Letter To Shareholders

Dear Shareholders,

T-HT Group generated solid business results in 2011, despite the challenging economic environment. Throughout 2011, Croatia faced a rising unemployment rate, further declines in personal spending and an increase in outstanding debts.
Competition in the telecommunications sector grew more intense, while many new regulatory measures were introduced.

In 2011, T-HT Group revenues amounted to HRK 8,067 million, a 3.6% drop compared to the previous year. The decline was largely driven by a 12.5% drop in revenue from voice services, mainly due to price decreases, lower termination fees and reduced revenue at the wholesale level. Last year's acquisition of Combis made a positive contribution of HRK 413 million, as did the 2.2% growth in revenue from non-voice services, thanks to increased broadband services in the fixed and mobile networks.

Throughout this challenging period, the Group remained committed to rigorous cost management, which resulted in EBITDA of HRK 3,619 million, a 1.2% drop compared to 2010.

Customer satisfaction remains the Group’s key priority and we are ever responsive to //increasing customers’ expectations//, providing continuously improvements in the quality of our services and technologies.

For residential customers, we introduced new tariffs related to mobile broadband services, while T-HT’s innovative bonbon mobile brand attracted more than 100,000 customers within one year. Our IPTV services also proved popular, thanks to the launch of new and exclusive content and ADSL customers benefitted from attractive bundled offers of fixed and mobile services.

The Group has seen a decrease in its fixed-telephony customer base, but this is in line with global trends and a consequence of the introduction of Wholesale Line Rental (WLR). The Group has nevertheless maintained its competitive edge through the provision of compelling tariffs and top quality services. 

In 2011, T-HT Group became one of the first operators in Europe to deliver cloud services ranging from Software as a Service products, including tCloud Store, tCloud Computing to business application solutions, such as tCloud Human Resources and tCloud Finance and Accounting.  These products emphasized our focus on providing cutting edge ICT services as a supplement to the traditional telco services portfolio.

Capital expenditure in 2011 decreased 23.9% to HRK 877 million. Although the Group made no significant investment in the fiber infrastructure, owing to regulatory measures that deter such activity, we continued further development of the network infrastructure by increasing broadband access capacity and setting up a common, fixed and mobile, transport and core network.

The financial crisis also had a negative impact on trends in Croatian capital markets. Croatia’s CROBEX index fell 17.56%, while T-HT share were 16.18% lower than the previous year. In 2011, T-HT shares were again the most traded stock on the Zagreb Stock Exchange. In light of the Group’s performance and its cash reserves, the Management Board and the Supervisory Board proposed to the General Assembly of Hrvatski Telekom d.d. a dividend of HRK 22.14 per share.

By being aware that the good reputation is dependent on far more than just business results, T-HT Group pays particular attention to the social responsibility.

Commitment to the idea of sustainability in all aspects of our business is constantly in focus. Our goal is a sustainable business in all phases of business processes. Numerous activities in the area of social responsibility are carefully planned and are based on three substantive backbones - excellent communication and networking opportunities in the private life and work, integration into the society of information and knowledge, and environmental protection and responsible use of resources and reduce greenhouse gas emissions.

The year ahead will be yet another tough and challenging year for the Croatian economy, including the telecommunications sector. In the coming period, Hrvatski Telekom will retain its focus on developing new services tailored to customers' needs as well as on developing and improving the network infrastructure. The enhanced operating efficiency will remain central to our efforts to maintain our leading market position with top quality services and high levels of customer satisfaction.

Finally, I would like to thank all our shareholders for the trust they place in us. I also extend my gratitude for their dedicated work and support to all employees of the Group and to my colleagues on the Management Board.

 

 

 

Ivica Mudrinić

 

President of the Management Board

Corporate Profile

At a Glance

The T-HT Group is the leading provider of telecommunications services in Croatia, offering fixed and mobile telephony services as well as wholesale, Internet and data services. As of 1 January 2010, the Group conducts its business through its Residential and Business units.

The basic activities of Hrvatski Telekom d.d. and subsidiary companies comprise the provision of electronic communications services and the design and construction of electronic communications networks within the Republic of Croatia. In addition to the provision of fixed telephony lines services (fixed telephony line access and traffic, as well as fixed network supplementary services), the Group also provides Internet and ICT services, data transmission services (lease of lines, Metro-Ethernet, IP/MPLS, ATM), operating with GSM and UMTS mobile telephone networks.

History and Incorporation

Hrvatski Telekom d.d. (HT d.d. or the Company) is a joint stock company majority owned by Deutsche Telekom AG (DTAG). It was incorporated on 28 December 1998 in the Republic of Croatia, pursuant to the provisions of the Act on the Separation of Croatian Post and Telecommunications into Croatian Post and Croatian Telecommunications, by which the business operation of the former HPT - Hrvatska pošta i telekomunikacije (HPT s p.o.) was separated and transferred into two new joint stock companies, HT - Hrvatske telekomunikacije d.d. (HT d.d.) and HP – Hrvatska pošta d.d. (HP d.d.). The Company commenced its operations on 1 January 1999.

Pursuant to the terms of the of Law on Privatization of Hrvatske telekomunikacije d.d. (Official Gazette No. 65/99 and No. 68/01), on 5 October 1999, the Republic of Croatia sold a 35% share in HT d.d. to DTAG, and on 25 October 2001 DTAG purchased a further 16% share in HT d.d. and thus became the majority shareholder with a 51% share in ownership. As of 17 February 2005, the Government of the Republic of Croatia transferred 7% of its shares in HT d.d. to the Fund for Croatian Homeland War Veterans and Their Families, pursuant to the Law on Privatization of HT d.d. (Official Gazette No. 65/99 and 8/2001).

In 2002, HT mobilne komunikacije d.o.o. (HTmobile) was established as a separate legal entity and subsidiary wholly owned by HT d.d. for the provision of mobile telecommunication services. HTmobile commenced its commercial activities on 1 January 2003 and in October 2004, the company name was officially changed to T-Mobile Croatia d.o.o. (T-Mobile).

On 1 October 2004, the Company was re-branded as T-HT, thus becoming a part of the global „T“ family of Deutsche Telekom. The change of identity at corporate level was followed by the creation of trade marks for the two separate business units of the Group: the fixed network operations business unit, T-Com, which also provided wholesale, Internet and data services, and the mobile operations business unit, T-Mobile.

In May 2006, the Group acquired 100% of shares of Iskon Internet d.d., one of the leading telecom alternative providers in Croatia.

Pursuant to the provisions of the Law on Privatization of HT d.d. (Official Gazette No. 65/99 and No. 68/01), on 5 October 2007, the Republic of Croatia sold 32.5% of T-HT ordinary shares by Initial Public Offering (IPO). Of the 32,5% of shares, 25% were sold to Croatian retail investors, while 7.5% were distributed among Croatian and international institutional investors.

Following the sale of shares to present and former employees of Hrvatski Telekom and Croatian Post in June 2008, the Government of the Republic of Croatia reduced its holding from 9.5% to 3.5%, while private and institutional investors held 38.5%.

In October 2009, an agreement was signed by which T-Mobile Croatia was merged into HT d.d. The merger came into effect on 1 January 2010, after which time the Group was organised into Residential and Business units. In addition the Company’s registered name was officially changed from HT – Hrvatske telekomunikacije d.d. to Hrvatski Telekom d.d. on 21 May 2010.

On 17 May 2010 HT d.d. has completed the aquisition of the IT services company Combis d.o.o., extending its reach into the provision of IT software and services for a client base that ranges form small businesses to government departments.

In December 2010, the Republic of Croatia transferred 2,859,148 shares of Hrvatski Telekom d.d., equal to 3.5% of the entire share capital of the Company, to the owner account of the Pensioners' Fund. Following this transfer, the Republic of Croatia no longer holds shares of Hrvatski Telekom d.d.

Investor Information

Economic environment and share price performance

Global uncertainties and market volatility prevailed in 2011, with growing budget deficits, the Eurozone debt crisis, an overall fall in consumer confidence, social unrest and a slowdown in the economies of Asia and South America, among others. These factors reignited concerns about a prolonged global recession. Uncertainty was further exacerbated by the Japanese tsunami, the Arab Spring and other tensions in the Middle East, with the latter triggering concerns about global oil supplies and inflation.

Global markets were highly volatile and largely subdued. In August, Standard & Poor’s removed for the first time the AAA credit rating of US, and this prompted further downward pressure on stock markets worldwide.

With Croatia’s parliamentary election in December 2011, the long overdue fiscal consolidation and structural reforms of Croatia’s economy were postponed. Domestic consumption hit a new low, unemployment remained high and problems with overdue payments persisted. These factors caused analysts to downgrade Croatia’s 2011 GDP growth forecast throughout the year to settle at around zero.

Big policy initiatives from the newly elected left-of-centre coalition Government are yet to emerge. The major credit agencies are expected to visit Croatia in first half of 2012 to discuss the sovereign credit rating. Meanwhile, in January 2011 a referendum on EU membership showed majority support and the accession target date is 1 July 2013.

Against the economic backdrop outlined above and poor liquidity, the Zagreb Stock Exchange experienced strong downward pressure, especially in the second half of the year, amid speculation that a dividend tax would be introduced. Consequently, the benchmark CROBEX index fell 17.6% in 2011, after two years of growth. Annual trading volumes showed another year of decline, falling 9.4%.

T-HT shares ended the year at HRK 242.00, down 16.2% on the HRK 288.71 closing price at the end of 2010 and marginally outperforming the CROBEX. The price decline was primarily seen in the first half of the year following the Company’s dividend announcement in mid February and ex-dividend date in early May. The year’s highest price was HRK 315.99, the lowest being HRK 224.05 (Source: Zagreb Stock Exchange).

 

In 2011, T-HT shares underperformed the Dow Jones Euro Stoxx Telecommunications Index (a leading indicator of the telecommunications industry that measures the performance of some Europe’s largest telecom companies) by 10 percentage points, having outperformed it for the previous two years.

T-HT Share and GDR as compared to CROBEX and Dow Jones Europe Stoxx Telecommunications Index 1 January 2011 - 30 December 2011

 

Although its turnover was around 15% lower than in 2010, T-HT was once again the most traded share on the Zagreb Stock Exchange, with HRK 1.3 billion of turnover, accounting for 24.1% of the ZSE’s total trade by value of shares in 2011 (2010: HRK 1.5 billion, 25.8%).

As at 31 December 2011, T-HT was the second largest company on ZSE, with a market capitalisation HRK 19.8 billion (EUR 2.63 billion) representing 15.2% of the total market capitalization by value (Source: Zagreb Stock Exchange).

At the last revision of the CROBEX index, T-HT’s weighting was set at 15% of the index.

Besides T-HT shares being listed on the Official Market of the Zagreb Stock Exchange, Global Depositary Receipts (GDRs), each representing one T-HT Share, are traded on London Stock Exchange.

In October, at the 21st annual conference of the Zagreb Stock Exchange, T-HT accepted the second place award for Investor Relations in Croatia 2011 sponsored by popular business newspaper Poslovni dnevnik (2010: first place award for best IR. )

Dividend policy

The Dividend policy of the Company was set out in the prospectus that accompanied its Initial Public Offering in October 2007:

The future dividend policy should be that any dividends declared and paid in respect of any year following the year in which Offering takes place, shall range from 50% to 100% of the Company’s distributable profits earned in the immediately preceding year. Any annual dividend shall depend on the overall financial position of the Company and its working capital needs at the relevant time (including but not limited to the Company’s business prospects, cash requirements, financial performance, and other factors including tax and regulatory considerations, payment practices of other European telecommunications operators and general economic climate).

Dividend for the 2010 financial year

On 4 May 2011, the General Assembly of the Company approved a dividend payment to shareholders of HRK 1,863,783,056.60 (HRK 22.76 per share), representing a dividend payout ratio of 100%. The dividend was paid in second half of May 2011.

At the end of 2011, this represented a dividend yield of 9.4% on T-HT’s closing price of HRK 242.00. Using the average closing share price over 2011, HRK 265.56, the dividend yield was 8.6%.

Dividend proposal for the 2011 financial year

The Management Board and Supervisory Board of Hrvatski Telekom d.d. propose to this year’s General Assembly, to be held on April 25, the distribution of a dividend of HRK 22.14 per share which will be paid from 2011 financial year profit, resulting in total dividend payment of HRK 1,813,012,164.90.

The Supervisory Board gave its consent to the Management Board to pay to the shareholders an advance dividend of HRK 11.07 per share or HRK 906,506,082.45 in total.

The date on which shareholder acquires the right to advance dividend payment amount, is established as 20 February 2012 and the due date for advance dividend payment is 27 February 2012.   

According to the proposal, the date on which shareholder acquires the right to residual dividend amount of HRK 11.07 per share is 25 April 2012, the day of the General Assembly session. The residual amount will be paid to shareholders on 21 May 2012.

Shareholder Structure as at 31 December 2011.

Deutsche Telekom remains the majority shareholder with a 51% holding, while the Croatian War Veterans’ Fund continues to own 7%. In November 2010 the Republic of Croatia transferred its 3.5% holding to the Pensioners’ Fund.

In April 2011 the Company received notification from Raiffeisen Mandatory Pension Fund Management Company Plc that Raiffeisen Mandatory Pension Fund has exceeded the 5% threshold in HT d.d. According to Central Depositary & Clearing Company web site at the end of 2011, it held 5.3% of T-HT shares.

The remaining 33.2% is in private and other institutional hands, with more than 220,000 Croatian private investors holding T-HT shares representing 23.3% of the total share capital of the Company.

Financial Calendar

General information on Shares and GDRs

 

Shares:

ISIN: HRHT00RA0005

Regulation S GDRs:

ISIN: US44330H2004

Rule 144A GDRs:

ISIN: US44330H1014

 

 

ZSE Share trading symbol:

HT-R-A

LSE GDR trading symbol:

THTC

Portal Rule 144A GDR listing symbol

P443296108

 

 

Reuters:

THTC.L,  HT.ZA

Bloomberg:

THTC LI,  HTRA CZ

Number of Shares:

81.888.535

Type:

Ordinary share

Nominal value:

HRK 100

 

Each GDR represents one Share on deposit with the Custodian.

 

The depository for the GDR is:

The Custodian is:

JPMorgan Chase Bank, N.A.,

Privredna Banka Zagreb

1 Chase Manhattan Plaza

Račkoga 6

Floor 21

10000 Zagreb

New York

Croatia

New York 10005-1401

 

United States of America

 

 

Investor Relations

 

Investor Relations

Tel.:

+385 1 49 12000

Hrvatski Telekom d.d

 

+385 1 49 11114

Savska cesta 32

 

+385 1 49 11884

10000 Zagreb

Fax.:

+385 1 49 12012

 

 

+385 1 49 11115

 

E-mail:

ir@t.ht.hr

Management Board

Ivica Mudrinić

President of the Management Board and CEO

Ivica Mudrinić was born in 1955. He graduated in electrical engineering from the University of Toronto in 1978. His first job was in the Product Development Department of Motorola Communications, and in 1985 he founded his own company, MX Engineering Inc. In 1990, he returned to Croatia and soon became adviser for communications to the President of the Republic. At the end of the following year, he became Assistant Minister for Maritime Affairs, Transportation and Communications, and in 1992 was appointed Minister. From 1994 Ivica Mudrinić also served as President of the Telecommunications Council. He held the post of President of the Management Board of Hrvatska radiotelevizija (Croatian Radio and Television) from 1996 until 15 October 1998, when he was appointed General Manager of Hrvatska pošta i telekomunikacije (Croatian Post and Telecommunications). Since the separation of Croatian Post and Telecommunications on 1 January 1999, he has served as President of the Management Board of Hrvatski Telekom.

Dino Ivan Dogan

Member of the Management Board and Chief Financial Officer

Born in 1963, completed the Study ‘Business Administration (technical oriented)’, University of Stuttgart, in 1988.

Dr. Dino Dogan brings considerable experience of the telecommunications industry, having served as Chief Financial Officer and Member of the Board at Mobilkom Austria AG since August 2009. In 2010, he also assumed the role of Chief Integration Officer for Mobilkom Austria AG’s merger with Telekom Austria AG.

Prior to joining Mobilkom Austria AG, Dr. Dogan was Chief Financial Officer and Member of the Board of its subsidiary, the Croatian mobile operator VIPnet, a post he held from July 2003 to July 2009, after spending 10 years in managerial positions at Alcatel.

From 1 April 2011 on, he will hold the position of Member of the Management Board and Chief Financial Officer of Hrvatski Telekom.

Irena Jolić Šimović

Member of the Management Board and Chief Operating Officer Business

Irena Jolić Šimović was born in 1969. She graduated from the Faculty of Economics in Zagreb and received an MBA from IEDC, Bled, Slovenia. Prior to joining Hrvatski Telekom in 1998, she worked at Croatian Radio and Television (HRT), the Ministry of the Sea, Transport and Communications and the Ministry of Immigration.

She was Executive Director for Corporate Strategy and Business Development until August 2006, when she was appointed Member of T-HT's Management Board and Chief Human Resources Officer. Irena Jolić Šimović was Chief Operating Officer T-Com from October 2008 until December 2009. Following the Group's restructuring in January 2010, she became Chief Operating Officer Business with responsibility for Sales, Marketing, Customer Service, Wholesale and ICT Business Solutions.

In March 2010, Irena Jolić Šimović was honoured as one of the World Economic Forum's Young Global Leaders 2010, a unique community of exceptional young leaders who share a commitment to shaping the global future.

Johan H.M. Busé

Member of the Management Board and Chief Operating Officer Residential

Johan Busé was born in 1969. After completing the study of economics, he started his career in retail marketing at British Petroleum in Belgium and the Netherlands, joining T-Mobile in 2000, where he took the position of the Head of Business Development. After that he led several marketing departments of T-Mobile in the Netherlands, Germany, and Croatia. From 2006 to 2008 he held the position of the Member of the Management Board and Chief Marketing Officer of T-Mobile Croatia. He then joined the Indonesian mobile operator AXIS as Chief Marketing Officer, helping it to become the fastest growing 3G operator in Indonesia. On 1 April 2010 Mr. Busé returned to HT when he was appointed Member of the Management Board and Chief Operating Officer Residential, responsible for Sales, Marketing, and Customer Services..

Branka Skaramuča

Member of the Management Board and Chief Human Resources Officer

Branka Skaramuča was born in 1958 and in 1982 obtained a master’s degree in Psychology at the Faculty of Philosophy, University of Zagreb.

She began her career with the pharmaceutical company PLIVA in 1985, where she worked in Human Resources. In 1989 she was appointed Head of Marketing Communications in part of its FMCG portfolio, being promoted to the position of HR Director for Croatia in 1993 and then becoming Global HR Director until February 2002.

She joined Hrvatski Telekom in 2002 as a Member of the Management Board and Chief Human Resources Officer, becoming a Management Board member and Chief Human Resources Officer of T-Mobile Hrvatska in March 2004.

In September 2008 the Supervisory Board of Hrvatski Telekom appointed Branka Skaramuča a Member of the Management Board and Chief Human Resources Officer of the T-HT Group.

Božidar Poldrugač

Member of the Management Board and Chief Technical and Chief Information Officer

Božidar Poldrugač was born in 1967. He graduated from the Faculty of Electrical Engineering and Computing, Zagreb University in 1992 and earned a master’s degree from the same faculty in 2000. He began his career at Croatian Post & Telecommunications in 1993 and participated in all the development activities related to implementation of the first GSM network in Croatia. After the separation of Croatian Post & Telecommunications, he continued his career in Hrvatski Telekom, where he served as a Member of the Management Board and Director of Mobile Communications from October 1999 to October 2001. He was Chief Technical Officer for Mobile Communications at Hrvatski Telekom from October 2001 to 1 January 2003, when the subsidiary company T-Mobile Croatia was launched. In March 2007, he was appointed Member of the Management Board and Chief Technical and Chief Information Officer for the T-HT Group.

Jürgen P. Czapran

Member of the Management Board and Chief Financial Officier until 31 March 2011

Compensation to the Management Board members in 2011

In 2011, Ivica Mudrinić, President of the Management Board, was paid a fixed salary contracted in annual gross amount of HRK 2,120,500 in average net monthly installments of HRK 93,085. Variable part, in accordance with 2010 goals achievement, amounted to HRK 616,899 net. Payment according to MTIP 2008 amounted to HRK 222,909 net. Income in kind amounted to HRK 154,565 gross for company car usage.

Irena Jolić Šimović, member of the Management Board, was in 2011 paid a fixed salary contracted in gross amount of HRK 1,561,171 in average net monthly installments of HRK 68,379. Variable part, in accordance with 2010 goals achievement, amounted to HRK 243,956 net. Payment according to MTIP 2008 amounted to HRK 101,180 net. The income in kind amounted to HRK 139,679 gross for company car usage.

Johan Buse, member of the Management Board, was in 2011 paid a fixed and variable salary contracted in annual gross amount of HRK 2,578,961. The amount of income in kind was HRK 380,073 gross for rental, insurance and company car usage.

Božidar Poldrugač, member of the Management Board, was in 2011 paid a fixed salary contracted in annual gross amount of HRK 1,430,865 in average net monthly installments of HRK 65,741. Variable part, in accordance with 2010 goals achievement, amounted to HRK 290,223 net. Payment according to MTIP 2008 amounted to HRK 121,376 net. The income in kind amounted to HRK 157,378 for company car usage.

Jürgen P. Czapran, member of the Management Board until March 31st 2011, was in this period 2011 paid a fixed and variable salary contracted in annual gross amount of HRK 1,288,058. The amount of income in kind was HRK 172,184 gross for rental, insurance and company car usage.

Dino Dogan, member of the Management Board from April 1st 2011, was in 2011 paid a contracted fixed salary in gross amount of HRK 1,113,421, in average net monthly installments of HRK 73,806. Contracted sign-in bonus amounted to HRK 523,107 net. The income in kind amounted to HRK 87,693 gross for company car usage.

Branka Skaramuča, member of the Management Board, was in 2011 paid a fixed salary contracted in annual gross amount of HRK 1,379,016, in average net monthly installments of HRK 60,338. Variable part, in accordance with 2010 goals achievement, amounted to HRK 260,079 net. Payment according to MTIP 2008 amounted to HRK 113,126 net. The benefit in kind amounted to HRK 136,589 gross for company car usage.

Share-based payment transactions

Mid-term incentive plans (MTIPs) and long-term incentive plan (LTIP - Variable II) exist at HT level to ensure competitive total compensation for members of the Management Board, senior executives and other beneficiaries. The plans promote the medium and long-term value enhancement of the Company, thus aligning the interests of management and shareholders. First HT’s MTIP is introduced in 2008.

MTIP is generally set up as a cash-based plan linked to two equally weighted, share-based performance parameters – one absolute and one relative. If both performance targets are achieved, then the total amount earmarked as an award to the beneficiaries by the respective employers is paid out; if one performance target is achieved, 50 percent of the amount is paid out, and if neither performance target is achieved, no payment is made.

In 2011 new cash-based long-term incentive plan LTIP - Variable II was established. Variable II includes four equally weighted performance parameters. In contrast to the former MTIP structure, Variable II offers the option of exceeding the amounts earmarked for award, limited to 150% of the award volume per parameter. The parameters are independent from each other, hence each parameter is assessed separately. Both potential excesses and shortfalls in relation to targets are accounted for on a graded basis per target parameter (departure from the principle of “all or nothing”).

As a result of the extension of the new LTIP – Variable II 2011 duration from three to four years, there appears a lack of payment after three years. In order to close the lack of a payout option, the Transitional HT MTIP 2011 is established. Transitional HT MTIP 2011 was set up as a “bridging instrument” before introducing newly designed four-year-term LTIP 2011 (Variable II).

All MTIPs cover period of three years and LTIP- Variable II covers period of four years. Upon expiry of the term of the plan (after three years for MTIP and after four years for LTIP- Variable II), the Supervisory Board of the Company shall determine for MTIP whether each of the targets has been achieved or for Variable II  target achievement for each of four parameters. Based on the findings of the Supervisory Board, the Management Board shall determine and announce the level of target achievement.

Based on decision of the Supervisory Board who has established that one target (of two) MTIP 2008 have been achieved, in March 2011 was the payment for participants HT MTIP 2008. In accordance with targets achievements, payment of 50% of the total amount was made.

Currently are in progress HT MTIP 2009, HT MTIP 2010, Transitional HT MTIP 2011 and LTIP - Variable II 2011. All MTIPs have two targets which are equally weighted and cannot be changed during the MTIP duration. One target is based on the increase of the share price by a certain percentage; the second target is related to the share price movement compared to the complex return index.

The incentives themselves consist of 20 or 30% of the participants’ individual annual salary as contracted on the beginning of the each MTIP, depending on the management level of the participant and according to the Supervisory Board decision. Participants’ individual annual salary is defined as the annual amount of total fixed salary and the amount of variable salary in case of a 100 percent target achievement.

LTIP – Variable II has four equally weighted performance parameters and also cannot be changed during the LTIP durations. Two targets are financial KPIs, Earnings Per Share - EPS and adjusted operating Return On Capital Employed  - ROCE, third target is customer satisfaction and fourth target is employee satisfaction.

The amounts awarded for LTIP – Variable II 2011 are for International Business Leaders (BLT’s) – HT CEO is fixed sum specified in the individual employment contract,and for other participant is 30% or 20% of the participants’ individual annual salary as contracted on the beginning of the LTIP- Varaible II 2011. depending on the management level of the participant and according to the Supervisory Board decision. Participants’ individual annual salary is defined as the annual amount of total fixed salary and the amount of variable salary in case of a 100 percent target achievement.

In 2011 HT Matching Share Plan is introduced, following its implementation for DT Group International Business Leaders (BLTs). For the time being it is applicable only for the President of the Management Board (CEO), as a member of DT Group BLTs.

HT Matching Share Plan is established to ensure the long-term incentive effect and orientation towards the sustained development of the Company.

According to the provisions of the Plan, the participant is obliged to invest in HT shares, through a personal investment, minimum 10% and maximum 33,33% of his annual gross variable salary (Bonus/Variable I) paid for 2011. 

These shares are to be held for a period of at least 4 years (lock-up period). After the lock-up period expires, one additional share (matching share) Company will grant for each share acquired as a part of the aforementioned personal investment.

Consequently, the new compensation model for the President of the Management Board (CEO) was introduced based on the above described Matching Share Plan.

Supervisory Board

Guido Kerkhoff

 

dr. Lutz Schade

president of the Supervisory Board until 31 March 2011

 

member

Andreas Moelich

 

dr. Ralph Rentschler

member and president of the Supervisory Board from 4 May 2011

 

member

dr.sc. Ivica Mišetić

 

Andreas Hesse

Deputy president

 

member

dr. Steffen Roehn

 

dr. Slavko Leban

member until 4 May 2011

 

member

Oliver Morbach

 

Juko Cikojević

member from 4 May 2011

 

member

Kathryn Walt Hall

 

 

member

 

 .

 

As specified by the Company, the chairman of the Supervisory Board receives remuneration in the amount of 1.5 of the average net salary of the employees of the Company paid in the preceding month. To the deputy chairman, the amount of 1.25 of the average net salary of the employees of the Company paid in the preceding month is paid while any other member receives the amount of one average net salary of the employees of the Company paid in the preceding month. To a member of the Supervisory Board who is in the same time the Chairman of the Audit Committee of the Supervisory Board in the amount of 1.5 of the average monthly net salary of the employees of the Company paid in the preceding month. To a member of the Supervisory Board who is in the same time a Member of the Audit Committee of the Supervisory Board in the amount of 1.25 of the average monthly net salary of the employees of the Company paid in the preceding month. To a member of the Supervisory Board who is in the same time a Member of the Compensation and Nomination Committee of the Supervisory Board in the amount of 1.25 of the average monthly net salary of the employees of the Company paid in the preceding month. DTAG representatives do not receive any remuneration for the membership in the Supervision due to a respective policy of DTAG. No loans were granted to the members of the Supervisory Board.

Compensation to the Supervisory Board members in 2011 is as follows::

Since the remuneration of the Supervisory Board members is based on net average salary paid to the employees of the Company in previous month, only gross amounts are shown therein.

Supervisory's Board Report

Pursuant to Article 263, paragraph 3, and Article 300.c of the Companies Act and Article 31 of the Articles of Association of Hrvatski Telekom d.d., the Supervisory Board of Hrvatski Telekom d.d. Zagreb, Savska cesta 32 (hereinafter referred to as “the Company”), consisting, on the day of issuance of this report, of Mr. Andreas Moelich, Chairman of the Supervisory Board, Mr. Ivica Mišetić, Ph.D., Deputy Chairman of the Supervisory Board, Mr. Oliver Morbach, Dr. Lutz Schade, Dr. Ralph Rentschler, Mr. Andreas Hesse, Ms. Kathryn Walt Hall, Mr. Slavko Leban, M.D and Mr. Juko Cikojević, representative of the workers of HT d.d., Members of the Supervisory Board, submits to the General Assembly this

REPORT on performed supervision during the business year 2011 and on the results of the examination of the business and financial reports for the business year 2011

The content of this report includes:

Corporate Profile

On 31 December 2011, according to the list of the top ten shareholders of the Company published by the Central Depository & Clearing Company, significant Company shareholders are as follows. Deutsche Telekom AG (hereinafter referred to as “DTAG”) is the majority owner of the Company with 51 per cent of total outstanding shares. The Croatian War Veteran’s Fund owns 7% of shares, the Raiffeisen Mandatory Pension Fund holds 5.3 percent of shares (Excludes possible GDR holdings) and the Pensioner's Fund 3,5% of shares. Other private and institutional investors hold the remaining 33.2 % of shares. An up to date list of the top ten shareholders of the Company may be found on the Central Depository & Clearing Company web site.

The shares of the Company are included in depository services of the Central Depository & Clearing Company as of 12 July 2002.

The Company’s shares have been listed on the Zagreb Stock Exchange since 5 October 2007. Global Depository Receipts (GDR), each representing one (1) HT d.d. share, have been listed on the London Stock exchange since 5 October 2007.

On the day of issuance of this Report, the Supervisory Board has five members representing Deutsche Telekom AG, one member nominated by the Republic of Croatia, two independent members and one member appointed by the Workers’ Council of HT d.d.

Supervisory Board

During 2011, the composition of the Supervisory Board of the Company changed as follows:

Member of the Supervisory Board and its Chairman, Mr. Guido Kerkhoff, has resigned from his membership of the Supervisory Board with effect as of 31 March 2011. 

Member of the Supervisory Board, Mr. Steffen Roehn, has resigned from his membership of the Supervisory Board with effect as of 4 May 2011.

Mr. Andreas Moelich and Mr. Oliver Morbach were elected as Members of the Supervisory Board as of 4 May 2011. In addition, Mr. Andreas Moelich was elected as Chairman of the Supervisory Board as of 4 May 2011.

The Workers’ Council appointed Mr. Juko Cikojević as Workers’ Representative on the Supervisory Board, with effect from 1 January 2011.

Audit Committee

On the day of issuance of this report: Mr. Kay Nolden, Chairman, Mr. Ivica Mišetić, Ph.D., Member, and Mr. Franco Musone Crispino, Member, are the members of this Committee.

Compensation and Nomination Committee

On the day of issuance of this report: Mr. Andreas Moelich, Chairman, Dr. Ralph Rentschler, Member, and Ms. Kathryn Walt Hall, Member, are the members of this Committee.

Management Board

On the day of issuance of this report, the Management Board of the Company has six (6) members.

The following section lists the changes in the Management Board membership:

Mr. Ivica Mudrinić was reappointed as President of the Management Board (CEO) for another term of office in the duration of three years, with commencement as of 1 January 2011.

Mr. Božidar Poldrugač was reappointed as Member of the Management Board and Chief Technical and Chief Information officer (CTO/CIO) for another term of office in the duration of three years, with commencement as of 15 March 2011.

Mr. Jürgen P. Czapran resigned from his position as Member of the Management Board and Chief Financial Officer (CFO) effective as of 31 March 2011.

Mr. Dino Ivan Dogan, Ph.D., was appointed as Member of the Management Board and Chief Financial Officer (CFO) for a period of three years, with commencement of his term of office as of 1 April 2011.   

Performed supervision during the business year 2011

In 2011, there were five (5) sessions of the Supervisory Board and three (3) decision makings out-of-session. The Supervisory Board supervised the managing of the Company's business operations and performed other tasks in accordance with the Companies Act, the Articles of Association of the Company, and the By-Laws on the Work of the Supervisory Board of the Company.

Aside from the regular reports of the Management Board of the Company on the results and status of business operations of the Company and joint consultations on business development, the issues below were discussed in detail, and the Supervisory Board provided respective prior approvals and recommendations:

In 2011, the Audit Committee of the Supervisory Board held five (5) regular sessions and discussed various issues, especially:

According to the available information, Audit Committee finds that in relation to financial reporting, risk management, compliance management system, internal and external audit engagement there is no indication that internal control system does not work effectively.

In 2011, the Compensation and Nomination Committee began the target-setting procedure for 2012 and also began preparing the target evaluation procedure for 2011. Changes in the Membership of the Management Board as outlined above were also covered by their Agenda as well as running the Mid Term Incentives Plans.

The Supervisory Board supported the Management Board in their efforts to protect the interests of HT d.d. in Bosnia and Herzegovina.

Results of the examination of the Management Board report on relations with the governing company and affiliated companies thereof

The Management Board submitted to the Supervisory Board the Report of the Management Board on relations with the governing company and affiliated companies thereof (Report of the Dependent Company), compiled in accordance with Articles 474 and 497 of the Companies Act and in accordance with the principles of conscientious and truthful reporting.

In the opinion of the Management Board, the relationships of affiliated companies in the business (calendar) year 2011 in total, realized by contractual affiliating and other undertaken legal actions, were within the scope of ordinary business and entrepreneurial relationships, standard conditions and the application of regular prices.

The Company’s auditor, PricewaterhouseCoopers d.o.o. Zagreb, reported on the results of its audit and issued the following confirmation on the audit of the above report:

Report of Independent Accountants

Quote:

This report is produced in accordance with the terms of our Contract dated 11 July 2011 for the purpose of reporting to the Supervisory Board and shareholders of Hrvatski Telekom d.d. (‘HT’) in connection with the relationships with the governing entity (Deutsche Telekom AG) and its affiliated entities (herein the ‘Related party report’) for the year ended 31 December 2011.

Management’s responsibility

Management of Hrvatski Telekom d.d. is responsible for the preparation of the Related party report in accordance with the criteria as set out in Article 497 of the Croatian Company Law. Management’s responsibility includes presenting in a complete and accurate manner the following information in the Related party report: all legal transactions that the Company undertook during 2011 with Deutsche Telekom AG and its affiliated entities (including description of underlying contract terms, related invoices and postings in accounting records), determining whether such transactions were carried out within the ordinary scope of business and whether HT has received a respective counteraction (ie. receipt of payment or goods/ services) for such transactions and actions without incurring any damage.

Description of the subject matter and identification of the criteria

The subject matter upon which we performed assurance procedures was limited to the contracts and related transactions concluded between HT and Deutsche Telekom AG and its affiliated entities for the year ended 31 December 2011 as presented in sections E and F of the Related party report.

We assessed whether the information presented in the Related party report is consistent with the books and records of HT as required by Article 497 of the Croatian Company Law.

Our responsibility

Our responsibility is to report on the Related party report based on our work performed.

We conducted our engagement in accordance with the International Standard on Assurance Engagements 3000 “Assurance Engagements other than Audits or Reviews of Historical Information” (“ISAE 3000”). This Standard requires that we comply with ethical requirements and plan and perform the assurance engagement to obtain limited assurance whether the Related party report complies, in all material aspects, with the requirements of Article 497 of the Croatian Company Law.

Summary of the work performed

Within the scope of our work we performed, among others, the following procedures:

The nature and extent of our procedures were determined based on our risk assessment and our professional judgment in order to obtain limited assurance.

The scope of work did not include matters related to legal interpretation of HT’s compliance with requirements of Article 497 of the Croatian Company Law.

In a limited assurance engagement the evidence-gathering procedures are more limited than for a reasonable assurance engagement, and therefore, less assurance is obtained than in a reasonable assurance engagement.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion.

Conclusion

Based on our work described in this report, nothing has come to our attention that causes us to believe that the Related party report is not presented, in all material respects, in accordance with the criteria as set out in Article 497 of the Croatian Company Law.  

Restriction of use and distribution

This independent assurance report is provided solely for the use of the Management Board, Supervisory Board and shareholders of Hrvatski Telekom d.d. and only for the purpose of HT’s compliance with the requirements of Article 497 of the Croatian Company Law and should not be used for any other purpose or distributed to any other parties.

PricewaterhouseCoopers d.o.o.
Zagreb
6 February 2012.

John Mathias Gašparac

Tamara Mačašović

Procurator

Croatian Certified Auditor

End of quote.

The Supervisory Board has no objections to the results of the auditor’s examination of the Management Board Report on relations with the governing company and the affiliated companies thereof.

After considering the Management Board Report, the statement of the Management Board and the results of the auditor’s examination, the Supervisory Board states that the Company, according to the circumstances that were known at the time of undertaking the legal affairs and actions stated in the said Management Board Report, received a respective counter-action for each legal affair, without any damage to the Company.

Results of the examination of the annual financial statements and auditor's report, Management Board Report on the status of business operations for the business year 2011 and draft decision on utilization of profit

The Supervisory Board issued an order to PricewaterhouseCoopers, the Company’s auditor, for the examination of the annual financial statements for the year 2011.

The Supervisory Board, after considering the audited financial statements for the business year 2011, established that the Company acted in 2011 in accordance with the law, the acts of the Company and the decisions of the General Assembly, that the annual financial statements were made in line with the situation in the Company’s ledgers and that they indicate the correct property and business status of the Company. The Supervisory Board has no objections to the auditor’s report on the examination of the annual financial statements for the business year 2011. 

The Supervisory Board has no objections to the audited financial statements delivered by the Management Board and gives its approval of the delivered audited financial statements. The said financial statements are considered adopted by both the Management Board and the Supervisory Board and are to be presented to the General Assembly.

The Supervisory Board has considered the Annual Report on the status of business operations for the business year 2011 and has no objections to the delivered report. Furthermore, the Supervisory Board has no objections to the statement on the Code of Corporate Governance applied, given within the above Report. The Supervisory Board has no objections to the statements made in the answers within the attached questionnaire requested to be completed by the Zagreb Stock Exchange and states that the answers given to this questionnaire are to their best knowledge truthful in their entirety.

The Supervisory Board holds the opinion that the proposal of the Management Board on utilization of the profit is in accordance with the business results, is in accordance with the business plan for the current year, protects the Company’s and shareholders’ interests and is in accordance with the positive regulations of the Republic of Croatia.

Therefore, the Supervisory Board gave its consent to the net profit utilization proposal of the Management Board and that is, that the amount of HRK 1,813,012,164.90 will be distributed to shareholders as dividend payment, in the amount of HRK 22.14 per share, whereby an advance dividend of HRK 906,506,082.45 or HRK 11.07 per share is to be paid to the Shareholders in February 2012. The remainder of net profit in the amount of HRK 283,022.36 is to be allocated to retained earnings. The joint proposal by the Management Board and the Supervisory Board on the utilization of profit for 2011 is to be referred to the General Assembly of the Company for decision making.

Summary

The Management Board of the Company regularly informed the Supervisory Board of the Company’s business, status of assets and liabilities, revenues, and organizational and other changes related to the management of the Company’s business operations.

The Supervisory Board analyzed the realization of the planned results and the implementation of the basic goals of the Company’s business policy for the year 2011.

After analyzing the reports of the Management Board of the Company and monitoring the changes in the financial indicators, it was assessed that certain planned parameters were not realized to the full extent due to different impacts (majority of which were unexpected in such extent), as follows:  regulatory impacts (mobile termination prices, ULL, DTK, WLR opt out, etc.), mobile tax effects, GDP drop, falling disposable income, high unemployment and overall market decline. However the Company and whole T-HT Group successfully maintained its leading position in the Croatian telecommunications market and achieved solid financial results in 2011 despite strong competition and a serious and prolonged downturn in the Croatian economy.

Aside from the financial results for the year 2011, the Supervisory Board considered and approved the Company’s business plan for the year 2012 and the Strategic Plan for 2013-2015 .

Pursuant to all of the above, the Supervisory Board will deliver to the General Assembly of the Company this Report on the performed supervision of the managing of the Company's business operations in 2011. 

Andreas Moelich
Chairman of the Supervisory Board

Corporate Governance Code Compliance Statement

Hrvatski Telekom d.d. (hereinafter referred to as “the Company”) has, in accordance with Article 250b, paragraphs 4 and 5 of the Companies Act (“Official Gazette” Nos. 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08 and 137/09), prepared the Annual Report of the Management Board on the Status and Business Operations of the Company and the T-HT Group for the Business Year 2011 consisting of the Annual Report on the Status and Business Operations of the Company and the Consolidated Annual Report on the Status and Business Operations of the Company (hereinafter referred to as “Annual Report”), as well as the Corporate Governance Code Compliance Statement.

Given the fact that the Company’s shares are admitted to trading on a regulated market, the Company applies the Corporate Governance Code published on the web-site of the Zagreb Stock Exchange Inc. (www.zse.hr) and on the web-site of the Croatian Financial Services Supervisory Agency (www.hanfa.hr), and in effect as of 1 January 2011.

The Company complies with the recommendations of the Code, with the exception of those that were not, or are not practical for the Company to implement at the relevant time. These exceptions are as follows:

Internal Control and Risk Management

The Audit Committee of the Supervisory Board of the Company was established in April 2002. The Audit Committee's principal responsibilities are the preparation of the decisions of the Supervisory Board of the Company and the supervision of the implementation of such decisions in relation to the controlling, reporting and audit activities within the Company. Revisions to the Audit Committee's term of reference were adopted in November 2006, amended in 2008 and adjusted in accordance with the Sarbanes Oxley Act and the Croatian Audit Act. The Audit Committee oversees the audit activities of the Company (internal and external), discusses specific issues brought to the attention of the Audit Committee by the auditors or the management team and makes recommendations to the Supervisory Board. The Audit Committee is responsible for ensuring the objectivity and credibility of the information and reports submitted to the Supervisory Board.

In executing its activities, the Audit Committee is authorized to:

The Corporate Internal Audit of the Company performs an independent audit and control function on behalf of the Management Board and informs managers with comprehensive audit reports (findings and proposed improvements). Implementation of the annual Audit Program contributes to the minimization of risks and the improvement of operational efficiency. Audit Manual of the Corporate Internal Audit of the Company latest updated in December 2009.

The Financial Reporting Audit ensures the reliability of the Company’s financial reporting by:

Significant Company Shareholders

On 31 December 2011, according to the list of the top ten shareholders of the Company published by the Central Depository & Clearing Company, significant Company shareholders are as follows. The majority owner of the Company is Deutsche Telekom AG, with 51 per cent of total outstanding shares. The Croatian War Veterans' Fund owns 7.0 per cent of shares, the Raiffeisen Mandatory Pension Fund holds 5.3 percent of shares and the Pensioner's Fund 3.5 per cent of shares. Remaining 33.2 per cent of shares are owned by Croatian citizens and by other domestic and foreign institutional investors. An up to date list of the top ten shareholders of the Company may be found on the Central Depository & Clearing Company web site.

The President of the Management Board of Hrvatski Telekom d.d., Mr. Ivica Mudrinić, owns 4,569 shares in total; Mr. Jürgen P. Czapran, MB Member until 31 March 2011, owns 185 shares in total; Mrs. Branka Skaramuča, MB Member, owns 200 shares in total; Mrs. Irena Jolić Šimović, MB Member, owns 45 shares in total; Mr. Ivica Mišetić, Ph.D., deputy Chairman of the Supervisory Board, owns 63 shares in total and Mr. Juko Cikojević, Supervisory Board Member (workers’ representative, as of 1 January 2011), owns 263 shares in total.

Appointment of the Management Board, its Functions and the Amendments to the Articles of Association

The Members and President of the Management Board are appointed and removed by the Supervisory Board. Their term of office is up to five years, with the possibility of re-appointment. Pursuant to the Company's Articles of Association, the Management Board consists of between five and seven members. Currently the Management Board has six members: the President of the Management Board (CEO); MB Member and Chief Financial Officer (CFO); MB Member and Chief Operating Officer Residential (COO Residential); MB Member and Chief Operating Officer Business (COO Business); MB Member and Chief Technical and Chief Information Officer (CTO/CIO) and MB Member and Chief Human Resources Officer (CHRO).

The Company is offering fixed and mobile telephony services as well as wholesale, Internet, data and ICT services, organized into two business units, Business and Residential.

The Management Board needs prior approval from the Supervisory Board for the proposal of any amendments to the Articles of Association at the General Assembly.

Authorities of the Management Board Members

Pursuant to the Companies Act and the Company's Articles of Association, the Management Board has responsibility for managing the business affairs of the Company. It is obligated and authorized to perform all the activities and to pass all the resolutions that it considers necessary to successfully manage the business affairs of the Company, subject to such approvals as may be required from the Supervisory Board for certain matters and decisions.

Under the Articles of Association, the Company may be represented by any two members of the Management Board.

The Management Board was authorized by respective General Assembly decisions from 2009, 2010 and 2011 to acquire Company shares, with associated prior approval of the Supervisory Board to start the process of acquiring and managing of Company shares as in accordance with the authority given by the above mentioned General Assembly decisions. No Company shares were acquired during 2009, 2010 and 2011.

The Composition and Functions of the Supervisory Board

Pursuant to the Company's Articles of Association, the Supervisory Board consists of nine members. Eight members are elected by the General Assembly and one is appointed by the Company's employees. The Supervisory Board is responsible for the appointment and removal of Management Board members as well as for supervising the management of the Company's business affairs. Certain major or uncommon transactions such as large capital expenditure items, the assumption of long-term indebtedness or significant appointments require the approval of the Supervisory Board. The Supervisory Board established the Compensation and Nomination Committee and the Audit Committee.