HZ PUTNICKI PRIJEVOZ d.o.o., Zagreb Strojarska cesta 11 Annual financial statements and the Independent Auditor's Report for the year 2018 Page Responsibility for the annual financial statements 1 Independent Auditor's Report 2-8 Statement of comprehensive income 9 Statement of financial position / Balance sheet 10 Statement of cash flows 11 Statement of changes in equity 12 Notes to the annual financial statements 13- 54 RESPONSIBILITY FOR THE ANNUAL FINANCIAL STATEMENTS The Management Board of the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb, Strojarska cesta 11, (hereinafter: "the Company") is responsible for ensuring that the annual financial statements for the year 2018 are prepared in accordance with the Accounting Act (Official Gazette No 78/15, 134/15, 120/16 and 116/18) and International Financial Reporting Standards as adopted by the European union to give a true and fair view of the financial position, the results of operations, the cash flows and the changes in equity of the Company for that period. After making enquiries, the Board has a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Management Board has adopted the going concern basis in preparing the financial statements of the Company. In preparing the annual financial statements, the Management Board is responsible for: * suitable accounting policies are selected and then applied consistently in accordance with applicable financial reporting standards * judgments and estimates are reasonable and prudent; * the financial statements are prepared on the going concern basis unless such assumption is not appropriate. The Management Board is responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position, the results of operations of the Company, cash flows and changes in equity and their compliance with the Accounting Act (Official Gazette No 78/15, 134/15, 120/16 and 116/18) and the International Financial Reporting Standards as adopted by the European union. The Management board is also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Signed on behalf of the Management Board: 2eljko Uki6, MIaden Lugaric, Damir Rub6ii, President of the Member of the Member of the Management Board Management Board Management Board HZ PUTNICKI PRIJEVOZ d.o.o. Strojarska cesta 11 10 000 Zagreb The Republic of Croatia Zagreb, 31 May 2019 DIT MOORE STEPHENS LTDITi Audc doo za revizijske us uge Radnlika -esta 54 10000 Zagreb HRVATSKA Tel '385 (0) 1 3667 994 Fax +385 (0) 1 3667 997 E-rnad audit-revizija@audit hr INDEPENDENT AUDITOR'S REPORT To the Owner of the company HZ PUTNICKI PRIJEVOZ d.o.o., Zagreb Report on the Audit of the Annual Financial Statements Qualified opinion We have audited the annual financial statements of the company H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb, Strojarska cesta 11, (the "Company") for the year ended 31 December 2018, which comprise the Statement of financial position (Balance Sheet) as at 31 December 2018, Statement comprehensive income, Statement of cash flows and Statement of changes in equity for the year then ended, and accompanying notes to the annual financial statements, including a summary of significant accounting policies and other explanations. In our opinion, except for the possible effects of the matter described in the Basis for Qualified opinion, the accompanying annual financial statements, give a true and fair view of the financial position of the Company as at 31 December 2018, and of its financial performance and its cash flows of the Company for the year then ended in accordance with the Accounting Act and the International Financial Reporting Standards ("IFRS") as adopted by the European Commission and published in the Official Journal of the European Union. Basis for Qualified opinion li/ In the statement of financial position (Balance sheet) as at 31 December 2018, the Company stated total value of the real estate in the amount of HRK 63,669 thousand within position buildings in the amount of HRK 28,599 thousand, and within position of investment property in the amount of HRK 35,070 thousand for which ownership is not regulated by registration in the land registers. Furthermore, the value of the land that is an integral part of these real estates is not stated in the business books. Given that the settling of property rights is ongoing, we are unable to determine the effects of any corrections, if any, to the Company's annual financial statements for the year 2018. We conducted our audit in accordance with Accounting Act, Auditing Act and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the annual financial statements section of our Independent Auditor's report. We are independent of the Company in accordance with the Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. 2 MOORE STEPHENS Other matters The Company will prepare consolidated annual financial statements for the year ended 31 December 2018. and for a better understanding of the Company's operations as a whole, users should read the consolidated annual financial statements of the Company in connection with these annual financial statements. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the annual financial statements of the current period and include identified most significant risks of material misstatement due to error or fraud with the highest impact on our audit strategy, on our resources available and the time spent by the engaged audit team. These matters were addressed in the context of our audit of the annual financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined that the issues below are the key audit issues to be reported in our Independent Auditor's Report. Related party transactions ____ Description How we have audited Key audit matters See Accounting Policies, Note 2.25. Key Our audit procedures included, among accounting estimates and judgments and others: note 39. Related Party Transactions in * understanding and documenting the Annual Financial Statements. process of identifying related party transactions and evaluating the design In Statement of Financial Position / Balance of controls related to the fraud risk Sheet at 31 December 2018 receivables identified from related companies are stated in amount * we have verified that transactions have of HRK 10,062 thousand while liabilities to been approved in accordance with related companies are stated in the amount internal procedures including the of HRK 68,615 thousand. These receivables involvement of key personnel at the and liabilities are not fully reconciliated with appropriate level the amounts recorded in financial statements * we have analyzed the supporting of these related companies. documentation to make sure that the We considered the related party transactions transactions were at arm's length and to be significant to the audit as the risk is that their business rationale these transactions are not conducted at * we have evaluated that the transactions arm's length, and/or the accounting (rights and obligations) are recorded in treatment of the rights and obligations of accordance with the terms of the these transactions are not correct, it could contract influence the results of the Company. * we have confirmed all receivables and .liabilities from related companies Furthermore, for financial reporting l f purposes, IAS 24 Related party disclosure, we have identified the differences rp between related parties and what they requires complete and appropniate reaet disclosure of the transactions with related relate to * verification of required disclosures in parties. accordance with IAS 24 (see Note 39) By our audit procedures, we have been assured that related party transactions in material assets are recorded and disclosed in accordance with International Financial Reporting Standards. 3 MOORE STEPHENS Valuation of Property, plant and Equipment and Investment property Description How we have audited Key audit matters See Note 2.10 Property, plant and Our audit procedures included, among equipment, 211. Investment property, 2.12. others: Impairment of non-financial assets, 2.25 * assessing the compliance of property, Key accounting estimates and judgements, plant and equipment and investment note 9. Depreciation, note 16 Property, plant property recognition policies with and equipment and note 17. Investment relevant financial reporting standards; property. * analysis of the Management Board and the Supervisory Board meetings Property, plant and equipment at 31 t ' minutes regarding information to the December 2018 amounts to HRK 1,785,037 m e a . investment plans and investment project thousand, while property investments amounts to HRK 35,070 thousand, decisions * test of controls and test of details for the representing 89.82% of total assets in the - purchase of the Property, plant and Company's Statement of financial position / Balance sheet. Impairment requires equipment in 2018 according to the Management to make significant judgments selected sample relating to the estimated level of income, the * we have evaluated the estimated useful operating costs and the applicable discount life of the assets used by the Company when calculating the depreciation as rates. well as the beginning of the depreciation Given the material significance of this assets, calculation for activated assets and the its role as a key material resource in the cessation of for the assets non in use. Company's operations and the complexity of * based on the sample, we tested accounting treatment (procurement, disposal of long-term tangible and measurement, depreciation calculation, cost intangible assets capitalization, impairment, etc.), this issue is * a review of the recoverable value of a of particular significance for our audit. railway vehicle owned by the Company (amount of planned free cash flow, selected period of planned free cash flow, end of depreciation period, selected WACC) * evaluation of the impairment indicators analysis with the requirements of lAS 36 * interview with the responsible experts in charge of asset management * it was established that the registration of property ownership rights is not fully resolved. The settling of property rights is ongoing. Other than the above mentioned, we have verified by our audit procedures that property, plant, equipment and property investment in material assets are recorded and disclosed in accordance with International Financial Reporting Standards. 4 MOORE STEPHENS Litigations and potential liabilities Description How we revised Key audit Matters See Accounting Policies, note 2 20 Provisions, note 2.25. Key accounting Our audit procedures included, among estimates and judgements and notes 12. and others: 29. Provisions in annual financial statements, compliance assessment of the litigations The Company has stated the provisions for provision recognition policy with the with contingent liabilities due to court cases in the relevant financial reporting which the Company is a defendant as at 31 standards; December 2018 in the amount of HRK * review of the purpose and nature of the 68,861 thousand (31 December 2017 in the material provisions amount of HRK 65,640 thousand). * analysis of the attorney's response to our written inquiries and other Due to its specific activity, the Company is supporting documentation prepared by exposed to a significant number of long- the Company standing court disputes that require complex * review of the previously recorded assessments with a high level of judgment provision amounts to estimate the and uncertainty, which can lead to significant accuracy of previous judgments and misstatement of the provisions cost. estimates The outcome of the court proceedings is * review of the required disclosures outside the control of the Company, and related to the provisions in the financial accordingly the Management Board makes statements to determine whether they estimates on the outcome of court disputes are accurate and complete. based on opinions of the internal legal service and external attorneys representing By our audit procedures, we have been the Company. assured that provisions for initiated court Gnhdisputes in materially significant aspects Given the significance of the amount and be eoddaddslsdi complexity of the outcome assessment have accordance with International Financial process, the issue of court disputes and potential liabilities was of particular Reporting Standards. s g ificance for our audit. Other Matters The Company's annual financial statements for the year ended 31 December 2017 were audited by the auditing company BDO Croatia d.o.o., Zagreb, which, in its Independent Auditor's Report dated1l June 2018, issued a qualified opinion on these annual financial statements related to potential the effects of the property ownership regulation and the adequacy of the provisions for the initiated court disputes. Other information in the Annual Report The Management Board is responsible for other information. Other information includes the information included in the Annual Report but does not include the annual financial statements and our Independent Auditor's Report on these statements. Our opinion on the annual financial statements does not include other information, except to the extent explicitly stated in the part of our Independent Auditor's Report, entitled Report on Other Legal Requirements, and we do not express any kind of conclusion with assurance on them. 5 MOORE STEPHENS Related to our audit of the annual financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the annual financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated as well whether the non-financial information required by the provisions of by paragraph 1 or paragraph 2 of Article 21a of the Accounting Ac are presented in the separate non-financial report t. If, based on the work we have done, we conclude that there is a significant misstatement of these other information, we are required to report this fact. In that context, except as set forth in the Basis for Qualified opinion and Other matters, we do not have anything to report. Responsibilities of the Management Board and those who are responsible for managing the annual financial statements The Management Board of the Company is responsible for the preparation of annual financial statements that provide true and fair view in accordance with the IFRSs as adopted by the European Commission and published in the Official Journal of the European Union, and for for such internal controls as the Management Board determines are necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error. In preparing the annual financial statements, the Management Board of the Company is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management Board either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. Auditor's Responsibilities for Audit of Annual Financial Statements Our objectives are to obtain reasonable assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an Independent Auditor's Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual financial statements. As an integral part of the audit in accordance with IAS, we create professional judgments and maintain professional skepticism during the audit. We also: * identify and assess the risks of material misstatement of the annual financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. 6 MOORE STEPHENS 1LTDEIT * evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management Board of the Company. * conclude on the appropriateness of the Management's Board of the Company use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. * if we conclude that a material uncertainty exists, we are required to draw attention in our Independent Auditor's report to the related disclosures in the annual financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our Independent Auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. * evaluate the overall presentation, structure and content of the annual financial statements, including the disclosures, and whether the annual financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with the governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on other legal requirements Report based on the requirements of Regulation (EU) No. 537/2014 1. On 26 September 2018, the General Assembly of the Company appointed us to carry out an audit of the annual financial statements for the year 2018. 2. As at the date of this report, we have been continuously engaged in carrying out the Company's statutory audits, from the audit of the Company's annual financial statements for the year 2018, which is a total of 1 year. 3. In addition to the matters we have included in our Independent Auditor's Report as Key Audit Matters within the subsection Report on the audit of annual financial statements, we have nothing to report in relation to point (c) of Article 10 of Regulation (EU) No. 537/2014. 4. By our statutory audit of the Company's annual financial statements for the year 2018, we are able to detect irregularities, including fraud in accordance with Section 225 Responding to Non-Compliance with Laws and Regulations of the IESBA Code, which requires us, in carrying out our audit engagement, to establish whether the Company complied with laws and regulations that are generally recognized to have a direct impact on the determination of significant amounts and their disclosures in annual financial statements, as well as other laws and regulations that do not have a direct effect on the determination of significant amounts and their disclosures in annual financial statements, but compliance with which may to be the key to the operational aspects of the Company's business, its ability to continue to operate as a going concern or to avoid significant penalties. 7 MOORE STEPHENS LJ DIT Unless we encounter, or find out about, non-compliance with any of the aforementioned laws or regulations that are apparently insignificant, according to our judgment of its content and its influence, financially or otherwise, for the Company, its shareholders and the wider public, we are obliged to inform the Company thereof and request to investigate this case and take appropriate measures to resolve the irregularity and to prevent the reappearance of these irregularities in the future. If the Company on the date of Statement of financial position, does not correct irregularities based on which incorrect disclosures in the audited annual financial statements arise that are cumulatively equal to or greater than the amount of materiality to the annual financial statements as a whole, we are required to modify our opinion in the Independent auditor's report. In the audit of the Company's annual financial statements for the year 2018, we determined the materiality for financial statements as a whole in the amount of HRK 12,760,000, representing approximately 1.5% of operating revenues, because these revenues represent a stable business indicator including key revenues from the activities the Company is engaged in, namely revenue from passenger transportation and income from state aid to encourage passenger transport. 5, Our audit opinion is consistent with the additional audit report prepared for the Company's Audit Committee in accordance with provisions of the Article 11 of Regulation (EU) No. 537/2014. 6. We have not provided to the Company prohibited non-audit services during the period between the initial date of the Company's audited annual financial statements for the year 2018 and the date of this report. In addition, we have not provided services for the design and implementation of internal control procedures or risk management related to the preparation and / or control of financial information or the design and implementation of technological systems for financial information in the preceding year. Therefore, we have remained independent of the Company in the performance of the audit. Report based on the requirements of the Accounting Act 1. In our opinion, based on the work that we performed during the audit, the information in the Company's Management Report for the year 2018 are in accordance with the accompanying annual financial statements of the Company for the year 2018. 2. In our opinion, based on the work that we performed during the audit, the Company's Management Report for the year 2018 is prepared in accordance with the Accounting act. 3. Based on the knowledge and understanding of the Company and its environment obtained while performing the audit, we have not found that there are material misstatements in the Company's Management Report for the year 2018. In Zagreb, 31 May 2019 AUDIT d.o.o. Radni6ka cesta 54 10000 Zagreb Darko Karic, director, certified auditor 8 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2018 POSITION Notes 2018 2017 HRK '000 HRK 000 Sales revenue 3 273.424 271 343 Other income 4 577.299 554 184 Operating revenue 850.723 825.527 Changes in the value of work in progress (44) (20) and finished goods Costs of raw materials 5 (107.020) (104.130) Cost of goods sold 6 (16,390) (10.442) Other operating expenses 7 (226.968) (236.285) Personnel expenses 8 (251 190) (255.233) Depreciation and amortization 9 (135.122) (135.252) Other expenses 10 (63.370) (62.906) Value adjustment 11 (20.259) (1.186) Provisions 12 (22.412) (6.253) Operating expenses (842.775) (811.707) Finance income 9.466 12.157 Finance costs (14.605) (25.719) Net finance costs 13 (5.139) (13.562) TOTAL REVENUE 860.189 837.684 TOTAL EXPENSES (857.380) (837.426) PROFIT BEFORE TAX 2.809 258 Income tax 14 0 PROFIT FOR THE YEAR 2.809 258 Other comprehensive income 0 0 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 2.809 258 The accompanying notes form an integral part of these annual financial statements. 9 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB STATEMENT OF FINANCIAL POSITION As at 31 December 2018 POSITION Notes 31 122018. 31 122017 HRK '000 HRK '000 ASSETS Intangible assets 15 13.006 3.834 Property, plant and equipment 16 1.785.037 1.814.474 Investment property 17 35.070 36.981 Investments in related parties 18 31.936 31.936 Financial assets 19 27.962 27.299 TOTAL NON-CURRENT ASSETS 1.893.011 1.914.524 Inventories 20 15.116 28.217 Receivables from related parties 39 1.207 1.244 Trade receivables 22 16.820 18.291 Receivables from employees 23 5.489 5.492 Receivables from state and other institutions 24 9.714 10.258 Other receivables 25 1.253 1.341 Financial assets 30 12 Cash and cash equivalents 26 80.217 75.656 Prepayments and accrued income 27 3.534 3.534 TOTAL CURRENT ASSETS 133.380 144.045 TOTAL ASSETS 2.026.391 2.058.569 OFF-BALANCE SHEET RECORDS 38 2.112.066 2.486.401 CAPITAL I RESERVES Share (subscribed) capital 872.368 872.368 Accumulated loss (101.567) (101 826) Profit for the year 2.809 258 TOTAL CAPITAL AND RESERVES 28 773.610 770.801 Provisions 29 90.323 82.808 Long-term liabilities 30 425.913 388.817 Liabilities to related parties 39 22.987 22 878 Liabilities for loans, deposits, etc. 31 770 1 066 Liabilities to banks and other financial institutions 32 22.474 21.148 Liabilities for received prepayments 143 0 Trade payables 33 74.029 80.966 Liabilities to employees 4 15.717 12.449 Liabilities for taxes, contributions and similar fees 35 8.496 8.552 Other liabilities 36 31.104 40.893 Accrued expenses and deferred income 37 560.826 628.191 Short-term liabilities 736.546 816.143 TOTAL CAPITAL AND LIABILITIES 2.026.391 2.058.569 OFF-BALANCE SHEET RECORDS 38 2.112.066 2.486.401 The accompanying notes form an integral part of these annual financial statements 10 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB STATEMENT OF CASH FLOWS For the year ended 31 December 2018 - indirect method POZ IC IJA 2018 2017. HRK'000 HRK '000 Cash flow from operating activities Profit before taxation 2 809 258 Depreciation 135122 135253 Impairment 20,259 1.186 Provisions 22.413 6.254 Interests expenses 11,094 16.674 Interests income (529) (2,230) Changes in inventories 13.100 (23.267) Changes in receivables from related companies 37 70 Changes in trade receivables 1,472 6.068 Changes in receivables from the state and other institutions 544 (3.879) Changes in other receivables 91 1 090 Changes in liabilities to the related companies 109 3.047 Changes in liabilities for deposits and guarantees (297) (256) Changes in liabilities for prepayments 143 0 Changes in trade payables (6.937) 11.079 Changes in liabilities to the employees 3.268 (1.985) Changes in liabilities for taxes and contributions (56) (272) Changes in other short-term liabilities (9.789) 18.065 Other increases or decreases in working capital (98.976) (100.497) Interests paid (11.094) (16 674) Interests collected 529 2.230 Net cash flow from operating activities 83.312 52.214 Cash flow from investing activities Inflows from sale of long-term tangible and intangible assets 620 760 Inflows from deposits 0 90.097 Other inflows from investing activities 663 2.563 Inflows from sale of long-term tangible and intangible assets (123.565) (45.503) Inflows from deposits (18) 0 Net cash flows from investing activities (122.300) 47.917 Cash flow from financing activities Inflows from loans 67.732 42.742 Outflows for loan repayments (24.183) (119.742) Net cash flows from financing activities 43.549 (77.000) TOTAL NET CASH FLOW 4.561 23.131 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD 75.656 52.525 CASH AND CASH EQUIVALENTS AT THE END OF PERIOD 80.217 75.656 INCREASE IN CASH AND CASH EQUIVALENTS 4.561 23.131 The accompanying notes form an integral part of these annual financial statements 11 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Accumulated Profit for the D E S C RI P T I 0 N Share capital loss current year TOTAL HRK 000 HRK 000 HRK'000 HRK 000 Balance on 1 January 2017 872.367 (102.010) 184 770.542 Profit allocation in 2016 0 184 (184) 0 Profit for the year _ 0 0 258 258 Balance on 31 December 2017 872.367 (101.826) 258 770.801 Profit allocation in 2017 0 258 (258) 0 Profit for the ear 0 0 2.809 2.809 Balance on 31 December 2018 872.367 (101.567) 2.809 773.610 The accompanying notes form an integral part of these financial statements 12 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS For the year ended 31 December 2018 1. GENERAL INFORMATION 1.1. Legal frame, activities and employees H2 PUTNICKI PRIJEVOZ d.o.o., Zagreb ("the Company") was founded on 30 August 2006 pursuant to the Law on the division of the company H2 HRVATSKE 2ELJEZNICE d.o.o. Zagreb and registered with the Commercial Court in Zagreb under company subject number 080590508 and personal identification number 80572192786. The Company's headquarters are in Zagreb, Strojarska cesta 11. As at 31 December 2018 the registered share capital amounts to HRK 872,367 thousand (as at 31 December 2017 same amount). The founder and sole owner of the Company is the Republic of Croatia. By a decision of the Commercial Court in Zagreb as of 19 January 2016, the Company's share capital was increased from HRK 75,627 thousand by the amount of HRK 796,740 thousand to HRK 872,367 thousand pursuant to the Company's General Assembly decision on the increase of the share capital as of 21 December 2015. The Company is registered for the transport of passengers in domestic and international railway traffic. 1.2. Employees As at 31 December 2018 the Company had 1,847 employees (31 December 2017: 1,937 employees). The structure of the employees by qualification level is presented below: DESCRIPTIO N 31 12.2018, 31.12.2017. PhD. 1 1 Master's degree 10 10 University degree 139 149 Bachelor 83 91 High school education 1.507 1.573 Low-skilled qualification 73 78 High skilled workers 6 6 Skilled workers 17 17 Semi-skilled workers 0 1 Unskilled workers 11 11 Total 1.847 1.937 1.3. Governance and management Bodies of the Company are the General Assembly, Supervisory Board and the Management Board. As the founder, the Republic of Croatia exercises its rights in the General Assembly through the Croatian Government and competent ministry. The Supervisory Board has four members. The Management Board has three members appointed by the General Assembly. 13 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 1.3. Governance and management (continued) The Supervisory Board Irena Gerovac Zrnic president since 8 April 2019, member since 28 March 2019 Gordan Han2ek deputy chairman since 8 April 19, member since 28 March 2019 Tomislav Dru2ak member since 28 March 2019 Zdeslav Milas - - ---,-,member since 28 March 2019 Dalibor Petrovic member since 2 February 2015 until 2 February 2019 Snjetana Josipovic president since 28 June 2013 until 28 June 2017 Dalibor Obradovic deputy chairman since May 19, 2016 until June 28, 2017 Hrvoje Livaja member since 7 January 2014 until 7 January 2018 The Management Board Zeljko Ukic president of the Management Board since 2 October 2017 Mladen Lugaric member of the Management Board since 2 October 2017 Damir Rubtic member of the Management Board since 2 October 2017 The compensations to the Company's Management Board and the Supervisory Board members are disclosed in the notes 8 and 10 to the annual financial statements. 1.4. Subsidiaries As at 31 December 2018 the Company had the following subsidiaries: Share in the SUBSIDIARY - - capital (%) Basic activity Subsidiaries - Group Tehnitki servisi 2eljezni kih vozila d.o o., Zagreb 100 Railway vehicles maintenance Tersus eko d.o.o., Zagreb - 14 September 2017 is merged with Tehni6ki servisi 2e1jeznidkih vozila d.o.o., Cleaning services Zagreb Tehni6ki servisi ±eljezni6kih vozila d.o.o., Zagreb Subsidiary over which the Company has no control Tvornica 2eljezniikih vozila Gredelj d.o.o. in Manufacturing, reconstructing bankruptcy, Zagreb 100 and modernizing railway vehicles Proizvodnja-Regeneracija d.o.o. in bankruptcy Zagreb 77 14 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Statement on Compliance and basis of the presentation The financial statements of the Company for the year 2018 are prepared in accordance with the Accounting Act (Official Gazette 78/15, 134/15, 120/16 and 116/18) and the International Financial Reporting Standards ("IFRS") in force in the European Union. Beside these separate financial statement, the Company also prepares the consolidated financial statements. These Company's separate financial statements prepared in accordance with the Accounting Act should be read together with the consolidated financial statements of the Company which will be available in the register of the annual financial statements. 2.2. Basics of measurement The annual financial statements have been prepared by the application of basic accounting presumption of the business event inception upon which the effects of operations are recognised when arisen and are shown in the financial statements for the period to which they relate and with the basic accounting presumption of the going concern. The financial statements are prepared on a historical cost basis, with the exception of financial assets and financial liabilities that are stated at fair value in accordance with IFRS 9 "Financial Instruments". 2.3. Functional and reporting currency The Company's financial statements are prepared in Croatian kuna as the functional and reporting currency of the Company. The financial statements are presented in thousands of Croatian kuna ('000 HRK'), which, since this is the currency in which most of the Company's business events are reported, is also the functional currency of the Company. At 31 December 2018 the exchange rate for 1 USD and 1 EUR was HRK 6.47 or HRK 7.42 (31 December 2017: HRK 6.27 or HRK 7.51). 2.4. Adoption of new and revised International Financial Reporting Standards ("IFRS") Standards and Interpretations effective in the current period The following new standards and revised existing standards issued by the International Accounting Standards Board and Interpretations issued by the International Financial Reporting Interpretations Committee and which have been adopted by the European Union are effective for the current period. * IFRS 9 Financial Instruments: Classification and Measurement The Standard is effective for annual periods beginning on or after 1 January 2018, with earlier use being allowed. IFRS 9 "Financial Instruments" reflects all phases of a financial instrument project and changes IAS 39 Financial Instruments: Recognition and Measurement as well as all prior versions of IFRS 9. The Standard introduces new requirements for classification, measurement, impairment and hedge accounting. The Management Board adopted this standard with the effective date and its application did not have a significant impact on the Company's financial statements. 15 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMAR OF SIGNIFICANT ACCOUTING POLICIES - continued 2.4 Adoption of new and revised international financial reporting standards (IFRS) - continued Standards and Interpretations effective in the current period - continued * IFRS 15 Revenue from contracts with customers The Standard is effective for annual periods beginning on or after 1 January 2018. The standard introduces a five-step model that will apply to revenues generated under customer contracts (with limited exceptions), regardless of the type of income transaction or industry. The Standard requirements will also apply to the recognition and measurement of gains and losses on the disposal of some non-financial assets that are not part of the Company's regular activities (for example, the sale of property, plant and equipment or intangible assets). Extensive disclosures will be required, including disaggregation of total revenue; information on the obligations execution; changes in the amount of contract assets and liabilities between periods and key estimates and judgments. The Management Board adopted a standard with the effective date and its application did not have a significant impact on the Company's financial statements. * IFRS 15 Revenue from contracts with customers (clarification) The Clarification is in effect for the annual periods beginning on or after January 1, 2018, with earlier implementation permitted. The purpose of the Clarification is to clarify the intent of the Board when defining the requirements of IFRS 15 Revenues from contracts with customers, in particular accounting treatment of identified performance obligations by supplementing the definition of a "separately recognizable" principle, application guidance on principal versus agent considerations including an assessment of whether the Company is principal or agent in the transaction as well as application of access control and licensing by providing additional instructions for accounting for intellectual property and royalties. Clarification also provides additional practical expedients for companies applying IFRS 15 using a fully retrospective approach or for those who opt for the use of a modified retroactive approach. The Clarification has not yet been adopted in the European Union. * Amendments and supplement to IAS 40: Transfer of Investment property Amendments shall be effective for annual periods beginning on or after 1 January 2018, with earlier implementation permitted. Supplements clarify at which point the Company should transfer real estate, including real estate under construction to or from investment property. Amendments state that change in the manner of use arises when the property meets or ceases to meet the definition of investment property and there is an evidence of a change. The change of the management's intention to use the property itself does not give evidence of manner of use. These Amendments have not yet been adopted in the European Union. * Amendments to IFRS 2: Classification and measurement of share-based payment The Amendments are in effect for the annual periods beginning on or after January 1, 2018, with earlier implementation permitted. Amendments have defined the accounting treatment of the impact of performance and non-performance measures on cash-settled share- based payments, share-based payments with the option of net settlement of a withholding tax liability and changes in share-based payment conditions that change the transaction's classification from the one settled in cash to the one settled by equity instruments. 16 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUTING POLICIES - CONTINUED 2.4 Adoption of new and revised international financial reporting standars (IFRS) - continued Standards and interpretations effective in the current period - continued * IFRIC 22: Foreign currency transactions and prepayments The Interpretation is in effect for the annual periods beginning on or after January 1, 2018, with earlier implementation permitted. The Interpretation clarifies the accounting treatment of transactions involving the receipt or payment of the prepayments in the foreign currency. The Interpretation applies to foreign currency transactions in which a company recognizes a non-cash asset or a non-cash obligation arising out of the payment or receipt of prepayments before the company recognizes the relevant assets, expenses or income. The Interpretation states that the transaction date for the purpose of determining the exchange rate takes the date of initial recognition of non-monetary assets (prepayments) or deferred income (liabilities). In cases where there are multiple payments or the receipt of prepayments, the company must determine the date of the transaction for each payment. Standards and interpretations adopted by the Board, which are not yet in effect and which had not been already adopted by the Company * IFRS 16 Leases The standard is in effect for the annual periods beginning on or after January 1, 2019. IFRS 16 defines the rules for recognition, measurement, presentation and disclosure for the leases from the aspects of both parties, i.e. the buyer (the "lessee") and the supplier (the "lessor"). In accordance with the new standard, the lessees need to recognize most of the leases in their financial statements. A single accounting model will be applied to all leases, with certain exceptions. Accounting treatment of leases by the lessor will not be significantly altered. Management of the Company has decided not to apply new standard for leases retroactively completely but to use directive on exemption for lessee. During the transition to the new standard, the obligation to pay on the basis of existing operating leases will be discounted using appropriate incremental borrowing rate and will be recognized as a liability for rent. The property with right of use will display the amount of the lease obligation adjusted for the amount prepaid or accrued payment for rent. Based on the current management estimate, the Company expects that the transition to the new standard as of 1 January 1 2019 will have the following effects: - Increase of assets with right of use for approximately HRK 1,088 thousand - Increase of liabilities by approximately HRK 1,088 thousand * Long-term interests in associates and joint ventures (Amendments to the IAS 28) The Amendments shall be in effect for the annual periods beginning on or after January 1 2019, with earlier implementation permitted. The Amendment clarifies that an entity applies IFRS 9, including its impairment requirements, to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. These amendments have not yet been adopted in the European Union. 17 HZ PUTNIIKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.4. Adoption of new and revised International Financial Reporting Standards (IFRS) - continued Standards and interpretations adopted by the Board, which are not yet in effect and which had not been already adopted by the Company - continued * IFRS 17: Insurance contracts The Standard is effective for annual periods beginning on or after 1 January 2021. Earlier application is permitted if IFRS 15 Revenues from Customer Agreement and IFRS 9 Financial Instruments have been applied. IFRS 17 Insurance contracts establish principles for recognition, measurement, presentation and disclosure of insurance contracts within the scope of the Standard. The purpose of IFRS 17 is to ensure that the entity provides relevant information that faithfully represents such contracts. These data provide the basis for the users of the financial statements to assess the effect of the insurance contract on the financial position, financial result and the cash flows of the entity. This interpretation has not yet been adopted in the European Union. * Prepayment features with negative compensation (Amendments to the IFRS 9) The Amendments shall enter into force for annual periods commencing on or after 1 January 2019 with earlier implementation permitted. Existing requirements in IFRS 9 related to cancellation rights to allow measurement at amortized cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negligence. * Long-term interests in associates and joint ventures (Amendments to the IAS 28) The Amendments shall be in effect for the annual periods beginning on or after 1 January 2019 with earlier implementation permitted. The Amendment clarifies that an entity applies IFRS 9, including its impairment requirements, to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. These amendments have not yet been adopted in the European Union. 2.5. Use of estimates and judgments The preparation of financial statements in accordance with IFRS requires Management to make judgments, estimates and assumptions that affect the applied policies and disclosed amount of assets and liabilities, revenue and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are considered to be reasonable in the circumstances, the results of which is starting point for estimating the carrying values of assets and liabilities that can't be obtained from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. Judgments made by Management in the application of IFRS that have significant effect on the financial statements and estimates with a high risk of materially significant corrections in the next periods are disclosed in Note 2.25. Key accounting estimates and judgments. 18 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6. Revenue recognition a) Revenue from the passenger tickets sale Revenues realized in the Company relate to the services provided to the passenger and other services related to railway traffic. Revenue recognition in accordance with IFRS 15 is based on the principle of recognition of revenue when control over a product or service is transferred to customers. Revenue generated by providing services is recognized in the amount expected as a fee as soon as the transfer of control over the services is performed. Passenger services provided by the Company are typically executed within a few hours / days. Revenues from the passenger tickets sale are recorded as income in the period of the transport service. The transaction price is the amount of contractual remuneration that the Company expects to be entitled to in return for the promised merchandise or customer service. Revenues are stated in amounts deducted for value added tax, estimated returns, rebates and discounts. According to the above, revenue recognition takes place at the same time as IAS 18 - Revenue was effective and no significant impact of IFRS 15 Revenue from contract with customers is determined. b) Income from state aid Government grants in the form of direct financial support under public service contracts (PSOs) for services of general economic interest in public rail transport without any additional related conditions, are recognized as part of other income in the statement of comprehensive income for the period in which they were received. State aid is recognized when there is sufficient assurance that the Company will meet the conditions and that the aid will be received. State aids are recognized in the income statement on a systematic basis over the period in which the Company's related costs are recognized as expense for which the coverage of the aid is intended. Government grants associated with tangible assets which is being amortized are recognized in profit or loss in the periods and in amount of the depreciation charge is recognized. Government grants associated with non-amortized assets are recognized in profit or loss over the periods in which they are incurred, i.e. the expected useful lives of such assets. Claims for state support to offset expenditures or losses already incurred or to provide current financial support to the Company without future related costs are recognized as revenue for the period in which the claim arises. 19 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.6. Revenue recognition (continued) C) Revenues from the sale of services If the conditions that the amount of revenues can be measured reliably and there is possibility that Company will receive a fee are met the service revenues are recognized in the period in which they are provided. The revenues from service contract is recognized in relation to the level of performance of a contract. The levels of performance of a contract are as follows: * the services performed are recognized in relation to the level of execution, determined as a percentage of the time spent over the balance sheet date, in relation to the total planned time; * maintenance fees included in the price of the sold product are recognized in proportion to the share in the total cost of maintaining the sold product, taking into account the number of previous maintenance services for previously sold products; and * contract revenue based on time and material expense is recognized at agreed prices in the period in which the hours worked and in which direct costs were incurred. d) Interest Income Interest income is deferred on a timely basis, on the basis of unpaid principal and at the applicable effective interest rate, which accurately discounts estimated future cash receipts through the expected life of the financial instrument or the net book amount of financial assets. Interest income is recognized as a financial income in the income statement. e) Lease income Income from operating leases is calculated on a straight-line basis over the lease term. f) Dividend income and profit share Dividend income and profit share are recognized when the right to dividend and profit is established. 2.7. Operating expenses Operating expenses are recognized in profit or loss on the basis of the direct link between the costs incurred and the specific income item. Confronting revenue expenditures involves simultaneous or combined recognition of revenue and expense arising directly or jointly from the same transactions or other events. Expense is recognized immediately in the income statement when an expenditure does not generate future economic benefits or in proportion and which future economic benefits are not such that they qualify for recognition in the balance sheet as assets. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are recognized as expense. 20 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.8. Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Non-monetary assets and items that are measured based on historical cost in a foreign currency are not translated using new exchange rates. Non-monetary assets and liabilities that are measured based on a historical cost in a foreign currency are translated using the exchange rate at the date of transaction. 2.9. Intangible assets Non-current intangible assets include software and leasehold improvements regarding rights of usage and are capitalised to the extent that future economic benefits are probable and will flow to the Company. Subsequent expenditure on capitalised intangible assets is capitalised only if it is probable that it increases the future economic benefits embodied in the specific asset to which it relates and those benefits will flow to the Company. All other expenditure is recognised in the profit or loss as an expense as incurred. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. Intangible assets are amortised from the date on which they are available for use. The estimated useful lives of intangible assets are as follows: Software 5 years Leasehold improvements regarding rights of usage 5 -10 years 2.10. Property, plant and equipment Property, plant and equipment are stated at cost less for accumulated depreciation and accumulated impairment losses, if any. Cost includes the purchase price and directly associated cost of bringing the asset to a working condition for its intended use. Assets under construction are not depreciated. Depreciation of the property, plant and equipment is calculated using a straight-line method for the purpose of allocating the cost of that asset over its estimated useful life as follows: 2018 2017. Buildings 10 - 50 years 10 - 50 years Plant and equipment 2 - 20 years 2 - 20 years Transport vehicles 20 - 50 years 20 - 50 years Tools and plant inventory 4 -10 years 4 -10 years Other tangible assets 10 years 10 years 21 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.10. Property, plant and equipment (continued) The estimated useful life is reviewed at each reporting date and adjusted if appropriate. If the carrying amount of the asset exceeds the estimated recoverable amount, the difference is written off to the recoverable amount. Gains and losses on disposals are determined as the difference between the income from the disposal and the carrying amounts of the asset disposed, and are recognised in profit or loss within other income/expenses. Subsequent expenditure is included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the Statement of comprehensive income during the financial period in which they are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard performance, the expenditures are capitalised as an additional cost of property, plant and equipment. Costs eligible for capitalization include costs of periodic, pre- planned significant inspections and overhauls necessary for further operation. 2.11. Investment property Property investments include properties that is held for rent by renting or increasing their market value or for both purposes. Built-in equipment is considered to be an integral part of investment property. The cost of the purchase includes all costs directly linked to the acquisition of that property. Investments in real estate, i.e. construction, are classified as fixed assets until they are ready to be used. The Company uses a cost model for all investments property when re-measuring investment properties. Amortization is calculated using the straight-line method for the purpose of allocating the cost of that asset over its estimated useful life as follows: Estimated useful life of use (years) 2018. 2017. Investment property 10-50 10-50 Subsequent expenditure for investment property is capitalised only if it is probable that it increases the future economic benefits embodied in the specific asset to which it relates and it can be reliably measured. Regular maintenance expenditure is recognised in income statement as an expense as incurred. Costs of replacing an item of property investment are recognized in the carrying amount of this asset if it is probable that the future economic benefits included in that item will flow to the Company and their value can be measured reliably. The costs of regular maintenance of real estate investments are recognized in the income statement as they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use as well as when no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognized. 22 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.12. Impairment of non - financial assets At each reporting date, the Company reviews the carrying amounts of its non-financial assets (apart from inventory and deferred tax assets which are separately reviewed) to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined net of depreciation or amortisation had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 2.13. Investments in related companies (i) Subsidiaries Subsidiaries are all related companies over which the Company has control over financial and business policies, which usually includes more than half of the voting rights. The existence and effect of potential voting rights that can be used or exchanged, are considered when assessing whether the Company has control over other business. Investments in subsidiaries are initially recognized at cost, and subsequently at cost less impairment. Investments in subsidiaries for impairment are carried out on an annual basis. (ii) Associated companies Associated companies are those in which the Company has significant influence, but has no control, which usually includes 20% to 50% of the voting rights. Investments in associates are initially recognized at cost and at cost less impairment. Testing of investments in associates for impairment is carried out on an annual basis. 23 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14. Financial assets The Company has adopted IFRS 9 - Financial Instruments as at 1 January 2018 and its application has not had a significant impact on the Company's annual financial statements. The Company recognizes financial assets in its financial statements when it becomes party to the contractual provisions of the instrument. Depending on the business model for asset management and contractual features of financial flows, the Company measures financial assets at amortized cost, fair value through other comprehensive income or fair value through profit or loss. The Company classifies assets as shown below: DESCRIPTION Classification / measurement Non - current assets Financial assets at fair value through profit or loss Equity instruments / fair value through profit or loss Current assets Cash and cash equivalents (deposits) Hold to collect / amortized cost Receivables from customers and other receivables Hold to collect / amortized cost The business model reflects the way in which the Company manages assets to realize cash flows - whether the Company's objective is (i) solely the collection of contractual cash flows from assets ('holding due to contractual cash flows') or (ii) cash flows and cash flows arising from the sale of assets ("hold due to contractual cash flows and sales"), and if none of the points above are applicable, financial assets are classified as part of another business model and are measured at fair value through profit or loss or loss. i) Financial assets through profit or loss Initial recognition The Company recognizes a financial asset or liability when and only when it becomes a party to the contractual provisions of the instrument. Instruments are classified at fair value through profit or loss if the Company holds them for trading or are designated as such at initial recognition. Financial instruments are designated at fair value through profit or loss if the Company manages these investments and makes decisions about their purchase and sale on the basis of their fair value. At initial recognition, direct transaction costs are recognized in profit or loss at the time they arise. Subsequent measurement Financial instruments classified at fair value through profit or loss are measured at fair value and changes are recognized in profit or loss. With the application of the new IFRS 9 standard, all investments in equity instruments are presented at fair value through profit or loss. 24 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14. Financial assets (continued) ii) Loans The Company loans are held within a business model whose purpose is to hold a financial asset in order to charge contractual cash flows. Contractual terms at a particular date are cash flows that represent only payments of principal and interest. At that, the principal is the fair value of the asset at initial recognition. Based on the above, the given loans are measured at amortized cost. Measurement at amortized cost implies that interest income is calculated using the effective interest rate and applied to the gross book value of the asset at the calculation. iii) Trade receivables Receivables from customers that do not have a significant financial component at initial recognition have been measured in accordance with IFRS 15 at their transaction price. iv) Impairment The Company recognizes a loss allowance for expected credit losses. At each reporting date, the Company measures expected credit losses and recognizes the same in the financial statements. Expected credit losses from financial instruments are measured in a manner that reflects: - an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes - Time value of money - Reasonable and supportable information about past events, current conditions and forecasts of future economic conditions Regarding trade receivables, the Company applies a simplified approach allowed by IFRS 9 to measure expected credit losses by using expected provisions for credit losses. To measure anticipated trade receivables losses, the Company has by analysing the age structure and historical data determined potential future losses v) Derecognition of financial assets The Company ceases to recognize financial assets when; - Contractual rights has been expired - It transfers financial assets and the transfer is subject to conditions for termination of recognition The Company transfers financial assets if and only if, or: (a) transferring contractual rights (b) retain contractual rights to receive cash flows from a financial asset but assumes a contractual obligation to pay cash flows to one or more recipients in the arrangement. When the Company transfers financial assets, it is required to estimate the extent to which it retains the risks and rewards of ownership of the financial asset. In this case, when all risks and rewards of ownership are transferred, the Company ceases to recognize financial assets and recognizes separately as assets or liabilities all rights and obligations that have arisen or are retained in the transfer. If almost all the risks and rewards of ownership of financial assets are retained, the Company continues to recognize financial assets. 25 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.14. Financial assets (continued) v) Derecognition of financial assets (continued) If the Company neither transfers nor retains all the risks and rewards of ownership of financial assets, the Company determines whether the Company has retained control of the financial asset. If no control over financial assets is retained, the Company derecognises financial assets and recognizes separately as assets or liabilities all rights and obligations that have arisen or are retained in the transfer. If control is retained, the Company continues to recognize financial assets to the extent that it continues to participate in that financial asset. 2.15. Financial obligations Initial Recognition and Measurement Financial liabilities are classified as financial liabilities that are measured at amortized cost. All financial liabilities are initially recognized at fair value plus the associated transaction costs. The Company's financial liabilities include liabilities to suppliers and other liabilities, overdrafts and loans. Subsequent measurement After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Borrowing costs that can be directly linked to the acquisition, construction or production of a qualifying asset, a means that necessarily requires a considerable amount of time to be ready for intended use or sale, are attributed to the cost of purchasing that asset until the asset is largely available intended use or sale. Borrowings are classified as short-term liabilities unless the Company has the unconditional right to postpone the obligation to pay at least 12 months after the reporting date. Short-term lending and supplier loans are shown on the original borrowed amount deducted by repayments. The interest expense is charged to the profit and loss account for the period in which the interest relates. Derecognition The Company ceases to recognize the liability in the financial statements when and only when the obligation has been settled. When the existing financial liability is replaced by another by the same creditor under substantially different terms or the terms of the existing obligations have changed significantly, such change or modification is treated as termination of the original obligation and recognition of the new liability, and the difference in the corresponding carrying amounts is recognized in the profit and loss account. 26 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.16. Supplies Inventories are stated per cost and net realizable value, depending on which is lower. The cost of inventories comprises all purchase costs, the cost of conversion and other costs that have been incurred in bringing the inventories to their present location and condition. The net realizable value represents the estimated selling price during the normal course of operations minus all estimated costs of completion and necessary costs to be incurred in selling. If the value of inventories is higher than the estimated net selling price, an allowance is created and charged to the Comprehensive Income Statement for the current year. Small inventories, packing and car tires are written off by 100% at the moment they are put into use. 2.17. Cash and cash equivalents Cash and cash equivalents include cash on account and in cash register and they are stated in the balance sheet. The book values of cash and cash equivalents are generally approximate to their fair values. For the purpose of reporting cash flows, cash and cash equivalents comprise cash and deposits with banks with maturities up to three months. 2.18. Accounting lease of leases - the lessee is the Company Leased assets, where the Company accepts almost all the benefits and risks of ownership are classified as finance leases. Financial leases are capitalized on the estimated current value of the corresponding lease payments. Each lease payment is classified in the liabilities and financial expenses in order to obtain a constant rate on the remaining financial condition. The related lending obligation, less any financial expense, is recognized as a liability for long-term liabilities. The interest component of financial expense is charged to profit or loss during the lease period. Assets acquired under a finance lease are amortized over the useful life of the asset. Leases of property in which the benefits and risks of ownership are retained by the lessor are classified as operating leases. Payments based on operating leases are charged to profit or loss on a straight-line basis over the lease term. If a business lease expires prior to the expiry of the lease term, all payments to the lessor in the form of a penalty are recognized as an expense within profit or loss for the period in which the lease expires. 2.19. Employee benefits (i) Pensions obligations and post-employment benefits In the normal course of business through salary deductions, the Company makes payments to the mandatory pension funds on behalf of its employees as required by law. All contributions made to the mandatory pension funds are recorded as salary expense when incurred. The Company is not obliged to provide any other post-employment benefits with respect to these pension schemes. This obligation applies to all staff hired on the basis of employment contract. The contributions are paid at a certain percentage determined on the basis of gross salary. 27 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.19. Employee benefits (continued) (i) Pension obligation and post-employment benefit (continued) Contributions on behalf of the employees and the employer are accounted for as the expense for the period in which they arise. 2018. 2017. Contribution to pension insurance 20% 20% Contribution to health insurance 15% 15% Employment fund contributions 1,7% 1,7% Occupational injury 0,5% 0,5% (ii) 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 recognises termination benefits as expenses when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (iii) Regular retirement benefits Retirement benefits falling due more than 12 months after the reporting date are discounted to their present value based on the calculation performed at each reporting date by an independent actuary, using assumptions regarding the number of staff likely to earn regular retirement benefits, estimated benefit cost and the discount rate which is determined as average expected rate of return on investment in government bonds of the Republic of Croatia which are quoted on the market and their currency and maturity dates are in accordance with currency and estimated duration of liabilities for the benefit payment. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised immediately in profit or loss. Based on the currently valid collective agreement, retired workers are entitled to a regular severance pay in the amount of HRK 8,000. (iv) Long-term employee benefits The Company recognizes the obligation to long-term employee benefits (jubilee awards) equally in the period in which the award was made based on the actual number of years of service. The reward for long-term work is from 1.500 to 5.000 kuna net for working in the Company from 10 to 40 years of continuous employment with the employer. The long-term employee benefit obligation is measured by an independent actuary at the end of each reporting period using the assumptions on the number of employees to which the said benefits should be paid, the estimated cost of the said benefits and the discount rate as the average expected return on investment in government bonds. Actuarial gains and losses arising from compliance and changes based on experience in actuarial assumptions are immediately recognized in profit or loss. 28 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.20. Provision Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. Provisions are made for litigations, regular retirement benefits and jubilee awards and termination benefits. 2.21. Taxation (i) Income Tax The Income tax expense consists of current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. (ii) Value Added Tax (VAT) The Tax Authorities requires VAT settlement on a net basis. VAT resulting from sales and purchase transactions is recognized and reported in the statement of financial position on a net basis. In the case of impairment of receivables, the impairment loss is recognized in the gross amount of receivables, including VAT. 2.22. Contingent liabilities and assets Contingent liabilities are not recognized in the financial statements but are only disclosed in the notes to the annual financial statements. Potential assets are not recognized in the annual financial statements, yet are recognized at the time when a inflow of economic benefits becomes probable. 2.23. Events after the Date of the Statement of financial position I Balance sheet Events which occur after the date of Statement of financial position / Balance sheet that provide additional information about the Company's position on the date of Statement of financial position / Balance sheet (adjusting events) are reflected in the annual financial statements. Post-year-end events that are not adjusting events are disclosed in the notes to the annual financial statements when material 2.24. Comparative data The comparative information is reclassified as necessary to match the presentation of the current year. 29 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2.25. Key accounting judgement and estimates During the preparation of the Company's annual financial statements, the Board used certain estimates and assumptions that affect disclosed income, expense, assets and liabilities and disclosure of contingent liabilities during and on the reporting date. However, the uncertainty associated with these assumptions and estimates can result in significant changes in the carrying amount of the related assets or liability in future periods. Key assumptions related to the future and other key sources of uncertainty on the date of the Statement of financial position that bear significant risk of significant changes in the carrying amounts of assets and liabilities in the following financial years are as follows: The preparation of financial statements in accordance with IFRS requires the Management to make judgments, estimates and assumptions that affect the application of policies and amounts disclosed for assets, liabilities, income and expenses and disclosure of contingent liabilities. Actual results may differ from such estimates. The estimates and underlying assumptions are reviewed on an ongoing basis, Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods. (i) Useful lives of property, plant and equipment Determining the useful life of an asset is based on historical experience with similar assets as well as anticipated technological development. The suitability of the estimated useful life is considered annually, or whenever there are indications of significant changes in assumptions. We believe that this is an important accounting estimate, as it includes the assumptions about technological development and significantly depends on the Company's investment plans. Furthermore, given the significant share of Company's depreciable assets in total Company's assets, the impact of major changes in these assumptions could be significant for the financial position and results of the Company's business. In the course of 2018, there was no change in the estimated life of the property, plant and equipment or depreciation rate. (ii) The recoverability of trade and other receivables The recoverable amount of trade and other receivables is estimated at present value of future cash flows discounted at the market interest rate at the measurement date. Short-term receivables with no stated interest rate are measured by the amount of original invoice if the effect of discounting is not significant. (iii) Recoverability of inventories The Company performs a value adjustment of inventory by age structure. In the year 2018 due to sales of slow moving and obsolete inventory, the Company reduced the value adjustment of inventories by HRK 13,391 thousands. (iv) Actuarial estimates used for calculation of retirement benefits The cost of defined benefits is determined using actuarial estimates. Actuarial estimates involve assumptions about discount rates, future salary increases and the mortality or fluctuation rates. Due to the long-term nature of those plans, these estimates contain an element of uncertainty. 30 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)) 2.25. Key accounting judgement and estimates (continued) (v) Consequences of certain court disputes The Company is a party to numerous court disputes arising from regular business. Provisions are recorded if there is a present obligation as a result of the past event (taking into account all available evidence including the opinion of legal experts) where it is likely that settlement of the obligation would require a resource outflow and if the amount of the liability can be reliably estimated (see notes 12 and 29). (vi) Ownership of land and buildings The Company has recorded real estate for which the process of determining and registering ownership rights has not been fully resolved. The Company acquired the majority of real estate in the division process of the Hrvatske 2eljeznice d.o.o. With this division, the Hrvatske >eljeznice d.o.o. was divided into 5 companies: HZ Holding d.o.o., HZ Vu6a vlakova d.o.o., H2 Infrastruktura d.o.o., HZ Putni6ki priejvoz d.o.o. and HZ Cargo d.o.o. Later the company HZ Holding d.o.o. merged with the company H2 Infrastruktura d.o.o., and the company HZ Vu6a vlakova d.o.o. was divided and merged with the companies HZ Cargo d.o.o. and HZ Putni5ki prijevoz d.o.o. The division plan also divides assets into companies. Issues related to the real estate status of companies HZ Putni6ki prijevoz d.o.o., HZ Infrastruktura d.o.o. and HZ Cargo d.o.o. is not entirely solved until today. 31 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 3. SALES REVENUE DESCRIPTION 2018 201T HRK '000 HRK '000 Revenue from sales to the related companies in the Group/i/ 4.074 1.515 Revenue from sales (outside Group) /ii/ 269 350 269.828 TOTAL 273.424 271.343 li/ Revenue from sales to the related companies in the Group is as follows: DESCRIPTION 2018 2017. HRK'000 HRK'000 Revenue from domestic passenger transportation 1.095 1.256 Revenue from the sale of goods and material 2.968 249 Revenue from the sale of roducts 11 10 TOTAL 4.074 1.515 /ii/ Revenue from sales outside group is as follows: DESCRIPTION 2018. 2017. HRK'000 HRK'000 Revenue from domestic passenger transportation 172.857 168.905 Revenue from international passenger transportation 33 769 32 774 Revenue from suburban passengers transportation (ZET- H2PP) 52,733 56.536 Revenue from passenger transportation - specific trains 766 729 Revenue from the sale of goods and material 8,273 9 762 Revenue from the sale of products 755 898 Other sales revenue 197 224 TOTAL 269.350 269.828 4. OTHER OPERATING INCOME 2018. 2017. ESC DE SCR IPTIO N HRK'000 HRK'000 Other income from sales to the related companies in the Group/i/ 3.498 4.258 Other income from sales Loutside Group) /ii/ 573.801 549,926 TOTAL 577.299 554.184 32 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 4. OTHER OPERATING INCOME (continued) /I/ Other income from sales to the related companies in the Group is as follows: DESCRIPTION 2018 2017 HRK'000 HRK 000 Income from rent of offices 1.590 1.588 Income from recalculation of costs 832 425 Income from penalties for delayed goods and works 1.060 1.359 Other _operating income 16 886 TOTAL 3.498 4.258 /iil Other income from sales (outside Group) is as follows: D ESCRIPTION 2018. 2017. HRK '000 HRK '000 Income from passenger transport incentives 461.700 441.667 Income from the state grants for the modernization of railway vehicles 76.043 75.788 Income from business premises rent 13.391 1.176 Income from rent of wagons and locomotives 6.239 19.284 Income from rent of advertising space 419 419 Income from sale of the long-term tangible assets 2.222 1.298 Income from sale of the blank forms 394 222 Income from the traffic delay fees 2.003 1.392 Income from the costs recalculation 1.017 1.505 Income from the insurance damages 620 760 Income from the collection of impaired and written-off receivables 508 2.034 Income from repeal of long-term provisions 897 532 Income from the impaired inventories 924 884 Charged income from the settlements 1 667 101 Other operating income 5.757 2 864 Total 573.801 549.926 5. COST OF RAW MATERIAL 2018, 2017. D_E_S_C_DESCRIPTION HRK'000 HRK'000 Cost of raw material and material 3.031 2.858 Cost of spare parts 35 17 Cost of small inventory 1.506 2.344 Energy cost 102.448 98.911 Total 107.020 104.130 33 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 6. COST OF GOODS SOLD Costs of goods sold in the amount of HRK 16.390 thousand (2017. in the amount of HRK 10,442 thousand) relate to the purchase value of goods sold. 7. OTHER EXTERNAEXPENDITURE DESCRIPTION 2018. 2017 HRK '000 HRK'000 Towing, telephone postal services and transport cost 12 627 9 792 Maintenance (services) 127.279 131 755 Rental costs and lease 1.173 2.150 Maneuver and towing services 7.113 9.944 Railway track lease (H2 Infrastruktura d.o.o.) 74.191 77.504 Train dispatcher services 1.047 1 546 Advertising and promotion costs 299 467 Property protection services 435 276 Property cleaning service 1 482 1.202 Other external expenditure 1 321 1.649 Total 226.967 236.285 8. STAFF COSTS DESCRIPTION 2018. 2017 HRK '000 HRK '000 Net salaries and wages 148,727 152.057 Taxes and contributions from salaries 53.637 53.888 Contributions on salaries 48.826 49.288 Total 251.190 255.233 The Management Board remunerations are as follows: DESCRIPT1ON 2018. 2017. HRK '000 HRK '000 Net salaries and wages 808 398 Taxes and contributions from salaries 618 278 Contributions on salaries 245 113 Total 1.671 789 34 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 9. DEPRECIATION AND AMORTISATION DESCRIPTION 2018. 2017 HRK'000 HRK'000 Amortization of the intangible assets (Note 15) 2.412 1,433 Depreciation of property, plant and equipment (Note 16) 130.799 131.908 Depreciation of the investments property (Note 17) 1.911 1.911 Total 135.122 135.252 10. OTHER EXPENSES D ESC RIPTION2018. 2017. HRK'000 HRK'000 Reimbursement of cost to the employees 2.626 2.705 Employees material rights 18.109 11.644 Mileage 10.794 10.887 Fines, penalties, compensations and similar 9.105 13.993 IT services - SAP 8 267 7.920 Value of abolished material and inventories write-off 5.126 496 Intellectual services 2.288 6924 Insurance premiums 1.564 2.086 Banking services and payment system costs 1.192 797 Travel agency commissions 1.496 1.615 IT Services of H2 Infrastruktura d.o.o, Zagreb 717 1.078 Taxes not depending on income and fees 344 461 Scholarship fees 219 285 Subsequently identified expenses 175 302 Entertainment expenses 157 135 Compensations to members of the Supervisory Board and Audit Committee 125 269 Professional training 125 157 Other operating expenses 941 1. 152 Total 63.370 62.906 11. IMPAIRMENT DESCRIPTION 2018. 2017. HRK'000 HRK '000 Impairment of long-term tangible assets (Note 16) 18.714 689 Impairment of inventories 0 0 Impairment of short-term receivables 1.545 497 Total 20.259 1.186 35 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 12. PROVISIONS DESCRIPTION 2018 2017 HRK'000 HRK'000 Provisions for incentive severance payments 10.041 1 474 Provisions for legal proceedings 11.394 4.106 Provisions for Jubilee awards 977 673 Total 22.412 6.254 13. NET FINANCIAL RESULT 2018. 2017. DESCRIPTION HRK'000 HRK '000 Financial revenue From related parties Interest income 9 6 9 6 Other Interest income 520 2 224 Foreign exchange gains 5.426 1 077 5.946 3.301 Total financial revenue 5.955 3.307 Financial expenses From related parties Interest expense 15 0 15 0 Other Interest expense 11.078 16869 11.078 16.869 Total financial expenses 11.095 16.869 Net financial result (5.139) (13.561) 36 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 14. INCOME TAX The Company is a taxpayer, in accordance with the tax laws and regulations of the Republic of Croatia. The tax base is defined as the difference between the income and the expense of the period, increased by tax non-deductible expenditures. The profit tax rate is 18% (2017: 18%). The reconciliation of the income tax is shown as follows: DESCRIPTION 2018. 2017 HRK '000 HRK'000 Accounting profit 2.809 258 Non-deductible expenses 41.605 5,490 Tax incentives (13.476) 0 Profit after increase / decrease 30938 5.749 Tax losses transferred from the previous periods (331.058) (336.807) Tax losses that can not be brought forward 331.058 0 Tax loss to be transferred 0 (331.058) In accordance with the tax regulations, the Tax Authorities may at any time inspect the books and the records of the Company within a period of three years after the expiration of the year in which the tax liability is reported and may impose additional tax liabilities and penalties. The Management Board of the Company is not aware of any circumstances that could result in a significant potential liabilities in this respect. 37 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 15. INTANGIBLE ASSETS Concessions, patents, D E S C R IP T I 0 N licenses, software and other rights HRK 000 Purchase value 1 January 2017 36.803 Transfer from tangible assets under construction 893 31 December 2017 37.696 Transfer from tangible assets under construction 11.585 31 December 2018 49.415 Accumulated amortisation 1 January 2017 under construction 32.429 Amortization for the year 2017 1.433 31 December 2017 33.862 Amortization for the year 2018 2.412 31 December 2018 36.410 Carrying amount 1 January 2017 4.374 31 December 2017 3.834 31 December 2018 13.006 38 оо г-, � и г. о о�- и со � г� rn о v^ и н v г�. � и и гю й т �р и г- т м о � Cб v rn ��- т м r. м со � о v rn CO а и сд о� °? 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PROPERTY INVESTMENT Investment property D E S C R I P T 10 N HRK'000 Purchase value 1 January 2017 108.170 31 December 2017 108.170 31 December 2018 108.170 Accumulated depreciation 1 January 2017 69.278 Amortization for the year 2017 1.911 31 December 2017 71.189 Amortization for the year 2018 1.911 31. December 2018 73.100 Carrying amount 1 January 2017 38.892 31 December 2017 36.981 31 December 2018 35.070 18. INVESTMENTS IN SUBSIDIARIES 31,12,2018. 31.12,2017. D E S C R I P T 10 N _ - ---- HRK'000 - ---------- - -- -HR-K-'000 Subsidiaries Tehni ki servisi 2e1jezni kih vozila d.o.o , Zagreb 75A33 75.433 Tvornica 2e1jezni kih vozila Gredelj d.o.o. in bankcruptcy, Zagreb 536.749 536.749 Proizvodnja-Regeneracija d.o.o., bankruptcy, Zagreb 15.099 15.099 Minus: Impairment (595.345) _(595 345) Total 31.936 19. LONG-TERM FINANCIAL ASSETS D E S C R I P T 10 N 31.12,2018, 31.12.2017. HRK'000 HRK'000 Financial assets at fair value through profit or loss Eurofima 27,960 2T297 BCC 2 2 Total, 27.962 27.299 40 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 20. INVENTORIES DESCRIPTION 31,12.2018 31,12.2017 HRK 000 HRK_'000 Raw materials 3082 3.713 Spare parts 59.039 85.214 Minus Impairment of obsolete inventories of raw materials and spare parts (48.352) (61.743) 13.769 27.184 Small inventory and packing 6 795 6.467 Minus. Impairment of small inventory and packing ____5633 (5.662) 1.162 805 Finished goods _185 229 Total 15.116 28.217 21. TRADE RECEIVABLES DES CRIPTION 31.12.2018. 31.12.2017. HRK'000 HRK'000 Domestic trade receivables 104.145 104.363 Foreign trade receivables 270 913 Less Impairment (87.595) (86.985) Total 16.820 18.291 Movements in the impairment allowance of trade receivables are shown as follows: DESCRIPTION 2018, 2017 HRK '000 HRK '000 Balance at 1 January (86.985) (88.301) New impairment (1.545) (496) Collection 1.017 1-505 Write-off during the year _(82) 307 Balance at 31 December (87.595) (86.985) Age analysis (structure) of the trade receivables is as follows: Due 30-60 60-90 90-120 > 120 Undue < 30 days days days days days Total HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 31.12.2018 8.940 4.680 2.286 51 67 796 16.820 31.12 2017 8.191 3.034 2.870 445 281 3.470 18.291 41 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 22. RECEIVABLES FROM EMPLOYEES DESCRIPTION 31.12.2018 31.12.2017. HRK'000 HRK'000 Short-term receivables from employees for shortages and damage 5,489 5.492 Total 5.489 5.492 23. RECEIVABLES FROM THE STATE AND OTHER INSTITUTIONS DESCRIPTION 31.12.2018 31.12.2017. HRK '000 HRK'000 VAT receivables 9.714 10.258 Total 9.714 10.258 24. OTHER RECEIVABLES DESCRIPTION 31.12.2018. 31.12.2017. HRK '000 HRK '000 Prepayments in the country 268 748 Receivables from the Croatian Health Insurance Institute 984 593 Total 1.253 1.341 25. SHORT-TERM FINANCIAL ASSETS DESCRIPTION 31.12.2018. 31.12.2017 HRK'000 HRK'000 Given deposits 30 12 Loans given to the related companies 11.288 11.288 Less. impairment of loans given to the related companies (11.288) (11.288) Total 30 12 26. CASH AND CASH EQUIVALENTS DES CRIPTION 31.12,2018. 31.12.2017. HRK'000 HRK '000 Gyro account balances 36.512 43-115 Foreign currency account balances 37.911 25493 Cash in hands -Croatian kuna 5.794 7.048 Total 80.217 75.656 42 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 27. PREPAID EXPENSES AND ACCRUED INCOME DESCRIPTION 31.12.2018. 31.12,2017. HRK '000 HRK '000 Prepayments for the accident in Rudine 3534 3,534 Total 3.534 3.534 Costs related to the accident in Rudine, which are charged to the Company until the final verdict, include damages costs and cost of out of court settlements in the amount of HRK 2,543 thousand, as well as the costs of substitution of transportation with buses because of the impassability of railway track in the amount of HRK 970 thousand and the cost of treating injured passengers in the amount of HRK 21 thousand. 28. CAPITAL NAD RESERVES li/ The subscribed capital of the Company amounts to HRK 872,368 thousand (31 December 2017: same amount) and represents own permanent sources for the Company's operations as well as share capital registered at the Commercial Court in Zagreb. The sole member of the Company is the Republic of Croatia. On 24 September 2015, the Government of the Republic of Croatia adopted a decision on granting the consent for the conversion of receivables from the debt assumption on the basis of given guarantees and unpaid compulsory contributions to the Company's equity in the total amount of HRK 796,740 thousand. The share capital increase was registered at the Commercial Court in Zagreb on 19 January 2016. /ii/ The accumulated losses are stated as at 31 December 2018 in the amount of HRK 101,567 thousand (31 December 2017 in the amount of HRK 101,826 thousand). /iii/ Profit for the current year is stated as at 31 December 2018 in the amount of HRK 2,809 thousand (31 December 2017 in the amount of HRK 258 thousand). 29. PROVISIONS DESCR I PTI1OIN 31.12.2018. 31.12.2017. HRK '000 HRK'000 Provisions for jubilee awards and retirement benefits 11.421 11.948 Provisions of incentive severance payments 10.041 5.400 Provisions for court litigations 68.861 65.460 Total 90.323 82.808 Movements in provisions are shown as follows: As at As at 31.12, New Utilized Reversal of 31.12. D E S C R I P T I0 N 2017 provisions provisions provisions 2018 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 Provisions for jubilee awards and retirement benefits 11.948 977 (1.470) (34) 11.421 Provisions of incentive severance payments 5.400 10.041 (5.400) 0 10.041 Provisions for court litigations 65.460 11.394 (2.056) (5.937) 68.861 Total 82.808 22.412 (8.926) (5.971) 90.323 43 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 29. PROVISIONS (continued) According to the Collective Agreements the Company has an obligation to pay jubilee awards, regular retirement benefits and other benefits to its employees. In accordance with the respective agreements, when employees leaving to regular retirement, they are entitled to a regular retirement benefit of HRK 8 thousand. The provision for regular retirement benefits and jubilee awards are calculation by authorized actuary. The calculation of the jubilee awards was made according to the following amounts: Number of years Amount in HRK 10 1.500 15 2,000 20 2.500 25 3.000 30 3.500 35 4.000 40 5.000 Actuary estimates are based on the following main assumptions: Estimate 2018. 2017. Fluctuation rate 5,3% 5,3% Discount rate 2,4% 2,2% 30. LONG-TERM LIABILITIES DESCRIPTION 321282018. 31.12.2017. HRK'000 HRK'000 Liabilities to banks and other financial institutions /il 448 387 409.965 Minus: current portion (Note 32.) (22.474) (21.148) Total 425.913 388.817 li/ Liabilities to the banks and other financial institutions are stated as follows: DESCRIPTION 31.12.2018. 31.12.2017. HRK '000 HRK '000 Croatian Bank for Reconstruction and Development, 285.655 289 355 International Bank for Reconstruction and Development 162.732 105 973 Hrvatska postanska banka d.d., Zagreb 0 14.637 Minus: current portion (Note 32.) (22.474) (21 148) Total 425.913 388.817 44 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 30. LONG-TERM LIABILITIES (continued) Liabilities to the banks on 31 December 2018 are stated as follows: Debt balance as at Contract Interest 31 Dec 2018 Due date and Creditor date rate (HRK 000) repayment Collateral Ministry of finance guarantee, H2PP bills 2020-2030 of exchange and HBOR 28 01.2014 3% 285.655 quarterly promissory notes variable margin + 6M 2018 -2032, Ministry of finance IBRD 06 05 2015. EURIBOR 162.732 half-yearly guarantee Total 448.387 li/ As at 28 January 2014, the Company signed a loan agreement with Croatian Bank for Reconstruction and Development, in the amount of EUR 38,510,629 for the purchase of new trains. As at 31 December 2018, the amount of debt outstanding amounts to HRK 285,655 thousand. Loan repayment begins on 30 September 2020. /ii/ As at 6 May 2015, the Company signed a loan agreement with the International Bank for Reconstruction and Development (IBRD) in the amount of EUR 43,000,000 to help finance the Sustainable Croatian Railways Project in Europe. As of 31 December 2018 the amount of withdrawn funds amounts to HRK 162,732 thousand. Loan repayment started as of 15 June 2018. The movements in liabilities to the banks and other financial institutions during the year may be summarized as follows: DESCRIPTION 2018. 2017. HRK'000 HRK'000 1 January 409.965 491.659 New borrowings 67 732 42.740 Amounts repaid (own assets) (24.183) (119,742) Foreign exchange differences (5.127) _.______(4.692 31 December 448.387 409.965 The long-term liabilities to the banks and other financial institutions become due for the repayment as follows: DESCRIPTIO N 31.12.2018. 31.12.2017. HRK'000 HRK'000 Maturity up to one year 22.474 21.148 Due in one to two years 37,913 26.959 Due in two to three years 51.018 37.982 Due in three to four years 51.018 51.110 Due in four to five years 51 018 51.110 Due in over five years 234.946 221 656 Total 448.387 409.965 45 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 31. LIABILITIES FOR LOANS, DEPOSITS ETC. DESCRIPTION 31.12.2018. 31.122017 HRK'000 HRK 000 Liabilities for deposits - reconciliation 770 1.066 Total 770 1.066 32. LIABILITIES TO BANKS AND OTHER FINANCIAL INSTITUTIONS DESCRIPTION 31.12.2018. 31.12.2017 HRK'000 HRK'000 Current portion of the long-term liabilities to banks see Note 30) 22.474 21.148 Total 22.474 21.148 33. TRADE PAYABLES DESCRIPTION 31.12.2018. 31.12.2017. HRK '000 HRK'000 Domestic trade payables 73.783 80.938 Foreign trade payables 246 28 Total 74.029 80.966 Age analysis (structure) of trade payables is as follows: Due 30-60 60-90 90-120 > 120 Undue < 30 days days days days days Total HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 HRK'000 31.12.2018 72.898 815 160 1 3 152 74.029 31.12.2017 80202 586 0 12 13 153 80.966 34. LIABILITIES TO EMPLOYEES DESCRIPTION 31.12.2018 31.12.2017. HRK'000 HRK'000 Liabilities for net salaries and contributions 14.638 11.377 Other liabilities to employees 1 079 1.072 Total 15.717 12.449 46 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 35. LIABILITIES FOR TAXES, CONTRIBUTIONS AND SIMILAR FEES DESCRIPTION 31.12.2018 31 12,2017 HRK'000 HRK'000 Liabilities for taxes and contributions from salaries 5.612 5.615 Liabilities for contributions on salaries 2,880 2 933 Other liabilities 4 4 Total 8.496 8.552 36. OTHER LIABILITIES DESCRIPTIO N 31.12.2018. 31,12.2017. HRK '000 HRK'000 Liabilities to the Ministry of Finance for activated guarantees li/ 30.823 29.288 Other short-term liabilities 281 11.605 Total 31.104 40.893 /il Liabilities to the Ministry of Finance of the Republic of Croatia relate to regressive rights claims of the Ministry of Finance due payments per activated guarantees based on which the Ministry of Finance has settled part of the due liabilities to the commercial banks instead of the Company. Namely, in the past years, the Ministry of Finance has issued several guarantees to commercial banks as a guarantee for the repayment of the lending obligations of the Company. The Guarantee Issuance Agreement between the Republic of Croatia and the Company for the settlement of long-term obligations states that if the guarantee is paid out of the State Budget funds, the amount paid is considered to be due receivable of the Ministry of Finance. The loan beneficiary is obliged immediately after the payment was made by the Ministry of Finance to allocate amount of the repaid funds increased by the statutory default interest with all the relevant costs. 37. ACCRUED EXPENSES AND DEFERRED INCOME DESCRIPTIO N 31.12.2018. 31.12.2017. HRK'000 HRK'000 State subsidies for purchase and modernization of fixed assets li/ 546 186 613.467 Deferred income 2.485 1.933 Accrued expenses for the current year 5.846 2.311 Accrued expenses for the unused vacation days 6.309 6.345 Other 0 4.135 Total 560.826 628.191 li/ State subsidies for the modernization of railway vehicles refer to funds provided by the Republic of Croatia for modernizing and regular maintaining of railway vehicles. 47 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 38. OFF BALANCE SHEET RECORDS DESCRIPTION 31122018. 31,122017 HRK'000 HRK'000 Received warranties 614.721 116.823 Given warranties 1.254.605 2.128.739 Actual costs for the utilization of space 819 819 Monoblocks in Go§a 1.969 1 969 Locomotives in the ownership of railways of the former SFRY in Croatia 23.403 23 403 Receivables for the passenger wagons in the former Yugoslavia 74.692 74.692 Property in inaccessible area 13.458 13.458 Receivables from the Zajednica J2 (Union of Yugoslav Railways) 74.251 71 358 Receivables from ,HZHB" 42 540 42 540 Balance of cash registers 4.574 5.567 Other 7.034 7.035 Total 2.112.066 2.486.402 39. TRANSACTIONS WITH THE RELATED PARTIES A party is associated with an entity when it is directly or indirectly controlled by one or more intermediaries, controlled by or under the control of a subject, has a share in a subject that gives it significant influence over that subject and has a common control over the subject. 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С � � > (6 С � � j >Np `- !I � � и �'� � � о > � L � °' �_ -N`о с с � ш >�= s � в. о > L � � с N > J О 03 д�. �_ �(� >. '�- г� о о о с О О I- _�� гs Q = Z Ш М г= � и с� N cri пг О.� U с О ia >N iл ! �е I О = Е'- т т о Q ш и� �и ��.�-�и> о и.. Ш � Е о L и.�i Q.а а 1 ,N�г���;'������'=�=Q'о����_°;i�i-=======z�o�° � H2 PUTNIdKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 40. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Capital risk management The Company manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance. The capital structure of the Company consists of debt, which includes credits, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, legal and other reserves and retained earnings/accumulated losses. The net debt to equity ratio is presented as follows: D E S C R I P T 10 N 31.12,2018. 31,12.2017. HRK'000 HRK'000 Liabilities to the bank and other financial institutions 448.387 409.965 Cash and cash equivalents (80,217) Net debt 368.170 334.309 Equity 773.609 770.801 Net debt to equity ratio 0,48 0,43 After the capital increase, "Capital and reserves" are positive in 2018 and on 31 December 2018 the ratio of debt and equity was 0.48. Categories of financial instruments D E S C R I P T 10 N 31.12.2018. 31.12,2017. HRK'000 HRK'000 Financial assets Loans and receivables (including cash and cash equivalents) 114.730 112.294 Financial liabilities Amortized cost 601.633 576,769 Financial risk management objectives The Company controls and manages financial risk which could affect the Company's operations through internal risk reports which analyze exposures by degree and magnitude of the market risk, interest rate risk, credit risk, currency risk and liquidity risk, Market risk The Company operates in Croatian and international markets. The Management Board determines the prices of its products and services, separately for domestic and international markets. There were no significant changes in the impact of market risk on the Company's business. Interest rate risk The interest rate risk is a risk that the value of a financial instrument will fluctuate due to changes in market rates relative to the interest rate applicable to the financial instrument. Interest rate cash flow risk is the risk that the interest cost of an instrument will fluctuate overtime. There were no significant changes of the influence of the credit risks on the Company's operations. 51 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 40. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Company. Financial assets that potentially expose the Company to credit risk consist mainly of cash, cash equivalents and trade receivables. Trade receivables have been adjusted for bad and doubtful receivables. There were no significant changes of the influence of the credit risks on the Company's operations. Currency risk The official currency of the Company is the Croatian Kuna ("HRK"). However, certain transactions denominated in foreign currencies are calculated in the Croatian Kuna by applying the exchange rates in effect at the date of Statement of Financial Position / Balance sheet, and consequently, the Company is potentially exposed to risks of changes in currency rates. Net carrying amount of monetary assets and liabilities of the Company denominated in foreign currencies on the reporting date is shown as follows: Liabilities Assets Balance on 31 December 2018. 2017. 2018, 2017 HRK '000 HRK '000 HRK '000 HRK '000 EUR 168 007 109.976 274 929 CHF 0 0 27.962 27.299 Liquidity risk A liquidity risk is a risk that the Company would not be able to fulfill its financial liabilities to the other contractual party. A Company manages liquidity risk in a way that observes continuously and analyses expected and actual cash flow on the basis of maturity of financial assets and liabilities. Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on quoted market prices, if available. If market prices are not available, fair value is estimated using discounted cash flow models or other appropriate pricing techniques. Changes in the assumptions underlying the estimates, including discount rates and estimated future cash flows, significantly affect the estimates. For this reason, the estimated fair value cannot be obtained from the sale of a financial instrument at this point. Valuation techniques and assumptions in determining the fair value When calculating the fair value, the Company takes into account the rules of IFRS fair value hierarchy that reflects the significance of inputs used in the valuation process. Each instrument is individually assessed in detail. The levels of the fair value hierarchy is determined based on the lowest level and input data which are important for determining the fair value of the instrument. 52 H2 PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 40. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) The Balance sheet items that are measured at fair value are categorized into three levels of the IFRS fair value hierarchy, as follows: * 1st level indicators - fair value indicators derived from (unadjusted) prices listed on active markets for identical assets and identical liabilities. * 2nd level indicators - fair value indicators derived from other information, not the listed prices from the 1st level, and relating to observed asset or liability (i.e. their prices) or indirectly (derived from prices) and * 3rd level indicators - indicators derived from valuation method in which used input data on assets or liabilities are not based on the available market information (unobservable inputs). The Company's assets measured at fair value as at 31 December 2018 are shown in the following table: Level 1 Level 2 Level 3 Total u 000 HRK u 000 HRK u 000 HRK u 000 HRK Financial assets stated at fair value through profit or loss Investments in equity instruments 0 0 27962 27962 Total assets at fair value 0 0 27.962 27.962 The Company's assets measured at fair value as at 31 December 2017 are shown in the following table: Level 1 Level 2 Level 3 Total u 000 HRK u 000 HRK u 000 HRK u 000 HRK Financial assets stated at fair value through profit or loss investments in securities 0 0 27.299 27,299 Total assets at fair value 0 0 27299 2 299 The Company adopted IFRS 13 under which it is obliged to issue the hierarchy of fair value of financial assets which is not measured at fair value as well as the write-off of evaluation method and inputs used. Loans and receivables (including deposits with banks) are stated at amortized cost less provision for impairment. Although the result of a variable/fixed interest rate, due to their specific nature, the Company's Management believes that the carrying amount of these instruments does not significantly differ from their fair value, under the assumption that all payments based on exposure, the value of which was not reduced, will be collected as contracted, not taking into account any future losses. The fair value of loans is estimated based on inputs the price of which is not market available, therefore, they would be classified on level 2 on the fair value hierarchy list. Investments with available market price which are classified under the portfolio of investment held to maturity would be allocated on level 1. 53 HZ PUTNICKI PRIJEVOZ d.o.o., ZAGREB NOTES TO THE ANNUAL FINANCIAL STATEMENTS - continued For the year ended 31 December 2018 41. COURT DISPUTES AND CONTIGENT LIABILITIES /i/ The Company as a Defendant, together with the companies H2 Infrastruktura d.o.o., Zagreb and HZ Cargo d.o.o., Zagreb, participates in numerous court disputes. According to the plan of division of the company HZ Hrvatske ±eljeznice d.o.o., Zagreb, the eventual obligations incurred in these disputes are borne by newly founded companies based on their participation in the capital. As the legal successor of the merged company H2 Vuda vlakova d.o.o., Zagreb, the Company inherited its court litigations. Furthermore, the Company is also the defendant in certain individual court litigations. As at 31 December 2018, the Company made provision for the contingent liabilities arising from these legal proceedings in the amount of HRK 68,861 thousand (see Note 29). /iJl The Company is exposed to contingent liabilities in the amount of HRK 1,254,605 thousand (31 December 2017 in the amount of HRK 2,128,739 thousand) based on the guarantees given to subsidiaries. 42. EVENTS AFTER THE DATE OF STATEMENT OF FINANCIAL POSTION / BALANCE SHEET After statement of financial position/ balance sheet date there were no events that could significantly affect the annual financial statements for the year 2018 and consequently be published. 43. APROVAL OF THE ANNUAL FINANCIAL STATEMENTS The annual financial statements presented on the previous pages have been prepared and approved by thb Management Board of the Company on 31 May 2019. Signed on behalf of the Management Board: Zeljko Ukic, Mlade'n Lugaric, Da/mir Rub6ic, President of the Management Member of the Member of the Board Management Board Management Board HZ PUTNICKI PRIJEVOZ d o.o. Strojarska cesta 11 10 000 Zagreb 54