ANNUAL REPORT For the fiscal year ended December 31, 2015

Magyar Telecom B.V. The Netherlands (Jurisdiction of Incorporation or Organization) 6 St Andrew Street, London EC4A 3AE, United Kingdom (Address of Principal Executive Offices)

Parent company of

THE DATE OF THIS ANNUAL REPORT IS MARCH 8, 2016.

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TABLE OF CONTENTS

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

INTRODUCTION ............................................................................................................................... 3 CERTAIN DEFINITIONS AND PRESENTATION OF GENERAL INFORMATION ................... 4 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS ..................................... 6 PRESENTATION OF FINANCIAL INFORMATION ...................................................................... 8 RISK FACTORS ............................................................................................................................... 10 SELECTED HISTORICAL FINANCIAL INFORMATION ........................................................... 22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................................................................ 25 HUNGARIAN TELECOMMUNICATIONS INDUSTRY AND REGULATION .......................... 41 COMPANY HISTORY ..................................................................................................................... 45 OUR BUSINESS ............................................................................................................................... 49 ORGANIZATIONAL STRUCTURE ............................................................................................... 68 OUR DIRECTORS AND SENIOR MANAGEMENT ..................................................................... 69 OUR PRINCIPAL SHAREHOLDERS ............................................................................................. 71 RELATED PARTY TRANSACTIONS............................................................................................ 72 PRINCIPAL ACCOUNTANT FEES AND SERVICES .................................................................. 73 GLOSSARY OF TERMS .................................................................................................................. 74 FINANCIAL STATEMENTS ........................................................................................................... 77

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1.

INTRODUCTION

Magyar Telecom B.V. (“Matel”) is a limited liability company (besloten vennootschap met beperkete aansprakelijhied) organized under the laws of The Netherlands on December 17, 1996 and registered on September 5, 2013 as an overseas company at Companies House in the United Kingdom, having its head office at 6 St Andrew Street, London EC4A 3AE, United Kingdom. Matel has: (a)

issued EUR 150,051 thousand 7.00%/9.00% Senior Secured PIK Toggle Notes due 2018 with additional 2% compulsory PIK interest (the “2013 Notes”) at a 100% issue price. The 2013 Notes were issued in exchange for formerly issued 2009 Notes as described more in these financial statements.

Matel Holdings Limited, a 49% direct owner of Matel, incorporated under the laws of Cayman Islands on October 2, 2013 and registered for taxation purposes in the United Kingdom has: (b)

issued 150,051,000 shares with a nominal value of €0.0001 per each ordinary share, representing 100% of its existing issued share capital (the “Shares”).

Each issued as 150,051,000 units each consisting of 1 Share and EUR 1 aggregate principal of 2013 Notes co-issued by Matel and Matel Holdings Limited on December 13, 2013. The 2013 Notes are stapled to the Shares for the stapling period, meaning that the 2013 Notes and the Shares are issued in the form of a Unit. The effect of this is that the 2013 Notes and the Shares cannot be traded separately and a transfer of the Units will result in a transfer of the 2013 Notes and the Shares. In October 2015 the Company announced the extension of the stapling period of the Company’s Senior Secured Notes due 2018 (“Notes”) and EquityCo shares (“Shares”) by one year to December 12, 2016. Matel is a holding company and conducts its operations entirely through its subsidiaries and depends on payments from its subsidiaries to make payments on the 2013 Notes. The main operational subsidiary through which Matel provides its services is Invitel Távközlési Zrt (“Invitel”). Invitel is a leading fixed line telecommunications, cable TV and broadband internet services provider in Hungary. The 2013 Notes have been issued pursuant to an indenture (the “2013 Notes Indenture”). The 2013 Notes are intended to be fully and unconditionally guaranteed on a senior basis by subsidiaries of Matel, Invitel, Invitel Technocom Kft. and Invitel International Holdings B.V. (together, the “Guarantors”). The 2013 Notes will be secured by first-priority security interests over certain assets of Matel and the Guarantors. The 2013 Notes are listed on the Official List of the Luxembourg Stock Exchange.

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2.

CERTAIN DEFINITIONS INFORMATION

AND

PRESENTATION

OF

GENERAL

In this Annual Report, unless indicated otherwise or the context requires otherwise: “Dataneum” means Dataneum Adatközpont Zrt., a company incorporated under the laws of Hungary; “E.U.” refers to the European Union; “Euro”, “EUR” or “€” refers to the lawful currency of the participating member states of the E.U.; “Fibernet” refers to FiberNet Kft and its subsidiaries; “forint” or “HUF” refers to the lawful currency of Hungary; “Group” refers to Magyar Telecom B.V. and its subsidiaries; “HTCC Holdco I B.V.” refers to HTCC Holdco I B.V., former holding company of Matel and its subsidiaries, a company incorporated under the laws of The Netherlands; “HTCC USA” refers to Hungarian Telephone and Cable Corp. with or without its subsidiaries, as the context requires, the predecessor entity to Invitel Holdings A/S; “Intercreditor Deed” refers to the Intercreditor Deed, dated December 12, 2013, as amended or supplemented from time to time, and entered into between Matel, the Subsidiary Guarantors, BNP Paribas Trust Corporation UK Limited, as security trustee for the 2013 Notes and the other parties thereto, establishing the rights of creditors under our finance arrangements; “International Holdings” means Invitel International Holdings B.V., a company incorporated under the laws of The Netherlands; “Invitel” refers to Invitel Távközlési Zrt., also known as Invitel Zrt, the main operating company and a 99.991487% owned subsidiary of Matel; “Invitel Holdings A/S” refers to Invitel Holdings A/S, former holding company of Matel and its subsidiaries, a company incorporated under Danish law; “Invitel Technocom” means Invitel Technocom Kft., a limited liability company incorporated under the laws of Hungary; “Magyar Telekom” refers to Magyar Telekom Nyrt., the largest provider of fixed line telecommunications services in Hungary, which is listed on the Budapest Stock Exchange and whose parent company is Deutsche Telekom AG; “Matel Holdings Limited” refers to Matel Holdings Limited, which is 100% owned by the Noteholders; “Mid Europa” refers to Mid Europa Partners Limited and any investment fund or vehicle advised, sponsored or managed directly or indirectly by Mid Europa Partners Limited, including Hungarian Telecom and Hungarian Telecom Finance International Limited; “NMHH” refers to the National Media and Infocommunications Authority;

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“Restructuring” or “2013 Restructuring” refers to the financial restructuring of Matel completed on December 12, 2013 as part of which its former senior secured notes were refinanced by issuing the 2013 Notes and the shares; “Subsidiary Guarantors” refers to Invitel, Invitel Technocom, Dataneum and International Holdings; and “we”, “us” and “our” refer to Matel and its consolidated subsidiaries, unless the context otherwise requires. In addition, we have included a glossary of certain technical terms used in this Annual Report under the heading “Glossary.” The market and macroeconomic information contained in this Annual Report was derived from various public sources, including the Hungarian Central Statistical Office and the Ministry of National Development. We believe that the market share information contained in this Annual Report provides fair and adequate estimates of the size of our market and fairly reflects our competitive position within that market. However, our internal surveys and management estimates have not been verified by any independent expert, and we can provide no assurance that a third party using different methods to assemble, analyze or calculate market data would obtain or generate the same results.

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3.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report includes forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believe,” “estimate,” “anticipate,” “expect,” “forecast,” “foresee,” “intend,” “may,” “plan,” “project,” “seek,” “should” or “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Annual Report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that the actual results of our operations, financial condition and liquidity, and the development of the Hungarian telecommunications industry in Central and Eastern Europe, and particularly in Hungary, may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the telecommunications industry in Central and Eastern Europe are consistent with the forward-looking statements contained in this Annual Report, those results or developments may not be indicative of results or developments in subsequent periods. Risk factors that could affect the Group’s operations include, but are not limited to: •

The Group is affected by the wider economy and in particular, the macroeconomic condition of Hungary.

•

The Group has in the recent past been unable to fund its operations through operating cash flow, and the Group may not be able to fund its operations through operating cash flow in the future without the availability of adequate working capital facilities.

•

The Group’s revenue and cash flow will be adversely affected if the Hungarian fixed line market further declines and its residential voice business declines at a higher rate than expected.

•

The Group’s failure to increase revenue in the Residential TV and Corporate ICT segments may adversely affect its results of operations and reduce its market share.

•

The Group’s revenue from the Corporate segment may be adversely affected due to competition and the economic environment.

•

The provision of cable services is highly competitive, and may become more competitive in the future, which could result in a loss of cable subscribers and revenue.

•

If the Group is not able to manage costs while effectively responding to competition and changing market conditions, its cash flow may be reduced and its ability to service its debt or implement its business strategies may be adversely affected.

•

The Group will be subject to increased competition due to the business strategies of its competitors, prevailing market conditions and the effect of local and E.U. regulation on the Hungarian telecommunications market, which may result in the loss of customers and market share for the Group.

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•

Slower growth of economy in the Group’s operating areas may impact demand for its services and affect its ability to obtain additional financing.

•

The telecom tax and utility tax introduced by the Hungarian Parliament have a significant impact on the Group’s results. Further changes to the regulatory and tax environment may increase the Group’s costs or otherwise constrain the Group’s operations.

•

The loss of key senior management could negatively affect the Group’s ability to implement its business strategy and generate revenue.

•

Technological changes and the shortening life cycles of the Group’s services and infrastructure may affect its operating results and financial condition and may require it to make unanticipated capital expenditures.

•

Network or system failures could result in reduced revenue, or require unanticipated capital or operating expenditures, and could harm the Group’s reputation.

•

Success of the telecommunication business operations requires and depends on continuous upgrading of the existing network infrastructure. Any unanticipated investments required due to external or internal factors would require additional capital expenditure by the Group.

•

The Group will be dependent on third party vendors for its information, billing and network systems. Any significant disruption in the Group’s relationship with these vendors could increase its costs and affect its operating efficiencies.

•

The Group will depend on third party telecommunications providers over which it has no direct control for the provision of certain of its services.

•

The Group may not be able to fund its operations which require substantial capital expenditures from cash generated from its operations or financing facilities.

•

The Group contains entities organized under the laws of a number of jurisdictions, and local insolvency laws may vary between jurisdictions. Variations in local insolvency laws may affect the rights of creditors upon insolvency.

We urge you to read “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Hungarian Telecommunications Industry and Regulation,” “Company History,” and “Our Business” for a more complete discussion of the factors that could affect our future performance, the Hungarian telecommunications industry as well as the telecommunications industry throughout Central and Eastern Europe. In light of these risks, uncertainties and assumptions, the events described or suggested by the forward-looking statements in this Annual Report may not occur. Except as required by law or applicable stock exchange rules or regulations, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Annual Report.

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4.

PRESENTATION OF FINANCIAL INFORMATION

Presentation of Financial Information The audited consolidated financial statements of Matel as of and for the year ended December 31, 2015 included in this Annual Report have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board and as adopted by the E.U. The audited consolidated financial statements included in this Annual Report are presented in Euro. See “Financial Statements” for further discussion. Certain amounts which appear in this Annual Report have been subject to rounding adjustments, and, accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them. Non-IFRS Financial Measures EBITDA, adjusted EBITDA, gross margin and segment gross margin and the related ratios presented in this Annual Report are supplemental measures of performance and liquidity that are not required by, or presented in accordance with, IFRS. We present non-IFRS measures because we believe that they and similar measures are widely used by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity. The nonIFRS measures may not be comparable to other similarly titled measures of other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our operating results as reported under IFRS. Furthermore, EBITDA, adjusted EBITDA, gross margin and segment gross margin and leverage and coverage ratios are not measurements of our financial performance or liquidity under IFRS and should not be considered as an alternative to net profit or any other performance measures derived in accordance with IFRS or as an alternative to cash flow from operating, investing or financing activities as a measure of our liquidity as derived in accordance with IFRS.

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Exchange Rate Information Hungarian Forint per Euro The following table sets out, for the periods and dates indicated, the period-end, average, high and low official rates set by the National Bank of Hungary for Hungarian forints per €1.00. We make no representation that the Hungarian forint amounts referred to in this Annual Report could have been or could be converted into any currency at any particular rate or at all. As of March 8, 2016 the rate was 310.98. EUR/HUF Exchange Rates Period End

Average

High

Low

(amounts in HUF/€1.00)

Year 2010 .............................................................................................................. 278.75 2011 .............................................................................................................. 311.13 2012 .............................................................................................................. 291.29 2013 .............................................................................................................. 296.91 2014 .............................................................................................................. 314.89 2015 .............................................................................................................. 313.12

Month January 2016 ................................................................................................ 312.42 February 2016 .............................................................................................. 310.75 March 2016 (through March 8, 2016) .......................................................... 310.98

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275.41 279.21 289.42 296.92 308.66 309.90

290.03 316.24 321.93 307.85 316.61 321.34

261.60 262.70 276.07 288.15 297.79 296.10

314.80

317.97

312.40

310.13 309.58

311.83 310.98

307.31 308.80

5.

RISK FACTORS

In addition to the other information contained in this Annual Report, you should carefully consider the following risk factors. The risks and uncertainties that are described below are not the only ones that we face. Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may also adversely affect our business, financial condition or results of operations. If any of the possible events described below occur, our business, financial condition or results of operations could be materially and adversely affected. In this section, we capitalize references to Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described below and elsewhere in this Annual Report. RISKS RELATED TO THE DEBT OF THE GROUP The Group’s substantial debt could adversely affect the Group’s financial position and may limit its ability to take certain actions. The Group’s debt will also require it to dedicate a large portion of its cash flow from operations to fund debt payments, reducing its ability to use such cash flows to fund working capital or capital expenditures. Total third-party debt of Matel and its subsidiaries is solely attributable to the 2013 Notes, other than certain de minimis amounts. Additionally, the Group has the ability to raise certain other facilities and other types of indebtedness in compliance with the terms of the 2013 Notes Indenture. The Group’s substantial debt could have important adverse consequences for the Group. For example, the Group’s substantial debt: a)

will require the Group to dedicate a large portion of its cash flows from operations to fund payments on its debt, thereby reducing the availability of its cash flows to fund working capital, capital expenditures and other general corporate needs;

b)

will increase its vulnerability to adverse general economic or industry conditions;

c)

could limit its flexibility in planning for, or reacting to, changes in its business or the industry in which the Group operates;

d)

could limit its ability to raise additional debt or equity capital in the future;

e)

could restrict the Group from making strategic acquisitions or exploiting business opportunities; and

f)

could place the Group at a competitive disadvantage compared to competitors that have less debt.

The Group’s ability to generate cash depends on many factors beyond its control, and it may not be able to generate sufficient cash to service its debt. The Group’s ability to make principal or interest payments when due or refinance its debt will depend upon its future operating performance and its ability to generate cash, which will be affected by general economic, financial, competitive, regulatory and business factors, as well as other factors described in the following risk factors, some of which may be beyond its control.

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It cannot be assured that the Group’s business will generate sufficient cash flows from operations that currently anticipated revenue trends and operating improvements will be realized, or that future borrowings will be available to the Group in amounts sufficient to enable it to pay its debt or to fund its other liquidity needs. If it is unable to meet its debt service obligations or fund its other liquidity needs, it may be required to: a)

reduce or delay capital expenditures;

b)

limit its growth;

c)

seek additional debt financing or equity capital;

d)

sell assets; or

e)

restructure or refinance its debt.

In addition, certain sales of assets will require the Group to apply the net cash proceeds of such sales to redeem the 2013 Notes. This means that the sale or disposition of certain assets cannot be used in the Group’s operations. If the Group is required to reduce or delay capital expenditures, limit its growth, seek additional debt or equity capital, forego opportunities, sell assets or restructure or refinance its debt in order to meet its debt service obligations or fund its other liquidity needs, the Group may not be able to effect any of these actions on favorable terms, or at all. The 2013 Notes Indenture and other related documents relating to the 2013 Notes impose restrictions on the Group’s ability to take certain actions. There can be no assurance that the operating and financial restrictions and covenants in the 2013 Notes Indenture, will not adversely affect the Group’s ability to finance its future operations or capital needs, or engage in other business activities that may be in its best interest. The 2013 Notes Indenture contains restrictions that substantially limit the financial and operational flexibility of the Group’s subsidiaries. In particular, these agreements place limits on the Group’s ability to incur additional debt, grant security interests to third persons, dispose of material assets, undertake organizational measures such as mergers, changes of corporate form, joint ventures or similar transactions and enter into transactions with related parties. Other limitations in the 2013 Notes Indenture restrict the Group’s ability to pay dividends. The Group’s ability to comply with these provisions may be affected by changes in economic or business conditions or other events beyond its control. If the Group does not comply with the covenants and restrictions in the 2013 Notes Indenture, it could be in default. Any default under the 2013 Notes Indenture could lead to an acceleration of debt under other debt instruments it is permitted to incur that contain cross acceleration or cross default provisions. If the Group’s obligations under the 2013 Notes were to be accelerated, it is possible that the collateral would not be sufficient to repay such debt in full. Matel is a holding company and conducts no business operations of its own and depends on payments from its subsidiaries to make payments on the 2013 Notes; Matel’s subsidiaries are subject to restrictions on making any such payments. Matel is a holding company that conducts no business operations of its own. Matel has no significant assets other than the shares it holds in its direct subsidiaries. The holders of the 2013 Notes will not have any direct claim on the cash flows or assets of any of Matel’s direct or indirect subsidiaries that are not Subsidiary Guarantors.

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Such subsidiaries have no obligation, contingent or otherwise, to pay amounts due under the 2013 Notes or to make funds available to the Group for these payments. The 2013 Notes Indenture contains, and future borrowings by Matel and its subsidiaries may contain, restrictions or prohibitions on the payment of dividends by its subsidiaries to Matel. In addition, provisions of applicable law, such as those requiring dividends be paid only from distributable reserves, could limit the amounts Matel’s subsidiaries are permitted to pay as dividends on their capital stock. The value of the collateral securing the 2013 Notes may not be sufficient to satisfy the Group’s obligations under the 2013 Notes, and the collateral securing the 2013 Notes may be reduced or diluted in certain circumstances. The 2013 Notes and the guarantees are secured by first priority liens on the collateral which consists of the following: f)

a first priority pledge over or security deposit of the shares of Matel and the shares (or quotas) of each Guarantor held by Matel or a Guarantor;

g)

a first priority pledge of certain intra-group loans made by Matel and certain of the Guarantors;

h)

a first priority pledge of certain bank accounts of Matel and certain of the Guarantors; and

i)

a first priority floating charge over certain assets of certain of the Guarantors.

The value of the collateral securing the 2013 Notes may not be sufficient to satisfy the Group’s obligations under the 2013 Notes. Realization of security interests governed by Hungarian law will be subject to the terms of the relevant Security Documents and to applicable provisions of Hungarian law which may be subject to a minimum price. There can be no guarantee that such minimum price would be achieved upon enforcement of the security or that such minimum price would generate sufficient funds to satisfy the Group’s obligations under the 2013 Notes. This collateral will be permitted under the terms of the 2013 Notes Indenture to secure, on a “super-senior” priority basis, the Group’s obligations under certain future borrowings pursuant to credit facilities (and related hedging obligations) and on a pari passu basis under certain hedging arrangements, in each case, permitted to be incurred under the 2013 Notes Indenture. Rights to the collateral would be diluted by any increase in the debt secured by the collateral. In the event of foreclosure on the collateral, the proceeds from the sale of the collateral securing debt under the 2013 Notes may not be sufficient to satisfy the 2013 Notes because proceeds from a sale of collateral would be distributed to satisfy debt and all other obligations under any debt secured by a “super-senior” priority lien on the collateral before any such proceeds are distributed in respect of the 2013 Notes. To the extent that holders of other secured debt or third parties enjoy liens (including statutory liens), whether or not permitted by the 2013 Notes Indenture, such holders or third parties may have rights and remedies with respect to the collateral securing the 2013 Notes that, if exercised, could further reduce the proceeds available to satisfy the obligations under the 2013 Notes.

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Matel may not be able to finance the change of control offer required by the 2013 Notes Indenture. Upon a Change of Control (as defined under the 2013 Notes Indenture), Matel will be required to offer to repurchase all outstanding 2013 Notes at a purchase price equal to 100% of their principal amount plus accrued and unpaid interest and additional amounts, if any, to the date of repurchase. If a Change of Control were to occur, it cannot be assured that Matel would have sufficient funds available at the time to pay the purchase price of the outstanding 2013 Notes or that the restrictions in the agreements governing its other borrowing arrangements would allow it to make such required repurchases. A Change of Control may result in an event of default under the Group’s other borrowing arrangements, if any, may require it to offer to repurchase the 2013 Notes and may cause the acceleration of other indebtedness. In any case, the Group expects that it would require third-party financing to make a Change of Control offer. The Group cannot assure that other third parties would be willing or able to provide this financing. The 2013 Notes are subject to restrictions on transfer. The 2013 Notes have not been and will not be registered under the U.S. Securities Act or any state securities laws and, unless so registered, may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act and applicable state securities laws. RISKS RELATING TO BUSINESS Risks relating to the Group’s market and its business The Group is affected by the wider economy and in particular, the macroeconomic condition of Hungary. The Group is at risk in relation to economic conditions in Hungary where it operates. In addition, as the global financial system has experienced unprecedented credit and liquidity conditions and disruptions, leading to a reduction in liquidity, greater volatility, general widening of credit spreads and, in some cases, lack of transparency in money and capital markets, many lenders reduced or ceased to provide funding to borrowers. If these conditions continue or worsen, it could negatively affect the Group’s ability to raise funding in the debt capital markets and/or access secured lending markets on financial terms acceptable to the Group, either to refinance the 2013 Notes or to introduce new liquidity into the Group. The continued impact of the global economic and market conditions, including, among others, the events described above could have a material adverse effect on the Group’s business, financial condition, results of operations or liquidity. The Group may not be able to fund its operations through operating cash flow in the future without the availability of adequate working capital facilities. In recent years competitive intensity has increased for the Group as new market entrants pushed providers to invest significant resources to upgrade their networks, whilst pricing has fallen. Invitel’s incumbent fixed internet and voice offerings have been particularly affected as newly upgraded networks allowed competitors to offer faster internet services, as well as voice services as an ancillary product for little or no cost. This has had a considerable impact on consumer willingness to spend on telecommunications services. It has also resulted in lost revenue in the corporate segment of the Group’s business.

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The introduction of adverse fiscal policy measures in Hungary, most notably the crisis tax introduced by the Act XCIV of 2010 on Special Tax on Certain Sectors, the per minute telecoms tax introduced by Act LVI of 2012 on Telecommunication Tax and, from January 2013, the utility tax introduced by Act CLXVIII of 2012 on Public Utility Tax, have severely reduced the Group’s cash flow generation. If the Group’s operating cash flow is not sufficient to meet its operating expenses, capital expenditures and debt payment obligations, it may be forced to raise cash or reduce expenses by doing one or more of the following: a)

obtaining alternative sources of funding for working capital;

b)

delaying or reducing capital expenditures necessary to maintain its business operations and to respond to technological developments and increased competition;

c)

selling or disposing of some of its assets, possibly on unfavorable terms;

d)

reducing other business costs;

e)

revising or delaying the implementation of its strategic plans; and/or

f)

foregoing business opportunities, including acquisitions and joint ventures.

It cannot be certain that any of the above actions would be sufficient to fund the Group’s operations. In addition, certain sales of assets will require the Group to apply the net cash proceeds of such sales to redeem the 2013 Notes. This means that the sale or disposition of certain assets cannot be used in the Group’s operations. In the event that Invitel and/or Invitel Technocom is placed into liquidation or is declared bankrupt at any future time, Invitel’s and Invitel Technocom’s operating licenses will be revoked. Further, as both Invitel’s and Invitel Technocom’s assets may be considered strategic assets of national importance, in the event of a liquidation and/or bankruptcy process, the Hungarian State may be able to declare Invitel and/or Invitel Technocom companies of national strategic importance and appoint a State receiver or liquidator, effectively taking the assets of either or both companies and continuing operations as a state owned operator, annulling investor value. The Group has experienced substantial net losses and may need additional liquidity in the future. For the year ended December 31, 2015 the Group incurred net loss of €12.4 million and for the year ended December 31, 2014 the Group incurred net loss of €17.0 million. During the years ended December 31, 2015 and 2014, the Group used €32.7 million and €26.4 million of cash for capital investments, respectively. The Group also may require additional financing in the future to fund its obligations and operations. The Group’s cash balance as at December 31, 2015 was €21.7 million and €20.8 million as at December 31, 2014. The Group’s main financial burden is the indebtedness under the 2013 Notes. There can be no assurance that the Group will be able to improve its results of operations.

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In order to meet the Group’s liquidity requirements, it may need to raise a new senior credit facility or other indebtedness, and it may not be able to do so on reasonably acceptable terms or at all. The Group has external debt mainly comprising of the 2013 Notes. If the Group cannot fund its operational or working capital requirements through its revenues, it may have to arrange for borrowings under a new senior credit facility or other financial indebtedness. The Group’s ability to arrange this facility or other financial indebtedness could be affected by a number of factors, including volatility in the financial markets, contractions in the availability of credit, including in interbank lending, and changes in investment markets, including changes in interest rates, exchange rates and returns from equity, property and other investments. Any adverse developments in the credit markets or other future adverse developments, such as further deterioration in the financial markets and a worsening of general economic conditions, may negatively impact the Group’s ability to raise or issue additional debt as well as the amount and terms of the debt the Group is able to raise or issue, if any. In addition, any future financing will be likely to include terms which restrict the way the Group may operate its business. These restrictions could limit the Group’s ability to finance its future operations and capital needs and its ability to pursue acquisitions and other business activities that may be in its interest. In the event of a default under any financing arrangement, creditors may be able to terminate their commitments and declare all amounts owed to them to be due and payable. Borrowings under other debt instruments that contain cross acceleration or cross default provisions, may, as a result, also be accelerated and become due and payable. This would place severe liquidity restraints on the Group. Any new financial indebtedness may rank in priority to Matel’s equity share capital on an insolvency of the Group. The Group’s revenue and cash flow will be adversely affected if the Hungarian fixed line market further declines and its Residential Voice business declines at a higher rate than expected. The Group’s business strategy depends, in part, on its ability to manage its Residential Voice operations, in terms of both its revenue and its market share. The Residential Voice market in Hungary has declined, in terms of both the number of lines and total voice traffic (i.e., average usage per line). The Group experienced a decline in the number of Residential Voice customers in its historical concession areas from approximately 267,000 as at December 31, 2013 to 263,000 as at December 31, 2014 and 258,000 as at December 31, 2015. The Group believes that the declines in the number of its fixed lines and voice traffic in the Hungarian fixed line market in general have been caused primarily by competition from mobile operators and cable television operators. The Group believes that the rate of line churn from fixed service to mobile service has slowed since the end of 2007 due to the very high mobile penetration in Hungary; approximately 120% as of December 31, 2014 and 2015 according to the KSH. At the same time, the Group has seen increased competition from, and increased churn to cable television operators (most significantly UPC, Magyar Telekom and Digi) offering voice services in triple play packages. A decline in the Group’s Residential Voice business at a rate greater than it is anticipated, through a decrease in the number of lines and/or voice traffic could have a material adverse effect on its business, operating results and financial condition.

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The Group’s failure to increase revenue in the Residential Internet & TV market may adversely affect its results of operations and reduce its market share. The Group’s strategy includes increasing its revenue from Residential Internet & TV by increasing its market penetration in the growing Residential Internet & TV market. The Group’s Residential Internet & TV services are subject to strong competition from cable television operators in triple play packages, and the Group has seen cable television operators increase their share of the overall fixed broadband market at the expense of the asymmetric digital subscriber line market. It is expected that the Group’s Residential Internet & TV business will grow as the Group expands its presence in the TV market. However, if Invitel’s TV revenues do not grow as expected, or if the Group’s competitors are more successful at obtaining new customers or place downward pressure on prices to a greater degree than expected, the Group may not be able to increase its revenue in the Residential Internet & TV market as planned, which could have a material adverse effect on its results of operations and reduce its market share. The provision of Cable segment services is highly competitive, and may become more competitive in the future, which could result in a loss of cable subscribers and revenue. The provision of cable services is highly competitive and the Group’s Cable business will continue to face competition from established and new competitors. As existing technology develops and new technologies emerge, it is expected that competition may intensify. The Group’s Cable business faces competition from other cable providers, satellite providers, wireless providers, terrestrial broadcasters, digital subscriber line providers, incumbent providers and other providers or delivery systems. Some of its Cable business’ competitors have substantially greater financial and technical resources than the Group will have. The Group’s Cable business may be required to reduce its prices if its competitors reduce prices, or as a result of any other downward pressure on prices for cable services, which could result in a decrease of the average revenue per user, and/or a loss of subscribers. The Group’s Cable business’ competitors may be able to launch products or services with superior capabilities or may be better able to fund development. An increase in competition in the provision of cable services, or activities by the competitors could lead to a decline in sales, renewal rates and/or increase in costs, which could have an adverse effect on the Group’s Cable business, financial condition, results of operations and cash flows. The Group’s revenue from the Corporate and Wholesale segments may be adversely affected due to competition and the economic environment. The Group’s Corporate and Wholesale segment operations have been negatively impacted in the past by the economy as businesses seek to cut their expenditures and contract renewals become more competitive, resulting in higher price erosion. If the economy negatively impact the expenditures of businesses and competition negatively affect the pricing of existing contracts and the pricing of the Group’s new contracts, this could have a material adverse effect on its business, operating results and financial condition. The Group’s Corporate revenue is impacted by the continued reduction in Corporate outgoing voice traffic as Corporate customers rely increasingly on mobile technology. If the decline in voice-related Corporate revenue occurs faster than expected, then this too could have an adverse impact on the Group’s operating results and financial condition.

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The Group’s revenue from the Corporate datacenter and IT services segment may be adversely affected due to competition. It is believed that the Group will be well positioned to increase its market share in the Corporate segment, particularly in the area of datacenter and IT services. However, the Group may not be successful in expanding its market share in the market, which also can have a negative impact on the Group’s operating results. If the Group is not able to manage costs while effectively responding to competition and changing market conditions, its cash flow may be reduced and its ability to service its debt or implement its business strategies may be adversely affected. The Group’s business will be dependent on its ability to effectively manage the costs associated with running its business. If it needs to respond to actions by its competitors or unanticipated changes in its markets, it may be required to make capital investments in its business and other expenditures which would reduce its cash flow available for other purposes. This could have a negative impact on its ability to service existing debt, and results of operations and financial condition could be adversely affected. The Group will be subject to increased competition due to the business strategies of its competitors, prevailing market conditions and the effect of local and E.U. regulation on the Hungarian telecommunications market, which may result in the loss of customers and market share for the Group. The Group’s competitors include mobile and fixed line telecommunications services providers in both the Residential and Corporate markets and cable television operators offering triple play packages in the Residential markets. Competition in any or all of the services the Group will offer has led to, and may continue to lead to: price erosion; loss of market share; increased customer line churn; loss of existing customers and greater difficulty in obtaining new customers; the need for more rapid deployment of new technologies and related capital expenditure as existing technologies are becoming obsolescent at a more rapid pace; and other developments that could have a material adverse effect on the financial condition and results of operations of the Group. The scope of competition and its effect on the Group’s business, operating results and financial condition will depend on a variety of factors which at present cannot be assessed with precision and that are for the most part outside of its control. Such factors include regulatory measures, the business strategies and capabilities of current and potential competitors, prevailing market conditions and the effect of local and E.U. regulation on the Hungarian telecommunications market, as well as the effectiveness of its efforts to address increased competition. Although the Group currently attempts to control customer churn by improving its customer service, introducing new customized service offerings, utilizing effective advertising and through other means, if the Group is unsuccessful in any of these initiatives, its customer churn could further increase and its business could be materially adversely affected. Slower growth of economy in the Group’s operating areas may impact demand for its services and affect its ability to obtain additional financing. Austerity measures introduced by the Hungarian government may similarly impact demand for its services. Global economic and market conditions, could have a material adverse effect on the Group’s business, financial condition, results of operations or liquidity. The Group’s business is affected by general economic conditions in Hungary and the Central and Eastern European region.

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There are many factors that influence global and regional economies which are outside of the Group’s control. A cautious or negative business outlook may cause the Group’s Corporate customers to delay or cancel investment in information technology and telecommunications systems and services, which may adversely and directly affect its revenue and, in turn, slow the development of new services that could become future revenue sources for the Group. A telecom tax and utility tax were introduced by the Hungarian Parliament in 2012 and 2013, respectively, with a significant impact on the Group’s results. On May 18, 2012, the Hungarian Parliament passed the law on the telecom tax. The tax was introduced on July 1, 2012 as a consumption tax on all calls and SMS/MMS and amounted to HUF 2 per minute and HUF 2 per SMS/MMS and was capped at HUF 400 (HUF 700 from January 1, 2013) per month for individuals and HUF 1 400 (HUF 2500 from January 1, 2013) per month for companies. From August 1, 2013, for companies the tax imposed on fixed and mobile usage was changed to HUF 3 per minute and HUF 3 per SMS/MMS and the cap was changed to HUF 5 000 per month. The tax payable for residential customer minutes and the cap remained unchanged. The annual telecom tax expense for Invitel was €3.0 million and €3.5 million for the year 2015 and 2014, respectively. The Hungarian Ministry for Economy introduced a utility tax effective from January 1, 2013. The utility tax is payable by energy and water utility companies, fixed line telecom service providers and cable operators and amounts to HUF 125 per meter of the owned utility networks. The annual utility tax liability for Invitel as of January 1, 2015 for the year 2015 was € 6.7 million and as of January 1, 2014 for the year 2014 was € 6.8 million. The tax is ordinarily payable in two instalments for the year, in March and September. The utility tax has a significant adverse impact on the Group’s financial position. In October 2014, the Hungarian government included a per-gigabyte charge on internet traffic as part of an omnibus tax bill and draft budget. The announcement resulted in large-scale public protests in Hungary. On October 31, 2014, the Prime Minister announced the withdrawal of the proposed internet tax. Additional taxes imposed by the Hungarian Parliament on telecommunication industry, or increase in the rate of existing taxes can have significant adverse impact on the Group’s financial position. The agreements entered into in relation to the international sales may result in warranty claims against the Group. As part of the sale of the Group’s international business, pursuant to the stock purchase agreement, the Group agreed to certain warranties and indemnities with Turk Telekom, some of which do not expire until December 31, 2015. In relation to these warranties, Turk Telekom may bring breach of warranty claims against the Group for the purchase price of the international business. In addition, the Group entered into a master services agreement for the provision of reciprocal telecommunication services with Turk Telekom. Under this agreement, Turk Telekom may bring warranty claims against the Group for up to 100% of the aggregate of all fees and expenses paid by it and its affiliates to the Group for a service in that contractual year. If Turk Telekom were to bring a breach of warranty claim in either instance, it could have a material adverse effect on the Group’s revenues, results of operations, liquidity or financial condition. The Group holds insurance against such claims, however there can be no assurance that such insurance will be adequate to cover all losses.

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The loss of key senior management could negatively affect the Group’s ability to implement its business strategy and generate revenue. The Group’s performance and continued success depends, in part, on its senior management. The familiarity of the Group’s senior management with the company and its business, their experience in management and with financial matters, and their combined experience in the telecommunications market generally make them important to the Group’s continued success. The loss of key members of the Group’s senior management could negatively affect its ability to implement its business strategy and generate revenue. Technological changes and the shortening life cycles of the Group’s services and infrastructure may affect its operating results and financial condition and may require it to make unanticipated capital expenditures. The telecommunications industry is characterized by rapidly changing technology, related changes in customer demands and the need for new services at competitive prices. Technological developments are also shortening life cycles of both services and the business infrastructure on which those services are based, and are facilitating convergence of different segments of the increasingly global information industry. In addition, competition based on alternative technologies, such as cable television networks, wireless based technologies or radio-based alternative networks in voice markets, could provide a lower cost solution or render the Group’s services obsolete or cost-inefficient in its markets. The Group’s future success will be impacted by its ability to anticipate, invest in and implement new technologies in order to provide services at competitive prices. In addition, the Group may not receive the necessary licenses to provide services based on these new technologies or may be negatively impacted by unfavorable regulation regarding the usage of these technologies. Technological advances may also affect its operating results and financial condition by shortening the useful life of some of its assets or by requiring it to make additional unanticipated capital expenditures, particularly in connection with its network. If the Group needs to respond to actions by its competitors or unanticipated changes in its markets or market conditions, it may be required to make investments in its business and other expenditures which would reduce its cash flow available for other purposes, including servicing its debt. Network or system failures could result in reduced revenue, or require unanticipated capital or operating expenditures, and could harm the Group’s reputation. The Group’s technical infrastructure (including its network infrastructure for fixed-network services and its data center for hosting services) will be vulnerable to damage or interruption from information technology failures, power loss, floods, windstorms, fires, intentional wrongdoing and similar events. Unanticipated problems at the Group’s facilities, network or system failures, hardware or software failures or computer viruses could affect the quality of its services and cause service interruptions. Any of these occurrences could result in reduced revenue, or require unanticipated capital or operating expenditures, and could harm the Group’s reputation. The Group will continue to depend on its ability to store, retrieve, process and manage a significant amount of information. If its IT systems fail to perform as expected, or if it suffers an interruption, malfunction or loss of information processing capabilities, it could negatively affect its ability to service its customers.

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Success of the telecommunication business operations requires and depends on continuous upgrading of the existing network infrastructure. Any unanticipated investments required due to external or internal factors would require additional unplanned capital expenditure by the Group. The Group must continue to upgrade its existing networks in a timely manner in order to retain and expand its customer base in each of its markets and to successfully implement its strategy. Amongst other things, the needs of its business could require it to: a)

upgrade the functionality and capacity of its networks;

b)

increase its network coverage in some of its markets;

c)

expand or upgrade its customer service, network management and administrative systems;

d)

upgrade older systems and networks to adapt them to new technologies.

Many of these tasks, which could create additional financial strain on the Group’s business and financial condition, are not entirely under its control and may be affected by applicable regulation. If the Group fails to execute them successfully, its services and products may be less attractive to new customers and it may lose existing customers to its competitors, which would adversely affect its business, financial condition and results of operations. The Group will be dependent on third party vendors for its information, billing and network systems. Any significant disruption in the Group’s relationship with these vendors could increase its costs and affect its operating efficiencies. Sophisticated information and billing systems are vital to the Group’s ability to monitor and control costs, bill customers, process customer orders, provide customer service and achieve operating efficiencies. The Group currently relies on internal systems and third party vendors to provide some of its information and processing systems. Some of its billing, customer service and management information systems have been developed by third parties and may not perform as anticipated. In addition, the Group’s plans for developing its information systems, billing systems and network systems rely on the delivery of products and services by third party vendors. The Group’s right to use these systems is dependent upon license agreements with third party vendors. Some of these agreements are cancellable by the vendor and the cancellation of these agreements could impair the Group’s ability to process orders or bill its customers. Since the Group will rely on third party vendors to provide some of these services, any switch in vendors could be costly and affect operating efficiencies. The Group will not have direct operational or financial control over its key suppliers and has limited influence with respect to the manner in which these key suppliers conduct their businesses. The Group’s reliance on these suppliers exposes the Group to risks related to delays in the delivery of its services. The Group will depend on third party telecommunications providers over which it has no direct control for the provision of certain of its services. The Group’s ability to provide high quality fixed-line telecommunication services depends on its ability to interconnect with the telecommunications networks and services of other fixed-line operators and mobile operators, particularly those of its competitors. While the Group has interconnection agreements in place with other operators, it does not have direct control over the quality of their networks and the interconnection services they provide.

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Any difficulties or delays in interconnecting with other networks and services, or the failure of any operator to provide reliable interconnection services to the Group on a consistent basis, could result in loss of subscribers or a decrease in voice traffic, which would reduce its revenues and adversely affect its business, financial condition and results of operations. The Group may not be able to fund its operations which require substantial capital expenditures from cash generated from its operations or financing facilities. The Group’s growth areas, such as Residential TV and Corporate datacenter services generally require more capital expenditure to connect and serve new customers than its copper voice and internet products. Growing the Group’s television and datacenter and IT service portfolio will therefore translate into relatively higher levels of success-based capital expenditure than in the past. The Group also requires substantial capital to maintain, upgrade and enhance its network facilities and operations. While it has historically been able to fund capital expenditures from cash generated from operations and financing facilities, this may not be possible in the future and the other risks described in this section could materially reduce cash available from operations or significantly increase the Group’s capital expenditure requirements, and these outcomes could cause capital not to be available when needed. The amount and timing of the Group’s future capital requirements may differ materially from the current estimates due to various factors, many of which are beyond its control. There can be no assurance that the Group will generate sufficient cash flows in the future to meet its capital expenditure needs, sustain its operations or meet its other capital requirements, which may have a material adverse effect on its business, financial condition and results of operations.

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6.

SELECTED HISTORICAL FINANCIAL INFORMATION

The following tables provide a summary of the operations of the consolidated financial statements of Matel as of and for the years ended December 31, 2015 and 2014. The summary consolidated financial information presented here as of and for the years ended December 31, 2015 and 2014 should be read in conjunction with the consolidated financial statements of Matel as of and for the year ended December 31, 2015 and the accompanying notes thereto included elsewhere in this Annual Report. The consolidated financial statements and the accompanying notes thereto have been prepared in accordance with IFRS. The information contained in this section should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report. For the year ended December 31, 2015 2014 (€ in millions)

Statement of Profit and Loss and Other Comprehensive Income Data: Residential Voice ............................................................................................. Residential Internet & TV ............................................................................. Cable .................................................................................................................. Corporate .......................................................................................................... Wholesale ......................................................................................................... Total operating revenue ............................................................................. Cost of sales exclusive of depreciation........................................................ Operating expenses......................................................................................... Depreciation and amortization ..................................................................... (Income) / loss from operations ............................................................. Net financial expense(1) .................................................................................. Income/ (loss) before tax .......................................................................... Income tax benefit/(expense)....................................................................... Income/ (loss) for the year .......................................................................

24.4 31.9 19.4 52.6 16.5 144.8 (53.3) (46.6) (40.6) 4.3 (14.2) (9.9) (2.5) (12.4)

25.9 30.9 18.3 54.8 19.6 149.5 (56.5) (48.7) (44.0) 0.3 (14.7) (14.4) (2.6) (17.0)

As of December 31, 2015 2014 (€ in millions)

Balance Sheet Data: Cash and cash equivalents ............................................................................. Net working capital(2) ..................................................................................... Total assets ....................................................................................................... Net assets/(liabilities) relating to derivative financial instruments ......... Liabilities relating to finance leases .............................................................. Third party debt(3) ........................................................................................... Shareholders’ equity(4).....................................................................................

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21.7 (20.4) 249.1 (0.2) 2.9 157.7 43.0

20.8 (15.4) 254.9 (0.2) 3.1 154.6 54.3

For the year ended December 31, 2014 2015 (€ in millions)

Cash Flow Data: Net cash flow provided by / (used in) operating activities ..................... Net cash flow provided by / (used in) investing activities ...................... Net cash flow provided by / (used in) financing activities ...................... Net increase / (decrease) in cash and cash equivalents............................ Free cash flow before debt service(5) ...........................................................

31.3 (30.4) 0.8 11.8

28.9 (29.0) (0.9) 10.6

For the year ended December 31, 2014 2015 (€ in millions)

Other Data: EBITDA(6) ....................................................................................................... Adjusted EBITDA(7) ...................................................................................... Capital expenditures cash outflows(8) .......................................................... Adjusted EBITDA less capital expenditures cash outflows ................... Net interest expense(9) .................................................................................... Net third party debt(10) ................................................................................... Net third party debt to adjusted EBITDA (11) ........................................... Adjusted EBITDA to net interest expense ................................................

44.9 47.5 32.7 14.9 (13.9) 136.0 2.9x 3.4x

44.3 47.4 26.4 21.0 (13.6) 133.8 2.8x 3.5x

(1) Net financial expense includes interest income, interest expense, net foreign exchange gains/(losses), gains/(losses) from fair value changes of derivative financial instruments and net other financial expense. (2) Net working capital is calculated as total current assets (excluding cash and cash equivalents and current assets relating to derivative financial instruments) less current liabilities (excluding current liabilities relating to derivative financial instruments and finance leases). (3) Third party debt includes the 2013 Notes and excludes liabilities related to finance leases and liabilities related to derivative financial instruments. (4) Shareholders’ equity includes non-controlling interest. (5) Free cash flow before debt service equals net cash flow provided by/(used in) operating activities plus cash interest paid minus net cash flow used in/(provided by) investing activities. The following table sets forth the reconciliation of net cash flow provided by/(used in) operating activities to free cash flow before debt service: For the year ended December 31, 2015 2014 (€ in millions)

Net cash flow provided by operating activities ......................................... Cash interest paid ............................................................................................ Net cash flow used in investing activities ................................................... Free cash flow before debt service ..............................................................

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31.3 10.9 (30.4) 11.8

28.9 10.7 (29.0) 10.6

(6) We define EBITDA as net income/(loss) plus income taxes, financial income, financial expense and depreciation and amortization. Other companies in our industry may calculate EBITDA in a different manner. EBITDA is not a measurement of financial performance under IFRS and should not be considered as an alternative to net income / (loss) or to cash flow from operating, investing or financing activities, as a measure of liquidity or an indicator of our operating performance or any other measures of performance derived in accordance with IFRS. Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. In addition, EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments. Management uses EBITDA as a tool for various purposes including measuring and evaluating financial and operational performance, making compensation decisions, planning and budgeting decisions and financial planning purposes. We believe that the presentation of EBITDA is useful for investors because it reflects management’s view of core operations and cash flow generation upon which management bases financial, operational and planning decisions and presents measurements that investors and their lending banks have indicated to management are important in assessing us and our liquidity. Management compensates for the shortcomings of this measure of financial performance by utilizing it in conjunction with financial measures under IFRS. The following table sets forth the reconciliation of net income / (loss) to EBITDA: For the year ended December 31, 2015 2014 (€ in millions)

Income / (loss) for the year .......................................................................... Income tax (benefit) / expense .................................................................... (Gains) / losses on derivative financial instruments................................ Foreign exchange (gains) / losses, net ........................................................ Other financing expenses, net ...................................................................... Depreciation and amortization ..................................................................... EBITDA ...........................................................................................................

(12.4) 2.5 (0.1) 0.5 13.8 40.6 44.9

(17.0) 2.6 (0.1) (0.4) 15.2 44.0 44.3

(7) We define Adjusted EBITDA as EBITDA plus the cost of restructuring, expenses relating to strategic projects, management fees, crisis tax and other items. The same considerations set forth in footnote 7 above with respect to the uses and limitations of EBITDA apply to Adjusted EBITDA. The following table sets forth the reconciliation of EBITDA to Adjusted EBITDA: For the year ended December 31, 2015 2014 (€ in millions)

EBITDA ........................................................................................................... Expenses relating to strategic projects(a) ..................................................... Other items(b) ................................................................................................... Adjusted EBITDA..........................................................................................

44.9 0.6 2.0 47.5

44.3 1.6 1.5 47.4

(a)

Expenses relating to strategic projects mainly include legal and financial fees of our advisors. For the year ended December 31, 2014 these expenses relate to various non-operational projects. For the year ended December 31, 2015 these expenses relating to various non-operational projects. (b) Other items include mainly board members fee (€0.2 million), legal expenses (€0.2 million), restructuring costs (€1.1 million) and other expenses (€0.5 million). (8) Capital expenditures cash outflows represent the “purchase of property, plant and equipment and intangible assets” line item in our consolidated statement of cash flows. (9) Net interest expense equals third party interest expense less interest income and excludes the amortization of deferred borrowing costs, bond discount and other interest expense relating to finance leases. (10) Net third party debt equals third-party debt less cash and cash equivalents. (11) Net third party debt to adjusted EBITDA contains utility tax for the full year of 2015 and 2014 recorded in January 1, 2015 and 2014 in the amount of €6.7 million and €6.8 million, respectively.

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7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is based on the consolidated financial statements of Matel as of and for the year ended December 31, 2015 prepared in accordance with IFRS included in this Annual Report. In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, “we,” “our” and other similar terms are generally used to refer to Matel’s business and its consolidated subsidiaries. In this section, we capitalize references to Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements. You should read this discussion in conjunction with the consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report. A summary of the critical accounting policies and estimates that have been applied during the preparation of our consolidated financial statements is set forth below in “Critical Accounting Policies”. Some of the information in the discussion and analysis set forth below and elsewhere in this Annual Report includes forward-looking statements that involve risks and uncertainties. See “Risk Factors” for a discussion of important factors that could cause actual results to differ materially from the results described in the forward-looking statements contained in this Annual Report. Overview We are one of the largest fixed line telecommunications services providers in Hungary and the incumbent provider of fixed line telecommunications services to residential and business customers in our 14 historical concession areas, where we have a leading market share. We are the number one alternative fixed line operator outside our historical concession areas in Hungary and nationwide integrated multi-service provider on the Corporate market. As of December 31, 2015, we had 258,000 Residential Voice subscriptions within our historical concession areas and we had 35,000 active Residential Voice subscriptions outside our historical concession areas connected through CPS, CS or LLU. This is compared to December 31, 2014 when we had 263,000 Residential Voice subscriptions within our historical concession areas and 43,000 active Residential Voice subscriptions connected through indirect access outside our historical concession areas. In the Residential Internet & TV segment, as of December 31, 2015, we had 169,000 broadband DSL subcriptions, 7,000 wireless subscriptions, 71,000 IPTV subscriptions and 14,000 DVB-T TV subscriptions compared to 163,000 broadband DSL subcriptions, 8,000 wireless subscirptions, 56,000 IPTV subcriptions and 16,000 DVB-T TV subcriptions as of December 31, 2014. As of December 31, 2015 we had 843,000 occupied homes passed in our historical concession areas out of which 365,000 have been upgraded to FTTx. In the Cable segment, as of December 31, 2015, we had 85,000 cable TV subcriptions, 63,000 cable internet subcriptions and 48,000 cable voice subcriptions compared to 85,000 cable TV subcriptions, 59,000 cable internet subcriptions and 40,000 cable voice subcriptions as of December 31, 2014. In the Cable segment, as of December 31, 2015 we had 293,000 occupied homes passed out of which 204,000 are reached through Docsis 3.0 technology. In the Corporate segment, as of December 31, 2015, we had 39,000 voice telephone lines within its historical concession areas compared to 40,000 lines as of December 31, 2014.

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Outside its historical concession areas, we had 31,000 direct access voice telephone lines and 6,000 indirect access voice telephone lines as of December 31, 2015, compared to 34,000 direct access voice telephone lines and 6,000 indirect access voice telephone lines as of December 31, 2014. We had 15,000 DSL lines and 13,000 leased lines as of December 31, 2015 compared to 16,000 DSL lines and 13,000 leased lines as of December 31, 2014. In the Wholesale segment, we had approximately 200 customers as of December 31, 2015, which customers include incumbent telecommunications services providers, alternative fixed line telecommunications services providers, mobile operators, cable television operators and internet service providers in Hungary. Explanation of Statement of Profit and Loss and Other Comprehensive Income Items Revenue Revenue is generated by five principal areas of activity as follows: Residential Voice — the revenue generated from the fixed line voice and voice-related services provided to Residential customers within our historical concession areas and outside our historical concession areas in Hungary. Residential Voice revenue comprises monthly fees charged for accessing the network, time based fixed-to-mobile, local, long distance and international call charges, interconnect charges on calls terminated in our network, monthly fees for value added services, one-time connection and new service fees, as well as monthly fees for packages with built-in call minutes. Residential Internet & TV — the revenue generated from Internet connections and television broadcast provided to residential customers nationwide both inside and outside the historical concession areas on various technologies other than cable. Residential Internet comprises revenue from broadband services provided through our copper and fiber network; DSL reselling revenue and wireless radio internet revenue all generated through a variety of monthly packages. Residential TV comprises revenue from television services delivered using IPTV and DVB-T in cooperation with Antenna Hungária all generated through fixed monthly subscription fees. Cable — the revenue generated from the provision of cable voice, broadband internet and TV services to customers outside the historical concession areas using our cable network. Corporate — the revenue generated from the fixed line voice, data, internet and IT and Datacenter services and products provided to business, government and other institutional customers nationwide. Corporate voice revenue comprises access charges, monthly fees, time based call charges of switched and IP voice solutions and, interconnect charges on calls terminated in our network. In addition, Corporate revenue includes revenue from leased line data services, VPN networks, DSL and leased line broadband, internet services which are comprised of access charges and fixed monthly rental fees based on the capacity/bandwidth of the service and the distance between the endpoints of the customers. Corporate IT and Datacenter services revenue comprises one-time and monthly recurring revenues from hardware sales, customised IT solutions, infrastructure related services, and server and hosting solutions. Wholesale — the revenue generated from voice and data services is provided on a wholesale basis to resellers to utilize excess network capacity. Wholesale revenue comprises rental payments for dark fiber, managed high bandwidth leased line services, which are based on the bandwidth of the service and the distance between the endpoints of the customers, and voice transit charges from other Hungarian and international telecommunications service providers, which are based on the number of minutes transited.

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Cost of sales exclusive of depreciation Cost of sales exclusive of depreciation consists of cost directly attributable to operations of segments such as interconnect expenses, access type charges, direct sales commissions (segment cost of sales in total) and expenses which are attributable to all segments such as network operating expenses and direct personnel expenses. Operating Expenses Principal operating expenses consist of: a)

indirect personnel expenses, including salaries, social security and other contributions, personnel related expenses, contracted employees and expatriate costs and bonuses and charges;

b)

headcount related costs, including office, building rental and maintenance, car related and training costs;

c)

advertising and marketing costs, including the costs of advertising campaigns and other publicity and market research;

d)

operating and other taxes including utility tax and telecom tax;

e)

IT costs including IT maintenance, software license and other IT related costs;

f)

bad debt expenses, including provisions for doubtful debts from customers;

g)

collection costs, including bank and other charges in respect of collecting payments from customers;

h)

legal and audit fees including fees paid to legal advisors and to auditors;

i)

consultant expenses including fees paid to other advisors;

j)

management fees including fees paid to trustees;

k)

non-recurring consulting expenses, which are fees paid to legal and financial advisors relating to strategic projects; and

l)

other costs, net including other miscellaneous expenses and revenues.

Depreciation and Amortization Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment, and major components that are accounted for separately. Assets leased under finance leases are depreciated over the shorter of the lease term or their useful lives. Land and capital work in progress are not depreciated. Intangible assets with a definite useful life are amortized on a straight-line basis over the period in which the asset is expected to be available for use. An impairment loss is recognized whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

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Net Financial Expenses Net financial expenses comprise interest income, interest expense, amortization of bond discount, amortization of deferred borrowing costs calculated using the effective interest rate method, foreign exchange gains and losses, gains and losses resulting from the changes in the fair values of derivative financial instruments and net other financial expense. Income Taxes Income tax expense comprises current and deferred taxes. Income tax expense is recognized in the income statement except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected corporate income tax and local business tax payable for the year, using tax rates enacted at the balance sheet date and any adjustment to tax payable in respect of previous years. Segment Gross Margin We present segment gross margin in the discussion of our operations. We define segment gross margin as segment revenue minus segment cost of sales for each of our operating segments. Segment gross margin is not a measurement of financial performance under IFRS and should not be considered as an alternative to net income or to cash flow from operating, investing or financing activities, as a measure of liquidity or an indicator of our operating performance or any other measures of performance derived in accordance with IFRS. Management uses segment gross margin as a tool for various purposes including measuring and evaluating our financial and operational performance, making compensation decisions, planning and budgeting decisions and financial planning purposes. We believe that the presentation of segment gross margin is useful for investors because it reflects management’s view of core operations and cash flow generation upon which management bases financial, operational and planning decisions and presents measurements that investors and their lending banks have indicated to management are important in assessing us and our liquidity. Critical Accounting Policies We believe the following accounting policies are critical to the understanding of our results of operations and the effect of the more significant judgments and estimates used in the preparation of our consolidated financial statements: Revenue Recognition — Revenues are primarily earned from providing access to and usage of our networks and facilities. Access revenue is billed one month in advance and recognized the following month when earned. Revenues based on measured traffic are recognized when the service is rendered. Revenue from connection fees are recognized upon service activation. Wholesale data revenue from leased lines is based on the bandwidth of the service and the particular route involved and is recognized in the period of usage or when the service is available to the customer. From time to time, we sell fiber optical assets to other telecommunications companies. Revenue is recognized as and when the transfer of ownership is complete. For further details about revenue recognition, see Note 2.16 – “Revenue Recognition” in the notes to the consolidated financial statements. Subscriber Acquisition Costs — Subscriber acquisition costs are fees paid to our internal sales force and fees paid to third party sales agents. We capitalize subscriber acquisition costs that relate to fixed term subscriber contracts. Such capitalized subscriber acquisition costs are amortized over the period of the related subscriber contracts. Property, Plant and Equipment — Property, plant and equipment comprise a significant portion of our total assets.

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Changes in technology, changes in our intended use of these assets and/or changes in the regulatory environment may cause the estimated period of use or the value of these assets to change. These assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Estimates and assumptions used in both setting depreciable lives and reviewing recoverability require both judgment and estimation by management. Impairment is deemed to have occurred if the fair values less cost to sale of non-financial assets are less than its carrying value. If impairment is deemed to have occurred, the carrying values of the assets are written down to their fair value, through a charge against earnings. For further details on the accounting policies of property, plant and equipment, see Note 2.11 – “Property, Plant and Equipment” in the notes to the consolidated financial statements. Intangible Assets — Intangible assets that have definite useful lives (whether or not acquired in a business combination) are amortized over their estimated useful lives. Intangible assets with definite lives consist of software, property rights, customer relationships and other intangible assets, mainly capitalized subscriber acquisition costs. Property rights represent the amounts paid for the right to use third party property for the placement of telecommunication equipment and the amounts paid for the usage of networks owned by third parties. The estimated useful lives of intangible assets are as follows: Software .................................................................................................................... Customer relationships………………………………………………………….. Property rights .......................................................................................................... Other .........................................................................................................................

3 years 9-15 years 1-43 years 1-16 years

We evaluate the carrying value of intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of an intangible asset is considered impaired when the fair value less cost to sale of nonfinancial assets are less than its carrying value. We measure impairment based on the amount by which the carrying value of the respective asset exceeds its fair value. Fair value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. For further details on the accounting policies of intangible assets, see Note 2.10 – “Intangible Assets” in the notes to the consolidated financial statements. Contingent Liabilities — We establish provisions for estimated loss contingencies when we determine that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are reflected in the income statement in the period in which different facts or information become known or circumstances change that affect our previous assessments as to the likelihood of, and estimated amount of loss. Contingent liabilities are based upon assumptions and estimates, after giving consideration to the advice of the legal department and other information relevant to the assessment of the probable outcome of the matter. Critical Accounting Estimates and Judgments Impairment provision for doubtful accounts The Group maintains an impairment provision for doubtful accounts for estimated losses resulting from customers’ or carriers’ failure to make payments on amounts due. These estimates are based on a number of factors including: (a) historical experience; (b) aging of trade accounts receivable; (c) amounts disputed and the nature of dispute; (d) bankruptcy; (e) general economic, industry or business information; and (f) specific information that we obtain on the financial condition and current credit worthiness of customers or carriers.

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The estimates used in evaluating the adequacy of the impairment provision for doubtful accounts receivable are based on the aging of the accounts receivable balances and historical write-off experience, customer credit-worthiness, payment defaults and changes in customer payment terms. Depreciation and amortization Property, plant and equipment and intangible assets are recorded at cost and are depreciated or amortized on a straight-line basis over their estimated useful lives. The determination of the useful lives of assets is based on historical experience with similar assets as well as any anticipated technology evolution and changes in broad economic or industry factors. The appropriateness of the estimated useful lives is reviewed annually. Non-financial assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s value in use and fair value less cost to sell, which considers a number of factors, including, future cash flows, technological obsolescence, discontinuation of services and other market evidence. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash-generating units. The Group has performed impairment reviews of its non-financial assets and goodwill acquired as part of Dataneum acquisition in accordance with its accounting policy for the years ended December 31, 2015 and 2014. Upon such review, no impairment charge arose for the year ended December 31, 2015 and December 31, 2014. The recoverable amount of all cash generating units has been determined based on fair value less cost to sell calculation. For determining fair value less cost to sell, the Group used the EBITDA multiples method. Based on publicly available transaction data, two different multiples were used in the model that correspond to the recent acquisitions of European telecommunications companies. One of the multiples takes the average of the EBITDA multiples with respect to the recent acquisitions of European incumbent telecommunication companies, and another multiple, specifically based on acquisitions of European cable companies. The latter multiple was applied to the cable segment and the former one was used for the remaining segments in the model. EBITDA was determined based on the Group’s budgeted financial performance and amounted to EUR 48,022 thousand in the impairment assessment for the year ended 2015 and EUR 42,102 thousand for the year ended December 31, 2014. Apart from the annual impairment review of non-financial assets, the Group accounted for the following impairment charges in connection with individual assets due to physical damages, deterioration and shortage identified as part of physical count of non-financial assets: impairment charge of EUR 96 thousand and EUR 1,035 thousand for the year ended December 31, 2015 and December 31, 2014, respectively, in relation to the property, plant and equipment and intangible assets. Comparison of the Year ended December 31, 2015 and the Year ended December 31, 2014 The functional currency of our operations is the HUF. The average HUF/EUR exchange rate for the year ended December 31, 2015 was 309.90, compared to an average HUF/EUR exchange rate for the year ended December 31, 2014 of 308.66. When comparing the year ended December 31, 2015 to the year ended December 31, 2014, EUR reported amounts have been affected by this 0.4% depreciation of the HUF against the EUR.

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Revenue The following table presents a breakdown of our revenue by segment for the year ended December 31, 2015 and 2014: Year Ended December 31, 2014 2015

Residential Voice .............................................................................. Residential Internet & TV ................................................................. Cable ................................................................................................. Corporate ........................................................................................... Wholesale .......................................................................................... Total Revenue ..................................................................................

(€ in millions) 24.4 25.9 31.9 30.9 19.4 18.3 52.6 54.8 16.5 19.6 144.8 149.5

% change

(6%) 3% 6% (4%) (16%) (3%)

Our revenue decreased by €4.7 million, or 3% for the year ended December 31, 2015 compared to the year ended December 31, 2014. The decrease is attributable to the factors described below. Residential Voice Our Residential Voice revenue was €24.4 million for the year ended December 31, 2015 compared to €25.9 million for the year ended December 31, 2014, representing a decrease of €1.5 million or 6%. This decrease was mainly due to the decrease in the number of our Residential Voice subscriptions, compensated in part by higher ARPU. The number of Residential Voice customers within our historical concession areas was 258,000 as of December 31, 2015 compared to 263,000 as of December 31, 2014 and the number of active CS, CPS and LLU lines that represents our customer base outside our historical concession areas was 35,000 as of December 31, 2015 compared to 43,000 as of December 31, 2014. Residential Internet & TV Our Residential Internet & TV revenue was €31.9 million for the year ended December 31, 2015 compared to €30.9 million for the year ended December 31, 2014, representing a €1.0 million or 3% increase. This increase was due to the decrease in the number of subcriptions. In the Residential Internet & TV segment, as of December 31, 2015, we had 169,000 broadband DSL subcriptions, 7,000 wireless subcriptions, 71,000 IPTV subcriptions and 14,000 DVB-T TV subcriptions compared to 163,000 broadband DSL subcriptions , 8,000 wireless subcriptions and 56,000 IPTV subcriptions and 16,000 DVB-T TV subcriptions as of December 31, 2014. Cable Our Cable revenue was €19.4 million for the year ended December 31, 2015 compared to €18.3 million for the year ended December 31, 2014, representing an increase of €1.1 million or 6%. This increase was mainly due to the increase in our customer base. In the Cable segment, as of December 31, 2015, we had 85,000 cable TV subcriptions, 63,000 cable internet subcriptions and 48,000 cable voice subcriptions compared to 85,000 cable TV subcriptions, 59,000 cable internet subcriptions and 40,000 cable voice subcriptions as of December 31, 2014 and increase in ARPU.

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Corporate Our Corporate segment revenue was €52.6 million for the year ended December 31, 2015 compared to €54.8 million for the year ended December 31, 2014, representing a €2.2 million or 4% decrease. This decrease is mainly due to decrease Corporate voice and data revenue as a result of decrease traffic and price erosion on contract renewals. The number of Corporate Voice telephone lines inside our historical concession areas was 39,000 as of December 31, 2015 compared to 40,000 as of December 31, 2014. The number of direct access Corporate voice telephone lines outside our historical concession areas was 31,000 as of December 31, 2015 compared to 34,000 as of December 31, 2014 and the number of indirect access Corporate voice telephone lines outside our historical concession areas was 6,000 as of December 31, 2015 compared to 6,000 as of December 31, 2014. In addition, we had 15,000 DSL lines and 13,000 leased lines as of December 31, 2015 compared to 16,000 DSL lines and 13,000 leased lines as of December 31, 2014. Wholesale Our Wholesale revenue was €16.5 million for the year ended December 31, 2015 compared to €19.6 million for the year ended December 31, 2014, representing a €3.1 million or 16% decrease. This decrease was due to the decrease in Wholesale data monthly fee and decreasing voice revenue which are partially offset by higher dark fiber sales revenue. Cost of Sales The following table presents segment cost of sales for the year ended December 31, 2015 and 2014: Year Ended December 31, 2014 2015

Segment cost of sales ...........................................................................

(€ in millions) 29.5

31.8

Cost of sales, at the segment level, totaled €29.5 million for the year ended December 31, 2015 compared to €31.8 million for the year ended December 31, 2014, representing a decrease of €2.3 million or 7%. The following table presents the reconciliation of segment cost of sales to total cost of sales as per our consolidated statement of comprehensive income for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Segment cost of sales .......................................................................... Network operating expenses ............................................................... Direct personnel expenses ................................................................ Total cost of sales, exclusive of depreciation ................................

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(€ in millions) 29.5 15.2 8.6 53.3

31.8 16.9 7.8 56.5

Segment Gross Margin We define segment gross margin as segment revenue minus segment cost of sales for each of our operating segments. Segment gross margin is not a measurement of financial performance under IFRS and should not be considered as an alternative to net income or to cash flow from operating, investing or financing activities, as a measure of liquidity or an indicator of our operating performance or any other measures of performance derived in accordance with IFRS. Management uses segment gross margin as a tool for various purposes including measuring and evaluating our financial and operational performance, making compensation decisions, budgeting decisions and for financial planning purposes. We believe that the presentation of segment gross margin is useful for investors because it reflects management’s view of core operations and cash flow generation upon which management bases financial, operational and planning decisions and presents measurements that investors and their lending banks have indicated to management are important in assessing us and our liquidity. The following table presents a reconciliation of segment gross margin to income / (loss) from operations as per our consolidated statement of profit and loss and other comprehensive income / (loss) for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Residential Voice ................................................................................. Residential Internet & TV ................................................................... Cable .................................................................................................... Corporate ............................................................................................. Wholesale ............................................................................................ Total segment gross margin .............................................................. Network operating expenses ................................................................ Direct personnel expenses ................................................................... Operating expenses .............................................................................. Depreciation and amortization ............................................................. Income/(loss) from operations ..........................................................

23.2 23.1 14.4 41.2 13.5 115.4 (15.2) (8.6) (46.6) (40.6) 4.3

(€ in millions) 23.9 23.1 13.4 41.9 15.4 117.7 (16.9) (7.8) (48.7) (44.0) 0.3

% change

(3%) (0%) 7% (2%) (12%) (2%)

Our segment gross margin changed from €117.7 million for the year ended December 31, 2014 to €115.4 million for the year ended December 31, 2015, representing a decrease of €2.3 million or 2%. This decrease is attributable to the factors below. Residential Voice Our Residential Voice segment gross margin was €23.2 million for the year ended December 31, 2015 compared to €23.9 million for the year ended December 31, 2014, representing a decrease of €0.7 million or 3%. This decrease was mainly due to the decrease in our Residential Voice revenue as a result of the decrease in the number of our Residential Voice subscriptions compensated in part by the increase in ARPU. Residential Internet & TV Our Residential Internet & TV segment gross margin was €23.1 million for the years ended December 31, 2015 and 2014.

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Cable Our Cable gross margin was €14.4 million for year ended December 31, 2015 compared to €13.4 million for the year ended December 31, 2014, representing an increase of €1.0 million or 7%. This increase was due to the increase in our customer base and the improvement of ARPU. Corporate Our Corporate segment gross margin was €41.2 million for the year ended December 31, 2015 compared to €41.9 million for the year ended December 31, 2014, representing a decrease of €0.7 million or 2%. This lower margin was mainly due to the decrease in Corporate voice and data revenue as a result of the decrease in traffic and price erosion on contract renewals, which was partially offset by the increase in our Corporate IT Services margins. Wholesale Our Wholesale segment gross margin was €13.5 million for the year ended December 31, 2015 compared to €15.4 million for the year ended December 31, 2014, representing a decrease of €1.9 million or 12%. This decrease mainly due to the decrease in Wholesale data monthly fee revenue which was partially offset by higher dark fiber sales revenue. General Operating Expenses Our general operating expenses consists of operating expenses as included in our consolidated statement of profit and loss and other comprehensive income / (loss) and the cost of sales which are not allocated to individual segments. The following table presents general operating expense for the year ended December 31, 2015 and 2014: Year Ended December 31, 2014 2015

General operating expense ...................................................................

(€ in millions) 70.4

73.4

Our general operating expenses decreased by €3.0 million or 4% from €73.4 million for the year ended December 31, 2014 to €70.4 million for the year ended December 31, 2015. This decrease was the result of the general strict cost control of operating expenses and savings in network operating expenses, including the elimination of rental expense as a result of the mid2014 Dataneum acquisition. The following table presents a reconciliation of general operating expense to operating expenses as per our consolidated statement of profit and loss and other comprehensive income / (loss) for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

General operating expense ................................................................ Network operating expenses ............................................................. Direct personnel expenses ................................................................ Operating Expenses ........................................................................

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(€ in millions) 70.4 (15.2) (8.6) 46.6

73.4 (16.9) (7.8) 48.7

Depreciation and Amortization The following table presents our depreciation and amortization for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Depreciation and amortization .............................................................

(€ in millions) 40.6

44.0

Depreciation and amortization decreased by €3.4 million or 8% from €44.0 million for the year ended December 31, 2014 to €40.6 million for the year ended December 31, 2015. Income / (Loss) from Operations The following table presents our income from operations for the year ended December 31, 2015 and 2014: Year Ended December 31, 2014 2015

Income (loss) from operations ........................................................

(€ in millions) 4.3

0.3

As a result of the factors described above, income / (loss) from operations increased by €4.0 million from a gain of €0.3 million for the year ended December 31, 2014 to a gain of €4.3 million for the year ended December 31, 2015. Foreign Exchange Gains / (Losses), Net The following table presents our net foreign exchange gains / (losses) for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Foreign exchange gains / (losses), net .................................................

(€ in millions) 0.5

(0.4)

Our foreign exchange gains of €0.5 million for the year ended December 31, 2015 resulted primarily from realized gains relating to our EUR denominated assets and liabilities. Interest Expense The following table presents our interest expense for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Interest expense ...................................................................................

(€ in millions) 14.6

14.3

Our interest expense increased by €0.3 million from €14.3 million for the year ended December 31, 2014 to €14.6 million for the year ended December 31, 2015.

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Interest Income The following table presents our interest income for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Interest income ....................................................................................

(€ in millions) 0.1

0.2

Our interest income was €0.2 million for the year ended December 31, 2014 and €0.1 million for the year ended December 31, 2015. Interest income was realized on our cash balances during these periods. Net Fair Value Change of Derivative Financial Instruments The following table presents our gains / (losses) from net fair value changes of derivative financial instruments for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Net fair value change of derivative financial instruments ...................

(€ in millions) (0.1)

(0.1)

The €0.1 million loss on the net fair value change of derivative financial instruments for the year ended December 31, 2015 includes unrealized losses in the amount of €0.1 million. The €0.1 million loss on the net fair value change of derivative financial instruments for the year ended December 31, 2014 includes unrealized losses in the amount of €0.1 million. Income Tax Benefit / (Expense) The following table presents our income tax benefit / (expense) for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014

Corporate tax ....................................................................................... Local business tax ................................................................................ Current tax benefit / (expense) ............................................................ Deferred tax benefit / (expense) .......................................................... Total income tax benefit / (expense) .................................................

(€ in millions) – (2.5) (2.5) – (2.5)

– (2.6) (2.6) – (2.6)

Our income tax expense changed from €2.6 million for the year ended December 31, 2014 to €2.5 million for the year ended December 31, 2015 and includes local taxes.

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Income / (Loss) for the Year The following table presents our income / (loss) for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014 (€ in millions) (12.4)

Income / (loss) for the year ................................................................

(17.0)

As a result of the factors discussed above, we recorded a net loss of €12.4 million for the year ended December 31, 2015 compared to a net loss of €17.0 million for the year ended December 31, 2014. Liquidity and Capital Resources The table below summarizes our cash flows for the year ended December 31, 2015 and 2014: Year Ended December 31, 2015 2014 (€ in millions) Net cash flow provided by / (used in) operating activities ......................... Net cash flow provided by / (used in) investing activities .......................... Net cash flow provided by / (used in) financing activities .........................

31.3 (30.4) -

28.9 (29.0) -

Our net cash provided by operating activities was €31.3 million and €28.9 million for the year ended December 31, 2015 and 2014, respectively. Our net cash used in investing activities was €30.4 million for the year ended December 31, 2015, which mainly included capital expenditure of €32.7 million and proceeds from sales of tangible and intangible assets of €2.3 million. Our net cash used in investing activities was €29.0 million for the year ended December 31, 2014, which mainly included capital expenditure of €26.4 million cash paid for acquiring Dataneum of €4.4 million and proceeds from sales of tangible and intangible assets of €1.7 million. The table below presents our other major contractual cash obligations as of December 31, 2015 (at December 31, 2015 exchange rates): Cash Payments Due by Period Obligation

Total

1 Year or Less 2-3 Years 4-5 Years

After 5 Years

(€ thousands) Long Term Debt Principal Payments ................................ 157,705 — Long Term Debt Interest(1) ................................................. 36,201 11,095 Lease Commitments to Teleco Providers...........................2,286 497 Other Operating Leases ...................................................... 20,600 3,827 Capital Leases ................................................................ 2,909 264

157,705 25,106 980 4,798 623

— — 777 1,823 114

32 10,152 1,908

Total................................................................................... 219,701 15,683

189,212

2,714

12,092

(1) Long-term debt interest payment obligations are calculated by 7.00% and PIK interest for the 2013 Notes.

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— —

Liquidity risk represents the risk that we are unable to meet our payment obligations when those become due. We monitor our liquidity position on an ongoing basis by forecasting and monitoring revenue, capital and operating expenses, investments and debt service. We believe that cash provided by our operating activities and our financing activities will provide adequate resources to satisfy our working capital requirements, scheduled principal and interest payments on our debt and our anticipated capital expenditure requirements. The 2013 Notes mature in 2018. We will evaluate our capital structure and the capital markets in the future in making our capital financing decisions. For a detailed description of our debt agreements, see Note 17 – “Borrowings” in the notes to the consolidated financial statements. We may, subject to the terms of our debt instruments, from time to time purchase or otherwise acquire or retire our subsidiaries’ debt and take other steps to reduce our consolidated debt or otherwise change our capital structure. These actions may include open market purchases and sales, negotiated transactions, tender offers, exchange offers or other transactions. The timing and amount of any debt purchases or acquisitions would depend on market conditions, trading levels of the debt from time to time, our cash position and the availability and terms of cash financing from other sources, and other considerations. Changes in capital structure The 2013 Notes On December 12, 2013, Matel issued senior secured notes in the principal amount of EUR 150,051,000 (the “2013 Notes”). The 2013 Notes mature in 2018 and are subject to the indenture dated December 12, 2013 (the “2013 Notes Indenture”). The 2013 Notes are listed on the Luxembourg Stock Exchange, and are governed by New York law. The 2013 Notes are fully and unconditionally guaranteed on a senior basis by Invitel, Invitel Technocom and International Holdings. The guarantees are subject to contractual and legal limitations, and may be released under certain circumstances. The 2013 Notes are secured by first-priority security interests over certain assets of Matel and certain Guarantors. The security interests are subject to limitations under applicable laws and may be released under certain circumstances. The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from June 15, 2013 and is paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. Matel may redeem the 2013 Notes at any time at a redemption price of 100% plus accrued and unpaid interest, if any to the date of redemption. Subject to retaining a minimum cash balance and certain other requirements as set out in the 2013 Notes Indenture, Matel must redeem the 2013 Notes at a redemption price of 100% plus accrued and unpaid interest, if any to the date of redemption with the proceeds of certain asset sales. If Matel undergoes a change of control, Matel may be required to make an offer to purchase the 2013 Notes. The 2013 Notes Indenture contains covenants restricting Matel’s ability to, among other things, (i) incur additional indebtedness or issue preferred shares, (ii) make investments and certain other restricted payments, (iii) issue or sell shares in certain restricted subsidiaries, (iv) agree to restrictions on the payment of dividends by subsidiaries or the making of loans, (v) enter into transactions with affiliates, (vi) create certain liens, (vii) transfer or sell assets,

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(viii) merge, consolidate, amalgamate or combine with other entities, (ix) designate subsidiaries as unrestricted subsidiaries, (x) de-list the notes, (xi) impair any security interests and (xii) engage in any business other than specifically enumerated activities. The 2013 Notes Indenture also contains customary events of default, including non-payment of rincipal, interest, or other amounts, violation of covenants, failure to make required offers, certain cross-defaults, invalidity of any guarantee, material judgments, bankruptcy insolvency, receivership or reorganization events, and invalidity or unenforceability of any security document or security interest. The capitalized interest on the 2013 Notes as of December 31, 2015 and 2014 amounted to EUR 7,654 thousand and EUR 4,547 thousand, respectively. The rating on the 2013 Notes by Moody’s was Caa1 as of January 23, 2015. The outlook on the ratings was negative. Inflation and Foreign Currency The HUF/EUR exchange rate changed from 314.89 as of December 31, 2014 to 313.12 as of December 31, 2015, an approximate 0.6% depreciation in the value of the HUF against the EUR. Overall, this resulted in a net foreign exchange gain of €0.5 million for the year ended December 31, 2015 compared to a net foreign exchange loss of €0.4 million for the year ended December 31, 2014. Approximately all of the revenue of our operations is denominated in HUF and our operating and other expenses, including capital expenditures, are predominantly in HUF and in EUR. In addition, certain items in the balance sheet accounts are denominated in currencies other than the HUF. Accordingly, when such accounts are translated into HUF, our functional currency, we are subject to foreign exchange gains and losses which are reflected as a component of earnings. When the subsidiaries financial statements are translated into EUR for financial reporting purposes, we are subject to translation adjustments, the effect of which is reflected as a component of equity. Quantitative and Qualitative Disclosures about Market Risk Market Risk Exposure Foreign Currency Exchange Rate Risks We are exposed to various types of risk in the normal course of our business, including the risk from foreign currency exchange rate fluctuations. Approximately all of our revenue and approximately 85-90% of our operating expenses and 80% of our capital expenses are HUF based. Therefore, we are subject to currency exchange rate risk with respect to our non-HUF denominated expenses, primarily EUR, due to the variability between the HUF and the EUR. Due to our limited exposure with respect to non-HUF denominated expenses, we have not entered into any agreements to manage our foreign currency risks related to such expenses but we monitor the currency exchange rate risk related to such expenses.

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We are also exposed to exchange rate risk since all of our debt obligations are in EUR. Given our EUR denominated debt obligations, exchange rate fluctuations can have a significant impact on our consolidated financial statements in connection with foreign exchange gains/losses and the resulting debt balances. Our future cash-flows are sensitive to foreign exchange rate changes related to our debt service. Sensitivity Analysis The following table shows the sensitivity of our debt instruments to potential foreign currency exchange rate and interest rate changes as of December 31, 2015:

Instrument

Notional amount

1%p.a. increase 10% increase in in EURIBOR HUF/EUR rate (€ in thousands)

Debt 2013 Notes ................................................................

157,705

—

(1,109)

Total Debt ................................................................

157,705

—

(1,109)

The 2013 Notes pay fixed rate interest therefore they are not affected by changes in interest rates.

The above table shows the impact of a 1% increase in interest rates (e.g. BUBOR or EURIBOR) and a 10% increase in the HUF/EUR exchange rate on our debt service related cash flows due in the next 12 months.

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8.

HUNGARIAN TELECOMMUNICATIONS INDUSTRY AND REGULATION

Certain of the projections and other information set forth in this section have been derived from external sources, including the Hungarian Central Statistical Office, the former Hungarian Ministry of Economy and Transport and the NMHH. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We believe that these industry publications, surveys and forecasts are reliable but we have not independently verified them and cannot guarantee their accuracy or completeness. The projections and forward looking statements in this section are not guarantees of future performance and actual events and circumstances could differ materially from current expectations. Numerous factors could cause or contribute to such differences. See “Risk Factors” and “Information Regarding Forward-Looking Statements.” Hungary Hungary is on EU member country located in Central Europe bordered by Austria, Slovenia, Croatia, Serbia, Romania, Ukraine and Slovakia. It has approximately 9.9 million inhabitants. The following table sets out Hungary’s annual GDP growth and inflation rates since 2010 according to the Hungarian Central Statistical Office. Annual GDP Growth Rate

Annual Inflation Rate

%

%

2010.................................................................................................................... 2011.................................................................................................................... 2012.................................................................................................................... 2013.................................................................................................................... 2014.................................................................................................................... 2015....................................................................................................................

1.3 1.6 (1.0) 1.1 3.6 2.9

4.9 3.9 5.7 1.7 (0.2) (0.1)

The Hungarian Market We are one of the largest incumbent fixed line telecommunications operators with Copper, FTTx and Cable network covering 1.1 million of Hungary’s approximately 4 million households. Invitel’s share of the national Residential market is 12.5% voice, 9.4% internet and 4.5% TV. Our main competitors are Magyar Telekom (majority owned by Deutsche Telekom), UPC (subsidiary of Liberty Global), Digi (subsidiary of RCS/RDS) as well as smaller local and regional cable operators. Fixed Line Voice The fixed line telecommunications market in Hungary has been characterized by a heavy decline in the number of subscriber lines in recent years. The penetration of fixed lines has fallen to approximately 65% of households as of December 2015. This is primarily a result of the rapid increase in mobile penetration from approximately of the population in 1998 to approximately 120% of the population in December 2015.

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The migration of both residential and business traffic from fixed to mobile networks have also contributed to this negative trend on the fixed line telephony market. In addition, the traditional fixed line voice telecommunications providers, the cable operators offering “triple play” packages comprised of television, internet and voice services occupy a meaningful part of the market and take market share away from the traditional telephony service providers. The decline is still ongoing, but at a slower speed than in recent years, also as mobile penetration has reached a stabile level at approximately 120% penetration. Internet Magyar Telekom, UPC and Digi offer their broadband services in many parts of our historical concession areas. Especially due to cable network developments (Docsis 3.0) in recent years, the technology has overtaken the basic ADSL technology in speed and stability. The classic incumbent telecom service providers on copper network are only able to offer high-speed broadband via FTTx developments, thus both, us and Magyar Telekom conducted network upgrades from ADSL to VDSL or FTTx (Fiber to the home/curb/node) in recent years. Although mobile internet services are generally still inferior to fixed line technology in both speed and quality, these services are also rapidly gaining popularity in Hungary especially as smartphones continue to expand in the mobile market and new standards such as 4G network significantly improve their product offering and competetiveness. The active mobile internet subscriber base is approximately 3 million as of December 2015. TV Hungary’s sizeable broadcasting market includes mature terrestrial TV, cable, broadband TV (IPTV) and satellite sectors. 83% of Hungarian household have subscriptions TV, cable and IPTV are the most popular broadcasting platforms, representing about 80% of total TV sets. By October 2015 about 71% of TV subscriptions had transitioned to digital broadcasting. Data Currently, the most important providers of data transmission services in Hungary other than us are Magyar Telekom, Antenna Hungária (a broadcasting company having a digital microwave backbone network), Magyar Villamos Művek (“MVM”). Mobile There are three primary mobile operators providing mobile network voice telephone services in Hungary, Magyar Telekom (through T-Mobile), Telenor Magyarország Zrt (Telenor affiliate operating since 1993, formerly Pannon GSM), and Vodafone (operating since 1999). The mobile communications market in Hungary is highly competitive and characterized by successive promotional campaigns and price competition. As of December 2015, mobile penetration was approximately 120% as compared with a fixed line penetration of approximately 65%. Mobile internet and data services are becoming popular within Hungarian subscribers, pushing the prices of mobile data services down and new standards such as 4G network significantly improve their product offering and competitiveness. We and other fixed-only cable operators also try to benefit from mobile services by cooperating with both Telenor and Vodafone, in the form of resale services. Active mobile data subscriber base is approximately 3 million as of December 2015.

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Hungarian Regulatory Environment Hungarian Regulatory Framework Infocommunications in Hungary is regulated by the Electronic Commuications Act (“ECA”) and the Media Act (“MA”). Both the ECA and the MA are based on and in line with the relevant EU regulatory framework. The National Media and Infocommunications Authority (“NMHH”) as established in 2010 is responsible for the oversight of both the telecommunications and media sectors. NMHH is an autonomous administrative body with limited legislative powers, reporting to the Hungarian Parliament. Pursuant to the ECA, NMHH is required to conduct periodic market analyses to determine, in line with conventional competition law principles, whether a certain market is effectively competitive and, if not, to designate operators with a so-called significant market player (“SMP”) status and impose forward looking obligations to enhance competition. NMHH conducts market analyses in respect of 7 markets. Invitel is designated with SMP status on 5 markets in the historical concession areas and, as such is subject to a number of obligations. Reference Interconnection Offer (RIO) The terms of Invitel’s RIO are used whenever a telecommunications operator wants to interconnect with Invitel’s telephone network in order to provide telephone service to Invitel’s subscribers through carrier selection, or to terminate calls on Invitel’s network. The terms of the RIO must be approved by the NMHH. Reference Unbundling Offer (RUO) The terms of Invitel’s RUO are used when another operator wants to rent the last mile of our copper based or fiber based network which connects the subscribers to the telephone network LLU. By renting the last mile of our network, alternative operators are able to provide telephone, broadband internet access and TV services without the need for significant investment in an access network. The terms of the RUO must be approved by the NMHH. Universal Service Obligation The ECA defines universal services as a set of basic communications services which must be made available to all customers at an affordable price. Universal service includes providing access to the fixed line telephone network, operating public payphones, issuing a public directory of subscribers (phonebook) and providing inquiry services. Invitel is the sole provider of the national universal inquiry service based on a tender won for a 3 year period from October, 1 2014. All other universal service elements (access to the fixed line telephone network, operating public payphones, issuing a public directory of subscribers) are provided by Invitel in its historical concession areas based on an official designation by NMHH. Price Regulation Pursuant to regulatory burdens imposed by the NMHH and applicable law, Invitel is currently subject to retail pricing restrictions, a price cap over retail fixed line access services.

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Other Statutory Obligations Imposed on Invitel in Hungary Telecom Tax In July 2012, the Hungarian Parliament imposed a telecom tax payable by the telecom service providers. The tax basis is all voice, sms, mms traffic (excluding emergency, donation and test traffic). The amount of the tax is HUF 3/minute; HUF 3/SMS, HUF 3/MMS in case of business subscribers and HUF 2/minute; HUF 2/SMS, HUF 2/MMS in case of residential subscribers. There are 10 free minutes per month for all natural person subscribers. The tax is currently capped at HUF 700/month for residential subscribers and HUF 5000/month for business subscribers. Utility Tax As of January 1, 2013 the Hungarian Parliament imposed a public utility tax payable by the owners of public utility networks, including telecommunications networks. The tax base is the length of network (parallel pathways to be regarded as one). The tax rate is currently HUF 125 / meter – but progressive up to a total network-length of 500,000 meters, whereby a total reduction of 100%, 70% and 25% of the tax is available to brackets up to 200,000 meters, between 200,000 and 350,000 meters and between 350,000 meters and 500,000 meters, respectively. In June 2015 the Hungarian Parliament amended the utility tax legislation introducing a 5year 100% utility tax allowance for new 100mb/sec network developments and a 5-year tax exemption on new network construction.

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9.

COMPANY HISTORY

In this section, we capitalize references to Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS. Historical Information Our predecessor company, HTCC USA, was incorporated in Delaware in 1992 as a holding company to acquire concessions from the government of the Republic of Hungary to own and operate local fixed line telecommunications networks in Hungary as Hungary privatized its telecommunications industry. HTCC USA acquired the right to operate fixed line telecommunications networks in five historical concession areas from the Hungarian government and purchased the existing telecommunications infrastructure, including 61,400 telephone lines, from Magyar Telekom in 1995 and 1996. The acquired telecommunications infrastructure was outdated (manual exchanges and analog lines). HTCC USA overhauled the existing infrastructure with a major capital expenditures program. HTCC USA owned and operated all public telephone exchanges and local loop telecommunications network facilities in these five historical concession areas and was, until the expiration of its exclusivity rights in 2002, the sole provider of non-cellular local voice telephone services in such areas. The five Hungarotel historical concession areas covered a population of approximately 668,000 with approximately 280,000 residences. Until 2007, HTCC USA operated and marketed this business through its Hungarian subsidiary Hungarotel, which was merged into Invitel as of January 1, 2008. The PanTel Acquisition HTCC USA purchased an initial 25% interest in PanTel Távközlési Kft (“PanTel”) in November 2004 and acquired the remaining 75% from Royal KPN NV, the Dutch telecommunications provider (“KPN”), on February 28, 2005. PanTel was founded in 1998 by KPN, MÀV Rt. (“MAV”), the Hungarian state railroad company and KFKI Investment Ltd. (a Hungarian entity) to compete with Magyar Telekom. Following a tender process, the Hungarian government awarded PanTel licenses to provide data transmission and other services that were not subject to Magyar Telekom’s government protected monopoly rights for long distance voice services. In 1999, PanTel began building, along MAV’s railroad rights-of-way, a 3,700 kilometerlong state-of-the-art fiber optic backbone telecommunications network. PanTel also built metropolitan area networks, including a metropolitan area network covering Budapest, which networks connected to PanTel’s backbone network. PanTel was Hungary’s leading alternative telecommunications provider with a nationwide fiber optic backbone network linking every county in Hungary. PanTel provided voice, data and internet services to businesses throughout Hungary in competition with other telecommunications service providers including Magyar Telekom. PanTel’s subsidiary, PanTel Technocom Kft, provided telecommunications services to MOL (a Hungarian oil company) and operated and maintained various parts of MOL’s telecommunications network. As of January 1, 2008, PanTel merged into Invitel and changed PanTel Technocom Kft’s name to Invitel Technocom. The Invitel Acquisition In 2007, HTCC USA combined its operations with Invitel following the acquisition of Invitel on April 27, 2007. Invitel began its operations in Hungary in 1994. Invitel initially owned and operated two Hungarian telecommunication companies which had the right to operate in four historical concession areas (Szeged, Szentes, Gödöllő and Vác). In 1996 and 1997, Invitel developed its network infrastructure within those areas and in 1998 established a joint venture for the provision of data services in and out of its historical concession areas, especially in Budapest.

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In 1999, Invitel acquired Jásztel Zrt., a regional telephone operating company operating in the Jászberény historical concession area and also acquired Corvin Telecom Távközlési Zrt., an optical network operator specializing in data transmission. In 2000, Invitel acquired four additional historical concession areas (Dunaújváros, Esztergom, Veszprém and Szigetszentmiklós). In 2000 and 2001, Invitel developed the national coverage for its telephone network in Budapest and more generally outside its historical concession areas. In 2001, Invitel was granted one of five national 3.5 GHz licenses over which it has deployed its point-tomultipoint (“PMP”) network. In the same year, Invitel also began its internet access activity nationwide. During 2002, the exclusivity period ended in Invitel’s concession areas. In May 2003, Emerging Europe Infrastructure Fund LP (“EEIF”) and funds managed by GMT Communications Partner III LLP (“GMT”) acquired the entire share capital of Invitel. The Euroweb Acquisition On May 23, 2006, Invitel completed the acquisition of Euroweb International Corporation’s two, internet and telecom related operating subsidiaries, Euroweb Hungary and Euroweb Romania, which provided internet access and additional value added services including international/national leased line and voice services primarily to business customers. Euroweb Hungary was merged into Invitel in December 2007. The Tele2 Hungary Acquisition On October 18, 2007 HTCC USA purchased the Hungarian business of Tele2, the Swedishbased alternative telecom operator, by purchasing the entire equity interests in Tele2’s Hungarian subsidiary. Tele2 Hungary provided CS and CPS fixed line telecommunications services to residential customers as a reseller using the network facilities of other operators pursuant to regulated resale agreements. Tele2 Hungary merged into Invitel in June 2009. The Invitel International Acquisition On March 5, 2008, HTCC USA acquired 95.7% of the outstanding equity in Austrian-based Memorex Telex Communications AG and its subsidiaries (the “Invitel International”). On August 28, 2008, HTCC USA acquired the remaining 4.3% stake of Invitel International from the minority shareholders, which gave a 100% ownership. Invitel International was one of the leading alternative telecommunications providers in the Central and South Eastern European region. Invitel International provided wholesale data and capacity services to leading global telecommunications providers and internet companies between 14 countries in the region including Austria, Bulgaria, the Czech Republic, Italy, Romania, Slovakia, Turkey, and Ukraine. Invitel International operated over 12,500 route kilometers of fiber optic cable in the region which enabled it to provide high quality wholesale services to large international carriers. Invitel International and its subsidiaries, including Invitel International Kft, Invitel’s international wholesale business, were sold on October 7, 2010. Re-domiciliation In February 2009, HTCC USA completed a reorganization, whereby the Group effectively changed its place of incorporation from the United Stated to Denmark. The successor company to HTCC USA as a parent company of the Group became a newly established Danish entity, Invitel Holdings A/S. As part of the reorganization, all assets and liabilities of HTCC USA were transferred to Invitel Holdings A/S and after the completion of the reorganization Invitel Holdings A/S and its subsidiaries the same business as HTCC USA and its subsidiaries.

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The Acquisition by Mid Europa In November 2009, Hungarian Telecom Coöperatief U.A. (“Coop”), a company controlled by Mid Europa, became the controlling shareholder of the Group through the acquisition from TDC of 64.6% of the capital stock of Invitel Holdings A/S. On November 27, 2009, Mid Europa completed the acquisition of an additional 9.8% of capital stock from Straumur—Burdaras Investment Bank hf., increasing their ownership interest to 74.4%. On December 7, 2009, Mid Europa announced its intention to offer to purchase all of the remaining ordinary shares of Invitel Holdings (the “Equity Tender Offer”). As a result of the completion of the Equity Tender Offer on January 22, 2010, Mid Europa increased its ownership in Invitel Holdings A/S to 91.78%. Mid Europa then acquired the remaining Invitel Holdings A/S shares in a compulsory acquisition procedure under Danish law. Deregistration from Securities and Exchange Commission On April 2, 2010 Invitel Holdings A/S filed Form 15 with the United States Securities and Exchange Commission (“SEC”) enabling Invitel Holdings A/S to deregister from the SEC and to cease reporting under the Securities Exchange Act of 1934, as amended. Upon the filing of the Form 15, the obligation of Invitel Holdings A/S to file periodic reports with the SEC under the Exchange Act was suspended immediately. The deregistration from the SEC was effective 90 days after the filing on July 2, 2010, after which date Invitel Holdings A/S no longer had an obligation to file an Annual Reports on Form 20-F with the SEC. The Sale of Invitel International On October 7, 2010, we consummated the sale of Invitel International, the Group’s wholesale business, comprising the entire issued share capital of Invitel International AG (including its subsidiaries), Invitel International Hungary Kft. and S.C. EuroWeb Romania S.A., to Türk Telekomünikasyon a.s. (“Turk Telekom”). Invitel International included operations in Austria, Bulgaria, the Czech Republic, Hungary, Italy, Romania, Serbia, Slovakia, Slovenia, Turkey and Ukraine, but excluded our Hungarian domestic wholesale business. The purpose of the sale was to deleverage and focus on our core Hungarian domestic markets. The Acquisition of Fibernet On February 28, 2011, we consummated the acquisition of the direct parent of FiberNet Zrt, Hungary’s fourth largest cable network operator (“Fibernet”). In order to meet Hungarian competition office requirements relating to infrastructure competition, we simultaneously sold approximately one-third of the Fibernet network assets to UPC. The Fibernet network we retained is located outside Invitel’s historical fixed line concession areas. On September 30, 2011 Fibernet was merged into Invitel. Reorganization of Invitel Technocom In March 2012, a reorganization affecting Invitel Technocom took place. A new company, MID-NEW Technocom Kft was established by one of the directors of Mid Europa on March 8, 2012. Matel transferred 75% of its membership interest in Invitel Technocom to MID-NEW Technocom Kft. On January 8, 2014 Coop sold its 100% ownership interest in Hungarian Telecom B.V. to MID-NEW Technocom Kft and MID-NEW Technocom Kft sold its 75% ownership interest in Invitel Technocom to Matel. The purchase price of the ownership interest was set at EUR 45,000, which equaled the amount of the loan Matel had provided to MID-NEW Technocom Kft when it has purchased the 75% ownership interest in Invitel Technocom.

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This loan became payable on January 8, 2014 when Matel exercised its call option to buy the 75% Invitel Technocom ownership interest from MID-NEW Technocom Kft. The purchase price and the loan payable were netted against each other. Liquidation of Holding Companies On March 12, 2012 the liquidation of Invitel Holdings A/S was completed, when Invitel Holdings A/S was deleted from the Danish Registar of Companies. After such liquidation, the ultimate parent company of the Group became HTCC Holdco I B.V., one of the subsidiaries of Invitel Holdings A/S. The Board of Director passed a resolution on the liquidation of HTCC Holdco I B.V. on December 22, 2011. The liquidation process was completed on January 29, 2013. 2013 Restructuring In December 2013, as part of the Restructuring, EUR 155.0 million of the 2009 Notes were exchanged into new notes (the “2013 Notes”) and equity of the Company. The 2013 Notes bear cash interest at 7% (subject to a PIK toggle) and PIK interest of 2%, which accrues from June 15, 2013 and paid semi-annually in arrears on December 15 and June 15. The PIK toggle allows the Company to capitalize a portion of the cash interest at a rate of 9% to the extent necessary to maintain a minimum liquidity level of EUR 10 million. The 2013 Notes have a maturity date of June 15, 2018. The remaining EUR 174.0 million of the 2009 Notes, together with all accrued interest, were converted into 49% of the pro-forma post-restructuring equity in the Group, which is held by Matel Holdings Limited, a newly formed entity. Matel Holdings Limited’s shares are stapled to the 2013 Notes. Dataneum Acquisition On August 28, 2014 Invitel acquired 100% of the share capital of Dataneum. Dataneum provides, primarily to Invitel, data center infrastructure services at its main data center in Budapest, under a 10 year asset rental and services contract signed in 2009. Before the acquisition in August, from March 2014, Invitel took over the operation of the infrastructure (i.e. power, cooling, and backup assets) at the data center. The Tier 3 equivalent data center, which has nearly 1,500 m2 of built-out data center space as well as additional expansion capacity, was built out in 2009 to Invitel’s specification. With the acquisition, Invitel will save EUR 1 million annually in rental and service fees. The EUR 5.5 million purchase price has been funded from existing cash balances.

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10.

OUR BUSINESS

In this section, we capitalize references to Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale where and to the extent that the references are to our reporting segments in our consolidated financial statements prepared in accordance with IFRS. Overview We are one of the leading fixed line telecommunications service providers and the third largest voice fixed line telecommunications service provider in Hungary and the incumbent provider of fixed line telecommunications services in our 14 historical concession areas, where we have a dominant market share of the traditional fixed line market. With the acquisition of Fibernet, the fourth largest cable network operator in Hungary, in March 2011, we entered into the Hungarian cable market, where we provide services to residential customers outside our historical concession areas. We also use our network capacity to transport voice, data and internet traffic for other telecommunications service providers and internet service providers on a wholesale basis. Our historical fixed line concession areas are geographically clustered and cover an estimated 2.0 million people, representing approximately 21% of Hungary’s population. Our extensive fiber optic backbone network (comprising approximately 9,000 kilometers in Hungary) provides us with nationwide reach. It allows corporate and wholesale customers, in particular, to be connected directly to our network to access voice, data and internet services. We have strengthened our competitive position with FTTx and VDSL network rollouts starting at the end of 2011. We currently cover 365,000 homes with these new technologies. This enables us to serve our subscribers with broadband internet speeds of up to 150 Mb/s, and a state of the art IPTV service. In addition, our Cable network upgrade by Docsis 3.0 technology (the third generation of data over cable service interface specification) enables us to serve our subsribers with an internet speed up to 120 Mb/s. We currently cover 204,000 homes with this technology. We operate in the following five market segments in our business: (a)

Residential Voice. We provide a full range of basic and value added voice related services to our residential and small office / home office customers both inside and outside our historical concession areas.

(b)

Residential Internet & TV. We provide xDSL and FTTx broadband internet services to our residential customers both in and outside our historical concession areas. We also provide IPTV (TV delivered over xDSL/FTTx broadband connections) services to our residential customers in our historical concession areas. With the latest network development upgrade to VDSL and FTTx, we are able to cope with internet speeds of the modern cable networks.

(c)

Cable. We provide cable television, broadband and voice services to our residential cable customers. We offer various analogue and digital TV basic and premium packages as well as multiple internet and voice packages and options. The speed of our cable broadband internet ranges now from 10Mb/s-120Mb/s as we have done a number of network upgrades over the recent years.

(d)

Corporate. We provide communication and connectivity services such as fixed line voice, data and internet and also a range of complex datacenter and IT services to our corporate (comprised of Mid, Enterprise & Government segment) customers

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nationwide. (e)

Wholesale. We provide voice, data and network capacity services on a wholesale basis to a number of other telecommunications and internet service providers within Hungary.

Competitive Strengths We are one of the largest national alternative fixed line telecommunications service providers in Hungary. We are one of the largest alternative fixed line operators in Hungary. We believe that we are well positioned to grow our market share outside our historical concession areas in our Corporate market segment through our owned backbone network, our experienced sales force and our comprehensive portfolio of services. Our backbone fiber optic network provides us with nationwide coverage, allowing us to directly connect to a high proportion of our Corporate customers. Diversified revenues and earnings base across four segments. We have a diversified revenue and earnings base across four segments. For the year ended December 31, 2015, the Residential Voice, Residential Internet & TV, Corporate, Wholesale and Cable segments each account for 17%, 22%, 36% , 11% and 13% of revenues and 20%, 20%, 36%, 12% and 13% of segment gross margin, respectively. We therefore are not overly dependent upon any one segment, and over time, in line with our strategy, the contribution from the traditional voice business segment has declined, and, we expect, will continue to decline in importance and it has been replaced by IT and Datacenter services. We have an extensive, modern and high quality domestic network infrastructure in Hungary. Our backbone network has nationwide reach, provides a high quality of service and does not require major capital investments. The national backbone network comprises over 9,000 kilometers of fiber connecting our historical concession areas and all of Hungary’s urban centers. As the incumbent operator in our historical concession areas, we benefit from an extensive access network in terms of both capacity and reach. We are continuously developing our network in the historical concession area to increase volume of occupied homes passed reached through the FTTx technology. As of December 31, 2015 we had approximately 843,000 occupied homes passed in our historical concession areas out of which 365,000 have been upgraded to FTTx. We are able to provide IPTV on around 70% of our lines and we have a DVB-T TV offering for the rest of our network in cooperation with Antenna Hungária. Outside our historical concession areas, our network allows us to connect our Corporate customers to our backbone by using our own metropolitan fiber, point-to-point or point-to-multipoint microwave, unbundled local loops or leased circuits. Since the Fibernet acquisition in 2011 we provide cable TV, broadband and voice services principally to residential cable customers outside our historical concession areas. We provide analogue and digital TV packages and offer the option for various premium channels. The broadband internet packages range from 10Mbs to 120 Mbs options. We are developing our network to increase volume of occupied homes passed reached through Docsis 3.0 technology in our Cable segment. As of December 31, 2015 we had approximately 293,000 occupied homes passed out of which 204,000 are reached through Docsis 3.0 technology. We have a substantial existing customer base, much of which is served by our infrastructure. As of December 31, 2015, we had 258,000 Residential voice customers in our historical concession areas being served by our access network.

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In addition, we had 35,000 active Residential customers outside our historical concession areas being served by Magyar Telekom’s (the main incumbent operator) infrastructure. We have an additional 91,000 Residential customers being served by our own cable access network. Furthermore, we have approximately 15,000 Corporate customers, the majority of whom are connected to our national backbone network or our historical concession access network. This substantial customer base presents an opportunity for cross-selling additional products and services. We have comprehensive and well established national distribution channels and a strong national brand. We have a well-established and comprehensive set of effective distribution channels both inside and outside of our historical concession areas which enable us to optimize our customer acquisition costs and to respond quickly to changing market conditions. To market to Residential customers, we have our own shops in our historical concession areas, and we also have our own in-house telesales team. In addition, we use independent third party direct sales agents, telesales channels and retail outlet partners. Corporate customers are addressed by our own national direct sales organization and telesales team. We have worked to continuously improve the national brand recognition of Invitel. As a result of these efforts, together with selective marketing communications activity, we now enjoy strong nationwide brand awareness. We have strong management and benefit from the added expertise of our majority shareholder. We benefit from a strong and experienced executive management team. Our executive management team has substantial international fixed line telecommunications and cable services experience and a proven track record of cost control and achieving operational efficiency. In addition, the executive management team has extensive experience in both the Corporate and Residential segments. Further, our Board of Directors has extensive experience in the telecommunications services industry and in infrastructure companies in Central and Eastern Europe. Our Strategy The following represent strategies which the Group believes will allow it to consolidate and in some instances grow its business. These may change depending on the markets in which the Group operates external economic factors and the decisions of the Group’s management, who may choose to focus on an alternative business plan which entails different strategies. . Stabilise revenue and cash flow in the Group’s historical concession areas. The Group is stabilizing its revenue and cash flow derived from the provision of TV-led bundled Triple Play services within its historical concession areas with the ongoing introduction of targeted, innovative and flexible offerings and by maintaining the quality of its customer service. In addition, the Group has been focusing on developing effective strategies to retain customers and defend against churn in its historical concession areas resulting from competition from alternative operators.

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Manage / slow down revenue decline from traditional copper ADSL Internet services, utilize growth potential in modern VDSL and FTTx Internet services and increase revenue via our TV services and bundled offerings. The Group believes that there is still a moderate growth potential of internet services in Hungary as personal computer and internet penetration levels in Hungary catch up with Western European levels. Broadband internet usage has still grown in Hungary with 3% penetration increase in the last year to 62% as of December 2015. In comparison, the broadband internet penetration in Western European countries was estimated at approximately 83% of households as of December 2015. The Group intends to continue to capitalize on this trend of increasing broadband usage by growing its VDSL/FTTx customer base inside its historical concession areas. The growth in the Group’s VDSL/FTTx customer base is a key business priority as it believes it will increase line retention and stimulate fixed line revenue. In addition, the Group has been focusing on its TV products, where it still sees a slight increase in pay TV market penetration and opportunity to gain market share as the Group is a relatively new player in its concession areas for these products. The Group also believes that offering bundled services (multi product bundle offerings with voice, broadband and TV services) is essential to stay competitive. Overcompansate revenue decline from analogue cable television and utilize growth potential for digital television, cable broadband and voice services. The Group’s strategy in its cable business is to unitize growth potential in digital TV and internet, by focusing on retention, while at the same time generating more revenue from digital television services as well as incremental internet and voice services from up and cross sell to existing customers as well as attracting brand new customers. Expanding our Corporate segment revenue and market share nationwide through becoming a key IT and Datacenter service provider. We will continue to focus on expanding our services provided to our Corporate customer base, growing our share of the national corporate market while becoming a major integrated datacenter and IT services provider. We primarily focus on providing high quality integrated IT services to Corporate customers, as we believe IT services are the main key factor of growth in our Corporate segment. In addition, we intend to capitalize on our extensive national backbone network, which means that in many cases business customers can be connected directly to our network, resulting in higher margins and more competitive pricing through lower access costs. Corporate customers can be connected directly to our backbone network mainly through the use of metropolitan fiber, line-of-site microwave, leased circuits or local loop unbundling. Continuing to leverage our modern national backbone network and our market reputation to grow our revenue in the Wholesale data market. We will continue to leverage our backbone network in Hungary, and our ability to easily add further capacity where required to sell infrastructure and capacity services to other service providers, including principally mobile operators and cable operators. We believe that the continuing growth in the fixed and mobile broadband markets will result in continued growth in the wholesale capacity market in the foreseeable future. We have developed a strong reputation for the quality of our service, our partnership oriented approach and our speed of execution in the Wholesale segment.

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Our Business In our business, we operate in five market segments: Residential Voice, Residential Internet & TV, Cable, Corporate and Wholesale. We are continually seeking to develop and improve our overall service through improving the quality of our customer care and developing new service packages and offerings. Residential Voice We offer our Residential Voice customers a full range of basic and value-added voice services, both inside and outside our historical concession areas. Our basic services in our historical concession areas include access to analog and VoIP lines for local, long distance, fixed to mobile and international calling, a full set of operator services, directory services and public telephones. Our value-added services include voicemail, a variety of special calling features such as call waiting, call forwarding and caller ID. Our services include a variety of bundled voice, internet and IPTV packages. Outside our historical concession areas, we provide a full range of basic and value added CPS and CS voice services to Residential Voice customers. However in the last 2-3 year due to the market transaction from copper voice-only to triple play customers. Invitel has changed focused from voice-only services to xDSL services outside of the historical concession areas. Residential Internet & TV We generate Residential Internet & TV revenue inside our historical concession areas by providing xDSL and FTTx broadband internet and IPTV services over our own network. Besides this, we also offer DVB-T services through a partnership. Outside our historical concession areas, we provide broadband internet services mainly by purchasing xDSL services on a wholesale basis from the incumbent operator and acting as a third party internet service provider. We provide xDSL technology based services on a flat fee basis at different standard bandwidths from 5 Mb/s up to 100Mb/s inside and outside our historical concession areas and up to 150 Mb/s in our FTTx areas. In our historical concession areas we offer xDSL through our own network. Substantially our entire network is capable of providing xDSL services. We expect to stabilize revenue from ADSL services but to grow on newly developed VDSL and FTTx services. Cable We provide cable TV, broadband and voice services principally to residential cable customers outside our historical concession areas. We provide analogue and digital TV packages and offer the option for various premium channels. The broadband internet packages range from 10Mbs to 120 Mbs options, depending of the network modernization. In addition, we offer low-cost voice services as part of triple play bundle. Corporate We offer connectivity and communication services such as fixed line voice, data, internet and datacenter and IT services (such as hosting and data center related services, outsourcing, system integration) services to Mid, Enterprise & Government customers nationwide. Our Corporate customers are primarily defined as businesses with over 50 employees.

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Inside our historical concession areas, we provide these services directly through our incumbent network. Outside our historical concession areas, we provide Corporate customers throughout Hungary with access to our voice, data and internet services by directly connecting them to our national backbone network by using our own PP and PMP microwave network, by metropolitan fiber or by using unbundled local loops or through leased lines. Outside our historical concession areas, we also provide lower-volume Corporate customers with voice services using CPS or IP and DSL internet services by purchasing and reselling wholesale DSL services from the incumbent local telephone operator. Our nationwide voice services include a full range of basic and value added voice services on PSTN, ISDN2, ISDN30 connections and also using VoIP technology. Our nationwide Corporate data services include managed leased line services, VPN services, and national frame relay ATM services, which is a broadband, network transport service that provides an efficient means of moving large quantities of information. Our managed leased line service consists of PP leased lines which corporates and institutions can use to establish direct digital connections between each other on a closed network, enabling the exchange of audio, data and multimedia files. We provide nationwide IP-VPN services from 64 Kbps to 1 Gbps. Our IPVPN network uses MPLS technology that allows unified, flexible, secure and value added voice, data and internet services. Our national frame relay service enables high-speed switched digital data communication and can transport voice and data at the same time. Recently many enterprises, where security is crucial, need a solution, which enables that they can configure and managing their network themselves. Layer 2 VPN provides the opportunity for them. Our nationwide Corporate Internet services consist primarily of internet access services. Our internet access services are provided primarily through leased lines and DSL services nationwide. In addition, we have also started to bundle a mobile internet proposition using a re-sell model. Corporate DSL services are available in four standard bandwidths (5 Mbps, 10 Mbps, 20 Mbps and 30 Mbps). We also offer Corporate customers the “IP Sec” feature, which allows Corporate customers to work from home via secure broadband internet access. We also offer server hosting and server virtualization services. We offer these services individually or on a “bundled” basis to Corporate customers nationwide, including voice, internet, data or IT packages for Mid size customers and for enterprise clients as well with required customization. As key part of our strategy of heavily extending our service portfolio for Corporate customers, we also now provide a range of co-location, server hosting and rental, server virtualization, several type of IT outsourcing and complex system integration services. Hosting is based at our two flagship and other smaller data centers in Budapest (which together comprise approximately 3,000 square meters). All in all, our main goal is to enhance the share of wallet of our customers. Wholesale We provide data bandwidth capacity, dark fiber and, to a small extent, voice services on a wholesale basis to other operators and service providers. These services typically generate revenue in the form of rental payments for capacity or managed bandwidth services (based on the bandwidth of the service and the distance between the endpoints of the customers), occasionally one-time payments for infrastructure sales, and trafficbased charges for voice transit services to and from other Hungarian and international telecommunication service providers.

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Our Wholesale business consists of four product lines: providing managed bandwidth services; providing dark fiber; providing IP capacity; and providing wholesale voice services. We provide managed bandwidth services with speeds up to 10 Gbps. This means, for example, that for a large telecommunications company, we can provide and manage the leased line connections to the endpoints of a network that they are providing to their corporate clients. We also provide lateral support services such as co-location and managed router services. Providing dark fiber entails renting or selling fiber optic cables to cable television operators, mobile operators and government institutions, which enables these customers to manage their own networks. We provide co-location facilities in addition to repair and maintenance services to these customers. Our Wholesale voice services involve routing voice calls to worldwide destinations. Through our international partner (Turk Telekom) we have access to over 120 international connections to incumbent telecommunications services providers, alternative fixed line telecommunications services providers and mobile operators, enabling us to route calls for such providers globally. While Wholesale voice routing is a somewhat commoditized service (and accordingly less profitable), by providing this service to new operators in developing countries, we are able to establish relationships that often lead to more profitable mandates. Pricing and Tariffs Residential In-Concession We charge our Residential Voice customers a monthly subscription fee and usage based service fees for local, mobile, long distance and international calls. We generally charge our Residential Internet & TV customers a monthly subscription fee. We operate a bundling strategy. Our bundled offerings include extra voice minutes, internet access and IPTV service. Our sales strategies emphasize our triple play bundled commercial packages with included free on-net calls (within Invitel copper and cable voice community), good internet speed and a rich channel line-up. We run active retention programs amongst our copper voice and ADSL customers to minimize customer churn. We also target residences that would not otherwise use our voice service by offering bundled voice and internet packages. Residential Out-of-Concession Outside our historical concession areas, we offer CPS based voice services. While we have a limited number of CS customers, we are not actively marketing that service and are attempting to convert CS customers to CPS based services. For such services, we bill on the basis of usage. With respect to the Residential Internet market outside of our historical concession areas, we charge a fixed monthly fee with no usage fee. We use different pricing points and focus on xDSL internet services. Cable We provide our customers with a variety of cable TV, internet and cable voice packages. We charge our customers a monthly subscription fee in addition to the usage based voice traffic fees and a variety of options for TV and voice services. Our price level for new and existing customers is determined by the market and competition and it focused around a bundling strategy to provide customers incentives to buy multiple services.

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Corporate In the Corporate market, we price voice, internet, data and IT and Datacenter services individually or on a bundled basis driven by competition in the specific customer segment and access technology available to provide the required service. We have been very successful in increasing our market share in the SME segment in the last few years by using targeted direct sales with tailored pricing and bundling data /internet access /voice services with datacenter and IT services. With respect to the enterprise segment, we compete with Magyar Telekom for a relatively low number of new customers in selected projects where pricing is determined by tenders. Our recently expanded datacenter and IT services portfolio provides us with increased pricing flexibility in both standard bundled packages for Mid and customized solutions for enterprise customers. We regularly adjust our pricing schemes and tools by monitoring our competition (mainly Magyar Telekom and UPC in the lower market segment). We price data, data related services and fixed line access on the basis of fixed monthly fees, with variable call charges for voice usage. Corporate voice tariffs have decreased significantly over the past decade as a result of increased competition from both fixed and mobile operators. While monthly fees for corporate data and internet services show a year-on-year decline, higher usage in terms of data and associated increased bandwidth requirements present opportunities of pricing new service features in bundled offers. Wholesale For managed bandwidth services, we charge our customers a fixed monthly fee for a guaranteed minimum bandwidth along with a service agreement. To the extent we provide dark fiber, we generally charge either a monthly fee on a per kilometer basis, or alternatively, a one-off outright sale charge. Customers often require us to extend our backbone network directly to their premises or to another city or, in the case of mobile operators, to one of their central switching locations. We generally charge our customers a onetime fee for extending our network to meet such requirements. For IP capacity services, we generally charge a monthly fee based on a guaranteed minimum bandwidth along with a service agreement. Customers can also pay for a committed amount of bandwidth and purchase supplemental bandwidth, if available, as needed. For Wholesale voice services, we generally charge our customers a variable amount based on the length of the call, the time of day and the destination. Interconnection A small portion of our revenue and a substantial portion of our cost of sales are made up of interconnection fees. We receive per minute call termination fees for completing calls to our customers who are directly connected to our network. We pay per minute call termination fees to other telecom operators for completing calls originating from our customers. We receive per minute call origination fees when any customer who is directly connected to our network elects to use a competing fixed line telecommunications services provider to make outgoing calls through the use of either CPS or CS. We pay per minute call origination fees when a customer who is directly connected to another Hungarian fixed operator’s network, elects to use our service to make outgoing calls through the use of either CPS or CS.

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When we connect a customer to our network through a LLU arrangement, we rent the connection to the customer from the incumbent local operator for a monthly fee. We then collect from our customer a monthly subscription fee and a traffic fee for service or a bundled fee. The incumbent operator loses the billing relationship with the customer. Conversely, when a competitor comes into one of our historical concession areas and connects a subscriber to their network through a LLU arrangement with us, we receive a monthly fee for allowing the competitor to use the telephone line that we own and we lose the direct billing relationship with the customer. Our Customers As of December 31, 2015, we had 258,000 Residential Voice customers within our historical concession areas and we had 35,000 active Residential Voice telephone lines outside our historical concession areas connected primarily through CPS, CS or LLU. As of December 31, 2014 we had 263,000 customers within our historical concession areas to service Residential Voice customers, and 43,000 active Residential Voice customers connected through indirect access and LLU outside our historical concession areas, respectively. This decrease in the number of active Residential Voice customers both in and outside our historical concession areas is due to the gradual decline in the overall fixed voice market. The rate of decline is lower in our historical concession areas as we provide service on our own infrastructure, face less competition and are able, in many cases, to offer triple play bundles. As of December 31, 2015, we had 169,000 Residential copper and fiber broadband customers, of which 157,000 were connected directly to our networks within our historical concession areas and 12,000 were outside our historical concession areas and serviced principally by our wholesale DSL services purchased from the incumbent local telephone operator (primarily Magyar Telekom). This compares to December 31, 2014 when we had 163,000 Residential broadband customers, of which 149,000 were connected directly to our networks within our historical concession areas and 14,000 were outside our historical concession areas and serviced principally by our wholesale DSL services purchased from the incumbent local telephone operator (primarily Magyar Telekom). The Company grew its customer base even though there has been no growth in the ADSL market, as a result of the economic conditions. The number of IPTV customers has increased to 71,000 as of December 31, 2015. In the Cable segment, as of December 31, 2015, we had 85,000 cable TV lines, 63,000 cable broadband lines and 48,000 cable voice lines compared to 85,000 cable TV lines, 59,000 cable broadband lines and 40,000 cable voice lines as of December 31, 2014. As of December 31, 2015, we had 39,000 voice telephone lines within our historical concession areas serving Corporate customers compared to 40,000 lines as of December 31, 2014. Outside our historical concession areas, we had 34,000 direct access voice telephone lines and 6,000 indirect access voice telephone lines as of December 31, 2014, compared to 31,000 direct access voice telephone lines and 6,000 indirect access voice telephone lines as of December 31, 2015. We had 15,000 DSL lines and 13,000 leased lines as of December 31, 2015 compared to 16,000 DSL lines and 13,000 leased lines as of December 31, 2014. In the Wholesale segment, we had approximately 200 customers as of December 31, 2015 compared to approximately 200 as of December 31, 2014. Customers include fixed line telecommunications services providers, mobile operators, cable television operators and internet service providers.

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Our Sales and Distribution Channels Residential In our historical concession areas and cable footprint, our Residential sales channels include walk-in shops, point-of-sale reseller and partner shops, third-party sales agents, our own telesales operations and our internet web site. We operate 23 walk-in shops. Our services are sold to Residential customers through a non-exclusive network of agents and point-of-sale reseller and partner shops and our own and outsourced third-party telesales operations. Corporate Our direct sales force of direct sales executives and key account managers is our primary Corporate sales channel. Enterprise and Government account managers are responsible for managing the relationship and developing cooperation with our top 1500 corporate customers. Our Mid segment sales executives serving almost 4200 customers are responsible for keeping the portfolio value, successful contract renewals, selling new services to our existing customers and for driving new corporate acquisition. Also a dedicated IT services and telecommunication presales team is supporting the significant growth in this segment. Wholesale We have a dedicated business development and sales staff that focuses primarily on marketing our managed bandwidth IP capacity and dark fiber services throughout Hungary to mobile operators, cable television operators and internet service providers. Our Competition Magyar Telekom, the largest provider of fixed line telecommunications services in Hungary, with its historical concession areas covering an estimated 77% of Hungary’s population, is only one of our many competitor, in our cable footprint via their copper / FTTx products and as a CS / CPS service operator in our out of concession footprint. Giving the communication strength and awareness of Magyar Telekom, it influences most trends and pricing of copper services. Besides that in many larger settlements, our strongest competitors are UPC and Digi. These companies are offering attractive triple play services on modernized cable or FTTx network, which erodes Invitel’s product capability on legacy copper network. Due to our VDSL and FTTx rollout we improved our competiveness in terms of product features like high speed internet and IPTV. There are also several areas where multiple competitors operate in the same territory, which puts additional pressure in these markets. The remaining competition results in smaller settlements from local cable operators. Residential Voice In the Residential Voice market the competitive positioning is mainly based on perceived value of bundled product offerings and price. Regarding residential voice products, we face three main challenges: the competition from mobile voice, cable and VoIP operators. Mobile substitution still exists on the market however, it shows a decreasing trend. We compete with mobile network operators, both in and outside of our historic concession areas. The mobile subscriber base in Hungary has grown rapidly and as a result, the mobile penetration rate in the country reaches approximately 120% of the population. The number of mobile subscriptions is more than three times the number of fixed lines as of December 2015.

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Whilst fixed to mobile line-churn has slowed down in recent years, there is still a traffic reallocation from customers to mobile. CS/CPS competition has lost its weight, by now only represent approximately 1% of the fixed voice market value generated in this segment. In our historical concession areas, our fixed line competitors may offer voice services on a CS basis or on a CPS basis although this has significantly reduced as a competitive threat during the last few years. Outside our historical concession areas, we compete with the main incumbent network operator as well as with other cable and mobile operators. In the past, we have focused mainly on providing CPS based voice services outside our historical concession areas. Now we mainly focus on selling standalone xDSL internet services on Magyar Telekom’s network, and try to retain CPS voice revenue with various retention campaigns. We also face competition from providers of VoIP services such as free Voice over Internet solutions (e.g. Skype) or via professional niche VoIP operators although this constitutes a very small part of the market. At the moment approximately 3-4% of the fixed voice market value generated in this segment. Residential Internet & TV Hungary enjoys a relatively high internet usage level with broadband representing the majority of internet connections. Competition is infrastructure and regulatory-based, with the latter made viable due to the Regulator’s actions to promote competition. xDSL and cable are the two most popular broadband platforms. Competition and the demand for bandwidth are pushing demand for higher speed state of the art networks (e.g. FTTx, Docsis 3.0). Hungary also has a very high penetration of pay TV, consisting of all technological platforms used and offered such as cable analog and digital TV, IPTV, DVB-T and satellite. The majority of subscribers are in cable and IPTV products but satellite and DVB-T offer a cheap alternative, mainly a more basic or free TV solution. In our historical concession areas, we compete with cable operators such as UPC, Magyar Telekom and Digi and many smaller cable operators, which utilize their cable networks to provide broadband internet services and VoIP bundled together with analogue or digital TV. Competition in this market is primarily on the basis of price, speed of access, number and quality of TV channels and brand. There are also several areas where multiple competitors operate in the same territory, which puts additional pressure in these markets and makes the acquisition and retention of subscribers more and more challenging. Additional TV competition, DVB-T operator Antenna Hungária and satellite operator such as UPC direct and Magyar Telekom cover the entire country. We also compete to a lesser extent with internet service providers which buy ADSL wholesale from us. However, this source of competition is declining. In our historical concession areas, we are able to offer ADSL broadband services to substantially all of our fixed line customers, and to a smaller group VDSL and FTTH broadband services. We also have been offering IPTV and DVB-T services to customers in our historical concession areas as part of triple play and double play offerings. Our “Net and Go” product, a combined fixed internet and mobile broadband proposition enables us to offer fixed broadband and mobile broadband in a single package all under the Invitel brand. This product was developed in cooperation with Telenor, the second largest mobile operator in Hungary.

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Outside of our historical concession areas, we are competing with UPC, Digi, smaller cable operators and the main incumbent fixed line operator (Magyar Telekom). We provide xDSL based broadband Internet services principally by buying the service on a wholesale basis from the incumbent operator. Mobile broadband is now widesprend, following substantial investments in 3G and 4G/LTE technology. Mobile broadband services are accessible via data-cards, USB keys and internetenabled 3G and 4G/LTE handsets. Cable Cable voice has become significant competitive factor in addition to mobile substitution by now. We have faced increased competition from cable television operators both in and out of our historic concession areas. Cable companies can effectively cross-finance services (TV, Internet and voice services) in product offers, enabling them to aggressively price and market the voice portion of their product offering. Cable television operators’ unique selling proposition is their low monthly fees for voice. However, the Hungarian cable market is still rather fragmented and cable competitors impact our company on different ways in each of our historical concession areas. The principal cable television operators we compete with in our Residential Voice market are UPC, Magyar Telekom and Digi, each of those have introduced triple play solutions in our historical concession areas, and collectively covering around 60% in our historical concession areas. In the case of our Cable internet services, we mainly compete with Magyar Telekom due to its upgraded xDSL internet service and the cable operators such as UPC and Digi, which utilize their cable networks to provide broadband internet services and VoIP bundled together with analogue or digital TV. There are also several areas where multiple competitors operate in the same territory, which puts additional pressure in these markets and makes the acquisition and retention of subscribers more and more challenging. Corporate Invitel is the second largest fixed line operator in the Corporate segment, The market leader, T-Systems still holds 55% of the total market, followed by Invitel (21% of total market value). Our main fixed line competitor in the Corporate market is Magyar Telekom, T-Systems and to a lesser extent UPC and other smaller players. The basis of competition includes network reach, proximity to customer premises, price and customer service. Operators who rent networks from the incumbent provider cannot compete as effectively as those with direct network presence in the area. Margin per customer is closely correlated with how much capacity is provided or how much traffic is carried on our own network infrastructure. We believe that our national network, as well as our modern data center facilities, gives us a strong competitive position when selling voice, data, internet access, and IT and Datacenter cervices to Corporate customers throughout Hungary. In most urban centers, we have a point of presence on our own fiber optic backbone network and, therefore, are able to connect customers directly to our backbone network using our metropolitan fiber, line of sight microwave, LLU or leased lines.

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We also compete with the mobile operators who target corporate customers, which have led to fixed-to-mobile traffic substitution in the Corporate voice market, and different IT providers as well, who can only offer stand-alone solutions without telecommunication connection, therefore we have comparative advantage over them. Wholesale Inside our historical concession areas, we currently experience limited competition for Wholesale services because these services are typically provided by the primary incumbent local telephone operator. Outside our historical concession areas in Hungary, our competition is comprised primarily of the incumbent operators, mainly Magyar Telekom as well as MVMNet (a government owned telecommunication provider), Antenna Hungária (the state-owned national broadcast company) which provides smaller bandwidth services over microwave. Our Network Overview Our telecommunications network is comprised of our original network in the Hungarotel historical concession areas, the national backbone network and access networks that we added when we acquired PanTel in 2005, the network we added through the acquisition of Invitel in 2007 (which consisted of the network covering the Invitel historical concession areas as well as a national backbone network) and access networks covering many of Hungary’s urban centers. In 2011 we acquired Fibernet and added HFC (Hybrid Fiber Coax) network to our existing network. Today our telecommunications network consists of a national backbone network and access networks throughout Hungary. Backbone Network Our national backbone network comprises approximately 9,000 kilometers of fiber with points of presence in Budapest and more than 40 urban centers across Hungary. Our network carries traffic between the major cities of Hungary, provides connectivity to and within our historical concession areas, connects major urban business centers outside our historical concession areas and provides international connectivity. Our backbone network consists of fiber rings that management believes are on par with Western European digital network standards and has been designed for an open architecture using Synchronous Digital Hierarchy, IP, Carrier Ethernet and DWDM technologies. Access Networks Inside Our Historical Concession Areas Within our historical concession area (which covers approximately 21% of Hungary’s population), we have versatile modern telecommunications networks. The networks are designed to offer voice and broadband (xDSL, FTTx) services to substantially all of our customers as well as data services to our Business customers. The network is based on a combination of copper lines, wireless technologies and fiber optic cable. Access Networks Outside Our Historical Concession Areas Point-to-Point Networks. We use PP microwave radio to provide high bandwidth connections to corporate clients. The majority of our PP sites have been deployed in Budapest. We have installed more than 2,800 PP links to date for connection to corporate clients and to provide connections between sites.

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Metropolitan Areas Networks (“MANs”). In addition to the PMP and PP networks, we operate approximately 800 kilometers of MANs in Budapest and eight of the urban centers outside our historical concessions areas. Our MANs provide a direct link between our backbone network and access network (e.g. radio (PP and PMP) base stations and xDSL). This allows the city rings to be fully integrated in a seamless manner with our overall network. Each MAN is built with fiber cable technology which is essentially the same as that used for our backbone network. Our Budapest MAN passes through areas of the capital with significant business potential. Cable (CMTS) and Wi-Fi Internet Network. The networks are designed to offer voice and broadband (CMTS and Wi-Fi) services to substantially all of our customers as well as our residential customers. The network is based on HFC and wireless technologies. The networks which we operate outside our historical concession areas also include network lines which we lease from other telecommunications operators and unbundled local loops (LLU). This enables us to reach a wider geographical area beyond the coverage of our PMP and PP networks and MANs over which we have control. LLU also provides us with a lower cost option for directly connecting smaller business customers. We have approximately 5,000 customers connected through LLU, with 13 LLU sites in Budapest and 18 LLU sites outside of Budapest. In addition, we have almost 40 WiMAX base stations in Hungary to provide alternative low cost access methodology to directly connect principally smaller business and residential customers. Voice Network We have deployed a fully digital switching network hierarchy. A total of 18 exchanges have been deployed in a hierarchical network. Local Exchanges handle the interconnection of customer lines and the switching of local traffic while the Primary Exchanges handle traffic for other areas. Secondary Exchanges provide the transit functionality for switching traffic between different regions. Secondary Exchanges also handle the interconnection of Business voice traffic from outside our historical concession areas. The International Gateway Exchange is the point of interconnection for all international traffic, secondary exchanges and is the point of interconnection for all national and mobile traffic in our network. We also operate a softswitch system providing VoIP and IP PBX services. Data and Leased Line Network Multi-service network. We have deployed an extensive multi-service network to provide advanced Carrier Ethernet and IP based services to corporate, SME and internet service provider clients. The range of services includes IP and Ethernet based VPN, Layer 2 Ethernet (“L2E”), virtual networks, VoIP, internet access, VLAN and Extranet services. This enables us to provide tailored services to meet the customers’ needs. This multi-service network has been deployed throughout Budapest, our historical concession areas and major cities in Hungary. Main interconnected Carrier Ethernet nodes provide 10 or 100 Gigabit Ethernet network connections on our backbone network. The smaller capacity nodes are connected in a star or mesh configuration to backbone. Managed leased line network. The managed leased line network provides “last mile” access to leased line customers. The extensive network provides multiple points of presence for managed leased line services. It also provides cross-connect capabilities to enable leased line networks. Leased Line services are provided through fiber, PP and PMP networks outside our historical concession areas.

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Both the multi-service and the leased line networks are designed to offer capacity and flexibility for the positioning of advanced data and leased line services. CaTV Head Ends We have 59 head ends for Cable TV serving 108 settlements outside our historical concession areas. Datacenter On August 28, 2014 Invitel acquired 100% of the share capital of Dataneum. Dataneum provided, primarily to Invitel, data center infrastructure services at its main data center in Budapest, under a 10 year asset rental and services contract signed in 2009. The Tier 3 equivalent data center, which has nearly 1,500 m2 of built-out data center space as well as additional expansion capacity, was built out in 2009 to Invitel’s specification. This datacenter has large telecommunication capacities and resilience with multiple, independent optical connections to both the national and the Budapest regional backbone network and also direct connections to the bigger internet junctions such as the Invitel “Ilka Datacenter”, BIX, Infopark and T-Systems. The datacenter is able to provide services including rented server, virtualization, collocation, server hosting services. Interconnection Agreements with Other Operators We have interconnection agreements with each of the major Hungarian fixed line, mobile and alternative operators, including, among others, Magyar Telekom, UPC Hungary, T-Mobile, Telenor and Vodafone. The objective of these interconnection agreements is to enable the parties to access each other’s networks and terminate traffic originated in the other party’s network, which enables the two operators’ customers to connect with each other. These interconnection agreements are typically for indefinite terms and are based on, or incorporate the terms of, our reference interconnection offers (“RIOs”). Network Access Agreements with Internet Service Providers We have wholesale agreements with various internet service providers under network management agreements enabling them to provide Mass Market Internet and Business Internet services. These agreements provide for DSL broadband internet access through our networks. See “Hungarian Telecommunications Industry and Regulation — Hungarian Regulatory Environment.” We have been a DSL services provider in our historical concession areas since 2001. We offer DSL services in our historical concession areas on a wholesale basis, mainly to Magyar Telekom. Outside our historical concession areas, we have network access agreements with Magyar Telekom and UPC Hungary for DSL services. Additionally, in the Domestic Wholesale market, we act as a nationwide internet service provider and purchase international peering services. We also have direct peering with Magyar Telekom, Digi, UPC and Google to exchange direct traffic. Network Management We monitor our voice network with continuously running systems, which has enabled us to improve our quality of service to an average fault rate per month which we believe is comparable to European benchmark operators and is better than the threshold imposed by the Hungarian

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regulatory authorities. Monitoring provides us with the proactive management ability of network/service failures, allowing us to provide a high, guaranteed level of service availability, which is particularly important to and valued by our Business customers. The backbone and access networks are monitored via various management systems (including Alcatel NM, Tellabs Network Manager and Newbridge NMS). We also constantly monitor our IP network using the IBM Tivoli Netcool/OMNIBUS network management system. This platform provides integrated management of our operation and maintenance processes by our centralized network management staff and significantly reduces our network operating costs. These network monitoring systems, which also have back-up facilities, are located at our Service Management Center near our corporate headquarters in Budaörs near Budapest and can be accessed from other locations on our network. In addition, we monitor customer service level agreements to ensure that we apply the appropriate priority and escalation levels to customer service calls logged. Billing and Customer Care Software Systems We currently operate on a single monthly billing period. At the end of each billing period, our usage traffic generating external systems transfer metered data to the billing systems and an update is prepared for the general ledger. The printing files of billing systems are sent to a third party for printing and another third party for distribution. The majority of our residential customers pay their bills through the Hungarian Post Office’s third party payment system. Under this system, customers fill out a payment order and pay the amount due to the Hungarian Post Office, which in turn transfers all amounts paid by our customers promptly to our account. The Hungarian Post Office’s third party payment system has traditionally been the main means of bill payment for service providers in Hungary. More and more of our customers pay their bills through direct debit and bank transfers but still it is the minority. We currently operate two major billing systems: (a)

CosmOSS, a post-paid billing system that provides billing services basically to Residential customers including Small Account corporate and a few Core Corporate customers. CosmOSS bills for analogue standard voice, CS, CPS, internet, data and TV services. CosmOSS is partly operated by Euromacc Kft.

(b)

FusionR, a post-paid billing system that provides billing services for Core Corporate customers and Wholesale services. We also operate four different customer administration systems:

(c)

Contract Management (“CM”) is an order management application that provides a consolidated platform for the entire Core Corporate customer market. It also supports the entire sales cycle from prospect to disconnection.

(d)

Network Management Tool (“NMT”) is an order management system serving Residential customers with voice and cable services and some automatic provisioning and fault handling support for Residential and Corporate customers in our historical concession areas.

(e)

Internet Administrator (“IA”) is an order management system serving Residential customers with internet and bundled (voice, IP, IPTV, MBB) services with automatic Page 64 of 76

provisioning support and also with CS and CPS services. (f)

VITRIN is a workflow application providing provisioning and fault handling workflow support mainly for Core Corporate customers (data, ISDN30, ADSL and IT and Datacenter services) and partially some residential services (IPTV, LLU).

We believe that our billing and customer care systems are adequate to meet the current functional requirements for invoicing our customer base. Employees As of December 31, 2015 and 2014, we had 1,155 and 1,173 employees, respectively, all of which were located in Hungary. A breakdown of our headcount by job function as of December 31, 2015 is set forth in the table below: Number of Function Employees Residential Business Unit (including Operations) ................................................................ 551 477 Corporate/Wholesale Business Unit (including Operations) ................................................... 66 Finance ................................................................................................................................ Legal, HR and Regulatory......................................................................................................... 56 General Management and Administration ................................................................................ 5 Total.......................................................................................................................................... 1,155 We believe that we have satisfactory working relationships with our employees and have not experienced any significant labor disputes or work stoppages. Property, Plant and Equipment Our Property We lease our principal executive offices in Budaörs, Hungary. In addition, we own and lease properties throughout Hungary. We have secured all the necessary rights-of-way with respect to our telecommunications networks. We believe that our leased and owned office space and real property are adequate for our present needs but we periodically review our future needs. Our material properties include properties that we own that comprise part of our telecommunications infrastructure (“telecom freehold” properties), properties that we lease that comprise part of our telecommunications infrastructure (“telecom leasehold” properties) and properties we lease in connection with the day-to-day operations of our business (“other leasehold” properties), each of which is summarized below: Telecom Freehold. Of our 575 telecom freehold properties, we own the land and superstructure for 194 properties, we own the superstructure only for an additional 373, we have joint ownership with third parties over 5 properties, and we have free rights of use, although the Hungarian Post Office has title, over 3. All of our telecom freehold properties are located in our historical concession areas except for 9 buildings, which we bought as part of the Fibernet Acquisition, which are outside our historical concession areas. Telecom Leasehold. We have 1,199 telecom leasehold properties that comprise part of our telecommunication network.

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The total annual rental fees for our telecom leasehold properties are approximately €3.4 million, with various durations; approximately 70% of these leases are of an indefinite duration, approximately 30% of these leases are for a period of one to five years and the remainder is for 2 to 25 year periods. Other Leasehold Facilities. We lease an additional 42 properties, comprising 16 office buildings, 23 customer services offices and 3 other leasehold properties. The total annual rental fees for these other leasehold properties are approximately €2.6 million, with various durations; approximately 30% of these leases are of an indefinite duration and approximately 70% of these leases are for 2 to 5 year periods. Rights of Use. Under the Hungarian Civil Code, we are authorized to obtain rights of use over real property owned by third parties in exchange for a lump sum of compensation. Furthermore, the 2003 Communications Act re-enforced existing rights to construct buildings and install telecommunications equipment, wires and antennas on real property owned by third parties. In keeping with standard market practice among Hungarian telecommunications network operators, we have historically commenced operations based on a landowner’s consent granted during the construction permitting process but before reaching formal written agreements. In connection with our national backbone network, we have successfully concluded agreements with affected landowners for the most part. However, in connection with certain portions of our national backbone network constructed from 1996 through to 1998, we initiated formal contractual negotiations to reach agreements with the affected landowners at the beginning of 2001, and these contractual negotiations, along with the related registration of rights of use, are still ongoing. Insurance We maintain the types and amounts of third party insurance coverage customary in the industry in which we operate, including coverage for business interruption, property damage, liability and employee related accidents and injuries above specified self-insured amounts for each type of risk. We are current with all of our premium payments and have made no material claims under our insurance policies in the past three years. We also maintain directors’, and officers’ insurance. We consider our insurance coverage to be adequate for our business, as to both the nature of the risks and the amounts insure. Environmental Our operations are subject to a variety of laws and regulations relating to land use and environmental protection. We have a good relationship with the environmental authorities. The internal environmental protection activities are governed by certain internal rules on environmental protection issued by us, for the purpose of educating our employees about environmental protection and requiring them to be environmentally conscious. In the past five years, no environmental fines have been imposed on us. We are in substantial compliance with the applicable requirements. Legal Proceedings The Group is involved in legal proceedings in the normal course of business. Based on legal advice, management made appropriate provisions in its December 31, 2015 consolidated balance sheet for the potential future cash outflows relating to certain ongoing legal matters.

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The Group accounts for termination services provided by mobile operators at regulated interconnection rates. The mobile service providers have ongoing legal cases against the regulator with respect to such termination fees. Management of the Group believes that the outcome of such disputes will not have a significant impact on the consolidated financial statements of Matel, and accordingly no provision has been recorded in the consolidated financial statements for the possible return of amounts arising from reduced regulated interconnection rates. Other The Group is involved in various other legal actions arising in the ordinary course of business.The Group is contesting these legal actions in addition to the actions noted above; however, the outcome of individual matters is not predictable with assurance. Although the ultimate resolution of these actions (including the actions discussed above) is not presently determinable, management believes that any liability resulting from the current pending legal actions, in excess of amounts provided therefore, will not have a material effect on the consolidated financial position, results of operations or liquidity of the Group.

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11.

ORGANIZATIONAL STRUCTURE The following chart summarizes our corporate structure at December 31, 2015:

Noteholders

Mid Europa Partners

Mid-New Technocom Vagyonkezelő Kft.

Hungarian Telecom (Netherlands) Coöperatief U.A.

100%

25%

75%

Hungarian Telecom B.V.

Matel Holdings Limited

51%

49%

Magyar Telecom B.V.

Hungarian Authorities

99.991487%

100%

0.001605%

0.006909%

Invitel Távközlési Zrt

1100% 1 0 1 Dataneum Zrt

Invitel Technocom Kft .

100%

Key Issuer of Notes Guarantor of Notes

Invitel International Holdings B.V.

Mid Europa Partners

N. B. The flag included in respect of each company represents that company’s jurisdiction of Incorporation/ . tax residency

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12.

OUR DIRECTORS AND SENIOR MANAGEMENT

The following table sets out certain information concerning Matel’s Board of Directors as of December 31, 2015. The business address of each of the directors is 6 St Andrew Street, London EC4A 3AE, United Kingdom. The Board of Directors exercises its voting rights by each director having one vote. Name

Age

Position

Mark Nelson-Smith Nikolaus Bethlen Jan Vorstermans Tas Tóbiás András Piller

50 38 56 30 46

Chairman of the Board Member of the Board Member of the Board Member of the Board Member of the Board

Certain information relating to our directors is set out below. Mr Mark Nelson-Smith (Chairman of the Board) served as a non‐executive director of Medfort and Perseus, two holding companies in the Primacom group from December 2010 to April 2013. Primacom is Germany’s fourth largest cable TV operator. During his time with Primacom, the group underwent a comprehensive operational restructuring, two financial restructurings and a formal disposal process which resulted in a binding offer that was ultimately not accepted by the shareholders. Mr Nelson-Smith was heavily involved in Primacom’s governance, both through his directorships of Perseus and Medfort, and through his membership of Primacom’s “operational council” during this period. Mr Nelson-Smith has extensive experience in the field of financial restructuring and is currently a partner at Talisman Management, a specialist operational restructuring boutique, and an affiliate of FTI Consulting, whom he has assisted on a number of assignments. Mr Nelson-Smith spent the early part of his career at S.G. Warburg and UBS. Mr Nikolaus Bethlen has been a member of the Board of Directors since November 2009. Mr Bethlen is a Partner of Mid Europa. Prior to joining Mid Europa, he worked for Kohlberg, Kravis, Roberts & Co. (“KKR”) in London. Prior to joining KKR, he was with Morgan Stanley & Co. in its European Mergers and Acquisitions and Capital Markets Departments. Mr Bethlen holds a B.A. in Business Economics from Durham University, England. Mr Jan Vorstermans held the position of Chief Operating Officer at Telenet, the largest provider of cable broadband services in Belgium, from October 2010 to July 2013. In this role, he was responsible for the network and IT divisions, wholesale, projects and program management and end-to-end quality control, realizing various quality improvement programs and cost reduction initiatives, and implementing a business continuity program. Mr Vorstermans worked for Telenet for seven years prior to assuming this position, acting as the Executive Vice President Technology and Infrastructure for four years and the Senior Vice President Networks and Service Operations for three years. From 1994 to 2003, Mr Vorstermans worked for BT, where he held the role of Vice President Networks and Service Operation from 2001 to 2003. Mr Tas Tóbiás is a Senior Associate of Mid Europa Partners and is focused on executing and monitoring investments. Prior to joining Mid Europa, he worked at The Riverside Company in New York. Previously, he was in the Investment Banking Division at Merrill Lynch in New York. Mr Piller András graduated as economist, having diversified professional experience in the telecommunications and media sector: between 1993 and 1997 he was the CFO of Westel, from 1997 to 2001 he had been the CFO and CEO of RTL Klub.

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From 2002 to 2007 he had been the CEO of T-Kábel and between 2007 and 2011 he led the Central and Eastern Europe operation of Fibernet, presently he is the CEO of Baltcom, the leading cable TV operator in Latvia. Chief Executive Officer As of December 31, 2015 Mr David Blunck is the Chief Executive Officer of Invitel, and his biography is as follows: Mr David Blunck has been Chief Executive Officer of Invitel since January 2015. Prior to that, Mr Blunck held the position of Chief Financial Officer of Invitel since September 2012. Before Invitel, Mr Blunck served as Chief Financial Officer of the Brokernet Group in Hungary and has served in senior management positions at Delta Air Lines in the United States and Colt Technology Services in the United Kingdom. Change in Board of Directors As of January 14, 2015 Mr David McGowan resigned as the Chief Executive Officer of Invitel and Executive Board Member of Matel. On the same day, Mr David Blunck became the Chief Executive Officer of Invitel and Member of the Board of Directors of Matel. Mr Robert Chmelar resigned as non-executive Board Member from the Board of Matel effective as of January 29, 2015 and was replaced by Mr Tas Tóbiás. On October 15, 2015 the Company announced further changes to its Board of Directors. Matel Holdings Limited, which holds 49% of the shares of the Company, has appointed Mr András Piller as a new Director of the Company. Mr Mark Nelson-Smith is succeeding Mr Nikolaus Bethlen as Chairman of the Board of Directors. Mr Thierry Baudon and Mr David Blunck have both stepped down from the Board. Mr Blunck remains Chief Executive Officer of Invitel. Mr Bethlen will continue to serve on the Board as Director, alongside Mr Tas Tóbiás and Mr Jan Vorstermans. Compensation Directors’ Compensation The compensation of the Board of Directors is determined by the Shareholders’ Agreement dated December 12, 2013. Only the directors delegated by Matel Holdings Limited receive compensation. Employment arrangements In 2015, the aggregate compensation of the Board of Directors was €159 thousand. On May 19, 2014 the Board of Directors of Matel approved the introduction of a Management Incentive Plan (the “MIP”). In the framework of the MIP, on July 31, 2014, Matel issued 16 non-voting “C” shares in the capital of the Company. Each “C” share has a nominal value of one euro cent (EUR 0.01). The “C” shares were acquired by Stichting Administratiekantoor MTBV, a special-purpose Dutch foundation whose beneficiaries are the MIP participants. Holders of the “C” shares will be entitled to certain distributions if certain conditions specified in the MIP are met. As of December 31, 2015 no amount was recorded in relation to the MIP, as it is management’s assessment that the conditions specified in the MIP are not probable as of the date of the Consolidated Financial Statements.

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13.

OUR PRINCIPAL SHAREHOLDERS

As of December 31, 2015 and 2014, Matel shares were 51% owned by Hungarian Telecom B.V., which is 100% owned by Mid Europa, through its holding companies and 49% owned by Matel Holdings Limited, a newly established entity owned by noteholders.

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14.

RELATED PARTY TRANSACTIONS

Related parties as of December 31, 2015 and 2014 include the Group’s subsidiaries, as well as Mid Europa, Hungarian Telecom B.V., Matel Holdings Limited and key management personnel of the Group. Salaries and other short-term employee benefits paid to key management personnel (members of the executive management team) amounted to EUR 2,098 thousand and EUR 2,809 thousand for the years ended December 31, 2015 and 2014, respectively. Termination benefits paid to key management personnel amounted to EUR 555 thousand and EUR nil for years ended December 31, 2015 and 2014. There have been no share based compensation, post-employment benefits or other long-term benefits paid to key management personnel during the years ended December 31, 2015 and 2014. There have been no loans or guarantees provided to key management personnel during the years ended December 31, 2015 and 2014.

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15.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Principal Accountant Fees and Services EY and firms of the world-wide network of EY firms (collectively, “EY”) served as the Company’s independent auditor for the audit of the financial statements for the year ended December 31, 2015 and PricewaterhouseCoopers served as auditor for the year ended December 31, 2014. The following table presents fees for professional audit services rendered by EY and PricewaterhouseCoopers (“PwC”) for the audit of the financial statements for the years ended December 31, 2015 and 2014 and fees for other services rendered by EY and PwC during those years.

(In €) Audit of the financial statements Other services Total

2015 (EY) 219,423 349,100 568,523

2014 (PwC) 288,825 288,825

The fees listed above relate to the procedures applied to the Company and its consolidated Group entities by external auditors as referred to in Article 1(1) of the Dutch Accounting Firms. Services rendered by external auditors in connection with fees presented above were as follows. Audit of the Financial Statements For the years ended December 31, 2015 and 2014, fees for audit of the financial statements included fees associated with the annual audit of the consolidated financial statements and statutory and regulatory filings. Other Services Other service fees consist of fees for assurance and advisory type services that are related to ongoing and strategic projects of the Company.

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16.

GLOSSARY OF TERMS

Our industry uses many terms and acronyms that may not be familiar to you. To assist you in reading this Report, we have provided below definitions of some of these terms. “access network” part of a network which connects end-users to the backbone. “ADSL” means asymmetric digital subscriber line. “ATM” or “asynchronous transfer mode” an international high-speed, high-volume, packetswitching protocol which supplies bandwidth on demand and divides any signal (voice, data or video) into efficient, manageable packets for ultra-fast switching. “backbone” a high-speed line or series of connections that forms a major pathway within a network. “bitstream access” a broadband access product which utilizes DSL in the local loop point of presence and then transports across the network to a DSL regional point of presence. It allows a voice and a DSL service to be integrated over the same two-wire copper pair. “broadband” a descriptive term for evolving digital technologies that provided consumers with a signal-switched facility offering integrated access to voice, high-speed data service, videodemand services and interactive delivery services. “Corporate” refers to one of the four markets in which we operate. “cable modem” a cable modem is a device that enables connection of a PC to the cable TV network and receive data at a high speed. “CPS” or “Carrier Pre-selection” whereby the selected operator is pre-set as the default operator for making certain calls so that no prefix needs to be dialed. “CS” or “Carrier Selection” carrier selection on a call-by-call basis, whereby an operator different from the default operator may be selected by the subscriber through dialing a prefix for making certain calls. “Dark fiber” unused fiber optic cable. Fiber optic cables convey information in the form of light pulses so that “dark” fiber means that no light pulses are being sent over the fiber optic cable. “DSL” or “digital subscriber line” an access technology that allows voice and high-speed data to be sent simultaneously over local exchange service copper facilities. “DVB-T” digital terrestrial television broadcast services “DWDM” or “Dense Wavelength Division Multiplexing” is a technology which multiplexes multiple optical carrier signals on a single optical fiber by using different wavelengths (colors) of laser light to carry different signals. This allows for a multiplication in capacity, in addition to making it possible to perform bidirectional communications over one strand of fiber. “Ethernet” the most common type of connection computers used in a local area network. “Frame Relay” industry-standard switched data link layer protocol, used typically for high speed data transmission through leased lines.

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“FTTx”: includes FTTH or FTTC which means fiber to the home and fiber to the curb, respectively. “GSM” global system for mobile communications. “IT and Datacenter services” refers to our department operating in Corporate market and providing Information and Communication Technology services to our customers. “incumbent” the dominant operator which was licensed to enter the market and establish a proprietary network under the protection of a regulatory monopoly. “IP” or “Internet protocol” the communications standard that defines the unit of information passed between computer systems that provide a basic packet delivery service. “IPTV” Internet protocol television. “ISDN” or “integrated services digital network” an international standard which enables high speed simultaneous transmission of voice and/or data over an existing public network. “ISDN2” ISDN access with two channels designed primarily for residential use. “ISDN30” ISDN access with 30 channels designed primarily for business use. “leased line” A dedicated communications circuit for continual data transmission leased typically by business customers enabling the connection of two geographically distant points. “local loop” the part of a communications circuit between the subscriber’s equipment and the equipment in the local exchange. Also known as the subscriber loop, local line and access line. “LLU” local loop unbundling. “LRIC” or “long run incremental cost” a cost accounting methodology focusing on long-run incremental costs. “LTO” or “local telephone operator” a telecommunications operator which, until the liberalization of voice telephony, was licensed to provide local telephone services in designated concession areas only. “managed leased line” a leased line monitored, managed and controlled by a network management system offering an increased level of flexibility, reliability and security. “MNO” or “mobile network operator” is a provider of services wireless communications that owns or controls all the elements necessary to sell and deliver services to an end user. “MPLS” or “Multiprotocol label switching”: a widely supported method of speeding up data communication over combined IP/ATM networks. Numbers of “lines” or “fixed lines” refers to numbers of fixed telecommunications line equivalents; “number portability”: the ability of a customer to transfer from one telecom operator to another and retain the original telephone number.

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“PMP” or “Point-to-multipoint”: point-multipoint; usually refers to access networks utilizing microwave technology to link the operator’s point of presence with a number of remote customer locations. “PSTN” or “public switched telephone network”: traditional landline network for voice telephony. “RIO”: reference interconnection offer. “RUO”: reference unbundling offer. “SME”: small and medium-sized enterprises. “SMP”: significant market power. “transit services”: an interconnection service comprising of conveyance on a network between two points of interconnection, linking two networks that are not directly interconnected. “unbundling”: granting unbundled access to the local loop so that the third party operators requesting access to the local loop is not required to purchase interconnection services from the incumbent operator; also referred to as “local loop unbundling.” “VDSL”: Very high bit-rate Digital Subscriber Line. “VLAN”: virtual local area network. “VoIP”: voice over Internet protocol. “VPN” or “virtual private network”: A private network (often an Intranet) that makes use of the public telecommunication infrastructure, maintaining privacy through the use of specific protocols and security procedures. A VPN can be contrasted with a system of owned or leased lines that can only be used by one company. The main purpose of a VPN is to give the company the same capabilities as private leased lines at much lower cost by using the shared public infrastructure. “Wholesale”: refers to one of the four markets in which we operate. “WiMAX” or “Worldwide Interoperability for Microwave Access”: a telecommunications technology that provides for the wireless transmission of data using a variety of transmission modes. “xDSL”: wholesale broadband access network for copper. In addition, we have included a list of certain other defined terms used in this Report under the heading "Certain Definitions and Presentation of General Information".

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