O2 Czech Republic : Annual report 2016 (17 February 2017)

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".

O2 IT Services s.r.o. hereinafter "O2 IT Services" or "O2 ITS".

Table of Contents Page

Independent auditor's report to the shareholders 4

1. Foreword by the Chairman of the Board of Directors 16

2. Financial and operating highlights 18

3. Calendar of key events 19

4. Board of Directors' Review of Business 22

5. Factors influencing the business and results in 2016 22

   Regulation 22

   The Czech telecommunication market 23

6. O2 Czech Republic Group 24

   Overview of the O2 Group and the main changes in 2016 24

   Slovakia 30

   O2 IT Services 32

   Risk management 33

7. Products and services 34

   Consumer segment 34

   Corporations and government 36

   Payment and financial services 37

8. Overview of consolidated financial and operating results 37

9. Corporate Social Responsibility (CSR) 43

10. Corporate governance 48

11. Financial part 70

    Chief financial officer's comments on the consolidated financial results for the year

    ended 31 December 2016 70

12. Consolidated financial statements for the year ended 31 December 2016 prepared in accordance with International Financial Reporting Standards as adopted

    by the European Union 72

13. Financial statements for the year ended 31 December 2016 prepared

    in accordance with International Financial Reporting Standards as adopted

    by the European Union 151

14. Declaration of persons responsible for the Annual Report 224

15. Appendix: Report on relations between the controlling person and the controlled person, and between the controlled person and persons controlled by the same controlling person for the accounting period of 2016 225

    KPMG Ceska republika Audit, s.r.o.

    Pobfezni 1a 186 00 Praha 8 Czech Republic

    +420 222 123 111

    www.kpmg.cz

    This document is an unsigned English translation of the Czech auditor's report.

    Only the Czech version of the report is legally binding.

    Independent Auditor's Report to the Shareholders of 02 Czech Republic a.s. Report on the Audit of the Consolidated Financial Statements

    Opinion

    We have audited the accompanying consolidated financial statements of 02 Czech Republic a.s. ("the Company"), prepared in accordance with International Financial Reporting Standards as adopted by the European Union, which comprise the consolidated balance sheet as at 31 December 2016, and the consolidated statement of total comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory notes. Information about the Company is set out in Note "General information" in the consolidated financial statements.

    In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Company as at 31 December 2016, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.

    Basis for Opinion

    We conducted our audit in accordance with the Act on Auditors, and Auditing Standards of the Chamber of Auditors of the Czech Republic, consisting of International Standards on Auditing (ISAs) as amended by relevant application guidelines. Our responsibilities under those regulations are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the Act on Auditors and the Code of Ethics adopted by the Chamber of Auditors of the Czech Republic, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.