10 Consolidat-ed Financial Statements and provide additional transition relief in IFRS 10, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, limiting the requirement to provide adjusted comparative information to only the preceding comparative period. Furthermore, for disclosures related to unconsolidated structured entities, the amendments remove the requirement to present comparative information for periods before IFRS 12 is first applied.

An entity shall apply this package of five new and revised standards for annual periods beginning on or after January 1, 2014. We do not expect that their adoption would result in significant changes in the financial statements of the Company. The European Union has endorsed the new standards and the 2011 May amendments.

IAS 36 (amended) – The IASB published Recoverable Amount Disclosures for Non-Financial Assets, amendments to IAS 36 – Impairment of Assets in May 2013. The amendments address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. When developing IFRS 13 Fair Value Measurement, the IASB decided to amend IAS 36 to require disclosures about the recoverable amount of impaired assets. The amendments clarify the IASB’s original intention: that the scope of those disclosures is limited to the recoverable amount of impaired assets that is based on fair value less costs of disposal. The application of the amendment is required retrospectively for annual periods beginning on or after January 1, 2014. We do not expect that the adoption of the amendment would result in significant changes in the financial statements of the Company. The European Union has not yet endorsed the amended standard.





IAS 39 (amended) – The IASB published “Novation of Derivatives and Continuation of Hedge Accounting”, amendments to IAS 39 – Financial Instru-ments: Recognition and Measurement in June 2013. The amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met (in this context, a novation indicates that parties to a contract agree to replace their original counterparty with a new one). This relief has been introduced in response to legislative changes across many jurisdictions that would lead to the widespread novation of over-the-counter derivatives. These legislative changes were prompted by a G20 commitment to improve transparency and regulatory oversight of over-the-counter derivatives in an internationally consistent and non-discriminatory way. Similar relief will be included in IFRS 9 Financial Instruments. The application of the amendment is required for annual periods beginning on or after January 1, 2014. We do not expect that the adoption of the amendment would result in significant changes in the financial statements of the Company. The European Union has not yet endorsed the amended standard. IFRIC 21 – The IASB issued IFRIC Interpretation 21: Levies, an Interpretation on the accounting for levies imposed by governments in May 2013. IFRIC 21 is an interpretation of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The new interpre-tation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the pay-ment of the levy. The application of IFRIC 21 is required for annual periods beginning on or after January 1, 2014. We do not expect that the adoption of the new interpretation would result in significant changes in the financial statements of the Company as our interpretation has been in line with the newly issued IFRIC. The European Union has not yet endorsed the interpretation.

c) Standards, amendments and interpretations that are not yet effective and not relevant for the Company’s operations

IFRS 10, IFRS 12, IAS 27 (amended) – The IASB published “Investment Entities” (Amendments to IFRS 10, IFRS 12 and IAS 27) in October 2012. The amendments apply to a particular class of business that qualify as investment entities. As Crnogorski Telekom does not have investment entities, the amended standards will not have any impact on the Company’s financial statements. The European Union has endorsed the amended standards.

IAS 19 (amended) – The IASB published amendments to IAS 19 – Employee Benefits in November 2013. The amendments apply to contributions from employees or third parties to defined benefit plans which are not relevant for the Company. Therefore the amended standard will not have any impact on the Company’s financial statements. The European Union has not yet endorsed the amended standard.

2.2. Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The Chief Operating Decision-Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Management Board that makes strategic decisions. Until the end of 2012 the Company was reporting on fix and mobile segments, as the internal reporting to the CODM was based on the network split During 2013, however, the Company went through an internal reorganisation, which also led to a change in the internal reporting provided to the CODM. The Executive Management Board reviews and analyses the operating results at the Company level, instead of based on network split as in the past. Consequently to these changes, there are no identifiable segments in Crnogorski Telekom since all relevant decisions are made on the Company level.

2.3. Foreign currency translation

The functional and presentation currency of the Company is Euro (EUR).

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized as finance income or finance costs.

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2.4. Property, Plant and Equipment

Property, plant and equipment of the Company are stated at historical cost less accumulated depreciation and impairment losses.

The historical cost 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, as well as costs to decommission the asset if necessary.

Historical cost of telecommunications equipment comprises all expenditures including the cabling to the customers’ premises. Cost also includes internally generated work for a specific item of property, plant and equipment.

Subsequent costs are included in the assets carrying amount or recognized as a separate asset, 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 reliably. The carrying amount of the replaced part is derecognised. All other costs of maintenance and repairs are charged to the financial period in which they are incurred.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within Other operating income/Other operating expense in the income statement.

Construction in progress includes third-party and internally generated work 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 are capitalized as items for property, plant, and equipment.

In determining whether an asset that incorporates both intangible and tangible elements should be treated under IAS 16 - Property, Plant and Equip-ment or under IAS 38 – Intangible Assets, management uses judgment to assess which element is more significant, to recognize the asset accord-ingly.

Land is not depreciated. Depreciation of other assets is calculated using the straight-line method to allocate their cost to residual values over their estimated useful lives, as follows:

Major categories in years

Buildings 40Access networks 20Optical connectors 20Exchanges 7Transmission system equipment 10Computer equipment 3Mipnet network 5-6Routers and switches 5-8

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, once per year.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recover-able amount.




2.5. Intangible Assets

a) Goodwill

Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Company’s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree. The Company recognized goodwill on the acquisition of its fully owned subsidiary, Internet Crna Gora d.o.o., on March 7, 2005, which was subse-quently merged into the Company.

Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs, or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill ismonitored for internal management purposes. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impair-ment is recognised immediately as an expense and is not subsequently reversed.

b) Licences

Separately acquired licences are shown at historical cost. Licences acquired in a business combination are recognised at fair value at the acquisition date. Licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of licences over their estimated useful lives.

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives.

c) Computer software

Costs associated with maintaining computer software programmes are recognized as an expense as incurred. Development costs that are directly at-tributable to the design and testing of identifiable and unique software products controlled by the Company are recognised as intangible assets when the following criteria are met:

it is technically feasible to complete the software product so that it will be available for use; management intends to complete the software product and use or sell it; there is an ability to use or sell the software product; it can be demonstrated how the software product will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and the expenditure attributable to the software product during its development can be reliably measured.

Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads.

Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.

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2.5. Intangible Assets (continued)

Amortization of intangibles other than goodwill is calculated on a straight-line basis from the time the assets are deployed and charged over their economic useful lives as follows:

Intangible Assets in years

Telecommunication license - (public fixed telephony services) 25

Telecommunication license - (international traffic) 23

IPTV licence 10

Mobile telephony license 15

3G license 15

Internet – web services license 10

Purchased computer software 5

Microsoft licence 5

2.6. Impairment of non-financial assets

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

Management performs quarterly assessment whether there are indicators of impairment and reports the results of analysis to the ultimate parent. No indicators of impairment of property, plant and equipment and intangible assets are identified as at and for the year ended December 31, 2013.

2.7. Financial assets

The Company classifies its financial assets in the following categories: loans and receivables and available-for-sale assets. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

2.7.1. Classification

a) 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 financial assets.

Loans and receivables include the following: trade receivables, housing loans and other receivables, short term bank deposits and cash and cash equivalents.

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non- current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment.




2.7.1. Classification (continued)

a) Loans and receivables (continued)

Long-term loans for employees’ 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 mar-ket 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.

Short term bank deposits are deposits with a maturity of more than three months up to twelve months measured at their amortized cost. Interest receivable on bank deposits is presented separately within the Statement of financial position as other receivable. The associated interest income is presented in the Statement of comprehensive income as finance income.

Cash and cash equivalents include cash on hand and in banks and all highly liquid deposits with original maturities of three months or less.

b) Available-for-sale (AFS) financial assets

Available-for-sale financial assets are non-derivative financial assets 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 consist of the Company’s participation in the share capital of foreign entities which are not quoted on active markets.

2.7.2 Recognition

Regular purchases and sales of financial assets are recognised on the trade-date – the date on which the Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs.

Available-for-sale financial assets are subsequently carried at fair value and loans and receivables are subsequently carried at amortised cost using the effective interest method.

Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in other comprehensive income.

When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as ‘gains and losses from investment securities’. Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of finance income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of other income when the Company’s right to receive payments is established.

Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership.

2.7.3 Offsetting financial instruments

Financial assets and liabilities such as interconnection revenue and receivables are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

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2.7.4 Impairment of financial assets

a) Assets carried at amortised cost

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired.

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.

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. Provisions 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 payments. 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 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. Sub-sequent recoveries of amounts previously written off are credited against Other operating expenses – Bad debt, in the statement of comprehensive income.

For the loans and receivables category, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective in-terest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recog-nised in the statement of comprehensive income.

b) Assets classified as available for sale

The management assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. Evidence that an asset is impaired, besides the criteria referred to in a) above is also a significant or prolonged decline in the fair value of the security below its cost. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in the statement of comprehensive income are not reversed.

As at 31 December 2013, these assets are fully impaired because no cash flows are expected in the future.




2.8. Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average method. The cost of inventories com-prises the cost of purchase and other incurred costs necessary to bring the inventories to their present location and condition. Net realizable value represents the amount at which inventories can be realized in the ordinary course of business less estimated costs necessary to make the sale.

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 value.

2.9. 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 deduc-tion, net of tax, from the proceeds.

2.10. Dividends

Dividends payable to the Company’s shareholders are recorded as a liability and debited against equity (Retained earnings) in the Company’s finan-cial statements in the period in which the dividends are approved by the shareholders.

2.11. Deferred income tax and current income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit or loss, except to the extent that it relates to items recognised in other comprehensive income.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted as of the Statement of financial position date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognised, 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 substantively en-acted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority entities where there is an intention to settle the balances on a net basis.

48



2.12. Employee benefits

a) Short term employee benefits

Short term employee benefits are recognized as a current expense in the period when employees render their services. These include wages, social security contributions, bonuses, paid holidays, discounted telephone bills, meal and holiday contributions and other fringe benefits and the tax charges thereon. In accordance with the signed Collective Bargaining Agreement (CBA), the Company is also obliged to pay to all employees a winter supply allowance in the amount of four minimum monthly salaries in the Company. Payments to defined contribution pension and other welfare plans are recognized as an expense in the period in which they are earned by the employees.

b) 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.

c) Obligations for Retirement Benefits

The Company has a defined contribution plan, under which the Company pays fixed contributions on a mandatory basis into a publicly administered insurance plan. The Company has no legal or constructive obligations to pay further contributions if the plan does not hold sufficient assets to pay all employees the benefits related to their service in the current and prior periods.

Contributions to the publicly administered insurance plan are recognized as employee benefit expense when they are due.

As defined by the Montenegrin Labour Law, employees are eligible for retirement after 67 years of age and at least 15 years of labour. Pursuant to the signed CBA, the Company is obliged to make a severance payment in the amount equal to ten minimal monthly salaries in the country to the employees meeting the criteria for retirement. The payment is due on the day of the retirement, but not later than 30 days following the termination of employment.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method, see note 4.f). Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past service cost is recognised immediately to the extent that the benefits are already vested.




2.12. Employee benefits (continued)

d) Obligations for jubilee awards Pursuant to the signed Collective Bargaining Agreement (CBA), the Company is obligated to pay between three and nine minimal monthly salaries as a jubilee award. The number of minimal monthly salaries for jubilee awards corresponds to the total number of years of service of the employee as presented in the table below:

Total number of service years Number of minimal monthly wages

10 320 530 739 9

Obligations for jubilee awards are accounted for in the same manner as defined benefit plans, except that any actuarial gains and losses on jubilee payments as well as past service cost are recognized directly in the Income statement in the period in which they are incurred.

e) Housing loans

Long-term loans to employees for residential housing purposes, which bear an interest rate significantly below the prevailing market rates of inter-est, 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.

This is because the Company expects future economic benefits 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.

f) 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 the Statement of financial position date are discounted to present value.Termination benefits are calculated based on specific conditions contained in detailed formal plan communicated to the employees.

50



2.12. Naknade zaposlenima (nastavak)

g) Mid-term incentive plan (MTIP)

In 2007 the Company launched a Mid-Term Incentive Plan (MTIP) for its top and senior management. The provision is calculated based on the prob-ability of the achievement of the targets. 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 fixed targets.

e) Varial bonuses programme (VAR II)

Also in 2011 the Company launched the Var II programme for top senior management for a 4 year period. The provision is calculated based on the probability of the achievement of the targets, and payments will be paid out at the end of the plan, depending on the achievement of the fixed targets.

2.13 Trade and other payables

Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method. The carrying values of trade and other payables approximate their fair values due to their short maturity.

2.14. Provisions and contingent liabilities

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, when it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated. Provisions are not recognized for future operating losses.

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.

Expenses for provisions are recognized in the income statement line where the actual expense is expected to be incurred. When a provision is released unused, it is released to the same income statement line where it was originally provided for. Provisions made for liabilities expected to be incurred in foreign currency are recognized in the functional currency at the spot foreign exchange rate, and any change in the provision in the func-tional currency as a result of a subsequent change in the foreign exchange rate is recognized in Other finance expense – net.

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 an obligation whose amount cannot be measured with sufficient reliability. No provision is recognized for a contingent liability.




2.15 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, and various other taxes and con-tributions 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”.

2.16. Revenue

Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for services provided and merchandise supplied, stated net of discounts, returns and value added taxes. The Company recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria of IAS18 on the sale of goods and rendering of services are met for provision of each of the Company’s services and sale of goods, as described below. The Company bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue is primarily derived from services provided to subscribers and other third parties using the fixed and mobile telecommunication networks.

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.

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 financial reporting purposes. These units are identified and separated, since they have value on a standalone basis and are sold not only in a bundle but separately as well. Therefore, the company recognises revenue for all these elements using the residual method. That is, the amount of consideration allocated to the delivered ele-ments of the arrangements equals the total consideration less the fair value of the undelivered element.

The Company operates a loyalty programme where customers accumulate points for purchases made which entitle them to discounts on future purchases. The reward points are recognised as a separately identifiable component of the initial sale transaction, by allocating the fair value of the consideration received between the award points and the other components of the sale such that the reward points are initially recognised as deferred income at their fair value. Revenue from the reward points is recognised when the points are redeemed. Breakage is recognised as reward points are redeemed based upon expected redemption rates. Reward points expire 24 months after the initial sale.

Income from outgoing calls within Montenegro, and from outgoing international calls are recorded at its invoiced value less any effective discounts and VAT, at the moment of the provision of the contracted services.

Revenues from incoming international calls include the income arising from international traffic.

52



2.16.1. Revenue from fixed telephony

Revenues from direct international traffic include the income generated from all incoming international calls realized in countries having direct international connection with the Company. A portion of such income earned is measured and recorded at an estimated value arrived at based on the internal settlement accounting of telephony traffic.

Revenues from incoming domestic traffic relate primarily to domestic interconnection revenue. Interconnection revenue includes revenue from incom-ing telephone traffic originated by the mobile networks of Telenor d.o.o., Podgorica and M-tel d.o.o. Podgorica but transmitted through, or terminated in the Company’s network.

Customers and third parties generate traffic based on their actual use of our network, after consuming the free minutes included under each type of subscription multiplied by a contractually agreed rate for minute.

Other income primarily includes the lease of telephony capacities, i.e., telephone lines, dial up services to business customers, web presentation and hosting, Asymmetric Digital Subscriber Line (ADSL) revenue, Montenegrin IP Network (MIPNET) services revenue, Information Communication Technology (ICT), IPTV services, revenues from sold internet access, equipment sales revenue, voice machines, call listings, voice mail, telegram, and other services. Recognition rules for revenue from these services is described above.

2.16.2. Revenue from mobile telephony

Outgoing traffic represents customer and third party use of the Company’s telecommunications network. The revenue from usage is recognized in the period in which service is provided to our customers or third parties.

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.

Revenues from the sale of mobile phone cards are recognized as deferred revenue in the balance sheet when sold and as revenues in income state-ment when used by the customer or when the cards expire with unused units.

Sales of mobile phones are recorded at the time of sale. Cost of goods sold includes the amount of sold mobile phones, and is recognized at the time of sale.

Revenue arising from incoming roaming and expenses with outgoing roaming with foreign mobile operators that have 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 recog-nized at the time of the usage, and presented on a gross basis

On behalf of the Company, an independent financial clearing house (Mach) records reconciled traffic that has been confirmed by an independent technical clearing house (Syniverse) collects and makes payments with respect to the reconciled receivables from, and payables to the mobile tele-phony operators.

Interconnection revenue includes revenue from incoming telephone traffic originated by the mobile networks of Telenor d.o.o., Podgorica and M-tel d.o.o. Podgorica but transmitted through, or terminated in the Company’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 have been transmitted through, or terminated on the other mobile companies’ net-works 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 cost of this traffic are stated gross in these financial statements. Interconnection income and expenses are recorded when the contracted services are pro-vided. Revenues are presented at the fair value of consideration received or receivable. Revenues are shown net of VAT and discounts.




2.17. Leases

2.17.1. Operating leases

Company as Lessee - Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operat-ing 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.

2.17.2. Finance lease

Company as Lessee - Leases of property, plant and equipment where Company assumes substantially all the benefits and risks of ownership are clas-sified as finance leases. Finance leases are capitalized at the fair value of the asset or if lower, at the estimated present value of the future minimum lease payments against a finance lease payable. Each lease payment is allocated between the finance liability and interest expense so as to achieve a constant rate of interest on the outstanding finance balance payable. The finance lease obligations, net of finance charges, are included in the State-ment of financial position (Other financial liabilities). The interest element of the lease payments is charged to the Profit for the year (Interest expense) over the lease period. Property, plant and equipment acquired under finance lease contracts are depreciated over the shorter of the lease term or the useful life of the asset.

Company as Lessor - A lease is an agreement whereby the lessor conveys to the lessee in return for a payment, or series of payments, the right to use an asset for an agreed period of time. When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return. When assets are leased out under an operating lease, the asset is included in the balance sheet based on the nature of the asset. Lease income is recognised over the term of the lease on a straight-line basis.

2.17.3. Indefeasible Right of Use (IRU) of Dark Fibre

Agreements over rights to use specific dark fibres are akin to leases as they convey a right to use specified network assets, to the exclusion of other operators, including Crnogorski Telekom.

Payment for the use of the dark fibre is made in advance and does not vary with the buyer’s actual usage. It is recognised net of the associated cost as income from a dark fibre long term lease.

The carrying amount of the dark fibre is derecognised from the Company’s property, plant and equipment at the same point as the income is recog-nised.

2.18. Interest Income/Expense

Interest income and expense is recognized in the Statement of comprehensive income in the accounting period in which it arises, using the effective interest method.

54


3. finanCial risk managemenT

3.1 Financial risk factors

The Company’s activities expose it to a variety of financial risks: credit risk, liquidity risk and foreign exchange risk. The Company does not use deriva-tive financial instruments or any other form of hedges against these risks. There is no formal risk management framework implemented in the Company. The Executive Management Board focuses mainly on credit risk and liquidity risk and acts on a case by case basis to mitigate risks and minimize losses.

3.2 Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation. It arises from cash, and cash equivalents and deposits with banks, as well as credit exposures to customers.

Credit risk management principles of the Company are in line with the risk policy of its parent. In order to minimize credit risk concentration, short term bank deposits are placed in different banks. Banks are chosen based on the following risk aspects: total assets, market share, credit ratings by Moody’s and S&P, and safety of funds. All deposits are guaranteed by banks’ in the EU countries with minimum bank rating BBB+. Credit risk is moni-tored on a monthly basis. Management of the Company believes that it has adequately assessed the recoverability of Company’s bank deposits.

In respect of credit risk exposure to customers, the Company has no significant concentration of credit risk due to its diverse customer base.

The Company further limits the risk through short credit period (invoices are due for payment within 15 days) and segmented approach to crediting in different time intervals. Credit risk arising from a single subscriber is limited to 4 months. Enforced collection is initiated for receivables which are overdue more than 240 (residential) and 180 days (business customers).

Management monitors credit risk exposure on a monthly basis. Trade receivables outstanding between 6 and 12 months are provided for at 69% of the outstanding balance. Trade receivables older than 12 months are fully provided. Credit risk arising from transactions with related parties from Magyar Telekom and Deutsche Telekom is considered minimal and no provisions are being set. Also Credit risk arising from foreign trade receivables arising from interconnection and roaming transactions is considered as minimal because amounts due to, and receivable from, interconnection and roaming are shown net where a right of set-off exists and the amounts are settled on a net basis.

For those housing loans where the Company does not hold real estate mortgages as collateral, overdue receivables are fully provided for. A specific impairment provision is set for receivables from local municipalities based on past experience and expectations of future cash flows. Collection of receivables from the Government of Montenegro is also monitored on a monthly basis. As at 31 December 2013, maximum exposure to credit risk arising from trade and other receivables is in the amount of EUR 21,370 thousand (2012: EUR 19,462 thousand).



3. finanCial risk managemenT (ConTinued)

3.3 Liquidity risk

Liquidity risk is the risk that an entity may encounter difficulty in meeting obligations associated with financial liabilities.

Treasury monitors on a weekly basis the net liquidity position of the Company and reports it to the CFO each month. Prudent liquidity risk manage-ment implies maintaining sufficient cash and cash equivalents and bank deposits. Maturity of all liabilities is less than one year.

3.4 Foreign exchange risk

The Company is exposed to limited foreign exchange risk arising from various currencies, primarily with respect to Special Drawing Rights (SDR) and US dollars (USD) used to settle its international traffic revenue and expenses.

In the table below is summarised the currency split as of December 31, 2013:

USD SDR EUR Other TotalCash and cash equivalents 14 - 3,684,298 - 3,684,312Short term bank deposits - - 54,000,000 - 54,000,000Trade and other receivables - 895,071 20,457,331 - 21,370,402Trade and other payables (75,438) (576,108) (22,097,898) - (22,749,444)

(75,424) 318,963 56,061,731 - 56,305,270

In table below is summarised currency split as of December 31, 2012:

USD SDR EUR Other TotalCash and cash equivalents 29,254 - 26,409,611 - 26,438,865 Short term bank deposits - - 32,000,000 - 32,000,000 Trade and other receivables 39,912 1,541,364 17,881,600 - 19,462,876Trade and other payables (49,474) (661,002) (18,828,105) (4,993) (19,543,574)

880,362 57,463,105 (4,993) 58,358,166

At December 31, 2013, if the EUR had strengthened / weakened by 5% against the SDR with all other variables held constant, post-tax profit for the year would have been EUR 49,690 higher/lower (December 31, 2012: EUR 169,223), mainly as a result of foreign exchange gains /losses on transla-tion of SDR denominated trade receivables and trade payables. At December 31, 2013, if the EUR had strengthened / weakened by 5% against the USD with all other variables held constant, post-tax profit for the year would have been EUR 24,761 higher/lower (December 31, 2012: EUR 5,281), 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 lending. Its interest bearing assets include loans provided to employees on a fixed interest rate basis (for more details about terms and conditions, please see Note 2.5.1.1) and short term bank deposits.

Credit risk related to short term bank deposits is minimized due to fixed interest rates, which cannot be changed during the contracted period. Ad-ditionally, if the Company withdraws funds before maturity, interest rates stay the same for the whole period of time. There is no penalty interest or decreasing initial interest rate..

56


3. finanCial risk managemenT (ConTinued)

3.6 Fair Value

The management uses fair value valuation techniques in determining recoverability of available-for-sale financial assets and housing loans. The available-for-sale financial assets are not traded in an active market, there are no observable market data and the management does not expect any future cash flows from these instruments. Therefore, these financial assets are fully impaired as at 31 December 2013. In respect of housing loans issued by the Company where it holds mortgages over the underlying real estate properties taken as collaterals, these properties vary in size and type and are located in different areas of Montenegro. Fair value of these properties cannot be reliably measured at the end of each reporting date due to lack of sufficient observable market data. In determining recoverability of housing loans and fair value of collaterals, the management uses estimates described in note 4.

3.7. 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 BoD proposes to the shareholders 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 its own shares. Also, the Company monitors that its capital is kept above minimum legal requirements. Because the Company has been profitable, risk that its capital may fall below minimum legal requirements is minimized.

The equity managed by the Company is in the amount of EUR 165,819,715 as at 31 December 2013 (EUR 169,875,184 as at 31 December 2012).

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, as well as 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 management relies on independent expert opinions. Management makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual result. The esti-mates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are outlined below:

a) Useful lives of assets

The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technological develop-ment 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 developments in an innovative branch of telecommunications. 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 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 1,949 thousand (2012. EUR 2,143 thousand).



4. CriTiCal aCCounTing esTimaTes and judgemenTs (ConTinued)

b) Estimated impairment of goodwill

Goodwill is tested for impairment at the end of each reporting period. The recoverable amounts of the cash generating units (CGU) are calculated based on value in use 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 inappropri-ate. The management’s uses their best estimate on market participants’ assumptions and expectations, and also considers recent similar transactions and industry benchmarks.

As at December 31, 2013 and December 31, 2012 goodwill was allocated to the Company’s cash-generating units (CGU). The recoverable amount of goodwill is based on the weighted average cost of capital (WACC) after tax which is determined based on a CAPM (capital asset pricing model) using the average beta of the peer group, a risk free rate applying the Svensson method and increased by the country specific risk premium, a debt ratio in line with the usual indebtedness of listed peer telecommunications companies and a debt risk premium in line with the average premium of the peer group. 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:

2013 2012

EBITDA 40.6% 44.4%Beta 0.89 0.89Growth rate 2.0% 2.0%Discount rate (WACC) 9.56% 9.00%

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.

Should the WACC increase/decrease by 0.5% with all other assumptions held constant, estimated equity value would decrease/increase by EUR 6,436 thousand or EUR 2,746 thousand, respectively.

Should the growth rate increase/decrease by 0.05% with all other assumptions held constant, estimated equity value would increase by EUR 12,995 thousand or EUR 1,650 thousand, respectively.

c) Impairment of trade and other receivables

Impairment of trade and other receivables is based on estimated losses resulting from the inability of our customers to make required payments. The estimate is based on the aging of the account receivables balance and past write-off experience, customer credit-worthiness and recent and expected changes in customer payment terms. Those factors are reviewed periodically and changes are made to the calculations when necessary. The esti-mates also involve assumptions about future customer behaviour and the resulting future cash collections. If the financial condition of the 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. Management estimates past due trade receivables which are not impaired as fully recoverable based on the history of collection in prior periods.

Included in long-term receivables are specific receivables from the Government of Montenegro (Note 7) which the management estimates to be entirely recoverable and where impairment in value is not anticipated. This estimate is based on a past history of repayments.

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4. CriTiCal aCCounTing esTimaTes and judgemenTs (ConTinued)

c) Impairment of trade and other receivables (continued)

In case of specific receivables from local municipalities, the management makes estimates of impairment also based on history of collection and expected future cash flows.

In assessing recoverability of receivables from housing loans collateralized by property mortgages, the management uses fair value of collaterals de-termined at the inception of housing loans by a third party valuation agency. For those receivables whose carrying amount as at December 31, 2013 is above initial fair value, the management applies a haircut of from 50-35% (2012: 35%) to the fair value of collateral to determine the amount of impair-ment. Where the carrying amount of receivables from housing loans as at December 31, 2013 is below initial fair value of collateral, no impairment charge is made. For housing loans which are not backed by property collaterals, overdue receivables are fully impaired.

d) Fair value of housing loans

Housing loans were issued at interest rates varying from zero to 2%. In estimating their fair value, management uses average effective market interest rate of 6,5% (2012: 7.5%). Should the market interest rate increase/decrease by 1%, its effect on financial income/expense would be in the amount of EUR 40 thousand for the year ended December 31. 2013 (2012: EUR 31 thousand).

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 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 actual outcome of the case. In order to determine the probability of an advance outcome, the Company uses internal and external legal counsel.

f) Retirement benefits and jubilee awards

Employee benefits such as retirement benefits and jubilee awards, are calculated based on actuarial assumptions of expected average remaining working lives. Due to uncertainty, in some cases the evaluation may not prove to be in line with actual outcome.

The following assumptions were used by an actuary in the calculation of retirement benefit obligations and jubilee awards (note 16):

2013 2012Discount rate 5.5% p.a. 6.5% p.a.Inflation rate 3% 3.6%Retirement age 67 67Mortality rate Common mortality tables for 2005 in Croatia Common mortality tables for 2005 in Croatia

Present value of future benefits is calculated assuming increase of the benefit base in accordance with the inflation growth rate which is 3 %. If the Discount interest rate increase/decrease by 1%, its effect on financial income/expense would be in the amount of EUR 57 thousand for the year ended December 31, 2013 (2012: EUR 50 thousand).



5. iTems of properTy, planT and eQuipmenT

Land BuildingsEquipment and other

assetsConstruction in

progress TotalCost Balance January 1, 2013 2,994,682 88,571,158 136,609,084 2,625,373 230,800,297Additions - - 2,221,996 7,468,948 9,690,944 Transfers - 2,109,041 4,833,543 (6,942,584) -Transfers to intangible assets - - - (764,379) (764,379)Disposals /write –offs - (256,624) (24,706,705) - (24,963,329)Balance December 31, 2013 2,994,682 90,423,575 118,957,918 2,387,358 214,763,533 Accumulated DepreciationBalance January 1, 2013 - 34,741,215 99,705,669 192,129 134,639,013Charge for the year (Note 21) - 3,881,401 12,704,744 - 16,586,145Impairment - - - 667 667Disposals /write –offs - - (24,788,785) - (24,788,785)Balance December 31, 2013 - 38,622,616 87,621,628 192,793 126,437,040

Net Book ValueDecember 31, 2013 2,994,682 51,800,959 31,336,290 2,194,565 88,326,493 December 31, 2012 2,994,682 53,829,943 36,903,415 2,433,244 96,161,284

Land BuildingsEquipment and other

assetsConstruction in

progress TotalCost Balance January 1, 2012 2,959,682 85,538,729 155,500,625 9,308,472 253,307,508Additions - - 1,179,660 11,743,732 12,923,392Transfers 35,000 3,036,599 13,268,069 (16,339,668) -Transfers to intangible assets - - - (2,087,163) (2,087,163)Equipment sold – RAN modernization - - (21,606,357) - (21,606,357)Disposals /write –offs - (4,170) (11,732,913) - (11,737,083)Balance December 31, 2012 2,994,682 88,571,158 136,609,084 2,625,373 230,800,297 Accumulated DepreciationBalance January 1, 2012 - 30,980,076 117,893,577 - 148,873,653Charge for the year Note 21 - 3,765,309 14,898,677 - 18,663,986Impairment - - - 192,129 192,129Equipment sold – RAN modernization (21,465,197) - (21,465,197)Disposals /write –offs - (4,170) (11,621,388) (11,625,558)Balance December 31, 2012 - 34,741,215 99,705,669 192,129 134,639,013

Net Book ValueDecember 31, 2012 2,994,682 53,829,943 36,903,415 2,433,244 96,161,284

60


5. iTems of properTy, planT and eQuipmenT (ConTinued)

Included in the net book value of land and buildings are land of EUR 61,085 and buildings of EUR 371,759 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 buildings, but effectively has control over these items.

Total disposals for 2013 in amount of EUR 24,485,987 is related to write-off of equipment which had zero net book value on the end of 2013, and for which management estimated that they are not usable.

Furthermore, included in disposals for 2013 is the amount of EUR 132,040 related to NBV of optical cable fibre that was leased out as dark fibre under IRU for a period of 15 years (Note 19).

In 2012 Company sold old equipment for 141,160 EUR which was the same as the net book value of equipment at the time of selling.

In 2012 Company estimated an impairment of Construction in progress in an amount of EUR 192,129 . Impairment is related to management’s esti-mate that equipment could not be used in the future period.

A review of assets’ useful lives in 2011 resulted in a reduction of the estimated useful lives of radio access network equipment mainly due to changed expectations, technical development, budgets and plans for the upcoming years. The impact of the change in the useful lives on the financial state-ments is as follows:

2011 2012 2013 2014 After 2014Increase / (decrease) in depreciation 2,789,370 (142,757) (1,258,881) (1,044,331) (343.400)



6. inTangible asseTs

Goodwill Licenses SoftwareInternally generated

SoftwareIntangible Assets in

progress TotalCost At January 1, 2013 941,624 18,202,882 14,411,293 410,092 188,085 34,153,976Additions - - - - 4,763,396 4,763,396Transfers - 237,117 2,385,589 182,266 (2,804,972) -Transfers from PPE - - - - 764,379 764,379Disposals - - (163,443) - - (163,443)At December 31, 2013 941,624 18,439,999 16,633,439 592,358 2,910,888 39,518,308

Accumulated amortizationAt January 1, 2013 - 8,953,559 10,168,243 137,991 - 19,259,793Charge for the year (Note 21) - 1,151,263 1,653,506 100,003 - 2,904,772Disposals - - (163,443) - - (163,443)At December 31, 2013 - 10,104,822 11,658,306 237,994 - 22,001,122

Net Book ValueDecember 31, 2013 941,624 8,335,177 4,975,133 354,364 2,910,888 17,517,186December 31, 2012 941,624 9,249,323 4,243,050 272,101 188,085 14,894,183

Goodwill Licenses SoftwareInternally generated

SoftwareIntangible Assets in

progress TotalCost At January 1, 2012 941,624 17,367,708 11,670,000 276,909 222,097 30,478,338Additions - - - 1,625,424 1,625,424Transfers - 835,174 2,778,242 133,183 (3,746,599) -Transfers from PPE - - - - 2,087,163 2,087,163Disposals - - (36,949) - - (36,949)At December 31, 2012 941,624 18,202,882 14,411,293 410,092 188,085 34,153,976

Accumulated amortizationAt January 1, 2012 - 7,770,022 8,879,245 71,282 - 16,720,549Charge for the year (Note 21) - 1,183,537 1,325,947 66,709 - 2,576,193Disposals - - (36,949) - (36,949)At December 31, 2012 - 8,953,559 10,168,243 137,991 - 19,259,793

Net Book ValueDecember 31, 2012 941,624 9,249,323 4,243,050 272,101 188,085 14,894,18331. decembar 2011. godine 941,624 9,597,686 2,790,755 205,627 222,097 13,757,789

62


6. inTangible asseTs (ConTinued)

Intangible assets in progress in the amount of EUR 2,910,888 as of December 31, 2013 comprise software implementation of which is expected to be completed during 2014.

The most significant licences and availability period of commercial use are listed as follows: Fixed Telephony Telecommunication License

The Agency for Electronic Communications and Postal Services of Montenegro (“the Agency”) issued to the Company a Fixed-Line License that is valid from January 1, 2002 for a period of twenty-five years. Net book value of this license is in the amount of EUR 3,303,720 as at December 31, 2013 (2012: EUR 3,539,700)

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 Ministry of the Economy prescribed a special one-time fee for the provision of international traffic services. The aforementioned fee was paid in one instalment in the amount determined by the Agency. The license for provision of international traffic services is granted for a period of twenty-three years and its net book value is in the amount of EUR 1,560,000 as at December 31, 2013 (2012: EUR 1,680,000).

The expenditure to acquire the telecommunication licenses has been capitalized and amortized on a straight-line basis over its estimated useful life.

In October 2007, the Broadcasting agency of Montenegro issued to Telekom a license for building and distributing / broadcasting radio and TV program to customers (IPTV license) for a period of ten years. The Company paid a one-time fee for registration in the amount of EUR 75,000. The expenditure to acquire the IPTV license has been capitalized and amortized on a straight-line basis over the period of the licence.

Mobile Telephony Telecommunication License

The Agency issued a mobile telecommunication license GSM 900 MHz for the territory of Montenegro valid from January 1, 2002 for a period of fifteen years. At the expiration of this period, the Company shall have the option to extend the license for an additional period of ten years at a price equal to nominal cost. Carrying amount of this license is in the amount of EUR 893,208 (2012: EUR 1.182.940).

Based on decision of Agency for Electronic Communications and Post nr. 0505-545/1 dated on 31.01.2012. Crnogorski Telekom was awarded a license which grants exclusive right of use of additional radio spectrum for mobile communications in bands 900MHz, 1800MHz and 2100MHz. The license was awarded for a period of 5 years upon payment of 549,833EUR by Crnogorski Telekom based on the outcome and procedure of spectrum tender nr. 505-5043/1 published on 01.11.2011. by the Agency for Electronic Communications and Post. Carrying amount of this license is in the amount of EUR 339,064 (2012: EUR 449,030).

On March 28, 2007, the Agency awarded a 3G license to the Company valid for a period of fifteen years. Net book value of this licence is EUR 1,333,357 at December 31, 2013 (2012: EUR 1,493,359).

The expenditures to acquire the telecommunication licenses have been capitalized and amortized on a straight-line basis over their estimated useful lives.

License for Web Services

The license for Web Services is a general license for the provision of web services covering the territory of Montenegro, with an additional value received from the Agency 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 Agency an annual fee calculated as 1% of the annual income earned from fixed and mobile telephony ser-vices. This fee is included within “Other operating expenses”.



6. inTangible asseTs (ConTinued)

Goodwill

In accordance with the Company’s Board of Directors’ Resolutions of February 19, 2004 and March 7, 2005 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 amounts of EUR 1,750,000 in 2004 and EUR 435,700 in 2005, and became the owner of 100 percent of the capital of Internet Crna Gora d.o.o. Carrying amount of goodwill is EUR 941,624 as at December 31, 2013 (2012: EUR 941,624). The Company performed an impairment test, which resulted in recoverable amount exceeding carrying value and no impairment charge (Note 4).

7. long Term loans and oTher reCeiVables

December 31, 2013 December 31, 2012

Housing loans given to employees 3,612,615 1,861,761Housing loans given to former employees 2,314,818 2,188,422Long term receivables from Government - 600,935Long term receivables from customers 1,085,112 754,775Total financial receivables 7,012,545 5,405,913 Prepaid employee benefits 939,451 743,555Prepaid rent for the GSM locations 468,622 537,525Total other receivables 1,408,073 1,281,080Total 8,420,618 6,686,993

Employee loans

During 2007, in accordance with the Company’s Statute and the Rules on the Fulfilment of Employee Residential Housing Requirements, The Company’s Operative committee decided to grant housing loans to employees in total amount of EUR 1,282,000. These loans were approved for repayment periods of 5, 7, 10 and 20 years, and were issued at annual interest rates ranging from 0% to 2% (Note 2.7.1a). The total amount of the approved loans per employee ranges from EUR 5.000 to EUR 50.000. A condition for the realization of these loans is that the employees had to stay employed in the Company for a loyalty period of minimum three years. If an employee leaves the Company before the 3-years term, loan principal and interest become immediately due.

The Company obtained mortgages on the residential housing units occupied by the loan beneficiaries and other real estate property, in order to secure timely loan repayments.

Contracted maturities of long-term housing loans are presented below:

December 31, 2013 December 31, 2012-from two to five years 2,164,199 1,915,026 -over five years 6,708,009 4,312,992 Undiscounted housing loans 8,872,208 6,228,018 Discount (2,005,324) (1,434,260)Fair value of housing loans 6,866,884 4,793,758

64


7. long Term loans and oTher reCeiVables (ConTinued)

As of December 31, 2013 the Company changed the discount rate for housing loans, to reflect the changes in market conditions related to financial instruments comparable to employee housing loans. The discount rate used as at December 31, 2013 is 6.5% (2012:7.5%). Effect of this change is presented in table below:

2013 2014 2015 2016 After 2016Increase / (decrease) discount related to employees who left the Company (154,847) 17,707 15,018 14,425 107,696Increase / (decrease) discount related to current employees (199,022) 17,289 16,530 16,243 148,960Increase / (decrease) employee benefits 168,448 (13,046) (13,647) (13,402) (128,353)Total (185,421) 21,950 17,901 17,266 128,303

Maturities of undiscounted long-term receivables from the Government are presented below:


from 2 to 5 years - 707,234- 707,234

Receivables from the Government of Montenegro in the amount of EUR 600,935 as of December 31, 2012 represent the discounted 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 Radio difuzni centar d.o.o., Podgorica (“RDC”) entered into on December 10, 2004 between Telekom Crne Gore and the Government of Montenegro. According to this agreement, the RDC became the property of the state.

The Government 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 was not calculated. At the expiration of grace period, by termination of the second year from the execution date of the Agreement, the Government of Montenegro was 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 Montenegro is obligated to remit to the Company a total an-nual amount of EUR 600,000 in equal monthly instalments on the first day of the month for the coming month.

The basis for computing the current value of expected future cash flows is effective market annual interest rate of 7.5% The effect of interest income recognized using the effective interest rate method for the period from January 1 to December 31, 2013 amounted to EUR 77,998 (December 31, 2012: EUR 87,793).

Long term receivables from customers in amount of EUR 1,085,112 (2012: EUR 754,775) relate to receivables from sales of equipment to individual customers over the period of 24 months.



8. inVenTories


Cables, wires and other materials 1,044,196 1,181,062 Inventory for resale 2,165,885 2,390,339

3,210,081 3,571,401

Less allowances for obsolete inventory (932,264) (956,198)

2,277,817 2,615,203

Movements in the provision for inventories for year ended December 31, 2013 and December 31, 2012 are summarized in the table below:

2013 2012

Balance, January 1 956,198 887,960 Charged during the period (Note 23) (23,934) 68,238

Balance, December 31 932,264 956,198

66


9. Trade and oTher reCeiVables


Domestic trade receivables 33,895,574 32,605,287 Foreign trade receivables 1,234,176 1,319,399 Allowance for receivables from third parties (19,733,879) (19,180,078) Trade receivables from third parties , net 15,395,871 14,744,608 Receivables from Magyar Telekom Group companies 96,516 23,302 Receivables from Deutsche Telekom Group companies 2,053,750 1,671,985 Total trade receivables, net 17,546,137 16,439,895 Current portion of housing loans to employees 164,049 567,100Current portion of housing loans to former employees 152,865 123,551 Past due employee loans receivable – impaired 466,049 252,818 Past due housing loans – not impaired 54,661 110,173Allowance for housing loans (466,049) (252,818) Current portion of long term receivables from Government 712,357 712,357 Current portion of long term receivables from customers 2,740,333 1,509,800 Total current portion of long term receivables 3,824,265 3,022,981 Total financial assets 21,370,402 19,462,876 Advances paid for current assets 210,142 134,631 Prepayments for lease of GSM locations 232,491 252,894 Other Prepayments 356,258 163,392 Other receivables 2,900,265 2,579,551 Allowance for other receivables (1,129,330) (686,765)Total other receivables, net 2,569,826 2,443,703 Total trade and other receivables, net 23,940,228 21,906,579

The structure of other receivables as of December 31 2013 and 2012 is as follows:

(In EUR)December 31, 2013 December 31, 2012

Receivables from local municipalities 1,642,389 1,526,145 Receivables for dividend paid 847,699 754,737Prepaid taxes and contributions 277,133 137,071Receivables for interest income on term deposits 45,531 77,550Other receivables 87,513 84,048

2,900,265 2,579,551 Allowance for receivables from municipalities (1,129,330) (686,765)

1,770,935 1,892,786



9. Trade and oTher reCeiVables (ConTinued)

Age profile of current portion of long term receivables and other receivables

The following tables show the age profile of the Company’s current portion of long term receivables and other receivables by days outstanding (past due). The carrying amounts of past due receivables are shown gross:

In EUR

Carrying amount as of December 31,

2013of which not

past due

of which past due by

less than 30 days

30 – 60 days

61 – 90 days

91 – 180 days

181 – 360 days

over 360 days

Other receivables 1,770,935 1,267,563 9,687 9,687 19,374 29,061 48,435 387,128employee loans - current employees 164,049 164,049 - - - - - -employee loans - ex employees 207,526 152,865 - - - - - 54,661receivables from Government 712,357 712,357 - - - - - -receivables from Customers 2,798,974 2,798,974 - - - - - -Total 5,653,841 5,095,808 9,687 9,687 19,374 29,061 48,435 441,789

In EUR

Carrying amount as of December 31,

2012of which not

past due


less than 30 days

30 – 60 days

61 – 90 days

91 – 180 days

181 – 360 days

over 360 days

Other receivables 1,892,786 1,053,406 5,328 10,987 21,011 21,311 93,149 687,594employee loans - current employees 567,100 567,100 - - - - - -employee loans - ex employees 233,724 123,551 - - - - - 110,173receivables from Government 712,357 712,357 - - - - - -receivables from Customers 1,509,800 1,509,800 - - - - - -Total 4,915,767 3,966,214 5,328 10,987 21,011 21,311 93,149 797,767

68



Receivables for dividend paid (individual shareholders) relate to dividend payments placed with Crnogorska Komercijalna Banka a.d. which are not yet collected by individual shareholders.

Provision for receivables from municipalities in the amount of EUR 1,129,300 (2012: EUR 686,765) is created based on management’s estimate that a portion of receivables may not be collected. Montenegrin Municipalities made withdrawal from the Company’s bank accounts for usage of the Municipalities land used for network structure. The Company disagreed with the amount of fee and started court cases in 2009. Since the Company still did not manage to collect the receivables the management estimated and created an additional provision in 2013.

Trade and other receivables are denominated in the following currencies:


EUR 23,045,157 20,325,303 SDR (Special Drawing Rights) 895,071 1,541,364USD - 39,912

23,940,228 21,906,579

Fair values of trade and other receivables are as follows:


Trade receivables 15,395,871 14,744,608Trade receivables from related parties 2,150,266 1,695,287Housing loans receivable 371,575 800,824 Receivables from Government 712,357 712,357Receivables from customers 2,798,974 1,509,800Total financial assets 21,429,043 19,462,876




Age profile of Trade receivables

The following tables show the age profile of the Company’s trade receivables by domestic and foreign split by days outstanding (past due). The carry-ing amounts of past due receivables are shown net of impairment losses charged as of the financial statement dates.

In EUR

Carrying amount as of December

31, 2013of which not

past due


less than 30 days 30 – 60 days 61 – 90 days 91 – 180 days

181 – 360 days

over 360 days

Domestic 14,775,713 10,790,816 1,860,058 1,000,917 493,404 394,583 145,479 90,456Foreign 2,770,424 2,398,932 128,058 123,095 34,618 29,001 51,676 5,044Total 17,546,137 13,189,748 1,988,116 1,124,012 528,022 423,584 197,155 95,500

In EUR

Carrying amount as of December

31, 2012of which not

past due


less than 30 days 30 – 60 days 61 – 90 days 91 – 180 days

181 – 360 days

over 360 days

Domestic 13,943,674 9,347,985 1,765,343 987,705 490,455 393,123 192,799 766,264Foreign 2,496,221 1,147,098 589,102 126,105 328,342 65,861 124,040 115,673Total 16,439,895 10,495,083 2,354,445 1,113,810 818,797 458,984 316,839 881,937

Movements in allowance for impairment losses are summarized below:

Domestic Foreign2013 2012 2013 2012

Balance, January 1 19,348,378 17,024,029 518,465 496,427Charged during the year 1,332,067 1,077,898 95,553 49,026 Charged during the year – provision for Municipalities 442,565 369,649 - - Release of provision related to receivables collected during the year (250,629) (78,608) - (26,988)Effects of exchange rate - - - -Penalties charged to customers (5,427) 955,410 - -Factoring receivable (617,763) - - -Balance, December 31 20,249,191 19,348,378 614,018 518,465

70


10. shorT Term inVesTmenTs


Credit rating A2 (Moody’s) 21,000,000 16,000,000Credit rating Baa1 (Moody’s) 33,000,000 16,000,000

54,000,000 32,000,000Short term bank deposits represent deposits with maturity from three months up to one year and average interest rate of 1.23 % in 2013 (2012: 3.73 %). All short term bank deposits are denominated in EUR. In the period ended December 31, 2013, total amount of deposits are additionally guaran-teed by a credit institution with credit ratings A2, Baa1 (2012: credit institution with credit ratings A2, Baa1).

11. Cash and Cash eQuiValenTs


Cash on hand 511 2,462 Cash in banks 3,683,801 4,436,403 Short term deposits with initial maturity up to 3 months - 22,000,000

3,684,312 26,438,865

12. finanCial insTrumenTs

a) Financial instruments by categories

The accounting policies for financial instruments have been applied to the line items below:

Loans and receivables December 31, 2013 December 31, 2012

Long term loans and receivables 6,953,904 5,405,913Short term bank deposits 54,000,000 32,000,000Trade and other receivables 21,429,043 19,099,885Cash and cash equivalents 3,684,312 26,438,865Total 86,067,259 82,944,663

Liabilities at amortised cost December 31, 2013 December 31, 2012

Financial liabilities 22,749,444 19,543,573 Total 22,749,444 19,543,573



12. finanCial insTrumenTs (ConTinued)

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 December 31, 2013 December 31, 2012

Counterparty with external credit rating Ba3 - 600,935 Counterparty without credit rating 6,953,904 4,804,978

6,953,904 5,405,913

Counterparties without credit rating includes long term receivables from customers and receivables for housing loans.

Receivables for housing loans are secured by mortgage which is a pre-requisite for a loan to be approved. Long term receivables from customers relate to sale of equipment on instalments. The Company performs credit checks of all customers before the sales occur.

Cash and cash equivalents December 31, 2013 December 31, 2012

Cash and cash equivalents without credit rating 3,484,265 4,229,321 Counterparty with Credit rating A1 (Moody’s) 200,047 209,544Counterparty with Credit rating Ba2 (Moody’s) - 22,000,000

3,684,312 26,438,865

Cash and cash equivalents without credit rating are kept in Montenegrin domestic banks.

Short term bank deposits December 31, 2013 December 31, 2012

Guaranteed short term deposit by credit institution Credit rating A2 (Moody’s) 21,000,000 16,000,000Credit rating Baa1 (Moody’s) 33,000,000 16,000,000

54,000,000 32,000,000

Trade and other receivables - neither past due nor impaired December 31, 2013 December 31, 2012

Counterparty without external credit ratingDomestic (Note 9) 10,790,816 9,347,985Foreign (Note 9) 2,398,932 1,147,098

13,189,748 10,495,083

72


13. share CapiTal

As at December 31 , 2013 As at December 31, 2012Number of Shares % Value Number of Shares % Value

Subscribed and paid in capital - Magyar Telekom 36,177,950 76.53 107,902,165 36,177,950 76.53 107,902,165Legal entities and custody 5,851,965 12.38 17,454,071 5,562,860 11.77 16,591,786Individuals 5,244,025 11.09 15,640,158 5,533,130 11.70 16,502,443

47,273,940 100.00 140,996,394 47,273,940 100.00 140,996,394

As at December 31, 2013 and December 31, 2012 the par value of an individual share was EUR 2.98254. Telekom’s shares are publicly listed on the Montenegro Stock Exchange. The market price of an individual share as at December 31, 2013 was EUR 4.1865 (December 31, 2012: EUR 3.2133).

14. sTaTuTory reserVes

According to the Company’s Articles of Association, the Company was required to transfer 5% (5 percent) of its statutory profit for the year to statutory reserves, until these reserves reach the level of 1/10 (one tenth) of the share capital. These reserves are intended to be used to cover losses, and are not distributable to shareholders except in the case of bankruptcy of the Company.

The Company changed its Article of Association at the General Assembly meeting held on May 18, 2012 to reflect the changes in Montenegrin Com-pany law. These reserves are not required to be kept by the Company, and, therefore, the total amount of statutory reserves was allocated to retained earnings.

15. Trade and oTher payables

December 31, 2013 December 31, 2012 Trade payables to third parties 13,432,881 11,614,777 Payables to Magyar Telekom Group 461,169 492,574 Payables to Deutsche Telekom Group 2,452,671 2,083,470Total trade payables 16,346,721 14,190,821Accrued expenses 3,907,462 3,315,651 Liabilities for dividends 940,590 844,540Accrued bonuses 1,266,844 915,170 Other payables 287,827 277,393 Total other financial liabilities 6,402,723 5,352,754 Total financial liabilities 22,749,444 19,543,575Advances received for mobile phone cards 806,938 942,194 Amounts received in advance and prepayments 129,335 122,709Other taxes and social security 217,851 208,948 VAT payables 868,652 737,032 Customer Loyalty Programs 665,631 625,306 Deferred revenues 832,772 689,026 Total other payables 3,521,179 3,325,215Total trade and other payables 26,270,623 22,868,789



15. Trade and oTher payables (ConTinued)

Accrued expenses include the following:

December 31, 2013 December 31, 2012Accrued marketing expenses 443,648 312,846 Accrued expenses for postal services 85,012 114,698 Accrued expenses for maintenance 988,042 720,827 Accrued liabilities for IPTV services 258,320 346,998 Other accrued liabilities 2,132,440 1,820,282

3,907,462 3,315,651

Trade and other payables are denominated in the following currencies:


EUR 22,097,898 18,828,105SDR 576,108 661,002USD 75,438 49,474CHF - 1,449GBR - 3,544

22,749,444 19,543,574

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 / 60 / 90 days.

74


16. proVisions for liabiliTies and Charges Movements in provisions for liabilities and charges for the year ended December 31, 2013 and December 31, 2012 are summarized in the table below:

2013 2012

Balance, January 1 3,237,756 2,572,854Additions during the year 3,296,296 2,131,474 Release during the year - (1,035,660)Amounts utilized / retired during the year (4,849,800) (430,912)Balance, December 31 1,684,252 3,237,756Less: non current portion 757,642 635,382 926,610 2,602,374

Movements in provisions for liabilities and charges per type of provision are summarized in the table below:

Legal casesSeverance payments

Retirement and jubilee award benefits

Mid term incentive plan (MTIP)

Varial bonuses II programme (VAR II) Total

January 1, 2012 997,572 355,388 447,305 695,356 77,233 2,572,854

Charged during the year 25,245 1,626,484 - 339,148 140,597

2,131,474 Release during the year (373,623) (355,388) - (306,649) - (1,035,660)Used during the year - (260,161) (8,937) (161,814) - (430,912)December 31, 2012 649,194 1,366,323 438,368 566,041 217,830 3,237,756

January 1, 2013 649,194 1,366,323 438,368 566,041 217,830 3,237,756Charged during the year 301,029 2,748,499 36,311 113,704 96,753 3,296,296Release during the year - - - - - -Used during the year (367,124) (4,114,822) - (367,854) - (4,849,800)December 31, 2013 583,099 - 474,679 311,891 314,583 1,684,252

Less: non current portion - - (443,059) - (314,583) (757,642)Current provision 583,099 - 31,620 311,891 - 926,610

Most legal cases are related to disputes of property ownership rights in Cetinje in the amount of EUR 251,752 and a dispute over lease of satellite systems in amount of EUR 200,000.



16. proVisions for liabiliTies and Charges (ConTinued)

a) Retirement and jubilee award benefits

Jubilee award obligations Retirement obligations Total

January 1, 2012 336,830 110,475 447,305Additions - - -Amounts utilized / retired (24,224) 15,287 (8,937) December 31, 2012 312,606 125,762 438,368

January 1, 2013 312,606 125,762 438,368Additions 31,355 4,956 36,311Amounts utilized / retired - - - December 31, 2013 343,961 130,718 474,679

Less: non current portion (312,341) (130,718) (443,059)

Current provision 31,620 - 31,620

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 (note 2.15).

17. deferred inCome Tax liabiliTy

As at December 31, 2013 and December 31, 2012, the Company did not have any deferred tax assets arising from temporary differences or tax losses available for future years.

Deferred tax liabilities relate to temporary differences between the property, plant and equipment and intangible assets base recognized in the tax statement, and the carrying amount of property, plant and equipment and intangible assets as recorded in the Company’s financial statements. Tax-able temporary difference arises from accelerated tax depreciation and recognition of assets with the unit value below 300 EUR.

Movement in deferred income tax liability during the year is as follows:

Deferred tax liability Accelerated tax depreciationAt January 1, 2012 2,159,942Charged/(credited) to profit or loss (54,128)At December 31, 2012 2,105,814Charged/(credited) to profit or loss (29,114)At December 31, 2013 2,076,700

76


18. reVenues

a) Fixed line and Internet servicesDecember 31, 2013 December 31, 2012

Subscriptions connections and other charges 12,726,936 12,719,843

Outgoing domestic traffic revenues 6,395,303 7,425,179 Outgoing international traffic revenues 1,280,772 1,543,288 Total outgoing traffic revenues 7,676,075 8,968,467

Incoming domestic traffic revenues 987,400 986,463 Incoming international traffic revenues 12,096,275 13,129,853 Total incoming traffic revenues 13,083,675 14,116,316

Leased lines and data transmission 2,716,298 3,344,277 Web presentation and hosting 52,104 58,692 ADSL revenues 12,014,413 11,673,177 MIPNET revenues 1,913,663 2,202,644 IPTV revenues 6,564,562 6,088,292Revenues from internet access 453,567 560,867 Equipment sales 1,799,066 1,463,008 ICT revenues 2,191,938 1,023,500 Other revenues 529,564 904,726 Total other revenue 28,235,175 27,319,183

Total fixed line and internet services revenues 61,721,861 63,123,809

b) Mobile line servicesDecember 31, 2013 December 31, 2012

Post-paid revenues - outgoing domestic and international calls 8,790,007 10,576,377 - monthly subscriptions 9,876,111 9,014,516

18,666,118 19,590,893

Prepaid services 12,979,430 14,650,980 Sale of handsets 2,909,008 1,591,510

15,888,438 16,242,490

Revenue from interconnection fees 6,250,107 8,423,994 Revenue from roaming 5,451,144 6,253,431 Other revenue 971,722 442,317

Total mobile line service revenues 47,227,529 50,953,125



19. oTher operaTing inCome


Income from Dark fiber long term lease 896,210 - Capital gains on sold fixed assets 27,437 177,698 Other operating income 317,689 71,967

1,241,336 249,665

An amount of EUR 896,210 is related to income from leasing Dark fibre. Agreements over rights to use specific dark fibres are akin to leases because they convey a right to use specified network assets, to the exclusion of other operators, including Crnogorski Telekom. Payment for the use of the dark fibre is made in advance and does not vary with the buyer’s actual usage. The lease period is 15 years.

20. employee relaTed expenses


Net salaries and benefits 9,262,549 10,912,368 Taxes on salaries 3,182,908 1,755,146 State pension contributions 3,323,864 3,338,628 Social security and other contributions 2,385,433 2,344,633 Severance payments (Note 16) 2,748,499 1,271,095 Provisions for retirement and jubilee benefits (Note 16) 121,086 23,562 Other personnel costs 1,647,490 1,029,223

22,671,829 20,674,655

21. depreCiaTion, amorTizaTion and impairmenT


Depreciation (Note 5) 16,586,145 18,663,987 Impairment (Note 5) 667 192,128 Amortization (Note 6) 2,904,772 2,576,193

19,491,584 21,432,308

22. paymenTs To oTher neTWork operaTors


Payments to domestic fixed and mobile network operators 9,052,332 11,846,159 Payments to foreign fixed and mobile network operators 5,920,615 6,391,255

14,972,947 18,237,414

78


23. oTher operaTing expenses


Materials maintenance and service fees 7,435,283 7,148,263 Marketing 2,743,954 2,977,593 Provision for impairment of trade receivables 1,619,556 1,390,977Rental fees 2,717,208 3,489,357Telecommunication licence fee 1,658,485 1,678,420Sponsorships 435,600 381,400Municipality fees and charges 1,582,750 1,581,321Agent commissions 1,471,071 1,534,688Fees and levies 126,024 275,147Audit of financial statements 89,100 89,100Magyar Telekom consulting services 27,265 -Deutsche Telekom consulting services 273,481 284,472Other consulting services 9,881 444,977Energy expenses 1,617,810 1,385,059Postal expenses 659,676 713,645 Other service fee 659,609 715,431Increase in allowances for inventories (23,934) 68,238Release of provision (note 16) 301,029 (348,378)Other expenses 2,732,614 3,287,327

26,136,462 27,097,037

Rental fees are mostly related to rental of telecom lines in amount of EUR 1,059,549 (2012: EUR 1,302,172) and rental of space for base stations from Radio Difuzni Centar in amount of EUR 629,858 (2012: EUR 702,652).

Expenses for sponsorships relate to sponsoring the FSCG, women’s handball team “Budućnost” and mans basketball team “Budućnost” in the amount of EUR 435,600 (2012: EUR 300,000) and other culture, sports and education purposes.

In 2012 included in other expense is the expense of tax audit covering period May 2009-December 2011 in the amount of EUR 1,493,579, included as additional VAT charge within Other expenses and Corporate Income Tax in amount of EUR 609,369 (Note 25). Additional VAT is charged on sales of subsidised handsets on difference between purchase and selling price of handset in case when selling price was lower than purchase price.

As of 18 February 2013, the Company received a resolution from the Ministry of Finance related to VAT and income tax charges for subsidized phones as an answer on the Company’s appeal from September 2012.

Ministry of Finance has confirmed the Tax authorities’ view related to additional VAT calculation in the amount of EUR 1,493,579. Additionally, the Ministry of Finance accepted the Company’s appeal related to income tax charge of EUR 609,369 and committed to revise the findings of the tax inspecion. Although the initial decision of the Ministry of Finance is positive for the Company, the outcome of the revision cannot be reliably predicted, thus the Company made an accrual of EUR 609,369 in the financial statements for the year ending 31 December 2012.

Crnogorski Telekom has started court case with appeal which was submitted to Montenegrin Administrative court in March 2013.



24. finanCe inCome and CosTs -neT

December 31, 2013 December 31, 2012Finance income Interest income from - short term bank deposits 1,052,764 2,411,844- employee loans 95,034 96,038Interest income from unwinding of discount for long –term receivables 83,384 251,207Foreign exchange gains 59,458 96,405

1,290,640 2,855,494Finance expense Interest expenses (11,252) (144,634)Foreign exchange losses (130,468) (223,370) Other finance cost (156,816) (477,256)

(298,536) (845,260)

Finance income net 992,104 2,010,234

25. inCome Tax expense

December 31, 2013 December 31, 2012 Current income tax 2,315,364 3,224,933 Deferred income tax release (29,112) (54,128) Total 2,286,252 3,170,805

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, 2013 December 31, 2012 Profit before tax 21,130,783 23,110,809 Income tax at a rate of 9% 1,901,770 2,079,973 Non-deductible costs 179,106 268,874 Additional tax for periods from 2009-2011 (Note 23) - 609,369 Other adjustments 205,376 212,589

2,286,252 3,170,805

80


26. earnings per share

(In EUR) December 31, 2013 December 31, 2012

Profit attributable to equity holders of the Company 18,884,531 19,940,004 Weighted-average number of issued ordinary shares 47,273,940 47,273,940Number of ordinary shares 47,273,940 47,273,940 Basic earning per share - from ordinary business operations 0,40 0,42 Basic earnings per share 0,40 0,42

The Company does not have any amounts of diluted shares.

27. diVidend paymenTs

During 2013, profit related dividend for 2012, totalling EUR 22,900,000 (2011: EUR 16,500,000) were declared. The dividend per share amounted to EUR 0.46326 (2011: EUR 0.34903).

Net dividend Tax Total dividend Total declared dividend as distribution of 2012 profit 21,539,025 1,360,975 22,900,000Less - Liabilities for dividend as distribution of 2012 profit (3,522) (23,051) (26,573) Total paid dividend as distribution of 2012 profit 21,535,503 1,337,924 22,873,427Dividend paid in current for previous years - 8,649 8,649 Total dividend payment during 2013 21,535,503 1,346,573 22,882,076

28. relaTed parTy TransaCTions

Crnogorski Telekom A.D, Podgorica was acquired by Magyar Telekom. Magyar Telekom obtained control of Crnogorski Telekom on March 31, 2005 and by the end of 2005 it held a 76.53% stake, which has remained unchanged since then. 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%).

The Federal Republic of Germany is an indirect shareholder of DTAG and holds approximately 32% of the share capital of DTAG. Due to the average attendance at the shareholders’ meeting, the Federal Republic of Germany represents a solid majority at the shareholders’ meeting of DTAG, although it only has a minority shareholding, making DTAG a dependant company of the Federal Republic. Therefore, the Federal Republic and the companies controlled by the Federal Republic or companies over which the Federal Republic can exercise a significant influence are classified as related parties of DTAG and Magyar Telekom, and consequently of Crnogorski Telekom as well.

Other related parties with which the Company had transactions in the period January 1 to December 31, 2013 and 2012 include: Makedonski Tele-kom (subsidiary of Magyar Telekom), OTE group (subsidiary of 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.



28. relaTed parTy TransaCTions (ConTinued)

Transactions with related parties includes provision and supply of telecommunication services and leased lines.

I Liabilities (In EUR)

December 31, 2013 December 31, 2012Magyar Telekom Interconnections with fixed line of service 236,848 340,342Mobile phone service - 46,973Consulting services - -

236,848 387,315Makedonski Telekom Mobile phone service 224,321 105,259Total - Magyar Telekom Group 461,169 492,574Deutsche Telekom Interconnections with fixed line of service 1,378,197 1,734,995Mobile telephony services 748,538 220,943

2,126,735 1,955,938Ote TelekomInterconnections 63,734 61,771T - Hrvatski telekom Leased lines 262,202 65,760Total - Deutsche Telekom Group 2,452,671 2,083,469Total 2,913,840 2,576,043

II Receivables December 31, 2013 December 31, 2012

Magyar Telekom Leased lines 32,614 23,302

32,614 23,302Makedonski Telekom Mobile phone service 63,902 -Total - Magyar Telekom Group 96,516 23,302Deutsche Telekom Interconnections with fixed line of service 1,256,648 1,397,735Mobile telephony services 448,703 76,920

1,705,351 1,474,655Ote TelekomLeased lines 134,773 135,348T – Hrvatski telekom Leased lines 213,626 61,982Total – Deutsche Telekom Group 2,053,750 1,671,985Total 2,150,266 1,695,287

82



(In EUR)III Revenues December 31, 2013 December 31, 2012

Magyar Telekom Interconnections 61,800 44,860Mobile line services 11,246 25,874

73,046 70,734Makedonski Telekom Mobile line services 19,473 36,215Total - Magyar Telekom Group 92,519 106,949Deutsche Telekom Interconnections 9,550,751 10,025,433Mobile line services 145,810 143,746

9,696,561 10,169,179Ote TelekomLeased lines 80,365 85,080Hrvatski telekomInterconnections 23,302 58,709Leased lines 46,028 37,090Total - Deutsche Telekom Group 9,846,256 10,350,058 Total 9,938,775 10,457,007

IV Expenses December 31, 2013 December 31, 2012Magyar Telekom Consulting services 27,265 -Mobile line services 8,051 10,216Leased lines 481,534 570,308Other expenses 108,056 113,800

624,906 694,324Makedonski Telekom Mobile line services 7,069 10,992Total - Magyar Telekom Group 631,975 699,636Deutsche Telekom Interconnections 4,132,590 4,506,850Consulting services 273,481 284,472T brand 276,288 285,048

-Maintenance of telecom equipment 330,331 332,400Mobile line services 19,694 78,937Other expenses - 3,510

5,032,384 5,491,217T - Hrvatski telekom Interconnections Mobile line services 30,285 43,906Leased lines 184,005 356,994

214,290 400,900Total - Deutsche Telekom Group 5,246,674 5,892,117 Total 5,878,649 6,597,433




Agreements with the Company’s Senior Management

In 2013 the Company rewarded short term employee benefits to management, which amounted to EUR 927,286 (2012: EUR 1,137,674) for net salaries and bonuses to key management, who are members or permanent invitees of the Executive Management Board of Crnogorski Telekom, and EUR 583,469 (2012: EUR 774,592) for related taxes and contributions.

Also, during 2013 Company made payments to key management of MTIP “Mid term incentive plan” in the gross amount of EUR 367,854 (note 16) (2012: EUR 161,814).

29. ConTingenT liabiliTies

Potential onerous contracts

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 Purchaser undertakes to cause the Company to enter into contracts with the Radio Diffusion Centre to lease optical fiber capacities for transmission of TV and radio signals and the University of Mon-tenegro to provide for connection capacities. In both cases it is envisaged that the counterparties shall not pay any compensation for the use of these capacities. The Company management estimates that there will be no material expenditure related to this case in the future.

Environmental matters

Environmental regulations are developing in the Republic of Montenegro and the Company has not recorded any liability at December 31, 2013 and December 31 2012 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.

30. Tax risks

Tax laws of Montenegro are subject to different interpretations and frequent amendments. Tax authorities’ interpretation of Tax laws may differ to those made by the Company’s management. As a result, some transactions may be disputed by tax authorities and the Company may have to pay additional taxes, penalties and interests. Tax liability due date is five years. This means that tax authorities have rights to determine unpaid tax liabilities within five years since the transaction date. Management has assessed that the Company has paid all tax liabilities incurred until 31 December 2013.

84


31. CommiTmenTs

a) Operating lease commitments – Company as a 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.Amounts of minimum lease payments at balance sheet date under non-cancellable operating leases for periods:

not later than one year 2,630,391 later than one year and not later than five years 4,512,807 later than five years 836,586 Total 7,979,784

The lease contract with the Radio Difuzni Centar (RDC) is signed on indefinite time for rent of space on their towers for our base stations. Space on same towers is rented by RDC also to the other operators and domestic TV stations. The amount of the lease cost fluctuates depending on the space used for these towers. The lease expenditure charged to the Statement of comprehensive income during the year is disclosed in Note 23 (“Rental fees”).

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, 2013 December 31, 2012 Contracted liabilities on: The purchase of property, plant and equipment 2,392,414 2,142,759 The purchase of intangible assets 749,551 662,868 Maintenance and support services 942,557 861,519 Marketing and sponsorships 176,300 30,780Other operating expenditure commitments 1,549,388 197,076 Total 5,810,210 3,895,002

c) Use permits 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 Magyar Telekom Nyrt., 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. The Company manage-ment estimates that there will be no material expenditure related to this case in future.



32. 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, 2013 and December 31, 2012 respectively are as follows:

December 31, 2013 December 31, 2012 SDR 1.1183 1.1658 USD 0.7255 0.7586

33. Cash generaTed from operaTions

Note December 31, 2013 December 31, 2012Profit for the period 18.844.531 19,940,004Adjustments for:Income tax expense 2.286.252 3,170,805Depreciation amortization and impairment 22 19,491,584 21,432,308Net financial income 24 (992,104) (2,010,234)Increase/(decrease) of allowances for inventories recognized in profit or loss 23 (23,934) 68,238Increase/(decrease) of allowances for bad debt recognized in profit or loss 10 1,176,991 1,021,328Change in working capital:Change in payables (3,401,834) (816,567)Change in inventory 361.320 551,838Change in receivables (2.033.649) 870,672 Decrease in provision for legal cases 66,095 (348,378)Provision for Employee benefits (36,311) (8,937)Additional tax charges 23 - (2,102,948)

Other non-cash items 180,669 (138,859)

Cash generated from operations 35,556,620 41,629,270

34. eVenTs afTer The reporTing period

Based on minority shareholders’ request, the Company initiated a procedure for capital decrease. On its extraordinary meeting on March 5, 2014 the General Assembly approved a Resolution on share capital reduction by changing the par value from EUR 2.98255 to EUR 2.62001. Total number of shares remains 47.273.940. This resulted in share capital decrease in amount of 17,138,694 EUR.

87furTher informaTion

furTher informaTion

Contacts

Crnogorski TelekomMoskovska 2981000 PodgoricaMontenegroTel: + 382 20 433 433Fax: + 382 20 225 752e-mail: [email protected]

Stock tRAding inFoRMAtion:

Crnogorski Telekom stock code: TECG

Montenegroberza a.d.PodgoricaMoskovska 7781000 PodgoricaMontenegroTel/Fax: +382 20 228 502E-mail: [email protected]

Published by:Crnogorski Telekom © 2014

www.telekom.me

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