Bogotá en el contexto de la región central

In this section, we capitalize references to Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS.

Overview

We are one of the leading fixed line telecommunications service providers and the third largest voice fixed line telecommunications service provider in Hungary and the incumbent provider of fixed line telecommunications services in our 14 historical concession areas, where we have a dominant market share of the traditional fixed line market. With the acquisition of Fibernet, the fourth largest cable network operator in Hungary, in March 2011, we entered into the Hungarian cable market, where we provide services to residential customers outside our historical concession areas.

We also use our network capacity to transport voice, data and internet traffic for other telecommunications service providers and internet service providers on a wholesale basis.

Our historical fixed line concession areas are geographically clustered and cover an estimated 2.0 million people, representing approximately 21% of Hungary’s population. Our extensive fiber optic backbone network (comprising approximately 9,000 kilometers in Hungary) provides us with nationwide reach. It allows corporate and wholesale customers, in particular, to be connected directly to our network to access voice, data and internet services.

We have strengthened our competitive position with FTTx and VDSL network rollouts starting at the end of 2011. We currently cover approximately 211,000 homes with these new technologies. This enables us to serve our subscribers with broadband internet speeds of up to 150 Mb/s, and a state of the art IPTV service. In addition, our Cable network upgrade by docsis 3.0 technology (the third generation of data over cable service interface specification) enables us to serve our subsribers with an internet speed up to 120 Mb/s. We currently cover approximately 180,000 homes with this technology.

We operate in the following five market segments in our business:

(a) Residential Voice. We provide a full range of basic and value added voice related services to our residential and small office / home office customers both inside and outside our historical concession areas.

(b) Residential Internet & TV. We provide xDSL and FTTx broadband internet services to our residential customers both in and outside our historical concession areas. We also provide IPTV (TV delivered over xDSL/FTTx broadband connections) services to our residential customers in our historical concession areas. With the latest network development upgrade to VDSL and FTTx, we are able to cope with internet speeds of the modern cable networks. (c) Cable. We provide cable television, broadband and voice services to our residential cable customers. We offer various analogue and digital TV basic and premium packages as well as multiple internet and voice packages and options. The speed of our cable broadband internet ranges now from 10Mb/s-120Mb/s as we have done a number of network upgrades over the recent years.

(d) Corporate. We provide fixed line voice, data, internet and a range of complex ICT services to our corporate (comprised of SME and larger corporations), government and other institutional customers nationwide.

(e) Wholesale. We provide voice, data and network capacity services on a wholesale basis to a number of other telecommunications and internet service providers within Hungary.

Recent Developments

European Union Legal Remedy

In January 2013 Invitel filed self-revisions to the crisis tax and telecoms tax with the Hungarian Tax Authorities. Citing the European Commission’s reasoning that the taxes are incompatible with EU law, Invitel declared a zero tax liability for the taxes paid to date. The Hungarian Tax authority rejected the self-revisions submitted by Invitel, against which Invitel has appealed. In accordance with Hungarian tax procedures, Invitel continues to pay its taxes as they fall due, but has lodged disputes on a post-facto basis where it believes the taxes contravene EU law.

Invitel turned to the regular system of courts requesting a judicial review of the second instance decision of the Hungarian Tax Authority. As the subject matter at hand is conflict with EU law, Invitel requested a referral to the European Court of Justice. The Court denied referral to the European Court of Justice and dismissed Invitel’s petition.

Invitel may turn to the Kúria (Supreme Court) for an extraordinary judicial review within 60 days from the date of the receipt of the written decision.

2013 Restructuring

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

Under the terms of the Restructuring, EUR 155.0 million of the 2009 Notes were exchanged into new notes (the “2013 Notes”). The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from June 15, 2013 and paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. The 2013 Notes have a maturity date of June 15, 2018.

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

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

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

The Restructuring was implemented via a UK scheme of arrangement (which requires a favorable vote of 75% in principal amount and a majority in number of those voting).

After completion of the Restructuring, Mid Europa has the rights to appoint the majority of the Board of Directors of the Company. The noteholders (in their capacity as shareholders) are also able to appoint directors to the Board (“Noteholder Directors”), whose approval will be required in relation to certain strategic matters. As of December 31, 2013 and 2014 the Group is controlled by Mid Europa.

Dataneum Acquisition

On August 28, 2014 Invitel acquired 100% of the share capital of Dataneum. Dataneum provides, primarily to Invitel, data center infrastructure services at its main data center in Budapest, under a 10 year asset rental and services contract signed in 2009. Before the acquisition in August, from March 2014, Invitel took over the operation of the infrastructure (i.e. power, cooling, and backup assets) at the data center. The Tier 3 equivalent data center, which has nearly 1,200 m2 of built-out data center space as well as additional expansion capacity, was built out in 2009 to Invitel’s specification. With the acquisition, Invitel will save EUR 1 million annually in rental and service fees. The EUR 5.5 million purchase price has been funded from existing cash balances.

Competitive Strengths

We are one of the largest national alternative fixed line telecommunications service providers in Hungary.

We are one of the largest alternative fixed line operators in Hungary. We believe that we are well positioned to grow our market share outside our historical concession areas in our Corporate market segment through our owned backbone network, our experienced sales force and our comprehensive portfolio of services. Our backbone fiber optic network provides us with nationwide coverage, allowing us to directly connect to a high proportion of our Corporate customers.

Diversified revenues and earnings base across four segments.

We have a diversified revenue and earnings base across four segments. For the year ended December 31, 2014, the Residential Voice, Residential Internet & TV, Corporate, Wholesale and Cable segments each account for 17%, 21%, 37% , 13% and 12% of revenues and 20%, 20%, 36%, 13% and 11% of segment gross margin, respectively. We therefore are not overly dependent upon any one segment, and over time, in line with our strategy, the contribution from the traditional voice business segment has declined, and, we expect, will continue to decline in importance and it has been replaced by high quality data business.

We have an extensive, modern and high quality domestic network infrastructure in Hungary.

Our backbone network has nationwide reach, provides a high quality of service and does not require major capital investments. The national backbone network comprises over 9,000 kilometers of fiber connecting our historical concession areas and all of Hungary’s urban centers. As the incumbent operator in our historical concession areas, we benefit from an extensive access network in terms of both capacity and reach. We are continuously developing our network in the historical concession area to increase volume of occupied homes passed reached through the FTTx technology. As of December 31, 2014 we had approximately 843,000 occupied homes passed in our historical concession areas out of which 207,000 are reached through FTTx technology.

We are able to provide IPTV on around 70% of our lines and we have a DVB-T TV offering for the rest of our network in cooperation with Antenna Hungária. Outside our historical concession areas, our network allows us to connect our Corporate customers to our backbone by using our own metropolitan fiber, point-to-point or point-to-multipoint microwave, unbundled local loops or leased circuits. Since the Fibernet acquisition in 2011 we provide cable TV, broadband and voice services principally to residential cable customers outside our historical concession areas. We provide analogue and digital TV packages and offer the option for various premium channels. The broadband internet packages range from 10Mbs to 120 Mbs options. We are developing our network to increase volume of occupied homes passed reached through docsis 3.0 technology in our Cable segment. As of December 31, we had approximately 293,000 occupied homes passed out of which 202,000 are reached through docsis 3.0 technology.

We have a substantial existing customer base, much of which is served by our infrastructure. As of December 31, 2014, we had 263,000 Residential voice customers in our historical voice concession areas being served by our access network.

In addition, we had 43,000 active Residential customers outside our historical concession areas being served by Magyar Telekom’s (the main incumbent operator) infrastructure. We have an additional 93,000 Residential customers being served by our own cable access network.

Furthermore, we have approximately 15,000 Corporate customers, the majority of whom are connected to our national backbone network or our historical concession access network. This substantial customer base presents an opportunity for cross-selling additional products and services. We have comprehensive and well established national distribution channels and a strong national brand.

We have a well-established and comprehensive set of effective distribution channels both inside and outside of our historical concession areas which enable us to optimize our customer acquisition costs and to respond quickly to changing market conditions. To market to Residential customers, we have our own shops in our historical concession areas, and we also have our own in-house telesales team. In addition, we use independent third party direct sales agents, telesales channels and retail outlet partners. Corporate customers are addressed by our own national direct sales organization and telesales team.

We have worked to continuously improve the national brand recognition of Invitel. As a result of these efforts, together with selective marketing communications activity, we now enjoy strong nationwide brand awareness.

We have strong management and benefit from the added expertise of our majority shareholder. We benefit from a strong and experienced executive management team. Our executive management team has substantial international fixed line telecommunications and cable services experience and a proven track record of cost control and achieving operational efficiency. In addition, the executive management team has extensive experience in both the Corporate and Residential segments.

Further, Mid Europa, the majority shareholder, has extensive experience as an investor in the telecommunications services industry and in infrastructure companies in Central and Eastern Europe. Our Strategy

The following represent strategies which the Group believes will allow it to consolidate and in some instances grow its business. These may change depending on the markets in which the Group operates external economic factors and the decisions of the Group’s management, who may choose to focus on an alternative business plan which entails different strategies. .

Manage the decline in revenue and cash flow in the Group’s historical concession areas.

The Group is stabilizing its voice revenue and cash flow derived from the provision of voice services within its historical concession areas with the ongoing introduction of targeted, innovative and flexible offerings and by maintaining the quality of its customer service. In addition, the Group has been focusing on developing effective strategies to retain customers and defend against churn in its historical concession areas resulting from competition from cable operators.

Stabilize revenue from traditional copper ADSL Internet services, utilize growth potential in modern VDSL and FTTx Internet services and increase revenue via our TV services and bundled offerings.

The Group believes that there is still a moderate growth potential of internet services in Hungary as personal computer and internet penetration levels in Hungary catch up with Western European levels. Broadband internet usage has still grown in Hungary with 3% penetration increase in the last year to 59% as of December 2014. In comparison, the broadband internet penetration in Western European countries was estimated at approximately 76% of households as of December 2014. The Group intends to continue to capitalize on this trend of increasing broadband usage by growing its xDSL/FTTx customer base both inside and xDSL outside its historical concession areas. The growth in the Group’s xDSL/FTTx customer base is a key business priority as it believes it will increase line retention and stimulate fixed voice line revenue. In addition, the Group has been focusing on its TV products, where it still sees a slight increase in pay TV market penetration and opportunity to gain market share as the Group is a relatively new player in its concession areas for these products. The Group also believes that offering bundled services (multi product bundle offerings with voice, broadband and TV services) is essential to stay competitive.

Stabilize revenue from analogue cable television and utilize growth potential for digital television, cable broadband and voice services.

The Group’s strategy in its cable business is to stabilize revenue from existing analogue television customers, by focusing on retention, while at the same time generating more revenue from digital television services as well as incremental internet and voice services from up and cross sell to existing customers as well as attracting brand new customers.

Expanding our Corporate segment revenue and market share nationwide through becoming a key ICT service provider.

We will continue to focus on expanding our services provided to our Corporate customer base, growing our share of the national corporate market while becoming a major integrated ICT service provider. We primarily focus on providing high quality integrated ICT services to Corporate customers, as we believe ICT is the main key factor of growth in our Corporate segment. In addition, we intend to capitalize on our extensive national backbone network, which means that in many cases business customers can be connected directly to our network, resulting in higher margins and more competitive pricing through lower access costs. Corporate customers can be connected directly to our backbone network mainly through the use of metropolitan fiber, line-of-site microwave, leased circuits or local loop unbundling. Lower value/volume business customers outside our historical concession areas are served through indirect methods such as CPS voice, and by buying DSL wholesale capacity from the incumbent to offer IP based solutions.

Continuing to leverage our modern national backbone network and our market reputation to grow our revenue in the Wholesale data market.

We will continue to leverage our backbone network in Hungary, and our ability to easily add further capacity where required to sell infrastructure and capacity services to other service providers, including principally mobile operators and cable operators. We believe that the continuing growth in the fixed and mobile broadband markets will result in continued growth in the wholesale capacity market in the foreseeable future. We have developed a strong reputation for the quality of our service, our partnership oriented approach and our speed of execution in the Wholesale segment.

Our Business

In our business, we operate in five market segments: Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale. We are continually seeking to develop and improve our overall service through improving the quality of our customer care and developing new service packages and offerings.

Residential Voice

We offer our Residential Voice customers a full range of basic and value-added voice services, both inside and outside our historical concession areas. Our basic services in our historical concession areas include access to analog and VoIP lines for local, long distance, fixed to mobile and international calling, a full set of operator services, directory services and public telephones. Our value-added services include voicemail, a variety of special calling features such as call waiting, call forwarding and caller ID. Our services include a variety of bundled voice, internet and IPTV packages.

Outside our historical concession areas, we provide a full range of basic and value added voice services to Residential Voice customers. We have been offering CPS based voice services since early 2002, after Hungary’s telecommunications market was liberalized. We also have some CS customers, mainly as a result of the Tele2 Hungary acquisition, but have focused primarily on CPS outside our historical concession areas. These services enable customers who have fixed line voice access provided by other operators (primarily Magyar Telekom) to use our voice services. CPS and CS packages include call charges only, since the monthly access fees are paid to the incumbent provider. The acquisition of Tele2 Hungary in 2007 has added significantly to our Residential Voice customer base outside our historical concession areas. However in the last 2-3 year due to the market transaction from copper voice-only to triple play customers, and the entrance and capabilities of the cable operators with incremental voice over cable services in attractive triple play packages the CS and CPS market has been shrinking. Invitel has changed focused from voice-only services to xDSL services outside of the historical concession areas.

Residential Internet & TV

We generate Residential Internet & TV revenue inside our historical concession areas by