ANNUAL REPORT WorldReginfo - 9d6c7a32-f97a-4a47-a2a1-628a4261f871 This version of the Annual Report is a translation from the original which was prepared in the Czech language. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the Czech version of the Annual Report takes precedence over this translation. Note: O2 Czech Republic a.s., further below also as “O2 CZ” or “Company”. O2 Slovakia, s.r.o., further below also as “O2 Slovakia”. The O2 Czech Republic Group includes O2 Czech Republic a.s. and its subsidiaries, also as “the Group” or “O2 Group”. 2 O2 Czech Republic a.s. | 2015 Annual Report WorldReginfo - 9d6c7a32-f97a-4a47-a2a1-628a4261f871 TABLE OF CONTENTS 01 | LETTER BY THE CHAIRMAN OF THE BOARD OF DIRECTORS . 6 02 | FINANCIAL AND OPERATING HIGHLIGHTS . 9 03 | CALENDAR OF KEY EVENTS . 12 04 | BOARD OF DIRECTORS’ REVIEW OF BUSINESS . 16 Separation of the Company . 16 Factors infl uencing the business and results in 2015 . 19 Regulation . 19 The Czech telecommunication market. 21 O2 Czech Republic Group. 21 Overview of the O2 Group and the main changes in 2015 . 21 Slovakia . 23 Risk management . 24 Products and services . 25 Consumer segment . 25 Mobile access segment . 25 Fixed access segment . 26 Corporations and government . 27 ICT . 27 Payment and fi nancial services. 28 Comments on the fi nancial results . 28 05 | CORPORATE SOCIAL RESPONSIBILITY (CSR) . 33 O2 Group Business Principles . 33 Market conduct and consumer care. 33 Caring for employees and the workplace environment . 34 Caring for the environment . 35 Caring for the communities . 35 06 | CORPORATE GOVERNANCE . 38 Corporate governance of the O2 Group . 38 Subsidiaries and ownership interests in other companies . 38 Organisation structure of O2 Czech Republic a.s. 40 Governing bodies and executive management of the Company . 42 General Meeting . 42 Board of Directors . 44 Supervisory Board . 46 Audit Committee. 48 Executive management . 49 3 O2 Czech Republic a.s. | 2015 Annual Report / Translation from the Czech original WorldReginfo - 9d6c7a32-f97a-4a47-a2a1-628a4261f871 Rules of remuneration of persons with executive powers . 50 Other information related to persons with executive powers . 52 Information on corporate governance codes of the Company . 53 Information on internal control principles and procedures . 53 Information required by the Capital Markets Undertaking Act . 54 07 | FINANCIAL PART . 59 Consolidated fi nancial statements for the year ended 31 December 2015 prepared in accordance with International Financial Reporting Standards . 59 Financial statements for the year ended 31 December 2015 prepared in accordance with International Financial Reporting Standards . 140 08 | OTHER INFORMATION FOR SHAREHOLDERS AND INVESTORS . 214 09 | DECLARATION OF PERSONS RESPONSIBLE FOR THE ANNUAL REPORT . 221 REPORT ON RELATIONS. 223 Appendix: Report by the Board of Directors of O2 Czech Republic a.s. on relations between the controlling person and controlled person and between the controlled person and persons controlled by the same controlling person for the accounting period of 2015 pursuant to Sec 82 et seq. of the Act No. 90/2012 Coll., on Commercial Companies and Cooperatives, as amended (the “Report on Relations”). 4 O2 Czech Republic a.s. | 2015 Annual Report / Translation from the Czech original WorldReginfo - 9d6c7a32-f97a-4a47-a2a1-628a4261f871 LETTER BY THE CHAIRMAN OF THE BOARD OF DIRECTORS WorldReginfo - 9d6c7a32-f97a-4a47-a2a1-628a4261f871 LETTER BY THE CHAIRMAN OF THE BOARD OF DIRECTORS To Our Shareholders, Let me briefl y review the business of O2 Czech Republic in the past year. In the previous Annual Report, I wrote that the year 2014 was a turning point for our Company. In the light of the developments in 2015, I dare say that the past year was revolutionary. Quite clearly the most important event was the separation of the Company; we were the fi rst globally to spin off fi xed and mobile infrastructure into a new company – Česká telekomunikační infastruktura a.s. (CETIN). This step already refl ected on our business and results for the second half of 2015, and its full benefi t will manifest in the future. The seven months that have elapsed since the separation confi rmed the correctness of our assumptions and benefi ts we identifi ed in our analyses. Let me mention just a few of them here. The majority of obligations stemming from regulation passed to CETIN; this untied our hands when it comes to services which we could not off er to our customers prior to the separation. We introduced greater effi ciency and eff ectiveness into the management and decision-making process, as we now focus exclusively on our service proposition and retail customer care. Planning, construction and operation of infrastructure are now the domain of CETIN, with which we have entered into several key contracts that govern our relationship. At the same time, the separation indeed delivered a tangible improvement of our fi nancial results. We stabilised our revenues in the shrinking market. We streamlined a signifi cant part of our operating and commercial activities, which improved our operating profi t and net profi t. Simplifi cation was one of the key priorities which we focused on in 2015. We embarked on a comprehensive transformation programme, Simple Online Company, which seeks to streamline systems, processes, products and product communication internally and also externally, to the market, consistently in all online channels. This will help us build a simple operating model that will make it possible to respond fl exibly to changes in the market, quickly meet the demand from customers and launch new services and products across all distribution and service channels. We signifi cantly reduced the investment requirement as infrastructure investment is now carried out by CETIN. We took advantage of the favourable climate in the credit market, and, at the end of the year, we refi nanced our existing debt and took out a new loan. We unveiled our new long-term dividend policy and target debt level. We also revisited the idea of a share buy-back. As managers of the Company, we cannot infl uence the share price directly, through our actions; we are, nonetheless responsible for the fundamental value of the Company. The fi nancial results presented in this Annual Report, together with the implementation of key projects, drove the fundamental value of the Company upward. Till the end of the year, the share price went up about fi ve times since June, when the Company’s shares began to be publicly traded after the separation. Even after the separation we remained a major player and a leader in the Czech telecommunication marketplace. We have millions of individual, business, corporate and government customers, and their loyalty is steadily increasing. Our quality and, in many cases, unique proposition refl ects in the growing number of services subscribed by customers. The fact that the average customer spend has stabilised, and, in some cases increased, is a testament to the trust our customers place in our services and products, to the fact that they see value in them and are willing to pay for them. In the fi ercely competitive marketplace we focus on acquiring customers who will stay with us in the long run. A long-term relationship with our customers is key for us. One of the revolutionary new steps was to launch our own O2 Sport television channel which is bundled with all O2 TV packages. We acquired exclusive broadcasting rights to a number of sporting events; we launched new multidimensional functionality, such as a choice of several broadcast and camera angles. A new set-top box launched in December now enables all customers enjoy O2 TV regardless of their internet access provider. Through CETIN, we continue to increase xDSL connection speeds; the faster connection can now be enjoyed by an ever-growing number of customers. We also partnered with alternative providers who will supply a part of our internet connectivity. This has helped us bring our data and ICT services to new customers. 6 O2 Czech Republic a.s. | 2015 Annual Report / Translation from the Czech original WorldReginfo - 9d6c7a32-f97a-4a47-a2a1-628a4261f871 In the mobile area, data services are among the dynamically growing segments. In 2015 we forged ahead with expanding our broadband internet coverage to meet the growing market demand for data services and to accommodate the increasing volume of data traffi c. By the end of the year, we covered approximately 80% of the Czech population with LTE. We concentrate on marketing LTE-compatible devices. We debuted a new communication strategy for our medium business and corporate customers. We want to off er quality, reliable and aff ordable tailor-made telecommunication and ICT solutions to our customers – to help them fl exibly react to their immediate needs, better adapt to the ever-changing conditions and to assist them with achieving a greater growth dynamic. In line with our strategy, we ventured into a new market, outside the telecommunications industry. Starting from October, we now off er insurance for your mobile phone or tablet against damage or theft. The service is proving to be very popular with customers. As a major Czech corporation, we strive to foster innovative ideas and solutions. We launched SmartUp, a programme that helps young people develop their skills through funding as well as through training. Moreover, we decided to grant support to unique technology projects; we inaugurated BOLT, a new start-up accelerator. In addition to funding and prospects of a long-term partnership, we will also off er comfortable facilities and end-to-end infrastructure of our Company, the possibility to integrate the solution into our established ecosystem of products, and – of course – the use of our sales channels.