UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002.
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 0-30190.
NETIA HOLDINGS S.A.
(Exact name of Registrant as specified in its charter)
THE REPUBLIC OF POLAND
(Jurisdiction of incorporation or organization)
UL. POLECZKI 13, 02-822, WARSAW, POLAND
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, NOMINAL VALUE PLN 1.00 PER SHARE
AMERICAN DEPOSITARY SHARES, EACH REPRESENTING FOUR ORDINARY SHARES
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
ORDINARY SHARES, NOMINAL VALUE PLN 1.00 PER SHARE: 31,418,172 SHARES
PREFERRED SHARES, NOMINAL VALUE PLN 1.00 PER SHARE: 1,000 SHARES
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [X] Item 18
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[X] Yes [ ] No
TABLE OF CONTENTS
PART I
PAGE
ITEM 1 Identity of Directors, Senior Management and Advisors ....................................................3
ITEM 2. Offer Statistics and Expected Timetable...................................................................3
ITEM 3. Key Information...........................................................................................3
ITEM 4. Information on the Company...............................................................................19
ITEM 5. Operating and Financial Review and Prospects.............................................................51
ITEM 6. Directors, Senior Management and Employees...............................................................65
ITEM 7. Major Shareholders and Related Party Transactions........................................................74
ITEM 8. Financial Information....................................................................................83
ITEM 9. The Offer and Listing....................................................................................83
ITEM 10. Additional Information...................................................................................87
ITEM 11. Quantitative and Qualitative Disclosures About Market Risk...............................................102
ITEM 12. Description of Securities Other than Equity Securities...................................................103
PART II
ITEM 13. Defaults, Dividend Averages and Delinquencies............................................................104
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.............................104
ITEM 15. Controls and Procedures..................................................................................104
ITEM 16. [Reserved]...............................................................................................104
PART III
ITEM 17. Financial Statements.....................................................................................105
ITEM 18. Financial Statements.....................................................................................105
ITEM 19. Exhibits.................................................................................................105
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
The terms "we" and "Netia group" refer to Netia Holdings S.A. and its
consolidated subsidiaries. The term "Company" refers to Netia Holdings S.A. We
are the largest alternative fixed-line telecommunications provider in Poland, in
terms of value of generated revenues (based on June 2003 report prepared by
Computerworld, a Polish telecommunications information service). We provide a
broad range of telecommunications services including voice, data and wholesale
services. Our goal is to be the preferred telecommunications services provider
in Poland through innovative and attractive product and service offerings
supported by high-quality customer care. We own, operate and continue to expand
a fiber-optic network that as of March 31, 2003 stretched for 3,840 kilometers.
As of March 31, 2003, we connected 345,447 active subscriber lines, including
108,603 business lines.
As of May 16, 2003 we completed our financial restructuring implemented pursuant
to the Restructuring Agreement, dated March 5, 2002, which we refer to as the
Restructuring Agreement, and Polish arrangement plans and Dutch composition
plans adopted by our creditors and approved by the relevant Polish and Dutch
courts. These courts' decisions were recognized by the U.S. Bankruptcy Court for
the Southern District of New York, which we refer to as the U.S. Bankruptcy
Court, in a proceeding under section 304 of the U.S. Bankruptcy Code.
As of January 2, 2003, all court decisions approving Dutch composition plans and
Polish arrangement plans became final and unappealable. Consequently, the
restructuring is irreversible, subject to Netia group's compliance with
performance of all obligations under the Dutch composition plans and Polish
arrangement plans. Management believes that the Company will comply with its
obligations under the Dutch composition plans and the Polish arrangement plans.
The restructuring process encompassed legal proceedings in three jurisdictions
and consisted of Dutch moratorium proceedings, Polish arrangement proceedings
and proceedings in the United States of America under Section 304 of the U.S.
Bankruptcy Code. Pursuant to the Restructuring Agreement and the Exchange
Agreement dated June 14, 2002, which we refer to as the Exchange Agreement,
Netia Holdings B.V., which we refer to as NH BV, the Company's wholly-owned
Dutch subsidiary, issued EUR 49,869,000 of 10% Senior Secured Notes due 2008,
which we refer to as the 2002 Notes, to holders of the existing notes and
JPMorgan Chase Bank, in exchange for relinquishing their claims in respect of
the existing notes and obligations under the swap agreements with JPMorgan Chase
Bank. In addition, creditors of the Netia group had an opportunity to subscribe
with their reduced claims in the form of installment obligations for series H
shares issued by the Company. On December 23, 2002, the Company's creditors
subscribed for 312,626,040 series H shares offered by the Company in exchange
for such installment obligations. On January 30, 2003, the Polish court
registered the series H ordinary shares. Those shares were registered with the
Polish National Securities Depository on February 10, 2003 and on February 13,
2003 they commenced trading on the Warsaw Stock Exchange. On March 24, 2003 the
Company redeemed the outstanding 2002 Notes for a total amount of EUR 51,096,381
(approximately PLN 221,482,373 at the average exchange rate quoted by the
National Bank of Poland, which we refer to as NBP, on March 24, 2003) including
interest accrued until that date, following the Company's supervisory board
approval and recommendation by the Company's management board.
3
Under the Restructuring Agreement and the Exchange Agreement, the Company's
record shareholders as of December 22, 2002 were issued on May 16, 2003
32,424,221 two-year warrants and 32,424,221 three-year warrants to acquire
64,848,442 ordinary shares representing 15% of the Company's post-restructuring
share capital (taking into account the issuance of 18,373,785 ordinary shares
representing up to 5% of the outstanding share capital in respect of a key
employee stock option plan). Each two-year warrant entitles its holder to
subscribe for one series J share by April 29, 2005 and each three-year warrant
entitles its holder to subscribe for one series J share by April 29, 2006. On
April 12, 2003, the supervisory board approved the strike price for the warrants
at PLN 2.53, which corresponds to the volume-weighted average price of the
Company's ordinary shares on the Warsaw Stock Exchange for the 30 trading days
beginning 31 days following the registration of the series H shares by the
Polish court. The Company also plans to issue up to 18,373,785 ordinary shares
under a key employee stock option plan. As of June 24, 2003, our share capital
equaled PLN 344,158,751 and was divided into (i) 5,000 series A ordinary
registered shares, (ii) 3,727,340 series B ordinary registered shares, (iii)
1,000 series A-1 preferred registered shares, (iv) 312,626,040 series H ordinary
bearer shares, (v) 113,539 series J ordinary bearer shares and (vi) 27,685,832
series C through G ordinary bearer shares1 outstanding.
Our ordinary shares are listed on the Warsaw Stock Exchange under the symbol
"NET" and our American Depositary Shares, or ADSs, are traded in the "pink
sheets" over-the-counter trading market, which we refer to a as the Pink Sheets,
following their de-listing from the Nasdaq National Market on October 15, 2002
due to (i) failure to comply with certain requirements for continued listing on
the Nasdaq National Market, (ii) filing for arrangement proceedings in Poland
and (iii) filing a petition under section 304 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court. On May 22, 2003, our management board resolved not to
apply to re-list our ADSs on the Nasdaq Small Cap Market. Our two-year warrants
and three-year warrants are listed on the Warsaw Stock Exchange under the
symbols NETPP02 and NETPP03, respectively.
This annual report contains forward-looking statements. These statements appear
in a number of places in this annual report and include statements regarding our
intentions, beliefs or current expectations concerning, among other things: the
development of the Polish telecommunications market; the growth in demand for
business internet services; our plans for the development of our business,
including our plans to expand our voice telephone service in Warsaw, domestic
long-distance and internet services; our financing plans, including our need for
capital resources; trends affecting our financial condition or results of
operations; the build-out of our telecommunications network; the impact of
competition on our business; and changes in the regulatory environment affecting
our business.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
annual report identifies important factors that could cause such differences.
You should read Item 3.D ("Risk Factors") below for a discussion of some of
these factors. We undertake no obligation to publicly update or revise any
forward-looking statements.
- -----------------------
1 All our ordinary shares of series A through K are fungible and the
identification of different series refers only to different tranches that these
shares were issued in.
4
References in this annual report to "(euro)", "Euro" or "EUR" are to the
currency introduced at the third stage of the European Economic and Monetary
Union pursuant to the Treaty establishing the European Community, as amended.
References in this annual report to "Polish Zloty" or "PLN" are references to
the lawful currency of Poland. References in this annual report to "U.S.
dollar", "USD", "US$" or "$" are references to the lawful currency of the United
States of America.
A. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for the years ended
December 31, 1998, 1999, 2000, 2001 and 2002 have been derived from our audited
consolidated financial statements and the related notes. We have prepared these
consolidated financial statements in accordance with the International Financial
Reporting Standards, which we refer to as IFRS, including International
Accounting Standards, which we refer to as IAS, and Interpretations issued by
the International Accounting Standards Board, which we refer to as the IASB.
IFRS vary in certain important respects from generally accepted accounting
principles in the United States of America, which we refer to as U.S. GAAP. You
should read Note 25 to our Consolidated Financial Statements for a discussion of
the most significant of these differences as they relate to us.
The selected consolidated financial data also should be read in conjunction with
Item 5 ("Operating and Financial Review and Prospects") of this annual report
and our audited consolidated financial statements as of and for the year ended
December 31, 2002 included in Item 18 ("Financial Statements") in this annual
report. For your convenience, we have converted certain Polish zloty amounts
into U.S. dollars at the rate of PLN 3.8388 per US$1.00 (the average exchange
rate quoted by NBP, on December 31, 2002). You should not view these
translations as a representation that such Polish zloty amounts actually
represent such U.S. dollar amounts or could be or could have been converted into
U.S. dollars at the rates indicated, or at any other rate. At June 23, 2003, the
Polish zloty to U.S. dollar exchange rate as quoted by NBP was PLN 3.8265 per
US$1.00.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002 2002
(AMOUNTS IN THE TABLE IN THOUSANDS, EXCEPT PER SHARE DATA)
------------ ------------ ------------ -------------- ------------- -----------
PLN PLN PLN PLN PLN US$
STATEMENT OF OPERATIONS DATA:
Revenues
Telecommunications revenues 96,435 217,711 395,225 512,163 588,120 153,204
Other revenues (1) 23,945 31,386 47,522 26,688 16,264 4,236
------------ ------------ ------------ -------------- ------------- -----------
Total revenues 120,380 249,097 442,747 538,851 604,384 157,440
Costs and expenses:
Interconnection charges, net (22,900) (61,994) (112,270) (122,211) (117,480) (30,603)
Cost of equipment (11,425) (11,924) (20,359) (7,508) (5,693) (1,483)
Depreciation and amortization (41,040) (119,163) (179,710) (253,565) (268,680) (69,991)
Impairment of goodwill (2) - - - (220,279) - -
Impairment provision for fixed assets (3) - - - (116,247) (149,353) (38,906)
Other operating expenses (4) (124,317) (190,558) (286,939) (347,940) (325,986) (84,919)
------------ ------------ ------------ -------------- ------------- -----------
Total costs and expenses (199,682) (383,639) (599,278) (1,067,750) (867,192) (225,902)
Loss from operations (79,302) (134,542) (156,531) (528,899) (262,808) (68,462)
------------ ------------ ------------ -------------- ------------- -----------
Financial expenses, net (5) (151,596) (292,574) (198,681) (230,019) (417,570) (108,776)
Effect of default on long term debt (6) - - - (112,047) - -
Effect of cancellation of swap transactions (7) - - - (274,637) - -
Other losses (1,148) (550) (339) - - -
Income tax (charge)/benefit (8,802) 9,646 (2,514) (5,424) (1,903) (496)
Minority share in losses/(profits) of
subsidiaries 35,353 (911) (3,981) 1,809 7,309 1,904
------------
------------ ------------ -------------- ------------- -----------
Net loss from continuing operations (205,495) (418,931) (362,046) (1,149,217) (674,972) (175,830)
------------ ------------ ------------ -------------- ------------- -----------
Net loss (205,495) (418,931) (362,046) (1,149,217) (674,972) (175,830)
============ ============ ============ ============== ============= ===========
Basic and diluted net loss from continuing
operations per ordinary share (19.78) (22.48) (12.60) (37.29) (17.89) (4.66)
Basic and diluted net loss per ordinary share (8) (19.78) (22.48) (12.60) (37.29) (17.89) (4.66)
5
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
1998 1999 2000 2001 2002 2002
(AMOUNTS IN THE TABLE IN THOUSANDS, EXCEPT PER SHARE DATA)
------------ ------------ ------------ -------------- ------------- -----------
PLN PLN PLN PLN PLN US$
U.S. GAAP
Revenues (9) 120,380 249,097 391,529 551,345 619,385 161,349
Loss from operations (9) (86,743) (154,249) (203,193) (285,216) (244,331) (63,648)
Net (loss) / profit including extraordinary
credit(9) (214,363) (537,463) (391,857) (870,959) 1,777,069 462,923
Basic and diluted net (loss) / profit per
ordinary share (8)(9) (20.63) (28.84) (13.64) (28.26) 47.10 12.27
OTHER DATA:
Net cash (used in)/provided by operating
activities (156,413) (69,060) 165,306 177,612 198,476 51,702
Net cash used in investing activities (480,319) (970,522) (1,357,520) (639,160) (468,292) (121,989)
Net cash (used in)/provided by financing
activities (1,688) 1,727,628 1,289,231 (133,815) (109,673) (28,569)
Capital expenditures 395,943 697,199 756,657 582,779 270,548 70,477
BALANCE SHEET DATA:
Total cash and cash equivalents (10) 298,790 1,102,410 1,142,850 486,946 132,465 34,507
Total assets (11) 2,082,675 3,961,196 5,033,304 3,904,347 3,492,819 909,872
Total long-term debt (12) 1,581,030 2,750,780 3,509,625 3,396,869 161,756 42,137
Other liabilities for licenses (13) 269,179 214,452 261,628 258,377 323,507 84,273
Total long-term obligations 1,850,209 2,965,232 3,771,253 3,655,246 485,263 126,410
Total shareholders' (deficit)/equity (86,463) 677,092 780,411 (343,248) 2,802,291 729,992
Total shareholders' (deficit)/equity (U.S. GAAP) (95,465) 578,307 653,085 (195,209) 2,538,472 661,267
- --------------------
(1) Consists primarily of the provision of specialized mobile radio services
and sales of related equipment.
(2) The impairment of goodwill is a result of management's belief that there is
no longer a future economic benefit associated with goodwill and an
impairment test that was performed by management for the telecommunications
segment.
(3) The provision for impairment of fixed assets relates to specific assets of
transmission network and construction in progress included in the
telecommunications segment built in areas subsequently considered as not
profitable.
(4) Other operating expenses primarily include salaries and benefits, general
and administrative and external services. See the audited consolidated
financial statements included in this annual report under Item 18 for an
additional description of operating expenses.
(5) Includes non-cash financial expense arising on discount notes of PLN 84.6
million, PLN 106.1 million, PLN 116.6 million, PLN 106.8 million and PLN 0
for the years 1998, 1999, 2000, 2001 and 2002, respectively.
(6) As a result of the occurrence of the events of default with respect of our
long-term debt, the related liabilities were reclassified as current
liabilities in the audited consolidated financial statements as of the year
ended December 31, 2001. Due to this reclassification, the difference
between the amortized cost and the nominal value of the debt was charged to
the consolidated statement of operations for the year then ended.
(7) Effect of cancellation of swap transactions relates to the losses resulting
from the withdrawal from those agreements that have been fully recognized
in the year ended December 31, 2001.
(8) Basic and diluted net loss per ordinary share under IAS and U.S. GAAP is
calculated by dividing the net loss by the weighted average number of
shares of Netia Holdings S.A.'s capital stock outstanding during each
period. The weighted average number of shares used in calculating the net
loss per share was 10,391,371; 18,633,297; 28,728,709; 30,817,291; and
37,730,692 for the years ended December 31, 1998, 1999, 2000, 2001 and
2002, respectively. The number of outstanding ordinary shares were
10,391,371; 26,494,172; 31,419,172; 31,419,172; and 344,045,212 as of
December 31, 1998, 1999, 2000, 2001 and 2002, respectively. The weighted
average number of shares in issue and the number of outstanding ordinary
shares for the year ended December 31, 2002 includes 312,026,040 series H
shares issued on December 23, 2002. There have been no dividends declared
during any of the covered periods.
(9) Under IAS, we record in the Other Reserve component of the shareholders'
equity, the surplus on restructuring of the Netia group's debt, calculated
as the difference between the amount of reduction of carrying values of all
liabilities subject to restructuring and the total of: (i) net present
value of reduced liabilities in the form of installment obligations not
exchanged into shares, (ii) the value of the 2002 Notes, and (iii) the
issuance value of new ordinary series H shares issued. For U.S. GAAP, we
account for our restructuring in accordance with SFAS 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring," which we refer to
6
as SFAS 15. According to SFAS 15, the gain on restructuring is classified
as an extraordinary item in the Consolidated Statement of Operations and
calculated as the difference between: (a) the carrying amount of the
reduced debt and (b) the aggregate of: (1) the fair value of any equity
interests granted to the bondholders in exchange for their liabilities, (2)
the total future cash payments of principal relating to the 2002 Notes, (3)
the remaining installment obligations and (4) issuance costs relating to
the 2002 Notes. There is no tax effect relating to the gain on
restructuring. No interest expense will be recognized on the 2002 Notes for
the period between the restructuring and the date of maturity. No interest
will be recognized on the remaining installment obligations.
Under IAS, the 2002 Notes are recognized initially as proceeds actually
received, net of transaction costs incurred. The difference between the
proceeds (net of transaction costs) and the redemption value is recognized
in the statements of operations over the period of the debt, using the
effective cost method. Under U.S. GAAP, transaction costs relating to debt
issuances are offset against the gain on restructuring and no interest
expense will be recognized on the 2002 Notes, for any period between the
restructuring and the maturity date of the debt.
For other differences between IAS and U.S. GAAP, see Note 25 in the
consolidated financial statements included in this annual report under Item
18.
(10) Total cash and cash equivalents do not include restricted investments held
as security for the 13 3/4% Senior Notes due 2010 and the 2002 Notes.
(11) Total assets under U.S. GAAP would have been PLN 2.1 billion, PLN 3.9
billion, PLN 5.0 billion, PLN 4.2 billion and PLN 3.4 billion (US$ 0.9
billion) at December 31, 1998, 1999, 2000, 2001 and 2002, respectively.
(12) Includes current and long-term portion of long-term debt.
(13) Includes current and long-term portion of liabilities for licenses and
customer deposits. In 2000 we implemented IAS 38, "Intangible Assets." In
accordance with the requirements of this standard, we have restated the
nominal cost of licenses as of December 31, 2000 to reflect their net
present values. Additionally, in 2000 we were notified by the Ministry of
Infrastructure that certain of our license obligations would be deferred
until 2010, which resulted in further reduction of the amount of license
obligations based on the present value of these obligations. Further
deferrals were also granted by the Ministry of Infrastructure in 2001. The
Ministry of Infrastructure also issued decisions to companies holding
permits in the Netia group, whereby, effective as of June 28, 2002, it has
postponed the license payments of EUR 32,943 (PLN 134,879 at the December
31, 2002 exchange rate) due on June 30, 2002 until December 31, 2002.
Without the restatement described above, the liabilities for licenses as at
December 31, 2001 and 2002 would be PLN 345.2 million and PLN 406.3
million, respectively. Please see also Note 8 and 25 to our consolidated
financial statements included in this annual report under Item 18 for
further discussion on license fee obligations and the expected effect of
the introduction of the act on the conversion of license fee liabilities in
December 2002.
The following table sets forth, for the periods indicated, the exchange rate
quoted by NBP. The rates are expressed as Polish zloty per one U.S. dollar:
YEAR ENDED DECEMBER 31, PERIOD END AVERAGE RATE* HIGH LOW
- -------------------------------------- -------------------- ------------------------ ------------------ ----------------------
1998 ............................ 3.50 3.50 3.82 3.36
1999 ............................ 4.15 4.00 4.35 3.41
2000 ............................ 4.14 4.36 4.71 4.04
2001 ............................ 3.99 4.09 4.50 3.94
2002 ............................ 3.84 4.08 4.26 3.84
- -----------------------------------
* The average of the exchange rates on the last business day of each month
during the applicable period.
The following table sets forth, for the periods indicated, the high and low
average exchange rates for Polish zloty into U.S. dollars, as quoted by NBP, for
each month during the applicable period.
MONTH AND YEAR PER US$1.00
- -------------- -----------
December 2002
High ............................................... 3.9998
Low ................................................ 3.8369
January 2003
High ............................................... 3.9418
Low ................................................ 3.7914
7
MONTH AND YEAR PER US$1.00
- -------------- -----------
February 2003
High ............................................... 3.9135
Low ................................................ 3.8191
March 2003
High ............................................... 4.0746
Low ................................................ 3.8959
April 2003
High ............................................... 4.0910
Low ................................................ 3.8406
May 2003
High ............................................... 3.8015
Low ................................................ 3.6709
June 2003*
High ............................................... 3.8265
Low ................................................ 3.7213
-----------------
* Through June 23, 2003
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
You should consider carefully the risks described below. These risks are not the
only ones we face. Additional risks not presently known to us, or which we
currently deem immaterial, may also impair our business operations. In general,
investing in the securities of issuers with substantial operations in markets
such as Poland involves a higher degree of risk than investing in the securities
of issuers with substantial operations in the United States and other similar
jurisdictions.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE SUCCESSFUL IN CONTESTING OUR OBLIGATIONS UNDER CONVERTED LICENSES
We are currently contesting the requirement to pay the license fees due under
the licenses held by us prior to January 1, 2001. Pursuant to the new
Telecommunications Act that came into force in Poland on January 1, 2001, our
licenses for the provision of telephone services issued under the old
Telecommunications Act were automatically converted into telecommunication
permits that are granted to telecommunications services providers for a nominal
fee of EUR 2,500. As of December 31, 2002, the nominal value of our liabilities
(undiscounted) under license fees equaled approximately EUR 95.4 million
(approximately PLN 390.5 million at the average exchange rate quoted by NBP on
December 31, 2002), which amount was further increased by the extension fee of
approximately EUR 3.9 million (approximately PLN 15.8 million at the average
exchange rate quoted by NBP on December 31, 2002) pursuant to the decision of
the Minister of Infrastructure (the terms "Minister of Infrastructure" and
8
"Ministry of Infrastructure" used in this annual report may in some cases refer
to the Minister of Communications and the Ministry of Communications, their
respective predecessors) of October 2, 2002.
In December 2002, a law regarding the conversion of the outstanding license fee
obligations of local operators, which we refer to as the Conversion Act, entered
into force in Poland. The Conversion Act provides for the cancellation of
license fee obligations in exchange for telecommunication infrastructure capital
expenditures or the cancellation of license fee obligations in exchange for the
shares or debt of companies that have outstanding license fees in connection
with licenses for providing local services. We have submitted applications under
the Conversion Act for the cancellation of our outstanding license fee
obligations based on capital expenditures we have already incurred. The
applications are to be reviewed by the Polish government and can only be
rejected if the responsible ministry does not recognize the investments already
made as capital expenditures contributing to telecommunication market
development. In case certain capital expenditures are rejected, we may have,
according to the new regulations, up to four years to make new investments
eligible for conversion. We received notification letters from the Polish
government dated March 21, 2003, indicating that our applications for
cancellation of our outstanding license fee obligations based on incurred
capital expenditures will be considered by June 30, 2003. We will determine the
accounting treatment for the license fee obligations once we receive a formal
and definitive response from the Polish government regarding the cancellation of
our license fee obligations. As a result of submitting the applications, we have
not made the license fee payments of approximately EUR 47.7 million
(approximately PLN 195.4 million at the average exchange rate quoted by NBP on
December 31, 2002) due on December 31, 2002. On the date of this annual report
these payments remain due and payable. We are at liquidity risk if our
applications for conversion are rejected and the Ministry of Infrastructure
demands payment of our license fees in full.
Simultaneously with applying for conversion of our license fees we are also
contesting the requirement to pay the license fees. We have filed applications
with the Minister of Infrastructure to determine that the license fees
associated with previously issued licenses have expired as a direct result of
the conversion of such licenses to permits, and in the case of Netia 1 Sp. z
o.o., our wholly owned subsidiary, which we refer to as Netia 1, also to obtain
a refund of the license fees already paid since January 1, 2001. In the second
half of 2002, all our local operating companies received decisions of the
Minister of Infrastructure rejecting our companies' applications to establish
that our license fee obligations have expired after conversions of our licenses
into permits. The Minister of Infrastructure subsequently upheld its decisions
in proceedings under motions for reconsideration. With regard to these decisions
relating to all affected companies, we have appealed to the Supreme
Administrative Court of Poland demanding the revocation thereof on the grounds
of being contrary to the letter of law. We cannot predict, however, if the
appeals will result in revocation of these decisions. Should the actions prove
unsuccessful, the liability to pay the local license fees, including the
aforementioned approximately EUR 47.7 million (approximately PLN 195.4 million
at the average exchange rate quoted by NBP on December 31, 2002) (further
increased by the extension fees) that became due and payable on December 31,
2002, may have a negative impact on the liquidity of the Netia group, unless we
are able to obtain the conversion of these fees into investment obligations
under the Conversion Act. On the date of this annual report all the
aforementioned payments remain due and payable.
In December 2001, Netia 1 applied to the Minister of Infrastructure for a
postponement of the payment date for a license fee installment in the amount of
EUR 1,000,000 (approximately PLN 4.1 million at the average exchange rate quoted
by NBP on December 31, 2002)due on January 31, 2002. On November 20, 2002, the
Minister of Infrastructure issued a decision deferring the payment date for the
license fee for Netia 1, due on January 31, 2002, in part until December 20,
2002 and in part until December 30, 2002. On December 2, 2002 Netia 1 applied
for reconsideration of the matter and a subsequent deferral of payment until
June 30, 2003. On April 9, 2003, the Ministry of Infrastructure issued another
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decision refusing changes to the terms established in the previous decision
dated November 20, 2002. Furthermore, on December 2, 2002 Netia 1 applied to the
Minister of Infrastructure for postponement of payment of a license fee
installment amounting to EUR 1,000,000 due on January 31, 2003. On February 6,
2003 Netia 1 received a decision of the Minister of Infrastructure rejecting the
motion for postponement. Netia 1 has also applied for reconsideration of the
matter. On April 2, 2003, the Minister of Infrastructure issued a final decision
refusing a deferral of the obligation due January 1, 2003. On April 18, 2003,
Netia 1 paid the two outstanding license fee obligation installments in the
amount of EUR 2,000,000 (approximately PLN 8.5 million at the average exchange
rate quoted by NBP on April 18, 2003) and the applicable prolongation fees of
approximately PLN 320,000 and penalty interest amounting to approximately PLN
314,000.
Although we intend to continue seeking the cancellation or conversion or
deferral of or other redress for the license fees, we cannot assure you that our
efforts will be successful. The requirement to pay these amounts would have a
material impact upon our liquidity position and working capital availability.
Under the terms of the old licenses, which we contest, we were obliged to
connect a specified number of subscribers to our network. These requirements are
not met by our operating companies. Under the new Telecommunications Act, the
terms of a permit do not include those obligations. We cannot assure you that
these obligations will not be enforced by the new regulatory authority until we
confirm that the permits obtained by our operating subsidiaries in exchange for
the old licenses do not include those obligations. Unless the President of the
Office for Regulation of Telecommunications and Post, which we refer to as the
ORTP, eliminates or amends the requirements under the schedules to our permits,
which were originally part of the old licenses, our operating subsidiaries may
be required to install additional lines in commercially unattractive areas or
else face the possible withdrawal of the permits by the new regulatory
authority. Should this occur, we would be required to obtain new permits and
negotiate new interconnection agreements, which would result in the need to
reorganize our operations and have a material adverse effect on our financial
results.
OUR BUSINESS STRATEGY MAY CHANGE
Following the successful completion of our restructuring, on May 6, 2003, our
supervisory board adopted general guidelines for a new business strategy
designed to focus on the long-term commercial objective of becoming Poland's
provider of choice for business communications services. Although we expect that
the supervisory board will adopt a detailed revised business strategy later this
year, we cannot predict when and whether the detailed new strategy will be
implemented and what the impact of any new strategy will be on our business.
Moreover, it is possible that the implementation of a new strategy could
eventually have an adverse effect on our business, financial condition and
results of operations.
CHANGES IN SHAREHOLDERS' STRUCTURE MAY AFFECT OUR BUSINESS
As a result of our restructuring, we are not controlled by any strategic
investor and are owned by a larger number of shareholders. Following the
issuance of series H shares on December 23, 2002 to our pre-restructuring
creditors, the share ownership of our pre-restructuring shareholders was diluted
to 9% of our current share capital. Additionally, on May 16, 2003 we transferred
to our pre-restructuring shareholders subscription warrants entitling them to
subscribe to our series J shares. We also granted stock options for series K
shares pursuant to our new stock option plan. If all subscription warrants are
exercised and all stock options are granted and exercised, series J and series K
shares will represent 19% of our share capital on a fully diluted basis which
would reduce the relative holdings of our current shareholders. We do not have
in place any provisions in our organizational documents nor are there provisions
of Polish law to which we are subject, that materially prevent a change of
control occurring as a result of a party acquiring a significant amount of our
share capital by exercise of warrants or otherwise. Consequently, changes in
10
control may occur and such changes may influence the composition of our
supervisory board and management board and may therefore result in changes of
our strategy and operations. If such changes occur, they could have an adverse
effect on our business, financial condition and results of operations.
WE DEPEND ON TPSA FOR INTERCONNECTION WITH ITS NETWORK
Our ability to provide viable telecommunications services depends on our ability
to interconnect with the telephone network of Telekomunikacja Polska S.A., which
we refer to as TPSA, Poland's incumbent telecommunications provider. With
certain limited exceptions, calls that originate on our network but terminate
outside it, including most of the local and domestic long-distance calls placed
by our customers, must interconnect with TPSA's network. The new
Telecommunications Act requires TPSA to interconnect private telecommunications
operators such as us to its network. We have successfully entered into
interconnection agreements with TPSA in each of our permit territories, and our
interconnection rights have been successfully enforced in Poland. However, we
have historically experienced delays and difficulties in reaching
interconnection agreements with TPSA, which delayed the commencement of
commercial operations in some of the territories in which we operate. We have
also encountered difficulties in finalizing an interconnection agreement with
TPSA with respect to our provision of any new services, like domestic
long-distance voice services in 2001 or premium rate services in April 2003.
Further difficulties or delays in interconnecting with the TPSA's network and
entering into interconnection agreements with TPSA for our new services or
delays in extending the capacity of existing interconnection points may limit
our ability to provide telecommunication services and have a material adverse
effect on us.
Calls that originate on our network but terminate on TPSA's network account for
a significant portion of the traffic generated by our customers. The
interconnection charges relating to these calls are an important element of our
operating cash flows. Currently, there is no uniform regulation of
interconnection charges and TPSA negotiates separate interconnection agreements
with each operator. In September 2001, the President of the ORTP issued a
decision classifying TPSA as a dominant provider of telephone services, which
means that TPSA must present a Reference Interconnection Offer, which we refer
to as RIO, with the proposed general terms of interconnection agreements to the
President of the ORTP for approval. On June 18, 2003, the President of the ORTP
rejected four RIOs submitted by TPSA on May 20, 2003. The network
interconnection RIO was rejected due to formal reasons - the fact that TPSA did
not withdraw its application made to the Supreme Administrative Court regarding
the decision of the President of the ORTP rejecting TPSA's previous network
interconnection RIO submitted on December 18, 2002. The President of the ORTP
was of the opinion that the approval procedure regarding the previous RIO is
still open and no new RIO submissions in this regard may be made until the
Supreme Administrative Court issues its decision or TPSA's application is
withdrawn. The other three RIOs, regarding transit services for public
operators, connections to premium rate services offered by other operators and
connections to toll-free (free phone) services offered by other operators, were
rejected by the President of the ORTP due to their numerous references to the
network interconnection RIO, rendering the three RIOs unable to function
independently. They were also deemed by the President of the ORTP to be
non-compliant with the provisions of the new Telecommunications Act, in
particular due to the lack of justification of different tariffs for different
categories of operators, incorrect qualifications of services, the limitation of
permissible connections only to types of services specified in RIOs, the
limitation of operators benefiting from the RIO only to providers of local,
domestic long-distance, international and mobile telephone services, the
introduction of minimum thresholds of traffic volume and additional fees for
traffic below such thresholds. Once the TPSA's RIOs are approved, the terms of
interconnection proposed by TPSA to other operators should not be worse than
those in RIOs, but each separate interconnection agreement should be negotiated
individually. In the event the parties cannot agree on the terms of the
interconnection agreement, the President of the ORTP may, on a case-by-case
basis, establish the terms of each interconnection agreement negotiated between
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operators. Following the recent amendments to the new Telecommunications Act,
the notion of a dominant operator is no longer used and TPSA is classified as an
operator with significant market power, but its obligations described above
remain unchanged. At present it is not possible to predict whether or when TPSA
will comply with its obligations as an operator with significant market power
(formerly classified as a dominant operator) under the new Telecommunications
Act. Recent amendments to the new Telecommunications Act, which are expected to
enter into force by October 2003 will give to the President of the ORTP the
power to influence the content of a RIO, including the ability to change or
adapt the level of interconnection fees to the requirements of the new
Telecommunications Act, in line with the so called cost-based formula. These
amendments were required to align the interconnection rules with the European
Union regulations and are strongly supported by the market.
A material increase in the interconnection charges that we must pay arising from
new interconnection agreements or failure of interconnection charges to decline
in line with any future general reductions in retail telephone call charges
could result in our lower margins or an inability to offer telephone services at
competitive prices. After the opening of the international long-distance
telecommunications market in Poland in 2003, we are no longer forced to pay the
interconnection charges based on a percentage of TPSA's tariff when our
customers place an international call, but we can choose our foreign partner and
pay him a market-based international interconnection fee. In addition, in the
case of a domestic long-distance call that is carried over TPSA's network
irrespective of the old interconnection agreements which are based on a
percentage of TPSA's tariff for these calls, we can choose an alternative route
for such calls via our subsidiary Netia 1 and pay TPSA only the termination fee.
Therefore, we are more independent from TPSA's tariffs for theses calls.
However, any increase of call termination fees in TPSA's network could have a
material adverse effect on our financial results. This could be especially
important in the case of implementing new interconnection agreements based on
RIOs, which are expected to include implementation of new tariffs for local
termination of calls in TPSA's network.
LEGAL ENVIRONMENT OF OUR OPERATIONS
Access Deficit Charges
Pursuant to the recent amendments to the new Telecommunications Act, TPSA and
other telecommunications operators with significant market power will be obliged
to make their local subscriber loops available to other telecommunications
operators. Nevertheless, according to the bill amending the Telecommunications
Act, operators interconnecting with certain deficit local loops built by other
operators will have to pay additional charges calculated in accordance with a
formula specified in the law. The additional charges are to be settled within
the regime of interconnection agreements between operators. We expect that the
access deficit charges shall benefit TPSA the most, as TPSA is in possession of
the largest number of deficit subscriber loops. The amending bill stipulates
that these access deficit rules shall remain in force until the time the
President of the ORTP publishes information on balancing the prices for
telecommunications services, but in any event not longer than until December 31,
2003. The access deficit charges may have a negative effect on our financial
position and results of operation.
Universal Service Obligation
Under the new Telecommunications Act, the operating companies in the Netia group
are obliged to offer universal telecommunications services of a certain standard
to every user located in their area of activity. Our focus is to operate
telephone networks primarily in the largest cities, targeting primarily business
subscribers. Even if the operating companies in the Netia group meet their
obligations for the construction of a specified number of lines but it is
determined that they have been unfairly narrowing their customer base to those
customers who generate considerable telecommunications traffic, we may be in
12
breach of the provision of the new Telecommunications Act that requires us to
provide all users with equal access to the network, which could result in the
withdrawal of our permits. Pursuant to the recent amendments to the new
Telecommunications Act, which are expected to come into force by October 2003,
we can be obliged to provide universal telecommunications services in each
Polish province (wojewodztwo) in which we will be classified as having
significant market power. According to the amendments the universal service
obligation will now also include internet access for schools and other
educational organizations. Today, only TPSA is classified as having significant
market power in all of 16 Polish provinces.
Law on Public Procurement
The Polish Law on Public Procurement, with amendments which came into effect on
January 1, 2003, applies in certain cases to orders made by entities offering
telecommunications services. The Law on Public Procurement does not apply to
such orders in cases where entities other than the ordering party offer the same
services in the same area and under the same conditions. The amendments aim at
aligning Polish law in the area of public procurement with the laws of the
European Union. We believe that the new provisions applicable to providers of
telecommunications services are unclear and do not precisely reflect the
provisions of the relevant directives of the European Union. It will be
difficult to ascertain when to apply the public procurement procedure. As a
result, it is possible that in certain situations we may be in violation of the
Law on Public Procurement. The President of the Public Procurement Office may
request a court to declare our agreement violating the Law on Public Procurement
to be void by operation of law, in whole or in part.
Provision of VoIP Services
We have offered Voice over Internet Protocol services, which we refer to as
VoIP, since 2000. These services enable our customers to make international
calls over the internet. TPSA requested that we and other operators that offer
such services in Poland stop providing VoIP and asserted that they were the only
operator entitled to offer international calls in Poland until January 1, 2003.
We cannot assure you that we would prevail in this matter if we were taken to
court. If TPSA prevailed in such a claim, we might be forced to pay damages to
TPSA calculated on the basis of revenues that TPSA proves it lost.
Approvals and Rights-of-Way
The development, expansion and operation of our network will depend on, among
other things, our ability to obtain regional governmental approvals and
agreements for public and private rights of way on satisfactory terms and
conditions. We cannot assure you that we will be able to obtain regional and
local governmental approvals on acceptable terms, or the rights of way required
to build out our network in the territories in which we operate or in other
areas we plan to cover with our network. Our inability to obtain governmental
approvals or rights of way to expand in accordance with our plans could have a
material adverse effect on us. We have historically experienced, and expect to
continue to experience in the future, delays in obtaining governmental approvals
and rights of way, which have led to construction delays. These delays may
increase as we seek to expand our network into historic city districts.
Accordingly, we may be forced (and in certain areas we have already found it
necessary) to utilize alternative technologies, such as wireless local loops, to
minimize the impact of these factors. Our inability to obtain the necessary
local approvals for additional radio link frequencies and rights of way may
delay the build-out of our network in densely populated urban centers like
Warsaw.
13
WE FACE SIGNIFICANT COMPETITION
In the voice market segment, we compete with TPSA, mobile operators and other
alternative fixed-line telephone operators. In the unregulated data services
market, we face strong competition from a large number of providers, of which
TPSA is the largest. Competition in Poland is increasing rapidly. Since January
1, 2002, governmental authorities have been able to issue permits to provide
telecommunications services to any operator meeting certain minimum statutory
requirements and, accordingly, we expect to face more competition throughout
Poland. Although we are unable to predict the extent to which new entrants will
take advantage of the availability of these permits in the areas in which we
operate, any potential competitors seeking to obtain permits to provide
telecommunications services in those areas may incur lower entry costs than
those we incurred. With three existing voice telephone operators, the Warsaw
market will likely continue to be highly competitive. We cannot predict the
extent of the impact of increasing competition on our business.
TPSA. TPSA has a leading position in fixed-line telephony and has a strong
position in data and, indirectly through a majority-owned subsidiary, mobile
services. With respect to fixed-line telephone services, we are subject to
competition from TPSA in all of the territories in which we operate. TPSA is
significantly larger than we are and controls infrastructure in many major
cities in which we operate. Until the end of 2002, TPSA also had a monopoly in
the provision of international fixed-line telephone services in Poland. TPSA's
dominant position enables TPSA to set its tariff structure with greater
flexibility. While it is impossible to predict how TPSA will react to
competitors in terms of pricing policy, targeting specific markets, access to
infrastructure and interconnection arrangements, we believe that TPSA will seek
to match any attempt we make to compete on price in geographic areas and for
customers that it believes are most attractive. In situations in which TPSA
competes most aggressively with us, we have in the past been, and may in the
future be, forced to provide discounts in order to attract new customers or
maintain our existing customers. We expect TPSA to remain a strong competitor in
Warsaw and in most of our major geographic markets for voice telephone services.
TPSA will also continue to compete with us in providing services such as data
transmission and internet access. Aggressive competition from TPSA could have a
negative effect on our financial position and results of operations.
Since January 1, 2003, the new Telecommunications Act permits operators other
than TPSA to provide international long-distance telephone services. In our
revised business plan, we have provided for future revenues from our planned
entry into international telephony long-distance services. However, our ability
to provide those services will depend, among other things, on adjustments to
TPSA's infrastructure and the ability of its clients to place international
calls using our service.
Because of TPSA's dominant position in the telecommunications market in Poland
and because the areas in which we operate do not for the most part overlap with
those of other alternative operators, almost all of our indirect long-distance
customers are TPSA subscribers. To date, TPSA has refused to bill its
subscribers for any long-distance service we provide to them, and we therefore
have to enter into separate agreements with such TPSA subscribers and must bill
them separately. This inconvenience may discourage potential users of our
indirect long-distance services from using our services, resulting in loss of
revenues for us. In addition, the need to enter into separate agreements and to
bill separately results in additional costs to us. This situation may continue
unless the appropriate authorities intervene in our favor.
Mobile telecommunications providers. Mobile telecommunications providers have
recently become a significant competitive element in our markets and compete
with fixed telephony providers for subscribers. This resulted primarily from an
increase in monthly charges by fixed-line operators as part of tariff
rebalancing and a general decrease in charges by mobile telephony operators,
which in turn attracted a significant number of subscribers to mobile providers.
14
Mobile telephony operators in Poland offer pricing plans without monthly fees,
which certain customers find attractive. Accordingly, in the last year, many
customers turned from fixed-line operators to mobile operators. In addition,
mobile telephony operators have a strong market position and are subject to
favorable interconnection regimes with fixed-line operators. Finally, Polish law
does not classify mobile telecommunications as public services, and therefore,
operators of such services are not required to provide them to all the potential
clients who express their willingness to use such services.
Alternative operators other than Netia. Prior to the enactment of the new
Telecommunications Act, the Polish Ministry of Infrastructure generally issued
licenses to no more than one private operator (in addition to TPSA) to provide
local telephone services within any particular geographic territory. These
licenses were expensive compared to the permits introduced by the new
Telecommunications Act on January 1, 2002, which cost EUR 2,500 per permit. As a
result of the reduced costs of a permit and the elimination of the licensing
system for new entrants, several operators have obtained permits and we expect
an increase in the number of operators in all territories in which we operate.
In some areas where we hold permits, some large business organizations operate
their own internal telecommunications networks (some of which include local
residents as customers), which reduces the potential business we might receive
from such organizations as customers and provides a potential source of
competition in the future.
Other sources of competition. We also face competition in voice services from
alternative forms of telephony services, including radio fixed-line access,
cable television operators and providers of VoIP services. Further, as we expand
our data services, we face increasing competition from a large number of
various-sized data transmission providers. We cannot predict the effect on our
operations that any of these competitors will have in the future.
Consolidation of the market. The high degree of fragmentation in the provision
of telephone services among alternative operators may necessitate the
consolidation of alternative operators in the Polish market. This consolidation
may result in the creation of a viable competitor to TPSA. Although we have no
definite plans regarding any structure or means of consolidation, it is possible
that we will merge with some of our competitors. However, our role may be
limited to a very minor one in any such case, especially if we are unable to
obtain necessary financing. We cannot predict what effects such consolidation
might have on our financial situation or how it will affect our shareholders.
For example, if we are not able to participate in any such consolidation, we may
face stronger competitors than currently exist in the market.
POSSIBLE FUTURE ACQUISITIONS MAY INVOLVE CONSIDERABLE COSTS AND MAY PLACE A
SIGNIFICANT STRAIN ON OUR MANAGEMENT, FINANCIAL AND OTHER RESOURCES
The high degree of fragmentation in the provision of telephone services among
alternative operators may necessitate the consolidation of alternative operators
in the Polish market. We will evaluate potential acquisition and merger
opportunities as they arise. The pursuit of these opportunities places
significant demands on the time and attention of our senior management and may
involve considerable financial and other costs with respect to identifying and
investigating acquisition candidates, negotiating agreements and integrating the
acquired businesses. We may require financing in order to pursue potential
acquisitions.
The benefits of any potential acquisitions will depend on our ability to
integrate the business that we acquire. Any future acquisitions may involve
assumption of liabilities and the exposure to unforeseen liabilities of the
acquired companies. We cannot assure you that suitable acquisition opportunities
15
will arise in the future or that, if such acquisitions are made, the acquired
businesses will be successfully integrated into the Netia group. Failure to
integrate any acquired business into the Netia group may have an adverse impact
on the results of our operations or our financial condition.
OUR BUSINESS IS SUBJECT TO RISKS POSED BY RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes in
technology. We have utilized flexible and modern technology in our network's
design, but we cannot predict the effect on our business of technological
changes, such as changes relating to emerging fixed-line and wireless
transmission technologies, VoIP technology and telephone-over-cable television.
In order to be able to compete with other telecommunications operators, we may
need to invest in new technology. Such telecommunications investments require
significant capital expenditures, including, among other things, significant
network and infrastructure build-out and upgrading, both in the initial phases
and on an ongoing basis. The cost of implementing new technologies may
significantly affect our liquidity in the future. Any limitation on capital
expenditures could jeopardize the quality and range of our services and products
and harm our competitive position, leading to the loss of customers, market
share and/or revenues.
WE MAY EXPERIENCE PROBLEMS WITH OUR NEW BILLING AND CUSTOMER RELATIONSHIP
MANAGEMENT SYSTEM
In March 2003, we successfully implemented a tailor-made program for cost
reduction and revenue maximization, which we refer to as the CORE program, which
consists of a complex scalable and integrated information technology platform
for customer operations, including integrated billing and customer relationship
management as well as reporting and revenue assurance functions. Due to the
complexity of the CORE program and its potential significant impact on our
billings, collections and customer service, its failure to function in line with
our expectations may result in decreased revenues or cash flows, customer
dissatisfaction or the diversion of human resources from other areas to address
those disruptions at increased costs to us. Any of those developments may have
an adverse effect on our business, financial condition and results of
operations.
KEY MANAGEMENT MAY LEAVE US AND WE MAY FACE DIFFICULTIES ATTRACTING QUALIFIED
MANAGEMENT
Our operations are highly dependent upon the quality of our personnel and our
management. We cannot assure you that the departure of certain members of our
management will not adversely affect our business, financial condition and
results of operations. We would lose considerable management and operational
know-how as the result of the departure of certain members of our management.
Changes in our management may disrupt our operations by diverting the attention
of our management from their usual areas of responsibility.
IF WE LOSE OUR KEY PERSONNEL OR IF WE ARE UNABLE TO HIRE AND RETAIN HIGHLY
QUALIFIED EMPLOYEES, OUR BUSINESS OPERATIONS COULD BE DISRUPTED AND OUR
ABILITY TO COMPETE COULD BE HARMED
Our success depends in large part on our ability to hire and retain highly
qualified employees who possess the requisite qualifications and technical
skills. The loss of key personnel could disrupt our business operations if we
are unable to replace them with similarly qualified individuals. If we lose a
number of our key employees to our competitors, our business operations could be
disrupted and our ability to compete could be harmed.
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WE ARE SENSITIVE TO THE EFFECTS OF CURRENCY FLUCTUATIONS
Our revenues and costs are denominated predominantly in Polish zloty with the
exception of our license fees, which are denominated in euro, and payments for
suppliers of certain equipment and services, which are linked to the U.S. dollar
and the euro. Accordingly, we will face foreign exchange fluctuations from our
obligations regarding license fees and certain payments described above. Any
devaluation of the Polish zloty against the euro or U.S. dollar that we are
unable to offset through price adjustments in our Polish zloty-denominated
revenues will require us to use a larger portion of our revenues to service our
non-zloty-denominated liabilities. These shifts in currency exchange rates may
have an adverse effect on our ability to service our non-zloty-denominated
obligations and, therefore, on our financial condition and results of
operations.
In addition, our ADSs, trade in U.S. dollars. Fluctuations in the exchange rate
between the Polish zloty and the U.S. dollar are likely to affect the market
price of our ADSs. For example, because our financial statements are reported in
Polish zloty, a decline in the value of the Polish zloty against the U.S. dollar
would reduce our earnings as reported in U.S. dollars. This could adversely
affect the price at which the ADSs trade on the U.S. securities markets.
IT MAY NOT BE POSSIBLE FOR YOU TO EFFECT SERVICE OF LEGAL PROCESS, ENFORCE
JUDGMENTS OF COURTS OUTSIDE POLAND OR BRING ACTIONS BASED ON SECURITIES LAWS OF
JURISDICTIONS OTHER THAN POLAND AGAINST US OR AGAINST CERTAIN MEMBERS OF OUR
MANAGEMENT BOARD
We and certain members of our management board and supervisory board are
residents of Poland. In addition, our assets and a portion of the assets of
members of our management board and supervisory board are located in whole or in
substantial part in Poland. As a result, it may not be possible for you to
effect service of legal process within the United States or elsewhere outside
Poland upon certain of our members of the management board and supervisory
board, including with respect to matters arising under U.S. federal securities
laws or applicable state securities laws. Moreover, it may not be possible for
you to enforce against us or the members of our management board and supervisory
board judgments obtained in courts outside Poland, including the United States,
based on the civil liability provisions of the securities laws of those
countries, including those of the United States. A foreign judgment is not
directly enforceable in Poland, but it may be recognized by Polish courts on the
basis of reciprocity, international agreements or conventions.
WE MAY NOT BE ABLE TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We have never paid dividends in any form, and we cannot assure you that we will
pay dividends in the future.
RISKS RELATING TO OUR MARKET
THERE ARE RISKS ASSOCIATED WITH INVESTING IN EMERGING MARKETS SUCH AS POLAND
Poland is generally considered by international investors to be an emerging
market. As a result, we cannot assure you that political, economic, social and
other developments in other emerging markets will not have an adverse effect on
the trading price of our securities.
Due to the many formalities required for compliance with the laws in Poland's
regulated economy and the rapid changes that Polish laws have undergone in the
1990s, we may from time to time have violated, may be violating and may in the
future violate, the requirements of certain Polish laws, including provisions of
labor, foreign exchange, customs, tax and corporate laws and provisions related
17
to notice filings to the Office of Consumer and Competition Protection. Any such
violations could have a material adverse effect on us.
In anticipation of the entry into the European Union on May 1, 2004 and to
facilitate interaction with European Union members, the Polish government has
generally taken steps to harmonize Polish legislation with that of the European
Union, including the entry into force on January 1, 2001 of the New
Telecommunications Act in order to bring Polish telecom regulation more in line
with European Union regulation. Poland's entry into the European Union on May 1,
2004, can lead to alterations to the current or currently anticipated regulatory
environment that will be unfavorable for us, such as the introduction of the
permit system in the New Telecommunications Act allowing for the low-cost entry
of new competitors into the provision of telephony services, or that will have a
material adverse effect on our business, results of operations and financial
condition.
Our revenues and costs are dependent on a variety of factors influenced by the
Polish economy as a whole, as well as by regional economies within Poland. These
factors include, among others, increases or decreases in Polish gross domestic
product, inflation (which has in recent years been significantly higher than in
the United States or the European Union), unemployment, the size and demographic
characteristics of the population and growth in the services and retail sectors.
Any future adverse developments in any one or more of these factors, in
particular a deterioration in the state of the Polish economy, and any resulting
deceleration in the demand for telecommunications services could have a material
adverse effect on our business, results of operations and financial condition.
RISKS RELATED TO OUR ADSS
HOLDERS OF OUR AMERICAN DEPOSITARY SHARES MAY NOT BE ABLE TO SELL THEM
Following the de-listing of our ADSs from the Nasdaq National Market on October
15, 2002, our ADSs are quoted through the Pink Sheets. As reported by the Pink
Sheets on their website, from October 15, 2002 only insignificant number of our
ADSs were traded through the Pink Sheets. Consequently, you may not be able to
sell your ADSs due to the lack of a liquid market for our ADSs. On May 22, 2003,
our management board resolved not to apply for re-listing of our ADSs on the
Nasdaq SmallCap Market.
Further, our ADSs became subject to Rule 15g-9 under the Securities Exchange Act
of 1934, as amended, which imposes additional sales practice requirements on
broker-dealers that sell low priced securities to persons other than established
customers and institutional accredited investors. For transactions covered by
this rule, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transaction
prior to sale. Consequently, the rule may adversely affect the ability of
broker-dealers to sell our ADSs and may adversely affect the ability of holders
to sell our ADSs in the secondary market.
SEC regulations define a "penny stock" to be any non-Nasdaq equity security that
has a market price of less than US$5.00 per share or with an exercise price of
less than US$5.00 per share, subject to certain exceptions. The closing price of
our ADSs on June 16, 2003 on the Pink Sheets was US$2.80 per ADS. For any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared by
the SEC relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for the
penny stock held in the account and information on the limited market in penny
stocks.
"Penny stock" regulations could have a severe adverse effect on the liquidity of
the market for our ADSs.
18
HOLDERS OF OUR AMERICAN DEPOSITARY SHARES WILL NOT BE ABLE TO CONTINUE HOLDING
OUR AMERICAN DEPOSITARY SHARES
On May 22, 2003 we instructed The Bank of New York, whom we refer to as the
Depositary, to close the transfer books for our ADSs and not to accept any
shares for deposit under the Third Amended and Restated Deposit Agreement, dated
May 21, 2003, which we refer to as the Deposit Agreement, between the Company,
the Depositary and the owners and beneficial owners of the American Depositary
Receipts issued thereunder. Consequently, you are not able to deposit our shares
that you hold with the Depositary in exchange for our ADSs.
On May 22, 2003 we instructed the Depositary, to terminate the Deposit
Agreement. The Deposit Agreement will terminate after 90 days from delivery of a
termination notice by the Depository to holders of our ADSs. During 180 days
following the termination of the Deposit Agreement you will be able to exchange
your ADSs for our ordinary shares. After the expiration of such 180 days, the
Depositary may sell your ADSs and hold the net proceeds of such sales for your
benefit.
HOLDERS OF OUR AMERICAN DEPOSITARY SHARES MAY NOT RECEIVE THE ECONOMIC VALUE OF
OUR WARRANTS
In connection with our restructuring, we issued warrants to our shareholders who
held our shares on December 22, 2002, each one of which will entitle the holder
thereof to exercise such warrant for one series J share of the Company. Half of
these warrants will entitle their holders to subscribe for such shares by April
29, 2005 and the remaining half will entitle their holders to subscribe for such
shares by April 29, 2006. The exercise price for each warrant will be PLN 2.53.
Warrants held by U.S. persons will be restricted both as to transfer and as to
exercise. In accordance with the terms of the Deposit Agreement governing the
Company's American Depositary Shares facility, persons holding ADSs under that
facility did not receive the warrants. It is expected that cash proceeds from
sales, if any, of warrants by the Depositary would be distributed by the
Depositary to holders of our ADSs in accordance with the terms of the Deposit
Agreement. It is also expected that the Depositary will set a record date for
holders of ADSs who will be entitled to receive proceeds from the sales, if any,
of the warrants. The Depositary may not be able to sell the warrants on the
Warsaw Stock Exchange prior to their expiration. In such event, the warrants
will lapse and no cash proceeds will be distributed to ADS holders.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We are the largest, in terms of value of generated revenues, alternative
fixed-line telecommunications provider in Poland. All of our services are
provided by our subsidiaries that possess the required telecommunication
permits. The Company controls, directly or indirectly, all of the companies that
constitute the Netia group. The Company's activities are limited to the
management of the Netia group and financing activities carried out by its
various subsidiaries.
In December 2002, our supervisory board approved a plan to consolidate our
operating subsidiaries. The current structure of the Netia group primarily
resulted from the need to establish a separate entity for each
telecommunications license held. The supervisory board approved the
consolidation in an effort to reduce management costs, tax risks and operational
problems as well as to simplify our intra-group financing and legal
arrangements. This plan to consolidate our subsidiaries will result in most
operating companies currently held by the Company being merged into the holding
company. As part of the process the Company has performed a series of
19
acquisitions of minority holdings in various Netia group operating companies.
Furthermore, all shares in the operating companies held previously by various
entities in the Netia group were sold to the Company on June 13, 2003 and the
majority of dormant entities were sold to third parties. The operating
subsidiaries' telecommunication licenses (converted to permits) are not
transferable. As a result, we believe that the existing telecommunication
permits, except for the permit issued to our subsidiary Netia Telekom S.A.,
which we refer to as Netia Telekom, in 2002, will expire when we merge the
operating subsidiaries into the Company. The expiration of these permits will
not give us the right to claim the return of the license fees that we previously
paid. It is not certain whether the expiration of the permits would result in
any exemption from additional payments related to our outstanding obligations.
After the merger, the parent company will continue to provide telecommunication
services under a single new permit that it intends to obtain for the nominal fee
of EUR 2,500 in 2003.
Historically, we have achieved our growth mainly through investment in our
infrastructure. We completed our planned backbone nationwide network build-out
in 2002. The network consists of the nationwide backbone network, a series of
intra-city networks and local access networks. Our nationwide backbone network
connecting Poland's largest urban areas stretched 3,840 kilometers as of March
31, 2003. The construction of the duct system of our nationwide backbone network
is completed. In the future this infrastructure can be extended by additional
fiber-optic cables and transmission equipment, in accordance with the growth of
the customer base.
HISTORY
Netia Holdings S.A. was established on July 13, 1990 and incorporated under
Polish law on September 7, 1990 by an entry in the commercial register under RHB
number 23383, maintained by the District Court for the capital city of Warsaw,
XVI Commercial and Registry Department, as a limited liability company under the
name R.P. Netia Telekom Sp. z o.o. On April 28, 1992, an ordinary general
meeting of shareholders adopted a resolution on a transformation of the Company
into a joint stock company which took effect on July 1, 1992. On August 26,
1997, an extraordinary general meeting of shareholders changed the Company's
name from R.P. Netia Telekom S.A. to Netia Holdings S.A. which took effect on
September 9, 1997. On June 12, 2003, a general meeting of shareholders adopted a
resolution changing the Company's name from Netia Holdings S.A. to Netia S.A.
This change will become effective upon registration by the Polish court. As of
the date of this annual report, such registration is pending. Currently, Netia
Holdings S.A. is registered under KRS number 0000041649 with the District Court
for the capital city of Warsaw, XX Commercial Division of the National Court
Register and has its corporate seat and registered office at ul. Poleczki 13,
02-822 Warsaw, Poland, tel: +48 22 330 2000.
FINANCIAL RESTRUCTURING
Background
On December 15, 2001, we defaulted on several interest payments on two series of
our notes. Those defaults triggered cross-default provisions under the terms of
the indentures governing our four other series of notes and, as a result, we
were in default on all six series of the issued notes that were then
outstanding. We also defaulted on swap payments under certain swap agreements
and failed to make all subsequent payments of interest due after December 15,
2001. As a result of these defaults and a decline of a level of shareholders'
equity, which - as calculated according to Polish Accounting Standards - has
been in deficit since December 31, 2001, we were required to file for bankruptcy
under Polish law unless we petitioned for the opening of arrangement
proceedings. To avoid filing for bankruptcy, the Company, and its two operating
subsidiaries Netia Telekom S.A., and Netia South Sp. z o.o., which we refer to
as Netia South, petitioned the court in Warsaw on February 20, 2002 to open
arrangement proceedings.
20
On March 5, 2002, we entered into the Restructuring Agreement, concerning the
restructuring of our debt, with an ad hoc committee of our noteholders, certain
financial creditors, Telia AB (publ.) (currently TeliaSonera AB (publ.)), which
we refer to as Telia, and the following companies controlled by Warburg, Pincus
& Co., which we collectively refer to as Warburg: Warburg, Pincus Equity
Partners, L.P., Warburg Pincus Ventures International, L.P., Warburg Pincus
Netherlands Equity Partners I, C.V., Warburg Pincus Netherlands Equity Partners
II C.V., Warburg Pincus Netherlands Equity Partners III, C.V., Warburg Netia
Holding Limited. Together, Telia and Warburg then owned approximately 57.4% of
the Company's share capital and acted, with respect to the Restructuring
Agreement, separately as the two largest shareholders of the Company.
Subsequently the Restructuring Agreement was signed by the majority of our
creditors. Under the Restructuring Agreement, the parties agreed to implement a
restructuring plan designed to strengthen our balance sheet.
On June 14, 2002, we entered into the Exchange Agreement with a substantial
majority of the consenting creditors who were parties to the Restructuring
Agreement. The Exchange Agreement further specified terms of the Restructuring
Agreement and provided the means for implementing those terms.
The restructuring process encompassed legal proceedings in three jurisdictions
and consisted of Dutch moratorium proceedings, Polish arrangement proceedings
and proceedings in the United States of America under Section 304 of the U.S.
Bankruptcy Code. Pursuant to the Restructuring Agreement and the Exchange
Agreement, NH BV, the Company's wholly-owned Dutch subsidiary, issued the 2002
Notes to holders of the existing notes and JPMorgan Chase Bank, in exchange for
relinquishing their claims in respect of the existing notes and obligations
under the swap agreements with JPMorgan Chase Bank. In addition, creditors of
the Netia group had an opportunity to subscribe with their reduced claims in the
form of installment obligations for series H shares issued by the Company. On
December 23, 2002, the Company's creditors subscribed for 312,626,040 series H
shares offered by the Company in exchange for such installment obligations.
Pursuant to the Restructuring Agreement and the Exchange Agreement, the par
value of the Company's ordinary shares was reduced on January 30, 2003 from PLN
6.00 to PLN 1.00.
Under the Restructuring Agreement and the Exchange Agreement, the Company's
record shareholders as of December 22, 2002 were issued on May 16, 2003
32,424,221 two-year warrants and 32,424,221 three-year warrants to acquire
64,848,442 ordinary shares representing 15% of the Company's post-restructuring
share capital (taking into account the issuance of 18,373,785 ordinary shares
representing up to 5% of the outstanding share capital in respect of a key
employee stock option plan). Each two-year warrant entitles its holder to
subscribe for one series J share by April 29, 2005 and each three-year warrant
entitles its holder to subscribe for one series J share by April 29, 2006. On
April 12, 2003, the supervisory board approved the strike price for the warrants
at PLN 2.53, which corresponds to the volume-weighted average price of the
Company's ordinary shares on the Warsaw Stock Exchange for the 30 trading days
beginning 31 days following the registration of series H shares by the Polish
court. The Company also plans to issue up to 18,373,785 ordinary shares under a
key employee stock option plan.
Status of the Restructuring
Dutch Court Proceedings. A Dutch court presiding over the moratorium proceedings
entered its decision on November 6, 2002 confirming the moratorium arrangements
relating to three special-purpose Dutch finance subsidiaries of the Company and
that decision became final and unappealable on November 15, 2002. As a result of
that decision, the existing liabilities of those subsidiaries under the notes
and swap agreements have become unenforceable.
Polish Court Proceedings. The guarantees issued previously by the Company to
noteholders and swap counterparties were reduced separately in the Polish
arrangement proceedings to 8.7% of their original value, which we have to repay
21
in installments between 2007 and 2012. The Polish court decision with respect to
the Company's arrangement plan became final and unappealable on December 3,
2002. We also conducted the Polish arrangement proceedings separately for Netia
Telekom and Netia South relating to intra-group debt and the other swap
arrangements. The arrangement plans for Netia Telekom and Netia South were
approved by the Polish courts on June 25, 2002 and December 4, 2002,
respectively, and the approval decisions became final and unappealable on
January 2, 2003 and December 19, 2002, respectively. The Polish arrangement
proceedings resulted in a reduction of Netia Telekom's and Netia South's
liabilities to 8.7% and 1% of their original values, respectively.
U.S. Court Proceedings. In an order dated March 7, 2003, the U.S. Bankruptcy
Court gave full force and effect in the United States to our Polish arrangement
plans and Dutch composition plans ratified earlier by Polish and Dutch courts,
respectively. The court also ordered that a previously deposited amount of
approximately EUR 13,969,000 (PLN 61,534,000 at the average exchange rate quoted
by NBP on March 31, 2003), which was set aside to make certain interest payments
on one of the series of notes, be turned over to the Company immediately
following the completion of the final step of the Company's restructuring, which
required issuance of warrants to our pre-restructuring shareholders. The
warrants were made available to them on May 16, 2003 and, accordingly, these
funds were released on May 29, 2003.
Objecting Claimholders. On October 21, 2002, the Company, Netia Telekom and
Netia South entered into an agreement with a minority group of our claimholders
who previously objected to the restructuring. Pursuant to this agreement, these
claimholders withdrew all their claims in connection with the arrangement
proceedings in Poland. In addition, their appeal from the court's ruling in the
United States 304 proceeding was dismissed without prejudice to reinstatement in
the event that we did not complete the restructuring. However, on February 10,
2003, the claimholders withdrew their objections to the United States 304
proceedings, including objection to the turnover of the deposited amounts
referred to above to us, and their appeal was dismissed with prejudice.
Series H Shares, Series K Shares, Warrants and Underlying Series J Shares and
the 2002 Notes. Under the terms of the Restructuring Agreement, the Company
agreed to issue series H ordinary shares to the creditors parties to that
agreement, to issue warrants to its pre-restructuring shareholders and that it
could implement a stock incentive plan under the terms of which it could issue
ordinary series K ordinary shares. On November 29, 2002, the Polish Securities
and Exchange Commission, which we refer to as the Polish SEC, decided to admit
to public trading up to 317,682,740 ordinary series H ordinary shares,
64,848,652 ordinary series J ordinary shares (underlying the warrants) and
18,373,785 ordinary series K ordinary shares to be issued in connection with
restructuring. Furthermore, the Polish SEC gave its consent for the introduction
to public trading of certain notes that would facilitate the issuance of the
warrants and the ordinary series K ordinary shares. The notes do not represent
material indebtedness of the Company.
On December 23, 2002, the subscription of series H ordinary shares and issuance
of the 2002 Notes were completed. We allocated 312,626,040 series H ordinary
shares out of total of 317,682,740 offered to our creditors. The price per share
was PLN 1.0826241. NH BV issued EUR 49,869,000 in aggregate principal amount of
our 2002 Notes (approximately PLN 198,757,886 at the average exchange rate
quoted by NBP on December 23, 2002) in exchange for the existing notes of that
subsidiary and of Netia Holdings II B.V., another one of our Dutch finance
subsidiaries, which we refer to as NHII BV. NH BV also issued some of the 2002
Notes to JPMorgan Chase Bank for claims under swap arrangements between it and
Netia Holdings III B.V., our third Dutch finance subsidiary, which we refer to
as NHIII BV, in accordance with the agreed terms of restructuring and the
composition plans for each of the Company's Dutch subsidiaries.
22
On January 30, 2003, the Polish court registered the series H ordinary shares.
Those shares were registered with the Polish National Securities Depository on
February 10, 2003 and on February 13, 2003 they commenced trading on the Warsaw
Stock Exchange. The registration of series H ordinary shares provided the
Company's creditors with shares representing approximately 91% of the Company's
share capital.
On May 16, 2003, we issued 64,848,221 warrants pursuant to a prospectus, dated
April 17, 2002, as subsequently amended, prepared under Polish law and made
available in Poland on December 2, 2002. We issued the warrants to holders of
record of the Company's shares as of December 22, 2002. On April 12, 2003, the
Company's supervisory board approved the strike price for the warrants at PLN
2.53. The supervisory board determined the strike price in accordance with the
provisions of the Restructuring Agreement which required the strike price to be
equal to the volume-weighted average price of the Company's ordinary shares on
the Warsaw Stock Exchange for 30 trading day beginning 31 days following the
registration of series H shares by the Polish court . Pursuant to a resolution
of the General Meeting of Shareholders held on April 4, 2002, the warrant strike
price is the issue price for series J ordinary shares. The warrants began
trading on the Warsaw Stock Exchange on May 27, 2003 under the symbols NETPP02
and NETPP03.
Redemption of 2002 Notes. On March 24, 2003, the Company redeemed the
outstanding 2002 Notes for a total amount of EUR 51,096,381 (approximately PLN
221,482,373 at the average exchange rate quoted by NBP on March 24, 2003)
including interest accrued until that date, following Netia's supervisory board
approval and recommendation by the Company's management board. The decision was
driven by concerns over both the high costs of servicing the debt (including
establishing the security for the 2002 Notes as required under the indenture
governing them) and the substantial restrictions imposed by that indenture's
covenants on the Company's flexibility to run its daily business.
Current Financial Condition
The restructuring resulted in a surplus of approximately PLN 3,553,712,000 in
other reserves of shareholders' equity (under IAS), which was recorded in the
Other Reserve component of the shareholders' equity, calculated as the
difference between the amount of reduction in carrying values of all liabilities
subject to restructuring of approximately PLN 4,096,068,000 and the total of:
o the net present value of reduced liabilities in the form of
installment obligations not exchanged into shares (approximately
PLN 5,141,000),
o the value of the 2002 Notes (approximately PLN 198,757,886), and
o the issuance value of new ordinary series H ordinary shares
issued (approximately PLN 338,457,000) and was recorded in Other
Reserve component of shareholders equity.
The restructuring has permitted us to regain solvency. The restructuring did not
lead to the elimination of all of our outstanding debt. We will have to repay
the outstanding installment obligations at the nominal amount of approximately
PLN 11,872,000 (recorded at present value of future obligations of approximately
PLN 5,276,000 at March 31, 2003) between 2007 and 2012. This represents
indebtedness that was not exchanged for series H ordinary shares offered by the
Company in December 2002.
As a result of the restructuring, as of March 31, 2003, shareholders' equity
(under IAS) amounted to approximately PLN 2,722,033,000 and the Company had a
working capital deficit, including short term license fee obligations, of
approximately PLN 91,656,000.
23
As the restructuring is complete, management does not believe that events or
conditions exist that may cast significant doubt on our ability to continue as a
going concern. However, management will continue to take steps aimed at
preserving our cash, such as substantial reductions in capital and operating
expenditures in comparison with our prior plans and steps aimed at seeking to
confirm expiry, cancellation, deferral or conversion of our remaining license
fee obligations of nominal value of approximately PLN 420,190,000 on March 31,
2003. Cash and cash equivalents held by the Netia group as at March 31, 2003
amounted to approximately PLN 110,855,000. We also held approximately PLN
61,534,000 in a restricted deposit account, which pursuant to the U.S.
Bankruptcy Court's decision was released to us on May 29, 2003 after the
warrants became available for receipt by our pre-restructuring shareholders.
RECENT ACQUISITIONS
On April 8, 2003, Netia Swiat S.A., one of our subsidiaries, acquired from TDC
Internet A/S 17,424,332 shares of TDC Internet Polska S.A., which we refer to as
TDC. TDC controls the following seven entities: Polbox Sp. z o.o., Pik Net Sp. z
o.o., Publiczny Dostep do Internetu Sp. z o.o., Multinet S.A., Internet Data
Systems S.A., Polska On-Line Holding S.A. and Polska On-Line Sp. z o.o. The
total price for the acquisition of all shares was EUR 1,000. TDC is an internet
services provider. The acquisition will allow us to strengthen our position in
this business segment.
SERVICES
We are the largest alternative fixed-line telecommunications provider in Poland
(in terms of value of generated revenues). We own and operate a backbone network
and we own, operate and are continuing to build local access networks.
Since our inception, the Polish government has granted us licenses (currently
converted into permits) to provide voice telecommunications services in 24
license areas in Poland, including Warsaw. In 1999, we were granted a license to
provide internet access, other internet services and data transmission services
in Poland. In 2000, we received a license to provide domestic long-distance
voice telecommunications services throughout Poland. In 2002, we obtained a
countrywide permit for the provision of telecommunications services.
In August 2001, following our execution of an interconnection agreement with
TPSA, Poland's incumbent telecommunications provider, we began providing
domestic long-distance service. We also offer international long-distance
services (using both VoIP technology as well as standard lines) and
fixed-to-mobile (two-stage) access. Customers, including those of other
telecommunications operators, can access our domestic long-distance service by
dialing a "1055" prefix after they have entered into a subscription agreement
with us. We are currently providing these services using our backbone network
and using leased lines in areas not yet reached by our backbone.
We continue to offer selected wholesale services to other telecommunications
carriers operating in Poland. We believe that these services will provide us
with a significant opportunity to enhance our operating margins by leveraging
our investment in our infrastructure through the greater utilization of our
network. We believe that our substantial capacity will give us the flexibility
to sell excess capacity and dark fiber, domestically and internationally.
Our nationwide backbone network connecting Poland's largest urban areas
stretched 3,840 kilometers as of March 31, 2003. The planned build-out of our
backbone network has been completed. We can extend our infrastructure in the
future by additional ducting, fiber optic cables and transmission equipment, in
accordance with the growth of the customer base. We are also constructing
24
broadband radio access networks in several large cities, including Warsaw, using
radio frequency spectrum we acquired in February 2000. We believe that these
radio access networks will allow us to rapidly connect business customers while
our intra-city networks are under construction and will continue to complement
our fiber-optic networks after we complete them.
We continually review our plans to take into account business developments and
opportunities and changes in the competitive and regulatory environment in which
we operate. Macro-economic factors, such as the general slowdown of the Polish
economy, also affect our plans. Consistent with our continuing review, we are
currently in the process of making adjustments to the organizational structure
of our sales, marketing and product development departments.
LISTING INFORMATION
In July 1999, we became the first Polish company to list its ADSs on the Nasdaq
National Market and, in June 2000, we listed our ordinary shares on the Warsaw
Stock Exchange.
Our ordinary shares are currently listed on the Warsaw Stock Exchange under the
symbol "NET". Between August 1999 and October 2002, our ADSs were quoted on the
Nasdaq National Market. On October 14, 2002, the Nasdaq Listing Qualifications
Panel, which we refer to as the Panel, decided to delist our ADSs from the
Nasdaq National Market, effective the next day due to our failure to meet all
continued listing requirements, including the requirement that we have a minimum
of U.S.$ 4.0 million in net tangible assets and a minimum of U.S.$ 10.0 million
in stockholders' equity, and because we filed for arrangement proceedings in
Poland and filed a section 304 petition in the U.S. Bankruptcy Court.
On January 21, 2003, the Nasdaq Listing and Hearing Review Council, which we
refer to as the Listing Council, reversed the Panel's decision and remanded the
matter to the Panel after its review of the decision of the Panel and additional
information submitted by the Company regarding the status of the financial
restructuring. The Listing Council noted that the Panel's decision, dated
October 14, 2002, to delist the Company's ADSs from the Nasdaq National Market
was correct and appropriate at the time it was made. The Listing Council
instructed the Panel to re-list the Company's ADSs on the Nasdaq SmallCap Market
upon the Panel's review of the Company's application. On May 22, 2003 the
Company's management board formally resolved not to file an application for
re-listing the Company's ADSs on the Nasdaq SmallCap Market.
Currently, our ADSs are quoted in the United States on the Pink Sheets.
PRINCIPAL CAPITAL EXPENDITURES
In March 1998, we obtained licenses for the provision of telecommunications
services and the operation of local telecommunications networks in four major
cities of Poland (Krakow, Katowice, Gdansk and Poznan). Our investments in these
regions, as well as in the region of Lublin (another major city for which we
have held a license since 1996) grew to their highest levels in the years 1999
through 2001. In June 2000, we obtained a license for the provision of
telecommunications services in the city of Warsaw and the construction of an
access network and a fiber-optic city ring became one of our primary objectives.
In 2000, we launched another significant investment project and began the
construction of our backbone network covering the entire territory of Poland.
The majority of capital expenditures related to this project were incurred in
2001 and 2002. In 1999, we were granted a data transmission license. In 2000 and
2001, we began the construction of network used for internet and data
transmission, which we refer to as IP/ATM network. Since 1999, we have continued
the construction of our local access networks within territories covered by our
licenses. We are also constructing intra-city networks in Warsaw and nine other
major cities, and have substantially completed construction in five of these
25
cities (Krakow, Katowice, Gdansk, Lublin and Poznan). We are constructing
broadband radio access networks in order to access customers more rapidly while
we complete the build-out of our fiber-optic networks in these cities. The
broadband networks will continue to complement our fiber-optic networks. As of
March 31, 2003, our local access network had 345,447 active subscriber lines and
501,512 connected lines.
Net cash used in investing activities was approximately PLN 468.3 million during
the year ended December 31, 2002 compared to approximately PLN 639.2 million
during the year ended December 31, 2001. The decrease in outflows from investing
activities relating to purchases of fixed assets and computer software is in
line with our revised business plan, which contemplates a significant reduction
in such expenditures as compared to our previous plans. Cash used in investing
activities for the purchase of fixed assets and computer software was PLN 270.6
million (U.S.$ 70.5 million) for the year ended December 31, 2002 compared to
approximately PLN 582.8 million (U.S.$ 151.8 million) for the year ended
December 31, 2001.
Net cash used in investing activities was approximately PLN 639.2 million during
the year ended December 31, 2001 compared to approximately PLN 1,357.5 million
during the year ended December 31, 2000. This decrease reflected the deposit of
approximately PLN 219.9 million in investment accounts during the year ended
December 31, 2000, in connection with the issue in June 2000 of our 13.75%
Senior Notes due 2010 as well as the payment of license fees of approximately
PLN 360.0 million during the year ended December 31, 2000 compared to
approximately PLN 4.0 million during the year ended December 31, 2001. This
decrease in cash used in investing activities was also due to a decrease in the
amount of fixed assets purchased, such as switches and fiber-optic cable. Cash
used in investing activities for the purchase of fixed assets was approximately
PLN 582.8 million during the year ended December 31, 2001 and approximately PLN
756.7 million during the year ended December 31, 2000. These decreases were
partially offset by the purchase of minority interest shareholdings pursuant to
our pre-existing contractual obligations - including shareholdings in Netia 1 -
by the Company for approximately PLN 60.9 million during the year ended December
31, 2001.
Our planned capital expenditures in 2003 amount to approximately PLN 90.1
million. These capital expenditures will be financed from our own resources.
B. BUSINESS OVERVIEW
GENERAL
We own and operate a backbone network, and we own, operate and are continuing to
build local access networks. At March 31, 2003, our access network had 345,447
active subscriber lines, including 108,603 business lines, and our backbone
network stretched 3,840 kilometers. Our subsidiaries obtained licenses from the
Ministry of Infrastructure of Poland for the provision of local telephone
services in areas that included six of the Poland's largest cities - Warsaw,
Gdansk, Krakow, Poznan, Katowice and Lublin. One of our subsidiaries, Netia 1,
obtained a license for domestic long-distance telephone services. As of January
1, 2001, pursuant to the new Telecommunication Act, all telephone licenses were
converted by virtue of law into telecommunication permits.
As of December 31, 1999 we have provided a broad range of telecommunications
services including voice, data and internet-access services. In 2000 our voice
telephone services included switched, fixed-line voice telephone service,
Integrated Services Digital Network, which we refer to as ISDN, and voice mail.
We also provided internet access and data services in major urban areas. In
26
addition, we offered, on a selective basis, leased lines in connection with our
voice, internet and data services as well as other selected internet and
telecommunications services such as VoIP, web design, web hosting and
co-location services.
We launched wholesale services, including the wholesale termination of in-bound
traffic in early 2001. We offer data transmission services, including, since
September 2001, frame relay services. We are one of the two operators in Poland
offering, since February 2002, services based upon an Intelligent Network:
free-phone (toll free) ("0800") and split charge ("0801"). In the second half of
2002, we began offering duct, dark fiber and capacity leasing and co-location
services. In accordance with the provisions of the new Telecommunication Act
liberalizing the market for international long-distance calls, as of January 1,
2003, we began offering international long-distance services, based on standard
lines, in addition to alternative service based on VoIP technology. We commenced
offering "0-708" premium rate services in April 2003.
Our backbone network that connects the largest Polish cities as well as our
local access networks currently allows for the provision of various voice
telephone services. These services currently include switched, fixed-line voice
telephone service (including domestic long-distance, international long-distance
and fixed-to-mobile services), dial-up and fixed-access internet, leased lines,
voice over internet and co-location services.
We are also engaged in the installation and supply of specialized mobile radio
services (public trunking) in Poland through our 58.2% owned subsidiary, Uni-Net
Sp. z o.o., which we refer to as Uni-Net.
We have focused on servicing Poland's growing business market. Business
customers accounted for 31.4%, 31.0%, 28.5%, 25.3% and 20.5% of our total active
subscriber lines on March 31, 2003, December 31, 2002, December 31, 2001,
December 31, 2000 and December 31, 1999, respectively.
BUSINESS STRATEGY
As a result of our restructuring, our shareholder base changed and consequently
earlier this year our new shareholders appointed new members to our supervisory
board. There have been resulting changes to our management board as well. The
restructuring also served to strengthen our balance sheet. These changes in our
corporate governance and financial condition have precipitated a review of our
business strategy.
Our supervisory board adopted general guidelines for our new business strategy
on May 6, 2003. Our management is currently working on the preparation of a
detailed business strategy. Our strategic goal is to be Poland's provider of
choice for business communications services. We will strive to ensure the
highest level of customer satisfaction and offer advanced solutions, including
data transmission, internet and broadband services in addition to traditional
voice products.
Market Segmentation
Over the past two years, we have focused on delivering our services to business
clients, which today account for approximately 65% of our revenues. We intend to
further meet the needs of these business clients by providing a wider variety of
our services to each client with network investment if cost justified.
Additionally, we may pursue acquisitions that support our strategic objectives.
We believe that it is useful to view our target market in terms of the following
segments, based upon revenue sources and their differing service needs:
o Mass Market. This market includes residential customers and small
office / home office businesses.
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o Business Segment. This market includes small- to medium-sized
enterprises and large-sized enterprises.
o Key Accounts. This market includes selected larger corporate clients
and carriers.
We believe that our immediate opportunity to pursue our strategy will be in the
Business Segment. In order to successfully pursue these opportunities will have
to reorganize the relevant units within the Netia group and reallocate our
operating and capital investments. We also intend to augment, within the next
six to twelve months, our internal competences so that we may better serve those
clients we identify as our Key Accounts. In the course of preparing our new
business strategy, we intend to organize our operating units according to this
business segmentation model. We will also expand our range of business-based
services. This will be achieved through: (i) acquisitions, (ii) economically
justified network extensions, increasing our available footprint through organic
build-out and/or assets acquisitions, and (iii) introduction of new products and
services.
With respect to our Mass Market clients, we intend to optimize the level of
service and expenses allocated to this market segment by capitalizing on
efficiencies available with the newly implemented customer relationship
management system. Investment in the mass market segment will be allocated to
customer retention, churn reduction and maintenance of the existing customer
base.
Our development will be financed from our own resources and savings created by:
(i) optimization of the mass market segment, (ii) implementation of additional
operational improvements within the Netia group and (iii) financial synergies
arising from mergers with acquired companies. However, the acquisitions of large
entities, including mergers, may require additional financing.
Product and Service Offerings
As part of our strategy, in order to reflect the different needs of our various
market segments, we offer a range of products and services tailored to those
needs. For example, we have noticed a growing demand for complex solutions for
our business customers and our range of products permits us to offer each
customer a product and service package suitable to its individual needs. To
date, we have derived our revenues primarily from direct voice telephone
services and, to a lesser extent, from data, internet, indirect and wholesale
services. Because we expect revenues from data, internet, indirect and wholesale
services to grow in the future, on an absolute basis and relative to direct
voice telephone services, we intend to emphasize those product offerings. We
believe that, with a network covering the most important urban centers in
Poland, we are well positioned to take advantage of the opportunities in this
market. We currently provide indirect services such as fixed-to-mobile access,
indirect internet, domestic and international long-distance and international
VoIP telephony. We expect demand for indirect services to grow rapidly in
Poland, because we have observed similar growth trends in Western Europe. We
also currently offer wholesale services such as ducts, dark fiber, capacity,
telehousing and voice termination. We expect the importance of these services,
as well as data and internet services, to increase as has also been observed to
be the case in Western Europe. We will continue introducing new products and
services for the business segment following clients' needs and technological
trends.
Infrastructure
Historically, we have achieved our growth mainly through investment in our
infrastructure. We intend to continue to invest in our infrastructure but on a
more selective basis, focusing on connecting business customers in the urban
areas where we operate or expanding into new urban areas where we believe we can
attract new business customers. In places where it is not economically
justifiable for us to make infrastructure investments, we intend to deliver our
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services through the infrastructure of other operators. In the residential
market, we intend to achieve our business strategy through a more efficient use
of our existing network and through indirect access services. That means that we
intend to use the access network of other operators, primarily TPSA, to provide
additional internet, domestic and international long-distance and
fixed-to-mobile services.
Customer Satisfaction
We believe that customer orientation and customer satisfaction are the keys to
our success. We believe customer satisfaction depends on network quality,
pricing and customer care. We intend to maintain our high levels of network
quality in terms of network availability and time to correct faults. We intend
to remain competitive with our pricing and will continue to offer different
tariffs tailored to different segments. For the residential market, we have
introduced a simplified and transparent tariff plan and for the business market
we have introduced more-customized tariffs. In addition, we have made continuous
improvements in the area of customer care, including reductions in average
response and handling time. To improve customer retention, we have introduced a
dedicated relationship for the business market, including event sponsorship.
In March 2003, we successfully implemented the CORE program for our entire
customer base, combining multiple billing platforms into a single one. The CORE
program, while establishing a suitable information technology platform for
current operations, aims to simplify customer handling, reduce response time and
increase revenue collection.
OUR SERVICES AND PRICING
SERVICES
We provide our customers with a broad range of voice, data transmission,
internet and wholesale services under the "Netia" (or "Internetia," in the case
of dial-up internet access) brand name. We also provide mobile radio trunking
services through our majority-owned subsidiary, Uni-Net. We provide our services
to the customers connected to our own network (our direct customers) and to
customers of other operators, mainly TPSA (our indirect customers).
The services we presently offer to our direct customers include the following:
o Switched telephone services. We provide basic voice telephone
services, which include local, domestic and international
long-distance calling to our basic telephony subscribers. We also
provide enhanced voice services, such as call waiting, call
forwarding, wake-up calls, personalized ("easy-to-remember") phone
numbers, conference calling, call barring, call divert, hotline
service, bill limitation, automatic information on the change of a
phone number and itemized billing as part of a basic monthly service
package. As of December 31, 2002, we had 341,160 subscriber lines for
our basic voice telephone services, and that number had increased to
345,447 as of March 31, 2003. To date, we derive a significant
majority of our telecommunications revenues from providing voice
telephone services.
o Voice mail and fax mail. Our customers can use a virtual mailbox
offered by our network. Both voice and fax data can be stored in a
mailbox, depending on the customer's choice.
o Payphones. As of March 31, 2003, we operated 1,186 publicly available
payphones, most of which can be operated using both pay cards and
coins.
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o VoIP. We currently provide VoIP services and terminate VoIP traffic
from other operators on our network. We offer international
long-distance VoIP services at lower prices compared to fixed-line
services, although VoIP quality can be lower.
o Centrex. Netia Centrex is a virtual switch that enables our customers
to use the services of a typical office switchboard by using the
resources of our network. We assign abbreviated telephone numbers
within the virtual switch for internal calls made by our clients.
Netia Centrex enables a client to define a few numbers to function as
the main exchange. A customer using Netia Centrex services can use all
enhanced voice services available to switched telephone customers.
o ISDN. All of our switches are ISDN-equipped, and almost all of our
existing or potential customers have access to this service. ISDN is a
digital telephone network over which voice, data and video
transmission are possible at the same time. An ISDN network provides
higher-quality data and much faster transmission than does a
traditional network. We offer additional services together with ISDN,
including multiple line numbering, which provides up to eight numbers
per line to different equipment serviced, telephone number
identification, call diversion, diverted number identification, call
waiting and mobile terminal. ISDN also enables customers to transfer
short text messages among one another. We offer all of our ISDN
clients fast internet dial-up access.
o Dial-up internet services. We offer our dial-up internet services
under the brand name "Internetia." We launched them in April 2000. We
also operate the "www.internetia.pl" internet portal. Established
providers provide the content, including the British Broadcasting
Corporation, with whom we have entered into an exclusive rights
agreement.
o Fixed internet access. Since 2001, we have offered fixed internet
access under the brand name "BDI." The service is based mainly on
Digital Subscriber Line (DSL) technology which uses an existing copper
network. We charge subscribers a monthly fixed rate according to a
selected link capacity which can vary from 128Kb/sec to 2Mb/sec.
Currently, we offer two types of these services: BDI Standard and BDI
Professional. The main difference between these services is speed. In
both cases, a customer may choose an enhanced version of BDI (called
BDI+) which provides e-mail accounts and web-page capacity in addition
to the standard service.
o Data services and leased lines. We offer our customers leased-line
connections having transmission speeds from 64 kilobits per second to
two megabits per second, which covers a typical range of transmission
speed required by our customers. We also offer higher transmission
speeds on request. We expect further growth in our leased-line
business. Since September 2001, we have also been offering data
transmission services based on frame relay protocol, which is an
industry standard for data transmission.
o Intelligent Network-type services. Based on our domestic long-distance
network, in March 2002 we began to offer new services addressed mainly
to the business sector: an 0800 free phone (toll-free) service and an
0801 split charge service, in which calling and called parties share
the fee. We commenced offering "0-708" premium rate services early in
April 2003.
o Wholesale services. In order to maximize revenues from our investment
in our backbone, we offer wholesale services to other
telecommunications carriers. These services include two main
categories: the termination of domestic and international in-bound
traffic, which we have provided since early 2001, and wholesale
services, including duct, dark fiber and capacity leasing and
co-location services, which we began providing in the second half of
2002.
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The services we presently offer to our indirect customers include the following:
o Long-distance domestic, fixed-to-mobile and international services. We
offer long-distance domestic, fixed-to-mobile and international
services through our "1055" prefix for customers of other networks.
o Dial-up internet services. We offer our dial-up internet services
based on a call-back principle for TPSA customers located in areas
where we operate. We are now ready to offer direct access (using our
0209267 access number) for TPSA customers. However, we postponed the
launch of this service due to an inability to reach a suitable
interconnection agreement with TPSA. In February 2002, we received a
decision from the President of the ORTP confirming our right to
provide such services. However, the decision has been challenged by
TPSA and we are currently awaiting a final court decision on this
matter.
Apart from services to our direct and indirect customers, we also offer mobile
radio services called trunking services through our joint venture, Uni-Net.
These services include individual and group radio connections, alarm connections
and radio connections to the public telephone network (through operator
assistance).
PRICING
o Direct telephone services. We charge a fixed monthly fee in addition
to call charges for our voice telephone services. Our call charges for
telephone calls originating over our network depend on a number of
factors, including the type of call (local, domestic long-distance or
international), the duration of the call, the time of day and the day
of the week on which the call is placed and the volume of calls the
customer typically makes. We bill our customers based on connection
time. Our fixed monthly fees vary based on the service package for
which the customer subscribes. In addition to fixed monthly fees and
call charges, we charge installation fees for direct connections to
our customers.
Before October 1, 2001, we offered two pricing plans for customers
subscribing for voice-only services. This gave our customers a choice
between lower call charges with higher fixed monthly fees or higher
call charges with lower fixed monthly fees. As part of certain
promotions, we also offered an option for dial-up access, which
allowed subscribers to connect to the internet for a fixed number of
hours each month for a predetermined fee.
On October 1, 2001, we announced new tariff packages for analogue and
ISDN lines effective as of that date. Clients using analogue lines are
now offered three calling plans, all of which are net of VAT:
o Relaxed, with a monthly fee of PLN 19;
o Practical, with a monthly fee of PLN 30; and
o Chatty, with a monthly fee of PLN 40.
Clients using ISDN lines may choose between two tariff plans that are
net of VAT:
o Versatile (for basic rate access clients), with a fixed
monthly fee of PLN 46; or
o Professional (for primary rate access clients), with a fixed
monthly fee of PLN 700.
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The various packages differ primarily with respect to monthly fees and
charges for local calls. All other charges (domestic long-distance,
international long-distance, fixed-to-mobile and internet) are the
same in each of the new tariff plans. Moreover, we bill all charges
other than local voice and internet charges on a per-minute basis.
Since October 1, 2001, existing customers have had a choice of either
keeping their previously chosen tariff plans or switching to one of
the newly offered packages. At the moment, we are in the process of
moving our existing customers to the new tariff plans offering each a
choice from among the new tariff plans.
o Indirect telephone services. In July 2001, we announced our domestic
long-distance services tariffs (Netia 1055), which range from PLN 0.21
(off peak) to PLN 0.35 (peak), net of VAT, per minute. In June 2002,
we introduced a new direct-line dial tariff of PLN 0.31 (peak) per
minute based on the actual duration of the call, charged per second,
with a set-up charge of PLN 0.10, net of VAT. This tariff is also
available for our direct ISDN primary rate access customers.
On January 2, 2003, we also announced the introduction of new tariff
plans for international long-distance calls in selected zones, based
on standard lines and VoIP technology, with prices ranging from PLN
0.80 to PLN 5.50, net of VAT, per minute.
On April 1, 2003, we introduced new tariff plans for domestic
long-distance calls. The changes apply to all Netia tariff plans,
offered both to subscribers of Netia's direct voice services as well
as customers using the services offered through Netia's prefix (1055).
For tariff plans with per-minute billing, the price for connection
during peak hours will change from PLN 0.35, net of VAT, to PLN 0.33,
net of VAT, per minute.
o Dial-up internet. Our direct clients have a variety of dial-up
internet access tariffs. The simplest is a pay-per-use tariff of PLN
0.23 per each three-minute or six-minute intervals, at peak and
off-peak times, respectively. Alternatively, a customer can purchase
flat-rate packages: 50 hours for PLN 70, 100 hours for PLN 100 (PLN
120 in the case of ISDN) or internet by Night for PLN 50. All prices
related to internet access are subject to VAT at only 7%. The same
tariffs apply in the case of indirect (call-back) customers. However,
we will probably stop offering the call-back service (at least in the
case of flat-rate tariffs) after the implementation of a new
interconnection agreement with TPSA.
o Fixed internet access, leased lines and frame relay. We charge BDI
clients a fixed monthly fee which varies from customer to customer
depending on access line capacity and whether the customer has BDI
Professional or BDI Standard (the latter for service up to 1Mb/sec).
In the case of BDI+, we apply an additional monthly charge. The amount
of the additional fee depends on the number of e-mail and web packages
ordered by the customer. Leased line customers are charged a fixed
monthly fee which depends on capacity and line length. In the case of
frame relay, a fixed monthly fee is also charged, the amount of which
depends on (i) length, (ii) permanent virtual channel capacity, which
is a logical path created during transmission of data packets joining
two users of a data network and allowing them to transfer data and
(iii) committed information rate value, which represents a guaranteed
transmission between two end points of data transmission networks.
o Intelligent network-type service. We charge customers of our toll-free
and split-charge services according to the number of minutes of
traffic terminated at their 0800 or 0801 numbers. We apply a fixed
charge per minute independently of the location from which a given
call originates. In addition, we apply a fixed monthly fee, which
depends on a selected service package (so-called platinum, gold and
silver numbers).
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LICENSES
Certain of our subsidiaries hold fixed term permits for the operation of local
telecommunication networks on a non-exclusive basis in specified areas
throughout Poland. The companies obtained their telecommunication permits
through their conversion from telecommunication licenses issued under the
regulations of the previous Telecommunication Act. The conversion took place by
virtue of the new Telecommunications Act on January 1, 2001. In addition, all of
our operating subsidiaries that render basic telephone services applied to ORTP
to broaden the scope of their permits. The applications were approved in August
2002 and all operating subsidiaries may currently provide all telecommunications
services that may be rendered in a fixed-line network. Further, Netia Telekom
applied for a new permit under the new Telecommunications Act to render
telecommunications services within the entire territory of Poland. Netia Telekom
obtained this permit in June 2002. Currently, each permit holder is required to
provide public telecommunications services in its area of operation to all users
requesting such services.
When our subsidiaries obtained licenses prior to enactment of the new
Telecommunications Act, the Ministry of Infrastructure's policy for the
development of the telecommunications market in Poland envisaged the issuance of
no more than one local license to an operator who would have the right to
compete with TPSA in such zone. The Ministry of Infrastructure made an exception
to this duopoly model in the city of Warsaw, where it issued licenses to two
operators - including one of our subsidiaries. With respect to domestic
long-distance services, the Ministry of Infrastructure decided that three
operators in addition to TPSA would hold licenses for these services.
Accordingly, licenses for telecommunications services in Poland were issued for
15-year periods, and all business plans, including ours, were made on the
assumption that for such 15-year period, the operators would be able to operate
in an environment that was limited to two competitors. The Ministry of
Infrastructure established license fees and we accepted them under the same
assumption. However, the new Telecommunications Act allows for any number of
operators to obtain permits for both local and for domestic long-distance
services.
Because we obtained our licenses under the old regulatory regime, we incurred
license fee obligations of approximately EUR 215.8 million. As of December 31,
2002, our unpaid balance of those fee obligations was approximately EUR 95.4
million (approximately PLN 390.5 million at the average exchange rate quoted by
NBP on December 31, 2002) (plus approximately PLN 15.8 million that we were
assessed for obtaining a deferral on the payment of these amounts). In
connection with the conversion of licenses into permits and permissive entry
into the Polish telecommunications market for new operators we have filed
applications with the Minister of Infrastructure to establish that the license
fees associated with previously issued licenses have expired as a direct result
of the conversion of such licenses to permits, and in the case of Netia 1, also
to obtain a refund of the license fees already paid since January 1, 2001. In
the second half of 2002, all our local operating companies received decisions of
the Minister of Infrastructure rejecting our companies' applications to
establish that our license fee obligations have expired after conversion of our
licenses into permits. The Minister of Infrastructure subsequently upheld its
decisions in proceedings under motions for considerations. With regard to
decisions relating to all affected companies, we have appealed to the Supreme
Administrative Court of Poland demanding the revocation thereof on the grounds
of being contrary to the letter of law. These appeals are currently pending. The
Ministry of Infrastructure also issued decisions to Netia group companies that
hold permits, postponing the license payments of approximately EUR 32.9 million
(PLN 134.9 million at the average exchange rate quoted by NBP on December 31,
2002) due on June 30, 2002 until December 31, 2002. We did not pay these fees
when they became due at the end of 2002.
As of December 2002, the Conversion Act provides for the cancellation of license
fee obligations in exchange for telecommunication infrastructure capital
expenditures or the cancellation of license fee obligations in exchange for the
shares or debt of companies that have outstanding license fees in connection
33
with licenses for providing of local services. We have submitted applications
under the Conversion Act for the cancellation of our outstanding license fee
obligations based on capital expenditures we have already incurred. The
applications are to be reviewed by the Polish government and can only be
rejected if the responsible ministry does not recognize the investments already
made as capital expenditures contributing to telecommunication market
development. In case certain capital expenditures are rejected, we may have,
according to the new regulations, up to four years to make new investments
applicable for conversion. We received notification letters from the Polish
government dated March 21, 2003, indicating that our applications for
cancellation of our outstanding license fee obligations based on incurred
capital expenditures will be considered by June 30, 2003. We will determine the
accounting treatment for the license fee obligations once we receive a formal
and definitive response from the Polish government regarding the cancellation of
our license fee obligations. As a result of submitting the applications for
cancellation of our outstanding license fee obligations based on incurred
capital expenditures, we have not made the license fee payments of approximately
EUR 47.7 million (approximately PLN 195.4 million at the average exchange rate
quoted by NBP on December 31, 2002) due on December 31, 2002. On the date of
this annual report all the above mentioned payments remain due and payable.
In December 2001, Netia 1 applied to the Minister of Infrastructure for a
postponement of the payment date for a license fee installment in the amount of
EUR 1,000,000 (approximately PLN 4.1 million at the average exchange rate quoted
by NBP on December 31, 2002) due on January 31, 2002. On November 20, 2002, the
Minister of Infrastructure issued a decision deferring the payment date for the
license fee for Netia 1, due on January 31, 2002, in part until December 20,
2002 and in part until December 30, 2002. On December 2, 2002 Netia 1 applied
for reconsideration of the matter and a subsequent deferral of payment until
June 30, 2003. On April 9, 2003, the Ministry of Infrastructure issued another
decision refusing changes to the terms established in the previous decision
dated November 20, 2002. Furthermore, on December 2, 2002 Netia 1 applied to the
Minister of Infrastructure for postponement of payment of a license fee
installment amounting to EUR 1,000,000 due on January 31, 2003. On February 6,
2003 Netia 1 received a decision of the Minister of Infrastructure rejecting the
motion for postponement. Netia 1 has also applied for reconsideration of the
matter. On April 2, 2003, the Minister of Infrastructure issued a final decision
refusing a deferral of the obligation due January 1, 2003. On April 18, 2003,
Netia 1 paid the two outstanding license fee obligation installments in the
amount of EUR 2,000,000 (approximately PLN 8.5 million at the average exchange
rate quoted by NBP on April 18, 2003) and the applicable prolongation fees of
approximately PLN 320,000 and penalty interest amounting to approximately PLN
314,000.
INTERCONNECTION AGREEMENTS AND FEES
Generally, we must pay interconnection fees for international and long-distance
calls that originate on our network but terminate outside it, including most
international and domestic long-distance calls that must interconnect through
the networks of other operators, in most cases through TPSA and mobile
operators. As a result, we must execute agreements, commonly known as
"interconnection agreements," which establish both technical specifications for
interconnection and payment procedures for these calls that interconnect. Each
of our fixed-line operating subsidiaries has an interconnection agreement with
TPSA.
Currently, there is no uniform regulation of interconnection charges and TPSA
negotiates separate interconnection agreements with each operator. In September
2001, the President of the ORTP issued a decision classifying TPSA as a dominant
provider of telephone services, which means that TPSA must present a Reference
Interconnection Offer, which we refer to as RIO, with the proposed general terms
of interconnection agreements to the President of the ORTP for approval. On June
18, 2003, the President of the ORTP rejected four RIOs submitted by TPSA on May
20, 2003. The network interconnection RIO was rejected due to formal reasons -
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the fact that TPSA did not withdraw its application made to the Supreme
Administrative Court regarding the decision of the President of the ORTP
rejecting TPSA's previous network interconnection RIO submitted on December 18,
2002. The President of the ORTP was of the opinion that the approval procedure
regarding the previous RIO is still open and no new RIO submissions in this
regard may be made until the Supreme Administrative Court issues its decision or
TPSA's application is withdrawn. The other three RIOs, regarding transit
services for public operators, connections to premium rate services offered by
other operators and connections to toll-free (free phone) services offered by
other operators, were rejected by the President of the ORTP due to their
numerous references to the network interconnection RIO, rendering the three RIOs
unable to function independently. They were also deemed by the President of the
ORTP to be non-compliant with the provisions of the new Telecommunications Act,
in particular due to the lack of justification of different tariffs for
different categories of operators, incorrect qualifications of services, the
limitation of permissible connections only to types of services specified in
RIOs, the limitation of operators benefiting from the RIO only to providers of
local, domestic long-distance, international and mobile telephone services, the
introduction of minimum thresholds of traffic volume and additional fees for
traffic below such thresholds. Once the TPSA's RIOs are approved, the terms of
interconnection proposed by TPSA to other operators should not be worse than
those in RIOs, but each separate interconnection agreement should be negotiated
individually. In the event the parties cannot agree on the terms of the
interconnection agreement, the President of the ORTP may, on a case-by-case
basis, establish the terms of each interconnection agreement negotiated between
operators. Following the recent amendments to the new Telecommunications Act,
the notion of a dominant operator is no longer used and TPSA is classified as an
operator with significant market power, but its obligations described above
remain unchanged. At present it is not possible to predict whether or when TPSA
will comply with its obligations as an operator with significant market power
(formerly classified as a dominant operator) under the new Telecommunications
Act. Recent amendments to the new Telecommunications Act, which are expected to
enter into force by October 2003 will give to the President of the ORTP the
power to influence the content of a RIO, including the ability to change or
adapt the level of interconnection fees to the requirements of the new
Telecommunications Act, in line with the so called cost-based formula. These
amendments were required to align the interconnection rules with the European
Union regulations and are strongly supported by the market.
Interconnection costs, net of interconnection revenue, accounted for
approximately 13.5% of all of our operating costs in 2002. These costs represent
payments made by us to other operators for the origination, termination or
transfer of traffic using these operators' networks.
The Netia group companies are currently party to two interconnection regimes,
one using a revenue-based formula and another using a cost-based formula. The
Netia group companies that need to operate on the basis of a local license
granted under the previous telecommunications law pay interconnection costs
based on a certain percentage of revenues. Generally, under these
interconnection agreements, settlement costs paid to TPSA for outgoing
international calls originating from our customers are up to 72.0% of TPSA's
tariffs for those calls and, for outgoing domestic long-distance calls, from
22.5% to 40.0% of TPSA's tariffs. Recently we have reduced our payments to
mobile operators from between 0.87 PLN to 1.13 PLN (peak time) per call minute
to, respectively, 0.82 PLN to 0.87 PLN (peak time) per call minute (since May
2003) and further reduction of these payments is already announced. These
settlement costs are independent of the rates we charge our customers for
placing these calls, although our basic tariff option is effectively pegged to
the rates charged by TPSA for similar calls. We pay to and are paid by mobile
operators (but not fixed-line operators) who directly connect to our network for
calls originating and terminating on our network. Netia 1, one of our
subsidiaries that provides domestic long-distance services, is charged by local
loop operators on the basis of the number of switches required to connect a
telephone call, as provided in European Union guidelines. Those rates, which
were substantially reduced at the end of 2001, are currently PLN 0.05 for single
transit and PLN 0.068 for double transit (peak time). Since January 1, 2003 we
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also offer international long-distance calls and now pay to our foreign partners
the fees for international termination of these calls based on international
prices.
TARIFF REBALANCING
TPSA has stated that, historically, it has not based its tariffs (and hence the
interconnection fees charged to other operators like us) on the actual cost of
services provided. The lack of cost transparency, according to TPSA, has
resulted in an imbalance between the relatively low charges for local traffic
and relatively high charges for domestic long-distance and international traffic
in Poland. Since 1998, TPSA has been rebalancing its tariff structure by
decreasing the ratio of tariffs for certain domestic long-distance and
international calls to tariffs for local calls.
Consistent with these statements, TPSA increased its local call charges and
monthly fees several times in the last three years, while reducing domestic and
international long-distance tariffs. Local call charges in Poland have recently
matched the European Union average. Poland's telecommunications market may
continue to undergo further tariff rebalancing as the country moves toward
European Union pricing standards.
SALES AND MARKETING
We have historically organized our sales division along customer segments, into
three groups: the Business Services Group; the Residential Services Group; and
the Wholesale Services Group. Our Business Services Group is responsible for
selling our services to business customers, comprised of small-to-medium-sized
enterprises and corporate clients. These services include local voice services,
domestic and international long-distance, value-added voice services, internet
access, ISDN, leased lines and other business application services. Our
Residential Services Group is responsible for selling local access to
individuals and small businesses. These services include local voice services,
domestic and international long-distance, value-added voice services and
internet access. Our Wholesale Services Group is responsible for sales of
wholesale services to other telecommunications operators and service providers.
As discussed above, we are currently undergoing a review of our business
strategy and we intend to organize our operating units, which will most likely
include our sales force, based upon a business segmentation model that divides
our customers into:
o Mass Market. This market includes residential customers and small
office/home office businesses.
o Business Segment. This market includes small-to-medium-size
enterprises and mid- to large-size enterprises.
o Key Accounts. This market includes select larger corporate clients and
carriers.
We focus the majority of our direct sales efforts on identifying and acquiring
business customers. In sales to potential business customers, a sales manager
leads a team of salespersons trained to understand our services and the general
telecommunications needs of our business customers. Our sales force identifies
potential business customers and then makes formal presentations and personal
visits to each one. Our sales force, assisted by our technicians, works with the
potential customer to assess its specific telecommunications needs and, where
appropriate, offers a package of services specially designed to meet those
needs.
36
We have a dedicated team of business managers who serve high-volume business
accounts. We plan to continue to aggressively market our services to Poland's
large corporations and will intensify our marketing and sales initiatives for
those customers, especially in the Warsaw market. We believe that these efforts
have been successful, as evidenced by the fact that in 2002, the number of
business customer lines increased by 7,644, even though due to churn the total
number of ringing lines decreased. In the first quarter of 2003, the number of
business customers further increased by 2,965 while the total number of
customers increased by 4,287. Business lines comprised 31.4% of our total active
subscriber lines at March 31, 2003, up from 31.0% at December 31, 2002, 28.5 at
December 31, 2001 and 25.3% at December 31, 2000.
Our advertising and promotional strategy centers around the promotion of the
country-wide brand name "Netia." We intend to continue to increase recognition
of our brand name within the markets in which we operate.
BILLING AND SUBSCRIBER MANAGEMENT
Billing and collection. We typically bill our customers on a monthly basis. We
presently utilize software that collects data from each switch and processes
those data to produce bills and generate accurate and timely subscriber
information and analysis. This capability allows us to implement a more
effective credit management system.
We bill our voice customers through a centralized billing and collection system.
The main features of this system are:
o customer care billing and collections, based on a common customer
database; and
o a hardware platform based on high-reliability servers and a
centralized printing facility to process customer invoices.
Currently, our voice billing system provides support for over one million lines.
All regions have been or are being connected to our existing corporate network.
We bill our customers in arrears and, as it is customary in Poland, most of our
residential customers pay their bills through their local post office or bank.
We have strict revenue collection policies to encourage timely payment and are
taking steps to further improve cash collection. These policies include notices
of late payment, visits from service personnel and, ultimately, disconnection of
non-paying customers after on average of 60 days of a past-due bill. In 2002,
bad-debt expense was approximately PLN 10.6 million (U.S.$ 2.8 million),
representing approximately 1.8% of total telecommunications revenues.
During the year ended December 31, 2002, the provision for receivables increased
by PLN 9.1 million (representing 1.5% of total telecommunications revenues,
which is significantly below market averages).
Billing and customer management systems. We rely on the Clarify system for all
our billing. In 2001, we began to implement the CORE program, which consists of
a complex scalable and integrated IT platform for customer operations, including
integrated billing and customer relationship management as well as reporting and
revenue assurance functions. The CORE program, while establishing a solid IT
platform for current operations, aims to simplify customer handling, reduce
response time and increase revenue collection. In March 2003, we successfully
implemented the CORE program with our entire customer base, combining multiple
billing platforms into a single one. We also expect to add enhanced
functionality to the CORE program.
37
Other systems. We are planning to develop a system that will supervise our
network components and provide for automatic assigning of telephone numbers to
our customers. Since the end of 2001, we have used a salaries and human resource
management module of the SAP accounting system.
We are planning to implement a SAP materials management module as well as to
move all functions supporting purchase request authorizations and control of our
budget to SAP.
NETWORK
OVERVIEW
We completed our planned nationwide backbone network build-out in 2002. The
network consists of the nationwide backbone network, a series of intra-city
networks and local access networks. Our nationwide backbone network connecting
Poland's largest urban areas stretched 3,840 kilometers as of March 31, 2003.
The construction of the duct system of our nationwide backbone network is
completed. In the future this infrastructure can be extended by additional
fiber-optic cables and transmission equipment, in accordance with the growth of
the customer base.
In March 1998, we obtained licenses for the provision of telecommunications
services and the operation of local telecommunications networks in four major
cities of Poland (Krakow, Katowice, Gdansk and Poznan). Our investments in these
regions, as well as in the region of Lublin (another major city for which we
have held a license since 1996) grew to their highest levels in the years 1999
through 2001. In June 2000, we obtained a license for the provision of
telecommunications services in the city of Warsaw and the construction of access
network and a fiber-optic city ring became one of our primary objectives. In
2000, we launched another significant investment project and began the
construction of our backbone network covering the entire territory of Poland.
The majority of capital expenditures related to this project were incurred in
2001 and 2002. In 1999, we were granted a data transmission license. In 2000 and
2001, we began the construction of an IP/ATM network. Since 1999, we have
continued the construction of our local access network within territories
covered by our licenses. We are also constructing intra-city networks in Warsaw
and nine other major cities, and have substantially completed its construction
in five of these cities (Krakow, Katowice, Gdansk, Lublin and Poznan). We are
constructing broadband radio access networks in order to access customers more
rapidly in these cities while we complete the build-out of our fiber-optic
networks in these cities. The broadband networks will continue to complement our
fiber-optic networks. As of March 31, 2003, our local access network had 345,447
active subscriber lines and 501,512 connected lines. Our capital expenditures
for the fiscal years 2000, 2001 and 2002 and for the quarter ended March 31,
2003 were PLN 697.2 million, PLN 756.7 million, PLN 582.8 million, PLN 270.5
million and PLN 37.3 million, respectively, which were principally used to
construct our telecommunications network.
TECHNOLOGY AND NETWORK ARCHITECTURE
We use advanced technologies and network architectures to develop a highly
reliable infrastructure for delivering quality, high-speed digital transmissions
of voice and data telecommunications. The basic transmission platform consists
primarily of optical fiber (and, in some cases, copper wire) equipped with
high-capacity synchronous digital hierarchy, a type of telecommunication
transmission technology, which we refer to as SDH equipment, deployed in our
intra-city networks in rings that give us the capability to route customer
traffic in both directions around the ring, thereby reducing the risk of loss of
service in the event of a cable cut. Networks based on alternative designs, such
as star network architecture, are more vulnerable to service loss in the event
of a cable cut because transmissions have only one route for reaching the nodes.
In order to limit line cuts or damage, our fiber-optic and copper cables are
38
installed in either protective tubing or subducted plastic pipes and are usually
placed approximately two feet underground. We are constructing our backbone
network with seven or eight conduits, one of which has 48 fibers, with the
remaining available for future expansion or sale or lease to other
telecommunications providers.
Business customers are increasingly demanding higher capacity and better-quality
service in Poland. We have introduced two new technologies to meet these
demands. First, we have installed broadband radio access connections, which make
it possible to serve business customers requiring capacity of two megabits per
second (and multiples thereof) via a wireless link within two months after
receiving the order. Second, we have introduced "fiber in the loop," which
consists of a set of network fiber elements that make it economically feasible
to use fiber-optic cable instead of copper cable over the "last mile" to the
customer, thereby allowing the customers to gain a substantial increase in
bandwidth. This technology will enable us to better meet the growing demand of
our customers in a more cost-efficient manner. In addition, we deploy digital
subscriber lines, which we refer to as DSL, technology, which we currently use
to connect business customers to the internet, to offer our customers bandwidth
connections of up to eight megabits per second.
In February 2000, we acquired a 26 GHz broadband radio frequency spectrum in
Poland's 15 largest cities that allows us to provide broadband access services.
Using these frequencies, we are constructing broadband wireless access networks
in Warsaw and certain other major cities.
Our telecommunications switches are connected with a series of bi-directional
fiber-optic rings. We service the majority of our customers through remote
switching units, which collect traffic and send it to a switch. Remote switching
units are also connected to switches by the bi-directional fiber-optic rings.
Customers are connected to remote switching units or, in the case of customers
located near a switch, directly to switches, primarily by copper cables. Due to
the extensive use of remote switching units in our network, the average distance
between a customer and a point of entry into our network is less than 500
meters. Our use of remote switching units also allows us to provide DSL
broadband services using our existing network.
In order to exchange traffic with TPSA and their mobile network PTK Centertel
Sp. z o.o., which we refer to as Centertel, all of our switches are
interconnected with TPSA's network. We have designed our network so that it
interconnects with those parts of TPSA's network that use an international
signaling standard. The use of this standard makes the two networks compatible
and reduces interconnection difficulties. We have also designed our entire
network to interconnect with TPSA through at least two TPSA switches (at least
one of which is digital) at each connection point, thereby protecting our signal
quality. Pursuant to our interconnection agreements with Polkomtel S.A., which
we refer to as Polkomtel, and Polska Telefonia Cyfrowa Sp. z o.o., which we
refer to as PTC, two of Poland's main mobile telephone operators, we completed
several direct interconnection points with them in high-traffic areas. Since
obtaining our domestic long-distance license, we have expanded our capacity
through interconnection points with TPSA local switches and transit switches by
constructing new interconnection points or expanding existing ones. We have
several new interconnection points with other new operators that recently
entered the Polish market, which enables us to exchange traffic and terminate
calls either in our network or transfer them to other operators. Our National
Network Operations Centre, which we opened in 2000, monitors our network 24
hours a day and employs technicians on call to respond rapidly to any problems.
Since we commenced operations, we have not experienced a material network
failure.
NETWORK MAINTENANCE SYSTEMS
Our network maintenance systems are specifically designed for telecommunications
network management. In order to control our network, we have begun operating a
network maintenance center that relies on systems for network management. These
systems register all events that occur in our network and present them
39
graphically, which has already resulted in substantial decreases in our average
service response times. We have also introduced a traffic and network
performance management system, which enables us to predict network capacity
expansion requirements or to change the configuration of our network. We also
operate two geographical information systems that constantly monitor the
progress of our network build-out and help us predict possible future needs and
developments.
We purchase our infrastructure equipment from leading international
telecommunications suppliers. Our switching equipment is supplied by Lucent and
Alcatel; our transmission equipment (SDH) is supplied by Alcatel; our ATM
switches by Lucent; our IP platform by Emerson (formerly Ericsson); our power
supply systems by Emerson and Horus; our broadband radio access equipment by
Marconi (formerly Bosch); and our narrow-band radio access equipment by
Ericsson, Tadiran and Alcatel. Our internet routing equipment is supplied by
Cisco and Emerson.
The market for telecommunications equipment is competitive and timely equipment
delivery has generally been available as we have built our network. We do not
believe that we depend on any single equipment supplier for the success of our
build-out.
DATA TRANSMISSION NETWORK
Through our wholly owned subsidiary, Netia Network, we constructed a data
transmission network to produce and sell data services throughout Poland. For
infrastructure, we rely on a separate IP/ATM network that consists of three ATM
nodes delivered by Lucent and a number of IP routers.
UNI-NET
We own a 58.2% equity interest in Uni-Net, a specialized mobile radio network
providing mobile radio services called trunking services which include radio
individual and group connections, alarm connections and connections to the
public telephone network. Other shareholders in Uni-Net include Motorola
International Development Corporation, which has a 37.8% equity interest in
Uni-Net, and two individuals, each of whom owns 2.0%. Uni-Net has a long-term
agreement with TPSA relating to TPSA's radio trunking permit, which covers all
of Poland. This agreement provides for Uni-Net to construct and maintain a radio
public trunking network in accordance with TPSA's permit and to provide
operating services during a mutually agreed period. Uni-Net services
approximately 9,200 subscribers in 25 base stations throughout Poland. The
coverage distance of Uni-Net's specialized mobile radio network base stations
range from 30 to 50 kilometers, depending on the terrain.
COMPETITION
The market to provide telecommunications services in Poland is becoming
increasingly competitive. We compete with TPSA, other providers of fixed-line
telecommunications services in our markets and providers of alternative forms of
telecommunications services. We generally compete on the basis of quality of
service, service offerings and price. Our main sources of competition are the
following:
TPSA
TPSA, the formerly state-controlled telecommunications operator, is
significantly larger than we are, has substantially greater financial, technical
and marketing resources, has a far larger network than we do, controls far more
transmission lines than we do, and has long-standing relationships with certain
of our target customers, including most businesses in the territories in which
we operate. TPSA's infrastructure in the major cities is generally as
technologically advanced as our network, and TPSA has also embarked on an
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aggressive program to expand and modernize its international and long-distance
backbones and local networks in major cities.
LOCAL VOICE TELEPHONE COMPETITORS OTHER THAN TPSA
The new Telecommunications Act allows for free competition among providers of
local telephone services and after January 1, 2002, places no restriction on the
ORTP's ability to issue additional permits in the areas in which we operate. A
number of independent local telephone services providers have established
themselves in Poland. Our main alternative operator competitors are Telefonia
Lokalna Dialog S.A., Regionalne Sieci Telekomunikacyjne El-Net S.A. and Pilicka
Telefonia Sp. z o.o.
DOMESTIC LONG-DISTANCE OPERATORS
In March 2000, following a tender for domestic long-distance licenses, the
Ministry of Infrastructure announced that licenses would be awarded to two other
operators besides Netia 1. Those licenses were awarded to Niezalezny Operator
Miedzystrefowy Sp. z o.o. (a consortium consisting of Polskie Sieci
Energetyczne, which we refer to as PSE, a power grid distribution company,
Telekomunikacja Energetyczna Tel-Energo S.A., a telecommunications subsidiary of
PSE and Polski Koncern Naftowy ORLEN S.A.) and to Energis Polska Sp. z o.o.
(formed by Polskie Koleje Panstwowe S.A., the state-owned railway company,
Energis (U.K.), National Grid and Polish Telecom Operators N.V., an alternative
telecommunications company). As with the other two operators, due to prolonged
negotiations of interconnection agreements with TPSA, we were unable to commence
domestic long-distance operations until 2001.
MOBILE TELEPHONE OPERATORS
We also face increasing competition from wireless telephone service providers.
Currently, mobile telecommunications services in Poland are provided on a
country-wide basis through three GSM 900/1800 network operators: Polkomtel, PTC
and Centertel. We expect mobile operators to increase their penetration and
market share, especially by attracting business customers in those areas where
fixed-line penetration rates are low or where waiting periods for connection are
particularly long. The number of mobile phone subscribers in Poland is reported
to have reached 12 million at December 31, 2002, and has exceeded the number of
fixed phone subscribers in TPSA's network of 10.5 million.
In addition, the following three operators have been awarded licenses to provide
Universal Mobile Telecommunications System services, which we refer to as UMTS
services: Polkomtel, PTC and Centertel. We believe that none of these operators
is likely to begin providing UMTS services to customers until at least 2004.
Under the current regulatory regime 15 permits to operate as a mobile virtual
network operator have been granted. These operators can provide mobile services
by purchasing capacity on the network of one of the existing operators. We
obtained a mobile virtual network operator permit in February 2003.
CABLE TELEVISION OPERATORS
Another source of possible competition is certain Polish cable television
operators. Because cable networks can be upgraded to provide data and voice
services, and because there are over three million cable subscribers in Poland,
cable television companies could pose a potential threat to us in the provision
of those services. Currently, there are only two country-wide cable operators in
Poland: United Pan-Europe Communications NV, and Aster City Cable TV network,
both of which have partially upgraded their networks to offer voice or data
services over cable in selected areas.
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DATA AND INTERNET SERVICE PROVIDERS
The data services market has been and is largely unregulated in Poland and as a
result there is a large number of various-sized providers, some of which offer
only data transmission or internet service provider services, or both. The
leading data transmission operators in Poland include TPSA, Telekomunikacja
Energetyczna Tel-Energo S.A., Bankowe Przedsiebiorstwo Telekomunikacyjne Telbank
S.A., Energis (U.K.), Crowley Data Poland Sp. z o.o., Pro Futuro S.A. and Tele2
Polska Sp. z o.o. Internet service providers provide a wide range of
internet-related services. These providers include POLPAK (TPSA), GTS Polska
Holding Sp. z o.o. and Naukowa i Akademicka Siec Komputerowa - NASK.
TELECOMMUNICATIONS REGULATION IN POLAND
On January 1, 2001, the new Telecommunications Act came into force. The new
Telecommunications Act introduced numerous changes that significantly affect the
telecommunications market in Poland, including our operations. These changes,
which are intended to both liberalize Polish telecommunications regulation and
harmonize the Polish telecommunications market with European Union standards,
include the following:
o The establishment of the ORTP, an independent regulatory agency
charged with regulating the Polish telecommunications market in
collaboration with the Ministry of Infrastructure (formerly the
Ministry of Communications).
o The conversion of all licenses granted under the old
Telecommunications Act into permits.
o The reduction of fees for issuance of permits to EUR 2,500.
o Beginning on January 1, 2002, the granting to providers who meet
certain general statutory requirements of new permits to provide local
voice and domestic long-distance services and, beginning on January 1,
2003, international voice services.
o The immediate elimination of foreign ownership restrictions on all
operators providing local and domestic long-distance
telecommunications services and, on January 1, 2003, the elimination
of such restrictions on operators providing international
voice/telephone telecommunications services.
o The addition of a statutory requirement to ensure equal access to
basic telecommunications services of a certain quality and at a
reasonable price to all customers.
o The rescission of the legal provision granting TPSA its status as the
single monopoly provider of international telephone services after
December 31, 2002.
o The introduction of more stringent regulations on dominant operators
and operators with significant market power.
o The imposition of fines of up to 3% of an operator's annual revenue
for certain violations of the new Telecommunications Act.
Under the new Telecommunications Act, telecommunications activities conducted
through public telephone networks generally require a permit. New permits are
granted to any provider meeting certain general statutory requirements at a cost
much less than we incurred in obtaining our licenses.
42
The new Telecommunications Act also sets forth conditions that must be met to
obtain electromagnetic frequency allocations necessary to provide certain
telecommunication services. The fees associated with the allocation of a
frequency reservation intended for use for telecommunications activities may be
determined either by the costs of regulating and monitoring the relevant
activities, like fees associated with voice telecommunication permits, or they
may be determined through a tender process in the event insufficient frequency
resources require that a competitive tender take place.
The new Telecommunications Act states that any entity holding a dominant or
significant position with respect to any type of telecommunications activity and
in any local or domestic market may face more-rigorous regulation and may be
subject to additional obligations. These additional obligations include
requirements to submit for approval of the President of the ORTP agreements to
render certain kinds of telecommunications services, rate schedules (together
with justifications thereof) and interconnection agreements with other
operators.
On May 22, 2003 the Polish parliament adopted changes to the new
Telecommunications Act which aim at harmonizing it with the law of the European
Union. These changes are expected to come into force by October 2003. We believe
that the majority of changes to the new Telecommunications Act will result in
further de-monopolization of the telecommunications market in Poland. The
amendments do not address the changes introduced by a new set of
telecommunications directives adopted by the EU. Poland will have to adapt the
new Telecommunications Act to these new directives before its expected accession
to the European Union scheduled for May 2004.
Pursuant to the amendments to the new Telecommunications Act, TPSA will be
obliged to make its local subscriber loops available to other telecommunications
operators. If TPSA complies with this obligation, we will be able to offer our
services to a larger number of subscribers.
According to the bill amending the Telecommunications Act, operators
interconnecting with certain deficit local loops built by other operators will
have to pay additional charges calculated in accordance with a formula specified
in the law. The additional charges are to be settled within the regime of
interconnection agreements between operators. The amending bill stipulates that
these access deficit rules shall remain in force until the time the President of
the ORTP publishes information on balancing the prices for telecommunications
services, but not for longer than until December 31, 2003.
The recent changes to the new Telecommunications Act remove the concept of a
dominant operator and leave the concept of an operator with significant market
power, which corresponds to the provisions of European Union law.
Telecommunications operators will be obliged to provide universal
telecommunications services in each Polish province (wojewodztwo) in which they
have significant market power. The universal service obligation will now also
include internet access.
The possibility of retaining telephone numbers by subscribers who switch to
another telecommunications operator provided for in recent amendments to the new
Telecommunications Act should enable us to attract new subscribers.
TARIFFS AND PRICE REGULATION
Private telecommunications operators, including Netia Holdings S.A., may, at
their discretion, determine the prices charged to their customers in accordance
with the provisions of the new Telecommunications Act. However, they are
obligated to present to the President of the ORTP, at his request, the tariffs,
rates and fees they charge and to provide certain services free of charge in the
event of a national emergency. Further, under the new Telecommunications Act,
the President of the ORTP has been granted the authority to effectively overrule
43
the proposed tariffs of an operator holding a dominant or significant market
position with respect to public fixed-line voice services in any local or
domestic market. Tariffs of all operators are also subject to Polish antitrust
rules, which prohibit activities such as price fixing, abuse of a dominant
position and predatory pricing.
In addition, the new Telecommunications Act requires that tariffs for services
rendered by an operator with significant market power are to be calculated on
the basis of the actual costs incurred by the operator rather than the
traditional criteria used by TPSA.
After the recent amendments to the new Telecommunications Act telecommunications
operators with significant market power will be obliged to present a calculation
of the costs of providing each of the services in which they hold a significant
market position. In addition, they will be obliged to maintain their accounts in
a manner ensuring the division of assets and liabilities as well as incomes and
costs into the particular fields of regulated activities and to ascertain the
incomes and costs connected therewith separately for each service. These new
requirements are intended to ensure that operator charges will be based on the
costs they actually incur in relation to a particular service and eliminate the
subsidizing of some services from income from other services.
THE POLISH TELECOMMUNICATIONS INDUSTRY AND THE EUROPEAN UNION
In 1991, Poland signed an agreement establishing an association with the
European Union based on progressive economic integration. The agreement remains
the basis for the European Union's relations with Poland. The agreement went
into effect in 1994 and imposed progressive obligations on Poland to harmonize
its competition rules with those of the European Union insofar as they may
affect trade between the European Union and Poland. In addition, Poland agreed
to promote European Union telecommunications standards, systems of certification
and regulatory approaches. By themselves, such broadly worded objectives are not
legally binding obligations that Poland must fulfill under its existing
agreement with the European Union. However, they may be considered prerequisites
to Poland's admission to the European Union.
Accordingly, in order to align the telecommunications regime in Poland with
European Union law and policy, the new Telecommunications Act is intended to
implement, or to provide the basis for the implementation of, the European Union
telecommunications directives. The most important changes effected by the new
Telecommunications Act include a major overhaul of the existing
telecommunications licensing system, changes in the system of fees for
conducting telecommunication activities, the establishment of the ORTP and
requirements to ensure equal access to telecommunications services for
residential as well as business customers. The foundations laid by the new
Telecommunications Act now need to be built upon to ensure complete alignment
with the European Union law and its objectives. The recent amendments to the
Telecommunications Act introduced important changes regarding cost orientation,
interconnection, affordability, universal service and the availability of
carrier selection and number portability facilities. Nevertheless, Poland still
needs to adapt the new Telecommunications Act to a new set of European Union
telecommunications directives. Moreover, the reform of the telecommunications
sector will depend in large measure upon the capacity of the ORTP to oversee and
regulate the sector in an efficient and independent manner.
The Polish regulatory environment for telecommunications services is expected to
undergo further change as a result of Poland's increasing commitments to the
European Union and Poland's expected accession to the European Union planned for
May 2004. Poland applied for membership in the European Union in 1994, and in
June 1997 the European Commission issued a positive opinion with regard to
Poland's application. Negotiations on Poland's accession to the European Union
began on March 31, 1998, and were completed on December 14, 2002. On April 16,
2003, Poland signed the Treaty of Accession to the European Union together with
the Czech Republic, Estonia, Cyprus, Hungary, Latvia, Lithuania, Malta, Slovenia
44
and Slovakia. The Treaty of Accession will enter into force once it is ratified
by all the current Member States of the European Union and accepted in Poland in
a national referendum or by the Polish parliament. On June 7 and 8, 2003, Poland
held a referendum on the accession to the European Union, in which approximately
77% of the votes were cast in favor of the accession. It is almost certain that
Poland will join the European Union on May 1, 2004. The European Union entered
into an "Accession Partnership" with Poland, which provided a framework for
pre-accession negotiations and was intended to assist Poland in its preparation
for European Union membership. The Accession Partnership established priority
areas for further regulatory, legal and other harmonization, linking progress in
this process to financial assistance by the European Union.
The Accession Partnership with Poland identified the acceleration of the
privatization restructuring of state enterprises (including TPSA) as a
short-term priority that needed to be addressed in 1998. Accordingly, in
November 1998, the government commenced the privatization of TPSA. The
privatization process advanced in 2000 with the sale of a 35% equity stake in
TPSA. Medium-term priorities under the Accession Partnership included: further
improvements and more efficient enforcement in the field of competition; the
reinforcement of the powers of the antitrust and state aid authorities; and the
alignment of Polish telecommunications legislation with European Union
legislation. In its October 2002 report on Poland's progress towards accession
to the European Union, the European Commission noted that although Polish
telecommunications policy makers were slow to develop competition in the sector,
Poland has made steady progress in aligning Polish regulations with the European
Union law and its objectives and in liberalizing the market. The European
Commission underlined that the new Telecommunications Act was an important step
in the direction of liberalizing and developing the telecommunications sector.
The report also noted, however, that universal service and cost-oriented
interconnection prices should receive more attention and that further amendments
of telecommunications law are required, addressing the pre-selection and
carriers selection, asymmetric regulation, market definition and local loop
unbundling.
WORLD TRADE ORGANIZATION ACCORD ON BASIC TELECOMMUNICATIONS
Poland became a member of the World Trade Organization, which we refer to as
WTO, on July 1, 1995 and is a signatory to the General Agreement on Trade in
Services. Pursuant to the WTO Accord on Basic Telecommunications, which was
signed on February 15, 1997 and ratified by Poland on July 29, 1998, Poland has
committed to treat telecommunications services suppliers and services from other
WTO members on a "most favored nation" basis. Poland has also committed itself
to provide, among other things, market access to service suppliers and services
of other WTO members, although many of its commitments provide for market access
at some future time. For example, Poland has committed to provide market access
for the provision of international telephone services on a facilities or resale
basis by 2003. Further, Poland has also accepted WTO regulatory principles
relating to, among other things, competitive safeguards to prevent
anti-competitive measures by major service providers. Under these commitments,
any universal service obligations must be administered in a transparent and
non-discriminatory manner without placing unnecessary burdens on
telecommunications operators. The principles committed to by Poland also refer
to interconnection with major suppliers and obligate them to provide
interconnection at any technically feasible point, on non-discriminatory terms,
in a timely manner and at cost-oriented, reasonable, transparent and unbundled
tariffs.
LEGAL PROCEEDINGS
RESTRUCTURING
On December 15, 2001, we defaulted on several interest payments on two series of
our notes. Those defaults triggered cross-default provisions under the terms of
the indentures governing the four other series of notes and, as a result, we
45
were in default on all six series of our issued notes that were then
outstanding. We also defaulted on swap payments under certain swap agreements
and failed to make all subsequent payments of interest due after December 15,
2001. As a result of these defaults and a decline of a level of shareholders'
equity, which - as calculated according to Polish Accounting Standards - has
been in deficit since December 31, 2001, we were required to file for bankruptcy
under Polish law unless we petitioned for the opening of arrangement
proceedings. To avoid filing for bankruptcy, the Company, Netia Telekom and
Netia South petitioned the court in Warsaw on February 20, 2002 to open
arrangement proceedings.
Dutch Court Proceedings. A Dutch court presiding over the moratorium proceedings
entered its decision on November 6, 2002 confirming the moratorium arrangements
relating to three special-purpose Dutch finance subsidiaries of the Company and
that decision became final and unappealable on November 15, 2002. As a result of
that decision, the existing liabilities of those subsidiaries under the notes
and swap agreements have become unenforceable.
Polish Court Proceedings. The guarantees issued previously by the Company to
noteholders and swap counterparties were reduced separately in the Polish
arrangement proceedings to 8.7% of their original value, which we have to repay
in installments between 2007 and 2012. The Polish court decision with respect to
the Company's arrangement plan became final and unappealable on December 3,
2002. We also conducted the Polish arrangement proceedings separately for Netia
Telekom and Netia South relating to intra-group debt and the other swap
arrangements. The arrangement plans for Netia Telekom and Netia South were
approved by the Polish courts on June 25, 2002 and December 4, 2002,
respectively, and the approval decisions became final and unappealable on
January 2, 2003 and December 19, 2002, respectively. The Polish arrangement
proceedings resulted in a reduction of Netia Telekom's and Netia South's
liabilities to 8.7% and 1% of their original values, respectively.
U.S. Court Proceedings. In connection with the arrangement proceedings in
Poland, we commenced an ancillary proceeding in the U.S. Bankruptcy Court,
pursuant to section 304 of the U.S. Bankruptcy Code. The ancillary proceeding
sought, among other things, the turnover to us of deposits that we set aside to
fund certain interest payments under the 13.75% Senior Notes due 2010 issued by
NHII BV. Pursuant to the agreement entered into on October 21, 2002 by the
Company, Netia Telekom and Netia South with a minority group of our
claimholders, who previously objected to the restructuring, the minority group
withdrew all their claims in connection with the arrangement proceedings in
Poland. In addition, their appeal from the court's ruling in the United States
304 proceeding was dismissed without prejudice to reinstatement in the event
that the restructuring was not completed. On February 10, 2003, the minority
group of claimholders withdrew their objections to the United States 304
proceeding (including objection to turnover of the deposits to the Company) and
their appeal was dismissed with prejudice. In an order dated March 7, 2003, the
U.S. Bankruptcy Court gave force and effect in the United States to the
Company's Polish arrangement plans and Dutch composition plans ratified earlier
by Polish and Dutch courts, respectively. The court also ordered that the
deposited amount of EUR 13.9 million (PLN 61.5 million at the average exchange
rate quoted by NBP on March 31, 2003) be turned over to the Company immediately
following the completion of the final step of the Company's restructuring, which
required the issuance of Subscription Warrants to pre-restructuring shareholders
of the Company. The warrants were made available to the pre-restructuring
shareholders on May 16, 2003 and the funds were released on May 29, 2003.
DOMESTIC LONG-DISTANCE FEE OBLIGATIONS
In April 2001, we filed a petition with the ORTP seeking the return of the EUR
24.0 million in license fee obligations that we had paid to date with respect to
the domestic long-distance license that we received in May 2000. In our
petition, we claimed the period during which we were to have the semi-exclusive
46
right to provide domestic long-distance services in the original license has
been unfairly shortened due to three factors. First, the new Telecommunications
Act, which came into effect on January 1, 2001, allows any operator to apply for
a permit to provide domestic long-distance services after January 1, 2002, while
our license would have been valid for 15 years. Second, the Ministry of
Infrastructure delayed for a number of months both the tender process and the
actual grant of a license to us. Third, the Ministry of Infrastructure's failure
to issue timely and effective regulations with respect to the interconnection
regime and its failure to require TPSA to execute an interconnection agreement
with us with respect to domestic long-distance service further continues to
hinder our ability to provide domestic long-distance services.
We have filed similar petitions with the ORTP with respect to the fee
obligations under our other telecommunications permits.
On November 20, 2002 the Ministry of Infrastructure issued to Netia 1 a decision
splitting Netia 1's license fee obligations due January 31, 2002 into two
installments and deferring their payment until December 20 and December 30,
2002, respectively. On December 2, 2002, Netia 1 applied to the Ministry of
Infrastructure for a second review of the Ministry's decision, in order to
obtain a further deferral of both installments until June 30, 2003. On April 9,
2003 the Ministry of Infrastructure issued a final decision refusing changes to
the terms established in the previous decision dated November 20, 2002. On
December 2, 2002, Netia 1 also applied for the deferral until June 30, 2003 of
its license fee obligations due January 31, 2003. On February 6, 2003, Netia 1
received a decision from the Ministry of Infrastructure rejecting its request.
On April 2, 2003 the Ministry of Infrastructure issued a final decision on this
matter. On April 18, 2003, the Company paid the two outstanding license fee
obligation installments amounting to EUR 2 million (PLN 8.5 million at the
average exchange rate quoted by NBP on April 18, 2003) and the applicable
prolongation fees of PLN 0.3 million and penalty interest amounting to PLN 0.3
million.
UMTS TENDER
In November 2000, the Ministry of Infrastructure cancelled its planned tender
process and issued a UMTS license to each of Polkomtel, PTC and Centertel. We
chose not to participate in the tender process after careful analysis of the
terms upon which the licenses were to be granted. However, when the licenses
were granted (without a tender), many of the terms that we had found
objectionable were not included. As a result, in December 2000, we initiated
proceedings with the Ministry of Infrastructure with respect to the grant of
UMTS licenses to the other operators and we also submitted to the Ministry of
Infrastructure a statement of our intention to acquire a license to provide UMTS
services on the same terms as those granted to Polkomtel, PTC and Centertel. In
these proceedings, we sought the revocation of the licenses granted to these
operators and the initiation of a new tender for the three UMTS licenses. In the
alternative, we have requested that the Ministry of Infrastructure grant a UMTS
license to us on terms no less advantageous than those licenses granted to the
other operators. In January 2001, we received notice that the Ministry of
Infrastructure had ruled against us in these proceedings. We have resubmitted
our requests to the Ministry of Infrastructure on appeal and filed a claim with
the Supreme Administrative Court of Poland regarding the minister's delay in
reviewing the appeal and are currently awaiting a ruling.
MILLENNIUM
In August and September 2000, we entered into certain agreements to acquire all
of the outstanding equity of Millennium Communications S.A., which we refer to
as Millennium, a provider of telecommunications services to multi-tenant
buildings in Warsaw, for a total consideration of between US$ 10.8 million and
US$ 20.2 million, based on Millennium's financial performance through the end of
2001. Following the execution of the agreements, we advanced to Millennium a
loan in a total amount of PLN 8.5 million and Euro 2.9 million (PLN 12.8 million
at the average exchange rate quoted by NBP on March 31, 2003), of which PLN 8.5
47
million was subsequently repaid by Millennium in January 2001. In December 2000,
we initiated court and arbitration proceedings, which we amended in October
2001, in response to the failure by Millennium to perform the agreement. We
claimed the remaining part of the advance made to Millennium included in our
balance sheet and additional damages of PLN 8.5 million. In 2001, a valuation
allowance of PLN 17.0 million was recorded as other operating expense against
the outstanding amount receivable from Millennium as a result of the events
described above.
On October 15, 2002, we received a ruling of the Polish Chamber of Commerce
Arbitration Court, dated October 1, 2002, dismissing Millennium and its
shareholder's direct claims against us in which they sought to declare the share
subscription agreement void and ineffective and payment of PLN 11.5 million by
us. The court also dismissed our claim for damages against Millennium in the
amount of PLN 8.5 million. On November 12, 2002, we petitioned the Regional
Court in Warsaw to set aside the ruling of the arbitration court. Millennium
petitioned the Regional Court in Warsaw to enforce the ruling of the arbitration
court. Both cases are currently pending. Also, our claim brought against
Millennium in the Regional Court in Warsaw, petitioning for the repayment of a
loan of Euro 2.9 million (PLN 12.8 million at the average exchange rate quoted
by NBP on March 31, 2003), is still pending. On February 11, 2003, the court
ruled in our favor for the return of the principal amount of the loan and the
related interest. That ruling was appealed by Millennium.
In accordance with the ruling of the District Court in Warsaw, dated May 8,
2003, we seized 100% of shares held by Millennium in Genesis Sp. z o. o. with
its seat in Warsaw, the subsidiary of Millennium, for the purpose of securing
our claims related to the repayment of the loan granted by us to Millennium in
2000.
On February 28, 2001, Millennium filed a motion against us for certain acts of
unfair competition. In its motion, Millennium requested that the court order us
to pay Millennium damages of PLN 50 million. We believe that the Millennium suit
was filed as a litigation tactic in connection with our lawsuit against
Millennium and that Millennium's unfair competition claim does not have any
merit.
Having obtained legal advice, we do not believe that the settlement of this
matter will have a material adverse effect on our financial condition.
SOFITEC
In January 1998, Sofitec International, a company incorporated in France, which
we refer to as Sofitec, commenced proceedings in the Commercial Court of Paris
against us and two of our then officers claiming damages of approximately US$
4.5 million. Sofitec's claim relates to work and services allegedly performed
under an agreement that was entered into in January 1992 under which we agreed
to pay Sofitec a fee in the event that we obtained financing or other benefits
from an entity or entities to whom we had been introduced by Sofitec acting
according to the Sofitec agreement.
In the proceedings, Sofitec alleges that, as a result of the work and services
performed by it under the Sofitec agreement, we obtained financing from the
European Bank for Reconstruction and Development, which we refer to as EBRD, in
1996. We presented our defense motion in which we denied that Sofitec or any of
its agents or employees performed any work or services under the Sofitec
agreement, which would entitle it to payment of a fee. Specifically, we denied
that Sofitec either introduced us to EBRD or that Sofitec performed any work or
services in connection with the financing that we obtained from EBRD in 1996
which would entitle it to payment of any fee under the Sofitec agreement.
The first hearing in the proceedings took place in March 1998. At that hearing
Sofitec was ordered to produce the documents and evidence in support of its
claim by April 1998, at which time a second hearing took place. We presented our
48
defense motion at a hearing held in September 1998. The proceedings are still
pending. Having obtained legal advice, management is of the opinion that, it is
impossible to determine whether any liability with respect to this matter is
likely to arise. Accordingly, no liability has been recorded for this claim. We
do not believe that this matter will have a material adverse effect on our
financial condition.
KEVIN DAROCH
We received a letter, dated January 8, 1999, with a claim for US$ 10 million in
connection with consulting services provided to us by an outside consultant. We
are of the opinion, having obtained legal advice, that it is impossible to
determine whether any liability with respect to this matter is likely to arise
or to estimate the amount of this liability if it, in fact, were to arise.
Accordingly, no liability has been recorded for this claim. We do not believe
that this matter will have a material adverse effect on our financial condition.
MINORITY SHAREHOLDERS
On August 1, 2002, we received a copy of a claim by an individual shareholder
filed with the District Court in Warsaw with a demand for the invalidation of
certain sections of a resolution adopted by our general shareholders' meeting on
April 4, 2002. The individual shareholder claimed that the distribution of the
warrants issued in connection with our restructuring was harmful to the minority
shareholders and violates good commercial customs. On August 14, 2002, we filed
an answer to this claim and requested the District Court to dismiss it.
We received a claim filed by another minority shareholder, also for the
cancellation of a resolution adopted by our general shareholders' meeting that
was held on April 4, 2002. The claim is substantively based on the same grounds
as the other minority shareholder's claim. On January 17, 2003, we filed an
answer to this claim and requested the District Court to dismiss it.
We also received a decision from the District Court on July 1, 2002 in which the
District Court resolved to forward a claim filed by another minority shareholder
requesting the invalidation of a resolution adopted by our general shareholders'
meeting that was held on April 4, 2002 to the Regional Court for the capital
city of Warsaw for its determination. We have not received a copy of the claim
and are not aware of its merits. If, however, the claim is based on the same
grounds as the other minority shareholders, we expect that we will file for this
claim's dismissal as well.
MISCELLANEOUS
From time to time, we are involved in various other legal proceedings arising in
the ordinary course of business. We are not currently a party to any other
litigation or regulatory proceeding that we believe could have a material
adverse effect on our business, financial condition or operating results.
49
C. ORGANIZATIONAL STRUCTURE
THE STRUCTURE OF THE NETIA GROUP
Netia Holdings S.A. is the parent company of the Netia group, which currently
includes 27 subsidiaries that conduct operational activities. The Company's role
in the Netia group is limited to providing financing to its subsidiaries and the
Company does not itself provide any telecommunications services.
In December 2002, our supervisory board approved a plan to consolidate our
operating subsidiaries. The current structure of the Netia group primarily
resulted from the need to establish a separate entity for each
telecommunications license held. The supervisory board approved the
consolidation in an effort to reduce management costs, tax risks and operational
problems as well as to simplify our intra-group financing and legal
arrangements. This plan to consolidate our subsidiaries will result in most
operating companies currently held by Netia Holdings S.A. being merged into
Netia Holdings S.A. As part of the process the Company has performed a series of
acquisitions of minority holdings in various Netia group operating companies.
Furthermore, all shares in the operating companies held previously by various
entities in the Netia group were sold to the Company on June 13, 2003 and the
majority of dormant entities were sold to third parties.
The following chart shows the Netia group corporate structure as of June 16,
2003.
NETIA HOLDINGS S.A.
- - Netia Telekom Wloclawek S.A. (100%)
- - Netia Telekom Kalisz S.A. (100%)
- - Netia Telekom Modlin S.A. (100%)
- - Netia Telekom Torun S.A. (100%)
- - Netia Telekom Pila Sp. z o.o. (100%)
- - Netia Telekom Lublin S.A. (100%)
- - Netia Telekom Ostrowiec S.A. (100%)
- - Netia Telekom Warszawa S.A. (100%)
- - Netia Telekom Mazowsze S.A. (100%)
- - Netia South Sp. z o.o. (100%)
- - Netia Telekom S.A. (100%)
- - Netia Telekom Silesia S.A. (100%)
- - Netia Telekom Telmedia S.A. (100%)
- - Telekom Building Sp. z o.o. (100%)
- - Netia 1 Sp. z o.o. (100%)
- - Netia Telekom Swidnik S.A. (100%)
- - Optimus Inwest S.A. (100%)
- - Netia Network S.A. (100%)
- - Netia Holdings BV (100%)
- - Netia Holdings II BV (100%)
- - Netia Holdings III BV (100%)
- - Netia Online Inc. (100%)
- - Netia Overseas Ltd (100%)
- - Telko Sp. z o.o. (75%)
- - Uni-Net Sp. z o.o. (58%)
- - Netia Ventures Sp. z o.o. (100%)
- - Netia Globe S.A. (100%)
- - Netia Swiat S.A. (100%)
o Swiat Internet S.A. (99.97%)
- Polskia Online Holdings S.A. (100%)
o Polska Online Sp. z o.o. (100%)
- Internet Data System S.A. (100%)
- MULTINET S.A. (100%)
- PIK-NET Sieci Rozlegle Sp. z o.o. (100%)
- POLBOX Sp. z o.o. (100%)
- Publiczny Dostep do Internetu Sp. z o.o. (100%)
50
All of the entities listed above are organized under the laws of the Republic of
Poland, except for: NH BV, NHII BV and NHIII BV, each of which is organized
under the laws of The Netherlands, and each having its corporate seat in
Amsterdam, the Netherlands; Netia Overseas Ltd., organized under the law of
Cyprus; and Netia Online Inc., organized under the laws of the State of
Delaware, the United States.
D. PROPERTY, PLANTS AND EQUIPMENT
Our principal properties consist of our headquarters and our telecommunications
network located throughout Poland. Our headquarters, which include technical
facilities, are located in Warsaw and consist of approximately 11,300 square
meters of office space, which we own. We also have approximately nine major
lease agreements for offices, storage space and land adjacent to buildings. The
aggregate area leased by us is approximately 2,500 square meters (most of which
is land adjacent to buildings). In Warsaw, we also own two additional office
buildings, which contain 4,700 square meters and 2,800 square meters of office
space, respectively.
In addition, we rent or lease various properties (land and buildings) throughout
Poland to support our technical plant which we use, for example, for housing our
switches and remote switching units, to provide premises for our customer care
centers and, in certain cases, to provide accommodation for our employees.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
OVERVIEW
We own and operate a backbone network and we own, operate and are continuing to
build local access networks. At December 31, 2002, our access network had
341,160 active subscriber lines, including 105,638 business lines connected and
our backbone network stretched for 3,840 kilometers. Our telecommunications
services include switched, fixed-line voice telephone service (including
domestic long-distance, international long-distance and fixed-to-mobile),
dial-up and fixed-access internet, leased lines, VoIP and co-location services.
We launched wholesale services, including the wholesale termination of in-bound
traffic, in early 2001. In September 2001, we began offering frame relay
services. We are one of the operators in Poland offering, since February 2002,
services based upon an Intelligent Network: free phone (toll-free) ("0800") and
Split Charge ("0801"). We offer data transmission services utilizing a network
operated by our wholly-owned subsidiary Netia Network. In the second half of
2002, we started offering duct, dark fiber and capacity leasing and co-location
services. In accordance with provisions of the new Telecommunications Act
liberalizing the market for international long-distance calls, as of January 1,
2003, we started to offer international long-distance services in selected
zones, based on standard lines, in addition to the alternative service based on
VoIP technology. We began offering "0-708" premium rate services in April 2003.
We are also engaged in the installation and supply of specialized mobile radio
services (public trunking) in Poland through our 58.2% owned subsidiary,
Uni-Net. We have focused on servicing Poland's growing business market. Business
customers accounted for 31.0%, 28.5% and 25.3% of our total active subscriber
lines as of December 31, 2002, December 31, 2001 and December 31, 2000,
respectively.
We continue to offer selected wholesale services to other telecommunications
carriers operating in Poland. We believe providing these services will give us a
significant opportunity to enhance our operating margins by leveraging our
investment in our infrastructure through the greater utilization of our network.
We believe that our substantial capacity will give us the flexibility to sell
capacity and dark fiber, domestically and internationally.
51
The planned build-out of our nationwide backbone network is completed. We can
extend our infrastructure in the future by adding additional ducting, fiber
optic cables and transmission equipment, in accordance with the growth of the
customer base. We are also constructing broadband radio access networks in
several large cities, including Warsaw, using radio frequency spectrum we
acquired in February 2000. We believe these radio access networks will allow us
to rapidly connect business customers while our intra-city networks are under
construction and will continue to complement our fiber-optic access networks
when they are completed.
We continually review our plans to take into account business developments and
opportunities and changes in the competitive and regulatory environment in which
we operate. Our plans are also affected by macro-economic factors, such as the
general slowdown of the Polish economy. Consistent with our continuing review,
we are currently in the process of making adjustments to the organizational
structure of our sales, marketing and product development departments.
As discussed below under Item 5.B ("Liquidity and Capital Resources,") we
continue to take steps aimed at preserving our cash, such as substantial
reductions in capital and operating expenditures in comparison with our prior
plans and steps aimed at seeking to confirm expiry, cancellation, deferral or
conversion of our remaining license fee obligations.
All of the above factors may influence our results for 2003 and beyond.
SERVICES
Please see Item 4 ("Information on the Company,") for a description of services
currently provided to our customers.
REVENUES
The majority of our telecommunications revenues are currently derived from call
charges, monthly fixed fees and installation fees associated with providing
basic voice telephone services. We expect that as our network and our subscriber
base grow, call charges and monthly fees for basic voice services will continue
to account for a significant portion of our total revenues but that other
services, including internet, data and wholesale services, will increase as a
percentage of our total revenues. During the last few years, installation fees
have declined as a percentage of our total revenues due to the increase in other
service-related charges as our operations have matured, and we expect this trend
to continue in the future. Our revenues also include interconnection wholesale
revenues from domestic (mainly long-distance and mobile-to-fixed) and
international (VoIP) termination calls. This sector is expected to grow after a
new interconnection model is implemented with TPSA and the current model of
settlements used by our local operating companies is discontinued. This change
is expected to occur later in 2003.
Our revenue trends depend in part on the number of new customers we add, the
pricing of our services and our mix of business customers to total customers as
we realize greater revenue per customer from our business customers. As of
December 31, 2002, our cumulative business/total customer mix was 31.0%, a 8.8%
increase over our business/total customer mix at December 31, 2001. The
following table shows the periodic incremental business/total customer mix and
the cumulative business/total customer lines mix for each quarter of 2000, 2001
and 2002.
52
2000 2001 2002
--------------------------------- -------------------------------------- ----------------------------------
Q1 Q2 Q3 Q4 Q1(3) Q2(3) Q3(4) Q4(5) Q1(6) Q2(7) Q3(8) Q4
--------------------------------- -------------------------------------- ----------------------------------
Period incremental
Business/total
customer mix (1)
29.0% 44.6% 44.3% 62.9% 13.2% 60.8% 108.0% 2,548.2% n/a(6) n/a(7) n/a(8) 261.7%
Cumulative
business/total
customer mix (2) 21.0% 22.1% 23.6% 25.3% 25.0% 26.0% 27.3% 28.5% 29.4% 29.8% 30.3% 31.0%
- ----------------------------
(1) Periodic incremental business/total customer mix represents the net change
in subscriber business lines during the referenced periods as a percentage
of total net change in active subscriber lines during those periods.
(2) Cumulative business/total customer mix represents the number of subscriber
business lines as a percentage of total active subscriber lines at the end
of the referenced periods.
(3) The number of active subscriber lines reported previously has been
corrected as a result of discovering an error in the IT reporting system.
This also resulted in a recalculation of reported figures for the average
revenue per line, the number of business lines and business customers' mix.
This adjustment had no impact on our previously reported revenues.
(4) In the third quarter of 2001, the number of ringing lines increased by
5,296. Due to churn, number of non-business customers decreased by 425. As
a result, the business mix for the period reached 108.0%.
(5) In the fourth quarter of 2001, the number of ringing lines increased by
168. Due to churn, the number of non-business customers decreased by 4,113.
As a result, the business mix for the period reached 2,548.2%.
(6) In the first quarter of 2002, due to churn, the net change in the total
number of ringing lines decreased by 1,514. The number of business
customers lines in the same period increased by 2,569.
(7) In the second quarter of 2002, due to churn, the net change in the total
number of ringing lines decreased by 143. The number of business customers
lines in the same period increased by 1,434.
(8) In the third quarter of 2002, due to churn, the net change in the total
number of ringing lines decreased by 1,913 The number of business customers
lines in the same period increased by 1,212.
INVESTMENTS
As a part of our investment activities, our operating subsidiaries enter into
network construction agreements with certain subcontractors. Such agreements
result in certain capital expenditures, described in Note 7, to our Financial
Statements included in this annual report.
Other than the contracted capital expenditures described above and the
Millennium transaction described in Item 4 ("The Company--Description of
Business--Legal Proceedings,") we have not engaged in any other material
investment agreements.
OPERATING EXPENSES
Through December 31, 2002, we divided our costs and expenses into the following
categories: interconnection charges, cost of equipment, salaries and benefits,
social security costs, depreciation and amortization and other operating
expenses.
53
Interconnection Costs, net
Interconnection costs, net accounted for 13.5% of our operating expenses for the
year ended December 31, 2002. The Netia group companies are currently party to
two interconnection regimes, using (i) a revenue-based formula and (ii) a
cost-based formula. The Netia group companies operating on the basis of a local
license granted under the previous telecommunications law pay interconnection
costs based on a certain percentage of revenues collected. Generally, under
these interconnection agreements, settlement costs paid to TPSA for outgoing
(i.e., those originating from our customers) international calls are up to 72.0%
of TPSA's tariffs for these calls and, for outgoing domestic long-distance
calls, from 22.5% to 40.0% of TPSA's tariffs. Recently we have reduced our
payments to mobile operators from between 0.87 PLN to 1.13 PLN (peak time) per
call minute to, respectively, 0.82 PLN to 0.87 PLN (peak time) per call minute
(since May 2003) and further reduction of these payments is already announced.
These settlement costs are independent of the rates we charge our customers for
placing these calls, although our basic tariff option is effectively pegged to
the rates charged by TPSA for similar calls. We pay to, and are paid by, mobile
operators (but not fixed-line operators) who directly connect to our network for
calls originating in and terminating on our network. Netia 1, which provides
domestic long-distance services, is charged by local loop operators on the basis
of the number of switches required to connect a telephone call, as provided in
European Union guidelines. Those rates, which were substantially reduced at the
end of 2001, are currently PLN 0.05 for single transit and PLN 0.068 (in peak
time) for double transit. Since January 1, 2003 we also offer international
long-distance calls and now pay to our foreign partners the fees for
international termination of these calls based on international prices. Despite
expected changes in the interconnection settlements regime, these costs are
expected to remain a significant item of our operating costs in the foreseeable
future.
Cost of Equipment
The cost of equipment is related exclusively to our other businesses and
comprises costs incurred in connection with the purchase of radio trunking
equipment subsequently used in the construction of a trunking network and
trunking systems under various construction contracts entered into by Uni-Net,
our 58.2%-owned subsidiary.
Salaries, Benefits and Social Security Costs
The level of salaries, benefits and social security costs accounted for 14.2% of
our total operating costs for the year ended December 31, 2002, and increased as
expressed as a percentage of total operating costs for the year ended December
31, 2001 when it accounted for 11.7% total operating costs, primarily as a
result of reduction of operating costs. The number of employees in the Netia
group decreased from 1,536 as of December 31, 2001 to 1,289 as of December 31,
2002.
Depreciation and Amortization
Depreciation and amortization expenses consist of the depreciation of property,
plant and equipment, primarily related to our network, and the amortization of
intangible assets, principally of our licenses. We commence amortization of
licenses for a territory when we begin operations in that territory. We expect
depreciation and amortization expenses to remain stable in the future, except if
any future impairment of long-term assets is recorded.
Other Operating Expenses
Our other operating expenses primarily include maintenance and related expenses
necessary to service, maintain and operate our network; selling, general and
administrative expenses; and customer service expenses. We are implementing
54
cost-saving actions; however, we expect that our other operating expenses may
continue to increase in connection with the expansion f our network, the
expansion of our operations and the geographic expansion of our product and
service offerings.
TAXES
The Polish tax system has restrictive provisions for grouping of tax losses for
multiple legal entities under common control, such as us and our subsidiaries.
Thus, each of our subsidiaries may only utilize its own tax losses to offset
taxable income in subsequent years. Losses are not indexed to inflation.
Deferred tax assets related to these losses have been reserved for. Tax losses
incurred in 1999 and subsequent years are permitted to be utilized over five
years with a 50% utilization restriction per annum.
Although we believe we have structured our inter-company funding arrangements to
accommodate the rules that are presently in effect, we cannot be certain that
the tax authorities will concur with our position, or that we will be able to
structure our future funding arrangements to accommodate the rules.
Additionally, we believe we have constructed the effects of the restructuring in
a tax-efficient manner, but we cannot assure you that we will be able to avoid
taxation in all of the jurisdictions concerned. As a result, we may be required
either to pay increased amounts of Polish or Dutch corporate taxes and/or
transfer tax, or to restructure our inter-company funding arrangements in a
manner that would be less tax-efficient than our present arrangements.
The internal consolidation of the Netia group companies approved by the
Company's supervisory board in December 2002 will result in all operating
companies being merged into Netia Holdings S.A. Consequently, the new structure
will simplify the intra-group financial arrangements and therefore reduce the
risks related to compliance with applicable tax regulations. The proposed
consolidation will not result in an increase of tax liabilities of the Netia
group companies.
MINORITY INTERESTS
Minority interests represent that share of the net results of operations of
subsidiaries that are not attributable to our ownership interest. Minority
interests are adjusted out of the net loss of the Netia group in accordance with
IFRS and U.S. GAAP. Accordingly, we do not recognize the portion of the losses
assigned to the minority interest shareholders. Negative minority interest
resulting from negative net assets of subsidiaries is not recognized unless
there is a contractual commitment to fund the entity.
SEGMENT REPORTING
We report our operating results in two segments: the telecommunications business
and other businesses. Our other businesses consist of the provision of
specialized trunking services, the sale of related equipment and the development
of residential real estate. We conduct our specialized mobile radio business
through Uni-Net.
The following table sets out certain financial data related to our
telecommunications businesses and other business:
55
REVENUES OPERATING PROFIT/(LOSS)
----------------------------------------- ----------------------------------------------
YEAR YEAR
2000 2001 2002 2000 2001 2002
---- ---- ---- ---- ---- ----
(PLN IN MILLIONS)
Telecommunications businesses. 395.2 512.2 588.1 (160.7) (530.5) (263.3)
Other businesses............... 47.5 26.7 16.3 4.2 1.6 (0.5)
----- ----- ----- ------- ------- ------
442.7 538.9 604.4 (156.5) (528.9) 262.8
===== ===== ===== ======= ======= ======
RESULTS OF OPERATIONS
Certain important differences between U.S. GAAP and IFRS are explained in Note
25 to our Consolidated Financial Statements included in this annual report.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues from telecommunications services increased by 14.8% to PLN
588.1 million during the year ended December 31, 2002 from PLN 512.2 million
during the year ended December 31, 2001. The increase was primarily attributable
to an increase in the number of business customer lines that averaged a higher
revenue per line than residential customers - from 97,994 as at December 31,
2001 to 105,638 as at December 31, 2002 and increases in monthly fees. At
December 31, 2001 and 2002, 28.5% and 31.0%, respectively, of our subscribers
were business customers. Overall average monthly revenue per line decreased to
PLN 115.42 for the year ended December 31, 2002 from PLN 122.13 for the year
ended December 31, 2001. The average monthly revenue per line for business
customers also decreased during the year ended December 31, 2002 to PLN 200.11
as compared to the year ended December 31, 2001, when it was PLN 224.68.
Costs and expenses. Total costs and expenses decreased to approximately PLN
851.4 million during the year ended December 31, 2002 from approximately PLN
1,042.7 million during the year ended December 31, 2001, or by 18.3%. This
decrease was mainly attributable to lower level of charges for impairment of
long term assets recorded in 2002 of approximately PLN 149.4 million as compared
to approximately PLN 336.5 million in the year ended December 31, 2001. This
decrease was partially offset by an increase in the costs of depreciation of
fixed assets and amortization of intangible assets to approximately PLN 267.2
million in 2002 from approximately PLN 251.3 million in 2001 or by 6.3%.
Financial expenses, net. Net financial expenses amounted to PLN 417.8 million
during the year ended December 31, 2002 in comparison to PLN 231.4 million
during the year ended December 31, 2001. This increase was mainly attributable
to net foreign exchange losses of PLN 187.9 million recorded in 2002 as opposed
to net foreign exchange gains of PLN 154.4 for 2001. This increase was partially
offset by a lower amount of interest expense in 2002 compared to 2001. The
interest expenses amounted to PLN 244.5 million and PLN 421.9 million for 2002
and 2001, respectively, due to the fact that in 2002 interest was effectively
charged only until the opening of the Dutch moratorium proceedings on July 12,
2002.
Effect of debt default and cancellation of swap transactions. During the year
ended December 31, 2001, we recorded charges of PLN 274.6 million as a result of
the cancellation of our swap transactions with JPMorgan Chase Bank and Merrill
Lynch Capital Services, and PLN 112.0 million for the effect of the default on
our existing notes.
56
Taxes. The tax charge during the year ended December 31, 2002 amounted to PLN
1.7 million as compared to a tax charge of PLN 4.5 million during the year ended
December 31, 2001. In each period the charge primarily resulted from tax payable
by certain of our subsidiaries.
Net losses. As a result of the factors discussed above, we incurred net losses
of PLN 675.5 million during the year ended December 31, 2002 as compared to net
losses of PLN 1,151.3 million during the year ended December 31, 2001.
OTHER BUSINESSES
Revenues from other businesses decreased to PLN 16.3 million during the year
ended December 31, 2002 from PLN 26.7 million during the year ended December 31,
2001, mainly due to substitution of radio trunking services by mobile telephony
services. As a result of this decrease in revenues, operating profit decreased
to PLN 0.7 million during the year ended December 31, 2002 from PLN 3.0 million
during the year ended December 31, 2001. Net profit decreased to PLN 0.5 million
for the year ended December 31, 2002 from PLN 2.1 million for the year ended
December 31, 2001 as a result of these changes and decreases in financial costs.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
TELECOMMUNICATIONS BUSINESS
Revenues. Revenues from telecommunications services increased by 29.6% to PLN
512.2 million during the year ended December 31, 2001 from PLN 395.2 million
during the year ended December 31, 2000. The increase was primarily attributable
to a 7.1% increase in the number of total subscribers from 321,073 at December
31, 2000 to 343,802 at December 31, 2001, as well as increases in monthly
subscription fees in May 2001 and the introduction of new products. Revenue grew
at a greater rate than the subscriber base primarily due to the increase in the
proportion of our subscribers who are business customers, who on the average
generate higher revenue per line than residential customers. At December 31,
2000 and 2001, 25.3% and 28.5%, respectively, of our subscribers were business
customers. Average monthly revenue per line also increased to PLN 122.13 for the
year ended December 31, 2001 from PLN 114.31 for the year ended December 31,
2000. The average monthly revenue per line for business customers remained
stable during the year ended December 31, 2001 at PLN 224.68 as compared to the
year ended December 31, 2000, when it was PLN 224.25.
Costs and expenses. Total costs and expenses increased to PLN 1,042.7 million
during the year ended December 31, 2001 from PLN 556.0 million during the year
ended December 31, 2000, or by 87.5%. This increase was mainly attributable to
recording an impairment of goodwill in the amount of PLN 220.3 million, caused
by our belief that there is no longer a future economic benefit that can be
associated with our goodwill and an impairment test performed; an impairment
provision for fixed assets that are not expected to be utilized, in the amount
of PLN 97.0 million; a provision for network construction in progress, the
completion of which is considered to be unprofitable, in the amount of PLN 19.2
million; and an allowance in the amount of PLN 17.0 million for receivables in
connection with our withdrawal from our acquisition of Millennium. Other factors
influencing this increase include expanding our business activity, which
resulted in a higher level of interconnection charges and other operating
expenses, consisting mainly of salary costs and the cost of leased lines.
Depreciation of fixed assets also increased due to the continuing expansion of
our network. Amortization of other intangible assets increased due to the
increased level of computer software, an increase in the amortization of
licenses due to the commencement of provision of telecommunications services in
Warsaw, and amortization of the Warsaw license acquired in June 2000.
57
Financial expenses, net. Net financial expense amounted to PLN 231.5 million
during the year ended December 31, 2001 in comparison to PLN 198.4 million
during the year ended December 31, 2000. This increase was mainly attributable
to an increased amount of interest expense associated with a higher level of
average debt outstanding during the year ended December 31, 2001 as the result
of the issue of EUR 200 million Senior Euro Notes, which we refer to as the 2000
Euro Notes, in June 2000. Additionally, the increase in the foreign exchange
gains during the year ended December 31, 2001 compared to the year ended
December 31, 2000 was entirely offset by the decreased interest income in the
corresponding period.
Effect of debt default and canceling of swap transactions. During the year ended
December 31, 2001, we recorded charges of PLN 274.6 million as a result of the
cancellation of our swap transactions with JPMorgan Chase Bank and Merrill Lynch
Capital Services, and PLN 112.0 million for the effect of the default on our
existing notes.
Taxes. The tax charge during the year ended December 31, 2001 amounted to PLN
4.5 million as compared to a tax charge of PLN 1.7 million during the year ended
December 31, 2000. In each period the charge primarily resulted from tax payable
by certain of our subsidiaries.
Net losses. As a result of the factors discussed above, we incurred net losses
of PLN 1,151.3 million during the year ended December 31, 2001 as compared to
net losses of PLN 365.2 million during the year ended December 31, 2000.
OTHER BUSINESSES
Revenues from other businesses decreased to PLN 26.7 million during the year
ended December 31, 2001 from PLN 47.5 million during the year ended December 31,
2000, due to increased competition in the radio trunking equipment market. As a
result of this decrease in revenues, operating profit decreased to PLN 1.6
million during the year ended December 31, 2001 from PLN 4.2 million during the
year ended December 31, 2000. Net profit decreased to PLN 2.1 million for the
year ended December 31, 2001 from PLN 3.1 million for the year ended December
31, 2000 as a result of these changes and decreases in financial costs.
FOREIGN CURRENCY FLUCTUATIONS
Our revenues and costs are predominantly denominated in Polish zloty, other than
payments made to suppliers of certain equipment and services, which are linked
to the U.S. dollar and euro. In the previous years we raised long term debt on
international financial markets, and as of December 31, 2002 were exposed to
foreign exchange risk arising from various currency exposures primarily with
respect to the U.S. dollar and euro.
We will face foreign exchange risk in respect of our capital expenditure-related
liabilities and license fee obligations.
Our license fee obligations are denominated in euro. Any devaluation of the
Polish zloty against euro that we are unable to offset through price adjustments
will require us to use a larger portion of our revenues to service our
non-zloty-denominated debt. Shifts in currency exchange rates may have an
adverse effect on our ability to service our non-zloty-denominated obligations
and, therefore, on our financial condition and results of operations.
58
B. LIQUIDITY AND CAPITAL RESOURCES
As a result of the restructuring described more fully in Item 4.A ("Information
on the Company - History and Development of the Company - Financial
Restructuring") as of December 31, 2002, we had an accumulated deficit of PLN
2,932 million, shareholders' equity of PLN 2,802 million and a net working
capital of PLN 100 million, as computed according to IAS. The conclusion of
arrangements with our creditors in Poland and the Netherlands, allowed us to
regain solvency. The restructuring did not lead to the elimination of all of our
outstanding debt. We also redeemed all outstanding 2002 Notes issued on December
23, 2002 as part of the restructuring on March 24, 2003 for an aggregate amount
of EUR 51,096,381. In addition, we will have to repay the outstanding
installment obligations not exchanged for the ordinary series H shares offered
by us of a nominal amount of PLN 11.9 million between 2007 and 2012.
In relation to the conversion of licenses to permits, we are currently
contesting the requirement to pay the license fees due under the licenses held
by us prior to January 1, 2001. As of December 31, 2002, the liabilities under
local license fees equaled approximately EUR 95.4 million (recorded at nominal
value of PLN 390.5 million at the average exchange rate quoted by NBP on
December 31, 2002), further increased pursuant to the decision of the Ministry
of Infrastructure by a prolongation fee of PLN 15.8 million.
Further, the Conversion Act was enacted in Poland regarding the restructuring of
license fee obligations. Based on this law, we have submitted applications for
the cancellation of our license fee obligation amounting to PLN 308 million
(present value of the license obligations at December 31, 2002) based on capital
expenditures we have already incurred. These applications are to be reviewed by
the Polish government and according to the law can only be refused if the
Minister responsible for this matter does not recognize the investments already
made by us as qualifying capital expenditure. In this respect, we received
notification letters from the Polish government dated March 21, 2003, indicating
that the applications will be considered by June 30, 2003.
Simultaneously with applying for conversion of our license fees we are also
contesting the requirement to pay the license fees. We have filed applications
with the Minister of Infrastructure to establish that the license fees
associated with previously issued licenses have expired as a direct result of
the conversion of such licenses to permits, and in the case of Netia 1 also to
obtain a refund of the license fees already paid since January 1, 2001. In the
second half of 2002, all our local operating companies received decisions of the
Minister of Infrastructure rejecting our companies' applications to establish
that our license fee obligations have expired after conversion of our licenses
into permits. The Minister of Infrastructure subsequently upheld its decisions
in proceedings under motions for reconsideration. With regard to these decisions
relating to all affected companies, we have appealed to the Supreme
Administrative Court of Poland demanding the revocation thereof on the grounds
of being contrary to the letter of law. We cannot predict, however, if the
appeals will result in revocation of these decisions. Should the actions prove
unsuccessful, the liability to pay the local license fees, including
approximately EUR 47.7 million (approximately PLN 195.4 million at the average
exchange rate quoted by NBP on December 31, 2002) (further increased by the
extension fees) that became due and payable on December 31, 2002, may have a
negative impact on the liquidity of the Netia group, unless we are able to
obtain the conversion of these fees into investment obligations under the
Conversion Act.
As the restructuring is complete, we do not believe that events or conditions
exist which may cast significant doubt on our ability to continue as a going
concern.
59
We will continue to take steps aimed at preserving our cash, such as substantial
reductions in capital and operating expenditures in comparison with our prior
plans and steps aimed at seeking to confirm expiration, cancellation, deferral
or conversion of our remaining license fee obligations. Cash and cash
equivalents held by the Netia group as of December 31, 2002 amounted to PLN
132.5 million. We also held restricted cash and cash equivalents of PLN 199.3
million established as temporary security for our 2002 Notes. Furthermore, we
held PLN 54.9 million in a restricted deposit account, which pursuant to an
order of the U.S. Bankruptcy court was released to us on May 29, 2003 after we
made the warrants available to the pre-restructuring shareholders.
In our opinion, as of the date of this annual report, the working capital is
sufficient for our present requirements without taking into account any
consequences of potential adverse administrative or court decisions with respect
to our outstanding license fee obligations. For description of consequences of
potential adverse administrative or judicial decisions on our liquidity and
capital resources, see Item 3.D ("Key Information - Risk Factors - We May Not be
Successful in Contesting Our Obligations Under Converted Licenses.")
HISTORICAL OVERVIEW
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided by operating activities was PLN 198.5 million during the year
ended December 31, 2002 and PLN 177.6 million during the year ended December 31,
2001. This change was mainly driven by the fact that our telecommunications
revenues increased more than our cash operating expenditures during the year
ended December 31, 2002, which contributed to positive operating cash flow.
Net cash provided by operating activities was PLN 177.6 million during the year
ended December 31, 2001 and PLN 165.3 million during the year ended December 31,
2000. This change was again attributable to the fact that our telecommunications
revenues increased more than our cash operating expenditures during the year
ended December 31, 2002, which contributed to positive operating cash flow.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash used in investing activities was PLN 468.3 million during the year
ended December 31, 2002 compared to PLN 639.2 million during the year ended
December 31, 2001. The decrease in outflows from investing activities relating
to purchases of fixed assets and computer software is in line with our revised
business plan, which contemplates a significant reduction in such expenditures
as compared to our previous plans. Cash used in investing activities for the
purchase of fixed assets and computer software was PLN 270.6 million (U.S.$ 70.5
million) for the year ended December 31, 2002 compared to PLN 582.8 million
(U.S.$ 151.8 million) for the year ended December 31, 2001. Outflows from
investing activities in 2002 also included PLN 197.7 million deposited in a
restricted account as temporary security for obligations arising under our 2002
Notes.
Net cash used in investing activities was PLN 639.2 million during the year
ended December 31, 2001 compared to PLN 1,357.5 million during the year ended
December 31, 2000. This decrease reflected the deposit of PLN 219.9 million in
investment accounts during the year ended December 31, 2000, in connection with
the issue in June 2000 of our 13.75% Senior Notes due 2010 as well as the
payment of license fees of PLN 360.0 million during the year ended December 31,
2000 compared to PLN 4.0 million during the year ended December 31, 2001. This
decrease in cash used in investing activities was also due to a decrease in the
amount of fixed assets purchased, such as switches and fiber-optic cable. Cash
used in investing activities for the purchase of fixed assets was PLN 582.8
60
million during the year ended December 31, 2001 and PLN 756.7 million during the
year ended December 31, 2000. These decreases were partially offset by the
purchase of minority interest shareholdings pursuant to our pre-existing
contractual obligations - including shareholdings in Netia 1 - by Netia for PLN
60.9 million during the year ended December 31, 2001.
CASH FLOW FROM FINANCING ACTIVITIES
There were no financing activities in the year ended December 31, 2002, apart
from payments for our shares and notes issuance costs within the restructuring
process of PLN 80.4 million (U.S.$ 20.9 million) (see Item 4.A ("Information on
the Company - History and Development of the Company - The Financial
Restructuring")) and a partial settlement of our swap transactions paid in
January 2002 in the amount of PLN 29.3 million (U.S.$ 7.6 million). In the year
ended December 31, 2001, outflow from financing activities was PLN 142.6 million
(U.S.$ 37.1 million) and related mainly to the payment of coupon interest on our
10.25% Senior Dollar Notes due 2007 issued by NH BV of PLN 111.4 million and PLN
22.5 million related to cancellation of swap transactions.
Net cash provided by financing activities during the year ended December 31,
2000 was approximately PLN 1,289.2 million and resulted from our June 2000
public offerings of ordinary shares and ADSs, and our related sale of 2,250,000
of our ordinary shares to Telia, our principal shareholder, in which we raised
aggregate net proceeds of PLN 467.6 million; our June 2000 issue of EUR 200.0
million of 13.75% Senior Notes due 2010; and the proceeds from minority
shareholders in connection with the equity increase by Netia 1.
Cash and cash equivalents are held in Polish zloty, euro and U.S. dollars on the
bank deposits in Poland as well as with money market investment funds.
We cannot assure you that we will be successful in undertaking any of these
measures or that taking any or all of these actions would not have an adverse
effect on us.
DESCRIPTION OF CERTAIN INDEBTEDNESS
On December 23, 2002, NHBV issued EUR 49,869,000 (approximately PLN 198,757,886
at the average exchange rate quoted by NBP on December 23, 2002) aggregate
principal amount of the 2002 Notes to consenting holders of existing notes and
financial creditors in exchange for relinquishing their claims under existing
notes and swap obligations. The 2002 Notes were fully and unconditionally
guaranteed by the Company. The 2002 Notes were originally to mature on December
23, 2008. The 2002 Notes have borne interest at 10% per annum. Interest was
payable in six-month installments beginning on June 23, 2003. At the Company's
option, the first four interest payments could have been paid in kind by
capitalizing such interest at a rate of 12% per annum and issuance of additional
notes for principal amount equal to such capitalized interest. Interest expense
during the year ended December 31, 2002 was approximately EUR 114,000 (PLN
460,000 at the average exchange rate quoted by NBP on December 31, 2002). The
cost of issuance of the 2002 Notes amounted to PLN 42,550 and was to be charged
to the statements of operations throughout the period until the maturity of the
2002 Notes. The charge for the year ended December 31, 2002 amounted to
approximately PLN 127,000.
On February 13, 2003 the redemption of the 2002 Notes was approved by our
supervisory board, following the recommendation of the management board. The
2002 Notes were redeemed on March 24, 2003 without penalty at par value plus
accrued and unpaid interest from the date of issuance. We paid an aggregate EUR
51,096,381 (approximately PLN 221,482,373 at the average exchange rate quoted by
NBP on March 24, 2003 or U.S.$ 54,357,000 at the exchange rate on March 24,
2003) to redeem them. The one-off write off of the unamortized part of the
issuance cost in connection with the redemption of the 2002 Notes amounted to
PLN 41,161,000.
61
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are presented below. It should be noted that we
prepare our consolidated financial statements in accordance with IFRS. IFRS
differ in certain important respects from U.S. GAAP. You should read Note 25 to
our Consolidated Financial Statements included in this annual report for a
discussion of these differences as they relate to us.
These critical accounting policies are not intended to be a comprehensive list
of all of our accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by IFRS, or U.S. GAAP, if
applicable, with no need for management's judgment in their application. There
are also areas in which the exercise of management's judgment in selecting an
available alternative would not produce a materially different result. See Item
18 ("Financial Statements") and the notes thereto, which contain accounting
principles and other disclosures required by the applicable accounting
standards.
ESTIMATING THE IMPAIRMENT OF ASSETS
We are required to estimate the recoverable amount of an asset whenever there is
an indication that the asset may be impaired. Factors considered important that
could trigger an impairment review include significant negative industry or
economic trends as well as conditions within the Netia group. We are required to
recognize an impairment loss whenever the carrying amount of an asset exceeds
its recoverable amount. The recoverable amount of an asset is measured as the
higher of net selling price and value in use. The net selling price is the
amount obtainable from the sale of an asset in an arm's-length transaction
between knowledgeable, willing parties, after deducting any direct incremental
disposal costs; while the value in use is the present value of estimated future
cash flows expected to arise from the continuing use of an asset and from its
disposal at the end of its useful life. In determining an asset's value in use,
we are required to estimate the future cash inflows and outflows to be derived
from the continuing use of the asset and from its ultimate disposal, and
applying the appropriate discount rate to these future cash flows. For the
purposes of reconciliation of our results to U.S. GAAP, we measure the
recoverability of assets to be used by a comparison of the carrying value of an
asset to the projected undiscounted future net cash flows to be generated by the
asset.
REVENUE RECOGNITION
We measure our telecommunications and other revenue net of discounts and value
added tax. Our telecommunications revenue includes mainly installation fees,
monthly charges and calling charges. We record revenue from installation fees,
which are not in excess of selling costs, when the customer is connected to the
network. Our other telecommunications revenue comprises the provision of
internet, leased lines, frame relay and ISDN services as well as the sale of
telecommunications accessories; and we recognize revenues for these transactions
when the service is provided or when the goods are sold.
Our other revenue includes revenue from specialized mobile radio service (public
trunking), through our subsidiary Uni-Net. We record service revenues when the
service is provided. Revenue from the sale of equipment is recorded when the
customer takes delivery.
For the purposes of reconciling of our results to U.S. GAAP, we comply with
requirements of Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements," which we refer to as SAB 101. In certain cases, SAB 101
requires up-front fees to be deferred and recognized over the expected period of
the customer relationship. We have applied SAB 101 and deferred the revenue from
installation fees over the expected period of the customer relationship. The
expected period of the customer relationship was seven years through December
31, 2000 and, was revised to five years as of January 1, 2001. The effect of
this change in the expected period of the customer relationship is not material
for the current period.
62
DEFERRED INCOME TAXES
As part of the process of preparing our consolidated financial statements, we
are required to estimate the tax incomes and losses of our subsidiaries. To do
this, we estimate our actual current tax liabilities, whilst deferred income tax
is provided, using the liability method, for all temporary differences arising
between the tax bases of assets and liabilities and their carrying values for
financial reporting purposes.
We use currently enacted tax rates to determine deferred income tax. The
principal temporary differences arise from interest and foreign exchange
differences and tax losses carried forward. We record valuation allowances for
deferred tax assets when it is likely that tax benefits will not be realized. To
the extent we establish a valuation allowance or increase this allowance in the
period, we must include an expense within the tax provision in the statement of
operations.
We believe that the accounting estimate related to establishing tax valuation
allowances is a "critical accounting estimate" because: (1) it requires the
Company management to make assessments about the timing of future events,
including the probability of expected future taxable income and available tax
planning opportunities, and (2) the impact changes in actual performance versus
these estimates could have on the realization of tax benefit as reported in our
results of operations could be material. Management's assumptions require
significant judgment because actual performance has fluctuated in the past and
may continue to do so.
ACCRUED LIABILITIES
We exercise considerable judgment in recording our accrued liabilities and our
exposure to contingent liabilities related to pending litigation or other
outstanding claims subject to negotiated settlement, mediation, arbitration or
government regulation as well other contingent liabilities. Judgment is
necessary in assessing the likelihood that a pending claim will succeed or a
liability will arise and to quantify the possible range of the final settlement.
Where we expect that the occurrence of a contingency is reasonably likely, we
accrue an amount for the contingent liability that represents management's
estimate at the balance sheet date considering all anticipated risks and losses
up to that date, even if they became known after the balance sheet date but
prior to the preparation of the financial statements. Because of the inherent
uncertainties in this evaluation process, actual losses may be different from
the originally estimated amount accrued.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Services Accounting Board, which we refer to as the
FASB, issued SFAS No. 142, "Goodwill and Other Intangible Assets," which we
refer to as SFAS 142, which supersedes APB Opinion No. 17, "Intangible Assets."
SFAS 142 addresses how intangible assets that are acquired individually or with
a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. SFAS 142
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS 142 are required to be applied beginning with fiscal years
beginning after December 15, 2001. SFAS 142 is required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. On
January 1, 2002, we adopted SFAS 142. Based on management's evaluation of our
63
consolidated financial position at that date, including its negative equity and
the value of our quoted stock market price, we wrote off goodwill with a net
book value of approximately PLN 213,443,000 for U.S. GAAP purposes.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets". The objectives of SFAS 143
are to establish accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. The
provisions of SFAS 143 are required to be applied starting with fiscal years
beginning after June 15, 2002. The adoption of SFAS 143 did not have a material
impact on our consolidated financial statements.
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which we refer to as SFAS 144, which supersedes
APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" and SFAS No 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS 144 removes goodwill from its scope and, therefore, eliminates the
requirements of SFAS 121 to allocate goodwill to long-lived assets to be tested
for impairment. SFAS 144 also establishes a "primary assets" approach to
determine the cash-flow estimation period for a group of assets and liabilities
that represents the unit of accounting for long-lived assets to be held and
used. The adoption of SFAS 144 did not have a material impact on our
consolidated results of operations or financial position.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Correction as of
April 2002," which we refer to as SFAS 145. The objective of SFAS 145 is to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects and that are similar to sale-leaseback transactions. The
provisions of SFAS 145 are required to be applied in fiscal years beginning
after May 15, 2002. The adoption of SFAS 145 did not have a material impact on
our consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities, which we refer to as SFAS 146. SFAS 146
addresses significant issues relating to the recognition, measurement and
reporting of costs associated with exit and disposal activities, including
restructuring activities, and nullifies the guidance in Emerging Issues Task
Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Cost to Exit an Activity." The provisions of SFAS 146 are
required to be applied for exit or disposal activities initiated after December
31, 2002. The adoption of SFAS 146 did not have a material impact on our
consolidated financial statements at the date of this annual report.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which we refer to as FIN 45. FIN 45
requires the guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. It also elaborates on the disclosure to be made by a guarantor in its
financial statements about its obligation under certain guarantees that it has
issued and to be made in regard of product warranties. Disclosure requirements
are effective for financial statements of interim and annual periods ending
after December 15, 2002. The recognition and measurement provisions are
effective for guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a material impact on our consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123", which we refer to as SFAS 148. SFAS 148 amends SFAS 123 to provide
alternative methods of transition for a voluntary change to the fair value based
64
method of accounting for stock-based employee compensation. That amendment is
not relevant, unless management considers the adoption of the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are required to be applied
in fiscal years ending after December 15, 2002. We are currently evaluating the
impact that the adoption of SFAS 148 may have on our consolidated financial
statements.
INFLATION
In connection with its transition from a state-controlled to a free-market
economy, Poland experienced high levels of inflation and significant fluctuation
in the exchange rate for the Polish zloty.
The Polish government has adopted policies that slowed the annual rate of
consumer price inflation from an average of 250.0% in 1990 to approximately 8.6%
in 1998, 9.8% in 1999, 8.5% in 2000, 3.6% in 2001 and 0.8% in 2002. Inflation in
the 12-month period ended March 31, 2003 amounted to approximately 0.6%.
Substantial portions of our operating expenses are, and are expected to continue
to be, denominated in Polish zloty and tend to increase with inflation.
Inflation has had, and may continue to have, a material adverse effect on our
financial condition and results of operations. We may increase our tariffs to
account for Polish price inflation. The new Telecommunications Act, however,
grants the ORTP the authority to review and, in certain situations, effectively
overrule the prices we and other telecommunications service providers propose to
charge for our services.
C. RESEARCH AND DEVELOPMENT, PATENTS, LICENSES, ETC.
None.
D. TREND INFORMATION
See Item 5.A ("Operating and Financial Review and Prospects--Operating Results")
and Item 5.B ("Liquidity and Capital Resources") for a discussion of information
required by this item.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS, SENIOR MANAGEMENT
GENERAL
We are governed by a management board, a supervisory board and the general
meeting of our shareholders.
Currently according to the Company's statute, the Company's supervisory board
may consist of up to seven members, who are elected for five-year terms unless
dismissed earlier by shareholders. Holders of series A-1 preferred shares have
the right to appoint one member of the supervisory board. The statute requires
that at all times at least two supervisory board members be Independent Members.
Under the provisions of the Company's statute an "Independent Member" is a
person who: (i) is not the Company's executive officer or an executive officer
of any of the Company's subsidiaries of any affiliate of the Company and is not
a member of the immediate family (or someone with a similar relationship) of any
such person; (ii) does not have a business or professional relationship with the
Company or any of its subsidiaries that is material to the Company or such
person; (iii) does not have an ongoing business or professional relationship
65
with the Company or any of its subsidiaries, whether or not material in an
economic sense, which involves continued dealings with the management of the
Company, such as the relationship between the Company and our investment bankers
or legal counsel; (iv) is not an employee of the Company or any of its
subsidiaries or of any affiliate of the Company and is not a member of the
immediate family (or someone with a similar relationship) of any such person;
(v) is not an employee of any shareholder or any affiliate of any shareholder
holding more than 5 (five) per cent of issued share capital of the Company or
any of its subsidiaries or of any affiliate of the Company and is not a member
of the immediate family (or someone with a similar relationship) with any such
person or (vi) does not have a business or professional relationship with any
shareholder or any affiliate of any shareholder holding more than 5 (five) per
cent of the issued share capital of the Company or any of its subsidiaries that
could have significant impact on the ability of such person to make impartial
decisions.
Generally, the shareholders of a Polish company elect the members of its
supervisory board and its management board and, as a group, hold decision-making
power over the distribution and designation of profits, the issuance of shares,
increases or decreases in share capital and potential mergers or divestitures of
the company. The shareholders also vote on proposed amendments to that company's
statute.
However, pursuant to Netia Holdings S.A.'s statute, members of our management
board are appointed and dismissed by the supervisory board.
In addition, the supervisory board generally maintains supervision over a
limited number of our activities specified by law and the Company's statute.
Specifically, consistent with Polish legal requirements, the supervisory board
reviews our annual Polish statutory accounts, the management board's reports and
the matters proposed to be presented at the shareholders' meetings. The
supervisory board also sets the salaries of, imposes and enforces appropriate
disciplinary action on, and examines issues raised by, the management board. The
supervisory board also approves the motions of the management board pertaining
to the sale or encumbrance of real estate.
Our management board may consist of up to ten members, each of whom is to be
appointed for five-year terms. The management board is responsible for matters
not specifically reserved to either the shareholders or the supervisory board
and effectively oversees our day-to-day management. In particular, the
management board manages our operations under the supervision of the Chief
Executive Officer, serves as our legal, governmental and third-party
representative and issues resolutions concerning any business activities that we
may undertake. The management board resolutions are adopted by a simple majority
of votes.
66
Set forth below is a list of the current members of our supervisory board:
YEAR APPOINTED FOR YEAR TERM
NAME AGE APPOINTED BY THE CURRENT TERM EXPIRES
- ---------------------------------------------- ------------ ---------------------------------------- -------------------- ----------
Nicholas N. Cournoyer (Chairman) 45 Telia* 2003 2008
Morgan Ekberg................................. 57 Telia* 2003 2008
Andrzej Stefan Radziminski.................... 59 Holders of series A-1 shares** 2002 2007
Ewa Maria Robertson........................... 56 Warburg*** 2003 2008
Jaroslaw Bauc ................................ 45 All shareholders 2003 2008
Andrzej Michal Wiercinski..................... 55 All shareholders 2003 2008
Richard James Moon............................ 52 All shareholders 2003 2008
- --------------------------------
* Pursuant to paragraph 15.2(a)-(c) of our statute, Telia had the right to
appoint from two to four members of our supervisory board (depending on the
number of shares held in Netia Holdings S.A.). After changes to our statute
adopted by the general meeting of shareholders on January 15, 2003, which
became effective on February 20, 2003, Telia is no longer entitled to
appoint members of the supervisory board. This resolution did not
invalidate the prior appointments by Telia nor did it shorten their terms.
** Pursuant to our statute, holders of series A-1 shares have the right to
appoint one member of the supervisory board.
*** Pursuant to paragraph 15.2(d) of our statute, Warburg had the right to
appoint one member of the supervisory board. After changes to our statute
adopted by the general meeting of shareholders on January 15, 2003, which
became effective on February 20, 2003, Warburg is no longer entitled to
appoint members of our supervisory board. This resolution did not
invalidate the prior appointments by Warburg nor did it shorten their
terms.
Our management board currently consists of four members, all of whom are
appointed by the supervisory board.
Set forth below is a list of the current members of our management board:
YEAR APPOINTED
FOR THE CURRENT YEAR TERM
NAME AGE TITLE TERM EXPIRES
----------------------------------- ---------- ----------------------------------------------------------------------- ----------
Wojciech Madalski................. 47 Chief Executive Officer / President 2002 2007
Zbigniew Lapinski................. 36 Chief Financial Officer 2003 2008
Elizabeth McElroy................. 46 Chief Commercial Officer 2003 2008
Paul Kearney...................... 40 Chief Technology Officer 2003 2008
BIOGRAPHIES OF MEMBERS OF GOVERNING BODIES
JAROSLAW BAUC graduated from the University of Lodz and the University of
Windsor in Canada with degrees in economics. Mr. Bauc is a university professor
specializing in macroeconomics. He also worked as an advisor to the Ministries
of Finance in Mongolia and Romania in 1996 and 1997, respectively. Between 1998
and 2000, he represented the Polish government in the Monetary Policy Council.
Between 2000 and 2001, Mr. Bauc held the position of the Minister of Finance in
the Polish government. At present, Mr. Bauc is the President of the management
board of PTE Skarbiec Emerytura pension fund and a supervisory board member of
Tras Tychy S.A.
67
NICHOLAS N. COURNOYER, the chairman of our supervisory board, graduated from
Connecticut College with a Bachelor of Arts degree. He worked in the Latin
American Debt Restructuring Department of the Chase Manhattan Bank. In 1985, he
established the Emerging Markets Debt Trading Group based in New York. Between
1986 and 1991, he ran a similar operation in London. In 1992, Mr. Cournoyer
founded Montpelier, a company specializing in the Emerging Markets. At present,
Mr. Cournoyer acts as the Managing Director of Montpelier Asset Management.
MORGAN EKBERG has served as a member of our supervisory board since July 2001.
Mr. Ekberg has served in various capacities at Telia since 1984, including
Senior Vice President, Head of International Networks since April 2001, Senior
Vice President of Business Development from August 200 until March 2001, and
Senior Vice President of International Business from April 1999 until June 2000.
From January 1996 through April 1999, he was the Senior Vice President of
Business Communication at Telia responsible for Unisource/AT&T. Mr. Ekberg also
served as the Head of Marketing Division and Sales for Swedish TeleCom from June
through December 1995. From 1986 until 1995, Mr. Ekberg was the Head of
Administration and Deputy Marketing Director of Telia's Corporate Marketing
Department. Mr. Ekberg received an engineering degree in telecommunications in
1964.
PAUL KEARNEY was appointed Chief Technology Officer of Netia on June 12, 2003.
Prior to joining Netia, he held various managerial positions with
telecommunications companies worldwide. Between 2002 and 2003 he held the
position of Vice President, Customer Engineering at QuantumBEAM, UK; between
2000 and 2002 he held the position of Chief Technology Officer and Deputy Chief
Operating Officer of Alua, Spain; between 1998 and 2000, he served as Technical
Director and between 1994 and 1998 a Network Engineering Manager of BT Spain;
between 1991 and 1994 he worked at Cray Communications Spain; and between 1990
and 1991 he worked at Telefonika Sistemas. Mr. Kearney graduated from University
College London, UK, with a Masters of Science degree in Telecommunications
Business. He also holds a Diploma in Engineering from Dundalk Institute of
Technology.
WOJCIECH MADALSKI was appointed Chief Executive Officer and president of the
management board on September 17, 2002. Between 1993 and 1998, Mr. Madalski was
employed by Pepsico, Inc., where he held the following positions: between 1993
and 1995, he was Chief Executive Officer of E. Wedel S.A. and President of
Pepsico Foods International, Poland; between 1996 and 1997, he was Vice
President of Pepsico Foods International - Europe Group, UK; and in 1998, he was
ECR Director at Walkers Snack Foods Ltd. Between 1998 and 2001, Mr. Madalski
served as Chief Executive Officer and President of Hortex Holding S.A. In 2002,
he was also a managing director in the Carlsberg Breweries A/S Group in Poland.
Mr. Madalski holds a Master of Engineering degree in chemical engineering from
McMaster University, Hamilton, Ontario, Canada (1982) and an MSc in
environmental engineering from Technical University of Wroclaw (1980).
ELIZABETH MCELROY joined Netia in November 2002. From April 2003, she has held
the position of Chief Commercial Officer, responsible for marketing, sales and
customer care. Her professional career includes over 20 years of experience in
various managerial positions with telecommunications companies worldwide. She
also worked in Poland for Centertel between 1992-1993 (representing Ameritech
International) and Polska Telefonia Cyfrowa between 1997-2000 (representing
MediaOne International). In 2000-2001, she worked as an independent consultant
for Reliance Infocom (India), EXi (Canada), the American Association of
Pediatrics (USA) and the Polish American Association (USA). Prior to joining
Netia, she held the position of Chief Marketing Officer in Hrvatski Telekom,
Croatia. Elizabeth McElroy graduated from DePaul University of Chicago, USA,
with a Bachelor of Arts degree in marketing. She holds Polish and American
citizenship.
68
ZBIGNIEW LAPINSKI graduated from the Warsaw School of Economics with a Master's
degree in economics. He joined Netia in 2001. From 2001, Mr. Lapinski has been
Netia's deputy Chief Financial Officer and has worked on the financial
restructuring of Netia. In March 2003, Mr. Lapinski was appointed Chief
Financial Officer of Netia. Prior to joining Netia, Mr. Lapinski pursued a
career in investment banking working for four years in Deutsche Bank and one
year in Creditanstalt. Previously he also worked for over two years at the
United Nations Industrial Development Organization and Philips Lighting Polska.
RICHARD JAMES MOON graduated from high school at age 16 and joined EMI
Electronics as a Sponsored Engineering Apprentice. In 1971, Mr. Moon completed
electronic engineering studies earning The Thomas Beaven Memorial Trophy award
as the best apprentice. In 1973, Mr. Moon was awarded a diploma in Works
Management by Bath Business School. In 1992, Mr. Moon became a member of the
Institute of Directors and in 1997 a member of the Royal Society of Arts and
Manufacturers. During his professional career, he has worked as Operations
Director of Thorn EMI Electronics and Managing Director of Thorn Automation -
Industrial Company and in various other positions. For the past ten years, he
worked as Managing Director of Thorn EMI Electronics, Sensors Group, Chief
Executive of Racal Communications and the Chairman of the management board of
Racal Electronics Plc. At present, Mr. Moon works as Chief Executive Officer of
Thales Plc (previously Thomson - CSF).
ANDRZEJ RADZIMINSKI has served as a member of our supervisory board since May
1996. Mr. Radziminski was the president of our management board from Netia's
establishment in 1990 until his election as chairman. Mr. Radziminski has also
been a member of Netia Telekom's supervisory board since October 1995 and of
Netia South's supervisory board since February 1997. Until 1990, Mr. Radziminski
was Deputy Director General of Polska Poczta Telegraf i Telefon. He has an MSc
in electronics from the Warsaw Technical University and a postgraduate studies
diploma in law from the University of Warsaw. Mr. Radziminski is also a
president of the management board of RP Investment Sp. z o.o.
EWA ROBERTSON graduated from Birkbeck College, London, and specializes in
financial advising. She has held managerial positions with, among others,
Alliance Capital Ltd., Alliance Capital Management Europe and Citicorp
Investment Bank Ltd. Between 1993 and 1996, she was the Head of the Global Bond
Sales Department of Daiwa Bank (Capital Management) Ltd. Currently, Ms.
Robertson works as an expert in Central and Eastern European Investment Banking
with the London branch of Banco SanPaolo IMI.
ANDRZEJ MICHAL WIERCINSKI graduated from the Faculty of Law of Adam Mickiewicz
University in Poznan and holds a doctor's degree in legal sciences. He
specializes in legal advice in the area of the privatization and restructuring
of Polish enterprises. Mr. Wiercinski acted as legal counsel to the
Privatization Minister in the Polish government in connection with the National
Privatization Program. He has worked as an attorney at Stephenson Harwood in
London. He served as a supervisory board member of Wielkopolski Bank Kredytowy
S.A., as well as for other companies. Currently, Mr. Wiercinski acts as a
supervisory board member of ING Nationale - Nederlanden Polska Powszechne
Towarzystwo Emerytalne S.A. Since 1992, Andrzej Michal Wiercinski has been a
partner in the Polish law firm, Wardynski i Wspolnicy sp.j. (a registered
partnership).
B. COMPENSATION
Compensation and other costs associated with members of our various management
boards during the year ended December 31, 2002 amounted to approximately PLN
13.2 million. The compensation expense for the year ended December 31, 2002
includes approximately PLN 2.5 million of bonus recorded in accordance with the
Key Employee Retention Plan bonus scheme based on the restructuring agreement
and agreed upon by our supervisory board and the ad hoc committee of our former
noteholders. These amounts include remuneration and consulting agreements of the
69
President of the Company and of the former acting President amounting to
approximately PLN 0.7 million and to approximately PLN 3.8 million,
respectively.
We had consulting agreements with companies owned by our shareholders and
members of our supervisory board and we paid PLN 1.2 million during the year
ended December 31, 2002 to such companies.
Neither the Company nor Netia Telekom or Netia South, its two principal
operating subsidiaries, set aside any amounts for pension, retirement or similar
benefits for or on account of the members of their respective management boards
and supervisory boards, except for social security payments made to the
applicable Polish authorities with respect to those individuals who are
employees as required under Polish law.
Typically, fringe benefits granted to members of our management board in 2002
included reimbursement of documented expenses relating to the performance of the
management board member's duties in Poland. In some cases, they also include
reimbursement of children's educational fees, moving costs, percentage of home
maintenance fees, monthly accommodation allowances and international medical
coverage.
Each of our supervisory board members was entitled to reimbursement of costs
related to his/her participation in the meetings of the supervisory board. In
2002, three of the supervisory board members were entitled to a monthly
remuneration in the amount of the PLN equivalent of U.S.$ 3,000.
We have not provided any loans or guarantees to or for the benefit of any member
of our management or the supervisory board.
In December 1999, our supervisory board formally adopted the Netia performance
stock option plan, which we refer to as the original Netia performance stock
option plan, an incentive plan under which our top managers and key employees
were entitled to receive additional compensation in the form of the right to
acquire our ordinary shares.
Under the original Netia performance stock option plan, each grantee was
awarded, at one-year intervals, a predetermined number of stock options with the
right to acquire the number of shares equal to (a)(i) the difference between the
market price of our shares at the prescribed exercise date and the fixed initial
price, multiplied by (ii) the number of options granted to the grantee and
divided by (b) the then-current market price per share. As a result, the actual
number of our shares issuable upon exercise of the option depends on the
difference between the initial price and the actual market price per share at
the time of an exercise, which could vary to a considerable degree and may
exceed the number of ordinary shares authorized with respect to this plan.
Because Polish law did not recognize the concept of authorized but unissued
shares at the time the original Netia performance stock option plan was
established, 608,466 ordinary shares issuable upon the exercise of options have
been issued to Centralny Dom Maklerski Pekao S.A., which we refer to as CDM
Pekao, to hold in trust for the purpose of satisfying our obligations under the
original Netia performance stock option plan. Accordingly, upon an option
holder's exercise of his options, CDM Pekao is obligated to transfer to the
holder our ordinary shares on the terms set forth in the original Netia
performance stock option plan. In September 2000, we filed a Registration
Statement on Form S-8 to register for sale by the option holders the ordinary
shares they receive upon the exercise of their options. As of December 31, 2002,
CDM Pekao held 468,648 ordinary shares for issue upon the exercise of options.
70
As of December 31, 2002, we had an aggregate of 1,001,512 stock options
outstanding under the original Netia performance stock option plan of which
225,000 were held by persons who were members of either our supervisory board or
management board in 2002. 111,000 stock options were granted in 2002 and 121,652
previously granted stock options were vested.
In June 2002, our supervisory board adopted a new performance stock option plan,
which we refer to as the new Netia performance stock option plan. On April 11,
2003, Netia's supervisory board adopted the detailed conditions required to
implement the new Netia performance stock option plan. The new Netia performance
stock option plan replaced the original Netia performance stock option plan. The
new Netia performance stock option plan is an incentive plan under which senior
executives, employees, co-operators, consultants and board members of the
managing bodies of the Netia group will be entitled to receive additional
compensation in the form of the right to acquire our ordinary shares. Option
holders will be entitled to receive series K shares. Up to 5% of our fully
diluted ordinary share capital may be issued pursuant to the plan.
Under the new Netia performance stock option plan, our supervisory board has
been vested with the right to take individual decisions regarding the
participation in the plan, eligibility, the granting of stock options, terms of
the exercise, exercise periods, the conditions or circumstances of the
termination of stock options, and the method of calculation and the form of
receipt of gains accrued on the stock options.
Upon exercise of the options, Netia will issue to each exercising participant
the number of shares representing such participant's gain resulting from the
exercise of the options. The participant will not pay the exercise price. The
first stock options under the new Netia performance stock option plan were
granted on April 11, 2003.
The following table sets forth the number of options held on June 23, 2003 by
each member of our current management board or supervisory board to whom options
were granted and the exercise price and termination date of each option.
STOCK OPTION PLAN OPTIONS HELD SECURITIES EXERCISE
AS AT JUNE COVERED BY THE PRICE
NAME 23, 2003 OPTIONS (IN PLN) EXPIRATION
------------------------ ---------------------------- -------------- ---------------- ------------ -----------------
Wojciech Madalski new Netia performance 4,530,236 * 2.53 December 20,
stock option plan 2007
Elizabeth McElroy new Netia performance 1,812,095 * 2.53 December 20,
stock option plan 2007
Zbigniew Lapinski new Netia performance 1,087,257 * 2.53 December 20,
stock option plan 2007
Paul Kearney new Netia performance 1,087,257 * 3.12 December 20,
stock option plan 2007
- -----------
* The number of shares covered by the options equals the value of the gain of
the exercising person resulting from the exercise of the options divided by the
market price of our ordinary shares on the date of exercise of the options.
C. BOARD PRACTICES
TERMINATION BENEFITS OF SUPERVISORY AND MANAGEMENT BOARD MEMBERS
Under Polish law, the employee members of our management board are entitled to
receive their entire remuneration for a statutorily specified period, known as a
termination period, after being notified that their employment is to be
terminated. Other benefits due to members of our management board upon the
71
termination of their employment are set forth below. None of the members of our
supervisory board are entitled to any benefits upon the termination of their
service.
Current Members of our Management Board
Wojciech Madalski. In the event that Mr. Madalski's employment is terminated, he
is entitled to receive 100% of his remuneration for a period of 12 months
following the termination of his employment.
Zbigniew Lapinski. In the event that Mr. Lapinski's employment is terminated, he
is entitled to receive 75% of his remuneration for a period of 12 months
following the termination of his employment.
Elizabeth McElroy. In the event that Mrs. McElroy's employment is terminated,
she is not entitled to any remuneration after her employment is terminated.
However, she is entitled to receive 40% of remuneration for a period of 12
months following termination of the consultancy agreement she has with one of
our subsidiaries.
Paul Kearney. In the event that Mr. Kearney's employment is terminated, he is
not entitled to receive any remuneration following the termination of his
employment.
Former Members of our Management Board
Kjell-Ove Blom, former member of the management board and acting Chief Executive
Officer. Upon termination of Mr. Blom's employment, he was entitled to receive
50% of his remuneration for a period of 12 months following the termination of
his employment in addition to the reimbursement of certain expenses incurred
during his termination period (as defined by Polish law). Upon termination of
Mr. Blom's employment in September 2002, we agreed to pay him a lump-sum in
accordance with his employment agreement.
Mariusz Chmielewski, former member of the management board. Upon termination of
Mr. Chmielewski's employment, he was entitled to receive 50% of his remuneration
for a period of 12 months following the termination of his employment. Upon
termination of Mr. Chmielewski's employment in February 2003, we agreed to pay
him a lump-sum in accordance with his employment agreement.
Ewa Don-Siemion, former member of the management board. Upon termination of Ms.
Don-Siemion's employment, she was entitled to receive 100% her remuneration for
a period of six months following the termination of her employment and 75% of
her remuneration for an additional six months. Upon termination of Mr.
Don-Siemion's employment in March 2003, we agreed to pay her a lump-sum in
accordance with her employment agreement.
Avraham Hochman, former member of the management board and Chief Financial
Officer. Upon termination of Mr. Hochman's employment, he was entitled to
receive 50% of his remuneration for a period of 12 months following the
termination of his employment in addition to the reimbursement of certain
expenses incurred during his termination period (as defined by Polish law). Upon
termination of Mr. Hochman's employment in March 2003, we agreed to pay him a
lump-sum in accordance with his employment agreement.
Mariusz Piwowarczyk, former member of the management board. Upon termination of
Mr. Piwowarczyk's employment, he was entitled to receive 50% of his remuneration
for a period of 12 months following the termination of his employment. Upon
termination of Mr. Piwowarczyk's employment in June 2003, we agreed to pay him a
lump-sum in accordance with his employment agreement.
72
Dariusz Wojcieszek, former member of the management board. Upon termination of
Mr. Wojcieszek's employment, he was entitled to receive 50% of his remuneration
for a period of 12 months following the termination of his employment. Upon
termination of Mr. Wojcieszek's employment in February 2003, we agreed to pay
him a lump-sum in accordance with his employment agreement.
Tore Stefan Albertsson, former member of the management board, currently working
as Deputy Chief Commercial Officer of the Company. He resigned from his position
as member of the Company's management board in April 2003. However, Mr.
Albertsson remains a member of the management board of one of our subsidiaries,
Netia Telekom Mazowsze S.A. and is entitled to receive 50% of his remuneration
for a period of 12 months following the termination of his employment.
COMMITTEES OF THE SUPERVISORY BOARD
In the course of the year ended December 31, 2002, we had the following
committees within our supervisory board: the remuneration committee, the
executive committee and the audit committee. All these committees existed until
the changes in the composition of our supervisory board, which took place in
January 2003.
The remuneration committee of our supervisory board was authorized to exercise
its powers with respect to the following matters:
o the approval of agreements to be entered into with members of our
management board and other key employees;
o the administration of our stock option plan; and
o the granting of remuneration to members of our supervisory board,
subject to the review and approval of our shareholders.
Any action taken by the remuneration committee with respect to the remuneration
of supervisory board members could be amended or rescinded by our shareholders.
Members of the remuneration committee were appointed by our supervisory board.
Before its dissolution, the remuneration committee consisted of Mr. David
Oertle, Mr. Roberto Italia, Ms. Charlotta Oberg, former members of the Company's
supervisory board and Mr. Morgan Ekberg, current member of the Company's
supervisory board.
The executive committee of our supervisory board was charged with making
preliminary analysis of issues to be brought before the supervisory board as a
whole. Members of the executive committee were appointed by the supervisory
board. Before its dissolution, the executive committee consisted of Mr. Roberto
Italia, Ms. Charlotta Oberg, former members of the Company's supervisory board
and Mr. Morgan Ekberg, current member of the Company's supervisory board.
The audit committee was established in February 2002. Members of the audit
committee were appointed by our supervisory board.
Currently, there are no committees of our supervisory board. The entire
supervisory board is entrusted the functions of controlling books and financial
reporting of the company and of appointing members of the management board and
determining their remuneration. Two members of our supervisory board perform
certain coordinating functions. Mr. Richard James Moon is responsible for proper
73
coordination of work of the supervisory board in matters relating to
appointments and remuneration of members of the company's management board and
Ms. Ewa Maria Robertson is responsible for coordination of work of the
supervisory board in matters of internal and external audit and financial
reporting.
D. EMPLOYEES
The number of persons we employed as of December 31, 2000, 2001 and 2002 was
1,626; 1,536 and 1,289 respectively. All of our employees are based in Poland.
None of our employees is covered by a collective bargaining agreement or similar
arrangement.
E. SHARE OWNERSHIP
The table below sets forth certain information regarding the beneficial
ownership of our capital stock by members of our supervisory board and the
management board who beneficially owned our shares on June 23, 2003.
NAME OF BENEFICIAL OWNER NO. OF SHARES PERCENTAGE OF THE CLASS
- -------------------------------------------------- ------------------------------------ ----------------------------------------
Nicholas Cournoyer 3,000 series A ordinary shares 0.00087%
Andrzej Radziminski 1,000 series A-1 preferred shares 100%
The following table sets forth the number of options held on June 23, 2003 by
each member of our current management board or supervisory board to whom options
were granted and the exercise price and termination date of each option.
SECURITIES
STOCK OPTION PLAN OPTIONS HELD AS COVERED BY THE EXERCISE PRICE
NAME AT JUNE 23, 2003 OPTIONS (IN PLN) EXPIRATION DATE
- ------------------------ ----------------------- ----------------- ------------------- ---------------- ----------------
Wojciech Madalski new Netia performance 4,530,236 * 2.53 December 20,
stock option plan 2007
Elizabeth McElroy new Netia performance 1,812,095 * 2.53 December 20,
stock option plan 2007
Zbigniew Lapinski new Netia performance 1,087,257 * 2.53 December 20,
stock option plan 2007
Paul Kearney new Netia performance 1,087,257 * 3.12 December 20,
stock option plan 2007
- -----------
* The number of shares covered by the options equals the value of the gain of
the exercising person resulting from the exercise of the options divided by the
market price of our ordinary shares on the date of exercise of the options.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The table below sets forth certain information, to the extent known by us,
regarding the beneficial ownership of shares of our capital stock by persons or
entities that beneficially owned 5% or more of each class of our voting
securities on June 12, 2003 (or other date as indicated). All such shares have
the same voting rights as our shares owned by our other shareholders, except for
74
series A-1 preferred shares (all of which are held by Mr. Andrzej Radziminski)
which entitle their holder to appoint and dismiss one member of our supervisory
board.
PERCENTAGE OF THE CLASS OF
NAME OF BENEFICIAL OWNER NO. OF SHARES OUR SHARES
- ----------------------------------------------- ------------------------------------------ --------------------------------
JPMorgan Chase Bank 50,189,761 ordinary shares 14.6%
Montpelier Asset Management Ltd 27,168,828 ordinary shares (1) 7.9%
Warburg Pincus LLC 27,933,409 ordinary shares (2) 7.7%
Polish Enterprise Fund IV, L.P. 27,533,409 ordinary shares (3) 7.6%
TeliaSonera AB 26,289,367 ordinary shares (4) 7.2%
SISU Capital Limited 21,058,296 ordinary shares 6.1%
Griffin Capital Management Ltd 20,464,626 ordinary shares (5) 5.9%
Andrzej Radziminski 1,000 series A-1 preferred shares 100%
- ---------------------------
(1) Including 3,000 series A shares owned by Mr. Cournoyer, Managing Director
of Montpelier Asset Management Ltd.
(2) Information as of May 28, 2003. The number includes (i) 9,012,520 ordinary
shares owned by Warburg; (ii) 6,141,246 ordinary shares to be acquired upon
exercise of warrants; (iii) 6,088,835 ordinary shares to be acquired from
Telia pursuant to a call option after the receipt of Polish regulatory
approval; and (iv) 12,779,643 ordinary shares underlying the warrants to be
acquired from Telia pursuant to a call option after the receipt of Polish
regulatory approval. For the purpose of this calculation 6,141,246 ordinary
shares to be acquired upon exercise of warrants and 12,779,643 ordinary
shares underlying the warrants to be acquired from Telia pursuant to a call
option after the receipt of Polish regulatory approval were added to the
total number of outstanding shares.
(3) Information as of May 30, 2003. The number includes (i) 8,812,520 ordinary
shares owned by Polish Enterprise Fund IV, L.P.; (ii) 200,000 ordinary
shares to be purchased by Polish Enterprise Fund IV, L.P. from Telia by
June 16, 2003 (unless otherwise agreed between the parties, but not later
than July 31, 2003); (iii) 11,300,000 ordinary shares to be acquired upon
exercise of warrants owned by Polish Enterprise Fund IV, L.P.; and (iv)
7,220,889 ordinary shares underlying the warrants to be acquired from Telia
upon exercise of a call option exercisable within 90 days from May 28,
2003. For the purpose of this calculation 11,300,000 ordinary shares
underlying the warrants and 7,220,889 ordinary shares underlying the
warrants that are subject to a call option were added to the total number
of outstanding shares.
(4) Information as of May 30, 2003. This number includes (i) 6,088,835 ordinary
shares owned by Telia; (ii) 12,779,643 ordinary shares underlying the
warrants sold to Warburg pursuant to the Option Agreement, which remains
subject to Polish regulatory approval; (iii) 200,000 ordinary shares which
Telia agreed to sell to Polish Enterprise Fund IV, L.P. by June 16, 2003
(unless otherwise agreed between the parties, but not later than July 31,
2003); and (iv) 7,220,889 ordinary shares underlying the warrants that are
subject to the call option granted to Polish Enterprise Fund IV, L.P. that
is exercisable within 90 days from May 28, 2003. For the purpose of this
calculation 12,779,643 warrants sold to Warburg, and 7,220,889 ordinary
shares underlying the warrants subject to the call option granted to the
Polish Enterprise Fund IV, L.P. were added to the total number of
outstanding shares.
(5) Information as of February 17, 2003.
75
The table below presents changes in percentage ownership of our shares by our
major shareholders during the past three years. The information on percentage
ownership as of December 31, 2002 does not include series H shares issued on
December 23, 2002 as they were not registered by the Polish court until January
30, 2003.
DECEMBER 31, 2000 DECEMBER 31, 2001 DECEMBER 31, 2002
% OF THE % OF THE % OF THE
CLASS OF OUR CLASS OF OUR CLASS OF OUR
NAME OF THE BENEFICIAL OWNER NO. OF SHARES SHARES NO. OF SHARES SHARES NO. OF SHARES SHARES
--------------------------------- --------------------------------- ---------------------------------
12,674,278 40.34 15,101,285 48.07 15,101,355 48.07
Telia AB (publ.) (1) ordinary shares ordinary shares ordinary shares
2,277,077 70
Telia Holding Polen AB ordinary shares 7.25 ordinary shares -
2,923,685 2,923,685
ordinary shares
9.31 2,923,685 9.31 9.31
Warburg Pincus group (2) ordinary shares ordinary shares
- ------------
(1) Shareholdings of Telia AB (publ.) as of December 31, 2001 and December 31,
2002 included 200,000 ADSs which under Polish law are treated as held by
The Bank of New York and are shown in the audited consolidated financial
statements as held by The Bank of New York.
(2) The ordinary shares were held by various entities controlled by Warburg,
Pincus & Co., a New York general partnership.
ORDINARY SHARES HELD BY U.S. PERSONS
As of June 12, 2003, 1,958,170 of our ordinary shares, representing
approximately 0.5% of our aggregate share capital, were held in the form of ADSs
primarily in the United States. The Bank of New York is the depositary for the
ordinary shares evidenced by ADSs. As of March 13, 2003, there were 725
beneficial holders of our ADSs. In addition, we are aware that, as of April 28,
2003, at least 10% of our ordinary shares in the form of shares were held by
persons reasonably believed to be residents of the United States.
B. RELATED PARTY TRANSACTIONS
OUR RESTRUCTURING AGREEMENT
On December 15, 2001, we defaulted on several interest payments on two series of
its notes. Those defaults triggered cross-default provisions under the terms of
the indentures governing our four other series of notes and, as a result, we
were in default on all six series of the issued notes that were then
outstanding. We have also defaulted on swap payments under certain swap
agreements and failed to make all subsequent payments of interest due after
December 15, 2001. As a result of these defaults and a decline of a level of
shareholders' equity, which - as calculated according to Polish Accounting
Standards - has been in deficit since December 31, 2001, we were required to
file for bankruptcy under Polish law unless we petitioned for the opening of
arrangement proceedings. To avoid filing for bankruptcy, the Company, Netia
Telekom and Netia South petitioned the court in Warsaw on February 20, 2002 to
open arrangement proceedings.
On March 5, 2002, we entered into the Restructuring Agreement, concerning the
restructuring of our debt, with an ad hoc committee of our noteholders, certain
financial creditors, Telia and Warburg. Together, Telia and Warburg then owned
approximately 57.4% of the Company's share capital and acted, with respect to
the Restructuring Agreement, separately as the two largest shareholders of the
Company. Subsequently the Restructuring Agreement was signed by the majority of
76
our creditors. Under the Restructuring Agreement, the parties agreed to
implement a restructuring plan designed to strengthen our balance sheet.
On June 14, 2002, we entered into the Exchange Agreement with a substantial
majority of the consenting creditors who were parties to the Restructuring
Agreement. The Exchange Agreement further specified terms of the Restructuring
Agreement and provided the means for implementing those terms.
The restructuring process encompassed legal proceedings in three jurisdictions
and consisted of Dutch moratorium proceedings, Polish arrangement proceedings
and proceedings in the United States of America under Section 304 of the United
States Bankruptcy Code. Pursuant to the Restructuring Agreement and the Exchange
Agreement, NHBV issued the 2002 Notes to holders of the existing notes and
JPMorgan Chase Bank which, in exchange for relinquishing their claims in respect
of the existing notes and obligations under the swap agreements with JPMorgan
Chase Bank. In addition, creditors of the Netia group had an opportunity to
subscribe with their reduced claims in the form of installment obligations for
series H shares issued by the Company. On December 23, 2002, the Company's
creditors subscribed for 312,626,040 series H shares offered by the Company in
exchange for such installment obligations.
Under the Restructuring Agreement and the Exchange Agreement, the Company's
record shareholders as of December 22, 2002 were issued warrants to acquire up
to 64,848,652 ordinary shares representing 15% of the Company's
post-restructuring share capital pursuant to the Restructuring Agreement (taking
into account the issuance of 18,373,785 ordinary shares representing up to 5% of
the outstanding share capital in respect of a key employee stock option plan).
The supervisory board approved the strike price for the warrants PLN 2.53 on
April 12, 2003, which corresponds to the volume-weighted average price of the
Company's ordinary shares on the Warsaw Stock Exchange for the 30 trading days
beginning 31 days following the registration of series H shares by the Polish
court. The Company also plans to issue up to 18,373,785 ordinary shares under a
key employee stock option plan.
SHAREHOLDERS' AGREEMENTS
We are a party to a shareholders agreement, dated July 13, 2000, referred to
here as the Amended and Restated Post-IPO Shareholders' Agreement #1, between
Telia, certain entities controlled by Warburg and us, which provides, among
other things, that:
o the size of the supervisory board shall be ten members;
o Telia shall have the right to appoint four members of the supervisory
board for as long as Telia and its Permitted Controlled Affiliate
Transferees (as defined in the Amended and Restated Post-IPO
Shareholders Agreement #1) own 20% of our outstanding voting
securities, three members for so long as they own 10% to 20% of our
outstanding voting securities, two members for so long as they own 5%
to 10% of our outstanding voting securities, and no members if at any
time Telia and its Permitted Controlled Affiliate Transferees own less
than 5% of our outstanding voting securities;
o Warburg shall have the right to appoint one member of the supervisory
board as long as Warburg and its Permitted Controlled Affiliate
Transferees own 5% or more of our outstanding voting securities;
o certain of our founding shareholders shall have the right to appoint
one member of the supervisory board; and
77
o the remaining four members of the supervisory board shall be elected
by our shareholders generally (including Telia and Warburg), provided
that, of these four members, one member shall be nominated for
election jointly by Telia and Warburg for as long as Warburg and its
Permitted Controlled Affiliate Transferees own 5% or more of our
outstanding voting securities and one member shall be nominated for
election by BRE Bank S.A. for as long as BRE Bank S.A. and its
Permitted Controlled Affiliate Transferees own 3.5% or more of our
outstanding voting securities.
Under the Amended and Restated Post-IPO Shareholders' Agreement #1, the
following matters require the approval of a majority of the total number of
members of our supervisory board:
o presentation to the general assembly of shareholders of a written
report on the results of the supervisory board's examination of our
balance sheet and the profit and loss account;
o presentation to the general assembly of shareholders of a written
report on the results of the supervisory board's examination of the
report and the recommendations of our management board as to the
division of profits or coverage of losses;
o appointment and removal of the members of our management board (except
for any members with respect to whom our statute reserves the right of
appointment to one or more shareholders) and the issuance of by-laws
for the management board;
o setting or changing the compensation of our management board or
approving the employment contracts of the members of the management
board, and the setting and changing of any incentive plan for our
management board and our other key employees;
o approval of our business plans and annual budgets;
o unless otherwise provided in our most recent business plan or budget
as approved by the supervisory board, consent to incurring or making
loans or other indebtedness in excess of US$100,000 in a single or
series of related transactions or the equivalent amount in Polish
zloty or any other currencies;
o unless otherwise provided in our most recent business plan or budget
as approved by the supervisory board, the authorization of capital
expenditures, obligations or commitments in excess of US$100,000 in a
single transaction or series of related transactions or the equivalent
amount in Polish zloty or any other currencies;
o unless otherwise provided in our most recent business plan or budget
as approved by the supervisory board, the giving of any guarantee or
indemnity with respect to the obligations or liability of any other
entity, which guaranty or indemnity shall be in excess of US$100,000
in a single transaction or series of related transactions or the
equivalent amount in Polish zloty or any other currencies;
o unless otherwise provided in our most recent business plan or budget
as approved by the supervisory board, the acquisition of real estate
for a purchase price exceeding US$100,000 in a single transaction or
series of related transactions or the equivalent amount in Polish
zloty or any other currencies;
78
o unless otherwise provided in our most recent business plan or budget
as approved by the supervisory board, consent to the sale, lease,
pledge, hypothecation, encumbering or transferring of any of our
assets having a value in excess of US$100,000 in a single transaction
or series of related transactions or the equivalent amount in Polish
zloty or any other currencies; provided, however, that sales of
products and obsolete equipment in the ordinary course of business
will be subject to no such restriction;
o unless otherwise provided in our most recent business plan or budget
as approved by the supervisory board, the making of any investment or
funding of any amounts in or with respect to any of our
non-telecommunications-related businesses or operations (including,
for this purpose, Uni-Net), whether under existing contractual
arrangements or otherwise;
o consent to the commencement, settlement, assignment, compromise or
release of any claim of or against us in excess of US$100,000 in a
single transaction or series of related transactions or the equivalent
amount in Polish zloty or any other currencies;
o bidding for any license or concession or agreeing to the material
modification of any of our existing licenses of or our subsidiaries;
o consenting to acquiring shares of or investing in entities other than
our existing subsidiaries; and
o any matter concerning which our management board has reached a voting
deadlock and which has been certified to the supervisory board by the
Chairman of our management board.
According to our statute, at any meeting of the supervisory board, a quorum
consists of a majority of the members of the supervisory board, but must include
at least one member of the supervisory board appointed by Telia (for so long as
Telia and its Permitted Controlled Affiliate Transferees own at least 8% of our
outstanding voting securities) and the member of the supervisory board appointed
by Warburg (for so long as Warburg and its Permitted Controlled Affiliate
Transferees own at least 8% of our outstanding voting securities). If at any
meeting of the supervisory board the requisite quorum is not present, the
members present are entitled to adjourn the meeting (by written notice to the
other members) to a date not sooner than five business days following the date
originally proposed for such meeting and the quorum required at the adjourned
meeting consists of a majority of members of the supervisory board.
In addition, we are party to a second shareholders agreement, dated August 3,
1999 between Telia, Warburg and us, referred to here as the Post-IPO
Shareholders Agreement #2. Under the Post-IPO Shareholders Agreement #2, any
party that wishes to transfer any portion of its shares must notify the other
such shareholders of the proposed sale or transfer. Upon such notification, each
non-selling shareholder who is party to the Post-IPO Shareholders' Agreement #2
may submit an unconditional offer to purchase the shares being offered at the
price and upon the terms set forth in such transfer notice. If none of the
non-transferring parties submits such offer to purchase, then the selling
shareholder has the right to consummate a sale to a third party at a price not
lower than the price, and upon the terms, given in the transfer notice.
Each of the shareholders who is a party to the Post-IPO Shareholders' Agreement
#2, including Telia, has agreed that, as long as that shareholder owns 5.0% or
more of Netia's outstanding voting securities (or, if earlier, upon the
termination of the agreement with respect to such shareholder), and in each case
for a period of one year thereafter, it shall not, directly or indirectly, own,
manage, operate, join, control or participate in, be compensated by or invest
in, or be connected with, any telecommunications entity or otherwise engage in
79
any telecommunications activities (such as fixed-line, cellular, value-added and
content provision for cable television), in any such case, in the territory of
the Republic of Poland, other than us or our subsidiaries, subject to certain
exceptions.
In connection with our Restructuring Agreement, we entered into a termination
agreement, which we refer to as the Termination Agreement, with Telia AB (publ),
Warburg, Pincus Equity Partners, L.P., Warburg Pincus Ventures International,
L.P., Warburg Pincus Netherlands Equity Partners I, C.V., Warburg Pincus
Netherlands Equity Partners II C.V., Warburg Pincus Netherlands Equity Partners
III, C.V., Warburg Netia Holding Limited on March 5, 2002, which will terminate
the Amended and Restated Post-IPO Shareholders' Agreement #1 and the Post-IPO
Shareholders Agreement #2 upon the completion of our restructuring. Term of the
Termination Agreement are more fully described below.
Pursuant to the terms of the Amended and Restated Post-IPO Shareholders'
Agreement #1 and the Post-IPO Shareholders Agreement #2, Telia and Warburg lost
all their rights under these agreements as of January 30, 2003, due to
significant dilution of their share ownership in the Company's share capital as
a result of registration of series H shares by the Polish court.
REGISTRATION RIGHTS AGREEMENT
Telia, Warburg, certain other shareholders and Netia also have entered into a
Registration Rights Agreement, under which we granted to the other parties
thereto the right to initiate up to a total of seven demand registrations and
unlimited "piggyback" registrations of their shares under the U.S. Securities
Act of 1933, subject to customary underwriters' cutback provisions. The
Registration Rights Agreement provides procedures for initiating registrations
of shares, exceptions to our obligation to effect those registrations,
conditions to those registrations, representations, warranties and indemnities.
In connection with any such registration, we have agreed to indemnify the other
parties, their officers and directors and each underwriter, if any, and
controlling persons of the other parties or any underwriter, against some
liabilities arising under the laws of any country (including liabilities under
U.S. securities laws) resulting from any registration or other offering covered
by the Registration Rights Agreement. Subject to certain limitations specified
in the Registration Rights Agreement, we will pay all expenses incidental to
such registration.
Pursuant to the terms of the Registration Rights Agreement, Telia and Warburg
lost all their rights under the Registration Rights Agreement as of January 30,
2003, due to significant dilution of their share ownership in the Company's
share capital as a result of registration of series H shares by the Polish
court.
TERMINATION AGREEMENT
On March 5, 2002, we entered into the Termination Agreement with Telia and
Warburg under which all shareholders' agreements (i.e. the Amended and Restated
Post-IPO Shareholders' Agreement #1 and the Post-IPO Shareholders' Agreement #2)
were to expire, all the parties thereto were to be released from any and all
obligations thereunder and they waived any and all rights and claims they might
have thereunder. The foregoing was conditional on the completion of our
restructuring and was to become effective on the completion date. Under the
Restructuring Agreement, the restructuring was to be completed after our series
H shares and the 2002 Notes had been delivered to our pre-restructuring
noteholders and JPMorgan Chase Bank, and after the subscription warrants had
been delivered to our pre-restructuring shareholders. Pursuant to the provisions
of the Termination Agreement, no actions or omissions on the part of Telia
effected under the Restructuring Agreement would be deemed "actions" entitling
Warburg to exercise any option they had under the Amended and Restated Post-IPO
Shareholders' Agreement #1 or the Post-IPO Shareholders' Agreement #2. This
provision survives the termination of the Termination Agreement.
80
The Termination Agreement provides that for one year from the date on which our
series H shares and our 2002 Notes were made available to our pre-restructuring
noteholders and JPMorgan Chase Bank, neither Telia, nor any of the entities it
controls, shall acquire shares in entities conducting telecommunications
activities other than us.
The Termination Agreement further provides that despite the termination of the
above-mentioned shareholders' agreements, the confidentiality provisions thereof
shall survive the termination of the said shareholders' agreements and shall be
binding on Telia and Warburg for two years from the date on which Telia and
Warburg, respectively, cease to be our shareholders.
Furthermore, the parties to the Termination Agreement covenanted that during the
term thereof until the completion of the restructuring, neither Telia nor
Warburg shall transfer the ownership of the shares they hold in our share
capital, with the exceptions provided for in the Termination Agreement.
The Termination Agreement is governed by Polish law. The Termination Agreement
and the transactions contemplated thereunder were to be terminated if our
restructuring was not completed by December 31, 2002, or if we were to be wound
up (voluntarily or following bankruptcy proceedings) prior to the completion of
our restructuring or before December 31, 2002.
On November 14, 2002, the parties to the Termination Agreement executed an
agreement amending the Termination Agreement under which we covenanted to Telia
and Warburg that we would use our best commercially reasonable efforts so that
series H shares and the 2002 Notes were made available for purchase to each of
the entitled creditors by December 31, 2002, and that our management board would
submit to our general shareholders' meeting convened for November 14, 2002, a
draft resolution concerning the issue of series H shares, in the form and
contents of an attachment to the said agreement (which resolution was eventually
adopted on November 14, 2002). Consequently, the date "December 31, 2002"
referring to the termination date of the Termination Agreement was changed to
"October 31, 2003". The agreement amending the Termination Agreement is governed
by Polish law.
FIRST SIDE LETTER TO RESTRUCTURING AGREEMENT
On March 5, 2002, immediately after the conclusion of the Restructuring
Agreement, we entered into a side letter to the Restructuring Agreement, which
we refer to as the First Side Letter. Pursuant to the First Side Letter, parties
to the Restructuring Agreement gave us and the committee of the consenting
creditors the authority to amend section 2.1(a) of the Restructuring Agreement.
This section stated that the Restructuring Agreement could be terminated at the
election of any of: Netia Holdings S.A, JPMorgan Chase Bank, Telia and Warburg
after March 31, 2002, if we had not received by March 31, 2002 signature pages
duly executed by consenting creditors representing at least 95% of the total
value of all claims of the holders of then outstanding notes. The side letter
granted us and the committee of the consenting creditors the approval to
mutually agree to lower the percentage of consenting creditors, however not
below 80%.
SECOND SIDE LETTER TO THE RESTRUCTURING AGREEMENT
On April 22, 2003, the Company, Telia and Warburg entered into the second side
letter to Restructuring Agreement, which we refer to as the Second Side Letter.
Pursuant to the Second Side Letter, the parties agreed that the Company will not
prepare a U.S. registration statement under the Securities Act of 1933, as
amended, in connection with the issuance of series J shares to holders of
warrants issued on May 16, 2003. The Second Side Letter clarified the definition
of the strike price applicable to our warrants, as the volume weighted average
share price for the 30 trading days beginning 31 days after January 30, 2003,
i.e., during the period beginning on March 3, 2003 and ending on April 11, 2003.
Under the Second Side Letter we undertook to use our commercial best efforts to
81
list our warrants on the Warsaw Stock Exchange within 30 business days from the
delivery of our warrants.
PRIMA COMMUNICATIONS LEASE AGREEMENT
On January 14, 2002 Netia Telekom signed an agreement with Prima Communications
Sp. z o. o., a company in the Telia group, relating to the provision of
wholesale services. Under the terms of the agreement, we agreed to lease to
Telia two ducts on the route between Warsaw and the Szczecin area for the amount
of approximately US$16.0 million. The agreement terminated on April 15, 2002 as
a consequence of failure by the parties to satisfy certain conditions precedent.
OTHER AGREEMENTS
In June 2001, we extended an agreement entered into in June 2000 with a company
controlled by Avraham Hochman, a former member of the Company's management
board. Under the extended agreement, Mr. Hochman's company was to perform
certain advisory services for us in consideration for an initial fee of
US$4,536, monthly payments of US$24,935 and guaranteed bonuses of US$75,015
annually and US$18,750 quarterly (all payable to Mr. Hochman's company). Under
the previous agreement entered into with Mr. Hochman's company in June 2000, his
company received an initial fee of US$20,834, monthly payments of US$22,667 and
the same payments of a guaranteed annual bonus and quarterly and discretionary
bonuses. The agreement was terminated with immediate effect on March 6, 2003. A
six-month non-competition period was agreed during which the company controlled
by Mr. Hochman has undertaken not to provide consulting services.
In February 2002, we extended an agreement entered into in June 2000 with a
company controlled by Kjell-Ove Blom, a former member of the Company's
management board. Under the extended agreement, Mr. Blom's company was to
provide certain advisory services for Netia in consideration for monthly
payments of US$25,500 and special discretionary bonuses. In addition, Mr. Blom's
company was entitled to a special payment of US$100,000, which was paid on
February 28, 2002, and an additional payment of US$100,000 to be paid by
December 31, 2002. Under the previous agreement entered into with Mr. Blom's
company, his company received an initial fee of US$20,834, monthly payments of
US$23,167 and other discretionary bonuses. The termination notice was given on
September 17, 2002 pursuant to which the agreement terminated at the end of six
months after the month in which the termination notice was delivered, i.e. on
March 31, 2003. There was no non-competition period agreed and, therefore, we
were released from the obligation to pay Mr. Blom's company the consulting fee
for not becoming involved in competitive activities after the termination of the
agreement.
In January 2000, we entered into an agreement with a company controlled by Jan
Guz, a former member of the Company's supervisory board. Under the terms of this
agreement, Mr. Guz's company was to perform certain advisory services for us in
consideration for monthly payments of US$15,450 during 1997 and US$18,522 during
subsequent years, as well as discretionary bonuses. The agreement was terminated
in December 2002.
In September 1999, we entered into an agreement with a company controlled by
David Oertle, a former member of the Company's supervisory board. Under this
agreement, Mr. Oertle's company agreed to cause Mr. Oertle to perform consulting
services for Netia for 10 to 15 days per month. The agreement provided for an
annual fee of GBP 25,000 during the term of the agreement. This agreement was
terminated in January 2003.
82
INTERESTS OF EXPERTS AND COUNSEL
None.
ITEM 8. FINANCIAL INFORMATION
The financial statements required by this item are found in Item 18 ("Financial
Statements,") beginning on page F-1.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The following table provides the high and low closing prices for our ADSs
(trading symbol: NTIA) on the Nasdaq National Market and the Pink Sheets for
each full financial year since the listing of our ADSs. All prices in the
following table reflect the change of share-to-ADS ratio from one-to-one to
four-to-one effected on July 30, 2002. Nasdaq share price quotation was fully
converted to decimalization effective April 2001. We have, for your convenience,
converted fractional ADS prices into decimal equivalents. We have also rounded
ADS prices to two decimal points.
HIGH LOW
IN US$ IN US$
2000.............................. 47.50 12.75
2001.............................. 19.00 0.57
2002(*)........................... 5.60 1.12
- --------------------
Source: Bloomberg.
(*) Our ADSs were traded on the Pink Sheets from the second quarter of 2002.
Nasdaq halted trading of our ADSs on February 19, 2002, after we announced that
we were filing arrangement proceedings in Poland. On March 19, 2002, Nasdaq
granted permission for our ADSs to resume trading. On March 21, 2002, we
received a Nasdaq Staff Determination, indicating its intention to delist our
ADSs on the grounds that we were not in compliance with the minimum US$4.0
million in net tangible assets or the minimum US$10.0 million stockholders
equity requirements for continued listing on the Nasdaq National Market and that
we had filed for arrangement proceedings in Poland and had filed a section 304
petition in the U.S. Bankruptcy Court. On October 14, 2002 the Nasdaq Listing
Qualifications Panel decided to delist our ADSs from Nasdaq National Market,
effective the next day due to failure to meet all continued listing requirements
including the requirement that we have a minimum U.S.$ 4.0 million in net
tangible assets and a minimum U.S.$ 10.0 million in stockholders' equity and
because we filed for arrangement proceedings in Poland and a section 304
petition in the U.S. Bankruptcy Court.
On January 21, 2003 the Nasdaq Listing and Hearing Review Council after its
review of the decision of the Panel and additional information submitted by the
Company regarding the status of the financial restructuring, reversed the
Panel's decision and remanded the matter to the Panel. The Listing Council noted
that the Panel's decision from October 14, 2002 to delist the Company's ADSs
from the Nasdaq was correct and appropriate at the time it was made. The Listing
Council instructed the Panel to re-list the Company's ADSs on the Nasdaq
83
SmallCap Market upon Panel's review of the Company's application. On May 22,
2003, our management board resolved not to apply for re-listing of our ADSs on
the Nasdaq Small Cap Market.
The following table provides the high and low closing prices for our ADSs on the
Nasdaq National Market and the Pink Sheets for each quarter of two most recent
full financial years and for the first quarter of our financial year 2003. All
prices in the following table reflect the change of share-to-ADS ratio from
one-to-one to four-to-one effected on July 30, 2002.
2001(**)
----
HIGH LOW
IN US$ IN US$
First Quarter ................................ 19.00 8.13
Second Quarter ............................... 11.00 6.64
Third Quarter................................. 6.00 0.73
Fourth Quarter................................ 1.89 0.57
2002
---- HIGH LOW
IN US$ IN US$
First Quarter ................................ 5.60 2.20
Second Quarter(*) ............................ 3.40 1.12
Third Quarter................................. 2.60 1.50
Fourth Quarter................................ 2.00 1.50
- --------------------
Source: Bloomberg.
(*) Our ADSs were listed on the Pink Sheets from the second quarter of 2002.
2003
---- HIGH LOW
IN US$ IN US$
First Quarter.................................. 1.75 1.50
The following table provides the high and low closing prices for our ADSs on the
Pink Sheets for each of the six months preceding the date of this annual report.
All prices in the following table reflect the change of share-to-ADS ratio from
one-to-one to four-to-one effected on July 30, 2002.
84
HIGH LOW
IN US$ IN US$
December 2002................................. 1.65 1.50
January 2003.................................. 1.75 1.50
February 2003................................. 1.70 1.50
March 2003.................................... 1.70 1.70
April 2003.................................... 3.00 1.50
May 2003...................................... 2.85 2.50
June 2003(*)...............................(*) 3.00 2.80
Source: Bloomberg.
- --------------------
(*) Through June 23, 2003.
The following table provides the high and low closing prices (in PLN) for our
ordinary shares (trading symbol: NET) on the Warsaw Stock Exchange for each full
financial year since the listing of our shares:
HIGH LOW
IN PLN IN PLN
2000............................................ 121.00 60.00
2001............................................ 75.00 2.16
2002............................................ 6.05 1.59
Source: website bossa.pl
The following table provides the high and low closing prices (in PLN) for our
ordinary shares on the Warsaw Stock Exchange under the symbol "NET" for each
quarter of the two most recent full financial years and the first quarter of our
financial year 2003:
2001 HIGH LOW
---- ---- ---
IN PLN IN PLN
------ ------
First Quarter .................................. 75.00 31.70
Second Quarter ................................. 42.70 24.30
Third Quarter................................... 23.90 3.17
Fourth Quarter.................................. 7.70 2.16
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2002 HIGH LOW
---- ---- ---
IN PLN IN PLN
------ ------
First Quarter .................................. 6.05 3.11
Second Quarter ................................. 4.00 3.08
Third Quarter................................... 3.44 1.59
Fourth Quarter.................................. 3.95 1.71
2003 HIGH LOW
---- ---- ---
IN PLN IN PLN
------ ------
First Quarter .................................. 3.47 2.43
Source: website bossa.pl
The following table sets forth the high and low closing prices (in PLN) for our
ordinary shares on the Warsaw Stock Exchange under the symbol "NET" for each of
the six months preceding the date of this annual report:
HIGH LOW
---- ---
IN PLN IN PLN
------ ------
December 2002................................. 3.81 3.05
January 2003.................................. 3.47 2.93
February 2003................................. 3.12 2.49
March 2003.................................... 2.60 2.43
April 2003.................................... 2.89 2.49
May 2003...................................... 3.34 2.84
June 2003(*).................................. 3.19 3.10
Source: website bossa.pl
- --------------------
(*) Through June 23, 2003.
The following table provides the high and low closing prices (in PLN) for our
series H ordinary shares on the Warsaw Stock Exchange under the symbol "NET2"
for the first quarter of our financial year 2003:
2003 HIGH LOW
---- ---- ---
IN PLN IN PLN
------ ------
First Quarter(*) .............................. 2.55 2.24
Source: website bossa.pl
- --------------------
(*) Our series H ordinary shares have been listed on the Warsaw Stock Exchange
since February 13, 2003. Series H shares were assimilated with the other
ordinary shares of the Company on June 6, 2003 and since then have been
traded on the Warsaw Stock Exchange under a common symbol "NET".
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The following table sets forth the high and low closing prices (in PLN) for our
series H ordinary shares on the Warsaw Stock Exchange under the symbol "NET2"
for all months of their listing preceding the date of this annual report:
HIGH IN LOW IN
PLN PLN
February 2003(*).................... 2.55 2.24
March 2003.......................... 2.54 2.35
April 2003.......................... 2.88 2.51
May 2003............................ 3.33 2.82
- --------------------
(*) Our series H ordinary shares have been listed on the Warsaw Stock Exchange
since February 13, 2003. Series H shares were assimilated with the other
ordinary shares of the Company on June 6, 2003 and since then have been
traded on the Warsaw Stock Exchange under a common symbol "NET".
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Prior to July 29, 1999, there was no market for our ordinary shares. Our
ordinary shares are listed on the Warsaw Stock Exchange under the symbol "NET"
and our ADSs are traded on the Pink Sheets following their de-listing from the
Nasdaq National Market on October 15, 2002.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
GENERAL
We are registered under the name "Netia Holdings Spolka Akcyjna," registration
number 0000041649 at the National Court Register in Poland.
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Section 3 of our Articles of Association describes our purposes and objectives
as:
o designing, manufacturing and maintaining internal telecommunications
systems;
o designing and establishing new telecommunications designs and
techniques;
o providing telecommunications services over internal telecommunications
systems;
o manufacturing and leasing telecommunications equipment;
o conducting domestic trade;
o conducting imports in connection with the services we, our
shareholders and partners provide, except where an import requires a
concession;
o conducting exports of services we provide, except where an export
requires a concession;
o the export and import of telecommunications equipment, except where an
import or export requires a concession;
o rendering telecommunications services;
o organizing and implementing, by ourselves or together with other
entities, commercial undertakings, including construction for housing
purposes and the sale, rental and management of real estate;
o conducting holding activities by creating subsidiaries, coordination
of activities by managing, holding shares in capital, granting and
receiving of loans and guarantees, within the holding structure, and
o granting loans and credits to our subsidiaries.
SHAREHOLDERS MEETINGS
The shareholders, as a group, hold decision-making power over the distribution
and designation of profits, the issuance of shares, increases or decreases in
share capital and potential mergers or divestitures of the Company. The
shareholders also vote on proposed amendments to the Company's statute. Each
share entitles our shareholders to one vote at our shareholders meeting.
Ordinary shareholders meetings are convened by our management board annually,
not later than six months following the end of the financial year. At an
ordinary shareholders meeting, our shareholders consider and approve the
management board's reports on our activity and financial condition during the
preceding year. Shareholders may also adopt resolutions concerning distribution
of profits or covering of losses or take such other actions as properly brought
before the shareholders.
Extraordinary shareholders meetings may be convened as deemed necessary by the
management board or, under certain circumstances, the supervisory board, in
addition to those instances provided in Polish law.
Proposed shareholder resolutions must be provided by the management board to the
supervisory board before any shareholders meeting in order for the supervisory
board to render an opinion. The opinion of the supervisory board neither
prohibits nor requires that a resolution be put before the shareholders.
88
Under Polish law, announcements of either an ordinary shareholders meeting or an
extraordinary shareholders meetings must be published in Monitor Sadowy i
Gospodarczy.
Shareholders may participate in shareholders meetings and exercise their voting
rights in person or by proxy. Members of our management board and our employees
may not act as proxies during shareholders meetings. Pursuant to the provisions
of Polish law, in order to participate in a shareholders meeting, a shareholder
must deposit with the company registered deposit certificates issued by the
entity operating the securities account, at least one week prior to the
shareholders meeting.
SUPERVISORY AND MANAGEMENT BOARDS
Generally, the shareholders of a Polish company elect the members of its
supervisory board. One member of our supervisory board is appointed by Mr.
Andrzej Radziminski as long as he is the holder of all our series A-1 preferred
shares. The term of the members of our supervisory board is five years and may
be renewed.
The supervisory board of a Polish company is generally responsible for
supervising certain activities specified by law or in the company's statute.
Consistent with Polish legal requirements, our supervisory board reviews our
annual Polish statutory accounts, our management board's reports, our budget and
business plans, certain of our expenditures and investments and the matters
proposed to be presented at our shareholders meetings. Our supervisory board
also appoints the members of, sets the salaries of, imposes and enforces
appropriate disciplinary action on, and examines issues raised by, our
management board. Our statute presently requires a simple majority of votes cast
in a meeting with a quorum of at least 50% of the members of the supervisory
board present in order to adopt a valid resolution, with certain exceptions.
The compensation of supervisory board members is determined by the shareholders.
Our shareholders may at any time by majority vote rescind or modify compensation
granted to the members of our supervisory board.
Our management board is responsible for matters not specifically reserved to
either our shareholders or our supervisory board and effectively oversees our
day-to-day management. In particular, our management board manages our
operations under the supervision of our president, serves as our legal,
governmental and third-party representative and issues resolutions concerning
the business activities that we undertake.
Transactions concluded by the management board, including incurring or making
loans or other indebtedness the value of which exceeds the equivalent of
US$100,000 require the approval of the majority of our supervisory board, unless
they have been provided in the most recent business plan or budget of the
Company approved by the supervisory board.
Resolutions of the supervisory board regarding the consent for the Company to
enter into the first credit facility following January 15, 2003 in the amount
equal to, or exceeding the equivalent of euro 50 million require that at least
five members of the supervisory board vote in favor. Resolutions of the
supervisory board regarding the consent for the Company to enter into the all
subsequent credit facilities require that at least four members of the
supervisory board vote in favor.
Under Polish law, whenever a conflict of interest arises between a company and a
member of its management board (or certain persons with whom the member has a
personal relationship), the management board member must refrain from
participating in the settlement of the matter from which the conflict arose.
89
Under Polish law, the supervisory board or a proxy appointed by the shareholders
must represent a company with respect to the conclusion of agreements with
members of its management board.
Our Articles of Association do not place any restrictions on the age of our
supervisory board or management board members or with respect to the number of
shares required to qualify a member of the supervisory board.
SHARE CAPITAL
As of June 24, 2003, our share capital equaled PLN 344,158,751 and was divided
into (i) 5,000 series A ordinary registered shares, (ii) 3,727,340 series B
ordinary registered shares, (iii) 1,000 series A-1 preferred registered shares,
(iv) 312,626,040 series H ordinary bearer shares, (v) 113,539 series J ordinary
bearer shares and (vi) 27,685,832 series C through G ordinary bearer shares2
outstanding. On July 30, 2002 we effected a change of the shares-to-ADSs ratio.
After this change, each of our ADSs represents four ordinary shares. All of our
ordinary shares have equal voting rights. No preferences are attached to series
A registered shares. Series A-1 preferred shares (all of which are held by Mr.
Andrzej Radziminski) entitle their holder to appoint and dismiss one member of
our supervisory board. The transfer of any series A-1 preferred shares would
result in the loss of this right. No other preferences are attached to series
A-1 preferred shares.
Dividends to shareholders are determined by the shareholders. No series of
shares has any special right to dividends. The right of a shareholder to collect
a dividend expires ten years after a dividend has been duly approved. In the
event of liquidation, any surplus of our assets shall be paid to a shareholder
in respect of the contributions to our share capital represented by the shares
held by that shareholder. None of our capital stock is subject to any redemption
provisions, sinking fund provisions or liability pursuant to additional capital
calls. No rights to share in any surplus in the event of our liquidation are
attached to any of our shares.
Under Polish law, a company's articles of association may generally be amended
by a resolution of the shareholders approved by a three-fourths majority of
votes present at the meeting. Amendments are not effective until they are
registered in the proper court registry. Polish law requires, however, that
amendments affecting the individual rights of shareholders be approved by all
affected shareholders. In addition, our Articles of Association provide that any
amendment affecting the rights of holders of privileged shares must be approved
by the holders of such shares. Our Articles of Association do not provide for
any other class voting rights.
Under our Articles of Association, the dissolution, merger, sale, transfer or
sale of Netia or the transfer of a material amount of our assets must be
approved by three-fourths of the shareholders voting on such a matter.
Resolutions on the withdrawal of the Company's shares from public trading or on
de-listing of the Company's shares from the Warsaw Stock Exchange or on a merger
having the same consequences, must be approved by four-fifths of the
shareholders representing at least one half of the Company's share capital.
The acquisition of shares of or investing in other entities other than in
existing subsidiaries of the Company require the approval of the majority of our
supervisory board.
- -------------------------
2 All our ordinary shares of series A through K are fungible and the
identification of different series refers only to different tranches that these
shares were issued in.
90
In general, and without prejudice to any specific antitrust regulations, under
Polish law, a person or a group of persons seeking to acquire greater than 25%,
33% or 50% of the voting securities of a public company must notify and obtain
the consent of the Polish Securities and Exchange Commission prior to acquiring
such securities.
Polish law imposes no limitations on the ability of non-resident or foreign
shareholders to hold shares and exercise their voting rights.
C. MATERIAL CONTRACTS
For a description of contracts material to our business, see Item 4.B
("Information on the Company") and Item 7.B ("Major Shareholders and Related
Party Transactions--Related Party Transactions.")
D. EXCHANGE CONTROLS
EXCHANGE CONTROLS
Foreign exchange transactions are regulated by the Foreign Exchange Law of June
27, 2002, which came into force on October 1, 2002, which we refer to as the
Foreign Exchange Law. Generally, pursuant to the Foreign Exchange Law, foreign
exchange transactions are permitted subject to the restrictions provided
therein. While foreign exchange transactions with member countries of the
European Union, the European Economic Area and the Organization for Economic
Cooperation Development (including the United States) are mostly free from
foreign exchange restrictions. A more stringent legal regime applies to
non-residents from third countries, i.e. all non-member countries. Any exemption
from the restrictions and obligations set forth in the Foreign Exchange Law
requires a general or individual foreign exchange permit. General foreign
exchange permits are granted by the minister responsible for public finance by
way of an Ordinance. Such general permits may apply to all or a specific
category of entities defined by type, as well as all transactions or
transactions defined by type. Consequently, certain restrictions provided in the
Foreign Exchange Law are excluded by the Ordinance of the Minister of Finance on
general foreign exchange permits dated September 3, 2002, effective from October
1, 2002. While the adoption of amendments to the Foreign Exchange Law as a
legislative act has to go through the parliamentary process, the adoption of an
amendment to the Ordinance of the Minister of Finance rests solely within the
powers of the Minister of Finance.
The Foreign Exchange Law provides for the equal treatment of PLN and foreign
currencies listed on a convertible currencies list in the conduct and settlement
of foreign exchange transactions with parties located abroad. Accordingly,
payments to persons who are non-residents of Poland (as defined therein) may be
made and expressed in convertible currencies or in PLN with no difference in the
treatment thereof.
Among others, the restrictions contained in the Foreign Exchange Law affect such
transactions as:
o residents determining and accepting amounts due from non-residents in
currencies other than convertible currencies or PLN, with the
exclusion of receivables due free of charge or resulting from
non-business activities;
o the exportation and dispatch abroad of foreign exchange gold or
foreign exchange platinum, with the exclusion of the exportation and
dispatch of foreign exchange gold or foreign exchange platinum by
non-residents if the same had been previously imported by them into
the country and duly declared in accordance with the provisions of the
Foreign Exchange Law;
91
o the exportation and dispatch abroad of domestic or foreign means of
payment with an aggregate value in excess of EUR 10,000, with the
exclusion of the exportation and dispatch of domestic or foreign means
of payment by non-residents if the same had previously been imported
by them into the country and duly declared in accordance with the
provisions of the Foreign Exchange Law. (Please note that this
restriction is currently excluded on the basis of the Ordinance of the
Minister of Finance on general foreign exchange permits.)
All other restrictions set forth in the Foreign Exchange Law refer to
transactions with third countries, i.e. all non-member countries.
Additionally, the Foreign Exchange Law imposes certain duties. Residents are
required to transfer money abroad and to make settlements with non-residents in
Poland through authorized banks should the amount to be transferred or settled
exceed the equivalent of EUR 10,000. The transfer of money abroad or a
settlement in Poland with a non-resident through the intermediary of an
authorized bank takes effect after a resident presents the legal basis for the
transfer or settlement in question and: (i) if the indicated legal basis
requires an individual foreign exchange permit, then after the presentation of
such a permit; and (ii) if the amount of transfer or settlement exceeds the
equivalent of EUR 10,000, then after the presentation of documents confirming
the indicated legal basis. Such transfer or settlement can take place without
the need to present documents to confirm the authenticity of the legal basis to
the bank, should a resident make a written statement justifying the absence of
such documents. Should such a statement be made and a transfer or settlement
carried out without any documentation of the indicated legal entitlement being
presented, a resident is required to present documents to confirm their legal
entitlement to the bank immediately after obtaining such documents, not later
however than within three months after such transfer or settlement was made.
These provisions apply accordingly should non-residents transfer money abroad or
pay cash into their own bank accounts or the bank accounts of other
non-residents.
Under the Foreign Exchange Law, the transfer of money abroad or settlement in
Poland with a non-resident which results in revenue or income being obtained,
and with respect to which the non-resident is subject to taxation in Poland, is
effected after the bank acting as intermediary in the transfer or settlement is
presented with a certificate confirming the expiry of such tax liability under
such tax obligation issued by the relevant tax authority. Should such transfer
or settlement result in the non-resident obtaining revenue or income on which
the tax or tax advance is collected by a taxpayer or collector who is a
resident, such transfer or settlement takes place upon submission to the bank,
by such a resident taxpayer or collector, of a written statement on the
calculation and collection of the tax or the tax advance and submission of proof
of payment of such tax or tax advance to a competent tax authority, provided
that these taxes are already due in accordance with separate provisions.
Residents engaged in foreign exchange transactions with foreigners are required
to furnish the National Bank of Poland with data on such transactions within the
scope necessary to prepare the balance of payments and the balances of the
state's foreign receivables and liabilities.
E. TAXATION
The following discussion is a general summary of certain aspects of current law
and internal revenue practice in the United States and Poland as they apply to
the holders of the ADSs and ordinary shares of Netia Holdings S.A.
92
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Subject to the limitations described in the next paragraph, the following
discussion describes the material U.S. federal income tax consequences to a
holder of our ADSs, referred to for purposes of this discussion as a "U.S.
Holder," who is:
o a citizen or resident of the United States;
o a corporation (or other entity treated as a corporation for U.S.
federal tax purposes) created or organized in the United States or
under the laws of the United States or of any state;
o an estate, the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source; or
o a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial
decisions of the trust.
This summary is for general information purposes only. It does not purport to be
a comprehensive description of all of the tax considerations that may be
relevant to each person's purchase and ownership of ADSs. This summary considers
only U.S. Holders that beneficially own ADSs as capital assets, that is,
generally as investments.
This discussion is based on current provisions of the Internal Revenue Code of
1986, as amended, current and proposed Treasury regulations promulgated
thereunder, and administrative and judicial decisions as of the date of this
annual report, all of which are subject to change, possibly on a retroactive
basis. This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to any particular U.S. Holder based on such
holder's individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or U.S. federal
income tax consequences to U.S. Holders that are subject to special treatment,
including:
o taxpayers who are broker-dealers or insurance companies;
o taxpayers who have elected mark-to-market accounting;
o tax-exempt organizations or private foundations;
o financial institutions or "financial services entities";
o taxpayers who hold ADSs as part of a straddle, "hedge" or "conversion
transaction" with other investments;
o holders owning directly, indirectly or by attribution at least 10% of
our voting power;
o certain expatriates or former long-term residents of the United
States;
o taxpayers whose functional currency is not the U.S. dollar; and
o taxpayers who acquired their ADSs as compensation.
93
This discussion does not address any aspect of U.S. federal gift or estate tax,
or state, local or non-U.S. tax laws. Additionally, the discussion does not
consider the tax treatment of persons who hold ADSs through a partnership or
other pass-through entity. Material aspects of U.S. federal income tax relevant
to a holder other than a U.S. Holder (a "Non-U.S. Holder") are also discussed
below.
EACH INVESTOR IS ADVISED TO CONSULT SUCH PERSON'S OWN TAX ADVISOR WITH RESPECT
TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF PURCHASING, HOLDING OR
DISPOSING OF OUR ADSS.
TAXATION OF SHARES AND ADSS
For U.S. federal income tax purposes, a U.S. Holder of ADSs will be treated as
the owner of the common shares that those ADSs represent. Accordingly, except as
specifically noted, this discussion generally treats ownership of ADSs as
equivalent to owning common shares, and references to ADSs apply equally to
common shares.
TAXATION OF DIVIDENDS PAID ON ADSS
We have never paid dividends, and we currently do not intend to pay dividends in
the future. In the event that we do pay a dividend, and subject to the
discussion of the passive foreign investment company, or PFIC, rules below, a
U.S. Holder will be required to include in gross income as ordinary income the
amount of any distribution paid on ADSs, including any taxes withheld from the
amount paid, on the date the distribution is received to the extent the
distribution is paid out of our current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of such
earnings and profits will be applied against and will reduce the U.S. Holder's
basis in the ADSs and, to the extent in excess of such basis, will be treated as
capital gain.
Distributions of current or accumulated earnings and profits paid in foreign
currency to a U.S. Holder will be includable in the income of a U.S. Holder in a
U.S. dollar amount calculated by reference to the exchange rate on the date the
distribution is received. A U.S. Holder that receives a foreign currency
distribution and converts the foreign currency into U.S. dollars subsequent to
receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. dollar, which
will generally be U.S. source ordinary income or loss.
U.S. Holders will have the option of claiming the amount of any income taxes
withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their U.S. federal income tax liability.
Individuals who do not claim itemized deductions, but instead utilize the
standard deduction, may not claim a deduction for the amount of any income taxes
withheld, but such individuals may still claim a credit against their U.S.
federal income tax liability. The amount of foreign income taxes which may be
claimed as a foreign tax credit in any year is subject to complex limitations
and restrictions, which must be determined on an individual basis by each
shareholder. The total amount of allowable foreign tax credits in any year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income. A U.S. Holder will be denied a foreign tax credit
with respect to income tax withheld from dividends received on the ADSs to the
extent such U.S. Holder has not held the ADSs for at least 16 days of the 30-day
period beginning on the date which is 15 days before the ex-dividend date or to
the extent such U.S. Holder is under an obligation to make related payments with
respect to substantially similar or related property. Any days during which a
U.S. Holder has substantially diminished its risk of loss on the ADSs are not
counted toward meeting the 16-day holding period required by the statute. In
addition, distributions of our current or accumulated earnings and profits will
be foreign source passive income for U.S. foreign tax credit purposes and will
not qualify for the dividends received deduction available to corporations.
94
Dividends paid to non-corporate U.S. Holders may qualify for a reduced rate of
taxation of 15% or lower under recently enacted legislation if (i) our ordinary
share or ADSs are tradable on an established securities market in the United
States or (ii) we qualify for benefits under a comprehensive income tax treaty
with the United States which includes an exchange of information program. Our
ordinary shares and ADSs are not currently traded on an established securities
market in the United States. Pending official guidance on whether the U.S. -
Poland income tax treaty satisfies the treaty requirement above, it is unclear
whether dividends paid by us would qualify for the reduced rate under this
legislation. If our dividends did qualify, a U.S. Holder would not be entitled
to the reduce rate unless the holder satisfies certain eligibility requirements
(including certain holding period requirements).
DISTRIBUTION OF WARRANTS TO DEPOSITORY FOR SALE BY THE DEPOSITORY
Pursuant to the Restructuring Agreement and the Exchange Agreement, the par
value of the Company's ordinary shares was reduced on January 30, 2003 from PLN
6.00 to PLN 1.00. In addition, the Depository, as a record holder of ordinary
shares on December 22, 2002, was issued warrants on May 16, 2003 to acquire H
shares. The exercise price for the warrants is the volume-weighted average price
of the Company's ordinary shares on the Warsaw Stock Exchange for the 30 days
prior to, and the 31 days following, the registration of the H shares in Poland.
Under its agreement with the Company, the Depository will sell the warrants and
distribute the proceeds (net of expenses) pro-rata to the holders of ADSs on a
record date to be determined by the Depositary. Receipt and sale by the
Depository of the warrants should be treated as receipt and sale by the ADS
holders for U.S. federal income tax purposes.
Because the owners of ADSs on January 30, 2003 (the date the par value reduction
occurred) and the owners of ADSs on the date established by the Depository for
determining entitlement to proceeds from the sale of warrants may be different,
it is possible that the par value reduction and warrant distribution will be
treated as part of a recapitalization of the Company, or as a recapitalization
(due to the par value reduction) followed by a non-taxable distribution of the
warrants.
If the two event are treated as part of a recapitalization, no gain or loss
should be recognized by ADS holders and an ADS holder will allocate his basis in
the ADSs between the ADSs and the warrants based on their respective fair market
values. Such U.S. Holder's holding period for the warrant and ADSs would be
determined by reference to the holding period for such U.S. Holder's ADSs.
If the reduction in par value is treated as a separate event for US federal
income tax purposes, then (i) the constructive exchange of pre- par value
reduction ADSs for post- par value reduction ADSs should qualify as a
non-taxable recapitalization, and such U.S. holder's basis and holding period
for its ADSs would remain unchanged; and (ii) the distribution of the warrants
should be treated as a non-taxable distribution with respect to such holder's
ADSs for U.S. federal income tax purposes. If the fair market value of the
warrants on their date of distribution to a U.S. Holder is less than 15 percent
of the fair market value of the ADSs held by such U.S. Holder with respect to
which such warrants were distributed, then the tax basis of the warrants would
be zero, unless the U.S. holder affirmatively elects to allocate the tax basis
in its ADSs between such ADSs and the warrants in proportion to the relative
fair market value of each on such date. This election (which is irrevocable once
made) must be made on the U.S. holder's tax return for the taxable year in which
the warrants are received and will apply to all warrants received by the U.S.
holder pursuant to the Agreement. On the other hand, if the fair market value of
the warrants received by the U.S. holder pursuant to the Agreement is 15 percent
or more of the fair market value of such U.S. holder's ADSs on the date that the
warrants are distributed, the U.S. holder must allocate the tax basis of its
95
ADSs between the warrants and such ADSs in proportion to their relative fair
market values on such date. The holding period of the warrants distributed to
the ADS holder in a nontaxable distribution would include the holding period of
the ADSs held by such U.S. holder with respect to which the warrants were
distributed.
TAXATION OF THE DISPOSITION OF ADSS OR WARRANTS
Subject to the discussion of the PFIC rules below, upon the sale or exchange of
ADSs or warrants (including the lapse of a warrant prior to its exercise), a
U.S. Holder will recognize capital gain or loss in an amount equal to the
difference between such U.S. Holder's basis in the ADSs, which is usually the
cost of such shares or the amount allocated to the warrants as discussed
at--"Distribution of Warrants to Depository for Sale by Depository," and the
amount realized on the sale or exchange. A U.S. Holder that uses the cash method
of accounting calculates the U.S. dollar value of the proceeds received on the
sale date as of the date that the sale settles, while a U.S. Holder that uses
the accrual method of accounting is required to calculate the value of the
proceeds of the sale as of the "trade date," unless such U.S. Holder has elected
to use the settlement date to determine its proceeds of sale. Capital gain from
the sale or exchange of ADSs held more than one year (or warrants treated as
held more than one year) is long-term capital gain and is eligible for a reduced
rate of taxation of 15% or lower for non-corporate taxpayers. Gain or loss
recognized by a U.S. Holder on a sale or exchange of ADSs or warrants will be
treated as U.S. source income or loss for U.S. foreign tax credit purposes. The
deductibility of a capital loss recognized on the sale or exchange of ADSs or
warrants is subject to limitations. A U.S. Holder that receives foreign currency
upon a sale or exchange of ADSs or warrants and converts the foreign currency
into U.S. dollars subsequent to receipt will have foreign exchange gain or loss
based on any appreciation or depreciation in the value of the foreign currency
against the U.S. dollar, which will generally be U.S. source ordinary income or
loss.
TAX CONSEQUENCES IF WE ARE A PASSIVE FOREIGN INVESTMENT COMPANY
We will be a PFIC if 75% or more of our gross income in a taxable year,
including the pro rata share of the gross income of any company, U.S. or
foreign, in which we are considered to own 25% or more of the shares by value,
is passive income. Alternatively, we will be considered to be a PFIC if 50% or
more of our assets in a taxable year, averaged over the year and ordinarily
determined based on fair market value and including the pro rata share of the
assets of any company in which we are considered to own 25% or more of the
shares by value, are held for the production of, or produce, passive income. If
we were a PFIC, and a U.S. Holder did not make a election to treat us as a
"qualified electing fund" (as described below):
o Excess distributions by us to a U.S. Holder would be taxed in a
special way. "Excess distributions" are amounts received by a U.S.
Holder with respect to our stock in any taxable year that exceed 125%
of the average distributions received by such U.S. Holder from us in
the shorter of either the three previous years or such U.S. Holder's
holding period for ADSs before the present taxable year. Excess
distributions must be allocated ratably to each day that a U.S. Holder
has held our stock. A U.S. Holder must include amounts allocated to
the current taxable year and to amounts allocated to certain years
prior to the Company being a PFIC in its gross income as ordinary
income for that year. A U.S. Holder must pay tax on amounts allocated
to each prior taxable year when the Company was a PFIC at the highest
rate in effect for that year on ordinary income and the tax is subject
to an interest charge at the rate applicable to deficiencies for
income tax.
96
o The entire amount of gain that is realized by a U.S. Holder upon the
sale or other disposition of ADSs or warrants will also be considered
an excess distribution and will be subject to tax as described above.
o A U.S. Holder's tax basis in shares of our stock that were acquired
from a decedent would not receive a step-up to fair market value as of
the date of the decedent's death but would instead be equal to the
decedent's basis, if lower.
The special PFIC rules described above will not apply to a U.S. Holder if the
U.S. Holder makes an election to treat us as a "qualified electing fund," or
QEF, in the first taxable year in which the U.S. Holder owns ADSs and if we
comply with certain reporting requirements. Instead, a shareholder of a
qualified electing fund is required for each taxable year to include in income a
pro rata share of the ordinary earnings of the qualified electing fund as
ordinary income and a pro rata share of the net capital gain of the qualified
electing fund as long-term capital gain, subject to a separate election to defer
payment of taxes, which deferral is subject to an interest charge. The QEF
election is made on a shareholder-by-shareholder basis and can be revoked only
with the consent of the Internal Revenue Service. A shareholder makes a QEF
election by attaching a completed IRS Form 8621 (using the information provided
in the PFIC annual information statement) to such shareholder's timely filed
U.S. federal income tax return. Even if a QEF election is not made, a
shareholder in a PFIC who is a U.S. person must file a completed IRS Form 8621
every year. The special PFIC rules described above would apply to gain from the
disposition of a warrant to the same extent such rules would apply to a
disposition of an ADS, and a QEF election cannot be made with respect to the
warrants.
A U.S. Holder of PFIC stock which is publicly traded can elect to mark the stock
to market annually, recognizing as ordinary income or loss each year an amount
equal to the difference as of the close of the taxable year between the fair
market value of the PFIC stock and the U.S. Holder's adjusted tax basis in the
PFIC stock. Losses would be allowed only to the extent of net mark-to-market
gain previously included by the U.S. Holder under the election for prior taxable
years. If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.
We believe that we were not a PFIC for 2002 and that we will not be a PFIC for
2003. The tests for determining PFIC status, however, are applied annually, and
it is difficult to make accurate predictions of future income and assets, which
are relevant to this determination. Accordingly, there can be no assurance that
we will not become a PFIC. U.S. Holders who hold ADSs during a period when we
are a PFIC will be subject to the foregoing rules, even if we cease to be a
PFIC, subject to certain exceptions for U.S. Holders who made a QEF election.
U.S. Holders are strongly urged to consult their tax advisors about the PFIC
rules, including the consequences to them of making a mark-to-market or QEF
election with respect to our ADSs in the event that we are treated as a PFIC.
TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF ADSS
Except as described in "--Information Reporting and Back-up Withholding" below,
a Non-U.S. Holder of ADSs will not be subject to U.S. federal income or
withholding tax on the payment of dividends on, and the proceeds from the
disposition of, ADSs or warrants, unless:
97
o such item is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and, in the case of
a resident of a country which has a treaty with the United States,
such item is attributable to a permanent establishment or, in the case
of an individual, a fixed place of business, in the United States; or
o the Non-U.S. Holder is an individual who holds the ADSs as a capital
asset and is present in the United States for 183 days or more in the
taxable year of the disposition and does not qualify for an exemption.
INFORMATION REPORTING AND BACK-UP WITHHOLDING
U.S. Holders generally are subject to information reporting requirements with
respect to dividends paid in the United States on ADSs. In addition U.S. Holders
are subject to back-up withholding (currently at a rate of 28%) on dividends
paid in the United States on ADSs unless the U.S. Holder provides an IRS Form
W-9 or otherwise establishes an exemption. U.S. Holders are subject to
information reporting and back-up withholding (currently at a rate of 28%) on
proceeds paid from the sale, exchange, redemption or other disposition of ADSs
or warrants unless the U.S. Holder provides an IRS Form W-9 or otherwise
establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or back-up
withholding with respect to dividends paid on, or proceeds upon the sale,
exchange or other disposition of, ADSs or warrants provided such non-U.S. Holder
provides a taxpayer identification number, certifies to its foreign status, or
otherwise establishes an exemption.
Back-up withholding is not an additional tax. The amount of any back-up
withholding will be allowed as a credit against a U.S. or non-U.S. Holder's U.S.
federal income tax liability and may entitle such holder to a refund, provided
that certain information is furnished to the IRS.
POLISH TAX CONSIDERATIONS (ORDINARY SHARES AND ADSS)
The following is a summary of the principal Polish tax consequences for
non-resident investors in our ADSs. This summary only addresses the tax
consequences for non-resident investors who hold our ADSs as capital assets and
does not address the tax consequences that may be relevant to other classes of
non-resident investors such as dealers. It is not intended to constitute a
complete analysis of the tax consequences under Polish law of the acquisition,
ownership and sale of ADSs by non-resident investors such as dealers. This
summary is not intended to constitute a complete analysis of the tax
consequences under Polish law of the acquisition, ownership and sale of ADSs by
non-resident investors. Potential investors should, therefore, consult their own
tax advisors on the tax consequences of such acquisition, ownership and sale,
including specifically the tax consequences under Polish law, the law of the
jurisdiction of their residence and any tax treaty between Poland and their
country of residence and, in particular, the application of the relevant Polish
legislation.
RESIDENCE
The Corporate Income Tax Law of February 15, 1992, as amended, provides in
Article 3 that where taxpayers have their seat or the location of their board of
directors in Poland they are subject to corporate income tax on the whole of
their income, irrespective of the place in which it has been earned. Where
taxpayers have neither their seat nor a board of directors in Poland, they pay
income tax only on income earned in Poland.
98
The Polish Personal Income Tax Law of July 26, 1991, as amended, provides in
Article 3 that individuals whose place of residence is in Poland pay income tax
on the total of their income irrespective of the place in which it has been
earned. Individuals whose place of residence is not in Poland pay income tax
only on income resulting from work performed within the territory of Poland
pursuant to a service relationship or employment relationship, irrespective of
where they receive their remuneration as well as on other incomes earned in
Poland.
TAXATION OF DIVIDENDS
Dividends paid by Polish companies are subject to tax in accordance with the
Polish Personal Income Tax Law and the Polish Corporate Income Tax Law. Dividend
income is subject to a withholding tax at a flat rate of 15.0%. Tax is withheld
at source on payments of dividends. In the case of non-Polish residents
(resident in a jurisdiction that has a double taxation treaty with Poland)
holding shares, the ultimate amount of liability for such tax on dividends may
be reduced by such relevant double taxation treaty. Where the holder of shares
receiving dividends is a U.S. resident or is a corporation or other legal entity
organized under the laws thereof, the relevant treaties reduce the withholding
on dividends to 5.0% (if such shareholder holds directly at least 10.0% of the
shares of such company with voting rights). However, according to Polish income
tax regulations, the reduction of withholding tax under the relevant double
taxation treaty is possible if the recipient of the dividends provides the
paying company with a certificate of residence issued by its applicable tax
authority.
Similar double taxation treaties have been concluded between Poland and, among
other countries, the United Kingdom, Germany and France.
Netia has been advised that, for the purposes of Polish tax law, the Depositary
may be deemed the holder of common shares in ADS form and, if so, would be
entitled to double taxation relief under the double taxation treaty between the
United States and Poland. The Polish tax authorities may, however, take the view
that such withholding tax should be imposed by reference to the residence of the
beneficial owner of the common shares in ADS form and, if so, the benefits of
the double taxation treaty may be substantially reduced or eliminated.
TAXATION OF INTEREST
Interest payments made by Polish companies are subject to tax in accordance with
the Polish Personal Income Tax Law and the Polish Corporate Income Tax Law. As a
general rule, cross-border interest payments are subject to a withholding tax of
20.0% unless a relevant double taxation treaty provides otherwise. Pursuant to
double taxation treaties concluded by Poland with the United States, interest
payments to U.S. residents are exempt from tax in Poland unless the recipient of
such interest has a permanent establishment in Poland and the indebtedness
giving rise to the interest is effectively connected with such permanent
establishment, and with respect to payments to U.S. residents, unless the
recipient of such interest performs professional services in Poland from a fixed
base situated therein and the indebtedness giving rise to the interest is
effectively connected with such fixed base. As a consequence, any interest or
special penalty interest accrued for the benefit of, or paid to U.S. residents
(including the ADS Depositary) in accordance with the escrow agreement, may be
exempt from tax in Poland. However, according to Polish tax income regulations,
the reduction of the withholding tax under the relevant double taxation treaty
is possible if the recipient of the interest provides the paying company with a
certificate of residence issued by its applicable tax authority.
99
TRANSFER TAX
Transfer tax is payable on sale contracts (including share transfers) at a rate
of 1.0% of the value transferred however transactions made through a bank or
brokerage house are exempt from this tax.
GIFT AND INHERITANCE TAX
Liabilities for gift and inheritance tax (which applies to individuals only) may
arise on a donation of shares in a Polish company or on an inheritance in
Poland. The amount of such tax depends on the family relationship of the donor
to the recipient.
INFORMATION ON THE RULES FOR THE TAXATION OF INCOME CONNECTED WITH POSSESSING
AND TRADING IN WARRANTS
The information contained in this section is of a general nature and therefore
all investors are recommended to seek advice from their tax, financial and legal
advisors.
Rules for Apportioning Income Tax
Income from Trading in Warrants Earned by Domestic Natural Persons
Income from the sale of the warrants issued by the Company on May 16, 2003 that
constitute securities in the meaning of the Polish Act on the Public Trading of
Securities is a surplus of the revenue obtained under the warrants. The income
from the warrants is calculated as the sale price reduced by the expenses
incurred to purchase such warrants. If the sale price of the warrants is
significantly different from the market value of such warrants without a
justifiable reason, the revenue from such sale will be determined by the tax
office as the market value. Taxpayers who generate income from the sale of
securities that are not subject to the below-mentioned exemption are obliged to
make monthly advance payments for income tax of 19% of the income earned for the
months in which they generated such income by the 20th day of a given month for
the previous month (and on the date of filing a tax declaration for December),
and file a declaration with the competent tax office regarding generated income
in the standard form and by the same deadlines.
In accordance with the Polish Act on Personal Income Tax, during the period
commencing January 1, 2001 and ending December 31, 2003, income from the
non-gratuitous sale of the warrants admitted to public trading, purchased in a
public offering or on a stock exchange or in an organized over-the-counter
aftermarket public trading, or on the basis of a permit granted pursuant to the
Polish Act on the Public Trading of Securities, shall be exempt from income tax.
Such exemption does not apply if the sale of such warrants is part of the scope
of business activity of the seller.
Income from Trading in Warrants Earned by Domestic Legal Entities
Domestic legal entities' income from the sale of the warrants is subject to
corporate income tax on the general terms applicable in Poland. Income from the
sale of the warrants is the difference between the revenue, i.e. the value of
the warrants expressed as the price under the sale agreement, and the costs,
i.e. expenses incurred to purchase or subscribe for such warrants. If the price
of the warrants is significantly different from the market value of such
warrants without a justifiable reason, the revenue from such sale will be
determined by the tax office as the market value. Income from the sale of
warrants increases the taxpayer's tax assessment basis. Pursuant to the Polish
Act on Corporate Income Tax, from January 1, 2003, the tax on such income is 27%
of the tax assessment basis.
100
Taxation of Foreign Investors' Income
The above-referenced rules for the taxation of income from the sale of warrants
apply equally to the taxation of foreign investors' income, unless agreements on
avoiding double taxation provide otherwise.
Transfer Tax (Tax on Civil Law Transactions)
The sale of securities to brokerage houses and banks engaged in brokerage
operations as well as the sale of securities through such brokerage houses and
banks, in accordance with the Polish Act on the Tax on Civil Law Transactions,
is exempt from transfer tax. The Act on the Public Trading of Securities however
allows the possibility of executing agreements transferring the ownership of the
warrants other than through an entity engaged in brokerage activities. Such
agreements are subject to transfer tax of 1% of the market value of the
agreement pursuant to the Act on the Tax on Civil Law Transactions. The buyer
and the seller are obliged to pay transfer tax on a joint and several basis.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
STATEMENTS BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended, that apply to foreign private issuers and fulfill the
obligation of those requirements by filing reports with the Securities and
Exchange Commission. You may read and copy any document we file with the SEC
without charge at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material may be obtained by mail from the
Public Reference Branch of the SEC at such address, at prescribed rates. Please
call the SEC at l-800-SEC-0330 for further information about the public
reference room.
As a foreign private issuer, we are exempt from the rules under the Securities
Exchange Act of 1934, as amended, prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are
exempt from the reporting and "short-swing" profit recovery provisions contained
in Section 16 of the Exchange Act. We are also not required under the Exchange
Act to file periodic reports and financial statements with the SEC as frequently
or as promptly as U.S. companies whose securities are registered under the
Exchange Act. A copy of each report submitted in accordance with applicable U.S.
law is available for public review at our principal executive offices. Our SEC
filings are also available to the public from commercial document retrieval
services and at the internet world-wide website maintained by the SEC at
www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
101
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information provided in this Item present the quantitative and qualitative
analysis of market risk as of December 31, 2002. Following the redemption of
2002 Notes on March 24, 2003, the analysis is applicable only with respect to
our license fee obligations that are denominated in euro.
INTEREST RATES
Our income and operating cash flows are substantially independent of changes in
market interest rates. Our policy is to maintain approximately all of our
borrowings in fixed rate instruments.
As at December 31, 2002, we had fixed-rate borrowings in euro. If
euro-denominated market interest rates fall, the fair value of our fixed-rate
debt shall increase. As at March 31, 2003, we did not have any floating or
fixed-rate debt.
Our license fee obligations are not interest-bearing.
FOREIGN EXCHANGE RISK
Our revenues and costs are predominantly denominated in Polish zloty, other than
payments made to suppliers of certain equipment and services, which are linked
to the U.S. dollar and euro. In the previous years we raised long term debt on
international financial markets, and as of December 31, 2002 were exposed to
foreign exchange risk arising from various currency exposures primarily with
respect to the U.S. dollar and euro.
We will face foreign exchange risk in respect of our capital expenditure-related
liabilities and license fee obligations.
Our license fee obligations are denominated in euro. Any devaluation of the
Polish zloty against euro that we are unable to offset through price adjustments
will require us to use a larger portion of our revenues to service our
non-zloty-denominated debt. Shifts in currency exchange rates may have an
adverse effect on our ability to service our non-zloty-denominated obligations
and, therefore, on our financial condition and results of operations.
The table below provides information about our financial instruments that are
sensitive to changes in interest rates and foreign exchange rates as of December
31, 2002 and December 31, 2001. The table presents the maturities of debt and
the related weighted average interest rates by expected maturity date. The
information is presented in Polish zloty, which is our reporting currency.
102
INTEREST RATE AND FOREIGN EXCHANGE RISK MANAGEMENT PRINCIPAL (NOTIONAL)
AMOUNT BY EXPECTED MATURITY
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ---------- ----- ----------
Debt, including current
portion:
=======================
Fixed rate (U.S.$) .. - - - - - - - - 1,967,439 339,384
Interest rate (fixed) - 11.22%
Fixed rate (DM)...... - 372,860
Interest rate (fixed) - - - - - - - - 11.00% 64,318
Fixed rate ((C)...... 161,756 1,056,570
Interest rate (fixed) 161,756 - - - - - 11.02% 161,756* 13.67% 182,258
-------------- -------------- ------------ ---------
161,756 161,756 3,396,869 585,960
============== ============== ============ =========
* The new long term notes were issued on December 23, 2002, therefore, as at
December 31, 2002 the fair value of our long term debt was based on present
value of future cash flows amounting to PLN 161,756 and was equal to its
balance sheet value. The due date for payment of this long term debt,
according to the terms of the Indenture, dated December 23, 2002 was 2008.
We redeemed the notes on March 24, 2003.
In addition to our debt discussed above, we have obligations connected with the
payments for licenses of PLN 406.3 million (U.S.$ 105.8 million at the average
exchange rate quoted by NBP on December 31, 2002) (recorded at present values in
our financial statements as PLN 323.5 million (U.S.$ 84.3 million at the average
exchange rate quoted by NBP on December 31, 2002)) in accordance with the
requirements of IAS 38 "Intangible Assets."
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
103
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
On December 15, 2001, we defaulted on several interest payments on two series of
our then outstanding notes. Those defaults triggered cross-default provisions
under the terms of the indentures governing the four other series of notes and,
as a result, we were in default on all six series of the notes issued under U.S.
law that were then outstanding. We also defaulted on swap payments under certain
swap agreements. We also did not make all subsequent payments of interest due
after December 15, 2001.
All of our obligations under pre-restructuring notes and swap agreements were
cancelled pursuant to Dutch composition plans. Our obligations under the
guarantees related to our pre-restructuring notes and swap agreements were
reduced pursuant to the Polish arrangement plans to Polish zloty denominated
installment obligations payable until 2012. Pursuant to the U.S. Bankruptcy
Court's order, dated March 7, 2003, the Polish arrangement plans and Dutch
composition plans were given full force and effect in the United States.
Consequently, as of the date of this annual report we are no longer in default
under our pre-restructuring notes, swap agreements and related guarantees or any
other indebtedness.
For description of our restructuring, see Item 4.A ("Information on the Company
- - History and Development of the Company - Financial Restructuring.")
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) within 90 days prior to the date of
this report, have concluded that, as of such date, the Company's disclosure
controls and procedures were effective to ensure that material information
relating to the Company and its subsidiaries was made known to them by others
within the Company and its subsidiaries, particularly during the period in which
this Form 20-F was being prepared.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date
the Company's chief executive officer and chief financial officer completed
their evaluation, nor were there any significant deficiencies or material
weaknesses in the Company's internal controls requiring corrective actions.
ITEM 16. [RESERVED]
Not applicable.
104
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 below in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
The financial statements required by this item (i. e. the consolidated financial
statements of the Netia Group for the year ended December 31, 2002) are found at
the end of this annual report, beginning on page F-1.
ITEM 19. EXHIBITS
The exhibits filed with or incorporated into this annual report are listed on
the index of exhibits below.
NUMBER DESCRIPTION
------ -----------
1.1 The Formation Deed of Netia Holdings S.A. in English translation
(incorporated herein by reference to Exhibit 3.2 to Netia's
Registration Statement on Form F-4, filed with the Securities and
Exchange Commission on January 30, 1998, as amended, declared
effective on April 30, 1998 (the "Exchange Offer Registration
Statement")).*
1.2 Amended and Restated Statute of Netia Holdings S.A., dated as of
January 15, 2003, in English translation.* *
2.1 Senior Notes Indenture, dated as of November 3, 1997, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the 10 1/4% Senior Notes due 2007 and
the 10 1/4% Series B Senior Notes due 2007 issued by Netia
Holdings B.V. (incorporated herein by reference to Exhibit 4.1 to
the Registration Statement on Form F-4, filed with the Securities
and Exchange Commission on January 30, 1998, as amended (the
"1998 Exchange Offer Registration Statement")).*
2.1(a) Supplemental Indenture, dated as of December 1, 1998, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the Senior Notes Indenture included
herein as Exhibit 2.1 (incorporated herein by reference to
Exhibit 4.1(a) to the Company's Annual Report on Form 20-F, filed
with the Securities and Exchange Commission on June 29, 1999 (the
"1998 Annual Report")).*
2.2 Senior Notes Indenture, dated as of November 3, 1997, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the 11 1/4% Senior Notes due 2007 and
the 11 1/4% Series B Senior Notes due 2007 issued by Netia
Holdings B.V. (incorporated herein by reference to Exhibit 4.1 to
the 1998 Exchange Offer Registration Statement).*
2.2(a) Supplemental Indenture, dated as of December 1, 1998, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the Senior Notes Indenture included
herein as Exhibit 2.2 (incorporated herein by reference to
Exhibit 4.1(a) to the 1998 Annual Report).*
* Incorporated by reference
** Filed herewith
105
2.3 Senior Discount Notes Indenture, dated as of November 3, 1997,
among Netia Holdings B.V., Netia Holdings S.A. and State Street
Bank and Trust Company, relating to the 10 1/4% Senior (DM)
Discount Notes due 2007 and the 10 1/4% Series B Senior (DM)
Discount Notes due 2007 issued by Netia Holdings B.V.
(incorporated herein by reference to Exhibit 4.1 to the 1998
Exchange Offer Registration Statement).*
2.3(a) Supplemental Indenture, dated as of December 1, 1998, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the Senior Discount Notes Indenture
included herein as Exhibit 2.3 (incorporated herein by reference
to Exhibit 4.1(a) to the 1998 Annual Report).*
2.4 Form of 10 1/4% Series B Senior Notes due 2007 (incorporated
herein by reference to Exhibit 2.1 to Netia's Annual Report on
Form 20-F, filed with the Securities and Exchange Commission on
April 30, 2001 (the "2000 Annual Report")).*
2.5 Form of 11 1/4% Series B Senior Notes due 2007 (incorporated
herein by reference to Exhibit 2.2 to the 2000 Annual Report).*
2.6 Form of 11% Series B Senior (DM) Discount Notes due 2007
(incorporated herein by reference to Exhibit 2.3 to the 2000
Annual Report).*
2.7 Escrow Agreement, dated as of November 3, 1997, between Netia
Holdings S.A. and State Street Bank and Trust Company
(incorporated herein by reference to Exhibit 10.2 to the 1998
Exchange Offer Registration Statement).*
2.8 Senior Euro Notes Indenture, dated as of June 10, 1999, among
Netia Holdings II B.V., Netia Holdings S.A. and State Street Bank
and Trust Company, as trustee, relating to the 13 1/2% Senior
Euro Notes due 2009 (incorporated herein by reference to the 1998
Annual Report).*
2.9 Senior Dollar Notes Indenture, dated as of June 10, 1999, among
Netia Holdings II B.V., Netia Holdings S.A. and State Street Bank
and Trust Company, as trustee, relating to the 13 1/2% Senior
Dollar Notes due 2009 (incorporated herein by reference to the
1998 Annual Report).*
2.10 Form of 13 1/2% Senior Euro Note due 2009 (incorporated herein by
reference to Exhibit 2.8 to the 2000 Annual Report).*
2.11 Form of 13 1/2% Senior Dollar Note due 2009 (incorporated herein
by reference to Exhibit 2.9 to the 2000 Annual Report).*
2.12 Euro Investment Agreement, dated as of June 10, 1999, by and
among Netia Telekom S.A., Netia South Sp. z o.o. and State Street
Bank and Trust Company, as trustee (incorporated herein by
reference to Exhibit 4.14 to the 1998 Annual Report).*
2.13 Dollar Investment Agreement, dated as of June 10, 1999, by and
among Netia Telekom S.A., Netia South Sp. z o.o. and State Street
Bank and Trust Company (incorporated herein by reference to
Exhibit 4.15 to the 1998 Annual Report).*
* Incorporated by reference
** Filed herewith
106
2.14 Senior Euro Notes Indenture, dated as of June 9, 2000, by and
among Netia Holdings II B.V., Netia Holdings S.A. and State
Street Bank and Trust Company, as trustee, relating to the 13
3/4% Senior Notes due 2010 (incorporated herein by reference to
Exhibit 4.1 to the Registration Statement on Form F-3 filed with
the Securities and Exchange Commission on May 15, 2000, as
amended (the "2000 Notes Registration Statement")).*
2.15 Form of 13 3/4% Senior Euro Notes due 2010 (incorporated herein
by reference to Exhibit 2.14 to the 2000 Annual Report).*
2.16 Investment Agreement, dated as of June 9, 2000, by and among
Netia Telekom S.A., Netia South Sp. z o.o. and State Street Bank
and Trust Company (incorporated herein by reference to Exhibit
4.3 to the 2000 Notes Registration Statement).*
2.17 Master Agreement and the Schedule to the Master Agreement, dated
March 26, 2001, between Merrill Lynch Capital Services, Inc.,
Netia Telekom S.A. and Netia Holdings S.A. (incorporated herein
by reference to Exhibit 2.17 to the 2000 Annual Report).*
2.18 Letter of Confirmation from Merrill Lynch Capital Services, Inc.,
dated March 30, 2001, as amended on April 4, 2001 (incorporated
herein by reference to Exhibit 2.18 to the 2000 Annual Report).*
2.19 Credit Support Annex to the Schedule of the ISDA Master
Agreement, dated March 26, 2001, between Merrill Lynch Capital
Services, Inc., Netia Telekom S.A. and Netia Holdings S.A.
(incorporated herein by reference to 2002 Annual Report)*.
2.20 Guarantee by Merrill Lynch & Co. Inc. under the ISDA Master
Agreement, dated March 26, 2001 (incorporated herein by reference
to 2002 Annual Report)*
2.21 Guarantee by Netia Holdings S.A. under the ISDA Master Agreement,
dated 26 March 2001 (incorporated herein by reference to 2002
Annual Report)*
2.22 Master Agreement and the Schedule to the Master Agreement, dated
January 18, 2001, between Netia Holdings III B.V. and the Chase
Manhattan Bank International (incorporated herein by reference to
Exhibit 2.19 to the 2000 Annual Report).*
2.23 Deed of Undertaking and Guarantee, dated January 18, 2001 between
Netia Telekom S.A., Netia Holdings III B.V. and Chase Manhattan
Bank, London Branch (incorporated herein by reference to Exhibit
2.20 to the 2000 Annual Report).*
2.24 Letter of Confirmation from Chase Manhattan Bank, dated January
19, 2001 (incorporated herein by reference to Exhibit 2.21 to the
2000 Annual Report).*
2.25 Master Agreement and the Schedule to the Master Agreement, dated
July 31, 2000, between and among Netia South Sp. z o.o., Netia
Telekom S.A. and Chase Manhattan Bank (incorporated herein by
reference to Exhibit 2.22 to the 2000 Annual Report).*
2.26 Deed of Undertaking, dated July 31, 2000, between and among Netia
Telekom S.A.. Netia South Sp. z o.o. and Chase Manhattan Bank,
London Branch (incorporated herein by reference to Exhibit 2.23
to the 2000 Annual Report).*
* Incorporated by reference
** Filed herewith
107
2.27 Letter of Confirmation, dated July 31, 2000, from Chase Manhattan
Bank, London Branch (incorporated herein by reference to Exhibit
2.24 to the 2000 Annual Report).*
2.28 Confirmation, dated December 17, 2001, between Netia Telekom S.A.
and Merrill Lynch Capital Services, Inc., pursuant to the ISDA
Master Agreement, dated March 26, 2001 and (iii) terminating,
effective December 14, 2001, the swap transaction dated March 30,
2001 (incorporated herein by reference Exhibit 2.28 to the 2002
Annual Report)*
2.29 Close-out Settlement Agreement, dated January 10, 2002, between
JPMorgan Chase Bank and Netia Holdings III B.V., pursuant to the
ISDA Master Agreement, dated January 18, 2001, between JPMorgan
Chase Bank and Netia Holdings III B.V., and terminating,
effective January 10, 2002 all swap transactions then outstanding
between JPMorgan Chase Bank and Netia Holdings III B.V.
(incorporated herein by reference Exhibit 2.29 to the 2002 Annual
Report)*
2.30 Senior Secured Euro Notes Indenture, dated as of December 23,
2002, by and among Netia Holdings B.V., as Issuer, Netia Holdings
S.A., Netia Telekom S.A. and Netia South Sp. z o.o., as
Guarantors, The Bank of New York, as trustee and ING Bank Slaski
S.A., as the Security Agent, relating to the 10% Senior Secured
Euro Notes due 2008.**
2.31 Form of 10% Senior Secured DTC Restricted Global Note due 2008.**
2.32 Form of 10% Senior Secured European Global Restricted Note due
2008.**
2.33 Form of 10% Senior Secured Regulation S Global Note due 2008.**
4.1 Agreement and Restated Shareholders Agreement, dated January 20,
2000, between Netia Telekom S.A. and Mr. Jan Guz (incorporated
herein by reference to Exhibit 10.30 to the 1999 Annual Report).*
4.2 Netia Performance Stock Option Plan adopted by the Supervisory
Board of Netia Holdings S.A. on December 22, 1999, as amended on
August 29, 2000 (incorporated herein by reference to Exhibit 4.1
of the Registration Statement on Form S-8, filed with the
Securities and Exchange Commission on September 1, 2000).*
4.3 Amended and Restated Post-IPO Shareholders' Agreement # 1, dated
July 13, 2000, among Telia AB (publ.), Warburg, Pincus Equity
Partners, L.P., Warburg Pincus Ventures International, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus
Netherlands Equity Partners III. C.V., Warburg Netia Holding
Limited and Netia Holdings S.A. (incorporated herein by reference
to Exhibit 4.11 to the 2000 Annual Report).*
4.4 Post-IPO Shareholders' Agreement #2, dated August 3, 2000, by and
among Telia AB (publ.), Dankner Investment Ltd., Trefoil Capital
Investors L.P., Shamrock Holdings Inc., Warburg, Pincus Equity
Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II,
C.V., Warburg, Pincus Netherlands Equity Partners III, C.V.,
Warburg Netia Holdings Limited and Netia Holdings
S.A.(incorporated herein by reference to Exhibit 4.12 to the 2000
Annual Report).*
* Incorporated by reference
** Filed herewith
108
4.5 Restructuring Agreement, dated as of March 5, 2002, between and
among Netia Holdings S.A., Netia South Sp. z o.o., Netia Telekom
S.A., Netia Holdings B.V., Netia Holdings II B.V., Netia Holdings
III B.V., the Consenting Noteholders Signatories thereto,
JPMorgan Chase Bank, Telia AB (publ.), and Warburg, Pincus Equity
Partners, L.P., Warburg, Pincus Ventures International, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus
Netherlands Equity Partners III, C.V., Warburg Netia Holding
Limited (incorporated herein by reference Exhibit 4.11 to the
2002 Annual Report)*
4.6 Side Letter from Netia Holdings S.A. to Telia AB (publ), E.M.
Warburg, Pincus & Co., LLC and JPMorgan Chase Bank, dated March
5, 2002.**
4.7 Termination Agreement, dated as of March 5, 2002, between and
among Telia AB (publ), Warburg, Pincus Equity Partners, L.P.,
Warburg, Pincus Ventures International, L.P., Warburg, Pincus
Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands
Equity Partners II, C.V., Warburg, Pincus Netherlands Equity
Partners III, C.V., Warburg Netia Holding Limited and Netia
Holdings S.A. (incorporated herein by reference Exhibit 4.12 to
the 2002 Annual Report)*
4.8 Agreement on the Provision of Ducts, dated as of January 14,
2002, between Prima Communications Sp. z o.o. and Netia Telekom
S.A. (incorporated herein by reference Exhibit 4.13 to the 2002
Annual Report)*
4.9 Subscription Agreement dated November 20, 2002 by and among ING
Bank Slaski S.A. and Netia Holdings S.A. **
4.10 Amendment Agreement to Termination Agreement dated November 14,
2002 by among Netia Holdings S.A., Telia AB (publ.) and Warburg,
Pincus Equity Partners, LP, Warburg, Pincus, Ventures
International, L.P., Warburg, Pincus Netherlands Equity Partners
I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V.,
Warburg, Pincus Netherlands Equity Partners III, C.V., Warburg
Netia Holding Limited. **
4.11 Exchange Agreement dated June 14, 2002 by and among Netia
Holdings S.A., Netia Telekom S.A., Netia South, Sp. z o.o., Netia
Holdings B.V., Netia Holdings II B.V., Netia Holdings III B.V.
and Consenting Creditors. **
4.12 Amendment to Exchange Agreement, dated as of June 27, 2002, made
between Netia Holdings S.A., Netia Telekom S.A., Netia South Sp.
z o.o., Netia Holdings B.V., Netia Holdings II B.V., Netia
Holdings III B.V., JP Morgan Chase Bank and Consenting
Noteholders.**
4.13 Agreement on Security Assignment of Rights dated December 23,
2002 between Netia Holdings S.A., Deutsche Bank Polska S.A. and
The Bank of New York, London Branch.**
4.14 Agreement on Security Assignment of Rights dated December 23,
2002, between Netia Holdings S.A., Bank Polska Kasa Opieki S.A.
and The Bank of New York, London Branch. **
* Incorporated by reference
** Filed herewith
109
4.15 Paying, Registrar and Transfer Agency Agreement dated 23 December
2002 relating to 10% Senior Secures Notes due 2008 by and among
Netia Holdings B.V., the Guarantors, The Bank of New York and ING
Bank Slaski S.A. **
8.1 List of Subsidiaries **
10.1 Consent of PricewaterhouseCoopers Sp. z o.o. **
99.1 Certification of Chief Executive Officer of Netia Holdings S.A.
under Section 906 of Sarbanes-Oxley Act of 2002.**
99.2 Certification of Chief Financial Officer of Netia Holdings S.A.
under Section 906 of Sarbanes-Oxley Act of 2002.**
* Incorporated by reference
** Filed herewith
110
SIGNATURES
----------
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
NETIA HOLDINGS S.A.
By: /s/ Wojciech Madalski
-----------------------------------------------
Name: Wojciech Madalski
Title: Chief Executive Officer, President of
the Company
By: /s/ Zbigniew Lapinski
----------------------------------------------
Name: Zbigniew Lapinski
Title: Chief Financial Officer
Date: June 27, 2003
CERTIFICATIONS
--------------
I, Wojciech Madalski, Chief Executive Office, President of Netia Holdings S.A.,
certify that:
1. I have reviewed this annual report on Form 20-F of Netia Holdings S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
By: /s/ WOJCIECH MADALSKI
-------------------------------------------
Wojciech Madalski
Chief Executive Officer, President of the
Company
I, Zbigniew Lapinski, Chief Financial Officer of Netia Holdings S.A., certify
that:
1. I have reviewed this annual report on Form 20-F of Netia Holdings S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
By: /s/ ZBIGNIEW LAPINSKI
----------------------------
Zbigniew Lapinski
Chief Financial Officer
NETIA HOLDINGS S.A.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SUPERVISORY BOARD AND SHAREHOLDERS
OF NETIA HOLDINGS S.A.
We have audited the accompanying consolidated balance sheets of Netia Holdings
S.A. and its subsidiaries (the "Company") as at December 31, 2002, and 2001, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years ended December 31, 2002, 2001 and 2000, all
of them expressed in Polish Z(3)oty ("PLN"). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with International Standards on Auditing
and auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the consolidated financial position of the
Company as at December 31, 2002 and 2001 and the consolidated results of its
operations and cash flows for the years ended December 31, 2002, 2001 and 2000,
in accordance with International Financial Reporting Standards.
The convenience translations are disclosed as part of the consolidated financial
statements. The convenience translation for the year ended December 31, 2002 has
been presented in US dollars, as a matter of arithmetic computation using the
official rate of the National Bank of Poland at December 31, 2002 of PLN 3.8388
to US dollar 1.00. We have not audited these translations and accordingly we do
not express an opinion thereon. The US dollar amounts presented in these
consolidated financial statements should not be construed as a representation
that the PLN amounts have been or could have been converted to US dollars at
this rate or at any other rate.
International Financial Reporting Standards vary in certain important respects
from accounting principles generally accepted in the United States of America.
The application of the latter would have affected the determination of
consolidated net loss for each of the years ended December 31, 2002, 2001 and
2000 and the determination of consolidated shareholders' equity / (deficit) as
at December 31, 2002 and 2001 to the extent summarized in Note 25 to the
consolidated financial statements.
PricewaterhouseCoopers Sp. z o.o.
Warsaw, Poland
February 13, 2003
NETIA HOLDINGS S.A.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS)
CONVENIENCE
TRANSLATION
$ (NOTE 3)
--------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NOTE 2001 2002 2002
---------- -------------------- -------------------- --------------------
(PLN) (PLN) (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ 5 486,946 132,465 34,507
Restricted investments, cash and cash
equivalents................................... 6 47,500 254,211 66,221
Accounts receivable..............................
Trade, net of allowance for doubtful
accounts PLN 36,192 and PLN 45,278
(USD 11,795)............................... 91,838 87,067 22,681
Government - value added tax.................. 15,179 2,374 618
Other......................................... 3,510 8,147 2,122
Inventories...................................... 1,708 854 223
Prepaid expenses................................. 9,358 8,260 2,152
-------------------- -------------------- --------------------
TOTAL CURRENT ASSETS............................. 656,039 493,378 128,524
Investments...................................... 1,949 1,663 433
Fixed assets, net................................ 7 2,454,309 2,245,917 585,057
Intangible assets................................
Licenses, net................................. 8 695,149 639,176 166,504
Computer software, net........................ 9 82,944 112,685 29,354
Other long term assets........................... 13,957 - -
-------------------- -------------------- --------------------
TOTAL ASSETS..................................... 3,904,347 3,492,819 909,872
==================== ==================== ====================
- -------------------------
W. Madalski
President of the Company
- -------------------------
A. Hochman
Chief Financial Officer
Warsaw, Poland
February 13, 2003
The accompanying notes are an integral part of
these consolidated financial statements.
F-1
NETIA HOLDINGS S.A.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS)
CONVENIENCE
TRANSLATION
$ (NOTE 3)
--------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NOTE 2001 2002 2002
---------- -------------------- -------------------- --------------------
(PLN) (PLN) (UNAUDITED)
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt............. 12 3,396,869 - -
Short term liabilities for licenses.............. 8 165,613 211,247 55,029
Accounts payable and accruals....................
Trade......................................... 170,779 89,864 23,409
Liabilities connected with cancellation of cash
flow hedges................................. 14 224,907 - -
Accruals and other............................ 11 163,561 85,805 22,352
Deferred income.................................. 7,495 6,956 1,812
-------------------- -------------------- --------------------
TOTAL CURRENT LIABILITIES........................ 4,129,224 393,872 102,602
Long term liabilities for licenses............... 8 92,764 112,260 29,244
Long term debt................................... 12 - 161,756 42,137
Long term installment obligations................ 13 - 5,141 1,339
-------------------- -------------------- --------------------
TOTAL LIABILITIES................................ 4,221,988 673,029 175,322
Commitments and contingencies.................... 24 - - -
Minority interest................................ 17 25,607 17,499 4,558
SHAREHOLDERS' (DEFICIT) / EQUITY
Share capital (nominal par value
of PLN 6 per share)........................... 203,285 203,285 52,955
Share premium ................................... 1,713,865 1,713,865 446,459
Treasury shares.................................. (3,611) (2,812) (733)
Other reserves.................................. 2 - 3,819,712 995,028
Accumulated deficit.............................. (2,256,787) (2,931,759) (763,717)
-------------------- -------------------- --------------------
TOTAL SHAREHOLDERS' (DEFICIT) / EQUITY .......... (343,248) 2,802,291 729,992
-------------------- -------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
(DEFICIT) / EQUITY............................ 3,904,347 3,492,819 909,872
==================== ==================== ====================
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS)
CONVENIENCE
TRANSLATION
YEAR ENDED $ (NOTE 3)
----------------------------------------------------------- ---------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
NOTE 2000 2001 2002 2002
-------- ------------------ ----------------- ------------------ ---------------
(PLN) (PLN) (PLN) (UNAUDITED)
REVENUE
Telecommunication services revenue
Installation fees..................... 12,437 2,192 1,808 471
Monthly fees.......................... 89,685 142,068 148,183 38,601
Calling charges....................... 284,975 360,707 412,267 107,395
Other revenue......................... 8,128 7,196 25,862 6,737
------------------ ----------------- ------------------ ----------------
395,225 512,163 588,120 153,204
Other revenue:
Service............................... 24,234 18,235 9,487 2,471
Sales of equipment.................... 23,288 8,453 6,777 1,765
------------------ ----------------- ------------------ ----------------
TOTAL REVENUE............................ 442,747 538,851 604,384 157,440
COSTS
Interconnection charges, net............... (112,270) (122,211) (117,480) (30,603)
Cost of equipment.......................... (20,359) (7,508) (5,693) (1,483)
Salaries and benefits...................... (99,845) (104,498) (105,218) (27,409)
Social security costs...................... (19,221) (20,833) (18,152) (4,729)
Depreciation of fixed assets............... 7 (130,479) (172,735) (194,634) (50,702)
Amortization of goodwill................... (25,927) (17,938) - -
Amortization of other intangible assets.... (23,304) (62,892) (74,046) (19,289)
Impairment of goodwill..................... - (220,279) - -
Impairment provision for long term assets.. 10 - (116,247) (149,353) (38,906)
Other operating expenses................... 19 (167,873) (222,609) (202,616) (52,781)
------------------ ----------------- ------------------ ----------------
LOSS FROM OPERATIONS....................... (156,531) (528,899) (262,808) (68,462)
Financial expense, net..................... 20 (198,681) (230,019) (417,570) (108,776)
Effect of default on long term debt........ 12 - (112,047) - -
Effect of canceling of swap transactions... 14 - (274,637) - -
Other...................................... (339) - - -
------------------ ----------------- ------------------ ----------------
LOSS BEFORE INCOME TAX..................... (355,551) (1,145,602) (680,378) (177,238)
Income tax charge.......................... 15 (2,514) (5,424) (1,903) (496)
------------------ ----------------- ------------------ ----------------
LOSS BEFORE MINORITY INTEREST.............. (358,065) (1,151,026) (682,281) (177,734)
Minority share in losses / (profits)
of subsidiaries......................... 17 (3,981) 1,809 7,309 1,904
------------------ ----------------- ------------------ ----------------
NET LOSS................................... (362,046) (1,149,217) (674,972) (175,830)
================== ================= ================== ================
BASIC AND DILUTED
LOSS PER SHARE (not in thousands)....... 21 (12.60) (37.29) (17.89) (4.66)
================== ================= ================== ================
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS)
TOTAL
SHAREHOLDERS'
SHARE SHARE TREASURY OTHER HEDGING ACCUMULATED EQUITY /
NOTE CAPITAL PREMIUM SHARES RESERVES RESERVE DEFICIT (DEFICIT)
--------- ---------- ------------- -------- ------------ ------------ ------------- ---------------
(PLN) (PLN) (PLN) (PLN) (PLN) (PLN) (PLN)
BALANCE AS AT JANUARY 1, 2000..... 173,735 1,275,840 (1,401) - - (771,082) 677,092
Net loss.......................... - - - - - (362,046) (362,046)
Issuance of shares,
net of related costs........... 27,000 438,025 - - - - 465,025
Shares issued for stock option
plan.............................. 2,550 - (2,550) - - - -
Employee stock subscriptions
and stock option exercises..... - - 340 - - - 340
--------- ----------- -------- ----------- --------- ------------ -----------
BALANCE AS AT DECEMBER 31, 2000... 203,285 1,713,865 (3,611) - - (1,133,128) 780,411
Effect of adopting IAS 39......... - - - (25,424) 25,558 134
--------- ----------- -------- ----------- --------- ------------ -----------
AS RESTATED....................... 203,285 1,713,865 (3,611) - (25,424) (1,107,570) 780,545
Fair value losses on cash flow 14
hedges, net of tax............. - - - - (249,213) - (249,213)
Fair value losses reclassified 14
and reported in the statement
of operations.................. - - - - 47,903 - 47,903
Canceling of swap transactions.... 14 - - - - 226,734 - 226,734
Net loss.......................... - - - - - (1,149,217) (1,149,217)
--------- ----------- -------- ----------- --------- ------------ -----------
BALANCE AS AT DECEMBER 31, 2001... 203,285 1,713,865 (3,611) - - (2,256,787) (343,248)
Exchange of shares with minority 17
shareholder....................... - - 799 - - - 799
Reduction of debt................. 2 - - - 3,553,712 - - 3,553,712
Subscription for series H shares.. 2 - - - 338,457 - - 338,457
Cost of issuance of shares........ 2, 16 - - - (72,457) - - (72,457)
Net loss.......................... - - - - - (674,972) (674,972)
--------- ----------- -------- ----------- --------- ------------ -----------
BALANCE AS AT DECEMBER 31, 2002... 203,285 1,713,865 (2,812) 3,819,712 - (2,931,759) 2,802,291
========= =========== ======== =========== ========= ============ ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
CONVENIENCE
TRANSLATION
YEAR ENDED $ (NOTE 3)
-------------------------------------------------- -------------
NOTE DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2002
-------- ------------- ------------------ ----------------- -------------
(PLN) (PLN) (PLN) (UNAUDITED)
Cash flows from operating activities:
NET LOSS (362,046) (1,149,217) (674,972) (175,830)
Adjustments to reconcile net loss to net
cash provided by operating activities....................
Depreciation of fixed assets and amortization of
goodwill, licenses and other intangible assets....... 179,710 253,565 268,680 69,991
Amortization of notes issuance
costs.................. 12,932 - 127 33
Amortization of discount on
notes..................... 116,646 106,830 - -
Interest expense accrued on license liabilities....... 25,743 19,894 22,595 5,886
Interest expense accrued on long term debt............ 259,441 285,995 220,428 57,421
Minority share in profits / (losses) of subsidiaries.. 3,981 (1,809) (7,309) (1,904)
Impairment of goodwill................................ - 220,279 - -
Impairment provision for long term assets............. 10 - 116,247 149,353 38,906
Effect of default on long term debt................... - 112,047 - -
Effect of canceling of hedge transactions............. - 274,637 - -
Allowance for debtors subject to court settlements.... - 16,974 - -
Other losses.......................................... 339 - - -
(Decrease) / Increase in long term assets............. (2,185) 1,425 - -
Foreign exchange (gains) / losses on translation
of long term debt and restricted investments........ (127,622) (157,314) 195,914 51,035
Changes in working capital............................ 58,367 78,059 23,660 6,164
--------------- --------------- ----------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 165,306 177,612 198,476 51,702
Cash flows used in investing activities:
Purchase of fixed assets and computer software........ (756,657) (582,779) (270,548) (70,477)
Purchase of minority interest shareholdings in
subsidiaries........................................ - (60,883) - -
(Increase) / decrease of investments.................. (20,990) 8,500 - -
Increase of restricted investments.................... (219,902) - - -
Increase of restricted cash and cash equivalents...... 6 - - (197,744) (51,512)
Payments for licenses................................. (359,971) (3,998) -
--------------- --------------- ----------------- --------------
NET CASH USED IN INVESTING ACTIVITIES.................... (1,357,520) (639,160) (468,292) (121,989)
Net cash provided by / (used in) financing activities:
Net proceeds from issuance of shares.................. 467,575 - - -
Proceeds from long term loans and liabilities......... 839,320 - - -
Repayment of bank loans and vendor financing.......... (61,481) - - -
Payment of interest on long term debt................. - (111,355) - -
Payments related to restructuring..................... - (8,740) (80,394) (20,942)
Payments for cancellation of swap transactions........ 16 - (22,460) (29,279) (7,627)
Contribution from minority shareholders in subsidiaries 77,331 - - -
Capitalized deferred financing costs.................. (33,514) - - -
--------------- --------------- ----------------- --------------
NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES.... 1,289,231 (142,555) (109,673) (28,569)
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH
EQUIVALENTS......................................... (56,577) (51,801) 25,008 6,515
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. 40,440 (655,904) (354,481) (92,341)
Cash and cash equivalents at beginning of year........... 1,102,410 1,142,850 486,946 126,848
--------------- --------------- ----------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. 1,142,850 486,946 132,465 34,507
=============== =============== ================= ==============
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
CONVENIENCE
TRANSLATION
YEAR ENDED $ (NOTE 3)
----------------------------------------------------------- ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2002
----------------- ------------------ ------------------ ------------------
(PLN) (PLN) (PLN) (UNAUDITED)
Changes in working capital
components:...............................
Trade receivables............................ (23,832) 10,497 4,771 1,243
Government receivables....................... (3,693) 32,784 7,439 1,938
Other receivables............................ 928 357 (4,637) (1,208)
Inventories.................................. (58) 1,050 854 222
Prepaid expenses............................. 1,372 (1,813) 1,098 286
Trade creditors.............................. 83,695 20,418 25,246 6,577
Payables to related parties.................. (4,686) - - -
Accruals and other payables.................. 1,466 11,779 (10,572) (2,754)
Deferred income.............................. 3,175 2,987 (539) (140)
----------------- ------------------ ------------------ ------------------
58,367 78,059 23,660 6,164
================= ================== ================== ==================
SUPPLEMENTAL DISCLOSURES:
YEAR ENDED CONVENIENCE
TRANSLATION
$ (NOTE 3)
----------------------------------------------------------- ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2002
----------------- ------------------ ------------------ ------------------
(PLN) (PLN) (PLN) (UNAUDITED)
Interest paid................................ 258,762 256,868 - -
Income taxes paid / (recovered).............. 9,134 (4,915) 1,273 332
Interest paid during the year ended December 31, 2001 includes PLN
111,355 of payment from the Company's cash and cash equivalents and PLN 145,513
from the Company's investment accounts.
NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company incurred the following financing transactions that did not
involve cash flows in the current period:
CONVENIENCE
TRANSLATION
YEAR ENDED $ (NOTE 3)
----------------------------------------------------------- ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2002
----------------- ----------------- ------------------ ------------------
(PLN) (PLN) (PLN) (UNAUDITED)
Conversion of 1997, 1999 and 2000 Notes and
swap obligations into 2002 Notes and series
H shares (see Note 2) .................... - - 4,096,068 1,067,018
The Company incurred the following liabilities at the end of each year
that were related to fixed asset or construction in progress additions:
CONVENIENCE
TRANSLATION
YEAR ENDED $ (NOTE 3)
----------------------------------------------------------- ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002 2002
----------------- ----------------- ------------------ ------------------
(PLN) (PLN) (PLN) (UNAUDITED)
296,694 154,604 52,952 13,794
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
1. THE COMPANY
Netia Holdings S.A. ("the Company" or "Netia Holdings") was formed in
1990 as a limited liability company under the laws of Poland and was
transformed into a joint stock company in 1992. The Company is engaged
through its subsidiaries (together: the "Netia Group") in the design,
construction and operation of modern digital telecommunication and data
transmission networks.
The Company's subsidiaries obtained licenses from the Ministry of
Communications of Poland ("MOC") for the provision of local telephone
services in areas including six of the Poland's largest cities - Warsaw,
Gdansk, Krakow, Poznan, Katowice and Lublin. One of the Company's
subsidiaries, Netia 1 Sp. z o.o. ("Netia 1"), obtained a license for
domestic long distance telephone services. As of January 1, 2001, pursuant
to the new Telecommunication Act ("NTA"), all telephone licenses were
converted by virtue of law into telecommunication permits. (See Note 8 for
further details regarding conversion of licenses to permits.) On the basis
of these permits, the Netia Group currently provides various voice
telephone services in areas covering approximately 33% of Poland and
reaching approximately 40% of the population of Poland, including nine of
Poland's ten largest cities (Warsaw, Katowice, Krakow, Gdansk, Lublin,
Poznan, Bydgoszcz, Szczecin and Wroclaw). These services include switched,
fixed-line voice telephone service (including, since August 2001, domestic
long distance), Integrated Services Digital Network ("ISDN"), voice mail,
dial-up and fixed-access Internet, leased lines, Voice over Internet
Protocol ("VoIP") and co-location services. In September 2001, the Netia
Group began offering frame relay services. The Netia Group is one of the
two operators in Poland offering, since February 2002, services based upon
an Intelligent Network: Freephone ("0800") and Split Charge ("0801"). In
the near future the Netia Group also expects to begin offering "0-708"
premium rate services, based on an arbitration decision issued by the
President of the Office for the Regulations of Telecommunications and Post
(the "ORTP") and subject to the successful completion of negotiations with
TPSA in respect of interconnections with TPSA. The Netia Group has recently
launched wholesale services, including the wholesale termination of
in-bound traffic, which has been offered since early 2001, and duct, dark
fiber and capacity leasing and co-location services, which have been
offered from the second half of 2002. In accordance with provisions of NTA
liberalizing the market for international long-distance calls, as of
January 1, 2003 the Company started to offer international long distance
services in selected zones, based on standard lines, in addition to
alternative service based on VoIP technology. The Netia Group is also
engaged in the installation and supply of specialized mobile radio services
(public trunking) in Poland through its 58.2% owned subsidiary, Uni-Net Sp.
z o.o. ("Uni-Net").
The Company is subject to the periodic reporting requirements in the
U.S. under the Securities Exchange Act of 1934, as amended, and under the
Polish regulations on reporting requirements for companies listed on the
Warsaw Stock Exchange. Its ordinary shares have been listed on the Warsaw
Stock Exchange since September 2000. Between August 1999 and October 2002
the Company's American Depositary Shares ("ADSs") were listed for trading
on the NASDAQ stock market ("NASDAQ"). On October 14, 2002 the NASDAQ
Listing Qualifications Panel (the "Panel") decided to delist Netia's ADSs
from the NASDAQ, effective as of the opening of the business on October 15,
2002, due to failure by the Company to meet all listing requirements (see
also Note 26 for further details).
The Company is incorporated in Poland with its principal executive
office located at ul. Poleczki 13, 02-822 Warsaw, Poland.
2. FINANCIAL RESTRUCTURING
BACKGROUND
On December 15, 2001, the Company defaulted on several interest
payments on two series of its notes. Those defaults triggered cross-default
provisions under the terms of the indentures governing the four other
series of notes and, as a result, the Company was in default on all six
series of the issued notes that were then outstanding. The Company has also
defaulted on swap payments under certain swap agreements. The Company also
did not make all subsequent payments of interest due after December 15,
2001. As a result of these defaults and a level of shareholders' equity,
which - as calculated according to Polish Accounting Standards - has been
at deficit since December 31, 2001, the Company was required to file for
bankruptcy under Polish law unless it petitioned for the opening of
arrangement proceedings. To avoid filing for bankruptcy, Netia Holdings
S.A., Netia Telekom S.A. ("Telekom") and Netia South Sp. z o.o. ("South")
petitioned the court in Warsaw on February 20, 2002 to open arrangement
proceedings.
On March 5, 2002, the Company reached an agreement on the restructuring
(the "Restructuring Agreement") of its debt with an ad hoc committee of its
noteholders, certain financial creditors, Telia AB and certain companies
controlled by Warburg, Pincus & Co., then owning together approximately
57.4% of the Company's share capital, with the latter two acting separately
as the largest shareholders of Netia Holdings. Subsequently the
Restructuring Agreement was signed by majority of creditors. Under the
Restructuring Agreement, the parties agreed to implement a restructuring
plan designed to strengthen the Company's balance sheet.
On June 14, 2002 an exchange agreement (the "Exchange Agreement") was
entered into by the Company, certain of its subsidiaries and a substantial
majority of the consenting creditors, parties to the Restructuring
Agreement. The Exchange Agreement was intended to specify further terms of
F-7
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
the financial restructuring outlined in the Restructuring Agreement, and to
provide the means for the implementation of the terms of the restructuring
as set out in the Restructuring Agreement.
Pursuant to the Restructuring Agreement and the Exchange Agreement Netia
Holdings B.V. ("NH BV"), the Company's wholly-owned Dutch subsidiary issued
EUR 49,869 10% Senior Secured Notes due 2008 (the "2002 Notes") to holders
of the existing notes and JPMorgan Chase Bank ("JPMorgan") in exchange for
relinquishing their claims in respect of the existing notes and obligations
under the swap agreements with JPMorgan. In addition, creditors of the Netia
Group had an opportunity to subscribe with their reduced claims in form of
installment obligations for series H shares issued by the Company. On
December 23, 2002 312,626,040 (not in thousand) series H shares offered by
the Company were subscribed by its creditors in exchange for such
installment obligations. The restructuring process encompassed legal
proceedings in three jurisdictions and included: Dutch moratorium
proceedings, Polish arrangement proceedings and Section 304 Proceedings in
the United States of America.
Under the Restructuring Agreement and the Exchange Agreement, the
Company's shareholders as of December 22, 2002 will be issued transferable
warrants to acquire up to 64,848,652 (not in thousand) ordinary shares
representing 15% of the Company's post-restructuring share capital (after
the issuance of 18,373,785 (not in thousand) ordinary shares representing 5%
of the issued ordinary share capital in respect of a key employee stock
option plan). The strike price applicable to the warrants shall correspond
to the volume-weighted average price of the Company's ordinary shares on the
Warsaw Stock Exchange for the 30 trading days beginning 31 days following
the successful closing of registration of series H shares. The Company also
plans to issue up to 18,373,785 (not in thousand) ordinary shares under a
key employee stock option plan. The specific terms and conditions of the
warrants and stock option plan are not yet determined.
STATUS OF THE RESTRUCTURING
As result of the Dutch court decision of November 6, 2002, whereby the
moratorium arrangements relating to the three special-purpose finance
subsidiaries of the Company were confirmed, and that became final and
unappealable on November 15, 2002, the existing liabilities of the Company's
Dutch special-purpose finance subsidiaries under the notes and swap
agreements have become unenforceable. The guarantees issued previously by
Netia Holdings to noteholders and swap counterparties have been reduced
separately in the Polish arrangement proceedings to 8.7% of their original
value, which would have to be repaid by the Company in installments between
2007 and 2012. The Polish court decision became final and unappeable on
December 3, 2002. The Polish arrangement proceedings were also conducted
separately for two subsidiaries of the Company: Telekom and South in respect
to intra-group debt and the other swap arrangements. The arrangement plans
for Telekom and South have been approved by the Polish courts on June 25,
2002 and December 4, 2002, respectively, and the approval decisions became
final and unappealable on January 2, 2003 and December 19, 2002,
respectively. The Polish arrangement proceedings resulted in reduction of
the liabilities of Telekom and South to 8.7% and 1% of their original
values, respectively.
On October 21, 2002 Netia Holdings, Telekom and South entered into an
agreement (the "Agreement and Releases") with the minority group of the
Company's claimholders (the "Dissenting Parties"), who previously objected
to the restructuring. Pursuant to the Agreement and Releases, the Dissenting
Parties withdrew all their claims in connection with the arrangement
proceedings in Poland. In addition, their appeal from the court's ruling in
the United States 304 proceeding was dismissed without prejudice to
reinstatement in the event that the restructuring was not completed. On
February 10, 2003, the Dissenting Parties' objections to the United States
304 proceeding (including objection to turnover of the deposits to Netia)
were withdrawn and their appeal was dismissed with prejudice. The US
Bankruptcy Court will now decide when the deposits of EUR 13,878 (PLN 54,866
at the exchange rate prevailing at December 31, 2002) should be turned over
to Netia.
On November 29, 2002 the Polish Securities and Exchange Commission (the
"Commission") decided to admit to public trading up to 317,682,740 (not in
thousand) ordinary series H shares, 64,848,652 (not in thousand) ordinary
series J shares and 18,373,785 (not in thousand) ordinary series K shares to
be issued in connection with restructuring. Furthermore, the Commission gave
its consent for the introduction to public trading of 31,419,172 (not in
thousand) ordinary series I notes and 1,005,154 (not in thousand) ordinary
series II notes, which authorize their holders to subscribe for the series J
shares on a pre-emptive basis, with priority over the Company's shareholders
(subscription warrants), and 18,373,785 (not in thousand) ordinary series
III notes, which authorize their holders under a key employee stock option
plan to subscribe for the series K shares on a pre-emptive basis.
On December 23, 2002 the subscription of series H shares and issuance
new notes were completed. 312,626,040 (not in thousand) series H shares at
PLN 1.0826241 (not in thousand) per share were allocated out of total of
317,682,740 (not in thousand) offered to the Company's creditors in
accordance with the agreed terms of the restructuring. NH BV issued EUR
49,869 2002 Notes (PLN 198,758 at the exchange rate in effect on December
23, 2002) in exchange for the existing notes of NH BV and Netia Holdings II
B.V. ("NH II BV") and for claims under swap arrangement with JPMorgan by
Netia Holdings III B.V. ("NH III BV") in accordance with the agreed terms of
restructuring and the composition plans for each of the Company's Dutch
subsidiaries. After registration of series H shares, the Company's creditors
will own shares representing approximately 91% of the Company's share
capital.
F-8
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
Registration of series H shares took place on January 30, 2003. On
February 13, 2003 312,626,040 series H shares commenced trading on the
Warsaw Stock Exchange following their registration with the Polish National
Securities Depository on February 10, 2003 (see also Note 26).
As of January 2, 2003, all courts' decisions approving Dutch composition
plans and Polish arrangement plans became final and unappealable.
Consequently, the restructuring is irreversible, subject to Netia Group's
compliance with and performance of all obligations under the Dutch
composition plans and Polish arrangement plans. Management believes that the
Company will comply with its obligations under the Dutch composition plans
and Polish arrangement plans.
On February 13, 2003, Netia's Supervisory Board approved the redemption
of the outstanding 2002 Notes with an aggregate principal amount of EUR
49,869, following the recommendation by the Company's Management Board. The
decision was driven by the sufficient cash position and concerns over (i)
the high costs of servicing the debt and establishing the security for the
2002 Notes as required under the Indenture, dated December 23, 2002 (the
"Indenture") and (ii) the substantial restrictions imposed by the Indenture
covenants Netia's flexibility to run its daily operational business.
CURRENT FINANCIAL CONDITION
The restructuring resulted in a surplus of PLN 3,553,712, calculated as
a difference between the amount of reduction of carrying values of all
liabilities subject to restructuring of PLN 4,096,068 and the total of: (i)
net present value of reduced liabilities in the form of installment
obligations not exchanged into shares of PLN 5,141, (ii) the value of the
2002 Notes of PLN 198,758, (iii) the issuance value of new ordinary series
H shares issued of PLN 338,457, and was recorded in the other reserves of
the shareholders' equity.
The conclusion of arrangements with the Company's creditors in Poland
and the Netherlands, allowed the Company to regain solvency. Those
arrangements will be additionally confirmed in the proceedings commenced
under section 304 of the United States Bankruptcy Code pending in the U.S.
Bankruptcy Court for the Southern District of New York. Management does not
believe that the outcome of U.S. proceedings will have a material adverse
effect on the financial restructuring of the Company. The restructuring did
not lead to the elimination of all of the Company's outstanding debt. The
Company will have to repay (i) the 2002 Notes at principal amount of EUR
49,869 (PLN 198,758 at the exchange rate in effect on December 23, 2002) in
2008 and interests accrued on 2002 Notes in accordance with the terms of
2002 Notes, and (ii) the outstanding installment obligations at nominal
amount of PLN 11,872 between 2007 and 2012, not exchanged for the ordinary
series H shares offered by the Company.
As a result of the restructuring, as at December 31, 2002 the
shareholders' equity amounted to PLN 2,802,291, and working capital of PLN
99,506.
As the restructuring is virtually complete Management does not believe
that events or conditions exist which may cast significant doubt on the
Company's ability to continue as a going concern. However, Management will
continue to take steps aimed at preserving the Company's cash, such as
substantial reductions in capital and operating expenditures in comparison
with the Company's prior plans and steps aimed at seeking to confirm
expiry, cancellation, deferral or conversion of the Company's remaining
license fee obligations (see also Note 8). Cash and cash equivalents held
by the Netia Group as at December 31, 2002 amounted to PLN 132,465. The
Company also held restricted cash and cash equivalents of PLN 199,345
established as temporary security for its 2002 Notes. Furthermore, the
Company held PLN 54,866 in an restricted deposit account, which is expected
to be released for the Company upon finalization of the proceedings in the
U.S.
3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its accounting records and prepares statutory
financial statements in accordance with Polish accounting and tax
regulations. These consolidated financial statements have been prepared
based upon the Company's accounting records in order to present the
consolidated financial position, results of operations and of cash flows in
accordance with International Financial Reporting Standards ("IFRS"),
including International Accounting Standards ("IAS") and Interpretations
issued by International Accounting Standards Board ("IASB").
In 2001 the Company adopted IAS 39 "Financial Instruments - Recognition
and Measurement". The effects of the adoption, if any, are further
described in the notes to these consolidated financial statements.
IFRS vary in certain important respects from accounting principles
generally accepted in the United States of America ("U.S. GAAP"). See Note
25 for a reconciliation of net loss and shareholders' equity/(deficit)
based on IAS to U.S. GAAP.
MEASUREMENT BASIS
Until December 31, 1996, Poland was considered to be a
hyperinflationary economy. The consolidated financial statements for the
periods through that date were prepared under the historical cost
convention as adjusted for the effects of inflation in accordance with the
IAS 29, "Financial Reporting in Hyperinflationary Economies". The inflated
F-9
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
values in Polish Zloty ("PLN") at December 31, 1996 for balance sheet items
became the new historical basis for subsequent periods.
US DOLLAR CONVENIENCE TRANSLATION (UNAUDITED)
The measurement currency is Polish Zloty that reflects the economic
substance of the underlying events and circumstances of the Company. The US
Dollar amounts shown in the accompanying consolidated financial statements
have been translated at December 31, 2002 and for the year ended December
31, 2002 from Polish Zloty only as a matter of arithmetic computation at
the Polish Zloty exchange rate of PLN 3.8388 = USD 1.00, the rate published
by the National Bank of Poland and effective on December 31, 2002. These
amounts are unaudited and are included for the convenience of the reader
only as supplementary information. Such translation should not be construed
as a representation that the Polish Zloty amounts have been or could be
converted into US Dollars at this or any other rate.
PRINCIPLES OF CONSOLIDATION
Subsidiary undertakings, which are those companies in which the
Company, directly or indirectly, has an interest of more than one half of
the voting rights or otherwise has power to exercise control over the
operations, have been consolidated. Subsidiaries are consolidated from the
date on which effective control is transferred to the Company and are no
longer consolidated from the date on which control ceases. All intercompany
transactions, balances and unrealized gains on transactions between
subsidiaries of the Company have been eliminated; unrealized losses are
also eliminated unless the cost cannot be recovered. Separate disclosure is
made of minority interest. Negative minority interest resulting from
negative net assets of subsidiaries is not recognized unless there is a
contractual commitment by the minority shareholders to cover the losses.
USE OF ESTIMATES
The preparation of financial statements necessarily requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Although these estimates
are based on the Management's best knowledge of current events actual
results could differ from these estimates.
RECLASSIFICATIONS
Certain prior periods' amounts have been reclassified to conform to the
presentation for the year ended December 31, 2002.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried in the balance sheet at cost. For
the purposes of the cash flow statements and balance sheet the Company
considers all highly liquid debt instruments purchased with an initial
maturity of three months or less to be cash equivalents. The Company
presents cash and cash equivalents held in restricted accounts as a
component of restricted cash and cash equivalents in long or short term
assets, depending on the terms of legal restrictions relating to a
particular balance.
FINANCIAL INSTRUMENTS
Financial instruments carried on the balance sheet include cash and
cash equivalents, investments, accounts receivable, trade payables,
long-term debt and financial derivatives. The particular recognition
methods adopted are disclosed in the individual policy statements
associated with each item.
TRADE RECEIVABLES
Trade receivables are carried at original invoice amount less provision
made for impairment of these receivables at the year end. Bad debts are
written off when identified. If it is probable that the Company will not
able to collect the receivables, an impairment loss is recognized. The
impairment loss is measured as the difference between the carrying amount
of receivables and the present value of expected future cash flows,
discounted at the imputed interest rate of interest for similar borrowers.
INVENTORIES
Inventories are stated at the lower of historical cost or net
realizable value, generally determined on a first-in first-out (FIFO)
basis. Where necessary, provision is made for obsolete, slow moving or
defective inventory.
F-10
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
IMPAIRMENT
Tangible fixed assets and intangible assets, including goodwill, are
reviewed for impairment losses 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 carrying amount of the asset
exceeds its recoverable amount, which is the higher of an asset's net
selling price and value in use. For the purposes of assessing impairment,
assets are grouped at the lowest level for which there are separately
identifiable cash flows.
FIXED ASSETS AND NETWORK UNDER CONSTRUCTION
Fixed assets are stated at cost, plus related inflation through
December 31, 1996. Network under construction represents the accumulation
of costs associated with the construction of the telecommunications and
data transmission networks and other tangible fixed assets. The Company
includes in the construction cost of its networks all eligible borrowing
costs (including interest costs and foreign exchange gains and losses) and
administration and other overhead costs directly attributable to the
acquisition or construction of assets before operations commence. Costs
relating to the network under construction are transferred to the related
fixed asset account and depreciation begins when operations commence.
The costs of repairs and maintenance are included in the carrying
amount of the asset when it is probable that future economic benefits in
excess of the originally assessed standard of performance of the existing
asset will flow to the Company.
Depreciation expense is recorded utilizing the straight-line method
over the estimated useful life of the assets. These lives are summarized as
follows:
TERM
Land................................................. infinite
Buildings............................................ 40 years
Long term ground lease............................... 99 years
Base stations (Uni-Net).............................. 7 to 13 years
Transmission network................................. 15 years
Switching system..................................... 10 years
Machinery and equipment.............................. 4 to 8 years
Office equipment..................................... 3 to 8 years
Office furniture..................................... 5 years
Vehicles............................................. 5 to 6 years
LICENSES
Licenses are stated at cost less accumulated amortization. If payment
for the license is deferred beyond normal credit terms, its cost is the net
present value of the obligation. The present value of the obligation is
calculated using the Company's effective borrowing rates at the time the
license was granted. Any differences between the nominal price of the
license and its net present value are treated as interest costs. Interest
costs are capitalized up until the time when the network in that license
territory becomes operational and are then recognized as interest expense
over the period of the obligation. Amortization of the license also
commences once the related network is operational and is recorded on a
straight-line basis until the end of the grant period. The amortization
period is 12 to 14 years. See also Note 8 for Management's plans regarding
the licenses held by the Company.
COMPUTER SOFTWARE COSTS
Costs that are directly associated with identifiable and unique
software products controlled by the Company and which have probable
economic benefits, exceeding the cost, beyond one year, are recognized as
intangible assets. Direct costs include staff costs of the software
development team and an appropriate portion of relevant overheads.
Expenditure, which enhances or extends the performance of computer
software programs beyond their original specifications is recognized as a
capital improvement and added to the original cost of the software.
Computer software development costs recognized as assets are amortized
using the straight-line method over their useful lives, not exceeding a
period of 5 years.
LONG TERM DEBT
Upon the adoption of IAS 39, the Company stated its long term debt at
amortized cost using the effective cost method and the difference between
that cost and the amount payable, net of discount and deferred financing
costs, was recognized as the effect of adopting IAS 39 in the opening
accumulated deficit. As a result of the defaults on the Notes described in
Note 12, certain debt of the Company has been treated as short term and the
effective interest method value of the debt has equaled its face value.
F-11
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
Prior to the adoption of IAS 39, the Company had carried its long-term
debt at the amount payable, net of discount in the case of discount bonds.
Discounts were amortized over the discount period using the effective cost
method. Costs incurred in obtaining financing were deferred and amortized
to financial expense over the term of the credit facility or the maturity
of the outstanding notes.
Long term debt is recognized initially at the proceeds received, net of
transaction costs incurred. In subsequent periods, borrowings are stated at
amortized cost using the effective cost method; any difference between
proceeds (net of transaction costs) and the redemption value is recognized
in the income statement over the period of the borrowings.
RETIREMENT BENEFITS
The Company pays social security taxes on each employee to the Polish
Government. The Company has no other employee retirement plans.
SHARE CAPITAL
All shares outstanding issued by the Company are classified as equity.
External costs directly attributable to the issue of new shares are shown
in equity as a deduction, net of tax, from the proceeds.
REVENUE
Telecommunications and other revenue is stated net of discounts and
value added tax.
(1) Telecommunications Revenue
Telecommunications revenue includes mainly installation fees, monthly
charges and calling charges. The Company records revenue from installation
fees, which are not in excess of installation costs, when the customer is
connected to the network. Other telecommunication revenue comprises the
provision of domestic long distance telephone services, voice mail, ISDN,
dial-up and fixed-access Internet, leased lines, VoIP, frame relay and
co-location services, as well as the sale of telecommunications
accessories; revenues for these transactions are recognized when the
service is provided or when the goods are sold.
(2) Other Revenue
Other revenue includes revenue from specialized mobile radio service
(public trunking), through the Company's subsidiary Uni-Net. Service
revenues are recorded when the service is provided. Revenue from the sale
of equipment is recorded when the customer takes delivery.
INTERCONNECTION CHARGES
Interconnection with other telecommunication operators is required to
complete calls that originate on but terminate outside of the Company's
network or originate outside the network and terminate within it, or are
only transferred through the Company's network. The Company pays
interconnection charges based on agreements entered into with other
telecommunication operators.
FOREIGN EXCHANGE GAINS AND LOSSES
Foreign currency transactions are accounted for at the exchange rates
prevailing at the date of the transactions. Gains and losses resulting from
the settlement of such transactions and from the translations of monetary
assets and liabilities denominated in foreign currencies are recognized in
the income statement or capitalized as part of network under construction
in accordance with the Company's fixed assets capitalization policy when
the exchange differences arise from foreign currency borrowings used to
finance self constructed assets.
DEFERRED INCOME TAXES
Deferred income tax is provided, using the liability method, for all
temporary differences arising between the tax bases of assets and
liabilities and their carrying values for financial reporting purposes.
Currently enacted tax rates are used to determine deferred income tax. The
principal temporary differences arise from interest and foreign exchange
differences and tax losses carried forward. Valuation allowances are
recorded for deferred tax assets when it is likely that tax benefits will
not be realized.
F-12
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
4. FINANCIAL RISK MANAGEMENT
FINANCIAL RISK FACTORS
The Company's activities expose it to a variety of financial risks,
including the effects of changes in debt and equity market prices, foreign
currency exchange rates and interest rates. The Company's overall risk
management program focuses on the unpredictability of financial markets and
seeks to minimize potential adverse effects on the financial performance of
the Company.
Risk management has been carried out by a central treasury department
under policies approved by the Company's Management Board. The treasury
department has been identifying, evaluating and hedging financial risks in
close co-operation with the operating units. The Management Board provides
written principles for overall risk management, as well as written policies
covering specific areas, such as foreign exchange risk, interest rate risk,
credit risk, and investing excess liquidity.
Foreign Exchange Risk
---------------------
The Company's revenues and costs are predominately denominated in
Polish Zloty, other than payments made under the construction contracts,
which are linked to the U.S. Dollar and Euro. In the previous years the
Company raised long term debt on international financial markets and is
exposed to foreign exchange risk arising from various currency exposures
primarily with respect to the U.S. Dollar and Euro.
Interest Rate Risk
------------------
The Company's income and operating cash flows are substantially
independent of changes in market interest rates. The Company's policy is to
maintain approximately all of its borrowings in fixed rate instruments.
Interest rates of all categories of long term debt are fixed.
Credit Risk
-----------
The Company has no significant concentrations of credit risk. Cash
transactions are limited to high credit quality financial institutions.
Liquidity Risk
--------------
Prudent liquidity risk management implies maintaining sufficient cash
and marketable securities, which is analysed on a regular basis, the
availability of funding through an adequate amount of committed credit
facilities and the ability to close out market positions.
FAIR VALUE ESTIMATION
The face values less any estimated credit adjustments for financial
assets and liabilities with a maturity of less than one year are assumed to
approximate their fair values. The net book value and fair value of long
term fixed rate debt at December 31, 2001 was PLN 3,396,869 and PLN
585,960, respectively. The fair value of the long term debt was determined
using market quotes at the balance sheet date. As at December 31, 2002 the
fair value of long term debt was based on present value of future cash
flows amounting to PLN 161,756 and was equal to its balance sheet value.
5. CASH AND CASH EQUIVALENTS
DECEMBER 31, DECEMBER 31,
2001 2002
------------------- ------------------
(PLN) (PLN)
Cash at bank and in hand 486,946 86,870
Short term deposits - 45,595
------------------ ------------------
486,946 132,465
================== ==================
The short term deposits consist primarily of funds deposited with money
market investment funds and asset management institutions, which are
invested in various short term low risk debt instruments.
F-13
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
6.RESTRICTED INVESTMENTS, CASH AND CASH EQUIVALENTS
DECEMBER 31, DECEMBER 31,
2001 2002
---------------- ------------------
(PLN) (PLN)
Current portion
2000 Notes - Investment Account....... 47,500 54,866
2002 Notes - Restricted Accounts...... - 199,345
---------------- ------------------
47,500 254,211
================ ==================
In June 2000, the Company deposited EUR 52,400 (PLN 219,902 at the
exchange rate in effect on that date) in an "Investment Account" with the
trustee for its 2000 Notes. As of December 31, 2002, three payments of EUR
13,750 each have been made from this account. In June 2002 the Treasury
Notes have been sold and the funds invested in cash deposits. These
remaining funds are expected to be released for the Company upon completion
of the 304 Section proceedings in the U.S. (see Note 2).
On December 20, 2002 the Company established a restricted account as a
temporary security for the 2002 Notes. As at December 31, 2002 cash
deposited to this account amounted to PLN 63,256.
On December 23, 2002, the Company entered into agreements on security
assignment of rights to investment accounts as a temporary security for
obligations of NH BV arising from the issue of the 2002 Notes. The value of
these accounts amounted to PLN 136,089 as at December 31, 2002. On January
3, 2003 securities of PLN 80,265 have been transferred to an escrow account
securing the 2002 Notes.
On February 13, 2003 the redemption of 2002 Notes was approved by the
Company's Supervisory Board, following the recommendation of the Management
Board (see also Note 2).
7. FIXED ASSETS AND NETWORK UNDER CONSTRUCTION
DECEMBER 31, DECEMBER 31,
ASSETS AT ADJUSTED COST 2001 ADDITIONS TRANSFERS DISPOSALS 2002
------------------ ------------------ -------------- ----------------- -------------------
(PLN) (PLN) (PLN) (PLN) (PLN)
Buildings....................... 87,945 - (2,519) - 85,426
Land............................ 14,505 2,553 - - 17,058
Long term ground lease.......... 5,400 6 - - 5,406
Transmission network ........... 1,313,543 - 171,929 (2,652) 1,482,820
Switching system................ 848,020 - 132,977 (509) 980,488
Base stations................... 12,448 1,450 - - 13,898
Machinery and equipment......... 158,164 20,431 11,053 (1,859) 187,789
Office furniture and equipment.. 106,612 1,695 36 (133) 108,210
Vehicles........................ 19,520 - - (4,181) 15,339
------------------ ------------------ -------------- ----------------- -------------------
2,566,157 26,135 313,476 (9,334) 2,896,434
Network under construction...... 429,427 102,961 (313,476) (19,223) 199,679
------------------ ------------------ -------------- -----------------
-------------------
2,995,584 129,096 - (28,567) 3,096,113
================== ================== ============== ================= ===================
ACCUMULATED DEPRECIATION DECEMBER 31, DEPRECIATION DECEMBER 31,
2001 EXPENSE TRANSFERS DISPOSALS 2002
------------------ ------------------ --------------- ----------------- -------------------
(PLN) (PLN) (PLN) (PLN) (PLN)
Buildings....................... 7,116 3,317 (134) - 10,299
Long term ground lease.......... 258 103 - - 361
Transmission network............ 170,052 98,162 (293) (212) 267,709
Switching system................ 151,138 51,579 (1,221) (38) 201,458
Base stations................... 11,935 1,421 - - 13,356
Machinery and equipment......... 27,825 14,455 1,648 (1,133) 42,795
Office furniture and equipment.. 44,046 22,654 - (582) 66,118
Vehicles........................ 12,658 2,943 - (3,293) 12,308
------------------ ------------------ --------------- ----------------- ------------------
425,028 194,634 - (5,258) 614,404
================== ================== =============== ================= ==================
F-14
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
IMPAIRMENT CHARGE (SEE NOTE 10) DECEMBER 31, IMPAIRMENT DISPOSALS DECEMBER 31,
2001 CHARGE 2002
------------------ ----------------- ----------------- ------------------
(PLN) (PLN) (PLN) (PLN)
Transmission network.................... 97,024 89,594 - 186,618
Switching system ....................... - 16,668 - 16,668
Office furniture and equipment.......... - 8,116 - 8,116
Network under construction.............. 19,223 24,390 (19,223) 24,390
------------------ ----------------- ------------------
-----------------
116,247 138,768 (19,223) 235,792
================== ================= ================= ==================
NET BOOK VALUE DECEMBER 31, DECEMBER 31,
2001 2002
------------------ ------------------
(PLN) (PLN)
Buildings .............................. 80,829 75,127
Land..................................... 14,505 17,058
Long term ground lease................... 5,142 5,045
Transmission network..................... 1,046,467 1,028,493
Switching system......................... 696,882 762,362
Base stations............................ 513 542
Machinery and equipment.................. 130,339 144,994
Office furniture and equipment........... 62,566 33,976
Vehicles................................. 6,862 3,031
------------------ ------------------
2,044,105 2,070,628
Network under construction.............. 410,204 175,289
------------------ ------------------
2,454,309 2,245,917
================== ==================
Overhead costs directly attributable to the acquisition or construction
of assets amounting to PLN 35,516, PLN 30,109 and PLN 24,361 and financial
costs of PLN 27,135, PLN 5,525 and PLN 8,002 were capitalized to network
under construction during the years ended December 31, 2000, 2001 and 2002,
respectively. The capitalization rate used to determine the amount of
financial costs that were eligible for capitalization was based upon the
Company's effective borrowing rates of 9.29%, 11.45% and 6.95% for the
years ended December 31, 2000, 2001 and 2002, respectively.
8. LICENSES
Certain subsidiaries of the Company hold fixed term permits for the
operation of local telecommunication networks on a non-exclusive basis in
specified areas throughout Poland. The companies obtained their
telecommunication permits through their conversion from telecommunication
licenses issued under the regulations of the previous Telecommunication
Act. The conversion took place by virtue of law on January 1, 2001 upon the
NTA becoming effective. In addition, all operating subsidiaries of the
Company that render basic telephone services applied to ORTP to broaden the
scope of their permits. The applications were approved in August 2002 and
all operating subsidiaries may currently provide all telecommunications
services that may be rendered in a fixed-line network. Further, Telekom
applied for a new permit under the NTA to render telecommunications
services within the entire territory of Poland. Telekom obtained this
permit in June 2002. Currently, each permit holder is required to provide
public telecommunications services through its network.
The domestic and international long distance traffic is carried through
the network of Netia 1 Sp z o.o. ("Netia 1") in areas where Netia 1 has its
own network. The terms of interconnection in each area of our presence were
negotiated separately, subject to guidelines established by the Minister of
Communications ("MOC") prior to 2001 and by the telecommunications market
regulator in Poland - the President of ORTP. Based on the NTA since January
1, 2003, the Netia Group carries the international traffic through its
network and through interconnection with the international networks of
Telekomunikacja Polska S.A. ("TPSA") or other telecommunication operators.
When the licenses obtained, among other companies of Netia Group, by
Netia Telekom Silesia S.A. ("Silesia"), Netia Telekom Telmedia S.A.
("Telmedia"), Netia Telekom Mazowsze S.A. ("Mazowsze") and Netia 1 were
issued, the MOC's policy for the development of telecommunications market
in Poland envisaged the issuance of no more than one local license to an
operator who would have the right to compete with Telekomunikacja Polska
S.A. in such zone. An exception to this duopoly model was made in the city
of Warsaw, where licenses were issued to two operators - among them
Mazowsze. With respect to domestic long distance services, the MOC decided
that three operators in addition to TP SA would hold licenses for these
services. Accordingly, licenses for telecommunications services in Poland
were issued for 15-year periods, and all business plans were planned under
the assumption that such 15-year period would enable the operators to
operate in a duopolous environment. License fees were established by the
MOC and accepted by the Company in conjunction with the terms for which the
licenses were issued, under the same assumption.
F-15
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
The nominal license fees obligations of PLN 323,507, including deferral
fees of PLN 15,799, remained unpaid as at December 31, 2002. In connection
with the conversion of licenses into permits as of January 1, 2001 and the
freedom of entry into the Polish telecommunications market for new
operators, the Company's subsidiaries have submitted claims to the Polish
regulatory authorities seeking to confirm expiry, cancellation or deferral
of the Company's remaining license fee obligations. As a result, the
Ministry of Infrastructure (currently in charge of telecommunications)
issued decisions to the majority of the Company's subsidiaries holding
telecommunication permits, whereby it claimed that the license fee
obligations are payable according to the terms of the pre-existing
licenses. The Ministry of Infrastructure also issued decisions to companies
in the Netia Group holding permits, whereby, effective as of June 28, 2002
it has postponed the license payments of EUR 32,943 (PLN 134,879 at the
December 31, 2002 exchange rate) due on June 30, 2002 until December 31,
2002.
In December 2002, a law entered into force in Poland regarding the
conversion of the outstanding license fee obligations of local operators.
This law provides for the cancellation of license fee obligations in
exchange for telecommunication infrastructure capital expenditures or the
conversion of license fee obligations in exchange for the shares or debt of
companies, which have outstanding license fees in connection with licenses
authorizing provisioning of local services. Based on this law, the Company
has submitted applications for the cancellation of its outstanding license
fee obligations based on capital expenditures it has already incurred (the
"Applications"). The Applications are to be reviewed by the Polish
Government and can only be rejected if the Ministry responsible for the
matter does not recognize the investments already made as capital
expenditures contributing to telecommunication market development. In case
certain capital expenditures are rejected, the Company may have, according
to the new regulations, up to four years to make new investments applicable
for conversion. As of the date of these consolidated financial statements
the Company is awaiting a response to the Applications. The Company is
awaiting ultimate and formal resolution of the applications by the Polish
Government before determining the applicable accounting for the license fee
obligations. As a result of submitting the Applications the Company has not
made the license fee payments of PLN 195,384 due on December 31, 2002.
Furthermore, the Company has not made a payment of EUR 1,000 (PLN 4,094 at
the exchange rate in effect on December 31, 2002) for its long distance
license fee obligation due on January 31, 2002. On November 20, 2002 the
Ministry of Infrastructure issued to Netia 1 a decision splitting Netia 1's
license fee obligations due January 31, 2002 into two installments and
deferring their payment until December 20 and December 30, 2002,
respectively. On December 2, 2002, Netia 1 applied to the Ministry of
Infrastructure for a second review of the Ministry's decision, in order to
obtain a further deferral of both installments until June 30, 2003. The
Ministry of Infrastructure's decision in this matter is still pending. On
December 2, 2002, Netia 1 also applied for the deferral until June 30, 2003
of its license fee obligations due January 31, 2003. On February 6, 2003,
Netia 1 received a decision from the Ministry of Infrastructure's rejecting
its request. Netia 1 will apply for a second review of this decision. On
the date of these financial statements however, all the aforementioned
license fee obligations remain outstanding.
The table below presents the movements of the assets recorded in
relation to the value of licenses obtained.
GROSS BOOK VALUE DECEMBER 31, EFFECT OF DECEMBER 31,
2001 PAYMENT DEFERRAL 2002
---------------- ------------------ ----------------
(PLN) (PLN) (PLN)
Local telecommunication licenses/permits..................... 668,114 (321) 667,793
Datacom and internet licenses/permits......................... 7,417 - 7,417
Domestic long distance licenses/permits...................... 114,854 - 114,854
---------------- ------------------ ----------------
790,385 (321) 790,064
================== ================
================
DECEMBER 31, AMORTIZATION DECEMBER 31,
ACCUMULATED AMORTIZATION 2001 EXPENSE 2002
------------------ ---------------- ----------------
(PLN) (PLN) (PLN)
Local telecommunication licenses/permits..................... 84,263 47,233 131,496
Datacom and internet licenses/permits......................... 560 560 1,120
Domestic long distance licenses/permits...................... 10,413 7,859 18,272
------------------ ---------------- ----------------
95,236 55,652 150,888
================== ================ ================
DECEMBER 31, DECEMBER 31,
NET BOOK VALUE 2001 2002
---------------- -----------------
(PLN) (PLN)
Local telecommunication licenses/permits..................... 583,851 536,297
Datacom and internet licenses/permits......................... 6,857 6,297
Domestic long distance licenses/permits...................... 104,441 96,582
---------------- -----------------
695,149 639,176
================ =================
F-16
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
LIABILITIES FOR LICENSES FEES AS AT DECEMBER 31, 2002
LOCAL DOMESTIC LONG
TELECOMMU-NICATION DISTANCE
LICENSES/PERMITS LICENSE/PERMITS TOTAL
------------------ ------------------ ------------------
(PLN) (PLN) (PLN)
Not later than 1 year ................................. 211,182 8,189 219,371
Later than 1 year and not later than 5 years........... - 8,189 8,189
Later than five years.................................. 178,774 - 178,774
------------------ ------------------ ------------------
Nominal value of outstanding payments.................... 389,956 16,378 406,334
Future interest charges on license fee liabilities..... (81,746) (1,081) (82,827)
------------------ ------------------ ------------------
PRESENT VALUE OF LICENSE FEE LIABILITIES, OF WHICH:...... 308,210 15,297 323,507
================== ================== ==================
Short term license fee liabilities....................... 203,738 7,509 211,247
Long term license fee liabilities........................ 104,472 7,788 112,260
------------------ ------------------ ------------------
308,210 15,297 323,507
================== ================== ==================
LIABILITIES FOR LICENSES FEES AS AT DECEMBER 31, 2001
LOCAL DOMESTIC LONG TOTAL
TELECOMMU-NICATION DISTANCE
LICENSES/PERMITS LICENSE/PERMITS
------------------ ------------------
------------------
(PLN) (PLN) (PLN)
Not later than 1 year ................................. 177,355 3,522 180,877
Later than 1 year and not later than 5 years........... - 10,566 10,566
Later than five years.................................. 153,781 - 153,781
------------------ ------------------ ------------------
Nominal value of outstanding payments.................... 331,136 14,088 345,224
Future interest charges on license fee liabilities..... (85,088) (1,759) (86,847)
------------------ ------------------ ------------------
PRESENT VALUE OF LICENSE FEE LIABILITIES, OF WHICH:...... 246,048 12,329 258,377
================== ================== ==================
Short term license fee liabilities....................... 162,921 2,692 165,613
Long term license fee liabilities........................ 83,127 9,637 92,764
------------------ ------------------ ------------------
246,048 12,329 258,377
================== ================== ==================
LOCAL TELECOMMUNICATION PERMITS
In March 1998, Silesia and Telmedia obtained five fixed-term licenses
for the installation and operation of local telecommunication networks on a
non-exclusive basis in specified areas of Poland. These licenses were
converted into non-exclusive permits on January 1, 2001.
In June 2000, Mazowsze obtained a license for the provision of
telecommunication services within the city of Warsaw. Mazowsze's license,
currently converted into a permit, is non-exclusive and valid for 15 years.
The net present value of Mazowsze's license was EUR 98,700 (PLN 396,794 at
the exchange rate at the date of December 31, 2002). Total additions to the
value of the permit of PLN 428,057 also include PLN 12,144 of interest
capitalized before the related network became operational. A portion of the
license fee liability amounting to EUR 57,950 (PLN 225,275 at the exchange
rate at the date of the payment) was paid during 2000.
DOMESTIC LONG DISTANCE PERMIT
In May 2000, Netia 1 was granted a domestic long distance license. The
license, currently converted into a permit, covers the entire territory of
Poland and enables Netia 1 to provide inter-city telecommunication
services. The net present value of the license was EUR 28,574 (PLN 114,873
at the exchange rate at the date of December 31, 2002). Total additions to
the value of permits of PLN 114,854 also include PLN 605 of interest
capitalized before the related network became operational. A portion of the
license fee liability amounting to EUR 22,997 (PLN 93,999 at the exchange
rate at the date of the payment) was paid by May 25, 2000. A portion of the
license fee liability amounting to EUR 1,000 (PLN 3,998 at the exchange
rate at the date of the payment) was paid on January 31, 2001.
DATACOM AND INTERNET LICENSES
In April 1999, Netia Network S.A., a wholly owned subsidiary of the
Company, obtained a data communications license covering the entire
territory of Poland. The cost of the license was EUR 872 (PLN 3,767 at the
exchange rate on the date of the grant) and was paid for during the year.
Additionally, costs directly attributable to preparing the licenses for its
intended use of PLN 3,650 were capitalized to the value of license during
the year ended December 31, 2000.
F-17
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
In July 1999, Telekom obtained an internet provider license for a
nominal fee, covering the entire territory of Poland.
When the NTA became effective the license of Netia Network and Telekom
expired, as under the NTA data transmission and internet access
provisioning do not require licenses or permits.
LICENSE REQUIREMENTS
The terms of licenses issued to the Company's subsidiaries prior to
January 1, 2001, required them to meet annual connected capacity
milestones, as measured at the end of each year, subject to demand in each
of the respective areas. At December 31, 2002 and for almost all prior
periods, the Company's subsidiaries did not meet these milestones for any
of their licenses. While under the regulatory scheme in effect prior to
January 1, 2001, it was possible for the regulatory authorities to take
action against the companies which failed to meet capacity milestones,
including seeking revocation of the licenses (which action would have had a
material adverse effect on the Company, including on the value of its
related telecommunications network assets and its ability to continue its
operations), no such action has ever been taken.
On January 1, 2001, the NTA became effective in Poland. Under the NTA,
all of the Company's telephone licenses were converted into permits. The
confirmation of the terms of these permits had to be made in the course of
an administrative process before the President of the ORTP. The Company's
subsidiaries that hold permits (converted from the old licenses) have
applied to ORTP for confirmation of their terms in April and May 2001. All
of the Company's subsidiaries had received letters from the ORTP in March
and August 2002, whereby it refused to confirm that certain conditions of
the existing licenses have expired upon the conversion of those licenses
into permits. The President's of the ORTP position is that the terms of the
licenses, their territorial scopes, specific conditions for the performance
of services and requirements regarding changes in shareholding, remain
applicable to the permits into which the licenses have converted. In his
explanation, the President of the ORTP stated that the only conditions of
the previously existing licenses that have expired are those that would
lead to a violation of an explicit obligation or prohibition contained in
the NTA. The ORTP also stated in its decision that none of the conditions
contained in the previously existing licenses fulfils this criterion.
However, management has appealed the ruling with the President of the ORTP
and has appealed the ruling with the Supreme Administrative Court. There
can be no assurance that such decisions will not be upheld. As a result,
new permits may incorporate burdensome requirements, and assurance cannot
be given that the regulatory authorities will not take action against the
Company based on failure to meet these requirements. The new law regulating
the conversion of the license fee obligations, enacted in December 2002,
does not refer to the license requirements (other than financial
obligations). Management of the Company does not believe that this matter
will have a material adverse effect on the Company's financial condition
and operations.
9. COMPUTER SOFTWARE COSTS
DECEMBER 31, AMORTIZATION DECEMBER 31,
2001 INCREASE TRANSFERS EXPENSE 2002
------------------ ----------------- ---------------- ------------------ --------------------
(PLN) (PLN) (PLN) (PLN) (PLN)
ASSETS AT ADJUSTED COST.......
Gross book value............ 96,347 - 32,662 - 129,009
Capital work in progress.... 12,163 48,135 (32,662) - 27,636
------------------ ----------------- ---------------- ------------------ --------------------
108,510 48,135 - - 156,645
Accumulated amortization...... (25,566) - - (18,394) (43,960)
----------------- ---------------- ------------------
------------------ --------------------
NET BOOK VALUE 82,944 48,135 - (18,394) 112,685
================== ================= ================ ================== ====================
10. IMPAIRMENT OF ASSETS
During the years ended December 31, 2002 and 2001, the Company has
recorded a charge for the impairment of assets included in the
telecommunications segment to reflect a decrease of their recoverable amount
by PLN 149,353 and PLN 116,247, respectively. The impairment charge
recognized during the year ended December 31, 2002 related to 27,350 (not in
thousands) telephone lines, 100,975 (not in thousands) ports, which were
built in areas subsequently considered as unprofitable at total net book
value of PLN 106,263, additional network construction in progress of PLN
29,755 (including unrecoverable VAT of PLN 5,365), completion of which was
also considered unprofitable as well as computer equipment of PLN 8,116 and
other assets amounting to PLN 5,219. The amount for impairment of assets
recorded in 2001 included PLN 97,024 related to 70,200 (not in thousands)
telephone lines, which were built in areas subsequently considered as
unprofitable and additional network construction in progress of PLN 19,223,
completion of which was also considered unprofitable. On the basis of
management estimates, the recoverable amounts being the net selling price of
these assets were determined to be zero. As a result of those impairment
charges, the carrying value of these specific assets is nil.
F-18
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
11. ACCRUALS AND OTHER
DECEMBER 31, DECEMBER 31,
2001 2002
------------------ --------------------
(PLN) (PLN)
Accrued interest on notes ...................................................... 93,051 468
Construction costs.............................................................. 32,879 10,425
Costs of issuance of shares and notes........................................... - 25,876
Government payables............................................................. 10,539 13,244
Interconnection charges......................................................... 5,040 5,870
Holiday accrual................................................................. 5,701 4,803
Employees bonuses............................................................... 3,000 15,361
Other........................................................................... 13,351 9,758
------------------ --------------------
163,561 85,805
================== ====================
12. LONG TERM DEBT
DECEMBER 31, DECEMBER 31,
2001 2002
------------------ --------------------
(PLN) (PLN)
101/4% Senior Notes due 2007 ("1997 Dollar Notes")........................... 797,260 -
111/4% Senior Dollar Discount Notes due 2007 ("1997 Dollar Discount Notes").. 771,549 -
11% Senior DM Discount Notes due 2007 ("1997 DM Discount Notes")............. 372,860 -
131/8% Senior Notes due 2009 ("1999 Dollar Notes")........................... 398,630 -
131/2% Senior Notes due 2009 ("1999 Euro Notes")............................. 352,190 -
133/4% Senior Notes due 2010 ("2000 Notes").................................. 704,380 -
10% Senior Notes due 2008 ("2002 Notes") .................................... - 161,756
------------------ --------------------
3,396,869 161,756
================== ====================
Interest rates of all categories of long term debt outstanding as at
December 31, 2001 and 2002 are fixed.
The amortized cost of the outstanding debt as at December 31, 2001 was
PLN 3,284,822, however due to the defaults described below, the difference
between the amortized cost and the nominal value of the debt of PLN 112,047
was charged to the statement of operations. Furthermore, due to the default
on Notes the outstanding debt was reclassified to current liabilities.
LONG TERM DEBT REPAYMENT SCHEDULE
DECEMBER 31, DECEMBER 31,
2001 2002
---------------------- --------------------
(PLN) (PLN)
Due in 2002.................................................................. 3,396,869 -
Due in 2003.................................................................. - -
Due in 2004.................................................................. - -
Due in 2005.................................................................. - -
Due in 2006.................................................................. - -
Due in 2007 and thereafter................................................... - 161,756
---------------------- --------------------
3,396,869 161,756
====================== ====================
The weighted average effective interest rates at the balance sheet date
were as follows:
DECEMBER 31, DECEMBER 31,
2001 2002
---------------------- --------------------
1997 Dollar Notes................................................. 10.250% -
1997 Dollar Discount Notes........................................ 11.250% -
1997 DM Discount Notes............................................ 11.000% -
1999 Dollar Notes................................................. 13.125% -
1999 Euro Notes................................................... 13.500% -
2000 Notes........................................................ 13.750% -
2002 Notes........................................................ - 11.02%
F-19
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
THE 1997 NOTES, 1999 NOTES AND 2000 NOTES
In November 1997, NH BV issued USD 200,000 aggregate principal amount
of the 1997 Dollar Notes, USD 193,550 aggregate principal amount at
maturity of the 1997 Dollar Discount Notes and DM 207,062 aggregate
principal amount at maturity of the 1997 DM Discount Notes (collectively
the "1997 Notes"). The 1997 Notes were fully and unconditionally guaranteed
by the Company. The 1997 Notes were originally to mature on November 1,
2007.
On June 3, 1999 NH II BV issued EUR 100,000 aggregate principal amount
of the 1999 Euro Notes and USD 100,000 aggregate principal amount of the
1999 Dollar Notes (collectively referred to as the "1999 Notes"). The 1999
Notes were fully and unconditionally guaranteed by the Company. The 1999
Notes were originally to mature on June 15, 2009.
On June 2, 2000, NH II BV issued EUR 200,000 aggregate principal amount
of the 2000 Notes. The 2000 Notes were fully and unconditionally guaranteed
by the Company. The 2000 Notes were originally to mature on June 15, 2010.
As a result of the Dutch moratorium proceedings (see Note 2) the
liabilities of the Dutch special-purpose finance subsidiaries towards their
noteholders resulting from the 1997 Notes, 1999 Notes and 2000 Notes
(including interest accrued until July 12, 2002, the day when the Dutch
proceedings were opened) amounting to USD 536,980 (PLN 2,137,825 at the
exchange rate in effect on November 6, 2002, the day the Dutch proceedings
were approved by the court) and EUR 444,167 (PLN 1,761,790 at the exchange
rate in effect on November 6, 2002) have become unenforceable.
The guarantees granted by Netia Holdings in relation to the 1997 Notes,
1999 Notes and 2000 Notes have been subject to a separate reduction under
the Polish arrangement proceedings of Netia Holdings. Part of the reduced
value of guarantees in the form of installment obligations were used for
the settlement of the purchase price for the series H shares (see also Note
2 and 13).
CROSS-CURRENCY SWAPS
On December 14, 2001, Telekom cancelled the swap transactions entered
into with Merrill Lynch International ("Merrill Lynch") in March 2001.
Conditions of the canceling included the forfeiture of the deposit account
of USD 2,630 (PLN 10,492 at the exchange rate in effect on December 17,
2001) to Merrill Lynch and a payment of USD 3,000 (PLN 11,968 at the
exchange rate in effect on December 17, 2001) on the day of canceling plus
twelve installments of USD 710 (PLN 2,830 at the exchange rate in effect on
December 31, 2001) payable in arrears starting from either July 1, 2002 or
the date on which a new financing is secured by the Company. The
outstanding liability towards Merrill Lynch was reduced to 8.7% of their
nominal value in the arrangement proceeding of Telekom and is to be repaid
between 2007 and 2012. Furthermore, liabilities connected with these swap
transactions were guaranteed by Netia Holdings and became subject to a
separate reduction to 8.7% of their nominal value in the arrangement
proceedings of Netia Holdings with the reduced amount repayable in
installments between 2007 and 2012.
As a consequence of failure to make a coupon payment under the 1999
Notes on December 15, 2001 the Company also did not make a related payment
of PLN 70,640 due on December 17, 2001 pursuant to its cross-currency swap
agreement with JP Morgan. Consequently, on December 21, 2001, an event of
default occurred under the cross-currency swap agreement between NH III
BVand JP Morgan.
On January 11, 2002, NH III BV cancelled all swap transactions entered
into with JP Morgan in July 2000 and January 2001. Conditions of canceling
included a payment of USD 7,185 (PLN 29,279 at the exchange rate in effect
on January 11, 2002) being 15% of the mark-to-market value on that day. The
remaining portion of the Company's liability toward JP Morgan was to be
settled on terms comparable to terms, which might have been agreed with the
holders of the Notes issued by the Company provided that an agreement with
the bondholders was reached on or before March 20, 2002 or such settlement
was made on or before March 21, 2002. Effects of the cancellation were
fully recognized in the statement of operations for the year ended December
31, 2001. The outstanding liability towards JPMorgan has become
unenforceable in the Dutch moratorium proceedings. Furthermore, liabilities
connected with these swap transactions were guaranteed by Netia Holdings
and became subject to a separate reduction to 8.7% of their nominal value
in the arrangement proceedings of Netia Holdings. Due to the fact that
JPMorgan has exchanged this reduced guarantee as settlement for series H
shares the guarantees granted collectively by Telekom and South to JPMorgan
have expired.
THE 2002 NOTES
On December 23, 2002, NH BV issued EUR 49,869 (PLN 198,758 at the
exchange rate in effect on December 23, 2002) aggregate principal amount of
the 2002 Notes to consenting holders of existing notes and financial
creditors in exchange for relinquishing their claims under existing notes
and swap obligations. The 2002 Notes are fully and unconditionally
guaranteed by the Company. The 2002 Notes mature on December 23, 2008. The
Company may redeem the 2002 Notes without penalty at par value plus accrued
and unpaid interest from the date of issuance. The 2002 Notes bear interest
at 10% per annum. Interest is payable in six-month installments beginning
on June 23, 2003. At the Company's option, the first four interest payments
may be paid in kind by capitalizing such interest at a rate of 12% per
annum and issuance of additional notes for principal amount equal to such
capitalized interest. Interest expense during the year ended December 31,
F-20
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
2002 was EUR 114 (PLN 460 at the exchange rate in effect on that date). The
cost of issuance of the 2002 Notes amounted to PLN 42,550 and will be
charged to the statements of operations through the maturity of the 2002
Notes. The charge for the year ended December 31, 2002 amounted to PLN 127.
On February 13, 2003 the redemption of the 2002 Notes was approved by
the Company's Supervisory Board, following the recommendation of the
Management Board (see also Note 2).
13. INSTALLMENT OBLIGATIONS
The outstanding installment obligations comprise those claims reduced
in the Polish arrangement proceedings (including guarantees given by Netia
Holdings to the holders of 1997 Notes, 1999 Notes and 2000 Notes and to
swap counterparties), which were not exchanged into series H shares during
the restructuring process (see Note 2). These obligations are payable at
their nominal reduced values between 2007 and 2012 and bear no interest.
The installment obligations are recorded on the balance sheet at the
present value of the future payment obligations.
14. FINANCIAL INSTRUMENTS
SHAREHOLDERS' EQUITY - HEDGING RESERVE
On the adoption of IAS 39 at January 1, 2001, certain derivatives were
designated as cash flow hedges and remeasured to fair values. The fair
values at that date were recorded in a separate category of equity -
hedging reserve as shown below. Hedge transactions entered into during the
year ended December 31, 2001 were also designated as cash flow hedges and
their fair values were recorded in hedging reserve in accordance with IAS
39.
CROSS-CURRENCY SWAP TRANSACTIONS
MOVEMENTS OF HEDGE RELATED LIABILITY J.P. MORGAN CHASE BANK MERRILL LYNCH
--------------------------------------- -------------------
Date of transaction JULY 2000 JANUARY 2001 MARCH 2001 TOTAL
-------------------- ----------------- ------------------- -----------------
(PLN) (PLN) (PLN) (PLN)
NET LIABILITY AS AT JANUARY 1, 2001........... 29,575 - - 29,575
Loss on mark-to-market value.................. 70,170 109,631 69,412 249,213
Additional coupon payments.................... (28,588) - - (28,588)
Loss / (Gain) on cancellation................. 3,997 6,159 (12,989) (2,833)
Payments on cancellation...................... - - (22,460) (22,460)
-------------------- ----------------- ------------------- -----------------
NET LIABILITY AS AT DECEMBER 31, 2001......... 75,154 115,790 33,963 224,907
Payments on cancellation...................... (11,524) (17,755) - (29,279)
Foreign exchange gains ....................... 169 260 395 824
Reduction in the Polish arrangement
proceedings.............................. - - (31,369) (31,369)
Reduction in the Dutch composition proceedings (63,799) (98,295) - (162,094)
-------------------- ----------------- ------------------- -----------------
NET LIABILITY AS AT DECEMBER 31, 2002......... - - 2,989 2,989
==================== ================= =================== =================
The remaining nominal amount of PLN 2,989 of the hedge related
liability towards Merrill Lynch is included in the value of installment
obligations recorded at the present value of future obligations (see Note
13).
15. CORPORATE INCOME TAX
YEAR ENDED
---------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
---------------------- ---------------------- --------------------
(PLN) (PLN) (PLN)
Provision for income taxes:
Current................................................. 2,514 5,424 1,903
Deferred................................................ - - -
---------------------- ---------------------- --------------------
INCOME TAX CHARGE....................................... 2,514 5,424 1,903
====================== ====================== ====================
F-21
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
YEAR ENDED
-------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
---------------------- ---------------------- --------------------
(PLN) (PLN) (PLN)
Tax benefit at Polish Statutory tax rate................ 106,665 320,769 190,506
Increase / (decrease) in tax benefits:..................
Tax loss carry forward not expected to be utilized.... (76,433) (58,185) (82,134)
Non taxable / (deductible) items...................... (41,348) (268,008) (110,275)
Effect of enacted future rate changes on deferred taxation 8,602 - -
---------------------- ---------------------- --------------------
EFFECTIVE TAX CHARGE.................................... (2,514) (5,424) (1,903)
====================== ====================== ====================
The deferred tax assets/(liabilities) are composed of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
---------------------- --------------------
(PLN) (PLN)
Deferred tax asset
Interest and foreign exchange differences........................................ - 5,386
Accruals......................................................................... 62,974 468
Depreciation and amortization.................................................... 15,442 -
Tax loss carry forwards.......................................................... 294,740 293,372
---------------------- --------------------
373,156 299,226
---------------------- --------------------
Deferred tax liability
Depreciation and amortization.................................................... - (5,891)
Interest and foreign exchange differences........................................ (47,878) -
Prepayments...................................................................... (3,768) -
---------------------- --------------------
(51,646) (5,891)
---------------------- --------------------
Net deferred tax asset........................................................... 321,510 293,335
Valuation allowance.............................................................. (321,510) (293,335)
---------------------- --------------------
NET DEFERRED TAX ASSET/(LIABILITY) .............................................. - -
====================== ====================
The valuation allowance relates to deferred tax assets, which are
expected to expire before they are available for uses.
The corporate income tax rate in Poland for 2000, 2001 and 2002 was
28%.
The Polish tax system has restrictive provisions for grouping of tax
losses for multiple legal entities under common control, such as those of
the Company. Thus, each of the Company's subsidiaries may only utilize its
own tax losses to offset taxable income in subsequent years. Losses not
used cannot be carried forward to subsequent years. Losses are not indexed
to inflation. Deferred tax assets related to these losses have been
reserved for. Tax losses incurred in 1999 and subsequent years are
permitted to be utilized over five years with a 50% utilization restriction
per annum.
The net non-deductible items of PLN 41,348, PLN 268,008 and PLN 110,275
for the years ended December 31, 2000, 2001 and 2002, respectively,
primarily relate to unrealized foreign exchange gains and losses, accrued
interest and impairment provisions.
In 2002, the Company and some of its subsidiaries have been subject to
an audit by the tax authorities in respect of the corporate income tax,
value added tax, stamp duties and property taxes relating to selected
periods in 1999 and 2000. As a result of those tax audits, the tax
authorities assessed total additional tax and penalties amounting to PLN
3.8 million, which were paid by the Company. There is no procedure for
final agreement of tax assessments in Poland. The tax and fiscal
authorities may examine the accounting records up to five years after the
end of the year to which they relate. Consequently, the Company may be
subject to additional tax liabilities, which might arise as a result of
additional tax audits. However, management is not aware of any significant
unaccrued potential tax liabilities, which might arise in these
circumstances.
As at December 31, 2002, based on returns filed or expected returns,
the Company and its subsidiaries have available the following income tax
loss carry forwards for income tax reporting purposes (in nominal amounts):
AVAILABLE FOR USE IN:
2003 2004 2005 2006 2007 TOTAL
------------- -------------- ------------- ------------- -------------- -------------
(PLN) (PLN) (PLN) (PLN) (PLN) (PLN)
Netia Holdings S.A. 94,688 94,688 79,201 62,906 3,441 334,924
============= ============== ============= ============= ============== =============
F-22
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
AVAILABLE FOR USE IN:
2003 2004 2005 2006 2007 TOTAL
------------- -------------- ------------- ------------- -------------- -------------
(PLN) (PLN) (PLN) (PLN) (PLN) (PLN)
Subsidiaries 266,210 266,210 150,059 58,737 10,458 751,674
============= ============== ============= ============= ============== =============
16. SHAREHOLDERS' EQUITY
SHAREHOLDERS' RIGHTS (NOT IN THOUSANDS)
Until December 31, 2002 the Company's share capital consisted of
31,418,172 ordinary shares and of 1,000 of series A1 preferred shares. Each
ordinary share had one vote at shareholders' meetings. The holder of 1,000
series A1 preferred shares had the right to nominate one member of the
Supervisory Board. The Management Board was elected by the majority of
votes of the Supervisory Board.
On December 23, 2002 the subscription of series H ordinary shares and
issuance new notes was completed and as described in Note 2, 312,626,040
series H shares at PLN 1.00 par value were subscribed for by the Company's
creditors in accordance with the agreed terms of restructuring. The issuance
price of the new shares was PLN 1.0826241. The terms and conditions of
ordinary H shares are identical to terms and conditions of the Company's
existing ordinary shares. The issuance costs of PLN 72,457 have been
recorded as a deduction from share premium up to the amount of excess of
share price over the nominal value of shares and the remaining amount was
deducted from other reserves. The series H shares were registered by the
Register Court on January 30, 2003.
SHARE CAPITAL, SHARE PREMIUM AND TREASURY SHARES
NUMBER OF
SHARES
AUTHORIZED
AND ISSUED
(NOT IN SHARE SHARE OTHER TREASURY
THOUSANDS) CAPITAL PREMIUM RESERVES SHARES TOTAL
--------------- ------------ ------------- -------------- ------------ ------------
(PLN) (PLN) (PLN) (PLN) (PLN)
AT DECEMBER 31, 2000................... 31,419,172 203,285 1,713,865 - (3,611) 1,913,539
--------------- ------------ ------------- -------------- ------------ ------------
AT DECEMBER 31, 2001................... 31,419,172 203,285 1,713,865 - (3,611) 1,913,539
--------------- ------------ ------------- -------------- ------------ ------------
Reduction of debt...................... - - - 3,553,712 - 3,553,712
Subscription for shares, .............. - - - 338,457 - 338,457
Costs of share issuance ............... (72,457) (72,457)
Exchange of shares with minority
shareholder (see Note 17)............ - - - - 799 799
--------------- ------------ ------------- -------------- ------------ ------------
AT DECEMBER 31, 2002 .................. 31,419,172 203,285 1,713,865 3,819,712 2,812 5,734,050
=============== ============ ============= ============== ============ ============
Major shareholders of the Company's common shares are as follows (**):
DECEMBER 31, 2001 DECEMBER 31, 2002 (**)
---------------------------------- ----------------------------------
NO. OF % OF SHARE NO. OF % OF SHARE
SHARES CAPITAL SHARES CAPITAL
Telia 14,901,355 47.43 14,901,355 47.43
Warburg Pincus 2,923,685 9.31 2,923,685 9.31
The Bank of New York (*) 2,242,894 7.14 1,958,170 6.23
Shares held by public and other shareholders 11,351,238 36.12 11,635,952 37.03
---------------------------------- ----------------------------------
31,419,172 100.00 31,419,172 100.00
================================== ==================================
(*) The Bank of New York is the depositary for ordinary shares that are
traded on NASDAQ in the form of ADSs.
(**) Information presented above does not reflect the changes in
shareholders' structure as the registration of new series H shares took
place after December 31, 2002. After the registration of series H shares,
which took place on January 30, 2003 the noteholders and certain financial
creditors hold shares representing 91% of the Company's share capital
without taking into account shares to be issued upon exercise of the
warrants to be issued in connection with restructuring and shares to be
issued under the key employee stock option plan (see also Note 26).
F-23
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
STOCK OPTIONS (NUMBER OF SHARES NOT IN THOUSANDS)
Movements in the number of share options outstanding are as follows:
OPTIONS DECEMBER 31, 2001 DECEMBER 31, 2002
-------------------- ---------------------
At beginning of year........................................ 800,573 1,069,692
Granted..................................................... 335,832 111,000
Forfeited/ expired.......................................... (66,713) (179,180)
-------------------- ---------------------
At end of year.............................................. 1,069,692 1,001,512
==================== =====================
During the year ended December 31, 2002, the Company granted 111,000
options to purchase ordinary shares of the Company at exercise prices
ranging from USD 27.72 to USD 33.12 per share, under the Netia Performance
Stock Option Plan (the "Plan"). No options were exercised during the year
ended December 31, 2002. 179,180 options expired during the year ended
December 31, 2002. The total number of outstanding granted options as at
December 31, 2002 was 1,001,512. The vesting period for the options ranges
from the date of grant to two years from the date of grant or upon achieving
certain specified conditions. The options are exercisable for up to four
years. The majority of the options are exercisable only if the market price
of the Company's shares as at the date of exercise exceeds the stated
exercise price of the option by at least 20%. Upon exercise of an option,
the option holder is entitled to receive a number of shares calculated in
the following manner: the difference between the trading price of the
Company's shares established in accordance with the Plan and the strike
price is multiplied by the number of the exercised options and later divided
by the trading price of the Company's shares. As of December 31, 2002 and
December 31, 2001 the total number of vested options was 865,512 and
743,860, respectively.
Share options outstanding at the end of the year have the following
terms:
EXPIRY DATE EXERCISE PRICE DECEMBER 31, 2001 DECEMBER 31, 2002
--------------------- --------------------
2002 12.38-27.60 179,180 -
2003 15.75-27.72 487,680 487,680
2004 12.87-33.12 365,332 476,332
2005 19.25 37,500 37,500
--------------------- --------------------
1,069,692 1,001,512
===================== ====================
17. MINORITY INTEREST
DECEMBER 31, DECEMBER 31,
2001 2002
---------------------- --------------------
(PLN) (PLN)
At beginning of the year...................................................... 82,310 25,607
Acquisition of shares of Netia 1.............................................. (54,894) (799)
Share of net loss of subsidiaries............................................. (1,809) (7,309)
---------------------- --------------------
At end of the year............................................................ 25,607 17,499
====================== ====================
In accordance with the provisions of NTA, which abolished the foreign
ownership restrictions on telecommunications operators in Poland, the
Company announced that it would acquire the interest of the other
participants in Netia 1 consortium for cash or the Company's shares in
accordance with provisions of the consortium agreement, after which the
Company will own 100% of Netia 1. In January 2001, pursuant to pre-existing
contractual obligations, the Company paid USD 14,447 (PLN 59,193) for
548,944 shares of Netia 1, which constituted 44% of its share capital, of
which PLN 4,299 was recognized as goodwill arising on the transaction. After
having executed this transaction the Company owned 82% of Netia 1. In 2002,
7% of Netia 1 share capital was exchanged for 133,233 shares of the Company.
The Company currently holds, in the aggregate, approximately 89% of Netia
1's share capital.
F-24
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
18. SIGNIFICANT SUBSIDIARIES OF THE COMPANY
The consolidated financial statements include the accounts of the
Company's directly or indirectly held subsidiaries:
OWNERSHIP PERCENTAGE
----------------------------------------------------------------
SUBSIDIARY DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
--------------------- -------------------- -----------------
Subsidiaries held directly:
Netia Telekom S.A. ......................................... 100 100 100
Netia South Sp. z o.o. ..................................... 100 100 100
Netia 1 Sp. z o.o........................................... 38 82 89
Uni-Net Sp. z o.o........................................... 58 58 58
Netia Holdings B.V. (the Netherlands)....................... 100 100 100
Netia Holdings II B.V. (the Netherlands).................... 100 100 100
Netia Holdings III B.V. (the Netherlands) .................. - 100 100
Subsidiaries held indirectly:
Netia Telekom Swidnik S.A................................... 97 97 100
Netia Telekom Lublin S.A.................................... 92 92 98
Netia Telekom Ostrowiec S.A................................. 99 100 100
Netia Telekom Mazowsze S.A.................................. 100 100 100
Netia Telekom Warszawa S.A.................................. 100 100 100
Netia Telekom Modlin S.A.................................... 93 100 100
Netia Telekom Kalisz S.A.................................... 97 97 97
Netia Telekom Torun S.A..................................... 96 96 98
Netia Telekom Wloclawek S.A................................. 100 100 100
Netia Telekom Pila Sp. z o.o................................ 99 99 99
Netia Network S.A........................................... 49 100 100
Optimus Inwest S.A.......................................... 100 100 100
Netia Telekom Telmedia S.A.................................. 100 100 100
Netia Telekom Silesia S.A................................... 98 99 99
Internetia Telekom Sp. z o.o. (held directly until May 2000,
merged with Netia Telekom in March 2002) 100 100 -
Top-Net Sp. z o.o. (owned by Internetia Telekom Sp. z o.o.
until October 2001, merged with Netia Telekom in March 2002) 100 100 -
All subsidiaries are incorporated in Poland unless noted.
During the year ended December 31, 2001, the Company purchased from
minority shareholders shares in Netia Telekom Ostrowiec S.A. and Netia
Network S.A, increasing its ownership to 100% in both subsidiaries.
For changes of ownership structure of Netia 1 in the years ended
December 31, 2002 and 2001, see Note 17.
Other changes in shares held in operating subsidiaries during the year
ended December 31, 2002, relate to purchases by the Company of small number
of shares from the minority shareholders.
19. OTHER OPERATING EXPENSES
YEAR ENDED
--------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
---------------------- ---------------------- -------------------
(PLN) (PLN) (PLN)
Legal and financial services............................ 45,945 59,162 69,718
Cost of rented lines.................................... 30,756 48,087 43,723
Sales and marketing expenses............................ 29,754 18,524 20,793
Allowance for debtors subject to court settlements...... - 16,974 -
Bad debt expense........................................ 13,016 16,485 10,641
Office and car maintenance.............................. 10,474 14,206 17,002
Information technology services......................... 6,281 11,229 14,614
Mailing services........................................ 3,625 5,694 6,025
Travel and accommodation................................ 7,385 5,008 4,290
Materials and energy.................................... 7,432 8,063 8,033
Other operating costs................................... 13,205 19,177 7,777
---------------------- ---------------------- -------------------
167,873 222,609 202,616
====================== ====================== ===================
F-25
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
The average number of persons employed by the Company was 1,418, 1,576
and 1,413, during the years ended December 31, 2000, 2001 and 2002,
respectively.
20. FINANCIAL EXPENSE, NET
YEAR ENDED
---------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
---------------------- ---------------------- --------------------
(PLN) (PLN) (PLN)
Interest income.......................................... 80,784 36,025 14,804
Foreign exchange gains................................... 193,305 224,103 30,892
Interest expense......................................... (380,928) (421,874) (244,505)
Foreign exchange losses.................................. (74,965) (68,273) (218,634)
Amortization of notes issuance costs .................... (12,932) - (127)
Write off of loan origination fees ...................... (3,945) - -
---------------------- ---------------------- --------------------
(198,681) (230,019) (417,570)
====================== ====================== ====================
In the year ended December 31, 2002 the interest on the 1997 Notes,
1999 Notes and 2000 Notes was charged until the day the Dutch moratorium
proceedings were opened, i.e. July 12, 2002.
21. LOSS PER SHARE
Loss per share has been calculated based on the net loss for each
period divided by the weighted average number of shares in issue during the
year.
YEAR ENDED
---------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
---------------------- ---------------------- --------------------
Net loss................................................ (418,931) (1,149,217) (674,972)
Weighted average number of shares in issue (not in
thousands) ........................................... 28,728,709 30,817,291 37,730,692
Basic loss per share (not in thousands)................. (12.60) (37.29) (17.89)
Weighted average number of shares in issue for the year ended December
31, 2002 includes 312,626,040 (not in thousand) series H shares issued on
December 23, 2002 and registered by the Polish Court on January 30, 2003
(see also Note 26).
No diluted losses per share were computed in the years ended December
31, 2000, 2001 and 2002, as the effect of the Netia Performance Stock
Option Plan and options granted to Galopus Co. Ltd. ("Galopus") and Telia
were anti-dilutive during these periods, if applicable.
Weighted average number of shares in issue (not in thousands) excludes
601,881, 601,881 and 468,648 treasury shares as at December 31, 2000, 2001
and 2002, respectively.
F-26
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
22. SEGMENTAL REPORTING
The following tables contain segment information for the Company's
telecommunications business and other business (primarily radio
communications services and sales of equipment through Uni-Net).
YEAR ENDED
-------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------------ ------------------- -------------------
(PLN) (PLN) (PLN)
Revenue
Telecommunications....................................... 395,225 512,163 588,120
Other businesses......................................... 47,522 26,688 16,264
------------------ ------------------- -------------------
442,747 538,851 604,384
Operating Expenses
Telecommunications....................................... (555,966) (1,042,697) (851,415)
Other businesses......................................... (43,312) (25,053) (15,777)
------------------ ------------------- -------------------
(599,278) (1,067,750) (867,192)
(Loss) / income from operations
Telecommunications....................................... (160,741) (530,534) (263,295)
Other businesses......................................... 4,210 1,635 487
------------------ ------------------- -------------------
(156,531) (528,899) (262,808)
Net (loss) / income
Telecommunications....................................... (365,151) (1,151,293) (675,407)
Other businesses......................................... 3,105 2,076 435
------------------ ------------------- -------------------
(362,046) (1,149,217) (674,972)
Total capital expenditures
Telecommunications....................................... 1,116,501 586,753 270,250
Other businesses......................................... 341 24 298
------------------ ------------------- -------------------
1,116,842 586,777 270,548
Total depreciation charges
Telecommunications....................................... 128,254 170,507 193,186
Other businesses......................................... 2,225 2,228 1,448
------------------ ------------------- -------------------
130,479 172,735 194,634
Total amortization charges
Telecommunications....................................... 49,231 80,830 74,046
Other businesses......................................... - - -
------------------ ------------------- -------------------
49,231 80,830 74,046
Total impairment charges
Telecommunications....................................... - 336,526 149,353
Other businesses......................................... - - -
------------------ ------------------- -------------------
- 336,526 149,353
Other non-cash (income) / expense
Telecommunications....................................... 21,127 365,055 211,324
Other businesses......................................... 413 (111) 3
------------------ ------------------- -------------------
21,540 364,944 211,327
F-27
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
YEAR ENDED
-------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------------ ------------------- -------------------
(PLN) (PLN) (PLN)
Segment assets - before accumulated depreciation and amortization
Telecommunications.................................. 5,367,001 4,832,056 4,513,391
Other businesses.................................... 33,742 25,799 24,472
------------------ ------------------- -------------------
5,400,743 4,857,855 4,537,863
Segment assets, net
Telecommunications.................................. 5,013,011 3,892,987 3,479,901
Other businesses.................................... 20,293 11,360 12,918
------------------ ------------------- -------------------
5,033,304 3,904,347 3,492,819
Segment liabilities
Telecommunications.................................. 4,155,753 4,218,165 669,139
Other businesses.................................... 14,830 3,823 3,890
------------------ ------------------- -------------------
4,170,583 4,221,988 673,029
All operations and revenues are derived and conducted within Poland.
There are no sales or other transactions between the business segments
apart from loans granted to other business segment and related financial
costs. Segment assets consist primarily of property, plant and equipment,
intangible assets, inventories, receivables and cash. Segment liabilities
comprise long- and short-term liabilities. Capital expenditure comprises
cash payments resulting from purchases of property, plant and equipment and
intangible assets.
23. RELATED PARTY TRANSACTIONS
CHANGES IN MANAGEMENT BOARD
Effective June 1, 2002, Mr. Stefan Albertsson, Marketing and Products
Director was appointed a member of the Management Board of Netia Holdings S.A.
Effective September 17, 2002 Mr. Kjell-Ove Blom, Acting President of
the Management Board of Netia Holdings S.A. resigned from his post in the
Management Board.
Effective September 17, 2002 Mr. Wojciech Madalski was appointed Chief
Executive Officer and President of the Management Board of Netia Holdings S.A.
MEMBERS OF THE MANAGEMENT BOARD
As at December 31, 2002 total number of options granted to Members of
the Management Board of the Company was 225,000. 39,000 new options were
granted in the year ended December 31, 2002, while 83,042 previously
granted options expired during the respective period. Strike prices for the
options granted to the Management Board range between 19.25 USD to 33.12
USD per share. In connection with the resignation of the former Acting
President of the Company in September 2002, 120,000 options held by him are
no longer considered to be options held by a member of the Management
Board.
MANAGEMENT BOARD REMUNERATION AND SUPERVISORY BOARD REMUNERATION
Compensation and other costs associated with members of the Company's
various management boards during the years ended December 31, 2000, 2001
and 2002 amounted to PLN 9,679, PLN 11,676 and PLN 13,239, respectively.
The compensation expense for the year ended December 31, 2002 includes PLN
2,500 of bonus recorded in accordance with the Key Employee Retention Plan
bonus scheme based on the restructuring agreement and agreed upon by the
Supervisory Board and the ad hoc committee of the Noteholders. These
amounts include remuneration and consulting agreements of the President of
the Company amounting to PLN 658 for the year ended December 31, 2002 and
of the former acting President amounting to PLN 1,430, PLN 2,025 and PLN
3,775, for the years ended December 31, 2000, 2001 and 2002, respectively
and remuneration and consulting agreements of the previous President of the
Management Board of the Company in the amount of PLN 2,529 for the year
ended December 31, 2001.
The Company had consulting agreements with companies owned by its
shareholders and members of the Supervisory Board. The Company has paid PLN
1,370, PLN 1,154 and PLN 1,221 during the years ended December 31, 2000,
2001 and 2002, respectively, under these agreements.
F-28
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
GOLDMAN SACHS, SHAMROCK/TREFOIL AND DANKNER
Until July 2000, Shamrock Holdings Inc., Trefoil Capital Investors LP,
Dankner Investments Limited and certain entities affiliated with Goldman
Sachs Capital Partners LP were significant shareholders of the Company.
Transactions with these parties included management, consulting and
guarantee fees of PLN 455, PLN 257 and PLN nil for the years ended December
31, 2000, 2001 and 2002, respectively.
24. COMMITMENTS AND CONTINGENCIES
Capital expenditures contracted for at the balance sheet date but not
recognized in the consolidated financial statements amount to PLN 147, 022
as at December 31, 2001 and PLN 21,942 (USD 5,716 at the December 31, 2002
exchange rate) as at December 31, 2002.
MILLENNIUM
In August and September 2000, the Company entered into certain
agreements to acquire all of the outstanding equity of Millennium
Communications S.A. ("Millennium"), a provider of telecommunications
services to multi-tenant buildings in Warsaw, for a total consideration of
between USD 10,800 and 20,200, based on Millennium's financial performance
through the end of 2001. Following the execution of the agreements, the
Company advanced to Millennium a total of PLN 8,500 and EUR 2,936 (PLN
11,974 at the September 30, 2002 exchange rate), of which PLN 8,500 was
subsequently repaid by Millennium in January 2001. In December 2000, the
Company initiated court and arbitration proceedings, modified in October
2001, in response to the failure by Millennium to perform the agreement.
The Company claimed the remaining part of the advance made to Millennium
included in the Company's balance sheet and additional damages of PLN
8,500. In 2001, a valuation allowance of PLN 16,974 was recorded as other
operating expense against the outstanding amount receivable from Millennium
as a result of the events described above.
On October 15, 2002 the Company received a ruling of the Polish Chamber
of Commerce Arbitration Court, dated October 1, 2002, dismissing Millennium
and its shareholder's direct claims against the Company for declaration of
the share subscription agreement void and ineffective and payment of PLN
11,500 by the Company. The court also dismissed the Company's claim for
damages against Millennium in the amount of PLN 8,500. On November 12, 2002
the Company petitioned the Regional Court in Warsaw to set aside the ruling
of the arbitration court. Millennium petitioned the Regional Court in
Warsaw to enforce the ruling of the arbitration court. Both cases are
currently pending. Also a case brought by the Company against Millennium in
the Regional Court in Warsaw, petitioning for the repayment of PLN 11,500
loan is still pending. On February 11, 2003 the court ruled in favor of the
Company for the return of the principal amount of the loan and the related
interest. The ruling is still subject to approval by the court.
On February 28, 2001, Millennium filed a motion against the Company for
certain acts of unfair competition. In its motion, Millennium requested
that the court order the Company to pay Millennium damages of PLN 50,000.
Management believes that the Millennium suit was filed as a litigation
tactic in connection with the Company's lawsuit against Millennium and that
Millennium's unfair competition claim does not have any merit.
Management, having obtained legal advice, does not believe that the
settlement of this matter will have a material adverse effect on the
Company's financial condition.
MINORITY SHAREHOLDERS
On August 1, 2002 the Company received a copy of a claim by an
individual shareholder filed with the District Court in Warsaw (Sad
Okregowy w Warszawie) with a demand for the invalidation of sections 10, 11
and 13 of Resolution No. 2 adopted by the Company's General Shareholders'
Meeting on April 4, 2002. The individual shareholder claimed that the
distribution of the Subscription Warrants to be issued by the Company under
the pending financial restructuring was harmful to the minority
shareholders and violates good customs. On August 14, 2002, the Company
filed an answer to this claim and requested the District Court to dismiss
it.
The Company received a decision from the District Court in Warsaw dated
June 14, 2002 in which the Court resolved to forward a claim filed by
another minority shareholder, also for the cancellation of a resolution
adopted by the Company's General Shareholders' Meeting on April 4, 2002,
for determination by the Regional Court for the capital city of Warsaw. The
claim is substantively based on the same grounds as the previous minority
shareholder's claim. On January 17, 2003, the Company filed an answer to
this claim and requested the District Court to dismiss it.
The Company also received a decision from the District Court of July 1,
2002 in which the District Court resolved to forward a claim filed by
another minority shareholder requesting the invalidation of a resolution
adopted by the Company's General Shareholders' Meeting on April 4, 2002 to
the Regional Court for the capital city of Warsaw for its determination.
The Company has not received a copy of the claim and is not aware of its
merits. If, however, the claim is based on the same grounds as the previous
minority shareholder claim received on August 1, 2002, which the Company's
Management Board believes to be unsubstantiated, the Company expects that
it will file for this claim's dismissal as well.
F-29
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
CONSULTING SERVICES CLAIMS
The Company received a letter dated January 8, 1999 with a claim for
USD 10,000 in connection with consulting services provided to the Company
by an outside consultant. Management is of the opinion, having obtained
legal advice, that it is impossible to determine whether any liability with
respect to this matter is likely to arise or to estimate the amount of this
liability if it, in fact, were to arise. Accordingly no liability has been
recorded for this claim.
The Company is defending a legal claim for USD 4,450 (including
damages) brought in France in January 1998, also in connection with
consulting services provided to the Company by an outside consultant.
Management is of the opinion, having obtained legal advice that it is
impossible to determine whether any liability with respect to this matter
is likely to arise. Accordingly, no liability has been recorded for this
claim.
TELECOMMUNICATIONS PERMITS
For commitments and contingencies relating to telecomunications permits
held by the Company see Note 8.
25. RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
YEAR ENDED
--------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2002
------------------ ------------------ -----------------
(PLN) (PLN) (PLN)
Net loss per IAS..................................................... (362,046) (1,149,217) (674,972)
Foreign exchange losses (1, 6, 12)................................... (2,773) 9,002 (8,634)
Interest expense (1, 6).............................................. 19,087 27,002 (6,824)
Amortization of goodwill (4)......................................... 2,112 1,584 -
Reversal of impairment of goodwill (11) ............................. - 220,279 (213,443)
Amortization of license (6).......................................... 147 3,856 5,989
Gain on restructuring (12)........................................... - - 2,661,869
Reversal of 2002 Notes interest and amortization of notes
issuance cost (12) ................................................ 595
Stock Option Plan (2)................................................ 380 2,893 207
Employee Share Purchase (3).......................................... (1,650) - -
Depreciation of U.S. GAAP fixed asset basis differences (1, 5) ...... 3,567 1,147 (2,720)
Cumulative effect on prior years of adopting SAB 101 (7) ............ (48,361) - -
Deferred revenue (7) ................................................ (2,857) 12,495 15,002
Minority interest (8)................................................ 537 - -
------------------ ------------------ -----------------
NET PROFIT / (LOSS) PER U.S. GAAP.................................... (391,857) (870,959) 1,777,069
Basic and diluted earnings / (loss) per share per U.S. GAAP before
cumulative effect on prior years of adopting SAB 101 (not in
thousands)......................................................... (11.96) (28.26) 47.10
Loss per share related to cumulative effect on prior years of adopting
SAB 101 (not in thousands)......................................... (1.68) - -
------------------ ------------------ -----------------
BASIC AND DILUTED EARNINGS / (LOSS) PER SHARE PER U.S. GAAP
(NOT IN THOUSANDS)................................................. (13.64) (28.26) 47.10
================== ================== =================
Weighted average number of shares in issue for the year ended December
31, 2002 includes 312,626,040 (not in thousand) series H shares issued on
December 23, 2002 and registered by the Polish Court on January 30, 2003
(see also Note 26).
F-30
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2001 2002
-------------------- --------------------
(PLN) (PLN)
Shareholders' equity / (deficit) per IAS........................................ (343,248) 2,802,291
Fixed assets, including depreciation (1, 5)..................................... 22,858 12,136
Amortization of goodwill (4).................................................... 7,920 14,756
Reversal of impairment of goodwill (11) ........................................ 220,279 -
Amortization of license (6)..................................................... 8,365 14,353
Stock Option Plan (2)........................................................... (850) (643)
Increase in equity related to Stock Option Plan (2)............................. 850 643
Employee Share Purchase (3)..................................................... (1,650) (1,650)
Increase in equity related to Employee Share Purchase (3)....................... 1,650 1,650
Financial expense (4, 6, 12).................................................... (68,995) (76,450)
Purchase of EBRD interest in Netia (4).......................................... (14,756) (14,756)
Increase in equity related to Incentive Stock Option (5)........................ 42,216 42,216
Minority interest (8)........................................................... 537 537
Cumulative effect on prior years of adopting SAB 101 (7)........................ (48,361) (48,361)
Deferred revenue (7) ........................................................... 9,638 24,640
Gain on restructuring (12)...................................................... - 2,661,869
Fair value of series H shares (12).............................................. - 956,020
Reversal of effect of restructuring calculated under IAS (12)................... - (3,819,712)
Reversal of 2002 Notes interest and amortization of notes issuance cost (12)..... - 595
Other operating expenses (5).................................................... (31,662) (31,662)
-------------------- --------------------
SHAREHOLDERS' EQUITY / (DEFICIT) PER U.S. GAAP.................................. (195,209) 2,538,472
==================== ====================
CHANGES IN SHAREHOLDERS' EQUITY / (DEFICIT) ON A U.S. GAAP DECEMBER 31, DECEMBER 31,
BASIS 2001 2002
-------------------- --------------------
(PLN) (PLN)
Shareholders' equity / (deficit) at beginning of period as
reported.................................................... 653,085 (195,209)
Effect of adopting IAS 39 and FAS 133 (9)..................... 134 -
-------------------- --------------------
SHAREHOLDERS' EQUITY / (DEFICIT) AT BEGINNING OF PERIOD
AS RESTATED................................................. 653,219 (195,209)
Net profit / (loss)........................................... (870,959) 1,777,069
Issuance of shares at fair value in exchange for reduction
of debt, net of related costs............................... - 956,020
Exchange of shares with minority shareholder.................. - 799
Increase in equity related to Stock Option Plan (2)........... (2,893) (207)
Change of Other Comprehensive Income (10)..................... 25,424 -
-------------------- --------------------
SHAREHOLDERS' EQUITY / (DEFICIT) AT END OF PERIOD............. (195,209) 2,538,472
==================== ====================
The following are descriptions of U.S. GAAP reconciling items:
(1) Under IAS, the Company capitalizes foreign exchange differences and
net interest expense related to borrowings used to fund construction
in progress. Under US GAAP, foreign exchange differences must be
reflected in the statement of operations and are not subject to
capitalization. Additionally, an interest rate is applied to the
average construction in progress balance to obtain the amount of
interest capitalized under US GAAP, which is limited to the total
amount of interest expense incurred by the Company from all sources.
(2) Under IAS, the issuance of share options granted to employees of the
Company under the stock option plans is recorded when the options are
exercised. For US GAAP purposes, the cost relating to these options
(estimated using the intrinsic value method in accordance with APB
opinion No. 25, "Accounting for Stock Issued to Employees") is
recognized in the statements of operations in the period from the
grant date to the vesting date for each option.
(3) Under IAS, the discount on shares sold to employees is not recognized
as a compensation expense. For US GAAP purposes, the discount on
shares sold to employees was recognized as compensation expense in the
statements of operations in accordance with APB No. 25, "Accounting
for Stock Issued to Employees".
(4) Under IAS, the Company recorded goodwill of PLN 21,104 in 1997
relating to the purchase of shares in Netia Telekom owned by the
European Bank for Reconstruction and Development ("EBRD"). For US GAAP
purposes, the original issuance of shares in 1996 to the EBRD and the
subsequent purchase by the Company in September 1997 is treated as
being linked to the loan provided by the EBRD. However, during the
period of the EBRD loan, any resultant incremental finance cost was
not material. On purchase of the EBRD's shares in Netia Telekom by the
F-31
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
Company in 1997, the excess paid by the Company over the amount
originally paid for the shares by the EBRD in 1996 has been treated as
a component of financial expense. The balance of the amount paid by
the Company (equivalent to the original issue price to the EBRD) has
been charged to shareholders' equity for US GAAP purposes.
Accordingly, the total amount of goodwill recorded under IAS has been
reversed in the US GAAP reconciliation.
This adjustment was recorded through September 30, 2001 as the Company
recognized impairment of goodwill under IAS during the nine month
period ended September 31, 2001.
(5) Under IAS, the Incentive Stock Option issued in connection with the
Operational Support and Supervision Agreements ("OSSA") entered into
with Telia is not recognized until the Option is exercised. For U.S.
GAAP purposes, the fair value of the option is recognized as a
component of expenses in line with the treatment of costs invoiced
under the OSSA's. The fair value of the Incentive Stock Option was PLN
42,216 and this is being recognized over the service period of the
OSSA. During March 1999, Telia exercised its option to purchase the
shares. As a result in the year ended December 31, 1999, the remaining
PLN 22,867 has been recognized as other operating expenses and PLN
1,759 has been capitalized as part of cost of the network under
construction.
(6) For US GAAP the interest expense on the non interest bearing liability
associated with obtaining licenses from the Polish government was
imputed in accordance with APB Opinion No. 21 "Interest on Receivables
and Payables" based on the Company's effective borrowing rate. This
rate differs from the rate used for the calculation under IAS, which
allows for inclusion of interest income in the calculation of the
Company's effective borrowing rate. The amount recorded for the year
ended December 31, 2000 includes the cumulative adjustment necessary
to reflect the consistent treatment of license liabilities under both
US GAAP and IAS.
(7) In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB 101") which provides additional guidance in applying
generally accepted accounting principles. In certain cases, SAB 101
requires upfront fees to be deferred and recognized over the expected
period of customer relationship. The Company has applied SAB 101 under
U.S. GAAP and therefore deferred the revenue from installation fees
over the expected period of the customer relationship. . The expected
period of the customer relationship was seven years through December
31, 2000 and was revised to five years as of January 1, 2001.
(8) The adjustment reflects the effect of minority share in the above
adjustments.
(9) As of January 1, 2001 the Company has adopted the Financial Accounting
Standards Board (the "FASB") Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by FASB
Statement No. 138 and interpreted by Derivatives Implemenation Group
issues (together "SFAS 133"). The cross-currency interest rate swap
transactions described in Notes 14 and 15 have been designated as cash
flow hedges under SFAS 133. The fair value of those derivatives
instruments on January 1, 2001 of PLN 29,575 was charged to "Other
Comprehensive Income" (PLN 25,424) and to the statement of operations
(PLN 4,151) upon adoption of SFAS 133.
(10) This adjustment reflects the change in hedging reserve as reported in
consolidated statements of changes in shareholders' equity / (deficit)
under IAS.
(11) During the year ended December 31, 2001 the Company has written-off
the goodwill under IAS as a result of management's belief that there
was no longer a future economic benefit that can be associated with
goodwill and an impairment test performed. On January 1, 2002, the
Company adopted SFAS 142, "Goodwill and Other Intangible Assets."
Based upon management's evaluation of the Company's financial position
at that date, including its negative equity and the value of the
Company's quoted stock market price, the Company has wrote off
goodwill with a net book value of PLN 213,443 for U.S. GAAP purposes.
(12) Under IAS, the surplus on restructuring of the Company's debt is
recorded in other reserve of a component of shareholders' equity. For
US GAAP, the restructuring of the Company is accounted for in
accordance with SFAS 15 "Accounting by Debtors and Creditors for
Troubled Debt Restructuring" ("FAS 15"). According to SFAS 15, the
gain on restructuring is classified as extraordinary item and was
calculated as a difference between: (a) the carrying amount of the
reduced debt and, (b) the aggregate of: (1) fair value of equity
interest granted to the bondholders in exchange for their liabilities,
(2) total future cash payments nominal value relating to the 2002
Notes and the remaining instalment obligations, and (3) issuance costs
relating to the 2002 Notes. There is no tax effect relating to the
gain on restructuring. Under SFAS 15 the 2002 Notes are recognized at
its nominal value. No interest expense is recognized on the 2002 Notes
for the period between the restructuring and maturity of the debt
date. Accordingly, no interest is recognized on the remaining
instalment obligations.
Under IAS, the 2002 Notes are recognized initially at the proceeds
received, net of transaction costs incurred. The difference between
the proceeds (net of transaction costs) and the redemption value is
recognized in the statements of operations over the period of the
debt, using effective cost method. Under US GAAP, transaction costs
F-32
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
relating to debt issuance are offset against the gain on restructuring
and no interest expense is recognized on the 2002 Notes, for any
period between the restructuring and maturity of the debt date.
Additional U.S. GAAP disclosures are as follows:
1. Under U.S. GAAP, the "Loss from Operations" for the years
ended December 31, 2000, 2001 and 2002 would be PLN 203,193,
PLN 285,216 and PLN 244,331, respectively.
2. For U.S. GAAP purposes, certain additional disclosures are
required under SFAS 123 Accounting for Stock-Based
Compensation.
The following table summarizes information about stock options at
December 31, 2001:
OPTIONS WEIGHTED WEIGHTED
AVERAGE AVERAGE FAIR
EXERCISE PRICES VALUE OF WEIGHTED AVERAGE
NUMBER OF OF OPTIONS (NOT OPTIONS (NOT EXPECTED LIFE
OPTIONS IN THOUSANDS) IN THOUSANDS) (IN YEARS)
---------------- ------------------ ---------------------------------
(USD) (USD)
Outstanding at the beginning of the year.... 1,069,692 20.41 9.45 2.80
Granted..................................... 111,000 27.87 0.00 2.00
Exercised................................... - - - -
Forfeited/expired........................... (179,180) 15.99 35.05 2.60
----------------
OUTSTANDING AT THE END OF THE YEAR 1,001,512 23.01 11.00 2.13
================
----------------
EXERCISABLE AT THE END OF THE YEAR - - - -
================
The amount of stock options exercisable at December 31, 2002 is
different than the amount of options vested at December 31, 2002
(refer to Note 16) as the majority of the options are exercisable
only if the market price of shares as at the date of the exercise
exceeds the exercise price by at least 20%.
The fair value of the options were estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility of 70% for the year ended
December 31, 2002 and 50% for the year ended December 31, 2001; (2)
risk-free interest rate of 2% for the year ended December 31, 2002
and 2.24% for the year ended December 31, 2001 (3) expected life of
approximately 2.13 years for the year ended December 31, 2002 and
2.8 years for the year ended December 31, 2001 and (4) no expected
dividend. Had compensation expense been determined based on the
fair value at the grant dates for awards under the plans consistent
with the method of SFAS No. 123, the Company's U.S. GAAP net loss
and earnings per share would have been increased to the pro forma
amounts indicated below:
2001 2002
----------------- -------------------
(PLN) (PLN)
Net profit / (loss).................. As reported........... (870,959) 1,777,069
Pro forma............. (882,077) 1,778,178
Basic and diluted earnings / (loss) per
share (not in thousands)......... As reported........... (28.26) 47.10
Pro forma............. (28.62) 47.13
3. The significant valuation reserves for the Company were as follows:
Valuation allowance for net deferred tax asset for U.S. GAAP
JANUARY 1 PROVISION RELEASE DECEMBER 31
------------------ ------------------ ------------------ ----------------
(PLN) (PLN) (PLN) (PLN)
2001 279,027 42,483 - 321,510
2002 321,510 - (28,175) 293,335
F-33
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
Allowance for doubtful accounts:
JANUARY 1 PROVISION UTILIZATION DECEMBER 31
------------------ ------------------ ------------------ ----------------
(PLN) (PLN) (PLN) (PLN)
2001 23,033 16,485 (3,326) 36,192
2002 36,192 11,021 (1,935) 45,278
4. In June 2001, the FASB issued SFAS No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets".
The objectives of SFAS 143 are to establish accounting standards
for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. The
provisions of SFAS 143 are required to be applied starting with
fiscal years beginning after June15, 2002. The adoption of SFAS
143 did not have a material impact on the Company's consolidated
financial statements.
5. In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Correction as of April 2002" ("SFAS 145"). The
objective of SFAS 145 is to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects and that are similar to sale-leaseback
transactions. The provisions of SFAS 145 are required to be
applied in fiscal years beginning after May 15, 2002. The
adoption of SFAS 145 did not have a material impact on the
Company's consolidated financial statements.
6. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS
146 addresses significant issues relating to the recognition,
measurement and reporting of costs associated with exit and
disposal activities, including restructuring activities, and
nullifies the guidance in Emerging Issues Task Force Issue No.
94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Cost to Exit an Activity". The provisions of
SFAS 146 are required to be applied for exit or disposal
activities initiated after December 31, 2002. Management is
currently evaluating the impact that the adoption of SFAS 146 may
have on our consolidated financial statements.
26. SUBSEQUENT EVENTS
New Supervisory Board
On January 15, 2003 the Extraordinary General Meeting of
Shareholders appointed three new members of the Company's Supervisory
Board. On January 15, 2003 TeliaSonera AB (publ.) and Warburg Pincus
each appointed their new representatives in the Supervisory Board. In
accordance with the changes in the Company's statute adopted by the
Extraordinary General Meeting of Shareholders on January 15, 2003 the
number of members of the Company's Supervisory Board will be reduced
to seven as of the date of registration of changes to the Company's
statute by the Polish court.
Nasdaq De-Listing
On January 21, 2003 the Nasdaq Listing and Hearing Review
Council (the "Listing Council") after its review of the decision of
the Panel and additional information submitted by the Company
regarding the status of the financial restructuring reversed the
Panel's decision and remended the matter to the Panel. The Listing
Council noted that the Panel's decision from October 14, 2002 to
delist the Company's ADSs from The Nasdaq National Market was correct
and appropriate at the time it was made. The Listing Council
instructed the Panel to re-list the Company's ADSs on the Nasdaq
SmallCap Market upon Panel's review of the Company's application. The
Management Board has decided to file such application, which will be
subject to the approval of the Nasdaq Listing Qualifications
Department.
Registration of shares
On January 30, 2003 Polish Regional Court in Warsaw registered
(i) the increase of the Company's share capital resulting from the
issuance of series H shares and (ii) decrease of par value of
existing shares from PLN 6.00 (not in thousand) to PLN 1.00 (not in
thousand) per share. Upon this registration the share capital of the
Company amounted to PLN 344,045 and consisted of 344,044,212 (not in
thousand) ordinary shares and 1,000 series A1 preferred shares.
F-34
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
Changes in Management Board
As of February 7, 2003 Mr. Antoni Dariusz Wojcieszek resigned
from his post in the Management Board.
Listing of series H shares
On February 13, 2003, 312,626,040 series H shares commenced
trading on the Warsaw Stock Exchange following their registration
with the Polish National Securities Depository on February 10, 2003.
The series H shares will be traded on the main market of the Warsaw
Stock Exchange separately from the currently listed ordinary shares
under the name "NETIA2" and the ticker "NET2".
Redemption of 2002 Notes
On February 13, 2003, Netia's Supervisory Board approved the
redemption of the outstanding 2002 Notes with an aggregate principal
amount of EUR 49,869, following the recommendation by the Company's
Management Board. The decision was driven by the sufficient cash
position and concerns over (i) the high costs of servicing the debt
and establishing the security for the 2002 Notes as required under
the Indenture, and (ii) the substantial restrictions imposed by the
Indenture covenants Netia's flexibility to run its daily operational
business.
Redemption of 2002 Notes (unaudited, an event subsequent to the date
of the report of independent accountants)
On March 24, 2003, the Company redeemed the outstanding 2002
Notes amounting to EUR 51,096 (PLN 221,482 at the exchange rate in
effect on that date) including interest accrued until that date.
F-35
EXHIBIT INDEX
-------------
NUMBER DESCRIPTION
------ -----------
1.1 The Formation Deed of Netia Holdings S.A. in English translation
(incorporated herein by reference to Exhibit 3.2 to Netia's
Registration Statement on Form F-4, filed with the Securities and
Exchange Commission on January 30, 1998, as amended, declared
effective on April 30, 1998 (the "Exchange Offer Registration
Statement")).*
1.2 Amended and Restated Statute of Netia Holdings S.A., dated as of
January 15, 2003, in English translation.* *
2.1 Senior Notes Indenture, dated as of November 3, 1997, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the 10 1/4% Senior Notes due 2007 and
the 10 1/4% Series B Senior Notes due 2007 issued by Netia
Holdings B.V. (incorporated herein by reference to Exhibit 4.1 to
the Registration Statement on Form F-4, filed with the Securities
and Exchange Commission on January 30, 1998, as amended (the
"1998 Exchange Offer Registration Statement")).*
2.1(a) Supplemental Indenture, dated as of December 1, 1998, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the Senior Notes Indenture included
herein as Exhibit 2.1 (incorporated herein by reference to
Exhibit 4.1(a) to the Company's Annual Report on Form 20-F, filed
with the Securities and Exchange Commission on June 29, 1999 (the
"1998 Annual Report")).*
2.2 Senior Notes Indenture, dated as of November 3, 1997, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the 11 1/4% Senior Notes due 2007 and
the 11 1/4% Series B Senior Notes due 2007 issued by Netia
Holdings B.V. (incorporated herein by reference to Exhibit 4.1 to
the 1998 Exchange Offer Registration Statement).*
2.2(a) Supplemental Indenture, dated as of December 1, 1998, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the Senior Notes Indenture included
herein as Exhibit 2.2 (incorporated herein by reference to
Exhibit 4.1(a) to the 1998 Annual Report).*
2.3 Senior Discount Notes Indenture, dated as of November 3, 1997,
among Netia Holdings B.V., Netia Holdings S.A. and State Street
Bank and Trust Company, relating to the 10 1/4% Senior (DM)
Discount Notes due 2007 and the 10 1/4% Series B Senior (DM)
Discount Notes due 2007 issued by Netia Holdings B.V.
(incorporated herein by reference to Exhibit 4.1 to the 1998
Exchange Offer Registration Statement).*
2.3(a) Supplemental Indenture, dated as of December 1, 1998, among Netia
Holdings B.V., Netia Holdings S.A. and State Street Bank and
Trust Company, relating to the Senior Discount Notes Indenture
included herein as Exhibit 2.3 (incorporated herein by reference
to Exhibit 4.1(a) to the 1998 Annual Report).*
2.4 Form of 10 1/4% Series B Senior Notes due 2007 (incorporated
herein by reference to Exhibit 2.1 to Netia's Annual Report on
Form 20-F, filed with the Securities and Exchange Commission on
April 30, 2001 (the "2000 Annual Report")).*
2.5 Form of 11 1/4% Series B Senior Notes due 2007 (incorporated
herein by reference to Exhibit 2.2 to the 2000 Annual Report).*
2.6 Form of 11% Series B Senior (DM) Discount Notes due 2007
(incorporated herein by reference to Exhibit 2.3 to the 2000
Annual Report).*
* Incorporated by reference
** Filed herewith
2.7 Escrow Agreement, dated as of November 3, 1997, between Netia
Holdings S.A. and State Street Bank and Trust Company
(incorporated herein by reference to Exhibit 10.2 to the 1998
Exchange Offer Registration Statement).*
2.8 Senior Euro Notes Indenture, dated as of June 10, 1999, among
Netia Holdings II B.V., Netia Holdings S.A. and State Street Bank
and Trust Company, as trustee, relating to the 13 1/2% Senior
Euro Notes due 2009 (incorporated herein by reference to the 1998
Annual Report).*
2.9 Senior Dollar Notes Indenture, dated as of June 10, 1999, among
Netia Holdings II B.V., Netia Holdings S.A. and State Street Bank
and Trust Company, as trustee, relating to the 13 1/2% Senior
Dollar Notes due 2009 (incorporated herein by reference to the
1998 Annual Report).*
2.10 Form of 13 1/2% Senior Euro Note due 2009 (incorporated herein by
reference to Exhibit 2.8 to the 2000 Annual Report).*
2.11 Form of 13 1/2% Senior Dollar Note due 2009 (incorporated herein
by reference to Exhibit 2.9 to the 2000 Annual Report).*
2.12 Euro Investment Agreement, dated as of June 10, 1999, by and
among Netia Telekom S.A., Netia South Sp. z o.o. and State Street
Bank and Trust Company, as trustee (incorporated herein by
reference to Exhibit 4.14 to the 1998 Annual Report).*
2.13 Dollar Investment Agreement, dated as of June 10, 1999, by and
among Netia Telekom S.A., Netia South Sp. z o.o. and State Street
Bank and Trust Company (incorporated herein by reference to
Exhibit 4.15 to the 1998 Annual Report).*
2.14 Senior Euro Notes Indenture, dated as of June 9, 2000, by and
among Netia Holdings II B.V., Netia Holdings S.A. and State
Street Bank and Trust Company, as trustee, relating to the 13
3/4% Senior Notes due 2010 (incorporated herein by reference to
Exhibit 4.1 to the Registration Statement on Form F-3 filed with
the Securities and Exchange Commission on May 15, 2000, as
amended (the "2000 Notes Registration Statement")).*
2.15 Form of 13 3/4% Senior Euro Notes due 2010 (incorporated herein
by reference to Exhibit 2.14 to the 2000 Annual Report).*
2.16 Investment Agreement, dated as of June 9, 2000, by and among
Netia Telekom S.A., Netia South Sp. z o.o. and State Street Bank
and Trust Company (incorporated herein by reference to Exhibit
4.3 to the 2000 Notes Registration Statement).*
2.17 Master Agreement and the Schedule to the Master Agreement, dated
March 26, 2001, between Merrill Lynch Capital Services, Inc.,
Netia Telekom S.A. and Netia Holdings S.A. (incorporated herein
by reference to Exhibit 2.17 to the 2000 Annual Report).*
2.18 Letter of Confirmation from Merrill Lynch Capital Services, Inc.,
dated March 30, 2001, as amended on April 4, 2001 (incorporated
herein by reference to Exhibit 2.18 to the 2000 Annual Report).*
2.19 Credit Support Annex to the Schedule of the ISDA Master
Agreement, dated March 26, 2001, between Merrill Lynch Capital
Services, Inc., Netia Telekom S.A. and Netia Holdings S.A.
(incorporated herein by reference to 2002 Annual Report)*.
* Incorporated by reference
** Filed herewith
2.20 Guarantee by Merrill Lynch & Co. Inc. under the ISDA Master
Agreement, dated March 26, 2001 (incorporated herein by reference
to 2002 Annual Report)*
2.21 Guarantee by Netia Holdings S.A. under the ISDA Master Agreement,
dated 26 March 2001 (incorporated herein by reference to 2002
Annual Report)*
2.22 Master Agreement and the Schedule to the Master Agreement, dated
January 18, 2001, between Netia Holdings III B.V. and the Chase
Manhattan Bank International (incorporated herein by reference to
Exhibit 2.19 to the 2000 Annual Report).*
2.23 Deed of Undertaking and Guarantee, dated January 18, 2001 between
Netia Telekom S.A., Netia Holdings III B.V. and Chase Manhattan
Bank, London Branch (incorporated herein by reference to Exhibit
2.20 to the 2000 Annual Report).*
2.24 Letter of Confirmation from Chase Manhattan Bank, dated January
19, 2001 (incorporated herein by reference to Exhibit 2.21 to the
2000 Annual Report).*
2.25 Master Agreement and the Schedule to the Master Agreement, dated
July 31, 2000, between and among Netia South Sp. z o.o., Netia
Telekom S.A. and Chase Manhattan Bank (incorporated herein by
reference to Exhibit 2.22 to the 2000 Annual Report).*
2.26 Deed of Undertaking, dated July 31, 2000, between and among Netia
Telekom S.A.. Netia South Sp. z o.o. and Chase Manhattan Bank,
London Branch (incorporated herein by reference to Exhibit 2.23
to the 2000 Annual Report).*
2.27 Letter of Confirmation, dated July 31, 2000, from Chase Manhattan
Bank, London Branch (incorporated herein by reference to Exhibit
2.24 to the 2000 Annual Report).*
2.28 Confirmation, dated December 17, 2001, between Netia Telekom S.A.
and Merrill Lynch Capital Services, Inc., pursuant to the ISDA
Master Agreement, dated March 26, 2001 and (iii) terminating,
effective December 14, 2001, the swap transaction dated March 30,
2001 (incorporated herein by reference Exhibit 2.28 to the 2002
Annual Report)*
2.29 Close-out Settlement Agreement, dated January 10, 2002, between
JPMorgan Chase Bank and Netia Holdings III B.V., pursuant to the
ISDA Master Agreement, dated January 18, 2001, between JPMorgan
Chase Bank and Netia Holdings III B.V., and terminating,
effective January 10, 2002 all swap transactions then outstanding
between JPMorgan Chase Bank and Netia Holdings III B.V.
(incorporated herein by reference Exhibit 2.29 to the 2002 Annual
Report)*
2.30 Senior Secured Euro Notes Indenture, dated as of December 23,
2002, by and among Netia Holdings B.V., as Issuer, Netia Holdings
S.A., Netia Telekom S.A. and Netia South Sp. z o.o., as
Guarantors, The Bank of New York, as trustee and ING Bank Slaski
S.A., as the Security Agent, relating to the 10% Senior Secured
Euro Notes due 2008.**
2.31 Form of 10% Senior Secured DTC Restricted Global Note due 2008.**
2.32 Form of 10% Senior Secured European Global Restricted Note due
2008.**
2.33 Form of 10% Senior Secured Regulation S Global Note due 2008.**
* Incorporated by reference
** Filed herewith
4.1 Agreement and Restated Shareholders Agreement, dated January 20,
2000, between Netia Telekom S.A. and Mr. Jan Guz (incorporated
herein by reference to Exhibit 10.30 to the 1999 Annual Report).*
4.2 Netia Performance Stock Option Plan adopted by the Supervisory
Board of Netia Holdings S.A. on December 22, 1999, as amended on
August 29, 2000 (incorporated herein by reference to Exhibit 4.1
of the Registration Statement on Form S-8, filed with the
Securities and Exchange Commission on September 1, 2000).*
4.3 Amended and Restated Post-IPO Shareholders' Agreement # 1, dated
July 13, 2000, among Telia AB (publ.), Warburg, Pincus Equity
Partners, L.P., Warburg Pincus Ventures International, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus
Netherlands Equity Partners III. C.V., Warburg Netia Holding
Limited and Netia Holdings S.A. (incorporated herein by reference
to Exhibit 4.11 to the 2000 Annual Report).*
4.4 Post-IPO Shareholders' Agreement #2, dated August 3, 2000, by and
among Telia AB (publ.), Dankner Investment Ltd., Trefoil Capital
Investors L.P., Shamrock Holdings Inc., Warburg, Pincus Equity
Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II,
C.V., Warburg, Pincus Netherlands Equity Partners III, C.V.,
Warburg Netia Holdings Limited and Netia Holdings
S.A.(incorporated herein by reference to Exhibit 4.12 to the 2000
Annual Report).*
4.5 Restructuring Agreement, dated as of March 5, 2002, between and
among Netia Holdings S.A., Netia South Sp. z o.o., Netia Telekom
S.A., Netia Holdings B.V., Netia Holdings II B.V., Netia Holdings
III B.V., the Consenting Noteholders Signatories thereto,
JPMorgan Chase Bank, Telia AB (publ.), and Warburg, Pincus Equity
Partners, L.P., Warburg, Pincus Ventures International, L.P.,
Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg,
Pincus Netherlands Equity Partners II, C.V., Warburg, Pincus
Netherlands Equity Partners III, C.V., Warburg Netia Holding
Limited (incorporated herein by reference Exhibit 4.11 to the
2002 Annual Report)*
4.6 Side Letter from Netia Holdings S.A. to Telia AB (publ), E.M.
Warburg, Pincus & Co., LLC and JPMorgan Chase Bank, dated March
5, 2002.**
4.7 Termination Agreement, dated as of March 5, 2002, between and
among Telia AB (publ), Warburg, Pincus Equity Partners, L.P.,
Warburg, Pincus Ventures International, L.P., Warburg, Pincus
Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands
Equity Partners II, C.V., Warburg, Pincus Netherlands Equity
Partners III, C.V., Warburg Netia Holding Limited and Netia
Holdings S.A. (incorporated herein by reference Exhibit 4.12 to
the 2002 Annual Report)*
4.8 Agreement on the Provision of Ducts, dated as of January 14,
2002, between Prima Communications Sp. z o.o. and Netia Telekom
S.A. (incorporated herein by reference Exhibit 4.13 to the 2002
Annual Report)*
4.9 Subscription Agreement dated November 20, 2002 by and among ING
Bank Slaski S.A. and Netia Holdings S.A. **
4.10 Amendment Agreement to Termination Agreement dated November 14,
2002 by among Netia Holdings S.A., Telia AB (publ.) and Warburg,
Pincus Equity Partners, LP, Warburg, Pincus, Ventures
International, L.P., Warburg, Pincus Netherlands Equity Partners
I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V.,
Warburg, Pincus Netherlands Equity Partners III, C.V., Warburg
Netia Holding Limited. **
4.11 Exchange Agreement dated June 14, 2002 by and among Netia
Holdings S.A., Netia Telekom S.A., Netia South, Sp. z o.o., Netia
Holdings B.V., Netia Holdings II B.V., Netia Holdings III B.V.
and Consenting Creditors. **
* Incorporated by reference
** Filed herewith
4.12 Amendment to Exchange Agreement, dated as of June 27, 2002, made
between Netia Holdings S.A., Netia Telekom S.A., Netia South Sp.
z o.o., Netia Holdings B.V., Netia Holdings II B.V., Netia
Holdings III B.V., JP Morgan Chase Bank and Consenting
Noteholders.**
4.13 Agreement on Security Assignment of Rights dated December 23,
2002 between Netia Holdings S.A., Deutsche Bank Polska S.A. and
The Bank of New York, London Branch.**
4.14 Agreement on Security Assignment of Rights dated December 23,
2002, between Netia Holdings S.A., Bank Polska Kasa Opieki S.A.
and The Bank of New York, London Branch. **
4.15 Paying, Registrar and Transfer Agency Agreement dated 23 December
2002 relating to 10% Senior Secures Notes due 2008 by and among
Netia Holdings B.V., the Guarantors, The Bank of New York and ING
Bank Slaski S.A. **
8.1 List of Subsidiaries **
10.1 Consent of PricewaterhouseCoopers Sp. z o.o. **
99.1 Certification of Chief Executive Officer of Netia Holdings S.A.
under Section 906 of Sarbanes-Oxley Act of 2002.**
99.2 Certification of Chief Financial Officer of Netia Holdings S.A.
under Section 906 of Sarbanes-Oxley Act of 2002.**
* Incorporated by reference
** Filed herewith