Farice ehf. Financial Statements 1.1.-31.12.11Farice ehf. Financial Statements 1.1.-31.12.11 Approved on board meeting 27 April, 2012 ‘Table of contents Auditor's report 2 Endorsement of the Board of Directors and CEO 34 Statement of Comprehensive Income 5 Statement of Financial Position 67 Statement of Cash Flows 8 Statement of Equity 9 Notes 10-19Independent Auditor's Report To the Board of Directors and Shareholders of Farice ehf. We have audited the accompanying financial statements of Farice ehf, which comprise the statement of financial position as at December 31, 2011, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements ‘Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as ‘management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibilty is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing, Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. ‘An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements, The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that ate appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well a evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion the financial statements give a truc and fair view of the financial position of Farice ehf. as at December 31, 2011, and of its financial performance and its cash flows for the year then ended in accordance ‘with International Financial Reporting Standards as adopted by the EU. Report on the Board of Directors report Pursuant to the legal requirement under Article 106, Paragraph 1, Item 5 of the Icelandic Financial Statement Act No. 3/2006, we confirm that, to the best of our knowledge, the report of the Board of Directors accompanying the financial statements includes the information required by the Financial Statement Act if not disclosed elsewhere in the Financial Statements, Reykjavik, April 27, 2012 Gomori Agnibortt pans 2Report by the Board of Directors and the CEO Patice ehf. is a transmission and data service provider. ‘The company operates two submarine cables between Iceland and Europe and connects Iceland to the world to with backhaul agreements to other networks in major connecting points in Europe. Operations in 2011 “According to the Statement of Income the operating revenue amounted to EUR 7,2 million and the EBITDA EUR 1,3 million. According to the Statement of Financial Position the company’s asset amounted to EUR 119,7 million and equity EUR 57,8 million, an equity ratio of 48%. ‘The Financial Statements are prepared in accordance with International Financial Reporting Standards. Applicable legal provisions do not permit payment of dividend and equity is used to cover the loss of EUR 8,5 million. Share capital Five sharcholders are in the company and the number has remained unchanged from end of last year. The largest shareholders in Farice ehf are the Icelandic State with 30%, Landsvitkjun (The National Power Company) with 29% and Arion Bank with 39%. ‘The Icelandic State controls 57% of the voting rights and appoints two board members. Landsviekjun controls 27% of the voting rights and appoints two board ‘members and Arion Bank controls 16% of the voting rights and appoints one board member. Share Capital is EUR 83,5 million. Corporate governance ‘The board is practicing good corporate governance based on provisions of law, the company’s Articles of Association and guidelines in KPMG's handbook on corporate governance. The purpose of these rules is to censure transparency and internal contzol and increase risk awareness. The board consists of five members and five alternative members and the board hires the CEO. Internal audit and control system are limited due to the fact that only four people work for the company. ‘Three independent members form the audit committee that follows in detail the closing of the Financial Statements. ‘The risk assessment mainly relates to an action plan if a disruption happens to the submarine cables. Going concern Recently the company signed a Public Service Agreement with the Icelandic State. ‘The purpose of the Agreement is to secure international connectivity to and from Iceland in public interest. The Agreement supports the sustainability and the continuing operations of the company. ‘The public telecommunication sector is a vital customer of the company. The existing agreements are due for renewal in last quarter of this year. ‘The company has high expectations to the growing data industry in Iceland and expects increased tevenue from that source. Due to all this the company expects more revenue in 2012 than in 2011.Statement of the Board of Directors and the CEO According to the Board of Directors’ best knowledge, the Financial Statements comply with International Financial Reporting Standards as adopted by the EU and give a true and fair view of the Company's assets and liabilities, financial position as at 31 December 2011, operating performance and the cash flow for the year ended 31 December 2011 as well as describing the principal risk and uncertainty factors faced by the company “The report of the Board of Directors provides a clear overview of the development and achievements in the company’s operations and its situation. ‘The Board of Directors and CEO of Farice ehf,, hereby confirm the Financial Statements of Farice ef, for the year 2011 with their signatures. Képavogur 27. Apeil 2012 Board of Directors KeALKQ Kael Alvarsson ny ty silfedcnd Raisbin Gunnarsson Vo [VS on ra / Pétur Richter Magnis Bjarnason. Chief Executive Officer Shraas ee y Chim ‘Omar BenediktssonStatement of comprehensive income Operating revenue Operating expenses Administrative expenses Depreciation Operating loss Financial income Financial expenses Net finance cost .. Total comprehensive loss The nots on pages 10-19 ae an ntl pr ofthese Sania satements Fase et Financial Statements as of 31 December, 2011 Notes 2011 7.192.011 (4.591.289) 4 (1.254.642) (7.805.900) (6.459.820) 5 31.764 5 (2.124.568) (2.092.804) (8.552.624) 2010 6.691.021 (4.449.182) (1.326.871) (7.729.509) (6.814.541) 4.884 (10.141.242) (10.136.358) (16.950.899) Amounts in euroStatement of financial position Assets Notes 31.12.2011 31.12.2010 Non-current assets Properties and equipments a 6 115.660.035 122.639.425 Prepaid expenses : —— 2.079.973 2.169.213 Prepaid lease 135,015, 179.991 117.875.0235, 124,988.629 Current assets Accounts receivable sn 561.888 106.797 Other receivables ss : 884.811 587.446 Bank deposits and cash ennsonnnnne oe 408.282 2.749.032 1.854.981 3.413.276 Total assets 119.730.004 128.401.905 The notes on pages 10-19 ae an intel pst of thee financial satrents Fasc eh Financ ttoments a of 3 December, 2011 6 Amountsin eoDecember 31, 2011 Equity and liabilities Equity Share capital Loss carry-forward Total Equity Non-current liabilities Non-current liabilities Current liabilities Current and due maturities Accounts payable Other liabilities. Total liabilities Total equity and liabilities The note on pages 10.19 ar an iter pat of these financial satements Paice eh Financial Statements a of 31 Decorber, 2011 Notes 31.12.2011 83.492513 (25.666.934) 57.825.579 7 40.169.672 1 20,282,766 1.060.262 391.725, 21.734.153 61,904.25 119,730,004 31.12.2010 75.492.513 (1.114.313) 38.378.200 3.681.062 3.526.820 1.240.377 1.575.446 36342.643 70,023.05 128.401.9058 Amonntsin etoStatement of Cash Flows 2011 ‘Cash flows from operating activities Loss for the period (8.552.624) Adjustments for: Depreciation nnn 7.805.900 Changes in current assets and liabilities (539.326) Net finance cost a 2.092.804 Net cash provided by operating activities before interest Tar Interest received non 31.764 Paid interest expenses and exchange rate differences (3.825.151) Net cash (to) operating activities (2.986.633) Investing activities Investment in fixed assets soe 575.271) (675271) Financing activities Paid in share capita... 8.000.000 Long term borrowings o Short-term borrowings 0 Short-term liabilities repaid. (655.822) Long-term liabilities repaid (6.221.056) T2312 Increase (decrease) in cash and cash equivalents (2.338.782) Effects of foreign exchange adjustments (1.968) Cash and cash equivalents at 1 January sesso : 2.749.032 Cash and cash equivalents at 31 December 408.282, Non-cash items Converted debt to share capital 0 Short term liabilities repaid 0 Investments in fixed assets —— (251.233) Unpaid investment 251.233, The notes on pags 10-19 at integral part of thee ancl statements Fie eh Financial Statements a of 31 December, 2011 8 2010 (16.950.899) 7.729.309 (299.427) 10.136.358 6s 4.884 (2.334.145) (713.720) (241.301 (241.301) 5.346.174 3.056.125 4.226.885 (6.174.300) 2.021.971) 2973 2.477.892 12.863, 258.277 2.749.032 58.369.340 (68.369.340) 0 0 Amount in euroStatement of changes in Equity Year ended 31 December 2010 Share Accumulated Equity holders Non-controlling Total capital deficit of the parent —_interest equity ‘company Balance at 1 January, 2010. : 30.886.405 (20.279.441) 10,606.964 1.170033 11.776.997 Total comprehensive loss. © (16.950.899) 16,950,899) 0 16.950.899) Write down of shares, 0279.41) 20.279.441 ° o ° Effect of merger. 1.170.033 0 1.170.033 (1.170.033) ° Issued A share capital, 11.000.000 11,000.00 1.000.000 Issued B share capital, — 52.715.515 52.715.515 5.715.516 Other changes in equity ° (163.413) 163.413) o (163.413) Balance at 31 December, 2010. 75492512 _(17.114313) 58378200 0 58378200 Year ended 31 December 2011 Balance at 1 January 2011. 75492513 (17.114.313) 58.378.200 0 58378.200 Total comprehensive loss. oO __ (8.552.624) (8.552.624) oO __(8552.624 Issued A share capital, 8.000.000 0 8.000.000 © 8.000.000 Balance at 31 December, 2011 83492513 (25.666.934) 57,825,579 oO __57.825.579 The mt pas 10-19 a a itp part ofthe esi ements Invern inci Sentemens 0 30 Speer 2011 ° AeonNotes to Financial Statements a 2. Reporting entity Fatice ch, formerly gnathalstagid Paice ch, i Himited company incorporated in Fecland The principal activites of the Company is to insure safe tlecommunications between Iceland and is neighbour counties “The Company isin majority ownership ofthe Ieelandic State Company has opesations in Iceland, Faroe Islands, Denmark and United Kingdom. ‘The income and expenses originate in Iceland ad neighbour counts. The subsidiary Farce hf. was merged into Farce eh as of 1 January 2010. Basis of preparation Statement of compliance “These financial statements have been prepared in accordance with International Financial Reporting Standaeds (IFRS) a8 adopted by the PU and addtional eelandicdislosurerequiemens according to lclandic laws ‘The accounting policies applied by dhe Company in these Financial statements are the same as those applied bythe Company in ie financial statements a8 at and forthe year ended 31 December 2010. Functional and presentation currency These financial statements are presented in euro, which ie the Company's functional currency. Use of estimates and judgements ‘The preparation of financial statements requires management 10 make judgements, estimates and assumptions that affect the application of accounting policis and he reported amounts of assets and lbilites, income and expense, tual result may lifer fom these estimates. [Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates ace revised and in any future pesiods affected, Jaformation about etic judgements in applying accounting polices that have the most significant effect on the amounts ccognisd in the Financial statements is included in the following noes: [Note 6 key assumptions regarding estimating the useful ives of property and equipment. [Note 6 key assumptions used in discounted cash flow projections as basis for impairment resting. [Note 9- key assumptions uted in evaluation of tx asses, In preparing these nancial statements, the significant judgements made by management in applying the Company's accounting polices and the key sources of estimation uncertainty were the same as those applied to the financial statements ts at and forthe year ended 31 December 2010, Significant accounting policies ‘The accounting policies set out below have been applied consstely to ll periods presented in these financial statements. Revenue recognition Revenue is measured at the fair value of the consideration received of rccvable and represents amounts receivable for sevice provided in the normal course of business, net of discounts, VAT and other sles related taxes. Inerest income is accrued on a time bass, by ference to the principal outstanding and at the effective interest rate applicable, which i the rte that exactly discounts estimated furure cash receipts through the expected life ofthe financial {asset to that asc’ net earring amount Ini Finucil Sateen a of 31 December, 2001 w Amount caoLeasing Leases ace clasified as finance leases whenever the terma ofthe lese transfer substantially all che ssks and rewards of ‘ownerthip tothe letee. All oer leases are clasified as operating leases. ‘Assets held under finance leases ae intally recognised at ante ofthe Company a their fir vale at the inception of the ‘ease or, iFlower, atthe pretent value ofthe minimum lease payments. The ceresponding liabity to the lessor is included in the balance sheet a «france ease obligation. ‘Lease payments are apportioned between fnance charge and reduction of the lease obligation so as to achieve a constant ‘ate of interest on the remaining balance of the Habily. Finance charges are charged directly to proftor loss, unless they are icetlyateibutabe to qualifying asset, in which case they ae capitalised in accordance with the Company's gener policy ‘on boerowing costs. Contingent rentals are recognised as expenses inthe periods in which they are incured, Foreign currencies “Transactions in currence other than euros are recorded at the rates of exchange prevling on the dates of the transactions. ‘At each balance sheet date, monetary assets and lbiies that are denominated in foreign curences are retreated at the ‘ates prevailing on the balance abeet date. Non-monetary items that are measured in terms of historical cost in a foreign ‘currency are not etransated, [Exchange differences are recognised in profit o lous in the period in which they tise. Borrowing costs ‘Bocrowing costs directly attibutable to the acquisition, contruction or production of qualifying asset, which are assets that ‘necessarily take a substantial period of time to get ready for thei intended use or sale, are added to the cost of those asset, ‘ntl such time as the asset ace substantially ready for their intended use or sae. ‘All other borrowing cots are recognised in profit o los in the period in which they are incurred, Finance income and finance costs ‘Finance income comprise interest income on fonds invested. Interest income is recognised as it acrues in profit or loss, sing the effective interest method. Finance cost comprise interest expense on borrowings. Borrowing cost that are not directly attibutable 10 the aquisition, construction or production of qualifying asset are recognized in profit or loss using the effective interest method. Foreign carency gains and losses are reproted on a net bait a either nance income or finance cost depending on whether foreign curency movements sre i net gun or net loss position. Tanation “The tax expense represent the sum ofthe tax currently payable and deferred tax “The income tax crrently payable is based on taxable profit for the yeat. Txable profit differs from net prof as reported in the income statement because it excludes items of income ot expense that are table or deductible in other periods and it further excludes items that are never taxable or deductible. The consolidated Hnbilty for current tx is calculated sing ta ‘ates that have been enacted or substantively enacted by the balance sheet date Deferred taxis the tax expected to be payable or ecoverble on differences between the carrying amount of assets and liailes in the fnancial statements and the corresponding tax bases used in the computation of taxable profit, and is ‘accounted for using the balance sheet Kabilty method. Deferred tax lisiities are generally reeognised for all wxable temporary differences and deferred tax astets are recognised to the extent tht itis probable that txable profits will be avaiable aginst which deductible temporary differcces can be utilised. Such assets and lbiites are not recognised if the tempory difference arses from goodwill or from the ial recognition (othec than in a business combination) of other assets and lbiites in a trnsaction that affects neither the tax profit nor the accounting profit. Defered tx axsets and Tiabiites are offset when they relate to income taxes levied by the same taxation authority and the Company's intends to ‘sete its curreat tax atts and liabliies on a net basis. nn nti Stat a of 3 December 2011 u Amountsin ex‘The caring amount of deferted tax assets is reviewed at ach balance sheet date and reduced to the extent that its no longer probable that sufficient axable profits will be avaable tallow allo part of the asset to be secovere Deferred tx is calculate atthe tax rates foreach county that are expected to apply in the period when the liability is seed ‘or the asset i eaized, Defeeed taxis charged or credited in the income statement, except when it relates to items charged ‘or rete dzectly to equity, in which ease the defeeed tax i alo dealt with inequity Property and equipment Property and equipment are secognised as an assct when iti probable that Furure economic benefits associated with the asset wil flow to the company and the cost of the asset can be measured in a rable manser. Poperty, plant and equipment tte stated at cost less accumolated depreciation and impairment loses. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised i accordance with che Company accounting policy. Depreciation is charged so as to write off the cost or valuation of assets, other than proper under construction, over their estimated usefillves, using the straight-line method. Assets eld under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the clevant lease. ‘The gain or loss arising on the disposal or retirement of aa item of propery, plant and equipment is determined a8 the difference beoween the sales proceeds and the earzying amount ofthe asst and is tecognised in profit or loss Impairment of tangible assets At each reporting date, the company reviews the caeying amounts ofits tangible asses to determine whether there i any indication that those assets have suffered an impaiement loss. IF any such indication exists, the recoverable amount of the asst is estimated in order to determine the extent of the impairment lss (iF any). Where i is not possible to estimate the recoverable amount of an individual asst, che Company estimates the ecoverable amount of the cash-generting unit © which dhe asser belongs. Recoverable amount isthe greater of net slling price and value in use. In assessing value in use, the estimated future cash flows ace discounted to thee present vale wsing a pre-tax discount eat that reflects current market assessments of the time value of money and the sks specifi to the asset. 1 the ecoverable amount of an ase is estimated to be less than its earning amount, the carrying amount ofthe aset is reduced tits recoverable amount. Impairment loses ae ecognised as an expense immediately \Where an impairment loss subsequently reverses, the carrying amount of the asset i increased tothe revised estimate ofits recoverable amount, but so thatthe increased caring amount does aot exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediatly, unless the relevant asset is caried ata revalued amount, in which case the eeveesal of the impatement loss ie teated a a revaluation increase. Financial assets Accounts receivable and other receivables ae valued at ominal value ess any impairment losses. Financial assets are assessed for indicators of impaicment at each balance sheet date: Financial assets ae imprired where there is objective evidence that, a8 a result of one or more events that occured after the initial recognition of the Financial asset the estimated future cashflows of the investment have beea impacted. ‘Cash and cash equivalents Cash and cash equivalents comprise cash balances and deposits with orginal maturities of three months oles. race eh Inter Fini Sermons af 1 December, 201 2 Amon in croShare capital (Ordinary shaces ate classified as equity. Incremental costs directly attributable to the issue of ordinary shaes are eecognised asa deduction from equity, net of any ax effect. reference shace capital is asifed as equity iti aon-redeemable, or redeemable only at dividends are discretionary. 1e Company's option, and any ‘otal share capital is ELUR 8.492.513 and is divided into A shares and B shares. Each share amounting to FUR 1. Five votes ace atached to each share of dass A and one vote to cach share of dass B. ‘Shares in class A do not acquire the sight to dividend payments until shares in clas B have been redeemed in fll. Shares in ‘lass B shall not be ented to the payment of dividend and can only be converted into shares in ther share classes by ‘resolution of shareholders’ meeting, Long-term liabilities Long-term liabilities are valued at amortized cost less payments made and the remaining aominal balance is adjusted by ‘exchange rate or index, i applicable. Interest expense is accrued on a periodical basis, based on the principal outstanding and at the interest rate applicable ‘Accounts payable and other liabilities, Accounts payable and other liabilities are valued at fir value Segment reporting and major customers, “The operations of arice are within single reportable segment whose opening results are regulalyseviewed by the entity's chief operating decision maker, Four customers account for 87,1% ofthe revenses [New standards and interpretations not adopted A number of new standards, amendments to standards and interpretations ace effective forthe annual periods bepining, afte 1 Jansary 2011, and have no been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements ofthe Company. Administrative expenses 201 2010 Administrative expenses. 77450 397.097 Reorganisation cost. 6r.122 621.706 Salases and slary-related expenses. 10070 308.068 1254682 1326871 Slate and salac-clated expenses paid by the Company are specified as follows a Saas, sn BTSs Penson fan. ne Sayeed apes Soot, mr. — Fr Ava umber of ostons 30 30 Saar nd ete epee to Bond of Dito nu) 886 Sala and etd expen to GudmndarGanarson, CEO, 368 naa Gudmundur Gunnarsson, CEO, left the Company in November 2011 and the tem 2011 nation benefits cecognised in fll in Face ht Tots Fiancee of 1 December, 2011 3 Aun incurFinancial income / (expenses) Interest expenses and borrowing cos. Partial forgiveness of debt. Indexation change Exchange eae differences Interest sate swaps. Property, and equipment Cont At January, 2010. Additions. At 31 December 200. Additions At 31 December 201. ‘Accumulated depreciation A January 12010, age forthe yea. At31 December2010, Charge forthe yeu Disposals [At 31 December 2011 Canying Amounts ‘Att January, 2000. At31 December 2010 At31 December 2011. Pop/ Bach /CS 17238118 241.301, aan 843.967 Ties 39901056 205.647 5195705, 1.282.722 0 GaTae5 13248059 12285713 T8958, upgrade 46878987 ° —aRraeF ° 37 aoa 10502067 2.699.870, “3.201.557 2699471 ° 15 901.008 36376920, 33677450, 30977979, The following useful lives are wsed in the calculation of deprecation, Point of Presence Backhal Cable stations. Wer section Common tems. Por). ‘Depreciation methods, useful lives and residual values ar reviewed at each reposting date Impairment of tangible assets: Canta Danice 90.850.561 (052957) 90.657.c08 ° ner to6i2112 3.650.48 14292560 3.650.448, 0 TADS 0.208.449, 7605045 7.754596 “The Danice and Farce investments were tested for impairment at yearend 2011 isa strong indication that an impaizment loss wil be recognised Face ene eye anc Seatments of 8 December, 201 2011 31764 376 (2.686925) 1.857.737 (1.461958) 166.558 ° EO) Comaon Items 4425.56 ° TE BS6 ura Taare 3978694 173942 F526 173.259 19.186 eo 447162 273.220 210 884 2.900.376) ° 428958) (6.088.056) 13.852), T1243, Toul 159393519 cen TABI BS 815.6 THs 29412929, 7.729507 36B2A6 7.908:900 19.186 ers 130.280.590, 22639425 115.660035 10 yeas to years 20 years 20 yeas 5-10 years The test was performed by the management and did not lead to an impairment loss, Nevertheless if furace operation will no bein line with budgets there|A minor decrease in budgeted revenues will change the assumptions to worse 30 the impairment test will provide an impairment loss ‘Sensitivity analysis within the impairment test give a strong indication that a permanent 5% decrease in EBITDA will sult y analy imp ve a strong Pe in EUR 43 milion impairment of assets. “The PSA contract recently made with the Iedlandic Telecommunication Fund on behalf of the Ieelandic State will have substantial effect om the income in the next § years. The contract will also diminish the uncerainity of fue revenues, ‘contact ae in note 13, Further discussion on the PS. Long term liabilities Nominal Year of forest rate mamurty—51122011__—31.12.2010 Secured bond issue, indered 550% 2084 SeBLI7Q0 — 34.461.026 Secured bank loans Baibor2i2% 2011-2019 15359918 20630.112 ‘Sceured bank loans Buribor +15% 2011 0 2413332 Secured bank loans Eudbort45% 2018 3056125 3.056.125, Finance lease labites Libort412% 2017-2018 4770317 4.405.438 Finance lease labilites. Tibor H412% 2017 9360983 857.559 Finance lease labiites Tibort412% 2017 rasan 1158574 Finance lease labiites. Tibort4:12% 2017 185934 168717 ABE OTS Curcent and duc maturity 20282766 33526820 ‘Long tern labiltis tora. Taras as Aggregated annual maturities area follows: s1a22011 2.2010 20 33526820, 2012 20.2826 812432 2013, 1.936365 857730 2a, 2.008.684 908.554 2015, 2.088.785, 956085, 2016. 2161778 ater 31.979.060 _30:149.302 aera TTS Guarantees on longterm labilies Guncantoe ‘Secured bond issu, indexed endear ‘Secured bank loans tem. 12126313 Teelandie State Secured bank loans B-term, 2.678029 Skips hf Secured bank loan. 585576 Account ecevable Secured bank loan. 3056125 Landing equipment Finance lease abil. 7.204675 Leased equipment waeae ‘The bank loans are also guaranteed with 1st anking securtc in the subscacables, landing stations and accounts receivables. “The Ieelndic State has a Ist ranking sccurites in the Danice eable system as collateral agains its guarantee of the secured bond, ‘Te terms of loan faites include various provisions that limits certain actions bythe company without prior consulting with the lender. In addition the loan fuilies include certain financial covenants Fae {ni Finn Senet f 31 Der, 201 5“The Company isin breach of some covenants in its long term loans. Covenant breaches are in loans forthe amount of EUR 18,3 milion at yearend, According © IAS1, when an entity breaches a provision of longterm loan aerangement on or before the end of the reporting period with the effect thatthe lability becomes payable om demand, it classifies the lability as current, even ifthe Tender Spree, afte the reporting period and before the authorisation of the financial statements for issue, not ro demand payment 8 comtequence ofthe breach Restructuring of long term liabilities and new equity. In December 2010 the company signed new term loan agreements with its lenders and finshed the financial restructuring The loans have a new maggin ranging fom LIBOR + 0 Tease lbiites have a margin of LIBOR+4,12% and maturity in 2017-2018. and matustes ranging from 2017 © 2019, The fiance ‘he terms of lon faites include various provisions that limits certain actions by the company without prior consulting, with the lender, In addition the loan faites include certain financial covenants In beginning, of September 2011 the Company received EUR 8 sllion in cash feom is sharcholdes as new equity. The funds were used to pay up EUR 6 million in long term loans and due interest. The remaining cash was to strengthen the Company's cash poston Deferred tax “There is no defered income tax liability credited i the balance shect due to taxation loss carry forward, even though income tax lability elated to some individual items ofthe balance sheet. ‘The Company wll not pay income tx in 2012 due to the loss i the year 2011 and tax loss carry-forward. A tax asset, in excess of tax labilies due to temporary differences, has not been recognised ia the financial statements because of “uncertainty of when the tx loss can be utilised against Furure profits “The income tax liability is attributable tothe following balance sheet items Properties and equipments. 2.494.295 Accounts receivable (3.185) ‘Deferred foreign exhange difference. 439.593) ‘Tax loss carey forward (9.726066) Decrease in vale of tax assets 7.684549 Defected income tx lability at 31 December. aces Atbalance sheet date dhe Company has unused tx losss avaiable for offset against future profits as follows Available nel dhe year 2014 120495, Available uns dhe year 201. 181.395 Available unl the year 2018 21321 Available wal the year 2019. 15112987 Available until the year 2020, 20129.565, Available uni the year 2021 10972668 Unused ta losses tal Sea Face eh Ini nan Sextet af 1 December, 201 610. Financial risk Categories of financial instruments Financial asset suagao1_ 31122010 Bank deposits and cash ogame 2.749.032 Loans and receivables 1.446.609 4.248 Financial tabiliies sagz0n1_ 31122010 Other Financial ibies at amovtised cost ‘1904425 70023704 Financial risk management objectives ‘The Company's management monitors and manages the financial isk relating to the operations of the Company, These iss include marker dak Gelding currency risk, interest rate rck and price ssh), cet risk and liquidity sk ‘he Company feels 10 minimise the eects of these risks for example by uring derivative financial instruments to hedge these risk ‘xponures The Company docs not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes Interest rate risk Inezest ext isk tthe sk that fir value 0 Future cash flows ofa financial instrument will uct because of changes i market interest ates. The Company has both fixed and floating rate interest bearing financial instruments Sensitivity analysis the sensitivity analysis below have been determined based on the exposure 10 interest rates atthe balance sheet date, The analysers prepared assuming, the amount outstanding a the balance sheet date was oustanding for the whole yea. The fhalysisatsumes that all variables other than basis point, aze held constant. The sensitivity analysis takes into account tox cffects A ponitve number below indicates an increase in profit and other equity. An decrease in basis points would have an ‘Opponite impact on income statement and equity Inthe analysis below the effects of 50 and 100 basis points increase on P/-and equity ae demonsteated siaz20t1 31122010, 50 bps 100 bps So.bps 100 bp Feeets on P/L and equity (20088) N07) (183.968) 367.938) Exposure to currency risk Foreign currency sk exporure does arse when there i 2 difference between asets and liabiles denominated in foreign cuereney. The majority of the Companys assets and liabilities are denominated in EUR and ISK, Foreign currency isk 31-12 2011 Assets Liabilities __Netexposure py tas (staat) us 138 185.932 (034794 cue 0 9360983 (936983) NOK ° ° ° ISK 18340 34811720 (4.795.380) BP. 4226 ° 4226 DKK. 7288 ° 7288 fern imal Semen 31 December 2011 ”Foreign cureney risk 31.12 2010 Assets Lisbilties __Net exposure py 0 1asss73 (1.158573) usb 106.644 168.717 (aor) cue ° 857559 (957559) NOK 101 ° 101 18k 352.448 34461.026 —(34.108578) opp. 74128 o 74128 DKK 6.266 ° 6.266 Sensitivity analysis “The table below shows what effects 5Y% and 10% stenghtening ofthe relevant foreign curency cate aginst the EUR would have on D/L and equity. The foreign currency assets and liabilies in the sensitivity analysis are mainly foreign cureney Ihorrssngs and foreign cuency bank balances. The analysis is prepared assuming the amount outstanding atthe balance sheet date was outstanding forthe whole eae The analysis assumes that all variables other than the relevant foreign curency fate, are eld constant. The sensitivity analysis docs take into account tx effets. A positive number below indicates an increas in profit and other equity. A decrease ofthe evan foreign currency rate agaist the EUR would have an opposite impact on P/L. and equity Effcets on P/- and equity sui22011 s1122010, 10% ED 10% py 63258) (106515) i838) (103676) usp 7392) (14.788) (2788) (5565) cH or79) (74.959) 38469) 76938) NOK ° ° 5 9 DKK 2018 5828 281 se Isk (1391735) @7AB47)—(LS3007) —.060:154) cB? 169 338 3325, 6650 Credit risk. Crit eisk refers tothe risk that a countespary wil default on its contractual obligations resulting in financial loss to the company. The Company monitors the credit ik developesent on a regular bass, Maximum credit risk Carrying amounts 312201 _ 31.12.2010 Accounts receivables 561.888 106.797 ‘Othe receivables ssaatt 557.445, Cash and cash equivalents 4082822749033, 188961 3813275 Liquidity risk management ‘On a regular basis the Company monitors the liquidity balance, development and the effects of market environment, The following tables detail the Company's eemaining contractual maturity’ for its financial ables and assets, ‘The tables have been denwn up based on the undiscounted cash flow of financial liabilities based on the easiest date on which the Company can be required 1 pa. Carrying Contract 0-2 1-2 Mowe than Liabilities 31.12.2011 amount cash flows ___ months 2yeane rade and other payables 00262 1.060262 1.060.262 ° Long-term loans c04s2438 117.0243: 9.297.358 98.473.633, G1SI27O0 118084582 10357.620 9.253329 RATS Assets 31.12.2011 Cash and cash equivalents 408.282 408282 408282 o ° Trade reecivables 561.888 561.888 561.888 ° Other receivables 884811 sti! 884811 o Tasso 1ase981 1854981 0 o Net balance 31.12 2011 (69.657.719) (116229601) (@502639) (9.253329) _(98473.635) Free {ei ian Seermens of 1 December, 201 18 Amen coo1" 12. 13. 14. Carrying Contractual on 1-2 Mote than ilies 31.12 2010 amount __eash lows __months years years ‘Trade and other payables 2e1s822 281582 2.815.822 o Long-term loans 67207882 120556825 10650060 98,551.75, TOORTON DESIG 1308 BR 98551475 ‘Assets 31.12 2010 Cash and cash equivalents 2749083 2749033 -2.749.033 ° ° ‘Trade ecsvables 106797 106.797 106.797 ° ° Other eecvables 557.445 557.445, o ° Bannzis SaisaTs SATS 0 0 "Net balance 31.12 2010 (6610429) (119959372 (1005267) (11355290) (9851.475) Related parties Sharchoers, members of the Board and key management personnel are defined as elated partis. No elated partis purchased service from the Company in 2011. In 2010'The Iceland State, Landsvickiun and Aon Bank hf converted their ‘Short-term loans into equity. Faice did not buy any goods or service from related partes in 2011 o¢ 2010, Capital management ‘The Boant’s policy sto maintain a strong capital bate to sustain future developments ofthe business. The Company's Board of Ditectos sccks to maintain a balance between the higher reruns chat might be possible with higher levels of borrowings and the advantages and security afforded by a sound eapital position. The equity ratio was 448.3% at yearend 2011 (2010: 455%) “There were no change inthe Company's approach to capital management during the year and the Company is not obliged to comply with extemal rules on minimom equity other than thoxe elated 10 covenants ints loan agreements ‘Subsequent events Public Service Contract In April 2012 ‘The Company and The Telecommunications Fund entered into a Pubic Service Contract concering clectronie communication connectivity between Iceland and Europe. ‘The purpose of the contract is that the parties acknowledge that submarine electronic communications cables, providing international connectivity to the territory of Iecland are to be essential infeastucture. The partis furhermoce acknowledge that Farice is the only undertaking in possesions of submarine cables connecting ledand to other parts of Europe “The Telecommunications Fund undertakes to compensate Farce for discharging the public service in as much as even is not sufficient to cover the cost of providing the public sevice taking into account a reasonable ate of return, According to Farce’s busines plan the operation of Farice wil be sustainable ia the aca future, when income from services other than the public service increases. However there may be a period, before a significant increas in revenve from non public services occur, where revenue i aot sufficient to cover the cost of operating the public service Approval of Financial Statements ‘The Financial Statements were approved by the Board of Director and authorised for issue on 27 April, 2012. {nim ancl Sates 31 Decemes 2091 19 Amant in ero