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Annual report of the Management Board on the

company status in 2012

Zagreb, March 2013

Television and radio

programme broadcasting

services

Infrastructure

Multimedia services

Network services

Organisation and human

resources

ODAŠILJAČI I VEZE d.o.o. Annual report of the Management Board on the company status in 2012

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C O N T E N T S

1. INTRODUCTION ....................................................................................................................................................... 3

MANAGEMENT BOARD REPORT ................................................................................................................................................... 3 MANAGEMENT STRUCTURE ........................................................................................................................................................ 5 WORK ORGANISATION ............................................................................................................................................................... 6

2. KEY OBJECTIVES AND DEVELOPMENT OF THE COMPANY ........................................................................................ 7

GENERAL OBJECTIVES AND STRATEGY ........................................................................................................................................... 7 DEVELOPMENT AND EXPANSION OF BUSINESS ................................................................................................................................ 8 INVESTMENTS IN 2013 .............................................................................................................................................................. 9

3. FINANCIAL REVIEW ................................................................................................................................................ 10

INCOME 2010-2012 .............................................................................................................................................................. 12 EXPENDITURE 2011 – 2012 ..................................................................................................................................................... 13

4. ASSETS AND INVESTMENTS ................................................................................................................................... 14

INVESTMENTS ......................................................................................................................................................................... 15

5. OVERVIEW OF PLAN REALISATION ........................................................................................................................ 16

INCOME ................................................................................................................................................................................ 17 EXPENDITURE ......................................................................................................................................................................... 18

6. BUSINESS ENVIRONMENT AND OPERATIONAL RISKS ............................................................................................ 19

OPERATIONAL RISKS ................................................................................................................................................................ 19

7. HUMAN RESOURCES .............................................................................................................................................. 21

TRAINING AND EDUCATION ....................................................................................................................................................... 23 WORK ENVIRONMENT ............................................................................................................................................................. 23 RESPONSIBILITY TOWARDS EMPLOYEES ........................................................................................................................................ 23 REMUNERATION AND SUPPORT ................................................................................................................................................. 23 OCCUPATIONAL SAFETY ............................................................................................................................................................ 24 PROTECTION OF EMPLOYEES' DIGNITY......................................................................................................................................... 24 EMPLOYEES - MANAGEMENT BOARD RELATIONSHIP ...................................................................................................................... 24

8. SOCIAL RESPONSIBILITY ......................................................................................................................................... 25

COMMUNITY ASSISTANCE ......................................................................................................................................................... 25 ETHICS IN BUSINESS OPERATIONS ............................................................................................................................................... 25 CORPORATE MANAGEMENT CODE ............................................................................................................................................. 25 ANTI-CORRUPTION PROGRAMME ............................................................................................................................................... 25

9. QUALITY MANAGEMENT SYSTEM AND ENVIRONMENTAL MANAGEMENT POLICY ............................................... 27

QUALITY MANAGEMENT SYSTEM ............................................................................................................................................... 27 ENVIRONMENTAL MANAGEMENT POLICY .................................................................................................................................... 27

10. SIGNIFICANT EVENTS AFTER THE END OF THE BUSINESS YEAR .......................................................................... 28

11. CONCLUSION .................................................................................................................................................... 29


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1. Introduction This Report on the company status was compiled pursuant to the requirement stipulated by Article 250 of the Company Act and by Article 18 of the Accounting Act.

Management Board Report In accordance with the defined mission and outlined strategic objectives, OIV applies an integrated management system compliant with the requirements of HRN ISO 9001:2008 Quality Management Systems and ISO 14001:2004 Environmental Protection Management System. Given the specificities of services and the limited number of customers of our services, particular attention is given to customer relationships in order to realise mutual economic benefit and successful cooperation.

OIV has adapted its business to the overall situation in society, taking care of maintaining solvency, all with the objective of security and stability of business operations. The main challenge and goal in 2012 was to adapt its business operations to lower income caused by transition from analogue television broadcasting to digital television broadcasting. OIV realised this goal, which is evident from the business results for 2012, and it continued realising goals defined by strategic documents which envisage income increase from new sources. The Company business in 2012 was within established parameters. The business profit was HRK 28.3 million, and the profit after tax was HRK 13.4 million. The business plan for 2013 contains a slight income increase of HRK 5 million compared to 2012.

The most significant business activities of the Company during 2012

1. Television and radio programme broadcasting

The regular broadcasting of the programmes of HRT, RTL Televizije and Nova TV on multiplexes A and B continues, as well as the regular broadcasting of all the national, regional, and local television programmes on MUX D. The new contract with HRT was signed, regulating services of terrestrial broadcasting of radio and television programmes, of distribution and contribution of signals, and of other related services. In the last quarter of 2012 HRT commenced broadcasting HRT3 and HRT4 programmes on MUX B. With December 31st 2012 HRT cancelled broadcasting shortwave frequencies, and it announced termination of broadcasting on medium wave with the end of 2013. In the procedure of conciliation with HRT the solution was reached regarding the dispute arising from digital television transition, and based on the said solution the financial transactions were executed by fixing accounting periods based on IAS1 8 – Accounting Policies, Changes in Accounting Estimates and Errors. By decision of the OIV Management, the programme KAPITAL NETWORK was removed from the broadcasting system of digital television on multiplex D on the entire region of Croatia.

1 IAS – International Accounting Standards


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2. Continued expansion of the optical network

The Company plans to continue building OIV fibre optic network with the goal of linking the largest cities in the Republic of Croatia and connecting to the fibre optic networks of neighbouring countries. The following was accomplished in 2012:

Zagreb - Deanovec route, providing higher quality and more reliable transmission of the television programmes and telecommunication capacities between Zagreb and Deanovec satellite and multimedia centre.

Fiber optic cable along Solin - Klis highway, enabling a redundant network access to Split.

Expansion of telecommunication capacities on Zagreb - Rijeka route.

3. Development and expansion of multimedia services One of the Company's strategic goals is continued expansion of multimedia services IPTV and PlayOut. The course and dynamics of the development are determined by the external influences like the economic environment. During 2012 there were no significant new projects in the area of multimedia services, thus the Company focused instead on fostering relations with the existing key clients. By strengthening the existing business relationships, the Company has formed a network of clients with whom it expanded and developed mutual relationships with the goal of realising the long-term plans.

IPTV Service The business model is based on OIV implementing the systems that are necessary for providing IPTV services, and offering those systems on a wholesale basis to all telecommunication and cable operators. Telecom operators provide the end users with their services via their own network. We provide the client OT (Optima Telekom) with the IPTV service according to the "turn-key" principle, where the operator offers the service to its own users.

4. DVB-T network The most significant activity in 2012 was construction of the two new digital television networks, MUX C and MUX E. In accordance with the licence, the deadline for the phase 1 was July 15th 2012, and all the necessary equipment has been purchased and installed during the first half of 2012, which includes: content reception system, central signal processing system, signal distribution system, and transmission systems on 12 locations that belong to the phase 1. On July 23rd 2012 HAKOM conducted technical inspection and established that OIV had met criteria for providing management service of digital television electronic communication networks on multiplexes MUX C and MUX E within the deadlines set in the permit issued for the use of the radiofrequency spectrum. This concluded the Phase 1 of the system construction, when the large transmitters on the 12 most significant locations that cover 82% of the population of the Republic of Croatia were put into operation. According to the contractual obligations between OIV and HPP, beginning with September 15th 2012 OIV has fully started transmitting the programme Pay TV of the service Evo TV within multiplexes MUX C and MUX E.


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Following the request of the local broadcasters on MUX D in region D5, there was construction of an additional location Pula II, which was put into operation on April 5th 2012. There is interference present in reception of Croatian programmes of terrestrial digital television in all the networks. The interference is created by Italian transmitters that are operating illegally on frequencies assigned to Croatia in 2006 by the international agreement in Geneva. The interference from Italy has been present since the beginning of 2010 in the region of Istria (region D5), and partially in D7 (Zadar, Šibenik), and since May 2012 it expanded to the entire southern part of Croatia and islands (Split D8 and Dubrovnik D9). Practically the entire coastal region of Croatia, from Savudrija to Prevlaka, including islands and part of the hinterland open to the sea, suffers from the interference from Italy. The strength of the interfering signal varies between locations so the interference impact can be present on just one frequency (multiplex) and tolerable (occasional images with block artefacts), but it can also completely prevent reception of any Croatian signals. There are no technical measures that can remove the interference. The only solution is for Italy to stop transmitting on Croatian frequencies, and considering that the measures undertaken so far have not given any concrete results, it is necessary to make them stronger, particularly in the political, diplomatic and legal areas, in order to force the Italian administration to respect international agreements on frequency assignment and use. Considering that this interference comes from outside OIV's networks, and also that it is of the international character, pursuant to legal and regulatory provisions OIV reported all interference instances to the regulator HAKOM. Thus in a certain manner OIV's jurisdiction ends. Through its contact centre OIV provides viewers with necessary information and useful advice on how to reduce impact of the interference.

Management Structure

In accordance with the Companies Act and Articles of Association of Odašiljači i veze d.o.o. (OIV), the Company has an Assembly, a Supervisory Board and a Management Board. The fundamental authority of the Supervisory Board is to continuously supervise how the Company business operations are managed, and to appoint members of the Management Board. The Company's Supervisory Board has five members. Four members of the Supervisory Board are elected by the Assembly, while one member is elected by the employees of the Company. The term of office of the Supervisory Board members is four years. During 2012 the Supervisory Board members were appointed as follows:

Marijan Crnjak Chairman of the Supervisory Board Mislav Peričić Vice Chairman of the Supervisory Board Lora Čurković Supervisory Board Member Damir Vuk Supervisory Board Member Saša Radulić Supervisory Board Member, employees' representative The authorities, duties and responsibilities of the Management Board when conducting business and representing the Company are established by the Articles of Association of OIV, which is the constitutive document of the Company. The Members of the Management Board represent the Company independently and individually. The basic authority of the Management Board is to conduct the business activities of the Company and to represent the Company in front of the third parties. The Management Board is, among other things, required and authorised to undertake all actions and render all decisions it deems necessary to successfully manage the business operations of the Company, which, among other things, includes making the


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decisions for the purpose of implementing business strategy, and work and development plans and programmes. During 2012 the following Management Board was appointed: Mladen Malić Board Chairman Vlatka Dokoza Board Member

Work Organisation

The work organisation of the Company was structured based on business functions organised into business units that are headed by division and independent department directors, and by the Management Board office. The Signal Management, Monitoring and Processing Division consists of the Network Monitoring, and Satellites and Multimedia Departments. The Engineering Division consists of the Departments for Telecommunications, Radio-communications, Infrastructure, Multimedia and Technical Support. The Division of Infrastructure Operational Management consists of the Regional Centres Department and Technologies Department which contain their own departments. General Services, and Human Resources and Legal Affairs Departments have been joined in one division. Finance and Controlling division consists of Planning, Analysis and Billing, and Controlling departments. Independent departments are: Sales, Accounting, Network Information Systems, and Purchasing. Since we are a Company which is 100% owned by the Republic of Croatia, we are active participants in implementation of the Anti-corruption programme of the Government of the Republic of Croatia through the rendered Action Plan and Strategy.

SUPERVISORY BOARD

MANAGEMENT

DIVISION DIRECTORS AND HEADS OF INDEPENDENT DEPARTMENTS


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2. Key Objectives and Development of the Company

General Objectives and Strategy Business operations in 2013 shall continue in accordance with forecasts and estimates of the expected market trends and trends in the economy of the Republic of Croatia, which above all regards maintaining Company's business secure and stable. OIV continues to systematically implement objectives whose realisation forecasts income increase in 2013, and to perform activities connected with offering new services on the electronic communication market that could represent new income sources to OIV. Phase 1 of DVB-T2 networks MUX C and MUX E was realised. OIV signed the contract with Hrvatska pošta d.d. and HP Produkcija d.o.o. based on which OIV in mid-July 2012 fulfilled its obligation to build DVB-T2 networks (Phase 1 of the Project according to the obligations arising from the Permit issued by HAKOM, population coverage of 80% for MUX C and 80% for MUX E), with the implementation value of approximately HRK 33 million in Phase 1. The plan is to continue building DVB-T2 networks in 2013 according to the terms of the permit. Based on the said contract and capital investments into building of DVB-T2 networks OIV plans to realise significant income over next ten years. The planned 2013 income is approximately HRK 24 million. As a company owned by the Republic of Croatia, OIV shall responsibly and fully continue to meet its obligations ensuing from the documents adopted by the Government and other bodies and institutions of the Republic of Croatia which refer to activities of interest for the Republic of Croatia. In the following period the plan is to continue developing the fiber optic network, both by building proper structure and by using infrastructure of the companies that are in majority ownership of the State, depending on the outcome of the project of unification of that infrastructure. The priority objective in 2013 remains maintenance of the security and stability of OIV's business. In this sense, one of the goals of the business policy shall remain persistence on continuously implemented measures to the purpose of reducing the expenditure side, and of rationalisation of operations in all business segments. This is particularly important under the circumstances when there is persistent pressure for price reduction exerted by our users and when there is growing competition on the market, which could jeopardise the planned income. In addition to the above mentioned, the Company shall continue to pay particular attention on the obligations it has assumed towards employees, credit institutions and suppliers. Long-term development tendencies are connected with keeping the leading position of a network operator in the area of radio and television broadcasting and with strengthening the market share in the telecommunication transmission capacities, as well as positioning OIV as a multimedia services provider on the markets of neighbouring countries.


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General objectives of the Company:

To consolidate its position of the leading network operator in the Republic of Croatia in the area of radio communications.

To continue expansion of telecommunication services, especially through an increase in telecommunication capacities in the fibre optic network.

To continue expanding multimedia services.

To monitor the needs and desires of customers and to react accordingly in a timely manner in all areas, particularly in the area of telecommunication services, digital television and new interactive services.

To continuously work on improving quality of all services.

To maintain its position among the leading infrastructure operators in the Republic of Croatia.

To continuously work on infrastructure maintenance and development and on service improvement.

To continuously take care of all the aspects of the environmental protection.

Development and Expansion of Business

Continued expansion of the fibre optic network

OIV continues the project of constructing a regional fibre optic network in the territory of the Republic of Croatia by using the fiber optic infrastructure of other companies that are in majority ownership of the Republic of Croatia, in accordance with the recommendation issued by the Government of the Republic of Croatia and with implementation of the project of unification of that infrastructure. Depending on the requirements of the telecommunications market, there are plans to establish a fibre optic network that would link Zagreb with Varaždin, Osijek and other towns in the eastern part of the Republic of Croatia. Furthermore, all prerequisites for connection with telecommunication operators in the Republic of Serbia have been met, and the fibre optic infrastructure is being prepared for the purpose of establishing links with the Republic of Slovenia and the Republic of Hungary Through the realisation of the aforementioned fibre optic networks, OIV, as one of the leading telecommunications operators, gains the opportunity to provide integral services of linking regional centres in the Republic of Croatia, as well as to offer service of establishing links with telecommunications operators outside the Republic of Croatia, whereby OIV would achieve an enviable competitiveness in the telecommunications market of the entire region.

Colocation – leasing electronic communications infrastructure

There is various radio and telecommunication equipment installed on the existing OIV locations, such as radio transmitting equipment, GSM/UMTS/LTE equipment, microwave link devices, wireless equipment, equipment for satellite reception and transmission, etc. The users are given opportunity to lease space to position antennas on the pole, AC conditioned premises to place their equipment, basic and reserve electrical power supply, uninterruptible AC and DC supply. The reserve power supply on main transmitter locations is provided by diesel generators, and more important objects are equipped with two diesel generators. Uninterruptible AC supply is provided by redundant UPS devices, and uninterruptible DC supply is provided by power systems with batteries in n+1 configuration.


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We offer services of project preparation, installation and maintenance for all the equipment that the user might need to place on OIV locations.

DVB-T Network

Over the past ten years OIV has invested significant own funds in the construction of digital terrestrial television networks (DVB-T). During 2010 analogue transmitters in the entire Croatian territory were shut down, MUX A and MUX B networks were completed, and MUX D network construction began. In 2011, there was work on optimisation of the MUX A and MUX B networks, and on completion and optimisation of the MUX D network. In total, over HRK 230 million were invested into the DVB-T networks for MUX A, MUX B and MUX D. These investments did not mean that the terrestrial digital television networks construction was over. Beginning with October 2011, HP Produkcija d.o.o., OIV and HP-Hrvatska pošta d.d. were granted a network operator license for two additional multiplexes: MUX C and MUX E. Phase 1 of the project was completed by September 15th 2012, and commercial operation started on September 15th 2012. Considering that the realisation of these two networks was a multi-year project, there are plans to construct Phase 2 of these two networks in 2012. The investment in new equipment will total approximately HRK 16 million.

Multimedia Services

Continued growth of the offers in the catalogue of multimedia services that OIV offers on the market (IPTV and PlayOut) represents one of the crucial objectives of the company within strategic positioning of OIV on the electronic communications services market. Multimedia, as a secondary activity, only began to develop during 2009, and its first considerable income was registered in 2010. The trend of positive income results from this activity continued during 2011 and 2012. In order to further increase income from the multimedia segment, OIV plans to enter the markets of neighbouring countries in the upcoming period, since there is only a limited possibility of further placement of these services in the Republic of Croatia, and therefore there is no real opportunity to increase income from this source.

Investments in 2013 The most significant investments during 2013 will be those made into the project of construction of digital television networks MUX C and MUX E. The direct investments into transmitters, processing equipment and link system for signal distribution amount to approximately HRK 16 million. During 2013 there are plans to replace large UHF antenna systems for digital television transmissions on two transmission installations. There are also plans to invest approximately HRK 10 million into reconstruction of the transmission installation infrastructure. In 2013 the plan is to connect with fiber optic links cities Osijek and Varaždin, and also other towns in eastern part of Croatia, depending on market demands. The total amount planned for the investments in 2013 is approximately HRK 43 million. Realisation of the investment projects will depend on the stability of the financial market, and the obligations towards employees, credit institutions and suppliers will be taken into account.


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3. Financial Review Key Financial Indicators

Indicators 2012 2011 2010 2009 2008

Total (operating) income 231,039,649 226,786,189 274,228,136 275,531,233 264,608,124

Percentage change 1.9 -21.5 -0.5 4 -3

Total income (operating + financial) 236,985,219 235,108,450 278,338,155 281,048,732 269,743,938

Percentage change 0.8 -19.8 -1 4 -0.1

Total (operating) costs 202,703,036 232,251,358 248,300,199 243,052,758 229,763,569

Percentage change -12.7 -6.5 2.2 5.8 -8

Total costs (operating + financial) 219,583,328 252,811,137 267,185,715 265,444,295 250,822,353

Percentage change -13.1 -5.5 1 6.0 -4

EBIT 28,336,613 -5,465,169 25,927,937 32,478,475 34,844,555

Depreciation 59,791,551 59,284,905 55,563,773 48,404,183 45,632,372

EBITDA 88,128,164 53,819,736 81,491,710 80,882,658 80,476,927

EBIT margin 12.3 -2.4 9.5 11.8 13.2

EBITDA margin 38.1 23.7 29.7 29.4 30.4

GROSS PROFIT 17,401,891 -17,702,687 11,152,440 15,604,438 18,921,585

TOTAL CAPITAL 226,200,185 212,778,599 227,333,120 208,961,626 197,744,128

CURRENT ASSETS 120,310,826 89,123,104 154,193,782 157,439,634 168,633,603

FIXED ASSETS 384,362,508 413,734,107 449,209,031 449,286,947 406,374,264

TOTAL ASSETS 511,389,075 511,124,150 612,334,914 614,176,555 579,890,567

CASH 3,504,213 8,494,499 3,924,218 5,754,832 33,704,915

RECEIVABLES 88,042,556 48,105,350 92,181,540 71,450,404 62,548,114

CURRENT LIABILITIES 69,803,930 77,801,555 159,887,590 182,784,987 160,173,837

LONG-TERM LIABILITIES 210,820,899 209,420,094 222,104,248 215,967,688 216,129,490

CASH + RECEIVABLES 91,546,769 56,599,849 96,105,758 77,205,236 96,253,029

ROE 7.7 -8.3 4.9 7.5 9.6

ROI 3.4 -3.5 1.8 2.5 3.3

ROS 7.5 -7.8 4.1 5.7 7.2

Quick liquidity ratio 0.05 0.11 0.02 0.03 0.21

Current liquidity ratio 1.72 1.15 0.96 0.86 1.05

Acid test ratio 1.31 0.73 0.60 0.42 0.60

Financial stability ratio 0.88 0.98 1.0 1.1 1.0

Coverage level I 0.59 0.51 0.51 0.47 0.49

Coverage level II 1.14 1.02 1.00 0.95 1.02

Total assets turnover ratio 0.46 0.46 0.45 0.46 0.47

Current assets turnover ratio 1.97 2.64 1.81 1.79 1.60


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Profit and Loss Account

Item 2012 2011 Index 12/11

2010

Broadcasting revenue

148,936,653 141,147,535 105.52 149,131,738

Satellite sublease revenue

7,071,098 8,382,063 84.36 37,748,240

Capacities lease revenue

36,157,470 33,117,508 109.18 42,071,765

Microwave communications revenue

19,621,439 20,668,302 94.93 21,896,334

Multimedia revenue 13,261,396 11,323,482 117.11 7,858,070

Other operating revenues 5,991,593 12,147,299 49.32 15,521,989

Operating income 231,039,649 226,786,189 101.88 274,228,136

Financial income 5,945,570 8,322,261 71.44 4,110,019

TOTAL INCOME 236,985,219 235,108,450 100.80 278,338,155

Material costs 68,398,565 69,312,093 98.68 100,882,844

Personnel costs 51,309,039 61,209,490 83.83 57,249,405

Depreciation 59,791,551 59,284,905 100.85 55,563,773

Intangible costs 23,203,881 42,444,870 54.67 34,604,177

Financial expenses 16,880,292 20,559,779 82.10 18,885,517

Operating expenses 202,703,036 232,251,358 87.28 248,300,199

TOTAL EXPENDITURE 219,583,328 252,811,137 86.86 267,185,715

Profit 28,336,613 -5,465,169 -518.49 25,927,937

Earnings after taxation 13,421,587 -14,554,521 -92.22 8,427,138


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136,000,000

138,000,000

140,000,000

142,000,000

144,000,000

146,000,000

148,000,000

150,000,000

2010 2011 2012

Broadcasting revenue

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

2010 2011 2012

Capacities lease revenue

18,000,000

18,500,000

19,000,000

19,500,000

20,000,000

20,500,000

21,000,000

21,500,000

22,000,000

22,500,000

2010 2011 2012

Microwave links lease revenue

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

2010 2011 2012

Satellite sublease revenue

Income 2010-2012

Broadcasting revenue is the most significant income, and in 2012 its share in sales revenue was 64.5%.

The capacities lease revenue share in 2012 sales revenue was 15.7%.

The microwave link lease share in 2012 sales revenue was 8.5%. The share of satellite sublease revenue in 2012 sales revenue was 3.1%. This revenue remained at the level of the previous year.


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Expenditure 2011 – 2012 The total expenditure in 2012 was HRK 219.6 million, 13.1% less compared to the previous year. Realised operating expenses in 2012 were HRK 202.7 million, which is 12.7% less compared to the previous year. Total expenditure structure

Compared to 2011 the operating expenses were 12.7% lower, and the most significant reduction was noted in the category of intangible costs.

2012 material expenses did not significantly change compared to the previous year, their realisation amounted to HRK 68.4 million which is 102.1% of the annual plan. Compared to the previous year they were HRK 0.9 million or 1.3% lower.

Depreciation costs did not significantly change, their realisation amounted to HRK 59.8 million which was 99.7% of the annual plan. Compared to the previous year they increased by HRK 0.5 million or 1.3%.

The cost of employees were HRK 51.3 million or 91.6% of the annual plan. Compared to the previous year they were reduced by HRK 10 million or 16.2%. During the previous year the debt to employees based on collective contract and other rights was accounted for, but not paid.

Intangible costs totalled HRK 23.2 million, which was 155.1% of the annual plan or decrease of HRK 19.2 million compared to the previous year. The most significant reduction was HRK 5.7 million due to the expenses of adjusted receivables, severances due to notices for business reasons amounting to HRK 4.3 million, reserves for unused vacations amounting to HRK 2.1 million. The difference from expenditure in the previous year was also influenced by extraordinary expenses in the amount of HRK 3.0 million caused by termination of the contract with the former business partner, and in the amount of HRK 4.5 million that were subsequently discovered and which regarded the unpaid debt to the employees on the grounds of the collective contract, the work contracts and other rights.

Realised financial expenses were HRK 16.9 million, which was 88.4% of the annual plan.

68,399

51,309

59,792

23,204

16,880

69,312

61,209

59,285

42,445

20,560

Material expenses

The cost of employees

Depreciation cost

Intangible costs

Financial expenses

in thousands of Kuna

2011

2012


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4. Assets and Investments

Balance Sheet

(in thousands of Kuna) end of 2012 end of 2011 Index end of 2010

Index

ASSETS

Fixed assets 384,363 413,734 92.9 449,209 92.1

Non-tangible assets 854 2,391 35.7 4,386 54.5

Tangible assets 381,644 407,079 93.8 442,896 91.9

Financial assets and receivables 1,578 1,471 107.3 1,928 76.3

Receivables 287 2,793 10.3

Current assets 120,311 89,123 135.0 154,194 57.8

Inventories 23,043 23,777 96.9 25,582 92.9

Receivables 88,043 48,105 183.0 92,182 52.2

Financial assets 5,721 8,746 65.4 32,506 26.9

Cash and cash equivalents 3,504 8,494 41.3 3,924 216.5

Prepayments and accrued income 6,716 8,267 81.2 8,932 92.6

TOTAL ASSETS 511,389 511,124 100.1 612,335 83.5

LIABILITIES

Capital and reserves 226,200 212,779 106.3 227,333 93.6

Long-term provisions 1,791 3,863 46.4 2,942 131.3

Non-current liabilities 210,821 209,420 100.7 222,104 94.3

Financial liabilities 93,163 107,641 86.6 118,798 90.6

Liabilities for securities 99,796 99,689 100.1 99,581 100.1

Other non-current liabilities 17,861 2,091 854.3 3,726 56.1

Current liabilities 69,804 77,802 89.7 159,888 48.7

Financial liabilities 31,755 38,395 82.7 41,275 93.0

Trade payables 17,731 24,674 71.9 60,064 41.1

Liabilities for digital TV co-financing 8,533 8,533 100.0 42,139 20.3

Other current liabilities 11,784 6,199 190.1 16,410 37.8 Accrued expenses and deferred income 2,773 7,261 38.2 68 10.709.9

TOTAL LIABILITIES 511,389 511,124 100.1 612,335 83.5


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Investments The investment projects in 2012 were realised according to the measures of business rationalisations, primarily taking care of business security. The total amount invested into the investment projects was HRK 36 million, the more significant investments being::

DVB-T equipment – HRK 20.7 million

Processing equipment - HRK 4.2 million

Microwave link system– HRK 3.7 million

Multimedia – HRK 3.4 million Majority of the investments was directed into MUX C and MUX E networks, which received the total amount of investments of HRK 27 million or 75% of the total invested in 2012. Other investment projects served to improve existing functions or to increase certain types of income.

Activities Grouped by Significant Projects

In accordance with the received network operator licences, OIV has invested approximately HRK 300,000 into optimisation of MUX A, MUX B, and MUX D networks, i.e. into increasing quality of transmission service. After the public tender procedure for MUX C and MUX D network operator and based on joint offer of the companies OIV, HPP, and HP, on October 26th 2011 HAKOM issued the appropriate Permit to the said companies. Pursuant to the agreements and contracts in force between the said companies, and pursuant to the Permit for MUX C and MUX E network operator, there were plans to invest approximately HRK 25.5 millions into transmitters for Phase 1 of MUX C and MUX E networks, HRK 20 million of which was invested in the first quarter for the MUX C and MUX E equipment, thus securing timely construction and start of operations of the said networks. Planned investments into processing equipment amounted to approximately HRK 6.1. million, most of which, approximately 5.5 million, was to be invested into purchasing new equipment for construction of MUX C and MUX E networks. This was realised in the first quarter, when HRK 4.1 million were spent, and there was no further significant spending. There were plans for a significant number of new microwave links and for expansion of the existing links to serve the needs of DVB-T project (MUX C and MUX E). The planned financial assets were approximately HRK 4.3 million, and the amount spent was approximately HRK 3.7 million, primarily for signal distribution for MUX C and MUX E networks. The plan contained minimum amounts for investments into multimedia services, and the investments would depend on business opportunities and customer needs. If new sales contracts were signed, OIV would accordingly invest into the projects mentioned. According to the investment plan, the planned investment was approximately HRK 4.4 million. In 2012 HRK 3.4 million were spent on expansion of the head end processing equipment and for IPTV and PlayOut system equipment buyout.


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5. Overview of Plan Realisation

The achieved operating results in 2012 were according to the business plan. The operating income was HRK 231 million, which was 3.5% over the plan. Operating expenses were HRK 202.7 million, which was 2.4% over the plan.

(in thousands of Kuna) 2012 Plan Index

TOTAL INCOME 236,985 229,883 103.1

Operating income 231,040 223,283 103.5

Broadcasting revenue 148,937 145,583 102.3

Satellite sublease revenue 7,071 3,800 186.1

Capacities lease revenue 36,157 35,000 103.3

Microwave communications revenue 19,621 20,000 98.1

Multimedia revenue 13,261 11,500 115.3

Other operating revenues 5,992 7,400 81.0

Financial income 5,946 6,600 90.1

TOTAL EXPENDITURES 219,583 217,020 101.2

Operating expenses 202,703 197,920 102.4

Material costs 68,399 66,960 102.1

Personnel costs 51,309 56,000 91.6

Depreciation 59,792 60,000 99.7

Intangible costs 23,204 14,960 155.1

Financial expenses 16,880 19,100 88.4

PROFIT 28,337 25,363 111.7

EARNINGS AFTER TAXATION 13,422 9,891 163.9


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223.3

197.2

25.4

9.9

231.0

202.7

28.3

13.4

Operating income

Operating expenses

Operating profit

Net profit

in milions of Kuna

2012

Plan

Income

The highest income was achieved from broadcasting and transmitting services of radio and television programmes, which is the core activity of the Company. This income brought HRK 148.9 million, and compared to the plan its realisation was 102.3%.

Capacities sublease revenue was HRK 36.2 million, and its realisation compared to the plan was 103.3%.

Microwave communications revenue was HRK 19.6 million, and its realisation compared to the plan was 98.1%.

Satellite sublease revenue was HRK 7.1 million, and its realisation compared to the plan was 186.1%.

Multimedia revenue was HRK 13.3 million, and its realisation compared to the plan was 115.3%.

Other operating revenues were HRK 6 million. Graphic overview: Revenue by type - realised and planned

Net profit realised in 2012 was HRK 13.4 million. Compared to the planned figure, it was 35.7% higher.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Broadcasting revenue Capacities lease revenue Microwavecommunications revenue

Multimedia revenue Satellite sublease revenue Other

148,937

36,157

19,621

13,261

7,071 5,992

145,583

35,000

20,000

11,500

3,800

7,400

Realised in January-December 2012 2012 Plan


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Material expenses68,398,565

31%

The cost of employees51,309,039

23%

Depreciation cost59,791,551

27%

Intangible costs23,203,881

11%

Financial expenses16,880,292

8%

Expenditure Total Expenditure Structure

Material expenses were HRK 68.4 million, which was 102.1% of the planned amount. Depreciation cost was HRK 59.8 million, which was 99.7% of the planned amount. Intangible costs were HRK 23.2 million. Compared to the annual plan, their realisation was 155.1%, represented by the increase of HRK 8.3 million. The plan did not foresee the pre-bankruptcy and bankruptcy procedures of important customers.

During 2012 there was an increased recourse to measures to collect due payments from customers (notices, repayment plans, debt payment through collaterals, seizures). Despite all the undertaken measures, there is a significant amount of debts due over 180 days, which are value adjusted following the prudence principle. The Company will continue undertaking all the debt collecting measures available, and it will represent the collected debts in the income of the period when the debt was collected (according to the accounting rules). The costs of employees were HRK 25.1 million, which was 91.6% of the annual plan. The plan called for 305 employees on December 31st 2012, and the actual number of employees on that date was 291. Financial expenses were HRK 16.9 million, which was 88.4% realisation of the annual plan. The significant variance from the plan was due to interest rates.


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6. Business Environment and Operational Risks

Operational Risks The chapter Company Risk Exposure elaborates the following areas: capital risk management, price risk, interest rate risk, credit risk and liquidity risk. The Company monitors financial risks related to its business operations and manages them using internal risk reports which report risk exposures based on their level and size.

Capital Risk

The Company manages its capital in order to ensure unlimited continuation of business operations, while simultaneously generating the greatest return to interested parties through optimizing the balance between debt and equity capital. The structure of the Company's capital consists of the capital that comprises subscribed capital, reserves and kept profit.

Price Risk

OIV operates mainly on the domestic market, and the Company's Management Board sets prices of its services based on real market prices.

Interest Rate Risk

The interest rate risk is the risk that the value of the financial instruments will change due to changes to the market interest rates applicable to the financial instruments. Interest rate movements by quarters in 2011 and 2012

Simply put, the interest rate risk is the risk that the interest rates on approved loans will change. The Company is exposed to the interest rate risk on the basis of the received loans which are linked to EURIBOR trends on the international market, as well as to TBMF trends of on the domestic market. The oscillations of the

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3M EURIBOR 3M TBMF 6M TBMF


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previously mentioned interest rates represent possible increase or decrease in interest costs to the Company. The majority of the Company's loans have been contracted with the variable interest rate.

Credit Risk

In the strictest sense, credit risk refers to the possibility that a party to a contract will not pay its contractual obligation. The credit risk refers to the risk of default of the contractual obligations by the other contractual party, whereby the Company would suffer financial losses. The Company follows procedures that guarantee sales to the customers who have a good credit score and who do not pass the acceptable limit of credit exposure. There is continuous monitoring of the Company exposure and of its partner's credit scores.

Liquidity Risk

The liquidity risk management means maintaining adequate amount of money by maintaining adequate reserves, using suitable bank credit products and loans from central reserves through continuous monitoring of the estimated and actual cash flows, and by adjusting the maturity of financial assets and financial liabilities. The ultimate responsibility for credit risk management is borne by the Management Board. The Board has set up a quality framework for the liquidity risk management, and identified requirements which refer to liquidity management. In order to efficiently manage the liquidity risk, OIV follows the liquidity management policy that comprises planning of expected known and potential outbound cash flows, and of sufficient inbound cash flows to cover the former. In that sense OIV continuously monitors liquidity and takes adequate measures to remove or prevent anything that might cause lack of liquidity.


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100

150

200

250

300

350

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450

2004 2005 2006 2007 2008 2009 2010 2011 2012

Total number of employees 407 406 394 364 333 337 316 299 291

Number of employees with amaster's degree or higher

100 121 126 132 125 134 131 133 127

Changes in higher education employee numbers

7. Human Resources The greatest value of the Company rests with the employees whose educational structure indicates that they are dominantly a highly educated human resource which is the strategic capital of this Company. One of the basic business objectives of the Company is to attract and to retain highly educated, high-quality personnel, combined with application of efficient models of motivation and with encouragement of personal ambitions of each individual employee. Basic principles:

equal opportunities and working conditions for all employees,

equality and protection of human rights,

ethics in business operations,

fairness as a general moral principle,

achieving the greatest good for the greatest number of people.

The educational structure of employees is particularly favourable, and in 2012 highly educated employees held 44% share in the total number of employees. Just as an example, in 2004 the share of highly educated employees in the total number of employees was 25%. Since 2004 the number of highly educated employees has annually grown by approximately 3.5%.

On December 12th 2012 the Company had 291 employees, 4 of which had temporary work contracts and 287 had work contracts. The average employee seniority was 18 years and the average age was 42.

1%

35%

25%

26%

13%

Age structure

under 25 years of age

25-35 years of age

36-45 years of age

46-55 years of age

over 55 years of age


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Looking at the employee age structure one can see that 35% of the employees are younger, between 26-35, 26% are in the 46-55 age bracket, and 25% are between 36-45.

Productivity Considering that the 2012 operating income increased compared to the previous year and that the employee number fell, the productivity measured with this indicator shows 5% increase.

DESCRIPTION 2009 2010 2011 2012

Income per employee 000 817.6 867.8 758.5 794.0

Growth rate % - 6% -13% 5%

46%

9%

45%

Employee structure by education

Master's or higher

Undergraduate

Secondary school leveleducation or lower


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Training and Education Education of employees is one of the key prerequisites for the continued development of the Company and its survival on the demanding technological market. Sophisticated technology requires continuous investment in knowledge and competencies of employees, and training and education both in the Republic of Croatia and abroad. Employees acquire specialised and general knowledge within the Company. Specialised knowledge is often acquired through training and education provided by the provider of the equipment used by the Company for its core activity, and at conferences and seminars in Croatia and abroad, as well as on in-house seminars. In 2012 the employees participated in the following training programmes:

General and business competencies. Training encompasses accounting/financial part, seminars in the area of procurement, seminars in the area of quality systems, and regular monitoring of overall legislation in the field in which the Company operates.

Professional competencies. Specialised training according to the current needs and taking professional exams with certification.

Foreign language courses. Given that the Company generates part of its income on foreign markets, and that it also purchases technology on the foreign market, investing into foreign language training is necessary for Company's operation, particularly given its intention to open more towards foreign countries.

Work Environment There is a permanent effort to improve the working environment with the goal of increasing the employee satisfaction and motivation through:

Possibility of a continuous process of learning and training

Elaborated incentive system based on performance results

Stimulating working environment, work place with modern equipment

Care for the employees' health through regular annual medical examinations

Responsibility towards Employees

In general, the Company employees get regular contracts of employment, and temporary work contracts are used only for temporary replacements, and they are just a small part of the workforce. Employees have the opportunity to continuously learn and train. There is an elaborated system of incentives based on work performance. Employees work in a stimulating working environment in work places with modern equipment. Care for the employees' health is reflected in the regular annual medical examinations.

Remuneration and Support In addition to their regular income, the Company provides its employees with various benefits. They are shown through work place accident insurance, meal allowance, jubilee awards for loyalty to the Company, holiday bonuses, special Christmas present for all the employees' children under 15, reimbursement of travel costs to work, severance pay when retiring, support in the event of the death of a close family member, and assistance in children's education for the OIV employees who are single parents.


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Occupational Safety OIV holds certificate for specification OHSAS 18001 - occupational health and safety management system. The specification was introduced for the purpose of more efficient risk management for health, work safety, and minimising work related injuries and occupational diseases. There is a systematic monitoring of legal and other regulations, and adaptation of measures and implementation activities so that they are in compliance, education and training in occupational safety, examination of work tools that are extra dangerous, periodic medical examinations of workers on positions that have special working conditions, periodic examination of personal protective equipment and work equipment, as well as a series of other measures. OHSAS 18001 specification in OIV has been integrated with ISO 9001 and ISO 14001 standards. Up to the present time there has been no registered case of occupational disease. In July 2012 there was an accident during work on an antenna pole, and one employee died.

Protection of Employees' Dignity For the purpose of protecting the employees' dignity, the Company has appointed an employee who, in addition to the Management Board, is authorised to receive and resolve complaints regarding the protection of employees' dignity. In order to provide a working environment that is free of any form of behaviour which could endanger the dignity of employees, the rules have been set defining the procedure to be followed if any form of harassment or inappropriate behaviour occurs. The actual procedures, as well as any details regarding the procedures, are inviolable and confidential, while the initiation of the procedure is defined by internal rules.

Employees - Management Board Relationship There is a Workers' Council in the Company, comprised of 5 members, established in 2005. Through the Workers' Council, in the manner and according to the terms and conditions stipulated in the Labour Act, the employees participate in the decision-making process in matters related to their economic and social rights and interests. There is also a trade union in the Company which acts for the welfare of the employees.

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2008 2009 2010 2011 2012

Work accidents by number and type

fatal accidents in the workplace

in the workplace

outside the workplace


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8. Social Responsibility Doing business with social responsibility is an adoption of good business practice and its application in management and making business decisions. The key areas of activity within the context of socially responsible business are market behaviour, attitude towards employees, attitude towards environment, and attitude towards local community. The Company received Indeks DOP - DOP's award for socially responsible business - in 2010. In 2012 The Company presented its candidacy for the same award for 2011.

Community Assistance Whenever possible, Transmitters and Communications Ltd. (OIV) tends to offer humanitarian assistance to children or people in need, to support the gifted students, to give donations to pre-school and school institutions and to donate to scientific and professional conferences. The recipients of the Company's donations in 2012 include MIPRO for the purpose of organising the International Convention on Information and Communication Technology, the Faculty of Electrical Engineering and Computing, Association of the Sick HW Veterans of Eastern Slavonia, etc.

Ethics in Business Operations The Code of Ethics and Business Conduct has been published on the Company intranet since 2009. The purpose of the Code is to promote ethical values in business conduct, in daily work and in interpersonal relations. The Code provides for the appointment of a commissioner in charge of receiving reports about non-abidance or breaches of adopted ethical principles. It is also the duty of the commissioner to advance ethical conduct and activities in the Company, and to promote changes and improvements by promoting ethical values in business operations. Furthermore, internal regulations determining the procedure in the event of a breach of the ethical rules of conduct are accessible to all the employees; they have been published on the Company website. The ethics commissioner is elected among the employees of the Company.

Corporate Management Code The basis for the proper orientation and management of the Company, taking into account risks and respecting legislation and rules, may be integrated as "Corporate management, risks and conformity". By adopting the Code, the Company has continued with best practices for corporate management, and through its business strategy, business policy and key internal documents, contributes to transparent and efficient business operations and quality connections with the business environment in which it operates. Pursuant to the above mentioned and with the goal of management support, OIV contracted company "Krako-revizija d.o.o", relying on its objective and advisory function in the capacity of internal revision, to establish even higher standards of the corporate management.

Anti-corruption Programme In the wider sense of the socially responsible business, the execution of the Anti-corruption Programme is given a great importance. The programme execution is based on strengthening of the legal framework, of all the forms of Anti-corruption prevention measures, including removal of all shortcomings that may benefit corruption.


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The goals of the Anti-corruption Programme are strengthening of integrity, responsibility, and transparency in work, creating prerequisites to prevent corruption on all the levels, affirming "zero tolerance" approach to corruption. As a Company which is 100% owned by the Republic of Croatia, in 2012 we were active participants in implementation of the Anti-corruption programme of the Government of the Republic of Croatia through the established Action Plan and Strategy that was in place for the 2010-2012 period under the Ministry of Justice, Independent Sector for the Suppression of Corruption. In the upcoming period OIV will dedicate particular attention to practicing socially responsible business, including anti-corruption measures with the goal of preventing and reducing potential corruptive behaviour of employees, both through education and through a system of controls.


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9. Quality Management System and Environmental Management Policy

Quality Management System In accordance with its business policy, OIV manages the quality of its services using the Quality Management System to define operating processes, to determine responsibilities and roles in the fulfilment of business objectives, to conduct supervision, and to produce reports. The Management System is regularly updated and adapted to the current business strategy. The Quality Management System is verified using internal assessments one to three times per year (depending on the area), and once a year through the evaluation of an independent assessor, which is a certification company. Business objectives are defined in the business plan and their realisation is monitored on a monthly and quarterly basis, and the Management Board is notified of the results. OIV possesses the following certificates:

Certificate ISO 9001- 2000 for the following operating areas:

o Signal Management, Monitoring and Processing Division o Engineering Division o Division of Infrastructure Operational Management o Strategy, Research and Development Division o Division of Human Resources, Legal and General Services o Finance and Controlling Division o Independent Department Sales o Independent Department Accounting o Independent Department Procurement

Certificate ISO 14001-2004 – Environmental Management System

Environmental Management Policy The concept of the Environmental Management System (EMS System) is based on the introduction of systematic and structured environmental management procedure to prevent and control an unfavourable environmental impact. The model of the Environmental Management System in OIV is based on the implementation of four basic system components (plan-action-control-repair):

Planning establishes the priority aspect of the environment (air, water, soil), determines the legal and other obligations and standards, sets objectives, determines programmes, and assigns the person in charge of implementation of the plan,

Action puts into motion everything planned adhering to the processes,

Controls include finding and determining irregularities in the functioning of the system,

Repairs and testing include activities related to eliminating malfunctions and non-compliance determined through the control.

Internal and external verification of the functioning of the Environmental Management System is systematically and regularly conducted to retain the acquired ISO 14001 certificate.


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10. Significant Events after the End of the Business Year These are the events that occurred after December 31st 2012, but before the annual financial statements and annual report were completed, and that are of such significance that they could influence economic decisions of customers. Subsequent favourable or unfavourable events that are not harmonised in the financial statements are published in notes and in the annual report. The Company did not have significant events after the end of the business year; however, we are bringing to particular attention the initiation of the pre-bankruptcy procedure of customer OT-Optima, from which the Company claims HRK 7 million. With 31st December 2012 HRT cancelled broadcasting shortwave frequencies, and it announced termination of broadcasting on medium wave with the end of 2013.

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