Annual Report 2001 Development and globalisation Contents

KEY FINANCIAL INDICATORS

2001 2000 Earnings position Change HRK millions HRK millions Revenue 16.43% 6,788 5,830 Own costs capitalised -44.15% 167 299 4 Introduction Other income -2.20% 89 91 Letter from the President of HT Management Board Total operating income 13.25% 7,044 6,220 HT Management Board Material costs 17.03% -2,075 -1,773 Report on the Performed Supervision of Managing of Staff costs -1.37% -1,224 -1,241 Business Operations of the Company in the Year 2001 “Depreciation, amortisation and HT Supervisory Board write-down of fixed assets” -21.20% -1,208 -1,533 Write-down of fixed assets from appraisal -1,142 14 HT in 2001 Write-down of current assets 92.31% -125 -65 Management's Discussion and Analysis of Financial Other costs 43.56% -646 -450 Performance Total operating costs 26.83% -6,420 -5,062 Privatisation strategy Operating profit -46.11% 624 1,158 Organisation for a new age Net profit for the year -66.30% 310 920 Full range of telecommunication services Fixed network Mobile communications 3 2001 2000 Internet Assets and liabilities Change HRK millions HRK millions A response to new challenges - knowledge transfer Fixed assets 30.56% 10,586 8,108 Current assets 80.28% 3,337 1,851 34 Financial survey Prepayments and accrued income 10.00% 22 20 and survey of business operations Issued capital and reserves 33.93% 11,365 8,486 Corporate profile Long term liabilities 136.55% 1,029 435 Auditor’s report Short term liabilities 46.76% 1,337 911 Income statement Accruals and deferred income 45.58% 214 147 Balance sheet Total assets and liabilities 39.74% 13,945 9,979 Cash flow statement Statement of changes in equity Notes to the financial statements 2001 2000 Financing Change HRK millions HRK millions 68 Index Net cash inflow from operating activities 13.13% 3,308 2,924 Net cash outflow from investing activities 52.63% -2,816 -1,845 Net cash outflow from financing activities -39.11% -288 -473

2001 2000 Ratios HRK millions HRK millions Assets turnover *51,30% 62.70% Current ratio 2.50 2.03 Financial leverage ratio (total liabilities/subscribed capital) 0.32 0.18 ROE *2,73% 10.84% ROA *2,22% 9.22% ROS *4,33% 14.70% *Data for 2001are significantly affected by the asset appraisal. Introduction

6 Letter from the President of HT Management Board

8 HT Management Board

10 Report on the Performed Supervision of Managing of Business Operations of the Company in the Year 2001

13 HT Supervisory Board

5 Letter from the President of the Management Board

6 Dear shareholders, increased by 13% and amounted to 3.3 billion kuna. same time successfully prepared ourselves for further business challenges, but we will face it with optimism 7 After several years of successful business results of the growth and introduction of new services. and readiness. We will further strengthen our orientation It is with great pleasure that I present the Annual Company, I am glad to say that Hrvatski Telekom has a to the market and customers. Report of Hrvatski Telekom (HT) for the year 2001, strong balance sheet, which will be a safe and strong As the penetration in Croatia is still low, the main goals a year in which the results were consistently very basis for facing very dynamic times and great business of the Internet segment are to increase the popularity I believe that the Company's business results will good, the restructuring of the Company was success- challenges in front of us. and usage of the Internet and to create a basis for future continue to be very good in future years. This will be fully continued, and the Company prepared itself for value generation in the Company. For this purpose, several helped by our strategic alignment with and partici- the changes in global telecommunications industry and We are still a growth-oriented Company. In the year activities have been undertaken: reducing the Internet pation in the global group of Deutsche Telekom AG, the total deregulation of the Croatian market. 2001, we were the single biggest investor in the access price and providing the Internet services in all which has owned a package of 51% of the shares of HT Business successes that deserve a special mention are Republic of Croatia. Our long-term investments elementary and secondary schools in Croatia (with the since October 2001. the 162% increase in the number of ISDN channels and amounted to 1.7 billion kuna, exceeding the annual donation of more than 1,000 computers to the schools), the 51% increase in the number of mobile telephony depreciation by 48%. devising new integrated packages and tariff models for Finally, let me thank all the customers, business partners subscribers. various kinds of customers, and developing the domestic and our shareholders for trusting us. I am also thankful Our fixed network is gradually shifting from its traditional contents of the HThinet portal (especially multimedia). to the members of the Management Board and Super- The Croatian economy improved in the year 2001, with role of voice operator towards the role of the key infor- We also made significant improvements in enlarging the visory Board, as well as all employees of HT, for the GDP rising by 4.1%. The telecommunications industry mation structure of the future. As a preparation for total capacity. HThinet is still the uncontested leader effort they invested in our joint success. achieved even better results. In comparison with the this complex role, HT has undertaken several measures (72% of the total number of commercial dial-up year 2000, Hrvatski Telekom realized a 16% growth in with the goal of optimizing and implementing new customers), and both its customer base and its market the revenue from core telecommunications business, generation networks. In view of the impending share are growing. which eventually amounted to 6.8 billion kuna. liberalization of the fixed network market, a new tariff system has been introduced. It is modern, transparent Other important business events in 2001 include: We see that the needs and habits in communications are and compatible with the global systems. It did not have a early retirement of a part of the workers, employment changing day by day, and so are the trends in specific material effect on the Company's revenue in 2001. of new expert staff, and preparations for the outsourcing segments of core telecommunications business. Never- We are very pleased with the reaction of the market to of non-core activities of the Company (catering, building theless, the revenue of HT grew in all individual our new products. For example, the number of ISDN maintenance, physical and technical protection, Ivica Mudrinić segments of its core business in 2001: 8% in fixed channels rose by 162% in 2001. We will continue to cleaning services, vehicle maintenance and technical President of the Management Board of Hrvatski Telekom network, 44% in mobile communications, and 30% in invest effort in improving the quality of our current checkup stations). the Internet and data services. products, introducing new products, and getting prepared for the new period of fixed network We defined a new and more flexible organizational The decision to express the fair value of certain assets development. structure of the Company, which was implemented in resulted in a large one-time expense for the value reduc- February 2002. We significantly improved finance tion of fixed assets. As a consequence, net profit in 2001 The main features of the mobile communications market management & control systems, and we revalued our fixed was significantly lower and amounted to 310 million kuna. are strong growth and formidable competition. With our assets. We improved the human resource management Still, excepting the effect of this one-time accounting dynamic and proactive approach to the market and our policies and the segment of corporate communications. operation, we may say that there was an increase both in customer care activities, we achieved some significant The Collective Agreement was successfully negotiated with the EBITDA (earnings before interest, tax, depreciation and results: we introduced two dozen new services, we increased the unions (and signed in February 2002). The business amortization) and in the final net profit of the Company. the number of subscribers by 51%, we markedly domi- year 2001 was very dynamic and demanding. We are Furthermore, the cash flow from operating activities nated the segment of permanent subscribers, and at the aware that the future will be even more so, with bigger HT Management Board

8 IVICA Born in 1955. Graduated in electrical engineering from University of Toronto in 1978. His first job WOLFGANG Born in 1952. Was awarded an MBA from GSBA in Zürich in 1999. Has spent most of his 9 MUDRINIĆ was in the Product Development Department of Motorola Communications, and in 1985 established LISTER professional career with Deutsche Telekom, most recently in the capacity of Executive Vice- his own company, MX Engineering Inc. In 1990 he returned to Croatia and soon became adviser for President for Marketing and Sales in the Augsburg/Kempten branch. In November 2001 he was President of the communications to the President of the Republic. At the end of the following year, became Assistant Member of the appointed Member of the Management Board and Chief Executive Director of the Fixed Network, Management Minister for Maritime Affairs, Transportation and Communications, and in 1992 was appointed Management directly responsible for its operation, development and functioning, including product management Board and Chief Minister. From 1994 Ivica Mudrinić served as President of the Telecommunications Council, and from Board and Chief and product development, marketing, sales, telesales and billing, as well as the supervision, Executive Officer 1996 was President of the Management Board of Hrvatska radiotelevizija (Croatian Radio and Operating Officer management and maintenance of the network. (CEO) Television). From 15 October 1998 was CEO of Hrvatska pošta i telekomunikacije (Posts and Fixed Telecommunications), and since the separation of Posts and Telecommunications on 1 January 1999 he has been President of the HT Management Board.

When appointed President of the HT Management Board, Ivica Mudrinić outlined his business policy INGO Born in 1957, and graduated in economics in 1985 from the Technical University in Berlin. This - the development of the telecommunications infrastructure, with the convergence of voice, video RICHTER was an interdisciplinary study combining business management and chemical engineering. Served and text services, and particularly Internet services and video transfer methods. Therefore, it is not as auditor and senior auditor in a number of German and American companies such as Enka AG surprising that advanced HT services such as the introduction of WAP (among the first in Europe) Member of the Wuppertal, Akzo America Inc. in New York, Akzo Faser AG Wuppertal, etc. From 1992, worked in are for Mudrinić proof of the company's timely reaction to the challenges of the new techno- Management Vaillant GmbH as Auditing Director, and from 1995 took the same position in Deutsche Telekom logical revolution, but also a way of positioning the company alongside leading European and Board and Chief in the company headquarters in Bonn, and from 1998 was Director of Finance of ISLACOM in the world operators. Financial Officer Philippines. He has been with HT since March 1st 1999. (CFO)

KARIM Born in 1958. Graduated in 1981 and was awarded the degree of M.Sc. and DIC in Management EUGEN SCHULZ Born in 1953. Graduated in mathematics and economics at the Albertus - Magnus University in JADAVJEE from the Imperial College of Science, Technology and Medicine, London. In 1999 completed an Cologne. Gained wide experience and expertise in people, process and project management at KHOJA AMP (Advanced Management Program) at Harvard Business School. Has spent most of his Member of the managerial level in different companies such as Dresdner Bank AG, KPMG Peat Marwick, DeTe professional career working in the field of telecommunications, and in October 2002 was Management Mobilnet GmbH. Has successfully designed, developed and implemented IT strategies, architecture Member of the appointed Member of the HT Management Board and Chief Operating Officer Mobile. His main Board and Chief & processes, and has also proficiently handled customer care, billing, product development and Management task is the development and functioning of mobile networks, including product marketing, Services Officer quality improvement activities. In October 2001 was appointed Member of the Management Board and Chief communications, sales, systems planning and development, and the development of services. (CSO) Board and Chief Services Officer of HT, responsible for internal corporate services including IT, Operating Officer Customer Care, Procurement, Real Estate Management and General Affairs. Mobile Report on the Performed Supervision of Managing of Business Operations of the Company in the Year 2001

10 Pursuant to Article 263 of the Companies Law and on 24 October 2001 Supervisory Board dismissed four from duty of being a Supervisory Board Member and Mr. In accordance with the provisions of the Articles of 11 Article 31 of the Articles of Association of HT - Management Board Members and appointed the three Željko Tabaković was appointed to be a Member of the Association, the Supervisory Board established the Hrvatske telekomunikacije d.d., the Supervisory Board of new Management Board Members. It was decided also Supervisory Board. Financial and Economic Committee compiled of three the company HT - Hrvatske telekomunikacije d.d. Zagreb, that until the appointment of the Member of the Supervisory Board members (Mr. Goranko Fižulić, Mr. Jurišićeva 13, (hereinafter: Company), comprised of Management Board and Chief Human Resources Officer By the decision of the General Assembly dated 24 Joachim Peckert and Mrs. Erika Kašpar) with purposes of Mr. Hans Albert Aukes, President of the SB, Mrs. Ana and the Member of the Management Board and Chief October 2001, whereby the following Members of the preparing the recommendation to the Supervisory Board Hrastović, Deputy President of the SB, Mr. Milan Operating Officer On-line, the Management Board will Supervisory Board were relieved from duty: Mr. Hans relating to the adoption of the Annual Report for the Stojanović, Mr. Ivan Milić, Mr. Wolfgang Breuer, Dr. Martin have five Members and the activities falling within the Albert Aukes, Mr. Slavko Linić, Mrs. Erika Kašpar, Mr. year 2000, relating to the approach to the tarrif Walter, Mr. Michael Günther, and Mr. Herbert Müller, scope of the Management Board Member and Chief Fridbert Gerlach, Mr. Željko Tabaković, Dr. Joachim rebalancing and implementation of the results of Asset members of the SB, submits to the General Assembly the Human Resources Officer will be performed by the Peckert, Mr. Georg Poelzl, Prof. dr. Mato Crkvenac and Apraisal as of 1st January 2001. The aforementioned following President of the Management Board and Chief Executive Mr. Goranko Fižulić. Committee held two sessions and gave the positive Officer, while the activities falling within the scope of recommendation to the Supervisory Board with regard REPORT the Management Board Member and Chief Operating Eight Supervisory Board Members were appointed to the to the Management Board proposals relating to the on the Performed Supervision of Officer On-line will be performed by the Management Supervisory Board by the decision of the General aforementioned subjects. Supervisory Board gave a Managing of Business Operations of the Board Member and Chief Operating Officer Fixed. Assembly dated 24 October 2001 as it is stated in consent to the Management Board to record the results Company in the Year 2001 preamble to this report. of the Asset Appraisal as of 1st January 2001 as well as On its 1st constituional session, Supervisory Board to the related Amendments to the Accounting policies. Since 01 January 1999, HT - Hrvatske Telekomunikacije elected the Chairman and Deputy Chairman of the Five sessions of the Supervisory Board were held in the d.d. have been operating as a separate joint stock Supervisory Bord and adopted the By-Laws on the Work year 2001 (including the 1st constitutional session of In accordance with the provision of the Articles of company, the shares of which have been in the mixed of the Supervisory Bord and the By-Laws on the Work of the SB) and the Supervisory Board, in accordance with Association, the Supervisory Board gave the consent to ownership of the Republic of Croatia, 65%, and Deutsche the Management Bord. Decision on the Basic Management provisions of Article 263 of the Companies Law, Article the Management Board with regard to terminate the Telekom AG, 35%, since 5 October 1999. Organizational Structure of HT d.d., pursuant to the 18 of the Articles of Association of the Company as well provisioning of services of HERMES BIP system, to adopted By-laws is passed. as Article 2 of the By-laws on the Work of the Supervisory suggested approach for the restructuring of the non On 25 October 2001 Deutsche Telekom purchased a Board of the Company, performed supervision of the core business of the company and to swap the finally further 16% stake in HT d.d. and thus become the During 2001, the composition of the Supervisory Board managing of the business affairs of the Company and harmonized, due and unpaid receivables of HT d.d. majority shareholders with a 51% ownership stake. of the Company was changed on the following way: performed other activities in accordance with the law, against Uljanik d.d. Pula. Articles of Association and By-laws on the Work of the By closing of the transaction, management structure By the Decision of the Government of the Republic of Supervisory Board of the Company. The Supervisory Board supported the Management Board of HT d.d. was changed. Croatia dated 15 March 2001, Mr. Ivan Mijatović was in its efforts to protect the HT interests in BiH while relieved from duty of being a Member of the Supervisory In accordance with the provisions of Article 4 of the limiting the liability and capital expenditure in this New Supervisory Board is constituted and Deutsche Board of HT d.d. and Mr. Slavko Linić was appointed to By-laws on the Work of the Supervisory Board, the market. The Supervisory Board gave the consent to the Telekom is now represented in the Supervisory Board be a Member of the Supervisory Board of HT d.d. Supervisory Board adopted decisions out of sessions by Management Board for submission of a bid for a third with five members, the Republic of Croatia with three, Mr. Slavko Linić was also elected to be the President giving a written vote via facsimile, in one occasion - license in Bosnia and Herzegovina. and one member still needs to be appointed by the of the Supervisory Board at the 7th session of the proposal of the decision on dismissal and election of Workers Council of HT d.d. Supervisory Board, which was held on 6 April 2001. Supervisory Board Members forwarded to the General The Supervisory Board were not agreed with the Assembly (24th October 2001). Management Board proposal for the acquisition of IT Management Board of the Company consists of five to By the Decision of the Government of the Republic of company Multilink d.d. with recommendation to develop seven members. On its 1st constitutional session, held Croatia of 12 April 2001, Mr. Ivica Mišetić was relieved a contractual business cooperation. Supervisory Board Report on the Performed Supervision of Managing of Business Operations of the Company in the Year 2001 Supervisory Board of Hrvatski Telekom

12 gave the consent to the Management Board on selling The Management Board of the Company regularly reported market in Bosnia and Herzegovina, human resources Supervisory Board of Hrvatski Telekom 13 the shares of Zagrebačka banka owned by HT d.d. as to the Supervisory Board on the business operations of management, planned income, expenditures, capex, on 31 December 2001 well as for the restructuring its equity portfolio by selling the Company, on the status of assets and liabilities, on implementation of the new Organization Regulation, of its non-core equity holdings. income and on organizational and other changes in expected technological changes (next generation net- Hans-Albert Aukes connection with the management of the Company. works, GPRS, UMTS) in the next couple of years and President The Supervisory Board gave the consent to the transaction the liberalization of the telecommunications market in documentation to be entered into among Republic of The Supervisory Board has analyzed the realization of the Croatia, including the impacts of the WTO regulation. Ana Hrastović, Croatia, Deutsche Telecom and HT and to the respective planned results and the implementation of the basic goals Through the business year, the Company has also Deputy President Amendments to the Consession Agreements in the Fixed of the business policy of the Company for the year 2001. started preparations for the IPO. Network and HT's Mobile Network Systems as well as to Wolfgang Breuer the Amendments to the Articles of Association. By analysis of the reports of the Management Board of Further to afore-mentioned, the Supervisory Board Member the Company and by monitoring the trend of financial proposes to the General Assembly to accept the Report In accordance with the provisions of the Articles of indicators in the Company, it has been evaluated that on the Performed Supervision of the Managing of the Michael Günther Association of the Company, the Management Board the planned parameters have been realized in the Business Operations of the Company in the year 2001. Member submitted to the Supervisory Board annual financial business operations and that the business operations reports and annual report together with the report on of the Company have been successful. Ivan Milić the performed audit in the legally prescribed deadline, as President of the Supervisory Board Member well as the proposal of the decision on the utilization of Except for the financial results for the year 2001, the Hans Albert Aukes profit that the Company realized during the preceding Supervisory Board has reviewed and agreed to the Herbert Müller business year. business policy of the Company for 2002. Number: NO-4-13493-9/2002 Member

The Supervisory Board hereby confirms that the Company The Supervisory Board agreed with the proposed Annual Milan Stojanović operated in the year 2001 in accordance with the law, Business Plan for the year 2002 and to the Three Years Member Company regulations and decisions of the General Strategic Plan of the Company for the period of 2002 - Assembly and that the annual financial reports were 2005, expressing that planning exercises were made Martin Walter made in accordance with the status in the business pursuant to the old organizational structure and Member books of the Company and that they show a true status accordingly forecast and expectations of the Annual of assets and business operations of the Company, Business Plan for 2002 shall be revised in year 2002. Workers' representative - introduced on 24 October 2001, having respected the opinion of the auditors. but has not yet been appointed by the workers' council. The Supervisory Board is working with the Management The Supervisory Board is of the opinion that the proposal Board on the preparation of necessary guidelines for the of the Management Board on the utilization of profit, elaboration of the reviewing of the plan's documents, which was realized by HT - Hrvatske telekomunikacije d.d. whereby market impacts and competition on the market in the business year 2001, corresponds to the results of on which the Company operates in individual segments business operations, that it is in the function of the of activities and products (mobile telephony, Internet) business plan for the current year, that it protects the are taken into account, as well as key customer trends, interests of the shareholders and that it is in compliance regulatory changes, corporative strategy and key with positive regulations of the Republic of Croatia. transformation initiatives, potentials of the telecom HT u 2001.

16 Management's Discussion and Analysis of Financial Performance

20 Privatisation strategy

21 Organisation for a new age

23 Full range of telecommunication services

24 Fixed network

26 Mobile communications

28 Internet

32 A response to new challenges - knowledge transfer Management's Discussion and Analysis of Financial Performance

16 The following discussion should be leading market position and strong This impressive growth in revenue Total operating costs R/3, ITB2 and others) and Profitability 17 read in conjunction with the Audited focus on its customer base. was achieved by stronger customer Total operating costs rose by 26.8% investments in customer care Net profit for the year 2001 totalled Financial Statements and the Notes orientation which was rewarded by to HRK 6,420 million. The write- programmes. HRK 310 million. The decrease to the Financial Statement. Fixed telephone network an increased number of customers. down of fixed assets from the shown when this result is compared In 2001 revenue from HT's fixed HT's objectives of retaining the process of asset appraisal is the Non-operating to the net profit for 2000 is due to The overall business results of telephone network increased by loyalty of its customers led to the most significant contributor to this income/expense the growth of total operating costs - Hrvatski Telekom in 2001 were 8.3% to HRK 4,717 million from introduction of new services (VPN, increase in costs. Costs of materials, HT's financial income has grown primarily caused by the cost of the positive, but were heavily influenced HRK 4,355 million in 2000. SMSinfo, SMSstyle, +club, Partner consumables and merchandise grew significantly and has outstripped write-down of fixed assets from by the impacts of the asset appraisal Revenue growth resulted from Card). The Company's customer care by 13.1%, driven mostly by increased total financial expenses. Due to its appraisal amounting to HRK 1.142 process described later in this text. faster modernisation of technology was further reinforced by the setting purchases of handsets, resulting improved cash balances, significant million. This significant increase in Although the key financial perfor- and from strong efforts to provide up of HT's first Customer Care from higher demand for mobile growth from interest earnings was assets and issued capital and mance indicators declined in better customer service (HTisdn Centre. Revenue growth was also services and greater mobile market realised. Provisions against the reserves on one hand, and the comparison to 2000, it must be package, a new approach to supported by improvements in the penetration. An increase of 18.6% carrying values of associated increase in costs due to write-downs stressed that these indicators may be customers, new sales channels, the quality level and territory coverage in other material costs and costs of companies in Bosnia and on the other hand, caused significant assessed as satisfactory if the impacts completion of "last mile" through of the GSM network (capacity extension services was caused by rising Hercegovina diminished the positive changes in the profit & loss account. of the asset appraisal are excluded. wireless - fixed GSM technology). and upgrading of technical platforms). interconnection costs as a result of effects of increased financial Heavily influenced by the temporary The tariff rebalancing of August higher overall mobile penetration income achieved in 2001. impacts of the asset appraisal, EBIT, Total Operating Income / 2001 did not lead to a significant Internet and Data services and traffic. net profit, as well as related key Revenue / Revenue by increase in the overall prices of Revenue from Internet and data Taxation financial performance indicators business segment services. While the price of a local services increased by 29.8% to HRK Depreciation, amortisation and Current tax costs increased by were lower than expected. However, HT's total operating income call has increased, the price of 353 million in 2001 from HRK 272 write-down of fixed assets 96.2% when compared to current if the impacts of asset appraisal are amounted to HRK 7,044 million in domestic long-distance calls has million in 2000. This significant decreased by 21.2% in 2001 tax for the year 2000. The excluded, the company's performance 2001. This represents an increase of fallen. A single monthly rental fee for increase of revenue was largely due to compared with 2000. This decrease difference between current tax would be roughly in line with last 13.3% compared with the year 2000. residential subscribers and a single the introduction of a wide range of is the result of a change in expenses of HRK 359 million and year's results and thus could be national tariff have been introduced. services (Family Account, HThinet pro- accounting policy, in which the income tax expenses of HRK 203 judged as satisfactory. HT's revenues grew by 16.4% over Tariff rebalancing has laid the conditi- dual service, new HThinet web hosting normal useful life of assets was million represents the deferred tax the previous year, reaching HRK ons for long-term developments of services, domain registration, audio and revised. This change in accounting benefit. This deferred tax benefit of Asset Appraisal and its 6,788 million in 2001. This growth the national telecommunication infra- video streaming service, server renting policy has resulted in a more HRK 156 million relates to the effects on HT's financial was primarily due to an increase of structure and has created a good service, primary DNS service, Quick Call, appropriate presentation of the fair release of part of the deferred tax statements 44.0% in revenues from mobile starting position prior to market AltaVista search engine, auto replay market value of the company's liability recognised as a result of Since HT's inception, all its audited network services, a 29.8% rise in liberalisation. message and VPN - I service) as well as assets. the revaluation of property, plant financial statements have contained revenues from Internet and data to the network upgrade (new backbone and equipment, and to that part of several qualifications - limitations of services, as well as an 8.3% growth Mobile networks routers, additional access servers The increase in other costs is the the write-down of property, plant scope raised by the auditors. The in fixed telephone revenues. The The revenue from mobile networks and international capacities). These result of increased provisions for and equipment that will be tax audited financial statements for the increase from mobile network increased by 44.0% to HRK 1,673 improvements have led to a significant charges and risks, increased costs deductible in future periods. year 2001 and contained in this services and on-line services reflects million in 2001 from HRK 1,162 increase in the number of HT Internet associated with business process report are the first audited financial HT's strategy of maintaining its million in 2000. and data customers. improvement - consulting fees (SAP statements in HT's history that do Management's Discussion and Analysis of Financial Performance

18 not contain limitations of scope or from its multinational parent company. affecting the company's operating Balance Sheet Long term liabilities 19 any other specific qualifications by These efforts will ease, enhance and profit and net profit for the year. Total long term liabilities increased the auditor. further facilitate the next phase of the The amount of the write-off of Assets to HRK 1,029 million in December company's privatisation. assets resulting from the asset HT's total assets amounted to HRK 2001 from HRK 435 million in 2000, In order to clean up its balance appraisal, and increased depreciation 13,945 million at the end of 2001 primarily due to the emergence of sheet, HT has taken a series of The asset appraisal has resulted in arising from increased asset value compared with HRK 9,979 million in the deferred tax liability in the steps. A professional international increased asset value, but also in are not fully recognised as tax 2000. This increase in the value of amount of HRK 578 million. The appraiser was engaged by HT for lower net profit for the year. The deductible in the first year, thereby total assets is primarily due to the company has also established the purpose of establishing an benefits of the asset appraisal mean significantly increasing the current asset appraisal process, and is provisions of HRK 52 million for a independent valuation of HT's that the established prerequisites tax for the year 2001. reflected in the increased value of number of legal actions and claims property, plant and equipment. In are in place for the proper monitoring property, plant and equipment. that will probably be asserted in the line with the findings, HT's financial of the status and development of HT's financial statements and the future against HT. statements for 2001 no longer assets and for segment reporting by results of operations for the year Current assets reflect the historical cost of business units. Entire asset ending December 31st 2001 have The value of total current assets Current liabilities property, plant and equipment, but classification is now modelled in therefore to be viewed in the light of reached HRK 3,337 million from HRK Current liabilities have increased now show the appraised values. The accordance with IAS and Deutsche the combined effects of the asset 1,851 million in 2000. The increase mainly due to increases in taxes newly adopted depreciation rates for Telekom AG. The calculation of appraisal performed and its impact in total current assets resulted payable, increases in accrued liabili- property, plant and equipment reflect depreciation has been improved and on HT's overall results. primarily from increased time ties, and increases in supplier loans. the useful economic lives of the a single integrated database of deposits, increased investments and underlying assets in line with IAS approximately 180,000 asset/line improved cash balances. Cash Flow requirements, thus removing another items has been created and Strong cash flow generated from qualification. implemented into SAP. Equity and Liabilities ordinary activities as well as an The value of total issued capital and active policy of cash management HT has made additional provisions The write-up of assets resulting reserves increased to HRK 11,365 has increased the year end cash against its investments in Bosnia and from revaluation amounts to HRK million in 2001 from HRK 8,486 million balances and has enabled an increase Hercegovina, and has completed 3,275 million, and is shown in the in 2000, mainly due to increases in the in investment activities that are additional legal procedures that are equity and liabilities portion of the revaluation reserves in the amount of visible in the cash flow statement. providing solid support for legal title balance sheet as an increase in HRK 2,313 million resulting from the Strong cash balances have allowed to land and buildings transferred revaluation of property, plant and asset appraisal process. The line item active measures to be undertaken to from HPT, thus removing two further equipment (reduced by deferred tax "other reserves" contained in the provide hedging and risk reduction qualifications raised by the auditors liability and the release of revaluation balance sheet refers to adjustments instruments for part of the forecast in previous periods. reserves to retained earnings). made to the assets and liabilities future foreign currency indexed cash transferred from HPT as of January outflows. Cash outflows for the All the efforts undertaken have The write-down of assets resulting 1st 1999 to reflect certain assets and purchase of property, plant and equip- helped make the Company more from revaluation amounts to HRK liabilities that were not adequately ment amounted to HRK 1,691 million. transparent and better suited to 1,142 million and is shown in HT's incorporated within the net assets the standards expected from income statement as the write-down transferred as of January 1st 1999. international capital markets and of fixed assets from appraisal, Privatisation strategy Organisation for a new age

With the introduction of a new organisation structure, HT has prepared itself for the forthcoming market deregulation and for successful operation in a fully competitive environment.

Privatisation strategy Organisation for a new age Unit, Corporate Services Unit, and 21 On 17 October 2001, the Government of the Republic of By following up on strategic Human Resources Corporate Unit. Croatia and Deutsche Telekom AG signed an agreement privatisation, the preparations for on the sale of 16% of HT- Hrvatske telekomunikacije d.d. the introduction of a new The corporate units have the shares owned by the Republic of Croatia to Deutsche organisational structure were function of integrating the business Telekom. On the basis of this agreement, the transfer of completed in 2001 with the and management of the Company, this additional amount of 16% of HT shares was following objectives: with the primary value-generating executed on 25 October 2001, which made Deutsche - The creation of added value and value securing functions. Telekom AG the owner of 51% of the total shares. • alignment with the "four pillars" of the DT Group to maximise The business units consist of: This transaction followed the previous acquisition of 35% operational synergies Business Unit Fixed, Business Unit of HT shares by Deutsche Telekom on 5 October 1999. • the building of a more efficient Mobile, and Business Unit On-line. and flexible organisation which is In this way, HT became the first company from the group increasingly user focused and The business units have the function of former public companies to be privatised. By process driven of independent management up to a continuing its strategic privatisation, HT has become an - Adjustments to regulators' certain level, and have direct integral part of the DT Group, the leading international demands market responsibility for a group in the telecommunications industry. • transparency of costs particular business area. • separation of accounting The remaining 49% of HT shares are owned by the • prohibition of cross-subsidising The new organisational structure Republic of Croatia. The Law on the Privatisation of - Achievement presents a platform for the Hrvatske Telekomunikacije d.d. (Official Gazette No.65/99) • of economies of scale implementation of the strategy and and the Law on the Amendments and Modifications of the • of economies of synergies goals of HT in the coming period Law on the Privatisation of Hrvatske Telekomunikacije (preparation for deregulation and d.d. (Official Gazette 68/01) specify a further procedure The basic assumption for the new readiness to conduct business in a of privatisation of HT, within which, among other things, organisational structure of HT was competitive environment) where the Government of the Republic of Croatia will offer at the creation of conditions for focus on the user is the key driving least 20% of HT shares in the form of a public offering. efficient business operations with force of all processes. The the aim of better market positioning. implementation of the new The Law on the Amendments and Modifications of the organisation is also a stimulus for Law on the Privatisation of Hrvatske telekomunikacije d.d. The new organisational structure promoting other components of (Official Journal 68/2001) also specifies a transitional establishes two types of units: organisational architecture. period until 31 December 2004, which starts after the corporate units and business units. termination of the exclusive rights of HT. During this transitional period HT will not be obliged to give other The corporate units comprise: CEO operators and service providers unbundled access to its Corporate Unit, Financial Corporate local loop, or to provide number portability and carrier pre-selection services. 23 22 Full range of telecommunication services

Hrvatski Telekom is the only company to provide the entire range of telecommunications services in Croatia. In 2001, HT provided the following services to resident and business users in Croatia:

24 Fixed network Fixed line services include local, national long-distance and international telecommunications services, as well as value-added services, public telephones, ISDN lines, ADSL lines and the sales of additional equipment. The fixed network services are represented in the marketplace through the HTtel and HTisdn brands.

26 Mobile communications Include two mobile telephone networks: analogue, NMT 450i (HTmobitel brand), and GSM 900 (HTcronet post-paid service, and Simpa pre-paid service).

28 Internet Includes access to the Internet, web-content services, leased lines for business users and virtual ISP services. HT is represented on the Internet market through the HThinet brand.

31 Data transfer Includes data-transfer services through X.25, Frame Relay, TDM and ATM technologies, as well as unmanaged leased lines and telex services. Fixed network

Major achievements in 2001: - introduction of a new tariff system - significant growth in ISDN users - further optimisation of the network and introduction of a new-generation network

24 telecommunications market. By Therefore, the future of the fixed transfer capacity (and light-conductor include HT's inherited network and a Number of 1.790.000 abolishing the cross-subsidising of network will be driven by its need to cables) in HT's main network led to the strategy focused both on the product fixed lines (POTS and ISDN) 1.781.000 services, the preconditions have been reposition itself from being a basic drawing up of a DWDM concept of and on the user. 1.770.000 set for the deregulation of the market, information infrastructure into being a trunk and town networks. A pilot while the introduction of a single wide-band data transfer system. project was initiated which included The digitalisation of the fixed 1.750.000 national tariff has ensured equal This trend was particularly felt in HT the installation and testing of pilot telephone network continued in 2001, developmental conditions for all the in 2001 when a significant growth in equipment. The new DWDM technology and reached a level of 98% at the end 1.730.000 regions of Croatia. The lowering of the HTisdn service users was recorded. has large transmission capacities on of the year. 1.721.139 prices of international calls has helped The number of ISDN channels by the the existing light-conductor cables. 1.710.000 Croatia integrate more speedily with end of the year reached 102.721 To assemble and update documentation Miscellaneous the rest of the world, and has compared with 39.229 at the end of on the networks, as well as all the The total number of users of the fixed 1.690.000 significantly reduced the operating 2000, representing a 162% increase. data necessary for the everyday telephone network on 31 December 2000 2001 costs of businesses, particularly those functioning of the system in all TC 2001 amounted to 1,781,000, dealing with exports, which will in turn Sales were particularly stimulated by centres, a project has begun aimed at compared with 1,721,139 at the end directly stimulate economic the introduction of integrated HTisdn building an integral information of 2000, which represents an increase The company's core activity focuses and the introduction of a new- development. Finally, the introduction packages, which include service access system for managing the network of 59,861, or 3.5%. This growth is in on the fixed network services which generation network of a transparent time tariff system in and terminal equipment. Consequently, infrastructure. The system will contain line with the transition period of fixed provide a nationwide infrustructure for place of the archaic impulse system it takes just one simple step for a database of all the elements of the network development, whose role in the overall telecommunications traffic A new tariff system and the provision of a free itemised consumers to be able to use all the network, a special data subsystem, a voice-transfer is rapidly changing, in Croatia to serve residential and With the introduction of the new tariff billing statement have given Croatian advantages of ISDN technology. knowledge base and an interface with while its new role as an information corporate users. system in August 2001, the key users for the first time the possibility other systems. Simultaneously with network is just beginning. preconditions were set for the full to control their expenses. Further optimisation and the construction of the system, data In 2001, a number of initiatives were deregulation of the Croatian market of introduction of new are already being collected and In addition, it is necessary to mention undertaken to adjust the fixed telecommunications. Tariff rebalancing has also led to the generation networks compiled. the significant efforts made to shorten telephone network to the needs of introduction of new and very Together with the repositioning of the the waiting time to obtain a telephone consumers, to prepare for The new tariff system introduced the reasonable Internet access fees fixed network as a core information Radical changes driven by connection. In these terms, in 2001, deregulation, and to position the following changes: through which HT can make another infrastructure, the optimisation of the technological development and user the final part of the access network to company for a new period in the - a time tariff system replacing the contribution to the development of the existing network and the introduction demands lie ahead of telecommuni- the user began to be developed development of the next generation impulse system Internet in Croatia. of new generation networks have cations networks. An NGN project of through wireless fixed GSM technology. of fixed networks. - a single national tariff instead of continued. Thus, a DSL pilot project network optimisation has been At the end of the year, 3,359 users two tariffs - local and long-distance Strong growth of ISDN was completed in 2001, and initiated to examine and assess the were connected in this way. The key elements of fixed network - a significant reduction in the average users preparations were made for the sustainability of the next generation operations in 2001 included: price of international calls Due to the expansion of mobile commercial introduction of the DSL of technologies in access and trunk - the introduction of a new tariff - a free itemised billing statement telephony and the accompanying service that allows wide-band access networks, as well as to consider system change in telephone culture, the fixed to the Internet, several dozen times external issues, including users, - the strong growth of ISDN users The new system of tariffs has brought network is increasingly changing its faster than at present. technology, market trends and the - further optimisation of the network fundamental changes to the domestic traditional voice-transfer role. Further initiatives to broaden the economy, and internal issues which Mobile communications

Major achievements in 2001: - strong growth and consolidation of position as market leader - dynamic market performance - increase of technical capacity

26 ongoing improvement in its own costs to the internal business the market with competitive Number of 1.000.000 Miscellaneous mobile phone services and an aggressive market system itself. services and to reap additional HT provides mobile communication users 900.000 performance. Keeping in mind that - GPRS service - providing rapid profit from services for mobile services through GSM 900 and NMT 875.013 this is the most profitable segment data transmission by mobile Internet and m-commerce. 450i systems. 800.000 of the market, it is important to point phone. 700.000 out HT's strong market domination in - Partner Card - providing three Consequently, during 2001, many To promote more flexible and the field of regular subscribers to additional subscriptions for each initiatives in the development and effective market performance, HT 600.000 mobile networks which numbered HTcronet subscriber (e.g. for optimisation of technical capacities management approved the 580.467 500.000 199,451 at the end of the year. small and medium-size firms, or were carried out. The most establishment of a Business Unit for families) with a discount on the important are: Mobile Communications in October 400.000 For the second year in succession, subscription amounting to 40, 50 - setup of two commutations 2001, with the aim of overseeing the 300.000 particular success in attracting new or 60%, depending on the number MSC/VLR (July - December 2001) development of services, marketing users was achieved with the of additional subscriptions. - increase of interconnection and and sales in the field of mobile 200.000 Christmas product placement. - SMSinfo service - providing general capacity to 1.75 million communications. 100.000 The total mobile communications information services through SMS users, and introduction of SR 9.0. market in Croatia significantly messages (weather forecast, - extension of HLR capacity to Through a decision of HT on 15 0 increased, so that at the end of horoscope, news, etc....). 1,100 users. November 2001, the ERMES BiP 2000 2001 2001 it had penetrated 39.6% of the - SMSstyle - possibility of sending - Introduction of centralised system was de-activated. During market compared with 22.1% in the symbols and a selection of ringing monitoring SS7. 2001, 58 new contracts on roaming previous year. tones through SMS. - fulfilment of obligations arising in mobile communications were signed, In the field of customer care, there from the Agreement on which constitutes a total of 183 In 2001 the most dynamic area of Strong growth Dynamic market were significant new initiatives. Concession, taking into operators in 75 countries where business of HT was in the field of In the field of mobile communications performance So, for example, a new Call Centre consideration the number of roaming applies. mobile communications, which in 2001, HT registered as many as The exceptionally dynamic market for mobile phone users was opened inhabitants and territory covered registered exceptional results, both 431,781 new users, and with the performance of HT mobile in Zagreb. There are 190 people by the requirement (September in market performance and in HTcronet, HTsimpa and HTmobitel communications consists of three employed there, ready at any 2001) - two years following the training for future development. brands, the total number of users at segments: introduction of new moment to help users to obtain signing of the Agreement on 31 December 2001 had reached services, improved customer care, mobile phone services. The rate of Concession. Key elements of business in the field 875,013. In comparison with the and intensive and creative market successful responses to calls is - extension of IN system - Dynamic of mobile communications were: previous year which recorded communication. greater than 90 %. capacity PPS/UCB/SMS-MO/UCB - strong growth and consolidation of 580,467 users, this increasing - extension of VMS platform (July position as market leader amounts to 51%. In 2001 almost twenty new services Increase in technical 2001). - dynamic market performance for mobile phone users of HT were capacity - extension of SMS platform (July - increase of technical capacity Despite keen competition in the field, introduced. Some of the most In the dynamic field of mobile 2001). HT mobile communications important are: communications business, it is - commercial operation of GPRS maintained its position as market - VPN service - facilitating business essential to keep on developing platform - (July 2001). leader with a strong growth rate, systems communication without capacity to continuously provide Internet

Major achievements in 2001: - increase in the number of users and use of the Internet - development of Croatian content and popularisation of the Internet in Croatia - increase in capacity

28 HThinet, Hrvatski Telekom Internet operator, established Reduction in costs of access to the a name for itself in 2001 as the key standard-bearer of Internet Croatian internetisation. It has tremendous influence on Within the framework of an incentive programme to strengthening the exposure of Croatia on the Internet increase use of the Internet, the cost of access to the and thereby on a global level. Internet dropped several times during 2001.

The business strategy of HThinet was focused, above all, On 1 August 2001, along with a tariff model aimed on increasing the use of the Internet in Croatia, by which primarily at individual users, Small and Small Plus, a platform would be created for the future generation of HThinet introduced the Small Super Plus tariff model additional profit through the development of commercial with the most attractive cost per hour for Internet use. content-related applications as well as e-commerce. Following a subscription charge of HRK 79, the cost of using the Internet is only HRK 3 per hour, or HRK 1.5 Key elements of HThinet business operations in 2001 were: per hour depending on the time when used. - increase in the number of users and use of the Internet - reduction in the cost of access HThinet offers its business users Office, Office Plus and - development of Croatian content and popularisation of Pro tariff models and in 2001 within the Pro model, it the Internet in Croatia introduced the Pro Dual and Pro Trend services and - increase in capacity provided business users with the most economical option for using the Internet. In the year under review, HThinet Increase in the number of users and use also launched a new VPN-I service for business users. of the Internet Even though the Internet market in Croatia has been Popularisation of the Internet in Croatia completely deregulated from the very start, from year to In 2001 the most comprehensive project of the year HThinet has been affirming its leading position. internetisation of the educational system was launched Thus, in 2001 it registered growth, not only in the in co-operation with the Ministry of Education and number of users, but also in overall market share. Sport, whereby HT provided an Internet link-up for all primary and secondary schools in Croatia and donated At the end of 2001 HThinet had 238,586 dial-up users more than 1,000 computers. compared with 148,041 on 31 December 2000, repre- senting an increase of 61%. The number of rental users One of the basic assumptions of HThinet business increased by 27%, from 206 in 2000 to 262 users in 2001. strategies in 2001 was that the key to enhancing the growth of the Internet in Croatia was the development In 2001 HThinet users constituted 72% of the total of domestic content. Thus, a new HThinet portal was number of commercial dial-up Internet users. Mainly as a launched which offered the richest source of domestic result of HThinet, the total penetration of the Internet in content on Croatian Internet space. Croatia grew from 7% at the end of 2000 to 12% at the end of 2001. Internet

30 Increase in capacity Data Transfer Services 31 Increase in 300.000 Apart from the main location in Zagreb, HThinet has During 2001 the main achievements in data transfer number of dial-up users another node in the capital as well as in 11 other towns services were: 250.000 (Varaždin, Čakovec, Osijek, Rijeka, Pula, Poreč, Pazin, - introduction of VAN 238.586 Zadar, Šibenik, Split and Dubrovnik). The HThinet - introduction of ATM multicasting services 200.000 network is based on the redundant links of 155 Mbps - increase of FR link-ups between four main nodes in Zagreb, Rijeka, Split and - introduction of VPN data services 150.000 148.041 Osijek. The other nodes are connected with the nearest 100.000 main node through a bandwidth of 2 Mbps which During 2001, the number of ATM link-ups increased to expands as required. 15 from 2 in 2000 and the number of telegraph users 50.000 dropped by 12.94%, i.e. to 666 users. The number of HThinet is connected to the global network of the X.25 link-ups increased by 19.33% compared with the Croatian commercial Internet users 0 Internet through three independent Internet service same period the previous year. The total number of HThinet - 72% 2000 2001 distributors: American Cables and Wireless, Italian TDM link-ups rose by 63.69% while the total number of Others - 28% Seabone, and German Deutsche Telekom, with a total FR link-ups was 1,391, representing a growth of 98.15% capacity of 180 Mbps. All HThinet link capacities are over 2000. controlled and expand if their utilisation capacity exceeds 70% during peak time. HT has exclusive rights to provide the following data In 2001 the HThinet portal offered more than 50 In activities linked with popularising the Internet, the transmission services: non-managed rental lines, columns and about 150 sub-columns located on more promotion "Hoću Internet" (I want the Internet) was Within the framework of permanent activities to expand managed rental lines, telegraph, X.25, Frame Relay and than 200,000 pages. extremely successful. Within this promotion, integrated capacity, it should be pointed out that compared with ATM. Key products in this area are ATM, Frame Relay packages combining computers and subscriptions to the the previous period, in 2001 the number of servers and VPN. Up to 31 December 2001 the portal moj.hinet.hr Internet under exceptionally reasonable terms were put doubled, the capacity of installed discs tripled and the registered as many as 120 million visits which represents on the market. From its introduction in May until the end capacity of installed memory increased more than 2.5 times. an impressive increase of 400% over the previous year, of 2001, as many as 12,366 packages were sold. with as many as 45,000 registered users. In this way, the HThinet portal became the most visited portal in Croatia. As a result of the activities of HThinet, Internet operations within Croatia more than doubled in 2001. The HThinet portal also offers many multimedia contents, many of which are produced by HT itself. Thus, in 2001 In the future, the key strategic priorities of HThinet will through the HThinet portal, there were 600 hours of live be to capitalise on its acquired position as the most transmission with more than 300 hours of archived filing. relevant source of content on the Internet, to continue A total of 35,000 streamings were extracted. the development and commercialisation of applications It is particularly encouraging that in the first two months based on these contents, and to introduce e-commerce. of the children's entertainment-educational portal, Hinko, launched in September, a record number of 400,000 visits were recorded. A response to new challenges - knowledge transfer

The transfer of international knowledge is the key to business survival within a globalised and dynamic environment.

32 In 2001, the last year of transition from state to private To underscore the importance of synergy in the employee loyalty and as one of the first steps in 33 ownership and on the threshold of the complete opening development of capability and knowledge, in July 2001 adjusting the system of rewards of employees. up of the market, the basic task was to lay the foundations HT joined the DT International Project on Human for the optimisation of the development and management Resources Synergy. In this sphere, HT was authorised to In an economy which is based increasingly on human of human resources. lead one of the three main module projects - "Human resources rather than natural resources, employees Resources Development module". represent the greatest asset of every organisation. These activities are implemented through the following Effective development of their resources is essential projects: Co-operation with the DT Group, which has more than for business survival in a globalised and dynamic - educational programmes in accordance with business 250,000 employees throughout the world, will provide environment. Consequently, human resources will and corporate units outstanding possibilities for the transfer of international continue to be one of the key strategic priorities of HT. - integration into the programme of human resources knowledge as well as opportunities for our employees to development of the Deutsche Telekom Group affirm their capabilities within a global framework. - employment of highly-qualified experts in the most intensive developmental segments The employment of highly qualified experts, especially in - separation of non-core functions the most dynamic developmental segments of business, - high quality programme of supplemental retirement continued in 2001. Consequently, during that period 147 purchase experts with the highest qualifications were employed.

Within the restructuring framework, the previous Within the scope of streamlining the company and Personnel Sector began the process of transformation to enhancing the specific expertise of those employed, the Human Resources Sector. Apart from functional preparations for outsourcing non-core functions were transformation, the Sector began its own personnel completed in 2001. This process envisages the adjustment process in order to be able to meet new outsourcing of the following functions: car check challenges more professionally. With the new stations, car maintenance, restaurants, maintenance of Employed according to education organisational structure, i.e. introduction of human buildings, cleaning, security of personnel, and technical resources as a corporate unit on a Management level, this protection. Since these functions are to include 1,400 Unqualified - 1% Trained on the job - 2% segment is ranked at the highest level of HT management. employees, the programme is being carried out with Qualified - 8% maximum social sensitivity. Highly qualified - 10% In 2001 the training programmes in the company Elementary vocational - 5% Secondary vocational - 48% continued to enable the employees to be better In this socially sensitive process of corporate Tertiary ed. college - 9% prepared to respond rapidly to the challenges of a restructuring for the open market, notable success Higher education, dynamic telecommunications industry. In the forthcoming within the field of human resources has included MSc and DSc - 17% period, 3,000 employees of HT will undergo intensive voluntary early retirement for 337 employees training programmes. The experience and potential of accompanied by benefits which are among the highest our strategic partner, Deutsche Telekom, will play an in Croatia. important role in these programmes. During 2001 a programme was launched to subsidise interest on housing loans as an incentive for long-term Financial statements as at 31 December 2001 together with auditors' report

36 Corporate profile

40 Auditor’s report

42 Income statement 35 43 Balance sheet

45 Cash flow statement

46 Statement of changes in equity

47 Notes to the financial statements Corporate profile

History and incorporation In addition to basic fixed line to achieve further growth in fixed Sub-ordinate regulations passed in HT - Hrvatske telekomunikacije ("HT telephony, including local, long line telephony partly as a result of the second half of 2001, provide for d.d.", or the "Company"), is a joint distance, and international calls, HT an increased range of services and the right of HT d.d. to be awarded stock company in majority ownership d.d. operates analogue and GSM increase in subscriber numbers. with the UMTS concession under of Deutsche Telekom AG ("DTAG"). It mobile telephone networks, called Revenues from telecommunication prescribed conditions and for fixed was incorporated on 28 December MOBITEL and CRONET, respectively. services for 2001 were HRK 6,788 concession fee. 1998 under the laws of the Republic Other services include a paging million of which HRK 4,717 million of Croatia pursuant to the terms of service (BiP), data (CROAPAK and relate to fixed line telephony, HRK the Law on Separation of Croatian CROLINE), internet (HiNet) and 1,673 million to mobile telephony, Posts and Telecommunications into telegraph services. and HRK 398 million to data, Croatian Posts and Croatian internet and other services. Profit Telecommunications (Official Gazette Significant events from ordinary activities before tax No. 101/98. and 65/99 and Article On 1 January 2001 the Company for the year was HRK 513 million. 10 of Law on Privatization of decided to adopt the allowed The net profit for the financial year 36 Hrvatske telekomunikacije d.d.), alternative accounting treatment to amounted to HRK 310 million. Long 37 which involved the Post and carry its property, plant and and short term borrowings amounted Telecommunications businesses of equipment at a revalued amount less to HRK 570 million at year end. Cash the former HPT - Hrvatska pošta i accumulated depreciation . balances at 31 December 2001 telekomunikacije ("HPT s.p.o.") being International Accounting Standard amounted to HRK 909 million. During separated and transferred into two (IAS) 16, requires that revalued 2001 the Company paid remaining new joint stock companies, HT - amounts are determined by dividend in respect of 2000 net Hrvatske telekomunikacije d.d. ("HT professional appraisers and, profits of HRK 51 million. d.d.") and HP - Hrvatska pošta d.d. consequently, HT engaged ("HP d.d."), which commenced their professional appraisers to perform HT d.d.'s operating profit was operations on 1 January 1999. revaluation. The revaluation resulted significantly impacted by the in a gross write-up of certain revaluation described in the previous On 5 October 1999, the Republic of property, plant and equipment of section, as HRK 1,142 million of the Croatia sold a 35% stake in HT d.d. HRK 3,275 million, which was write down of assets was reported to DTAG and on 25 October 2001 recorded through revaluation against the current year results, and DTAG purchased a further 16% stake reserves within equity and in a gross by the change in estimate in respect in HT d.d. and thus became the write down of HRK 1,142 million, of the useful lives of HT's property, majority shareholder with a 51% which was recorded through the plant and equipment which are now ownership stake. DTAG is now profit and loss account for 2001. significantly longer. represented in the Supervisory Board with five members, the Republic of Additionally, the Company decided to The Company's current Croatia with three, and one member change the estimate in respect of telecommunications strategy is still needs to be appointed by the the useful lives of its property, plant geared towards the ultimate aim of Workers Council of HT d.d.. and equipment in order to better integrating networks and services approximate normal useful lives of within the concept of an integrated Principal activities the assets (see notes 9 and 22 for wide-band communications network The principal activities of HT d.d. further information). based on ATM technology, fibre- comprise the provision of optic cable transmission telecommunications services, and the Financial review and infrastructure and SDH transport. In design and construction of strategy the short term, HT d.d. plans to communications networks in the HT d.d. has continued to develop the continue to install new subscriber Republic of Croatia. range of its services and pricing to lines, increase the availability of respond to competition in the mobile fibre-optic access points, expand the HT d.d.'s operations are performed market and to prepare for de- range of business services and through 20 centres supported by a regulation in the fixed telephony increase the service area and Telecommunication Directorate and market. During 2001, HT d.d. penetration of its mobile telephony Central Services Departments which experienced significant growth in the networks. are based in Zagreb. mobile pre-paid market and managed Corporate profile

Directors and management Peter Janeck Member Until 24 October 2001 Wolfgang Lister Member From 24 October 2001 General Assembly Karim Jadavjee Khoja Member From 24 October 2001 Eugen Schulz Member From 24 October 2001 The representatives of the shareholders in the General Assembly are as follows:

Alojz Tušek President and representative of Republic of Croatia From 16 June 2000 Wolfgang Breuer Representative of Deutsche Telekom AG Until 29 June 2001 Hans Wolfgang Werner Representative of Deutsche Telekom AG From 29 June 2001 until 24 October 2001 Christoph von Damm Representative of Deutsche Telekom AG From 24 October 2001 Statement of responsibilities of the Management Board

Pursuant to the Croatian Accounting Law (90/92), the Management Board is responsible for ensuring that financial Supervisory Board statements are prepared for each financial year in accordance with International Financial Reporting Standards 38 (IFRS) which give a true and fair view of the state of affairs and results of the Company for that period. 39 The members of the Supervisory Board who served during 2001 and subsequently are as follows: In preparing those financial statements, the responsibilities of the Management Board include ensuring that:

Hans-Albert Aukes Deputy president Until 24 October 2001 - suitable accounting policies are selected and then applied consistently; President From 24 October 2001 Ivan Mijatović President Dismissed by decision of the - judgements and estimates are reasonable; Government of Croatia at 15 March 2001 Slavko Linić Member Appointed by decision of the - applicable accounting standards are followed, subject to any material departures disclosed and explained in Government of Croatia at 15 March 2001 the financial statements; and President From 6 April 2001 until 24 October 2001 Ana Hrastović Deputy president From 24 October 2001 - the financial statements are prepared on the going concern basis unless it is inappropriate to presume that Erika Kašpar Member Until 24 October 2001 the Company will continue in business in the foreseeable future. Wolfgang Breuer Member From 24 October 2001 Martin Walter Member From 24 October 2001 The Management Board must also ensure that proper accounting records are kept which disclose with reasonable Michael Gunter Member From 24 October 2001 accuracy at any time the financial position of the Company and must also ensure that the financial statements Herbert Muller Member From 24 October 2001 comply with the Croatian Accounting Law (90/92). The Management Board is also responsible for safeguarding the Ivan Milić Member From 24 October 2001 assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other Milan Stojanović Member From 24 October 2001 irregularities. Fridbert Gerlach Member Until 24 October 2001 The accompanying financial statements were approved for issuance by the Management Board on 19 March 2002. Ivica Mišetić Member Until 12 April 2001 Željko Tabaković Member From 12 April until 24 October 2001 HT - Hrvatske telekomunikacije d.d. Dr. Joachim Peckert Member Until 24 October 2001 Jurišićeva 13 Georg Pölzl Member Until 24 October 2001 10000 Zagreb Prof. Dr. Mato Crkvenac Member Until 24 October 2001 Republic of Croatia Goranko Fižulić Member Until 24 October 2001 Employees representative Introduced from 24 October 2001, On behalf of the Management Board, but not yet appointed by the workers council

Board

The members of the Management Board who served during 2001 and subsequently are as follows: I. Mudrinić 19 March 2002 Ivica Mudrinić President From 28 December 1998 President of the Management Board Armin Schubert Deputy president Until 24 October 2001 Božidar Poldrugač Member Until 24 October 2001 Gašper Gaćina Member Until 24 October 2001 Ingo Richter Member From 1 March 2000 Auditor’s report

To the Shareholders of HT audit provides a reasonable basis for the Separation Law of 10 July 1998. 4. HT d.d. had adopted depreciation financial statements as at 31 - Hrvatske our opinion. At that time, we were unable to rates for fixed assets and December 2001 give a true and fair telekomunikacije d.d.: In our auditors' report dated 29 May satisfy ourselves as to whether HT subsequent enhancements in view of the financial position of the We have audited the accompanying 2001, our opinion on the 2000 d.d. had established and registered accordance with Croatian Law and its Company, of the results of its financial statements of HT - financial statements contained four legal title to the majority of its land internal accounting policy. These operations, cash flows and changes Hrvatske telekomunikacije d.d. ("HT qualifications which related to the and buildings. rates were based on asset lives that in equity for the year then ended and d.d." or the "Company"), as at 31 following matters: As explained in Note 9 to the are generally shorter than the useful have been prepared in accordance December 2001, as set out on pages accompanying financial statements, economic lives over which the with International Financial 9 to 38 prepared under the 1. On 1 January 1999 the in 2001 HT d.d. performed additional underlying assets are expected to be Reporting Standards and the accounting policies set out on pages telecommunications trade and procedures which provided support used, as required by IAS 16. In requirements of the Croatian 14 to 21. The financial statements related net assets of HPT s p.o. were for the existence of the title to the addition, HT d.d. did not consistently Accounting Law (90/92). have been prepared on the basis of transferred to HT d.d. for Company's land and buildings. apply its policy to commence the International Financial Reporting consideration of 81,888,535 depreciation on the date fixed assets Standards issued by the ordinary shares of HRK 100 each. 3. Investment in associates in the and subsequent enhancements are 40 International Accounting Standards The net assets were transferred at balance sheet as of 31 December brought into service. 41 Board, as required by Croatian book value on 1 January 1999. 2000 included an amount of HRK 168 As explained in Note 9, management Accounting Law (90/92). However, the Croatian Accounting million in respect of HT d.d.'s interest of HT d.d. made a detailed analysis Law requires the maintenance of in Hrvatska Pošta i Telekomunikacije of the useful lives of all types of Arthur Andersen d.o.o. Zagreb Respective accounting records for a five year d.o.o. Mostar ( HPT Mostar). This fixed assets used by the Company in Republic of Croatia responsibilities of the period and therefore HT d.d.'s amount represented HT d.d.'s share order to reflect useful economic Zagreb, 9 October 2001 Management Board and accounting records did not permit (29.44% as of 31 December 1999) of lives, which were applied from 1 Zagreb, 19 March 2002 auditors the substantiation of the book value the net assets of HPT Mostar as at January 2001. These financial statements are the of the fixed assets transferred. 31 December 1999, as shown in HPT responsibility of the Company's Consequently, we were not able to Mostar's audited financial statements Opinion management. Our responsibility is to satisfy ourselves as to the book for that year, increased for In our opinion, except for the effect express an opinion on these financial value of HT d.d.'s fixed assets and subsequent contributions of capital of on the corresponding figures of the statements. reserves at 1 January 1999, 31 HRK 8 million and decreased by a adjustments, if any, to the financial December 1999 and 31 December provision of HRK 50 million. These position of the Company as at 31 Basis of opinion 2000 and of the depreciation and were the first financial statements of December 2000 and to the results of We conducted our audit of the tax charges to the profit and loss HPT Mostar subject to an audit and operations, cash flows and changes financial statements of HT d.d. in account for the years ended 31 the auditors' report covering those in equity for the year then ended, as accordance with International December 1999 and 31 December financial statements included such might have been determined to be Standards on Auditing. Those 2000. significant limitations on scope of necessary in respect of the matter standards require that we plan and As explained in Note 9 to the work that the auditors issued a referred to in paragraph 3 above, the perform our audit so as to obtain all accompanying financial statements, disclaimer of the Company's opinion the information and explanations in 2001 HT d.d. decided to change on the financial statements. No which we consider necessary in order its accounting policy in respect of audited financial statements of HPT to provide us with sufficient measurement of its property, plant Mostar were available for the year evidence to give reasonable and equipment and to now record at ended 31 December 2000. In these assurance that the financial a revalued amount less accumulated circumstances, we were unable to statements are free from material depreciation. An independent substantiate the carrying amount of misstatement. An audit includes property revaluation has been the Company's interest. In addition examining, on a test basis, evidence performed by professional appraisers there was some uncertainty as to the supporting the amounts and as of 1 January 2001. The results final percentage of HT d.d.'s disclosures in the financial have been recorded in the participating interest. statements. An audit also includes accompanying financial statements. As explained in Note 10, during 2001 assessing the accounting principles management of HT d.d. made a used and the significant estimates 2. As at 31 December 2000, HT detailed analysis of the value of its made by the management board as d.d. was in the process of investment in HPT Mostar and based well as evaluating the overall establishing and registering legal on that made additional provision presentation of the financial title to land and buildings against it in the amount of HRK 156 statements. We believe that our transferred from HPT s p.o. under million. Income statement Balance sheet

For the year ended 31 December 2001 31 December 2001

2001 2000 2001 2000 Notes HRK millions HRK millions Notes HRK millions HRK millions Operating income: ASSETS Revenue 3 6.788 5.830 B. Fixed assets Own costs capitalised 167 299 Intangible assets 8 140 123 Other income 89 91 Property, plant and equipment 9 10.133 7.719 Total operating income 7.044 6.220 Investments in associates 10 41 187 Material costs Other investments 11 150 34 a) Cost of raw materials, consumables and merchandise (561) (496) Long-term receivables 43 45 b) Other material costs and costs of services 4 (1.514) (1.277) Deferred tax asset 7 79 - Staff costs Total fixed assets 10.586 8.108 a) Gross wages and salaries (919) (893) C. Current assets b) Taxes, contributions and other payroll costs (305) (348) Inventories 12 159 103 Depreciation, amortisation Debtors 13 1.205 1.043 42 and write down of fixed assets 5 (1.208) (1.533) Investments 11 90 - 43 Write down of fixed assets from appraisal 9 (1.142) - Time deposits 27 b) 974 - Write down of current assets (125) (65) Cash and cash equivalents 27 a) 909 705 Other costs 6 (646) (450) Total current assets 3.337 1.851 Total operating costs (6.420) (5.062) D. Prepayments and accrued income - current assets 22 20 Operating profit 624 1.158 F. TOTAL ASSETS 13.945 9.979 Financial income 99 4 Financial expense (64) (42) Share of profits of associates 10 10 33 Provision against carrying value of associates 10 (156) (50) Income before taxes from ordinary activities 513 1.103 Current tax 7 (359) (183) Deferred tax 7 156 - Net profit for the year 310 920

The accompanying accounting policies and notes are an integral part of this income statement. Balance sheet (continued) Cash flow statement

31 December 2001 For the year ended 31 December 2001

2001 2000 2001 2000 Notes HRK millions HRK millions Notes HRK millions HRK millions EQUITY AND LIABILITIES Cash flows from operating activities A. Issued capital and reserves Cash receipts from customers 7.980 6.807 Subscribed share capital 19 8.189 8.189 Cash paid to suppliers and employees (4.374) (3.702) Legal reserve 20 82 36 Cash generated from operations 3.606 3.105 Other reserve 21 (796) (796) Interest paid (32) (32) Retained earnings 1.267 496 Income tax paid (266) (149) Revaluation reserve 22 2.313 - Net cash inflow from operating activities 3.308 2.924 Net profit for the year 310 561 Cash flows from investing activities Total issued capital and reserves 11.365 8.486 Acquisition of associates and other companies - (4) C. Long term liabilities Purchase of property, plant and equipment (1.691) (1.769) Provisions 18 52 - Purchase of treasury bills (40) (78) Employee benefit obligations 17 80 74 Purchase of government bonds (120) - 44 Deferred tax liability 7 578 - Investment in time deposits (974) - 45 Long-term loans 16 294 335 Investment in unit holdings of money market fund (50) - Other long term liabilities 25 26 Interest received 59 6 Total long term liabilities 1.029 435 Net cash outflow from investing activities (2.816) (1.845) D. Current liabilities Cash flows from financing activities Trade payables and Proceeds from borrowings - 20 other current liabilities 14 918 682 Repayment of borrowings (237) (134) Income tax payable 143 50 Appropriations to shareholders (51) (359) Short-term borrowings and Net cash outflow from financing activities (288) (473) current portion of long-term loans 15 276 179 Net increase in cash and cash equivalents 204 606 Total current liabilities 1.337 911 At 1 January 2001/2000 705 99 E. Accruals and deferred income At 31 December 2001/2000 27 a) 909 705 - current liabilities 214 147 Total liabilities 2.580 1.493 F. TOTAL EQUITY AND LIABILITIES 13.945 9.979 The accompanying accounting policies and notes are an integral part of this cash flow statement.

The accompanying accounting policies and notes are an integral part of this balance sheet.

Signed on behalf of HT d.d. on 19 March 2002

I. Mudrinić

I. Richter Statement of changes in equity Notes to the financial statements

For the year ended 31 December 2001

Subscribed Revaluation Legal Other Retained Net profit Total 1. Status of HT d.d. as disclosed in the accounting a 20% to 50% ownership interest in share reserve reserve reserve earnings for the HT d.d. is a joint stock company policies hereafter. a company's equity) where significant capital year whose shareholders are Deutsche influence is exercised by HT d.d. are HRK mil. HRK millions HRK millions HRK millions HRK millions HRK millions HRK millions Telekom AG (51%) and the Republic c) Changes in accounting accounted for using the equity Balance as at 1 January 2000 8.189 - - (796) - 532 7.925 of Croatia (49%). principles method. An assessment of Allocation of net income to retained earnings ----532(532) - Under the Separation Law of 10 July The following changes in accounting investments in associates is Appropriation of net income to legal reserve - - 36 - (36) - - 1998, the Telecommunications and principles have been introduced in performed when there is an Profit for the financial year -----920920 Post businesses of HPT s p.o. and accordance with the requirements of indication that the asset has been Appropriation to shareholders (in advance) -----(359) (359) the related assets and liabilities were the respective standards or as a impaired or the impairment losses Balance as at 31 December 2000 8.189 - 36 (796) 496 561 8.486 transferred at net book value into result of the change in HT d.d.'s recognised in prior years no longer Allocation of net income to retained earnings ----561(561) - two new joint stock companies, HT accounting policies: exist. Unrealised gains arising from Appropriation of net income to legal reserve - - 46 - (46) - - d.d. and HP d.d. at 1 January 1999. - HT d.d. has changed its accounting transactions with associates are Revaluation reserve, net of tax HPT s p.o. ceased operations from policy for accounting for its eliminated to the extent of the effect of HRK 655 million - 2.620----2.620 that date. The share capital of HT property, plant and equipment as it Company's interest in the associate, 46 Depreciation transfer, net of d.d. was registered on 28 December decided to adopt the allowed against the investment in the 47 related deferred tax of HRK 77 million - (307) - - 307 - - 1998 on the basis of the unaudited alternative treatment in accordance associate. Profit for the financial year -----310310 balance sheet of HPT s p.o. as at 31 with IAS 16 and to carry it at Appropriation to shareholders for 2000 - - - (51) - (51) December 1997. The registered revalued values. f) Other investments Balance as at 31 December 2001 8.189 2.313 82 (796) 1.267 310 11.365 office address of the Company is - Following the introduction of IAS All other investments are accounted located at Jurišićeva 13, Zagreb, 39, Financial Instruments: for in accordance with IAS 39, Croatia. Recognition and Measurement, Financial Instruments: Recognition available-for-sale investments are and Measurement as further The accompanying accounting policies and notes are an integral part of this statement of changes in equity. 2. Summary of accounting carried at fair value and all disclosed in note s. policies derivative financial instruments have A summary of HT d.d.'s principal been recognised as assets or g) Intangible fixed assets accounting policies are set out liabilities. Intangible fixed assets are measured below: The opening balance of equity initially at cost. Intangible assets are (retained earnings and hedging recognised in the event that the a) Basis of accounting reserve) as at 1 January 2001 has future economic benefits that are HT d.d. maintains its accounting not been adjusted as the carrying attributable to the assets will flow to records in Croatian Kuna (HRK) and amount of all available for sale the enterprise and the cost of the in accordance with International investments equals to its fair value asset can be measured reliably. After Financial Reporting Standards (IFRS) at this date. In accordance with initial recognition, intangible assets as published by the International standard, prior year comparative are measured at cost less Accounting Standards Board, figures have not been restated. accumulated amortisation and any effective as of 31 December 2001, accumulated impairment losses. and as prescribed by Croatian d) Measurement currency Intangible assets are amortised on a Accounting Law (90/92) and in HT d.d.'s financial statements are straight-line basis over the best accordance with the accounting prepared in HRK. The effective estimate of their useful lives. The principles and practices observed by exchange rate of the Croatian average amortisation period for enterprises in Croatia. currency (expressed in HRK) at 31 intangible fixed assets is ten years. December 2001 was HRK 8.36 (31 The amortisation method is reviewed b) Basis of preparation (of HT December 2000 - HRK 8.16) per annually at each financial year-end. d.d.'s financial statements) United States Dollar (USD) and HRK The financial statements have been 7.37 per Euro. All amounts disclosed h) Property, plant and equipment prepared under the historical cost in the financial statements are Property, plant and equipment are convention except that: stated in millions of HRK if not stated at revalued amounts less - Property, plant and equipment are otherwise stated. accumulated depreciation and any carried at revalued amounts (note h); accumulated impairment loss. - investments held for trading and e) Investments in associates Independent property revaluations available-for-sale are stated at their Investments in associated companies are performed when the carrying fair value (note s); (generally investments with between amount becomes materially different Notes to the financial statements

from the fair values. The last Depreciation is computed on a impairment loss is recognised in the income statement within financial credited or charged, in the same or a q) Cash and cash equivalents valuation was performed by the straight-line basis. At the time of income or treated as a revaluation income or financial expense different period, directly to equity. Cash and cash equivalents comprise professional appraisers as of 1 the last valuation described above, decrease for property, plant and respectively. cash on hand, demand deposits and January 2001. Any increase in a the Company made a detailed review equipment that are carried at o) Employee benefit obligations short term, highly liquid investments property, plant and equipment's of the remaining useful lives of its revalued amount to the extent that m) Operating leases The Company provides defined that are readily convertible to known valuation is credited to the property property, plant and equipment. The the impairment loss does not exceed Rentals payable under operating benefit plans for all employees. The amounts of cash with original revaluation surplus, unless and only revised remaining useful lives are on the amount held in the revaluation leases are recognised as an expense obligation and costs of pension maturities of three months or less to the extent it reverses a average as follows: surplus for that same asset. The on a straight line basis over the benefits including jubilee benefits are and which are subject to an revaluation decrease of the same recoverable amount is the higher of lease term, even if the payments are determined using a projected unit insignificant risk of change in value. asset previously recognised as an Buildings 12 years an asset's net selling price and value not made on such a basis. credit method. The projected unit expense in which case it is Machinery and equipment 6 years in use. The net selling price is the credit method considers each period r) Borrowings recognised as income. Furniture and vehicles 6 years amount obtainable from the sale of n) Taxation of service as giving rise to an Borrowing costs, which include an asset in an arm's length The income tax charge is based on additional unit of benefit entitlement interest and other costs incurred in Any decrease is first offset against The useful life and depreciation transaction less the costs of profit for the year and includes and measures each unit separately connection with the borrowing of 48 an increase related to an earlier method are reviewed periodically to disposal while value in use is the deferred taxation. Deferred taxes are to build up the final obligation. Past funds, including exchange differences 49 valuation in respect of the same ensure that the method and period present value of estimated future calculated using the balance sheet service costs are recognised on a arising from foreign currency asset and is thereafter recognised as of depreciation are consistent with cash flows expected to arise from liability method. straight line basis over the average borrowings, are expensed in the an expense. The relevant portion of the expected pattern of economic the continuing use of an asset and Deferred income taxes reflect the net period until the amended benefits period in which they are incurred. the revaluation surplus realised in benefits from items of property, from its disposal at the end of its tax effects of temporary differences become vested. Gains or losses on Borrowings are initially recognised at respect of a previous valuation is plant and equipment. useful life. between the carrying amounts of the curtailment or settlement of the proceeds received, net of released from the asset valuation assets and liabilities for financial pension benefits are recognised transaction costs. surplus directly to retained earnings Construction-in-progress represents j) Inventories reporting purposes and the amounts when the curtailment or settlement upon the disposal of revalued asset plant and properties under Inventories are valued at the lower used for income tax purposes. occurs. The pension obligation is s) Investments and as the asset is used. construction and is stated at cost. of cost and net realisable value, Deferred tax assets and liabilities measured at the present value of In accordance with IAS 39, Financial The initial cost of property, plant This includes the cost of after provision for obsolete items. are measured using the tax rates estimated future cash flows using a Instruments: Recognition and and equipment comprises its construction, plant and equipment Net realisable value is the selling expected to apply to taxable income discount rate that is similar to the Measurement, the Company adopted purchase price, including import and other direct costs. price in the ordinary course of in the years in which those interest rate on government bonds accounting policy for recognition and duties and non-refundable purchase business, less the costs of temporary differences are expected where the currency and terms of the measurement of financial taxes and any directly attributable Construction-in-progress is not completion, marketing and to be recovered or settled based on government bonds are consistent instruments which is applicable from costs of bringing the asset to its depreciated until such time as the distribution. Cost is determined tax rates enacted or substantially with the currency and estimated 1 January 2001. Accordingly, working condition and location for relevant assets are completed and primarily on the basis of weighted enacted at the terms of the defined benefit investments are classified into the its intended use. put into operational use. average cost. balance sheet date. obligation. following categories: held-to- The measurement of deferred tax The Company offered possibility for maturity, trading and available-for- Expenditures incurred after the fixed i) Impairment of assets k) Receivables liabilities and deferred tax assets early retirement to certain employees sale. assets have been put into operation, - Financial instruments Receivables are stated at the fair reflects the tax consequences that that meet conditions in respect of such as repairs and maintenance and For financial assets carried at value of the consideration given and would follow from the manner in age and years of service. The amount Investments with fixed or overhaul costs are normally charged amortised cost, whenever it is are carried at amortised cost, after which the enterprise expects, at the of payment in respect of early determinable payments and fixed to income in the period in the costs probable that the Company will not provision for impairment. balance sheet date, to recover or retirement that is to be paid to maturity that the Company has the are incurred. collect all amounts due according to settle the carrying amount of its employees is computed based upon positive intent and ability to hold to the contractual terms of loans, l) Foreign currencies assets and liabilities. average salaries and an additional maturity other than loans and In situations where it can be clearly receivables or held-to maturity Transactions denominated in foreign Deferred tax assets and liabilities amount that depends on the age and receivables originated by the demonstrated that the expenditures investments, an impairment or bad currencies are translated into local are not discounted and are classified years of service. Company are classified as held-to- have resulted in an increase in the debt loss is recognised in the income currency at the exchange rates as non-current assets (liabilities) in maturity investments. Investments future economic benefits expected to statement. prevailing at the date of the the balance sheet. p) Revenue recognition acquired principally for the purpose be obtained from the use of an item - Other assets transaction. Monetary assets and Deferred tax assets are recognised Revenue is recognised when it is of generating a profit from short- of property, plant and equipment Other assets are reviewed for liabilities denominated in foreign when it is probable that sufficient probable that the economic benefits term fluctuations in price are beyond its originally assessed impairment whenever events or currencies are translated into local taxable profits will be available associated with the transaction will classified as trading. All other standard of performance, the changes in circumstances indicate currency at the exchange rates against which the deferred tax flow to the enterprise and the amount investments, other than loans and expenditures are capitalised as an that the carrying amount of an asset prevailing at the year-end. Any gain assets can be utilised. of the revenue can be measured receivables originated by the additional cost of property, plant may not be recoverable. Whenever or loss arising from a change in Current tax and deferred tax are reliably. Revenues for all services are Company, are classified as available- and equipment. the carrying amount of an asset exchange rates subsequent to the charged or credited directly to equity recognised net of VAT and discounts for-sale. exceeds its recoverable amount, an date of the transaction is included in if the tax relates to items that are when the service is provided. Notes to the financial statements

Held-to-maturity investments are present obligation (legal or which case the instrument is 3. Revenue included in current assets unless they constructive) as a result of a past classified as equity. mature more than 12 months after the event and it is probable (i.e. more a) Revenue - by business balance sheet date and contract terms likely than not) that an outflow of - Revaluation reserves do not allow their earlier maturity. resources embodying economic This reserve includes the cumulative 2001 2000 Investments held for trading are benefits will be required to settle the net change in the fair value of HRK millions HRK millions included in current assets. obligation, and a reliable estimate property, plant and equipment Revenue from fixed telephony 4.717 4.355 can be made of the amount of the carried at revalued amounts. An Revenue from mobile telephony 1.673 1.162 Available-for-sale investments are obligation. Provisions are reviewed amount corresponding to the Revenue from internet classified as current assets if at each balance sheet date and difference between depreciation and data services 353 272 management intends to realise them adjusted to reflect the current best based on the revalued carrying Other revenue 45 41 within 12 months after the balance estimate. amount of the property, plant and 6.788 5.830 sheet date and contract terms do equipment and depreciation on the not allow its earlier maturity. All Where the effect of the time value of property, plant and equipment's 50 purchases and sales of investments money is material, the amount of a original cost is transferred annually 51 are recognised on the trade date. provision is the present value of the from the revaluation reserve to expenditures expected to be required retained earnings as a change in b) Revenue - by geographical area Investments are initially measured at to settle the obligation. When equity. cost, which is the fair value of the discounting is used, the increase in 2001 2000 consideration given for them, provision reflecting the passage of v) Contingencies HRK millions HRK millions including transaction costs. time is recognised as interest Contingent liabilities are not Republic of Croatia 5.916 4.946 expense. recognised in the financial Rest of the World 872 884 Available-for-sale and trading statements. They are disclosed 6.788 5.830 investments are subsequently carried u) Equity unless the possibility of an outflow at fair value without any deduction - Liabilities and equity of resources embodying economic The total number of employees as at 31 December 2001 was 11,053 for transaction costs by reference to Financial instruments are classified benefits is remote. (2000: 11,219). their quoted market price at the as liabilities or equity in accordance balance sheet date. with the substance of the A contingent asset is not recognised contractual arrangement on initial in the financial statements but 4. Other material costs and costs of services Gains or losses on measurement to recognition. disclosed when an inflow of fair value of available-for-sale economic benefits is probable. 2001 2000 investments are recognised directly Interest, dividends, gains, and losses HRK millions HRK millions in the fair value reserve in relating to a financial instrument w) Subsequent events Advertising costs 258 129 shareholders equity, until the classified as a liability, are reported Post-year-end events that provide Maintenance services 116 141 investment is sold or otherwise as expense or income. Distributions additional information about the International settlements- fixed telephony 418 403 disposed of, or until it is determined to holders of financial instruments Company's position at the balance International settlements - GSM 83 113 to be impaired, at which time the classified as equity are charged sheet date (adjusting events), are International settlements - leased lines 33 19 cumulative gain or loss previously directly to equity. reflected in the financial statements. International settlements - Internet 27 21 recognised in equity is included in Post-year-end events that are not Domestic interconnect - fixed telephony 367 243 net profit or loss for the period. When the rights and obligations adjusting events are disclosed in the Domestic interconnect - GSM 21 38 regarding the manner of settlement notes when material. Rent 25 17 Changes in the fair values of trading of financial instruments depend on Other costs 166 153 investments are included in financial the occurrence or non-occurrence of 1.514 1.277 expense. uncertain future events or on the outcome of uncertain circumstances Held-to-maturity investments are that are beyond the control of both carried at amortised cost using the the issuer and the holder, the effective interest rate method. financial instruments is classified as a liability unless the possibility of t) Provisions the issuer being required to settle in A provision is recognised when, and cash or another financial asset is only when, the Company has a remote at the time of issuance, in Notes to the financial statements

5. Depreciation, amortisation and write down 7. Taxation of fixed assets a) Tax on profit on ordinary activities 2001 2000 HRK millions HRK millions 2001 2000 Depreciation 1.116 1.512 HRK millions HRK millions Amortisation 23 21 Current tax expense 359 183 Write down of excessive spare parts 69 - Deferred tax benefit (156) - 1.208 1.533 Total income tax 203 183

Please refer to note 9 for further details on depreciation expense. b) Reconciliation of the taxation charge to the income tax rate 6. Other costs 2001 2000 52 2001 2000 HRK millions HRK millions 53 HRK millions HRK millions Profit on ordinary activities before taxation 513 1.103 Daily allowances 37 27 Income tax at 20% (2000 - 35%) 103 386 Travel allowances 37 34 Tax effects of income not taxable in determining taxable profit: Bank charges, membership and other fees 63 58 Dividends received (4) (13) Education and consulting cost 195 82 Tax effects of expenses that give rise to temporary differences that were not Loss on disposal of fixed assets 19 58 recognised as deferred tax assets: Security costs 19 17 Provision for obsolete inventories 25 - Contract workers 12 17 Impairment losses on investments 31 18 Provision for charges Provision for bad debts 30 76 (refundable subscription fee) - 9 Tax effects of expenses not deductible in determining taxable profit: Expense related to employee Entertainment expenses 2 4 benefit obligations (note 17) 38 31 Other non-deductible expenses 16 12 Provision for charges and risks (note 18) 52 - 203 483 Other operating charges 174 117 Other 646 450 Imputed interest - (294) Protective interest on tax prepayments - (6) - (300) Taxation 203 183

The difference between current tax expense of HRK 359 million and net income tax expense of HRK 203 million represents the deferred tax benefit. This benefit of HRK 156 million relates to the release of part of the deferred tax liability recognised as a result of the revaluation of property, plant and equipment (HRK 77 million) and to the part of the write down of the property, plant and equipment that will be tax deductible in future periods (HRK 79 million). Notes to the financial statements

The Company has not recognised any deferred tax in respect of non- 8. Intangible assets deductible costs such as impairment losses on investments, provisions for bad debts and obsolete stock as a result of the management's opinion that there is insufficient support to claim deduction in future periods. 2001 2000 There has been a change in the Croatian Income Tax Law as at 1 January HRK millions HRK millions 2001. The most significant changes in comparison to the old Income Tax Cost Law are that the income tax rate has decreased from 35% in 2000 to 20% At 1 January 208 189 in 2001 and that the recognition of imputed interest on share capital is no Additions 40 19 longer allowed for taxation proposes. At 31 December 248 208 Accumulated amortisation Component of deferred tax assets and liabilities are as follows: At 1 January 85 64 Amortisation for the year 23 21 At 31 December 108 85 Assets Liabilities Net book value 54 2001 2001 At 1 January 123 125 55 HRK millions HRK millions At 31 December 140 123 Property, plant and equipment write-down 79 - Property, plant and equipment write-up - (578) At 31 December 79 (578) The carrying value of the GSM licence as of 31 December 2001 is HRK 77 million (2000: HRK 87 million ). This licence is amortised over a period of 10 years starting in September 1999. The rest of the balance primarily relates to the various licences for use of software and other No deferred tax asset or liability has been recognised as at 31 December licences. 2000.

The deferred tax asset arises on the property, plant and equipment write- 9. Property, plant and equipment down as a result of the fact that HRK 395 million of the write-down In 2001 the Company changed its accounting policy relating to the subsequent measurement of reported in 2001 will be tax deductible in future periods. its property, plant and equipment from historical cost to revalued amounts. In accordance with The deferred tax liability arises on the property, plant and equipment write- the new policy, independent valuations will be performed periodically and the first valuation was up as a result of the fact that revaluation is only done for accounting performed by professional appraisers as of 1 January 2001. The appraisal company determined purposes. The deferred tax liability was at recognition taken directly to the fair value of the entire amount of the Company's property, plant and equipment based on equity and is released as tax benefit in the profit and loss account. their market value as at 1 January 2001. When there was no evidence of market value because The deferred tax liability recognised directly in equity during the period is of the specialised nature of the property and equipment and because the items are rarely sold, as follows: they were valued at the depreciated replacement cost. The Company's management estimates that there have not been significant changes in economic circumstances since this valuation was performed that would affect the fair value of its 2001 property, plant and equipment carried at revalued amounts at the balance sheet date. HRK millions Gross write up recognised through revaluation reserves of HRK 3,275 million was initially Property, plant and equipment write-up 655 reflected in the accompanying financial statements. The balance reported as at 31 December Depreciation transfer from revaluation reserves (77) 2001 was HRK 2,313 million. The decrease of HRK 962 millions relates to the fact that the 578 Company recognised deferred tax liability in the amount of HRK 655 millions at the time of revaluation and to the fact that there has been release of revaluation reserves to retained earnings in the amount of HRK 307 million (net of HRK 77 million of deferred tax) as shown in the statement of changes in equity. Notes to the financial statements

Gross write downs were reported in the profit and loss account for the year ended 31 December 2001 of HRK As stated in the summary of accounting policies, assets under construction are stated at cost 1,142 million. and are therefore not included in the revaluation summary above. The net increase in property, plant and equipment recognised at the time of revaluation was HRK 2,133 million. Included within assets under construction are fixed asset spare parts of HRK 324 million The Company did not calculate the value of the property, plant and equipment that would have been recorded in the (2000: HRK 386 million), net of a provision of HRK 193 million. financial statements had the property, plant and equipment been carried under the benchmark treatment, as its 9 In 2001 HT d.d. performed additional procedures, which provided support for the existence of accounting records did not permit the substantiation of this value. legal title to land and buildings transferred from HPT s p.o. under the Separation Law of 10 July 1998. HT d.d. is still in the process of formally registering this legal title.

Land and Plant and Tools, vehicles and Assets under Depreciation transfer from revaluation reserve buildings machinery office equipment construction Total An amount corresponding to the difference between depreciation based on the revalued HRK millions HRK millions HRK millions HRK millions HRK millions carrying amount of the property, plant and equipment and depreciation based on the property, Revaluation summary plant and equipment's original cost is transferred annually from the revaluation reserve to Net book value at 31 December 2000 4.477 2.161 105 - 6.743 retained earnings as a change in equity. Write-up resulting from revaluation 2.339 784 152 - 3.275 56 Write-down resulting from revaluation (977) (154) (11) - (1.142) The Company does not have any material property, plant and equipment held for disposal nor it 57 Net revaluation effect at 1 January 2001 1.362 630 141 - 2.133 has any material idle property, plant and equipment. Valuation of revalued assets as at 1 January 2001 5.839 2.791 246 - 8.876 Change in depreciation lives Fixed asset movement table (after revaluation) Until 2001 HT d.d. had adopted depreciation rates for property, plant and equipment and Cost or valuation subsequent enhancements in accordance with Croatian Law. These rates were based on asset At 1 January 2001 5.839 2.791 246 1.087 9.963 lives that are generally shorter than the useful economic lives over which the underlying assets Additions 28 5 3 1.501 1.537 are expected to be used, as required by IAS 16. In 2001, management of HT d.d. made a Transfers 325 1.092 18 (1.435) - detailed analysis of the useful lives of all types of property, plant and equipment acquired Disposals (4) (22) (4) (35) (65) during 2001. Additionally, professional appraisers prospectively revised remaining lives of the At 31 December 2001 6.188 3.866 263 1.118 11.435 revalued assets. The corresponding change in depreciation lives has been accounted for as a Accumulated depreciation change in accounting estimate. Accumulated depreciation of assets not appraised at 31 December 2000 - - - 111 111 The Company did not calculate the change in the depreciation charge for 2001 that resulted Charge for the year 492 585 39 - 1.116 from this change in estimate as its accounting records did not permit the substantiation of the Disposals (4) (11) (2) - (17) value of its property, plant and equipment before revaluation. Provision - - - 92 92 At 31 December 2001 488 574 37 203 1.302 Net book value At 31 December 2001 5.700 3.292 223 918 10.133 Notes to the financial statements

10. Investments in associates 11. Other investments

The investments in associates comprises: 2001 2000 HRK millions HRK millions 2001 2000 Available-for-sale investments - non-current 150 34 HRK millions HRK millions Total non current investments 150 34 HPT d.o.o. Mostar 20 168 Available-for-sale current investments 50 - Eronet d.o.o. 21 19 Held-to-maturity investments - current 40 - At 31 December 41 187 Total current investments 90 -

HT d.d. has the following associates incorporated in the Federation of (i) Held-to-maturity investments Bosnia and Herzegovina. Current held-to-maturity investments include 400,000 treasury bills issued by the Ministry of Finance at HRK 96.4 with the redemption value of HRK 100 and a maturity date of 25 April Entity Country of Principal Activities Ownership 2002. 58 Business Interest 59 HPT d.o.o. Mostar Federation of Bosnia Provision of post and fixed line (ii) Available-for-sale investments and Herzegovina telecommunication services 30.29% Non-current available-for-sale investments include bonds with the market value as at 31 Eronet d.o.o. Federation of Bosnia Provision of mobile December 2001 of HRK 41 million, issued by the Government Agency for Savings Security and and Herzegovina telecommunication services 49.00% Bank Restructuring with a fixed interest rate of 8.375 % and a maturity date of 19 December 2005 and bonds with the market value as at 31 December 2001 of HRK 40 million issued by The movement in investments in associates during the year was as follows: the same Agency with a fixed interest rate of 8 % and a maturity date of 19 December 2003.

2001 2000 Further, it includes bonds issued by Government of Croatia with a value of HRK 38 million, with HRK millions HRK millions a fixed interest rate of 6.5% payable semi-annually and with a principal payable on 20 Cost and net book value September 2004. At 1 January 187 201 Share of profits 10 33 The remaining HRK 31 million of non-current available-for-sale investments include a portfolio Additional investment - 3 of various equity securities. Current year provision for impairment (156) (50) At 31 December 41 187 Current available-for-sale investments include unit holdings in a money market fund of Zagrebačka Banka.

12. Inventories

2001 2000 HRK millions HRK millions Merchandise 133 86 Other 26 17 159 103 Notes to the financial statements

13. Debtors 16. Long-term loans

2001 2000 2001 2000 HRK millions HRK millions HRK millions HRK millions Trade debtors 985 1,005 Bank loans - 40 Other debtors 220 38 Supplier loans 294 295 1.205 1.043 294 335

14. Trade payables and other current liabilities Supplier loans represent the long-term portion of the unsecured supplier loans discussed in note 15. 2001 2000 HRK millions HRK millions 17. Employee benefit obligations Trade payables 358 484 The Company provides defined benefit pension plans for all employees. Provisions for pension 60 VAT and other taxes payable 55 12 obligations are established for benefits payable in respect of retirement, jubilee (length of 61 Payroll and payroll taxes 105 60 service) and surviving dependent pensions. Retirement benefits are dependent on employees Accrued liabilities 346 120 fulfilling the required conditions to enter retirement from the Company and jubilee benefits are Other creditors 54 6 dependent on the number of years of service. All benefit entitlements are determined from the 918 682 respective employee's monthly remuneration.

The obligation resulting from defined benefit pension plans is determined using the projected 15. Short-term borrowings and current portion unit credit method. Unrecognised gains and losses resulting from changes in actuarial of long-term loans assumptions are recognised as income / (expense) over the expected remaining service life of the active employees. There were no plan terminations or curtailments for the year ended 31 2001 2000 December 2001. HRK millions HRK millions Bank loans 38 62 The following table reconciles the funded status of defined benefit plans to the Supplier loans 238 117 amounts recognised in the balance sheet. 276 179 2001 2000 HRK millions HRK millions HT d.d. has two foreign currency bank loans. The first loan is for DEM 50 million and bears an Present value of funded interest rate at EURIBOR plus 0.5% per annum on the outstanding principal. The loan is being defined benefit obligations 246 212 repaid in semi-annual instalments over a 5 year period ending 11 June 2002. The second loan Unrecognised actuarial gains and losses (152) (123) is in respect of a term loan facility for EUR 7 million of which EUR 2 million had been drawn Unrecognised past service cost (14) (15) down at 31 December 2001. The facility bears an interest rate at EURIBOR plus 0.48 % per Net liability 80 74 annum on the outstanding principal. The loan is to be repaid in semi-annual instalments over a 3 year period, with the last instalment payable at 1 October 2002. Pension expense comprises the following:

HT d.d. has several long-term unsecured loan agreements with its domestic and foreign 2001 2000 suppliers totalling HRK 356 million, DEM 33 million, Euro 2 million and USD 7 million HRK millions HRK millions respectively. These loans bear interest rates ranging from 1.75% to 8.00% per annum on the Current service cost 15 12 outstanding principal. Repayments are made semi-annually. The liabilities at 31 December 2001 Interest expense on obligations 15 13 are to be repaid over the next 1 to 6 years. The fair value of these liabilities is not materially Net actuarial losses / (gains) recognised - - different to the carrying value recognised. Amortisation of past service cost 1 1 Amortisation of loss 7 5 Total pension expense 38 31 Notes to the financial statements

The movement in the liability recognised in the balance sheet was as 19. Share capital follows: 2001 2000 2001 2000 HRK millions HRK millions HRK millions HRK millions Authorised, issued, fully paid and registered share capital Net liability, beginning of year 74 71 81,888,535 ordinary shares of HRK 100 8.189 8.189 Net expense recognised in the income statement (Note 6) 38 31 The number of shares in issues remained unchanged between 1 January 1999 and 31 December Payments made under scheme (32) (28) 2001. Net liability, end of year 80 74 20. Legal reserves The principal actuarial assumptions used to determine pension Legal reserves represent reserves prescribed by the Company Law in the amount of 5% of the obligations as of 31 December were as follows: net profit for the year, until these reserves amount to 5% of share capital. Legal reserves that do not exceed the above amount can only be used to cover current year or prior year losses. If 62 2001 2000 the legal reserves exceed 5% of the share capital they can also be used to increase share 63 % % capital of the Company. Discount rate (p.a.) 7,0 7,0 Wage and salary increases (annually) 5,0 5,0 21. Other reserves Other reserves are result of certain adjustments made to the assets and liabilities transferred from HPT s p.o. at 1 January 1999 to reflect certain assets and liabilities that were not 18. Provisions adequately incorporated within the net assets transferred at 1 January 1999. As at 31 December 2001 the Company has provided HRK 52 million for several legal actions and claims that will probably be asserted in the future These adjustments primarily related to an appropriation of HRK 370 million that was declared against HT. on 1 June 1999 in respect of the 1998 profits of the former HPT s p.o. and an additional amount payable in respect of taxes in the amount of HRK 240 million that resulted from the review subsequently performed by the tax authorities.

22. Revaluation reserves

milijuni kuna Revaluation of property, plant and equipment 3.275 Deferred tax liability as at 1 January (655) Release of revaluation reserves to retained earnings (net of deferred tax) (307) Balance as at 31 December 2001 2.313

Release of revaluation reserves to retained earnings corresponds to the difference between depreciation based on the revalued carrying amount of property, plant and equipment and depreciation based on the property, plant and equipment's original cost, as explained in Note 9. Notes to the financial statements

23. Commitments 24. Contingencies

a) Operating lease commitments a) Taxation The Company has operating lease commitments in respect of buildings and equipment. There are no formal procedures in Croatia to agree the final level of tax charge upon submission of the declaration Operating lease charges consisted of the following: for corporate tax and VAT. However, such tax settlements may be subject to review by the relevant tax authorities during the subsequent five years. Accordingly, there remains a risk that the relevant tax authorities may have a 2001 2000 different opinion to HT d.d. as to the interpretation and application of the law on HPT s p.o. or its successor, which HRK millions HRK millions could have an effect on the tax charge in the income statement for the years ended 31 December 2001, 31 Current year expense 29 19 December 2000, 31 December 1999 and 31 December 1998 and the current taxation amounts due at 31 December 2001, 31 December 2000, 31 December 1999 and at 31 December 1998. Future minimum lease payments under non-cancellable operating leases with a term of more that one year as at 31 December were as follows: b) Litigation At the time of preparation of these financial statements, there are a number of claims outstanding. In the opinion of 2001 2000 the Management Board, the settlement of these or any future claims that may be brought against HT d.d. or its 64 HRK millions HRK millions predecessor HPT s p.o., will not have a material adverse effect on the financial position of HT d.d. 65 Within one year 28 13 Between 2 and 5 years 44 26 c) Refundable connection fees Greater than 5 years 18 23 Prior to the former HPT s.p.o's formation in 1990 and subsequently, HPT s p.o. or its predecessor entities (together "HPT") entered into contracts with customers and municipalities, which provided for the payment of connection fees The contracts relate primarily to property leases and car leases and are signed at usual business terms. to HPT. There were variations in the terms of these contracts between regions but certain contracts provided for the refund of connection fees on disconnection or other specified event. b) Capital commitments In addition, in war affected areas there is uncertainty as to whether all subscribers who had paid connection fees As at 31 December 2001, HT d.d. was committed under contractual agreements to capital were actually connected. On 1 January 1999 HT d.d. assumed responsibility for the liability arising out of these expenditures amounting to approximately HRK 858 million (31 December 2000 - HRK 435 million). contracts under the terms of the Separation Law.

Consequently, HT d.d. bears the risk noted above and may have an unrecorded liability for the refund of connection fees although the extent of any such exposure cannot reliably be determined.

The Management Board is of the opinion that the actual amounts not provided, which will require to be refunded in the future, are immaterial in the context of these financial statements.

d) Guarantee HT d.d. has entered into guarantee in respect of supplier loan to Eronet d.o.o. (associate company) as follows:

2001 HRK millions Amount of guarantee in respect of associate (DEM 27 million) 105 Amount paid by the associate during 2001 (DEM 10 million) (39) Amount of the outstanding guarantee (DEM 17 million) 66

The Management Board of HT d.d. do not expect this guarantee to be exercised or that in the event the guarantee being exercised that any material loss would result to HT d.d.. Notes to the financial statements

25. Balances and transactions with related parties 26. Financial instruments The main transactions with related parties during 2001 were as follows: The Company is exposed to international, commodity-based markets and has loan financing. As a result, it can be affected by changes in foreign exchange rates and interest rates. The Revenue Expenses Company also extends credit terms to its customers and is exposed to a risk of default. The 2001 2000 2001 2000 significant risks together with the methods used to manage these risks, are described below. Company Service HRK millions HRK millions HRK millions HRK millions The Company does not use derivative instruments to manage risk nor for speculative purposes. Deutsche Telekom AG, Germany International settlements 128 266 83 105 Intercompany services - - 152 60 a) Credit risk HPT Mostar, International settlements 45 23 34 19 The Company has no significant concentration of credit risk with any single counterparty or DeTeMobil, Germany International settlements 23 - 8 - group of counterparties having similar characteristics. The Company procedures are in force to Matav, Hungary International settlements 11 - 10 - ensure on a permanent basis that sales are made to customers with an appropriate credit Sprint, USA International settlements 10 - 1 - history and do not exceed an acceptable credit exposure limit. Eronet, Bosnia nd Herzegovina International settlements 7 12 2 1 The Company does not guarantee obligations of other parties except as described in the Note 24 d). Max Mobil, Austria International settlements 7 - 3 - The maximum exposure to credit risk is represented by the carrying amount of each financial 66 PTC-ERA, Poland International settlements 5 - - - asset, in the balance sheet. Consequently, the Company considers that its maximum exposure is 67 Westel 900, Hungary International settlements 4 - 2 - reflected by the amount of debtors (refer to Note 13) net of provisions for impairment Macedonia telecom International settlements 3 - 6 - recognised at the balance sheet date. RadioMobil, Czech Republic International settlements 2 - 1 - Slovakia Telecom International settlements 2 - 3 - b) Liquidity risk MTS, Russia International settlements 1 - 1 - The Company policy is to maintain sufficient cash and cash equivalents or have available funding Wind, Italy International settlements 1 - 1 - through an adequate amount of committed credit facilities to meet its commitments in the EuroTel Bratislava, Slovakia International settlements 1 - - - foreseeable future. Mobimak, Macedonia International settlements 1 - 2 - Any excess cash is invested mostly in available-for-sale investments and held to maturity 251 301 309 185 investments.

HT d.d. is a joint stock company which operates in Croatia in the telecommunications market. As a result of HT d.d.'s strategic position c) Foreign exchange risk within the Croatian economy, a substantial portion of its business was transacted with the Croatian Government, its subsidiary owned The Company's functional currency is the Croatian Kuna. Certain assets and liabilities are companies, departments and agencies. denominated in foreign currencies which are retranslated at the prevailing exchange rate at each balance sheet date. The resulting differences are charged or credited to the income statement The transactions specified in the above table primarily relate to the transactions with the companies owned by DTAG. The Company but do not affect short term cash flows. enters into transactions in the normal course of business on an arm's length basis. These transactions include the sending and receiving of international traffic to/from these companies during 2001. Further, Deutsche Telekom AG provided technical assistance to 27. Cash and cash equivalents and time deposits HT d.d. in the amount of HRK 152 million. a) Cash and cash equivalents Cash and cash equivalents included in the cash flow statement comprise the following balance HT d.d. provided a guarantee for Eronet d.o.o. as detailed in note 24 d). sheet amounts: The balance sheet includes the following balances resulting from transactions with related parties:

Receivables Payables 2001 2000 2001 2000 2001 2000 HRK millions HRK millions Company Service HRK millions HRK millions HRK millions HRK millions Cash on hand and balances with banks 798 627 Deutsche Telekom AG, Germany International settlements 51 51 38 60 Short-term investments 111 78 Intercompany services - - 30 - Cash and cash equivalents 909 705 HPT Mostar, Bosnia and Herzegovina International settlements 45 4 34 - Matav, Hungary International settlements 9 - 8 b) Time deposits Sprint, USA International settlements 5 - - - Time deposits are accounts that bear interest from 3.35% to 5.5% and that the HT is entitled to Eronet, Bosnia and Herzegovina International settlements 1 11 - - withdraw with prior notice. HRK 516 million of time deposits is held at Privredna Banka Zagreb Westel 900, Hungary International settlements 1 - - - and relates to Euro denominated time deposits (Euro 70 million) and HRK 458 million is held at Macedonia Telecom International settlements 2 - 3 - Zagrebačka Banka and relates to Euro denominated time deposit (Euro 62 million). Slovakia Telecom International settlements 1 - 2 - 115 66 115 60 Index

A G Property, plant, equipment 18, 19, 36, Activities 2, 6, 7, 9, 10, 11, 12, GPRS 13, 27 43, 45, 47, 48, 50, 53, 54, 19, 30, 31, 32, 36, 37, GSM 16, 23, 25, 27, 36, 51, 55 55, 56, 57, 63 42, 45, 53, 58 ADSL (see DSL) H R Assets 2, 6, 7, 12, 17, 18, 19, 36, HPT Mostar 40, 66 Repositioning 25 37, 39, 40, 41, 42, 43, 47, Htcronet 23, 26, 27 Restructuring 6, 11, 12, 32, 59 48, 49, 50, 52, 53, 54, 55, 56, Hthinet 7, 16, 23, 28, 30, 31 Retained earnings 44, 46, 47, 48, 50, 57, 63, 67 Htisdn 16, 23, 25 55, 57, 63 ATM technology 37 Htmobitel 23, 26 Revenue 2, 6, 16, 37, 42, 49, 51, 66 Httel 23 Roaming 27 B Balance sheet 3, 6, 18, 19, 34, 40, 43, 44, I S 47, 49, 50, 55, 61, 62, 66, 67 Internet 3, 6, 7, 8, 12, 15, 16, 17, SAP 17, 18 Bip (paging system) 11, 27, 36 23, 24, 25, 27, 28, 30, 31, Services 3, 6, 7, 8, 9, 11, 15, 16, 17, 68 Backbone 16 36, 37, 51 20, 21, 23, 24, 26, 27, 28, Investments 6, 17, 18, 19, 43, 47, 48, 31, 36, 37, 42, 49, 51, 58, 66 C 49, 50, 53, 54, 58, 59, 67 Shareholders 6, 7, 10, 12, 38, 40, 45, 46, CAPEX (Capital Expenditures) 13 IPO 13 47, 50 Cash flow 3, 6, 19, 34, 41, 45, 48, 49, 67 ISDN 6, 16, 23, 24, 25 SDH 37 Competition 6, 12, 26, 36 Income statement 3, 18, 34, 42, 49, Simpa 23, 26 Concession 27, 37 62, 65, 67 SMS 16, 27 Costs 2, 17, 21, 24, 27, 28, 42, Income 2, 3, 12, 13, 16, 17, 18, 34, SMSinfo 16, 27 48, 49, 50, 51, 52, 54 42, 43, 44, 45, 46, 48, 49, SMSstyle 16, 27 50, 53, 54, 61, 62, 65, 67 Staff 2, 7, 42 D ITB 17 Supervisory board 3, 4, 7, 10, 11, 12, Depreciation 2, 6, 17, 18, 36, 40, 41, 42, 13, 36, 38 46, 47, 48, 50, 52, 54, 56, L 57, 63 Liabilities 2, 12, 18, 19, 44, 47, 48, T Deregulation 6, 21, 24 49, 50, 54, 60, 63, 67 Tariff models (systems) 7, 28 Deutsche Telekom 7, 9, 10, 18, 20, Tariffs 24 31, 32, 36, 38, 66 M Tariff rebalancing 16, 24 Dividend 37, 50, 53 Management Board 3, 4, 6, 7, 8, 9, 10, Taxation 17, 49, 53, 54, 65 DSL 23, 25 11, 12, 38, 39, 40, 65 Telegraph 31, 36 DWDM 25 Mobile telephony 6, 12, 37, 51 Telex service 23

E N V Employees 7, 32, 33, 38, 45, 49, 51, 61 Net income 46, 53 VPN 16, 26, 28, 31 Equity 3, 12, 18, 19, 34, 36, 41, NMT 23, 27 VPN-I 16, 28 44, 46, 47, 49, 50, 54, 55, 57, 59 O W ERMES 27 Operating income 2, 16, 42 WAP 8 ERONET d.o.o. 58, 65, 66 Operating profit 2, 37, 42 Web content services 23 Write down 2, 17, 18, 36, 37, 42, 52, F P 53, 54, 56 Financial statements 3, 16, 17, 18, 34, Partner Card 27 39, 40, 41, 47, 50, Plus club (+club) 16 X 55, 56, 65 Post-paid 23 X.25 23, 31 Fixed GSM 25 Pre-paid 23, 36 Fixed telephony 36, 51 Profit 2, 6, 12, 17, 18, 26, 27, 28, Frame Relay 23, 31 36, 37, 40, 42, 44, 46, 49, 50, 53, 54, 56, 58, 63