Ársskýrsla Advania 2013 by Markaðsdeild Advania

Advaniaâ&#x20AC;&#x2122;s op

A So ware

Con

1 of 10 largest IT companies in the Nordics

1.000 employees

20 offices in 3 countries

600 employees

120 employees

Sales 2013

280 emplo Sweden 41% Norway 14% Iceland 45%

TOP 10

IT compa

perations 2013

IT solutions

nsulting

Hardware

oyees

Z Hosting

Operating Service

Double increase in sales and customers 2012

2013

TOP 100

anies in the Nordics

Guðrúnartún 10 | 105 Reykjavík | Tel. 440 9000 | advania@advania.is | www.advania.is

Contents 8

Endorsement and Statement by the Board of Directors and the CEO

Independent Auditorsâ&#x20AC;&#x2122; Report

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements

Corporate Governance Statement (unaudited)

All information in the Annual report are possibly subject to typographical and/or printing errors.

Endorsement and Statement by Endorsement and Statement by the and the CEO the Board of Directors Board of Directors and the CEO

Advania hf. operates in the IT sector and offers services to private companies and the public sector as well as individuals. The consolidated financial statements of Advania hf. are prepared in accordance with IFRS as adopted by the EU. The financial statements comprise the consolidated finanical statements of Advania hf. (the "Company") and its subsidiaries together referred to as the "Group". The subsidiary Advania SIA in Latvia was sold during the during the year 2013. Operations in the year 2013 According to the consolidated statement of comprehensive income, loss for the year 2013 amounted to ISK 134 million. When taking into account translation difference of foreign subsidiaries total comprehensive loss for the year amounted to ISK 360 million. EBITDA for the year amounted to ISK 1,315 million. According to the consolidated statement of financial position, equity at the end of the year amounted to ISK 1,535 million, including share capital in the amount of 586 million ISK. Reference is made to the notes to the consolidated financial statements regarding information on changes in equity. The Board of Directors proposes that no dividends will be paid to shareholders in the year 2014. Share capital and Articles of Association The Company's total issued capital amounted to ISK 586 million at year-end 2013. The share capital is divided into shares of ISK 1, each with equal rights. The Company's Board of Directors comprises five members and two alternate members elected at the annual general meeting for a term of one year. Those persons willing to stand for election must give formal notice thereof to the Board of Directors at least five days before the annual general meeting. The Company's Articles of Association may only be amended at a legitimate shareholders' meeting, provided that amendments and their main aspects are clearly stated in the invitation to the meeting. A resolution will only be valid if it is approved by at least 2/3 of votes cast and is approved by shareholders controlling at least 2/3 of share capital represented at the shareholders' meeting. Share capital at the end of 2013 is divided among 50 shareholders, compared with 51 at year end 2012. At year end the 10 largest shareholders were:

Name

Framtakssjóður Íslands slhf.................................................................................................................. Arocea ehf....................................................................................................................................................... Títan Fjárfestingarfélag ehf.................................................................................................................. Íslandssjóðir hf., Sjóður 1......................................................................................................................... S9 ehf................................................................................................................................................................. Lífeyrissjóður starfsmanna ríkisins B-deild.................................................................................. Íslandsbanki hf............................................................................................................................................. Stoðir hf............................................................................................................................................................ Stafir lífeyrissjóður.................................................................................................................................... Lífeyrissjóður Verkfræðinga................................................................................................................. Other shareholders.................................................................................................................................... Total issued shares.....................................................................................................................................

Shares in ISK million

Shares in %

417.2 26.8 15.3 13.4 13.3 11.8 11.7 10.5 8.4 7.6 536.0 49.5 585.5

71.3% 4.6% 2.6% 2.3% 2.3% 2.0% 2.0% 1.8% 1.4% 1.3% 91.5% 8.5% 100.0%

Information on matters related to share capital is disclosed in note 23.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 8

Consolidated Financial Statements of Advania hf. 2013

Endorsement and Statement by the Board of Directors and the CEO, continued: Corporate Governance The Group's management is of the opinion that practicing good Corporate Governance is vital for the existence of the Group and is in the best interest of the shareholders, Group companies, employees and other stakeholders and will in the long run produce satisfactory profits on shareholders' investment. The framework for Corporate Governance practices within the Group consists of the provision of law, the parent company's Articles of Association, general securities regulations and the Icelandic Corporate Governance guidelines issued by the Iceland Chamber of Commerce, NASDAQ OMX Iceland and the Confederation of Icelandic Employers. Corporate Governance practices ensure open and transparent relationship between the Company's management, companies within the Group, its Board of Directors, its shareholders and other stakeholders. The Corporate Governance exercised in Advania hf. ensures sound and effective control of the Company's affairs and a high level of business ethics. It is the opinion of the Board of Directors that Advania hf. complies with the Icelandic guidelines for Corporate Governance. The Board of Directors has prepared a Corporate Governance statement in compliance with the Icelandic Corporate Governance guidelines which are described in full in an appendix to the Financial Statements. Statement by the Board of Directors and the CEO The annual consolidated financial statements of Advania hf. for the year ending 31 December 2013 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. According to our best knowledge it is our opinion that the annual consolidated financial statements give a true and fair view of the consolidated financial performance of the Company for the financial year 2013, its assets, liabilities and consolidated financial position as at 31 December 2013 and its consolidated cash flows for the financial year 2013. Further, in our opinion the consolidated financial statements and the endorsement of the Board of Directors and the CEO give a fair view of the development and performance of the Group's operations and its position and describes the principal risks and uncertainties faced by the Group. The Board of Directors and the CEO have today discussed the annual consolidated financial statements of Advania hf. for the year 2013 and confirm them by means of their signatures. The Board of Directors and the CEO recommend that the consolidated financial statements will be approved at the Annual General Meeting of Advania hf. Reykjavík, 3 March 2014 Board of Directors Finnbogi Jónsson Anna Rún Ingvarsdóttir Katarina Burton Kristinn Pálmason Þór Hauksson CEO Gestur G. Gestsson

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Consolidated Financial Statements of Advania hf. 2013

Independent Independent Auditors’ ReportAuditors' Report To the Board of Directors and Shareholders of Advania hf. We have audited the accompanying consolidated financial statements of Advania hf., which comprise the consolidated statement of financial position as at 31 December 2013, and the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2013, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU. Report on the Board of Directors report Pursuant to the legal requirement under Article 104, Paragraph 2 of the Icelandic Financial Statement Act No. 3/2006, we confirm that, to the best of our knowledge, the report of the Board of Directors accompanying the financial statements includes the information required by the Financial Statement Act if not disclosed elsewhere in the Financial Statements. Reykjavík, 3 March 2014 KPMG ehf. Margret G. Flóvenz Hlynur Sigurðsson

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 10

Consolidated Financial Statements of Advania hf. 2013

Consolidated Statement of Comprehensive Income forofthe year 2013 Income Consolidated Statement Comprehensive for the year 2013

Note

Sales ................................................................................................................................................... Cost of sales ...................................................................................................................................

2013

5 (

Gross profit ......................................................................................................................................

Loss before income tax ............................................................................................................. Income tax .....................................................................................................................................

25,932 19,963 ) ( 5,969

Other income ................................................................................................................................. 6 Sales expenses .............................................................................................................................. Administrative expenses ........................................................................................................ Curtailment of defined benefit scheme .......................................................................... 9 Impairment losses on intangible assets .......................................................................... 16.17 Results from operating activities ....................................................................................... Finance income ............................................................................................................................ Finance expense .......................................................................................................................... Net finance costs ..........................................................................................................................

2012

5,824

( ( ( ( (

46 2,378 ) 3,789 ) 183 ) 696 ) 1,176 )

( (

35 576 ) ( 541 ) (

134 567 ) 433 )

(

166 ) (

1,609 )

( (

546 2,438 ) 3,702 ) 0 0 375

25,783 19,959 )

(

463 )

Loss for the year ..........................................................................................................................

(

134 ) (

2,072 )

Other comprehensive income Items that are or may be reclassified to profit or loss Currency translation difference of foreign operations .......................................... Total comprehensive loss for the year ............................................................................

( (

226 ) 360 ) (

380 1,692 )

(

0.24 ) (

3.73 )

Earnings per share Basic and diluted earnings per share of ISK 1 .............................................................

The notes on pages 15 to 34 are an integral part of these consolidated financial statements.

The notes on pages 10 to 29 are an integral part of these consolidated financial statements. ________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts areare in ISK million Amounts in ISK million

Consolidated Statement of Financial Position Consolidated Statement Position as at of 31 Financial December 2013 as at 31 December 2013

Note

Assets: Operating assets ..................................................................................................................... Intangible assets ..................................................................................................................... Long term receivables .......................................................................................................... Deferred tax asset .................................................................................................................. Total non-current assets

31.12.2013

31.12.2012

12 16 19 18

1,630 6,625 265 706 9,226

1,348 7,134 160 744 9,386

4 20 21 22

0 420 5,854 242 6,516

290 384 6,573 443 7,690

Total assets

15,742

17,076

Equity: Share capital ............................................................................................................................. Share premium ........................................................................................................................ Reserves ....................................................................................................................................... Total equity

586 516 433 1,535

564 596 659 1,819

25 26 18

6,620 45 19 6,684

6,561 179 107 6,847

25 27 28 26 4

843 5,241 1,308 131 0 7,523

787 5,917 1,228 220 258 8,410

Total liabilities

14,207

15,257

Total equity and liabilities

15,742

17,076

Assets classified as held for sale .................................................................................... Inventories ................................................................................................................................. Trade and other receivables ............................................................................................. Cash and cash equivalents ................................................................................................ Total current assets

Liabilities: Loans and borrowings ......................................................................................................... Provisions ................................................................................................................................... Deferred tax liability ............................................................................................................ Total non-current liabilities Loans and borrowings ......................................................................................................... Trade and other payables .................................................................................................. Deferred income ...................................................................................................................... Provisions ................................................................................................................................... Liabilities classified as held for sale ............................................................................ Total current liabilities

The notes on pages 15 to 34 are an integral part of these consolidated financial statements.

Amounts are are in ISK million Amounts in ISK million

Consolidated Statement of Changes in Equity Consolidated Statement Changes in Equity forofthe year 2013 for the year 2013

Share capital

Balance at 1 January 2012 ....................................................

Share premium

554

Total comprehensive income: Loss for the year ...................................................................... Other comprehensive income ........................................... Total comprehensive loss ...................................................

Transactions with owners of the Company, recognised directly in equity: Issues of shares ........................................................................ Settlement of losses ............................................................... Change in reserves .................................................................. Total transactions with owners of the Company ..

1,189

274

380 380

(

207 800 )

(

593 )

Retained earnings

Reserves*

Total

1,489

3,506

(

2,072 ) (

(

2,072 ) (

2,072 ) 380 1,692 )

(

217 ) 800

5 5

583

0 0 5 5

Balance at 31 December 2012 ..............................................

564

596

659

1,819

Balance at 1 January 2013 ....................................................

564

596

659

1,819

Total comprehensive income: Loss for the year ...................................................................... Other comprehensive loss .................................................. Total comprehensive loss ...................................................

Balance at 31 December 2013 ..............................................

586

( (

54 134 ) 80 ) 516

( 226 ) 226 ) (

134 ) ( ( 134 ) (

134 ) 226 ) 360 )

134 134

76 0 76

433

1,535

* See note 23

The notes on pages 15 to 34 are an integral part of these consolidated financial statements.

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Consolidated Statement of Cash Flows Consolidated Statement Cash Flows forofthe year 2013 for the Year 2013

Note

Cash flows from operating activities: Loss for the year ...................................................................................................................... Adjustments for: Depreciation ............................................................................................................................. Amortisation of intangible assets ................................................................................. Impairment losses on goodwill ....................................................................................... Gain on sale of investments ............................................................................................. Net finance costs .................................................................................................................... Long term receivables, change ........................................................................................ Gain on sale of property, plant and equipment ..................................................... Income tax ................................................................................................................................. Inventories, change .............................................................................................................. Trade and other receivables, change .......................................................................... Trade and other payables, change ............................................................................... Cash generated from operations before interest and taxes ..............................

( 12 14

( 11 ( ( (

Interest income received ...................................................................................................... Interest expenses paid ........................................................................................................... Income tax paid ....................................................................................................................... Net cash from operating activities Cash flows used in investing activities: Proceeds from sale of operating assets ........................................................................ Proceeds from sale of shares in other companies ................................................... Cash disposed of due to discontinued operation ................................................... Acquisition of operating assets ........................................................................................ Acquisition of intangible assets ...................................................................................... Dividend from discontinued operation ....................................................................... Change in long term receivables ..................................................................................... Net cash used in investing activities Cash flows from financing activities: Proceeds from issue of share capital ............................................................................. Proceeds from non-current borrowing ......................................................................... Repayment of loans and borrowings ............................................................................ Short term borrowings .......................................................................................................... Net cash from financing activities Net change in cash and cash equivalents ......................................................................

2013

( (

12 16

( ( ( ( (

( (

(

Cash and cash equivalents at 1 January ........................................................................ Effects of exchange rate fluctuations on cash held ................................................

134 ) 429 512 0 1 540 0 4) 32 ) 46 ) 152 153 ) 1,265 35 573 ) 54 ) 673

7 14 16 ) 748 ) 335 ) 19 127 ) 1,186 )

Cash and cash equivalents at 31 December ...................................................................

(

2,073 ) 379 440 696 0 435 177 5) 463 111 719 ) 693 597

( (

40 450 ) 27 ) 160

( (

7 0 0 647 ) 655 ) 0 115 ) 1,410 )

( (

17 708 328 ) 59 ) 338

(

0 5,985 5,329 ) 208 864

175 )

(

386 )

443 (

2012

26) 242

811 18 443

The notes on pages 15 to 34 are an integral part of these consolidated financial statements. The notes on pages 10 to 29 are an integral part of these consolidated financial statements.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are are in ISK million Amounts in ISK million

the Consolidated Financial Statements NotesNotes to theto Consolidated Financial Statement 1.

Reporting entity Advania hf. (the "Company") is a limited liability company incorporated and domiciled in Iceland. The address of the Company’s registered office is at Guðrúnartún 10, Reykjavík. The consolidated financial statements of the Company as at and for the year ended 31 December 2013 comprise the Company and its subsidiaries, together referred to as the “Group” and individually as Group entities. The Group operates in the IT sector. A total of 71.3% of the Company's share capital is owned by Framtakssjóður Íslands slhf. (The Iceland Enterprise Investment Fund slhf.).

2. a.

Basis of preparation Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The financial statements were approved by the Board of Directors on 3 March 2014.

Basis of measurement The consolidated financial statements have been prepared on the historical cost basis. The methods used to measure fair value are discussed further in note 2e.

Functional and presentation currency These consolidated financial statements are presented in ISK, which is the Company’s functional currency. All financial information presented in ISK has been rounded to the nearest million.

Use of estimates and judgements In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised prospectively. Information about assumption and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: • note 17 - measurement of the recoverable amounts of cash-generating units • note 18 - utilisation of tax losses • note 26 - provisions • note 33 - uncertainty

Measurement of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. The fair value of customer relationships acquired in a business combination is determinded using the multiperiod excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued:

Notes, continued: 3.

Segment reporting Segment information is presented in respect of the Group's business segments. The segment format is organised by the nature of the operations and is based on the Group's management and internal reporting structure. The only segment in the Group's operation is information technology. Information on reportable segments Segment sales and assets are based on the geographical location of the assets. Iceland

Sweden

Norway

11,946 656 10,038

11,116 434 7,045

3,069 398 1,631

10,663 639 10,299

11,431 418 ( 7,582

3,938 718) 2,158

2013

Sales .................................. EBITDA ........................... Assets ............................... 2012

Sales .................................. EBITDA ........................... Assets ...............................

Other

Eliminations

Consolidated

16 ( 0 ( 8 (

215) 173) 2,980)

25,932 1,315 15,742

16 ( 2 349 (

265) 0 3,312)

25,783 341 17,076

Included in the EBITDA for Iceland is an increase in the lease obligation amounting to ISK 133 million, see note 26. In Norway the EBTIDA includes profit from the sale of an IP code, see note 6. 4.

Non-current assets held for sale The subsidiary Kogun USA Inc., has been written down in full after the sale of its subsidiary. The subsidiary Advania SIA, which was presented as an asset held for sale at 30 June 2013, was sold during the year.

Sale of goods and services Sale of goods and services are specified as follows: Sale of services .......................................................................................................................................... Sale of goods .............................................................................................................................................. Total sale of goods and services ......................................................................................................

2013

2012

16,255 9,677 25,932

16,231 9,552 25,783

Other income Advania AS, Norway sold an IP code (intellectual property code) during the period resulting in other revenues amounting to ISK 506 million.

Personnel expenses Personnel expenses are specified as follows: Salaries ......................................................................................................................................................... Contributions to defined contribution plans .......................................................................... Other salary related expenses .......................................................................................................... Total ..............................................................................................................................................................

9,456 864 1,760 12,080

9,754 841 1,755 12,350

Average number of employees during the year .....................................................................

982

1,018

Amounts in ISK million Amounts are are in ISK million

Notes, continued: Notes, continued: 8.

Personnel expenses are allocated as follows on operating items: Cost of services sold ............................................................................................................................... Sales expenses ........................................................................................................................................... Administrative expenses ..................................................................................................................... Total ...............................................................................................................................................................

2013

2012

8,943 1,857 1,280 12,080

9,215 1,860 1,275 12,350

Employee benefits As a result of a curtailment in the pension arrangement for the employees of Advania AS, Norway, ISK 183 million were expensed in the consolidated statement of comprehensive income during the year 2012.

10. Finance income and expense Finance income and expense are specified as follows: Interest income from loans and receivables ............................................................................. Net foreign exchange gain .................................................................................................................. Finance income ........................................................................................................................................

35 0 35

39 95 134

Interest expense on long-term interest bearing financial liabilities ........................... ( Interest expense on short-term interest bearing financial liabilities ......................... ( Net foreign exchange loss .................................................................................................................. ( Impairment of other investments ................................................................................................. Finance expense ...................................................................................................................................... (

479) ( 76) ( 21) 0 ( 576) (

492) 49) 0 26) 567)

Net finance income and expense ...................................................................................................

541) (

433)

33 123) 18) 0 76 32)

0 49 0 0 414 463

2012

(

11. Income tax Income tax recognised in the income statement is specified as follows: Deferred tax: Expected tax payable ............................................................................................................................ Origination and reversal of temporary differences .............................................................. Benefits of tax losses recognised .................................................................................................... Effect of change in tax rate ................................................................................................................ Impairment of tax asset ....................................................................................................................... Total income tax ..................................................................................................................................... Reconciliation of effective tax rate:

2013

Loss before income tax ........................................................ Income tax using the Company's domestic tax rate ...................................................................................... Effect of tax rates in foreign jurisdictions ................ ( Non-deductible expenses ................................................... Untaxable revenues .............................................................. ( Current year losses for which no deferred tax asset recognised ........................................................... ( Impairment of tax asset ...................................................... ( Change in estimates related to prior years ............... Other items ................................................................................

2013

( (

(

166)

20.0% ( 4.8%) 44.0% 6.6%) (

33) 8 73 11)

20.0% 0.2% 9.5% 0.0%

35.5%) ( 6.0%) ( 0.0% 0.0% 11.1% (

59) 10) 0 0 32)

11.7% 0.0% 25.7% 2.1% 69.2%

(

1,609)

( (

322) 4) 153 0 189 0 414 33 463

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 12. Operating assets Operating assets and their depreciation is specified as follows:

Machinery and other assets

Buildings

Cost Balance at 1 January 2012 .................................................................................... Reclassification ........................................................................................................ Additions ..................................................................................................................... Disposals ..................................................................................................................... Currency adjustments ......................................................................................... Balance at 31 December 2012 .............................................................................

0 0 210 0 0 210

Balance at 1 January 2013 .................................................................................... Additions ..................................................................................................................... Disposals ..................................................................................................................... Currency adjustments ......................................................................................... Balance at 31 December 2013 .............................................................................

210 0 0 0 210

Depreciation and impairment losses Balance at 1 January 2012 .................................................................................... Reclassification ........................................................................................................ Depreciation for the year ................................................................................... Disposals ..................................................................................................................... Currency adjustments ......................................................................................... Balance at 31 December 2012 .............................................................................

0 0 6 0 0 6

Balance at 1 January 2013 .................................................................................... Depreciation for the year ................................................................................... Disposals ..................................................................................................................... Currency adjustments ......................................................................................... Balance at 31 December 2013 .............................................................................

6 7 0 0 13

Carrying amounts At 1 January 2012 ..................................................................................................... At 31 December 2012 ............................................................................................... At 31 December 2013 ............................................................................................... Depreciation ratios ................................................................................................

Total

2,512 433 437 231) ( 102 3,253

2,512 433 647 231) 102 3,463

3,253 748 973) ( 217 3,245

3,463 748 973) 217 3,455

1,465 433 373 229) ( 67 2,109

1,465 433 379 229) 67 2,115

2,109 422 968) ( 249 1,812

2,115 429 968) 249 1,825

0 204 197

1,047 1,144 1,433

1,047 1,348 1,630

7-33%

(

13. Insurance value Insurance value of machine and other assets amounted to ISK 4,127 million at year-end 2013 (2012: ISK 3,618 million) and official value for the building amounts to ISK 251 million at year-end 2013 (2012: ISK 237 million). 14. The Group's depreciation and amortisation in the income statement is specified as follows:

Depreciation of operating assets, see note 12 ........................................................................... Amortisation of intangible assets, see note 16 ......................................................................... Depreciation and amortisation recognised in the income statement .........................

2013

2012

429 512 941

379 440 819

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million 18

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 15. Depreciation is allocated as follows on operating items: Cost of services sold ............................................................................................................................... Sales expenses ........................................................................................................................................... Administrative expenses ..................................................................................................................... Total .............................................................................................................................................................. 16. Intangible assets The Groupâ&#x20AC;&#x2122;s intangible assets are specified as follows:

2012

449 149 343 941

402 64 353 819

Other Customer

intangible assets

Goodwill

relationships

Cost Balance at 1 January 2012 .................................................... Reclassification ........................................................................ Purchase price allocation ................................................... ( Acquisitions during the year ............................................ Sales and disposals during the year .............................. Currency adjustments ......................................................... Impairment loss during the year .................................... ( Balance at 31 December 2012 .............................................

4,646 0 102) 0 0 258 697) 4,105

2,655 0 40 0 0 126 0 2,821

Balance at 1 January 2013 .................................................... Acquisitions during the year ............................................ Sales and disposals during the year .............................. Currency adjustments ......................................................... ( Balance at 31 December 2013 .............................................

4,105 0 0 153) ( 3,952

2,821 40 0 ( 121) ( 2,740

Amortisation and impairment losses Balance at 1 January 2012 .................................................... Reclassification ........................................................................ Amortisation for the year .................................................. Impairment losses on intangible assets ..................... Sales and disposals due to de-merger .......................... Currency adjustments ......................................................... Impairment loss during the year .................................... ( Balance at 31 December 2012 .............................................

2013

0 0 0 697 0 0 697) 0

586 0 215 0 0 0 0 801

(

1,111 190 0 ( 655 106) ( 106 0 ( 1,956

8,412 190 62) 655 106) 490 697) 8,882

1,956 295 271) ( 163) ( 1,817

8,882 335 271) 437) 8,509

600 190 225 0 106) ( 38 0 ( 947

1,186 190 440 697 106) 38 697) 1,748

947 300 271) ( 75) ( 901

1,748 512 271) 105) 1,884

Balance at 1 January 2013 .................................................... Amortisation for the year .................................................. Sales and disposals during the year .............................. Currency adjustments ......................................................... Balance at 31 December 2013 .............................................

0 0 0 0 0

Carrying amounts At 1 January 2012 ..................................................................... At 31 December 2012 ............................................................... At 31 December 2013 ...............................................................

4,646 4,105 3,952

2,069 2,020 1,757

511 1,009 916

Amortisation ratios ...............................................................

Impairment test

5-20%

12-50%

(

801 212 0 ( 30) ( 983

Total

7,226 7,134 6,625

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 17. Impairment tests Goodwill and other intangible assets that have indefinite live are tested annualy for impairment. These assets were recognised at fair value on aquisition date. For the purpose of impairment testing, goodwill is allocated to the subsidiaries which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The recoverable amount of cash generating units was based on their value in use. Value in use was determined by discounting the future cash flows generated from the continuing use of the units. Cash flows were projected based on actual operating results and a five year business plan. Cash flows were extrapolated for determining the residual value using a constant nominal growth rate which was consistent with the longterm average growth rate for the industry. Management believes that this forecast period was justified due to long-term nature of the business. The values assigned to key assumptions represent management's assessment of future trends in the IT sector and are based on historical data from both external and internal sources. Value in use was based on the following key assumptions: Long term growth rate ......................................................................................................................... Revenue growth: Weighted average 2013 / 2012 ....................................................................................................... 2014-2018 / 2013-2017 .......................................................................................................................... Budgeted EBITDA growth .................................................................................................................. WACC .............................................................................................................................................................

2013

2012

3.0-3.9%

1.5-4.9%

3.0% 3.4% 10.0% 13.9-15.6%

5.4% 4.3% 35.7% 11.9-16.4%

6,757

Recoverable amounts ............................................................................................................................

6,879

Changes in key assumptions would have the following impact on the carrying amount of goodwill due to operations in Norway: Long term growth rate - 1% ................................................................................................................ WACC +1% ................................................................................................................................................... EBITDA ratio -1% .....................................................................................................................................

( ( (

57 ) ( 78 ) ( 203 ) (

60 ) 83 ) 247 )

No impairment loss is recognised in the Financial Statements (2012: ISK 696 million due to Norway). 18. Deferred tax asset and liability Deferred tax asset and liability are attributable to the following: 2013 Assets

Operating assets ...................................................................... ( Intangible assets ..................................................................... ( Deferred exchange gain ....................................................... ( Trade and other receivables .............................................. Inventories ................................................................................. Provisions ................................................................................... Trade and other payables ................................................... Tax loss carry-forwards ...................................................... Other items ................................................................................ Total ..............................................................................................

17 ) ( 318 ) ( 1) 42 5 30 0 915 50 ( 706

2012 Assets

99 ) 7) ( 0 29 0 0 64 759 2) 744 (

2013 Liabilities

0 31 ) ( 0 11 0 0 0 1 0 ( 19 ) (

2012 Liabilities

9 264 ) 0 15 0 80 0 64 11 ) 107 )

Tax loss carry-forwards amounting to ISK 4,361 million (2012: ISK 5,194 million) related to the operations in Norway is not included in the deferred tax asset due to uncertainty in its utilisation even though that loss does not have an expiring date.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million 20

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 19. Long term receivables Long term receivables are related to long term service agreements in Sweden. 20. Inventories Inventories consist of computer equipment for sale. 21. Trade and other receivables Trade and other receivables are specified as follows: Trade receivables .................................................................................................................................... Other receivables .................................................................................................................................... Impairment losses on trade receivables ..................................................................................... Trade and other receivables .............................................................................................................

2013

(

4,297 1,643 86) ( 5,854

2012

5,347 1,396 170) 6,573

22. Cash and cash equivalents Cash and cash equivalents are specified as follows: Bank balances ......................................................................................................................................... Marketable securities ........................................................................................................................... Cash and cash equivalents ................................................................................................................

242 0 242

284 159 443

23. Equity (i) Share capital The Company's share capital, according to its Articles of Association, amounts to ISK 586 million at year end 2013. Share capital was increased by 22 million during the year. Shareholders are entitled to one vote per share at shareholders' meetings. (ii) Share premium Share premium represents excess of payment above nominal value (ISK 1 per share) that shareholders have paid for shares sold by the Company. According to Icelandic Companies Act, 25% of the nominal value of share capital must be held in reserve which can not be paid out as dividend to shareholders. (iii) Other reserves Foreign exchange differences arising on translation of financial statements of foreign subsidiary are recognised directly in a separate component of equity. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss. Reserves are specified as follows:

2013

2012

Translation reserve................................................................................................................................. Legal reserve............................................................................................................................................... Restricted equity due to composition agreement................................................................... Other reserves total................................................................................................................................

261 131 41 433

487 131 41 659

24. Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Parent by the weighted average outstanding number of shares during the period and shows the earnings per share. The calculation of diluted earnings per share is identical to basic earnings per share as no convertible notes or stock options have been issued. Basic earnings per share: Loss for the year attributable to equity holders of the parent ....................................... ( Weighted average number of shares for the year .................................................................. Basic earnings per share of ISK 1 ..................................................................................................... ( Dilluted earnings per share of ISK 1 .............................................................................................. (

134 ) ( 566 0.24) ( 0.24) (

2,072 ) 555 3.73) 3.73)

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 25. Non-current interest-bearing liabilities:

2013

2012

Secured bank loans ................................................................................................................................ Other long-term liabilities ................................................................................................................. Total .............................................................................................................................................................

6,355 265 6,620

6,556 5 6,561

Current interest-bearing liabilities: Current portion of secured bank loans ..................................................................................... Current portion of other long-term liabilities ......................................................................... Secured bank loan .................................................................................................................................. Finance lease liabilities ........................................................................................................................ Bank overdraft ......................................................................................................................................... Total .............................................................................................................................................................

357 83 193 0 210 843

240 6 236 46 259 787

Total interest-bearing liabilities .....................................................................................................

7,463

7,348

Terms and conditions of outstanding loans were as follows:

Currency

2013 Average interest rate

Secured bank loan .............................. Secured bank loan .............................. Other long term liabilities ............... Other long term liabilities ............... Other long term liabilities ...............

ISK SEK ISK NOK DKK

7.4% 3.6% 7.6% 6.4% -

Secured bank loan ............................... Finance lease liabilities ..................... Bank overdraft ...................................... Bank overdraft ...................................... Bank overdraft ...................................... Total ..........................................................

NOK ISK ISK NOK SEK

6.4% 10.6% 6.3% 3.6%

Carrying amount

5,705 1,007 291 0 57 7,060 193 0 55 129 26 7,463

2012 Average interest rate

7.4% 3.6% 6.4% 7.5% 12.1% 6.3% -

Carrying amount

5,735 1,030 0 32 11 6,808 236 46 24 234 0 7,348

Repaymens of borrowings are specified as follows: 2013

Repayments in 2013 ............................................................................................................................... Repayments in 2014 ............................................................................................................................... Repayments in 2015 ............................................................................................................................... Repayments in 2016 ............................................................................................................................... Repayments in 2017 ............................................................................................................................... Repayments in 2018 ............................................................................................................................... Subsequent repayments .................................................................................................................... Total .............................................................................................................................................................

441 2,433 310 291 2,354 1,231 7,060

2012

246 2,460 240 240 0 0 3,622 6,808

Landsbankinn hf. has granted Advania hf. a temporary exemption from the covenants in the loan agreements as it was not fulfilled at year end 2013. The exemption is valid until year end 2014.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 26. Provision for onerous contracts The Group has entered into non-cancellable leases for office buildings which the Group had to some extent ceased to use by 31 December 2013. Market conditions have meant that the rental income for these buildings is lower than the rental expense. The obligation for the discounted future payments, net of expected rental income, has been provided for, amounting to ISK 150 million (2012: ISK 399 million), of which ISK 131 million (2012: ISK 220 million) is classified as a current liability. During the year the Group concluded an agreement with the lessor of all of the leased buildings. The agreement entails that there will be limited operational effects in the year 2014. 27. Trade and other payables Trade and other payables are specified as follows: Trade payables ......................................................................................................................................... Other payables ......................................................................................................................................... Total trade and other payables .......................................................................................................

2013

2012

2,356 2,885 5,241

2,806 3,111 5,917

28. Deferred income Deferred income is related to billing in advance of work in uncompleted, service agreements and other customer advances. 29. Financial risk management and fair values Overview The Group has exposure to the following financial risks: - Credit risk - Liquidity risk - Market risk This note presents information about the Group's exposure to each of the above risks, the Group's objectives, policies, and processes for measuring and managing risk, and the Group's management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Group's risk management framework. The Group's risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group's activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group's receivables from customers and investment securities. (i) Exposure to credit risk The carrying amount of financial assets represents the maximum credit risk exposure. The maximum exposure to credit risk at the reporting date was: Note

Long term receivables ......................................................................................... Trade and receivables .......................................................................................... Cash and cash equivalents ...............................................................................

19 21 22

Carrying amount 2013

265 5,854 242 6,361

2012

160 6,573 443 7,176

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 29. Financial risk management and fair values, continued: (i) Exposure to credit risk, continued: The maximum exposure to credit risk for loans and receivables at the reporting date by geographic region Iceland .......................................................................................................................................................... Sweden ........................................................................................................................................................ Norway ....................................................................................................................................................... Other European countries ................................................................................................................

2013

2012

1,549 3,699 600 6 5,854

1,659 4,029 848 37 6,573

(ii) Trade and other receivables The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. (iii) Guarantees The Group's policy is to provide financial guarantees only to wholly-owned subsidiaries. (iv) Impairment losses The aging of trade receivables at the reporting date was: Gross 2013

Not past due ............................................................................. Past due 0-60 days ................................................................. Past due 61-90 days ............................................................... Past due 91-180 days ............................................................. Past due 181-360 days ........................................................... Past due more than one year ...........................................

3,302 547 38 297 61 52 4,297

( ( ( ( ( ( (

Impairment 2013

Gross 2012

1) 3) 1) 29) 20) 32) 86)

4,512 362 94 179 114 86 5,347

Impairment 2012

( ( ( ( ( (

0 12) 12) 87) 24) 35) 170)

The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 January ............................................................................................................................. Losses during the period .................................................................................................................... Net change in allowance ..................................................................................................................... Currency adjustments ......................................................................................................................... Balance at 31 December .......................................................................................................................

( ( (

2013

2012

170 40) ( 13) 31) 86

83 20) 107 0 170

Based on historical default rates, the Group believes that, apart from the above, no impairment allowance is necessary in respect of trade receivables. A significant part of the balance relates to customers that have a good payment record with the Group. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Group monitors cash flow requirements and optimises its cash return on investments. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 60 days. ________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million 24

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 29. Financial risk management and fair values, continued: Liquidity risk, continued: The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

2013

Carrying amount

Contractual cash flows

Within 12 months

1-2 years

2-5 years

More than 5 years

Non-derivative financial liabilities Secured bankloans .............................. Other long-term loans .............................. Bank overdraft ........... Trade and other payables .......................

6,905

8,320

1,025

2,632

3,480

1,183

348 210

411 210

104 210

100 0

153 0

54 0

5,241 12,704

5,241 14,182

5,241 6,580

0 2,732

0 3,633

0 1,237

7,001

8,806

1,126

2,740

1,428

3,512

43 258

11 258

32 0

0 0

5,917 13,265

5,917 15,070

5,917 7,358

0 2,772

0 1,428

0 3,512

2012

Non-derivative financial liabilities Secured bankloans .............................. Finance lease ............... liabilities ...................... Other long-term loans .............................. Bank overdraft ........... Trade and other payables .......................

It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. (i) Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities. The Group's exposure to foreign currency risk was as follows, based on notional amounts at 31 December 2013: Trade and other receivables ........................................... Cash ............................................................................................. Loans and other financial liabilities ........................... Trade payables, other payables ..................................... Net exposure ...........................................................................

( (

EUR

NOK

47 29 0 304) 228)

198 0 0 0 198

USD

( (

84 25 0 ( 672) ( 563) (

Other

112 0 55) 75) 18)

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 29. Financial risk management and fair values, continued: (i) Currency risk, continued: The Group's exposure to foreign currency risk was as follows, based on notional amounts at 31 December 2012: EUR

Trade and other receivables ........................................... Cash ............................................................................................. Loans and other financial liabilities ........................... Trade payables, other payables ..................................... Net exposure ...........................................................................

( (

37 2 0 236) ( 197)

NOK

458 0 0 1) ( 457 (

The following significant exchange rates of ISK applied during the year 2013: SEK ................................................................................................................................................................. NOK ............................................................................................................................................................... DKK ................................................................................................................................................................ USD ................................................................................................................................................................ EUR ................................................................................................................................................................

USD

Other

50 15 0 ( 668) ( 603)

34 5 11) 20) 8

Average rate

Reporting date spot rate

18.8 20.8 21.8 122.2 162.4

17.9 18.9 21.2 114.8 158.1

Sensitivity analysis 10% strengthening of the ISK against the foreign currencies would have increased equity and decreased loss by ISK 59 million (2012: ISK 27 million). The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecasted sales and purchases. 10% weakening of the ISK against the foreign currencies would have had the same effect, but in the opposite direction. Currency risk due to borrowings is deemed not significant. (ii) Interest rate risk The Group's loans and borrowings are almost solely with 3 to 6 months variable interest rate. A change of 100 basis points in interest rates would increase or decrease equity and profit or loss by ISK 74 million (2012: ISK 73 million). Fair values versus carrying amounts The difference between fair values and carrying amounts of financial assets and liabilites is not material. 30. Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: Less than one year .................................................................................................................................. Between one and five years ............................................................................................................... More than five years .............................................................................................................................. Total ...............................................................................................................................................................

2013

2012

1,233 2,455 2,587 6,275

1,048 2,868 3,267 7,183

The Group leases a number of properties under operating leases. The leases vary between properties but run for a period of seven to fifteen years, with an option to renew the lease after that date. Leases provide for additional rent payments that are based on changes in a local price index. Each lease contract is noncancellable. The Group leases a number of cars under operating leases. The leases typically run for a period of three years, with an option to renew the lease after that date. Each lease contract is cancellable due to penalty. During the year ended 31 December 2013 ISK 1,587 million was recognised as an expense in the income statement in respect of operating leases (2012: ISK 962 million). ________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 26

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 31. Related parties Identity of related parties Parties are considered to be related if one party has the ability to directly or indirectly control the other party or exercise significant influence over the other party in making financial or operational decisions. The Group’s related parties include: Key management personnel, close family members of key management personnel and entities which are controlled, significantly influenced by or for which significant voting power is held by the key management personnel or their close family members, subsidiaries and associates. A total of 71.3% of the Company is owned by Framtakssjóður Íslands slhf., which is in majority owned by Icelandic pension funds and Landsbankinn hf. Transactions with related parties The Group has several business relationships with related parties. Transaction with such parties are made in the ordinary course of business and on substantially the same terms as comparable transactions with other parties. Transactions with management and key personnel Salaries and benefits paid to management for their work for the Group amounted to ISK 582 million (2012: ISK 604 million). Transactions with other related parties During the year the Group bought goods and services from associates amounting to ISK 202 million (2012: 314 million). The Group's revenues from associates amounted to ISK 650 million (2012: 774 million). The Group has not granted any loans to its associates. Trade receivables from associates at year end amounted to ISK 70 million (2012: 68 million) and trade payables amounted to ISK 24 million (2012: 24 million). 32. Group entities The Company holds three (2012: seven) subsidiaries which all are included in the consolidated financial statements. The subsidiaries own two (2012: two) subsidiaries which are also included. Ownership interest 2013 2012

Advania AS, Norway ............................................................................................................................. Advania Holding AB, Sweden ......................................................................................................... Advania AB, Sweden ......................................................................................................................... Virtus AB, Sweden ............................................................................................................................. Advania SIA, Latvia ................................................................................................................................ Exa ehf., Reykjavík ................................................................................................................................. Miðavefur ehf., Reykjavík .................................................................................................................. Sterna ApS, Denmark ............................................................................................................................ Thor Data Center ehf., Hafnarfjörður ..........................................................................................

100% 100% 100% 100% 50% -

100% 100% 100% 100% 100% 100% 100% 50% 100%

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 33. Other matters Uncertainty In December 2013 the Icelandic Tax Authorities ruled that interest expenses on loans that had been transferred to the Company as a result of a reverse acquisition in 2006 did not qualify as tax deductible expenses and re-assessed the tax calculations for the years 2007 and 2008. A ruling for the years 2009 and 2010 was postponed. Although the Company did not agree with the Tax Authorities reasoning an allowance was made on the deferred tax asset at year end 2012 without constituting an acceptance of such a claim in any way. The effects of the ruling in December 2013 are in most aspects in accordance with the estimated allowance at year end 2012 and an allowance is estimated for the years 2009 and 2010. The ruling will be appealed to the State Internal Revenue Board. Advania hf. has instigated court proceedings against Stólpar ehf. in relation to an agreement between the companies which has not been fulfilled by Stólpar. The agreement relates to the confirmed intent of the two companies to work together with the objective of minimizing the cost due to the termination of previous office lease obligations when moving to the current location which was developed and owned by Stólpar. The proceeding is scheduled to be held during the year 2014 in the District Court of Reykjavík. Matters resolved Advance ehf. instigated court proceedings against Advania hf. in relation to the possible similarity of the logos of the two companies. The District Court of Reykjavík as well as the Supreme Court ruled in favor of Advania hf. 34. Security Advania hf. has issued the following security documents to secure its debts. The Company has issued a several indemnity letters and pledged its receivables and inventories to secure the debts under Facility agreement with Landsbankinn hf. The Company has pledged its building to secure its debts under a Facility agreement between Advania hf. and MP Bank hf. The Company's subsidiary, Advania AB, has a credit facility with Skandinaviska Enskilda Banken (SEB). SEK 50 million in credit facility is secured by pledged accounts receivables. Advania hf. is a guarantor for Advania AS credit facility in the amount of NOK 10 million to Landsbankinn hf. The Company has provided Landsbankinn hf. with a share pledge over the assets and operations of the subsidiaries Advania Holding AB (100% of total shares) and Advania AS (100% of the total shares). 35. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by the Group's entities.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: a. Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Transactions eliminated on consolidation Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. b. Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or lossare generally recognised in profit or loss. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill, are translated to ISK at exchange rates at the reporting date. The income and expenses of foreign operations, are translated to ISK at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. c. Financial instruments (i) Non-derivative financial assets The Group classifies non-derivative financial assets into loans and receivables, other receivables and cash and cash equivalents. The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 35. Significant accounting policies, continued: c. Financial instruments (i) Non-derivative financial assets, continued: Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months. (ii) Non-derivative financial liabilities The Group initially recognises debt securities issued on the date that they are originated. All other financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. The Group has the following non-derivative financial liabilities: loans and borrowings, bank overdrafts, and trade and other payables. (iii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Repurchase and reissue of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is transferred to/from share premium or retained earnings. d. Operating assets (i) Recognition and measurement Items of operating assets are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Any gain or loss on disposal of an item of operating assets calculated as the difference between the net proceeds from disposal and the carrying amount of the item is recognised in profit or loss. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million 30

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 35. Significant accounting policies, continued: d. Operating assets, continued: (iii) Depreciation Items of property, plant and equipment are depreciated from the date they are available for use. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied on the asset. The estimated useful lives for the current and comparative periods are as follows: Buildings .......................................................................................................................................................................................... Machinery and other assets ..................................................................................................................................................

33 years 2-15 years

Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. e. Intangible assets and goodwill (i) Goodwill Goodwill that arises on the acquisition of subsidiaries is presented with intangible assets. Goodwill represents the excess of the cost of the acquisition over interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative, it is recognised immediately in profit or loss. Goodwill is stated at cost less accumulated impairment losses. (ii) Other intangible assets Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. (iii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss when incurred. (iv) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives for the current period are as follows: Customer relationships ........................................................................................................................................................... Other intangible assets ............................................................................................................................................................

5-20 years 2-8 years

Amortisation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. f.

Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs, and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and estimated costs necessary to make the sale.

Amounts are in ISK million Amounts are in ISK million

Notes, continued: Notes, continued: 35. Significant accounting policies, continued: g. Impairment (i) Non derivative-financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset, and that loss events had an impact on the estimated future cash flows of that asset can be estimated reliably. An impairment loss in respect of financial asset measured at amortised cost is calculated at the difference between its carrying amount and the present value of the estimated future cash flows dicounted at the asset's original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised. When an event occurring after the impairment recognised causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed throught profit or loss. (ii) Non-financial assets The carrying amounts of the Groupâ&#x20AC;&#x2122;s non-financial assets other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the assetâ&#x20AC;&#x2122;s recoverable amount is estimated. Goodwill and intangible assets that have indefinite lives are tested annually for impairment. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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 impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit"). The goodwill acquired in a business combination is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets impairment losses are reversed only to the extent that the assetâ&#x20AC;&#x2122;s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. h. Employee benefits (i) Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss when they are due. (ii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million 32

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 35. Significant accounting policies, continued: h. Employee benefits, continued: (iii) Termination benefits Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. i.

Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

(i) Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. j. Revenue (i) Sale of goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. (ii) Rendering of services Revenue from rendering of services is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. (iii) Commissions When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognised is the net amount of commission made by the Group. k. Leases (i) Leased assets All leases are operating leases and the leased assets are not recognised on the Groupâ&#x20AC;&#x2122;s statement of financial position. (ii) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. l.

Finance income and expenses Finance income comprises interest income on funds invested and dividend income. Interest income is recognised as it accrues, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Groupâ&#x20AC;&#x2122;s right to receive payment is established.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Notes, continued: Notes, continued: 35. Significant accounting policies, continued: l. Finance income and expenses, continued: Finance expenses comprise interest expense on borrowings and impairment losses recognised on financial assets. All borrowing costs are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether foreign currency movements are in a net gain or net loss position. m. Income tax Income tax in profit or loss comprises current and deferred tax. Income tax 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 equity. (i) Current tax 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. (ii) Deferred tax Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which tax losses and temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. n.

Earnings per share The Group presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period adjusted for own shares held.

Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components. Operating segments' operating results are reviewed regularly by the Group's CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

37. New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013 Amounts are in ISK million 34

Consolidated Financial Statements of Advania hf. 2013

Amounts are in ISK million

Corporate Governance Statement (unaudited)

Corporate Governance Statement The framework The guidelines on Corporate Governance issued by the Iceland Chamber of Commerce, NASDAQ OMX Iceland and the Confederation of Icelandic Employers, along with the Company's Articles of Association, and rules for Issuers of Securities listed on the NASDAQ OMX Iceland make up the framework for Advania's Corporate Governance practices. The Company's Articles of Association, Remuneration policy, Equal Opportunities policy, Rules of Procedure for the Board of Directors and the Corporate Governance statement can be found on the Company's website and the guidelines, while the rules for Issuers are on the website of NASDAQ OMX Iceland. The Company complies to the rules mentioned above. No government organization has found the Company to be in breach with any rule or regulation. In February 2014 the Iceland Chamber of Commerce, the Confederation for Icelandic Employers and NASDAQ OMX Iceland granted the Company a recognition for “Exemplary in Corporate Governance”. The aim of the recognition is to increase credibility and transparency of Icelandic companies’ corporate governance with respect to shareholders and interested parties. Values and code of ethics and corporate responsibility The core values Advania are passion, agility and competence. The values were chosen by the employees Values and Codeof ofthe Ethics and Corporate Responsibility themselves. The core values of the Advania are passion, agility and competence. The values were chosen by the employees themselves. PASSION refers to the fact that the Company’s employees are proud, love their field of profession and work arduously with their hearts and souls. Advania strives to create an entertaining workplace with good morale, frequent recreational events and good working facilities. PASSION refers to the fact that the Company’s employees proud, loveservice their field of profession and AGILITYare refers to the attitude of the employees, who aim to exceed the expectations of the customer work arduously with their hearts and souls. Advania with pro-active initiatives and react promptly and speedily to all wishes for service. The employees of strives to create an entertaining workplace with good Advaniafrequent always try to find swift solutions to any tasks given to them by co-workers or customers. morale, recreational events and good working facilities. COMPETENCE refers both to the vast expertise of the employees, many of whom possess decades of AGILITY refers to field the service attitude of the employexperience in the of information technology, but also the extensive education covering every field from ees, who aimengineering to exceed the the custechnology, andexpectations computing toofsocial sciences, design and business administration and finance. tomer with pro-active initiatives and react promptly and speedily to alliswishes for service. Advania’s slogan WELCOME TO ITThe andemployees was also chosen by the members of staff as to reflect the attitudes of Advania always try to guests find swift to any of the Company towards and solutions customers. tasks given to them by co-workers or customers. The Board of Directors and Executive Committee COMPETENCE refers both to the vast expertise of the Board of Directors employees, many of whom possess decades of experiFinnbogi Jónsson, of the Board but also ence in the field ofChairman information technology, Finnbogi Jónsson works as a consulting engineer the extensive education covering every field from tech- and economist. He holds an MSc degree in Physical Engineering and a BSc in Business from the Technical University of Lund, Sweden, nology, engineering and degree computing to social Administration sciences, design and business finance. from 1978. Finnbogiadministration was the CEO and of Framtakssjóður Íslands (the Enterprise Investment Fund) from 2010 to 2012, CEO of New Business Fund in Iceland from 2006 to 2010, Executive Chairman of Samherji Plc from 2000 to 2005, CEO of Iceland Seafood Plc from 1999 to 2000, CEO of Síldarvinnslan Plc from 1986 to 1999, CEO of Advania’s slogan is WELCOME TO IT and was also chosen by the members of staff as to reflect the attitudes of the Industrialtowards Development of Akureyri from 1982 to 1986 and Head of Divison in the Ministry for Company guests Company and customers. Industry from 1979 to 1982. Finnbogi has been a board member in more than 30 companies in Iceland and abroad.

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30 35

Corporate Governance Statement The Board of Directors and Executive Committee Finnbogi Jónsson, chairman of the board Finnbogi Jónsson works as a consulting engineer and economist. He holds an MSc degree in Physical Engineering and a BSc degree in Business Administration from the Technical University of Lund, Sweden, from 1978. Finnbogi was the CEO of Framtakssjóður Íslands (the Enterprise Investment Fund) from 2010 to 2012, CEO of New Business Fund in Iceland from 2006 to 2010, Executive Chairman of Samherji Plc from 2000 to 2005, CEO of Iceland Seafood Plc from 1999 to 2000, CEO of Síldarvinnslan Plc from 1986 to 1999, CEO of Industrial Development Company of Akureyri from 1982 to 1986 and Head of Divison in the Ministry for Industry from 1979 to 1982. Finnbogi has been a board member in more than 30 companies in Iceland and abroad. Anna Rún Ingvarsdóttir Anna Rún Ingvarsdóttir is a graduate in Business Administration and works as Chief Financial Officer of Apple VAD in Iceland. Previously she held the same post at Almenna verkfræðistofan hf. from 2008 to 2011 and from 2005 to 2008 at Humac, the operator of the Apple-stores in Scandinavia. She was Operational Manager of Median from 2004 to 2005. Anna was an employee of Strengur hf. from 1996 to 2004, where she was in charge of the service- and advisory department. From 1992 to 1996 she was the Chief Financial Officer at Tölvusamskipti hf. Katarina Burton Katarina Burton runs her own consulting company, Burton Consulting in Stockholm, Sweden and has done so since 2008. She has been a member of the board of Advania Sweden since 2012. She has over 25 years of experience in IT and telecom companies. From 1995 to 2007 she worked at the Swedish telecommunications company Ericsson, and since 1999 she worked in the market area Nordics & Baltics as the VP of marketing and communications and before that as a Key Account Manager. Between 1982 and 1994 she was a manager at Bull, the French IT company. Katarina has a Bachelor’s degree in science and Business Administration from the University of Lund as well as an Ericsson Executive from Columbia Business School in New York. Kristinn Pálmason Kristinn Pálmason works for the Framtakssjóður Íslands (the Enterprise Investment Fund). Kristinn completed an M.Sc. degree in Corporate Finance in 2010 and a B.Sc. in Business Administration in 2003 at the University of Reykjavik. Prior to working for the Enterprise Investment Fund he worked as a project manager at the Vestia ehf. holding company and Landsbanki from 2002 to 2008. At Landsbanki he was a mergers & acquisitions expert and a corporate restructuring consultant at the head office and London office. He has served on the boards of directors of various companies in Iceland. Þór Hauksson Þór Hauksson is the CEO of Burðarás hf. He graduated as B.A. in Political Science from the University of Iceland in 1995, M.A. in Political Science and Economy from the University of Hull in 1998 and MBA from Reykjavik University in 2007. Prior to joining Burðarás hf. Þór worked for Framtakssjóður Íslands (The Iceland Enterprise Investment Fund), Skipti, the parent company of Síminn in the field of business development, company investment and merger. From 2001 to 2006 he was an employee of Straumur Investment Bank, specialising in investment and financing. Þór worked at the department of asset management at Kaupþing from 1998 to 2001 and from 1995 to 1997 as an expert at the Ministry of Finance.

Corporate Governance Statement, continued: Alternate Board Members Erna Eiríksdóttir, Eimskipafélag Íslands hf. Hafliði Helgason, Framtakssjóður Íslands ( The Iceland Enterprise Investment Fund)

Executive Committee Gestur G. Gestsson CEO Gestur G. Gestsson is the CEO of Advania, a position he has held since 2009. Previously, Gestur served as the CEO of Teymi in Iceland. He held the posts of Chief Technology Officer at Vodafone in Iceland for three years and was Director of Sales and Marketing prior to that. Before his time at Vodafone Gestur served as the CEO of Icelandic pioneering ISP Margmiðlun and was marketing manager of interactive gaming company Betware. He has served as Chairman of the Board of top-level domain registry Internet in Iceland and had the same position at Vodafone in the Faroe Islands. Gestur has a degree in Political Science and Economics from the University of Iceland. Mikael Noakson, CEO Advania AB, Sweden Ole Morten Settevik, CEO Advania AS, Norway Board of Directors The Company’s Board of Directors exercises the supreme authority in the Company’s affairs between shareholders’ meetings, and it is entrusted with the task of ensuring that the organisation and activities of the Company’s operation are at all times in correct and proper order. The Board of Directors is instructed in the Company’s Articles of Association to appoint a CEO for the Company and decide the terms of his or her employment. The Board of Directors and the CEO are responsible for the management of the Company. The Company’s Board of Directors must at all times ensure that there is adequate supervision of the Company’s accounts and the disposal of its assets and shall adopt working procedures in compliance with the Companies Act. Only the Board of Directors may assign power of procuration on behalf of the Company. The signatures of the majority of the members of the Board are required to bind the Company. The CEO is responsible for the daily operation of the Company and is required in his work to observe the policy and instructions set out by the Company’s Board of Directors. Daily operation does not include measures which are unusual or extraordinary. Such measures can only be taken by the CEO with the specific authorization of the Board of Directors, unless it is impossible to await the decision of the Board without seriously disadvantaging the operation of the Company. In such instances, the CEO is required to consult with the Chairman of the Board, if possible, after which the Board of Directors must immediately be notified of the measures. The CEO shall ensure that the accounts and finances of the Company are in conformity with the law and accepted practices and that all assets belonging to the Company are securely safeguarded. The CEO is required to provide members of the Board of Directors and Company auditors with any information pertaining to the operation of the Company which they may request, as required by law.

Consolidated Financial Statements of Advania hf. 2013

the Board of Directors, unless it is impossible to await the decision of the Board without seriously disadvantaging the operation of the Company. In such instances, the CEO is required to consult with the Chairman of the Board, if possible, after which the Board of Directors must immediately be notified of the measures. The CEO shall ensure that the accounts and finances of the Company are in conformity with the law and accepted practices and that all assets belonging to the Company are securely safeguarded. The CEO is required to provide members of the Board of Directors and Company auditors with any information pertaining to the operation of the Company which they may request, as required by law.

Corporate Governance Statement, continued:

The Company's Board of Directors consists of five members and two alternate members, elected at the Annual General Meeting for a term of one year. Those who intend to stand for election to the Board of Directors must inform the Board in writing of their intention at least five days before the annual general meeting, or extraordinary shareholders' meeting at which elections is scheduled. Only those who have informed the Board of their candidacy are eligible. The Board of Directors elects a Chairman among its members, and otherwise allocates its obligations among its members as needed. The Chairman calls Board meetings. A meeting must also be held if requested by a member of the Board of Directors or the CEO. Meetings of the Board are valid if attended by a majority of its members. However, important decisions shall not be taken unless all members of the Board have had an opportunity to discuss the matter, if possible. The outcome of issues is decided by force of vote, and in the event of an equality of votes, the issue is regarded as rejected. The CEO attends meetings of the Board of Directors, even if he or she is not a member of the Board, and has the right to participate in discussions and submit proposals unless otherwise decided by the Board in individual cases. A book of minutes is kept of proceedings at meetings must be signed by participants in the meeting. A Board member who disagrees with a decision made by the Board of Directors is entitled to have his or her dissenting opinion entered in the book of minutes. The same applies to the CEO. The Chairman is responsible for the Board's relations with the shareholders and he shall inform the Board on the views of the shareholders. In 2011 the Board of Directors approved the Rules of Procedures for the Board of Directors that was amended in 2013. All new board members have confirmed these Rules in writing. The Rules of Procedures are accessible to the Board of Directors through the Company's website. In accordance with article 12 of the Rules on Procedures the Board of Directors must annually evaluate its work, size, composition and practices, and must also evaluate the performance of the CEO and others responsible for the daily management of the Company and its daily development. The annual performance assessment is intended to improve working methods and increase the efficiency of the Board. The assessment entails e.g. evaluation of the strengths and weaknesses of the Board's work and practices and takes into consideration the work components which the Board believes may be improved.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Corporate Governance Statement, continued: Corporate Governance Statement, continued: After the confirmation of the Rules of Procedures for the Board of Directors of Advania hf. it was further decided to have similar procedures within the Group co-ordinated and aligned. The Rules of Procedures for the Board of Directors of Advania hf. were used as a model for the Rules of Procedures for the subsidiaries’ Boards of Directors. The Rules of Procedures for the subsidiaries’ Boards of Directors reflect the law and corporate governance guidelines in each country. In order to ensure efficiency as well as the involvement of the Company’s Board in decision making in subsidiaries, certain steps have been defined and formalised. The Rules of Procedures for the Board of Directors within the Group are set forth in order to ensure that decisions defined as extraordinary or major are brought before the Company’s Board of Directors for approval. Authority limits of the Company’s CEO are clearly defined, i.e. which decisions need the approval of the Board of Directors of the Company. Authority limits of the Boards of Directors of subsidiaries for decision making are defined so they cannot exceed the authority limits of the Company’s CEO, i.e. the Boards of Directors of the subsidiaries must always seek the approval of the Board of Directors of the Company for extraordinary or major decisions in the same way as the Company’s CEO should. The definition of authority limits of the Boards of Directors of subsidiaries also stipulates that the Board of Directors of the Company shall approve decisions, which are considered by the Company’s CEO, who is also a board member of the subsidiaries, as extraordinary and major and should therefore be brought before the Board of Directors of the Company. The authority limits of the subsidiaries’ CEOs have been defined, i.e. which decisions need approval of the Boards of Directors of the subsidiaries. The Board of Directors convenes on average twelve times a year. The Board of Directors of Advania convened 12 times during the year 2013 and all Board Members or their alternates attended almost all meetings. All members of the Board of Directors are independent from the Company. All Board members except Kristinn Pálmason and Hafliði Helgason were independent from the Company's major shareholders in 2013.

________________________________________________________________________________________________ _____________ Consolidated Financial Statements of Advania hf. 2013

Guðrúnartún 10 | 105 Reykjavík | Tel. 440 9000 | advania@advania.is | www.advania.is