Stara Planina Hold Plc

STARA PLANINA HOLD PLC

CONSOLIDATED ACTIVITY REPORT

For 2012

CONTENTS

Introduction

I. Activity overview

1. Main indicators characterizing activity results

2. Investment portfolio

3. Liquidity

4. Activity results

5. Dividend policy

6. Environmental protection

7. Risk factors for the activity

8. Changes in the company share prices

II. Important events occurred since the beginning of 2013

ІІІ. Projected development of the group

ІV. Research and Development Activity

V. Financial instruments used by the enterprises of the group

1. Accounting policy

2. Major indicators for financial and accounting analysis

3. Financial instruments

4. Exposition of the risk.

VІ. Additional information on Appendix 10 of Ordinance No 2 of the FSC

VII. Analysis and explanation on the information as per Appendix 11 of Ordinance 2 - FSC

Introduction

The annual consolidated activity report provides commentary and analysis of financial statements and other important information regarding the financial condition and results from the activity of the company and of the subsidiaries.It includes information pursuant to the Accountancy Act and Public Offering of Securities Act as well as pursuant to Ordinance No 2 of the Financial Supervision Commission.

STARA PLANINA HOLD PLC is a public limited company. The company is successor of Central Privatization Fund AD promoted on 27 September 1996. The company has been bearing its present name since 30 April 1999.

Stara Planina Hold PLC is a parent company. The registered office of the HOLDING is in the city of Sofia, Izgrev District, 20 Frederic Joliot Curie, fl. 9. The scope of business activity of the holding shall be as follows: acquisition, management, evaluation and sale of share participations in Bulgarian and foreign companies; acquisition, management and sale of bonds, evaluation and sale of patents, transfer of licenses for use of patents, belonging to companies, in which the holding public limited company has participation; financing of companies, in which the holding public limited company has participation; other commercial transactions, except those prohibited by law.

The holding owns shares in industrial enterprises working in various fields of production.It actively participates in the development of the Bulgarian industry by achieving European and world quality level and profitability.

I. Activity overview

1. Main indicators characterizing activity results

(BGN’000s)

2. Investment portfolioon 31.12.2012

List of subsidiaries in the consolidated financial statements

The accounting for and presentation of investments in subsidiaries is performed as defined in IAS 27 Consolidated and Separate Financial Statements.

When classifying an entity as subsidiary, Stara Planina Hold Plc applies the criterion to own more than 50% of the voting shares or interests of their capital.

The related company Slavyana Jsc owns 8.28% of the Hydraulic elements and systems Plc capital and 0.8% of the Elchim-Iskra capital.

List of associates in the consolidated financial statements

The accounting for and presentation of investments in associates is performed as defined in IAS 28 Investments in Associates.

When classifying an entity as associate, Stara Planina Hold Plc applies the criterion to own between 20% and 50% of the voting shares or interests of their capital. At the same time, while taking into account the influence of the holding on the decision-making process with regard to the associates and the need to provide more comprehensive and correct information to the shareholders, investors and all interested parties, as of 01.01.2011 Stara Planina Hold Plc applies accounting policy aimed to further assist investors in making a well-founded investment decision.

3. Liquidity

The major portion of the cash inflows in the group is formed from income from sales of products of the subsidiaries and bank loans.

Cash outflows are predominantly connected with payments to suppliers, purchase of fixed assets, payments to the personnel, payments on loans and dividend payments.

Considering the specifics of the activity, the major portion of the cash inflows in the parent company only is formed from the received dividends, and the cash outflows are used to payout dividends to the shareholders, purchase shares and cover administrative overheads related to its maintenance. The net cash flows for the current period as per individual activity have the following levels:

(BGN’000s)

4. Activity results

The consolidated activity results are formed mainly from the results of the entities within the group which participate in the consolidated statement as well as from the income and expenses accrued from the participation of Stara Planina Hold Plc in the equity of the associated companies.

In 2012 the net consolidated profit amounted to BGN 5239 thousand which is an decrease of 42.75% compared to 2011 and increase of 6.9%compared to 2010.

Consolidated EBIDTA[*]for 2012 amounted to 28,608 thousand BGN.

Stara Planina Hold Plc and the enterprises from our group bid good bye to a tough, yet relatively successful year. The annual sales of the enterprises within the group will reach BGN 164 m. This would result in a 14.51% drop in the sales compared to 2011 and a 14.40% increase compared to the 2010 sales.

The processes in the economy are sluggish; we are observing a stagnation trend and we are not optimistic about its swift reversal. The constant erosion in the orders results in low confidence levels and creates uncertainty which affects all sectors of the EU economy. In 2Q 2012 the output of the EU machinery sector showed a negative growth for the first time after a two-year period of stable increase in the output.

A leading priority for us this year was to increase productivity. We continued to make investments even in the time of crisis which helped us retain our main markets and expand our pool of clients. Our enterprises affirmed their corporate export image of vendors offering good prices, high quality and short delivery times.

This year too our leading priority was to increase productivity. The enterprise personnel will remain on the level of the 4Q of 2012 but we do not rule out negative growth of the employment in the group.

Number of employees in all enterprises of the Holding Group

Labour productivity per employee (BGN’000s)

The above tables illustrate the correctness of the restructuring measures taken in order to overcome the negative effects of the economic crisis. At the end of 2012 the number of employees decreased by 3.7%, and for the three largest enterprises – by nearly 4.9% compared with the beginning of the year. The reported annual decrease in sales of 14.55% is accompanied by a decrease in labor productivity by 8.77%.

5. Dividend policy

The company applies a policy of annual distribution of dividends. The Board of Directors assumes that the regular annual general meeting of the shareholders will continue the tradition of allocating part of the financial profit for dividends.

Stara Planina Hold Plc has been paying dividend each year ever since its establishment. The total amount of the dividend distributed up to 2012 inclusive is BGN 4,054 mn. The initial investment has been paid back solely from dividends after the seven year of holding’s existence.

For the 15financial years closed since the enterprises within the Stara Planina Plc group have existed, they have distributed dividends to a total of BGN34.262million.

Stara Planina Hold Plc pays the dividend in compliance with the requirements of the Public Offering of Securities Act and the other applicable provisions of the acting legislation - as contracted with Central Depository AD and through the braches of International Asset Bank AD in the county towns.

6. Environmental protection

As a holding type company which does not carry out autonomous trade activity, Stara Planina Hold Plc has directed its activity mainly in the management of the subsidiary and associated enterprises.The holding gives special consideration to the impact on the environment which is exercised by our enterprises.They report on annual basis on the environment impact assessment and the measures which they undertake in this respect.

All industrial enterprises from the group have waste Management programs approved by the RIEW and fulfill the requirements provided in the regulations.

7. Risk factors for the activity

As of the present moment, the management of Stara Planina Hold Plc is not aware of any specific trends or conditions which may exercise significant influence on the future activity and results of the company. Risks to the company and risk management related solely to the risks relevant to the activities of the subsidiaries of the group.

A significant impact on the financial status of Stara Planina Hold Plc results from the direct dependence on the financial results of its subsidiaries and associated companies, the main business of which is export oriented - mainly to EU countries.

In 2012 the group entities from Stara Planina Hold Plc decreased their sales compared to the 2011 level. The largest companies of the holding showed a drop in the sales between 10% and 20% compared to 2011, yet the sales remained above the 2010 levels.

In 2012 the consumption of steel for the production of machine parts in the EU dropped by 2.4%. According to forecasts, a minimum growth of 0.4% is not to be seen before 3Q 2013. Investments in the machinery sector decrease and in 2012 they are 5% lower than those in 2011 with the forecasts for 2013 pointing to 1.2%. The forecasts are negative particularly in the construction and automotive industry – sectors which have a direct impact on the operations of our major customers.

Sales growth in 2012 compared to 2011 and 2010.

The risks for the company activity and their management are connected solely with the risks applicable to the activity of the companies from the group. The global financial crisis affected primarily the stock prices. The total loss of investors’ interest sharply reduced their liquidity. The resulting economic crisis led to significant decrease in the orders for industrial production which affected to various degrees the financial standing of the subsidiary and associated companies. All this may lead to reduced capabilities connected with the generation of cash inflows and as a consequence to affect dividend distribution.

Changes in currency values also have a certain impact and pose a business risk. Exchange rates influence directly income from sales abroad and the cost of imported raw materials. The devaluation of the Euro leads largely to an increase of expenditures on raw materials and affects the competitiveness of our products. This effect is mainly compensated through improvement of the quality production. Changes in interest rates also play a role depending on the share of acquired commercial and bank loans.Stara Planina Hold Plc uses its free resources optimally in order to limit the impact of interest rates levels.

The factors which are expected to influence expenditures during 2013 are market prices of raw materials and production materials, labor force costs on the regional market, and the prices of energy resources.

The upward trend in the steel prices observed almost throughout the entire 2011 continued until the end of 1Q 2012. Since the beginning of 3Q and especially in 4Q the price trend reversed steadily in downward direction and by the end of the year the price decrease for some materials reached 5%. Despite the price drop, the demand remained weak. Production plants continued to have sufficient available capacity and the delivery terms remained unchanged. Considering the processes developing in the international economy, we can expect the decrease in the prices of steel to continue until the middle of 2Q 2013 at the most. Undoubtedly, this level will not persist for too long and we will be seeing an increase long before the middle of 2013.

In the field of road construction, the major issues are expected from the already chronic delay of payments which can result in serious consequences in terms of liquidity. The high levels of indebtedness between companies caused also by the ongoing delays in state and municipal payments on concluded and either partially or completely fulfilled contracts hamper the recovery in the sector.

8. Changes in the company share prices

The average stock exchange price per 1 share on the last business day of 2011is BGN 2.60, on the last day on the last business day of 2012 it is BGN 2.52.

The shares of Stara Planina Hold Plc occupy segment “Standard” of the Bulgarian Stock Exchange. BSE code: 5SR.

Stara Planina Hold Plc has a free float of 64.4% and its shares are among the most actively traded on the BSE-Sofia where the liquidity continues to pose a major concern. Holding’s shares are a part of the SOFIX blue chip index. Stara Planina Hold Plc is also included in the BGTR30, BG40 and CGIX stock exchange indices. The CGIX index includes the issuances of shares of seven companies with the best corporate governance on the Bulgarian Stock Exchange.

The stock is also a part of a number of STOXX indices, including: STOXXAll Europe Total Market, STOXX Balkan TMI, STOXX Balkan TMI ex Greece &Turkey, STOXX Bulgaria Total Market, STOXX Eastern Europe TMI, STOXX EasternEurope TMI Small, STOXX EU Enlarged TMI, STOXX Global Total Market. StaraPlanina Hold has traditionally been part of the portfolios of local institutionals, whichsupport the share price.

Closing price per share (in BGN) at year-end

In 2012, the lowest weighted average share price was reached on June 29 – BGN 2.00, while the highest was reached on December 12 - BGN 2.67.

The shares of M+S Hydraulic Plc occupy segment “Standard” of the Bulgarian Stock Exchange. BSE code:5MH. Capital: BGN 13018400.As of 31.12.2011, the price of a company share was BGN 6.98 and on the last business day of 2012 – BGN 7.04.

The shares of Hydraulic Elements and Systems Plc occupy segment “Standard” of the Bulgarian Stock Exchange. BSE code:5MH. Capital: BGN 3032292.As of 31.12.2011, the price of a company share was BGN 10.26 and on the last business day of 2012 – BGN 7.50.

The shares of Elhim-Iskra Plc occupy segment “Standard” of the Bulgarian Stock Exchange. BSE code: 52E. Capital: BGN 12 554 205.As of 31.12.2011, the price of a company share was BGN 1.65 and on the last business day of 2012 – BGN 1.32.

The shares of Bulgarska RosaPlc which are traded on the BaSE market of the Bulgarian Stock Exchange – Sofia Jsc. BSE code:4BH. Capital: BGN 267549.The average stock exchange price of one share on the last business day of 2011 was BGN 7.50 and at the end of 2012 – BGN 9.52.

The shares of Fazan Plc which are traded on the BaSE market of the Bulgarian Stock Exchange – Sofia Jsc. BSE code:4F5. Capital: BGN 641826.The average stock exchange price of one share on the last business day of 2011 was BGN 2.20 and at the end of 2012 – BGN 0.51.

II. Important events occurred since the beginning of 2013

After the date of the annual accounting closing, the management of Stara Planina Hold Plc is not aware of any important and material events which may influence the investors’ interest.

ІІІ.Projected development of the group

The Board of Directors of Stara Planina Hold Plc expects the consolidated income from sales of production the next year to retain its 2012 levels and reach BGN 162 million. The individual enterprises of the holding’s group plan from 6% increase to 8% decrease in sales, and the profit, respectively. The entities already routinely operate in an uncertain environment and with maximum short horizon of the orders. The level of the sales is directly dependant on the markets on which the group operates – mainly EU markets.

We expect the business environment to remain tough at least until the middle of 2013 with continued downward trend in the sales in the first two quarters and in the 1H we will close the books with about 9.5% lower income compared to the same period of 2012. We do hope to see recovery in the 2H of the next year. The expected downturn of the world economy will continue to push down the demand outside the EU, yet the weaker euro should mitigate this effect. The hope for recovery in the 2H of the next year is reflected in the forecasted 9.8% sales growth compared to the same period of 2012.In this environment, our companies will continue their efforts to break into new markets – CIS, Far East, Australia, Canadaand America.