UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Dated as of February 13, 2003
NETIA HOLDINGS S.A.
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
UL. POLECZKI 13
02-822 WARSAW, POLAND
- --------------------------------------------------------------------------------
(Address of principal executive office)
[Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.]
Form 20-F [X] Form 40-F [ ]
[Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.] Yes [ ] No [X]
EXPLANATORY NOTE
Attached are the following items:
1. Press Release dated February 13, 2003.
2. Audited Consolidated Financial Statements for Netia Holdings S.A. for the
year ended December 31, 2002.
This current report on Form 6-K is hereby incorporated by reference into our
Registration Statement on Form F-3 filed with the Securities and Exchange
Commission on May 9, 2001 (File No. 333-13480).
[netia LOGO]
FOR IMMEDIATE RELEASE
Contact: Anna Kuchnio (IR)
+48-22-330-2061
Jolanta Ciesielska (Media)
+48-22-330-2407
Netia
- or -
Mark Walter
Taylor Rafferty, London
+44-(0)20-7936-0400
- or -
Abbas Qasim
Taylor Rafferty, New York
212-889-4350
NETIA HOLDINGS S.A. REPORTS 2002 YEAR-END AND FOURTH QUARTER RESULTS
WARSAW, Poland - February 13, 2003 - Netia Holdings S.A. ("Netia") (WSE: NET,
NET2), Poland's largest alternative provider of fixed-line telecommunications
services (in terms of value of generated revenues), today announced audited
consolidated financial results for the year and quarter ended December 31, 2002.
FINANCIAL HIGHLIGHTS:
>> REVENUES for 2002 were PLN 604.4m (US$157.4m), a year-on-year increase of
12%. Revenues for Q4 2002 were PLN 154.0m (US$40.1m), an increase of 6%
from Q4 2001.
>> ADJUSTED EBITDA (before the provisions for impairment of long term assets)
for 2002 was PLN 155.2m (US$40.4m), representing an adjusted EBITDA margin
of 26% and a year-on-year increase of 154%. Adjusted EBITDA for Q4 2002 was
PLN 34.2m (US$8.9m), with an adjusted EBITDA margin of 22%.
>> NON-CASH EXCEPTIONAL ITEM CHARGES totaling PLN 149.4m (US$38.9m) affected
financial results for 2002. These items were related to provision for
impairment of long term assets of PLN 108.7m (US$28.3m) recorded in Q3 2002
and an additional charge of PLN 40.7m (US$10.6m) recorded in Q4 2002.
>> CASH at December 31, 2002 was PLN 132.5m (US$34.5m), excluding restricted
cash and cash equivalents of PLN 254.2m (US$66.2m).
>> SUCCESSFUL FINANCIAL RESTRUCTURING LED TO AN INCREASE IN CONSOLIDATED
SHAREHOLDERS' EQUITY to PLN 2,802.3m (US$730.0m) at the end of Q4 2002
compared to shareholders' deficit of PLN 343.2m in Q4 2001. Netia's
long-term debt was reduced by PLN 3.9bn (US$1.0bn), and the company's
post-restructuring debt obligations are EUR 49.9m. Details of our
debt-for-equity swap transactions are provided in "Restructuring and Other
Highlights" on page 3.
- more -
- 2 -
OPERATIONAL HIGHLIGHTS:
>> NETIA'S NATIONWIDE BACKBONE NETWORK is comprised of 3,840 km as of December
31, 2002.
>> SUBSCRIBER LINES decreased to 341,160 net of churn and disconnections, a
year-on-year decrease of 1%.
>> BUSINESS CUSTOMER LINES increased to 105,638, a year-on-year increase of
8%. Subscriber lines for our business segment grew to 31% of total
subscriber lines while revenues from business customers accounted for 57%
of telecom revenues in 2002.
>> NEW, MORE COMPETITIVE TARIFF PLANS FOR INTERNATIONAL LONG-DISTANCE
CONNECTIONS were introduced on November 1, 2002 and January 2, 2003.
>> AVERAGE REVENUE PER LINE decreased by 6% to PLN 115 in December 2002,
compared to PLN 122 in December 2001 as a result of a decrease in tariffs.
On the other hand, revenues benefited from increased sales of data,
carrier's carrier and other non-direct voice services.
>> HEADCOUNT decreased to 1,289 at December 31, 2002 from 1,536 at December
31, 2001 as a result of management's program of cost reduction initiated in
August 2001.
WOJCIECH MADALSKI, NETIA'S PRESIDENT AND CHIEF EXECUTIVE OFFICER commented:
"Netia has emerged from 2002 as a healthy company on course for solid financial
performance. On the operational side, our 2002 results confirm that our business
model works - the annual revenues continue to grow at double digits, cost
reduction programs show good progress, adjusted EBITDA margin has improved
steadily from the negative level three years ago to a very respectable 26% and
capital spending has been curtailed to focus on the most relevant projects.
"On the corporate funding side, we have completed the financial restructuring
and can show a very strong balance sheet, and we are now focused on achieving
profitability within a reasonable timeframe. As a result, I believe that Netia
is well positioned to capitalize on business opportunities presented by the
growing Polish telecoms market."
AVI HOCHMAN, CHIEF FINANCIAL OFFICER OF NETIA, added: "Revenues grew 12% over
2001 and 6% in the fourth quarter as Netia benefited from the growth of its
fixed line services to business customers. Adjusted EBITDA margin in the fourth
quarter dipped from the levels seen in Q2 and Q3, due to investment in marketing
and advertising and traditional cost increases at the end of the year.
"We have also seen positive developments for Netia in the financial markets. The
debt-for-equity swap has been completed and reflected in the consolidated
financial statements for 2002. As a result, the consolidated balance sheet
reflects shareholders equity of PLN 2.8 billion and debt of PLN 161.8 million
(excluding license fee obligations), a reduction of PLN 3.9 billion. The new
shares commenced trading on the Warsaw Stock Exchange on February 13, 2003. In
addition, we are pleased that Nasdaq will permit us to re-apply for a quotation
of our shares.
"Netia intends to merge most of its operating subsidiaries into the parent
company due to changes in the legal environment regarding telecommunications
licenses following the introduction of a new telecommunications law in 2001
(which we expect will create a cost savings for us). Netia plans to write-off
its telecommunication licenses when the Company has started to implement its
plan to consolidate its operating subsidiaries."
- more -
- 3 -
RESTRUCTURING AND OTHER HIGHLIGHTS:
>> THE RESTRUCTURING AGREEMENT relating to Netia's debt restructuring, entered
into by Netia, Telia AB, certain companies controlled by Warburg Pincus &
Co., certain financial creditors and the ad hoc committee of noteholders on
March 5, 2002 (the "Restructuring Agreement"), continues to be implemented.
Pursuant to the Restructuring Agreement, the following milestones have been
achieved:
- ALL NECESSARY SHARE, WARRANT AND NOTE ISSUANCES in Netia's
restructuring have been approved by its shareholders. On December 2,
2002, Netia published its Polish prospectus relating to the issuance
and registration of new shares (series H, J and K shares) and notes
pursuant to the Restructuring Agreement.
- 312,626,040 SERIES H SHARES at the price of PLN 1.0826241 per share
were allocated to those creditors who opted to subscribe for them in
accordance with the agreed terms of Netia's restructuring on December
23, 2002. The series H shares represent approximately 91% of Netia's
share capital. Following the registration of the capital increase on
January 30, 2003, Netia has share capital of PLN 344,045,212
(344,045,212 shares issued and outstanding at PLN 1 par value per
share). Series H shares commenced trading on the Warsaw Stock Exchange
(separately from Netia's other series of shares and under the ticker
"NET2") on February 13, 2003.
- EUR 49.9M IN AGGREGATE PRINCIPAL AMOUNT OF 10% SENIOR SECURED NOTES
DUE 2008 were issued in exchange for the outstanding notes of Netia
Holdings B.V. and Netia Holdings II B.V. and obligations from swap
transactions entered into by Netia Holdings III B.V. on December 23,
2002, in accordance with the agreed terms of the restructuring and the
composition plans for each of Netia's Dutch subsidiaries.
WARRANTS to acquire shares representing 15% of Netia's post-restructuring
share capital (series J shares) will be issued to the holders of record of
Netia's shares on the day preceding the subscription for series H shares.
Additionally, up to 5% of the post-restructuring share capital, excluding
shares to be issued upon exercise of the warrants related with series J
shares, will be issued under a key employee stock option plan (series K
shares). The issuance of warrants for series J and issuance of series K
shares will complete the restructuring process.
>> CHANGES WITHIN NETIA'S SUPERVISORY BOARD. Effective January 15, 2003,
Netia's Supervisory Board consists of the following 10 members: Nicholas N.
Cournoyer (Chairman of the Supervisory Board), Jaroslaw Bauc, Morgan
Ekberg, Richard James Moon, Andrzej Radziminski, Ewa Maria Robertson
Andrzej Michal Wiercinski, Jan Henrik Ahrnell, Przemyslaw Jaronski and Hans
Tuvehjelm. As of the date of the registration by the Polish court of the
changes to Netia's Statute adopted by the Extraordinary General Meeting of
Shareholders on January 15, 2003, Jan Henrik Ahrnell, Przemyslaw Jaronski
and Hans Tuvehjelm will cease to be members of Netia's Supervisory Board.
>> CHANGES WITHIN NETIA'S MANAGEMENT BOARD. Effective February 7, 2003,
Dariusz Wojcieszek resigned from his position as member of Netia's
Management Board.
>> THE EXTRAORDINARY SHAREHOLDERS' MEETING OF NETIA HOLDINGS S.A. held on
January 15, 2003 adopted resolutions on (i) changes of Netia's Statute,
(ii) changes of the composition of Netia's Supervisory Board, (iii) rules
regulating compensation of members of Netia's Supervisory Board, and (iv)
establishing security interests over Netia's assets in connection with EUR
49.9m Senior Secured Notes due 2008 issued by Netia Holdings B.V. These
resolutions were adopted in connection with the restructuring of the Netia
group companies.
>> NETIA'S AMERICAN DEPOSITARY SHARES MAY BE RE-QUOTED ON THE NASDAQ SMALLCAP
MARKET upon completion of a review of Netia's application by the Nasdaq
Listing Qualifications Department. Netia's Management Board has decided to
file such an application.
>> LICENSE FEE PAYMENTS totaling approximately PLN 195.4m (US$50.9m) due on
December 31, 2002 were not made. Following the changes introduced into the
Polish telecommunications law in December 2002, Netia has filed for
canceling all outstanding license fees totaling PLN 323.5m (US$84.3m) based
on capital expenditures it has already incurred.
- more -
- 4 -
>> THE INTERNAL CONSOLIDATION OF OPERATING SUBSIDIARIES was approved by
Netia's Supervisory Board in December 2002. This process is expected to
result in most operating companies being merged into the parent company,
thus reducing management costs and simplifying both operational and
financing arrangements.
>> REDEMPTION OF THE OUTSTANDING SENIOR SECURED NOTES DUE 2008 (the "Notes")
with an aggregate principal amount of EUR 49.9m was approved by Netia's
Supervisory Board on February 13, 2003, following the recommendation of
Netia's Management Board. The decision was driven by the sufficient cash
position and concerns over (i) the high costs of servicing the debt and of
establishing the security for the Notes as required by the Indenture
governing the Notes and (ii) the substantial restrictions imposed by the
Indenture covenants on Netia's flexibility to operate its business. The
Notes were issued on December 23, 2002 in connection with Netia's financial
restructuring. Netia expects to redeem the Notes by the end of March 2003.
CONSOLIDATED FINANCIAL INFORMATION
2002 VS. 2001
REVENUES increased by 12% to PLN 604.4m (US$157.4m) for 2002 compared to PLN
538.9m for 2001.
REVENUES FROM TELECOMMUNICATIONS SERVICES increased by 15% to PLN 588.1m
(US$153.2m) from PLN 512.2m in 2001. The increase was primarily attributable to
an increase in the number of business lines and an increase in business mix of
lines as well as expansion of new products, such as indirect domestic long
distance, data transmission and wholesale services.
EXCEPTIONAL NON-CASH ITEMS totaling PLN 149.4m (US$38.9m) impacted the financial
results for 2002 and were related to the provisions for the impairment of long
term assets. The provision of PLN 108.7m (US$28.3m) recorded in Q3 2002 was due
to our investment in 27,350 connected lines and 100,975 ports, which were
located outside the main geographic areas of strategic interest to Netia. The
additional provisions totaling PLN 40.7m (US$10.6m) recorded in Q4 2002 were
related to impairment of network construction in progress of PLN 29.8m
(US$7.8m), computer equipment of PLN 8.1m (US$2.1m) and other assets the
utilization of which is considered unprofitable.
The above provisions followed the impairment of goodwill and fixed assets of PLN
317.1m recorded in Q3 2001, as a continued effort to strengthen our balance
sheet.
ADJUSTED EBITDA (before the provisions for impairment of long term assets)
increased by 154% to PLN 155.2m (US$ 40.4m) for 2002 from PLN 61.2m for 2001.
Adjusted EBITDA margin increased to 25.7% from 11.4%. This increase was achieved
due to a successful implementation of Netia's cost reduction program in late
2001, part of our effort to preserve cash, and increases in revenues from new
products.
OTHER OPERATING EXPENSES decreased by 7% to PLN 331.2m (US$86.4m) for 2002, from
PLN 355.4m for 2001. Other operating expenses represented 55% of total revenues
for 2002, compared to 66% for 2001, and are constituted primarily of salaries
and benefits. In addition, other operating expenses for 2001 included an
allowance for receivables from Millennium Communications S.A. of PLN 17.0m.
INTERCONNECTION CHARGES (NET) were PLN 117.5m (US$30.6m) for 2002 as compared to
PLN 122.2m for 2001. Interconnection charges as a percentage of calling charges
decreased to 28% from 34%, reflecting the increased proportion of traffic
carried through Netia's own backbone network.
DEPRECIATION OF FIXED ASSETS increased by 13% to PLN 194.6m (US$50.7m) from PLN
172.7m for 2001, as the construction stage of additional parts of the network
was completed.
AMORTIZATION OF OTHER INTANGIBLE ASSETS increased by 18% to PLN 74.0m (US$19.3m)
from PLN 62.9m for 2001 due to an increased level of amortization of computer
software costs associated with our information technology systems.
NET FINANCIAL EXPENSES increased to PLN 417.6m (US$108.8m) for 2002 from PLN
230.0m in 2001, due primarily to foreign exchange losses resulting from the
significant depreciation of the Polish zloty against the
- more -
- 5 -
euro and U.S. dollar during 2002. This amount also includes interest costs on
the notes issued by Netia which were accrued through year 2002 until July 12,
2002, (i.e., the date of opening the Dutch composition proceedings), although
Netia ceased to pay interest on its notes in December 2001. In accordance with
Dutch law, the financial costs accrued during the period of the composition
proceedings (i.e., from July 12, 2002 to November 6, 2002) were reversed upon
ratification of Dutch moratorium proceedings.
NET LOSS decreased by 41% to PLN 675.0m (US$175.8m), compared to a net loss of
PLN 1,149.2m for 2001. The loss for the period was mainly attributable to an
increase in net financial expenses related to unrealized foreign exchange
losses. However, a majority of the financial expenses are non-cash items that do
not impact Netia's cash flows. The amount of net loss for 2001 was adversely
impacted by exceptional items totaling PLN 740.1m.
CASH USED IN INVESTING ACTIVITIES decreased from PLN 639.2m in 2001 to PLN
468.3m (US$122.0m) for 2002. This includes PLN 199.3m (US$51.9m) deposited in Q4
2002 in a restricted account as temporary security for obligations arising under
the Notes issued in 2002. Net cash used for the purchase of fixed assets and
computer software decreased by 54% to PLN 270.5m (US$70.5m) in 2002 from
PLN582.8m in 2001, in accordance with the revised business plan approved in late
2001, aimed at preserving cash.
CASH AND CASH EQUIVALENTS at December 31, 2002 amounting to PLN 132.5m
(US$34.5m) were available to fund Netia's operations. Netia also had deposits in
restricted accounts in a total amount of PLN 254.2m (US$66.2m) as of December
31, 2002, which included PLN 199.3m (US$51.9m) relating to temporary security
for obligations arising under 2002 Notes.
Q4 2002 VS. Q3 2002
REVENUES increased by 1% to PLN 154.0m (US$40.1m) for Q4 2002 compared to PLN
152.4m for Q3 2002. This increase was attributable to a 2% increase in
telecommunications revenues to PLN 151.4m (US$39.4m) in Q4 2002 from PLN 149.1m
in Q3 2002 partially offset by a 21% decrease in other revenues, representing
the operations of Uni-Net, a joint venture with Motorola offering radio trunking
services, to PLN 2.6m (US$0.7m) for Q4 2002 from PLN 3.3m in Q3 2002.
ADJUSTED EBITDA for Q4 2002 decreased by 30% to PLN 34.2m (US$8.9m) from PLN
48.7m in Q3 2002. Adjusted EBITDA margin decreased to 22.2% for Q4 2002 from
31.9% for Q3 2002. The decrease in adjusted EBITDA and adjusted EBITDA margin
was mainly associated with an increase in marketing and advertising costs aimed
at strengthening Netia's brand awareness and traditional cost increases at the
end of the year.
NET PROFIT amounted to PLN 148.6m (US$38.7m) in Q4 2002, compared to a net loss
of PLN 328.1m in Q3 2002. The improvement was mainly due to net financial income
recorded in Q4 2002 associated with the reversal of interest expenses of PLN
177.4m (US$46.2m) recorded in the previous quarter before the Dutch composition
plans were ratified.
- more -
- 6 -
OPERATIONAL REVIEW
CONNECTED LINES at December 31, 2002 amounted to 500,552. The number of
connected lines decreased in comparison with the numbers reported for Q4 2001
due to: (i) provision for impairment of 27,350 connected lines recorded in Q3
2002 and (ii) decrease in equivalent of lines by approximately 4,000 connected
lines arising from the reconfiguration of the radio-access system recorded in Q4
2002.
SUBSCRIBER LINES IN SERVICE decreased by 1% to 341,160 at December 31, 2002 from
343,802 at December 31, 2001 and increased by 0.3% from 340,232 at September 30,
2002. The number of subscriber lines is net of customer churn and disconnections
by Netia of defaulting payers, which amounted to 7,706 and 5,279, respectively,
for Q4 2002 and 27,305 and 23,829, respectively, for 2002. The recorded churn
was mostly due to the deterioration of the Polish economy and customers moving
outside the coverage of Netia's network.
BUSINESS LINES AS A PERCENTAGE OF TOTAL SUBSCRIBER LINES reached 31.0%, up from
28.5% at December 31, 2001 and 30.3% at September 30, 2002, reflecting the
intensified focus on the corporate and SME market segments. Business customers
accounted for all net additions in the quarter while the residential segment saw
net disconnections. Revenues from business customers accounted for 57% of
telecommunications revenues for 2002.
BUSINESS CUSTOMER LINES IN SERVICE increased by 8% to 105,638 at December 31,
2002 from 97,994 at December 31, 2001 and by 2% from 103,209 at September 30,
2002.
AVERAGE MONTHLY REVENUE PER LINE decreased by 6% to PLN 115 (US$30) for December
2002, compared to PLN 122 for December 2001 and decreased by 4% from PLN 120 for
September 2002.
AVERAGE MONTHLY REVENUE PER BUSINESS LINE amounted to PLN 200 (US$52) for
December 2002, representing an 11% decrease from PLN 225 for December 2001 and a
12% decrease from PLN 226 for September 2002.
AVERAGE MONTHLY REVENUE PER RESIDENTIAL LINE amounted to PLN 76 (US$20) for
December 2002, representing a 6% decrease from PLN 81 for December 2001 and a 4%
increase from PLN 73 for September 2002.
NEW, ATTRACTIVE TARIFF PLANS FOR INTERNATIONAL LONG-DISTANCE ("ILD") CONNECTIONS
were introduced on November 1, 2002 and later on January 2, 2003. Netia
currently offers ILD services both on standard links and on Voice over Internet
Protocol ("VoIP") technology, according to tariff plans measuring the usage time
both on the per-second and per-minute basis.
TARIFF PLANS MEASURING THE USAGE TIME ON A PER-SECOND BASIS were introduced by
Netia in June 2002 for indirect domestic long-distance (Netia's prefix 1055) and
ISDN services and then extended to analog and Internet services in October 2002
and December 2002, respectively. These new packages supplemented the existing
Netia tariff offerings, providing easy-to-understand tariff plans. Netia was the
first Polish fixed-line operator to offer tariff plans based on per-second
billing.
PRODUCT PORTFOLIO OF NETIA'S INDIRECT SERVICES offered through Netia's prefix
(1055) was extended to international long-distance calls carried on standard
links in January 2003 and currently includes domestic long distance,
fixed-to-mobile and international long-distance services.
INTELLIGENT NETWORK SERVICES (free-phone and split-charge service offering) were
launched in February 2002. Netia is the first domestic long distance operator to
launch the IN services among three competitors to the incumbent TP S.A.
THE INTEGRATED CUSTOMER RELATIONSHIP MANAGEMENT ("CRM") SYSTEM was launched in
April 2002, being the first solution of any Polish telecommunications operator
that fully integrates contact and account management with operations support and
billing. This new initiative, designed to increase Netia customers' satisfaction
while further reducing operating costs, was implemented initially with respect
to customers of indirect voice services (Netia 1055). The migration of all
Netia's customers onto this platform is scheduled for completion in Q1 2003.
- more -
- 7 -
NETIA'S NATIONWIDE BACKBONE NETWORK connecting Poland's largest urban areas now
stretches 3,840 kilometers. The construction of the duct system of Netia's
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.
HEADCOUNT at December 31, 2002 was 1,289, compared to 1,536 at December 31, 2001
and 1,283 at September 30, 2002.
THE NUMBER OF ACTIVE LINES IN SERVICE PER EMPLOYEE increased by 28% to an
average of 275 in Q4 2002, from 215 in Q4 2001. The number of active lines in
service per employee increased by 24% to an average of 264 for 2002 from 214 in
2001.
MONTHLY AVERAGE TELECOMMUNICATIONS REVENUE PER EMPLOYEE increased by 48% to PLN
40,855 in Q4 2002 from PLN 27,523 in Q4 2001. Monthly average telecommunications
revenue per employee increased by 41% to PLN 38,135 in 2002 from PLN 26,979 in
2001.
THE LICENSE FEE PAYMENTS TOTALING APPROXIMATELY PLN 195.4M (US$50.9M) due on
December 31, 2002, were not made. In December 2002, changes were introduced into
the Polish telecommunications law that provided for cancellation of license fee
obligations in exchange for investments in the telecommunications infrastructure
or their conversion for the shares or debt of companies with outstanding license
fees. Following these changes, Netia has filed for canceling its outstanding
license fees, totaling PLN 323.5m (US$84.3m), based on capital expenditures it
has already incurred. Currently, Netia's applications are being reviewed by the
authorities. Netia plans to reverse license fee obligations in our statements of
operations upon receiving such approvals. Furthermore, in connection with an
approved internal consolidation of the Netia group by merging most of operating
subsidiaries into the parent company, Netia plans to write-off its
telecommunication licenses when the Company has started to implement its plan to
consolidate its operating subsidiaries.
- more -
- 8 -
KEY FIGURES
- ----------------------------------------------------------------------------------------------------------------------------
PLN'000 2002 2001 4Q02 3Q02 2Q02 1Q02 4Q01
- ----------------------------------------------------------------------------------------------------------------------------
Revenues 604,384 538,851 154,012 152,396 151,416 146,560 144,868
Adjusted EBITDA*** 155,225 61,192 34,197 48,689 42,249 30,090 29,294
Margin % 25.7% 11.4% 22.2% 31.9% 27.9% 20.5% 20.2%
Net (loss)/profit before FX (487,230) (1,305,047) 22,432 (237,506) (130,078) (142,078) (516,166)
Net (loss)/profit after FX (674,972) (1,149,217) 148,576 (328,131) (250,010) (245,407) (286,409)
Net debt** 219,779 (2,862,423) 219,779 (3,271,657) (3,201,760) (3,063,715) (2,862,423)
EBIT (262,808) (528,899) (68,131) (133,136) (24,567) (36,974) (57,940)
- ----------------------------------------------------------------------------------------------------------------------------
US$'000* 2002 2001 4Q02 3Q02 2Q02 1Q02 4Q01
- ----------------------------------------------------------------------------------------------------------------------------
Revenues 157,440 140,370 40,118 39,699 39,444 38,179 37,738
Adjusted EBITDA*** 40,435 15,940 8,908 12,683 11,006 7,838 7,631
Margin % 25.7% 11.4% 22.2% 31.9% 27.9% 20.5% 20.2%
Net (loss)/profit before FX (126,922) (339,962) 5,844 (61,870) (33,885) (37,011) (134,460)
Net (loss)/profit after FX (175,830) (299,369) 38,703 (85,478) (65,127) (63,928) (74,609)
Net debt** 57,252 (745,656) 57,252 (852,260) (834,052) (798,092) (745,656)
EBIT (68,462) (137,777) (17,748) (34,682) (6,400) (9,632) (15,093)
- ----------
* The US$ amounts shown in this table and in the entire document have been
translated using the exchange rate of PLN 3.8388 = US$1.00, the average
rate announced by the National Bank of Poland at December 31, 2002. These
figures are included for the convenience of the reader only.
** Net debt is defined as long-term debt, including its current portion less
cash and restricted cash.
*** We define EBITDA as net income/(loss) as measured by IAS or U.S. GAAP,
adjusted for depreciation and amortization, net financial expense, income
taxes, minority interest, share of losses of equity investments and other
losses and gains on dilution. EBITDA for 2001 and 2002 has been further
adjusted for impairment of goodwill, provisions for fixed assets, effects
of default on long-term debt and cancellation of swap transactions and is
therefore defined as Adjusted EBITDA. We believe EBITDA and related
measures of cash flow from operating activities serve as useful
supplementary financial indicators in measuring the operating performance
of telecommunication companies. EBITDA is not an IAS or U.S. GAAP measure
and should not be considered as an alternative to IAS or U.S. GAAP measures
of net income/(loss) or as an indicator of operating performance or as a
measure of cash flows from operations under IAS or U.S. GAAP or as an
indicator of liquidity. You should note that EBITDA is not a uniform or
standardized measure and the calculation of EBITDA, accordingly, may vary
significantly from company to company, and by itself provides no grounds
for comparison with other companies.
- more -
- 9 -
KEY OPERATIONAL INDICATORS
- -------------------------------------------------------------------------------------------------------------------------
4Q02** 3Q02* 2Q02 1Q02 4Q01
- -------------------------------------------------------------------------------------------------------------------------
NETWORK DATA
Number of connected lines (cumulative) 500,552 503,358 529,658 527,562 526,402
SUBSCRIBER DATA
Subscriber lines (cumulative) 341,160 340,232 342,145 342,288 343,802
Total net additions 928 (1,913) (143) (1,514) 168
Business net additions 2,429 1,212 1,434 2,569 4,281
Business subscribers (cumulative) 105,638 103,209 101,997 100,563 97,994
Business mix of total subscriber lines 31.0% 30.3% 29.8% 29.4% 28.5%
Average monthly revenue per line (PLN) 115o 120o 123o 130 122
Average monthly revenue per business line (PLN) 200o 226o 236o 251 225
Average monthly revenue per residential line (PLN) 76 73 74 79 81
- ----------
o Average monthly revenue per line and per business line excludes the
revenues from carrier's carrier services.
* The number of connected lines reported for Q3 2002 has been recalculated in
order to reflect the impairment of 27,350 lines due to the future limited
utilization of certain existing parts of Netia's local access network.
** The number of connected lines reported for Q4 2002 has been recalculated in
order to reflect the reconfiguration of radio-access system by
approximately 4,000 connected lines.
(Tables to Follow)
- more -
- 10 -
INCOME STATEMENT (ACCORDING TO IAS)
(PLN in thousands unless otherwise stated)
TIME PERIODS: 2002 2001 4Q02 3Q02
audited audited unaudited unaudited
- -------------------------------------------------------------------------------------------------------------------
Telecommunications services revenue 588,120 512,163 151,429 149,060
Other revenue 16,264 26,688 2,583 3,336
TOTAL REVENUES 604,384 538,851 154,012 152,396
Interconnection charges, net (117,480) (122,211) (27,948) (29,982)
Other operating expenses (331,679) (355,448) (91,867) (73,725)
ADJUSTED EBITDA 155,225 61,192 34,197 48,689
Margin (%) 25.7% 11.4% 22.2% 31.9%
Depreciation of fixed assets (194,634) (172,735) (42,443) (54,905)
Amortization of intangible assets (74,046) (62,892) (19,221) (18,231)
Amortization and impairment of goodwill 0 (238,217) 0 0
Impairment provision for long term assets (149,353) (116,247) (40,664) (108,689)
EBIT (262,808) (528,899) (68,131) (133,136)
Margin (%) -43.5% -98.2% -44.2% -87.4%
Effect of default on long term debt 0 (112,047) 0 0
Effect of canceling of swap transactions 0 (274,637) 0 0
Financial (expenses)/income, net (417,570) (230,019) 216,827 (202,113)
(LOSS)/PROFIT BEFORE TAX (680,378) (1,145,602) 148,696 (335,249)
Income tax (charge)/benefit (1,903) (5,424) 315 (893)
Minority share in losses/(profits) of
subsidiaries 7,309 1,809 (435) 8,011
NET (LOSS)/PROFIT (674,972) (1,149,217) 148,576 (328,131)
Margin (%) -111.7% -213.3% 96.5% -215.3%
(Loss)/earnings per share (not in thousands) (17.89) (37.29) 2.56 (10.61)
Weighted average number of shares outstanding
(not in thousands) 37,730,692 30,817,291 58,135,397 30,927,353
NOTE TO FINANCIAL EXPENSES
Net interest (expense)/income (229,701) (385,849) 90,810 (111,488)
Net foreign exchange (losses)/gains (187,742) 155,830 126,144 (90,625)
Amortization of notes issuance costs (127) 0 (127) 0
- more -
- 11 -
BALANCE SHEET (ACCORDING TO IAS, audited)
(PLN in thousands unless otherwise stated)
TIME PERIODS DECEMBER 31, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 132,465 486,946
Restricted investments, cash and cash equivalents 254,211 47,500
Accounts receivable
Trade, net 87,067 91,838
Government value added tax 2,374 15,179
Other 8,147 3,510
Inventories 854 1,708
Prepaid expenses 8,260 9,358
TOTAL CURRENT ASSETS 493,378 656,039
Investments 1,663 1,949
Fixed assets, net 2,245,917 2,454,309
Computer software, net 112,685 82,944
Licenses, net 639,176 695,149
Other long term assets 0 13,957
TOTAL NON-CURRENT ASSETS 2,999,441 3,248,308
TOTAL ASSETS 3,492,819 3,904,347
Current maturities of long term debt 0 3,396,869
Short term liabilities for licenses 211,247 165,613
Accounts payable and accruals
Trade 89,864 170,779
Liabilities connected with cancellation of cash flow hedges 0 224,907
Accruals and other 85,805 163,561
Deferred income 6,956 7,495
TOTAL CURRENT LIABILITIES 393,872 4,129,224
Long term debt 161,756 0
Long term liabilities for licenses 112,260 92,764
Long term installment obligations 5,141 0
TOTAL NON-CURRENT LIABILITIES 279,157 92,764
Minority interest 17,499 25,607
Share capital 203,285 203,285
Share premium 1,713,865 1,713,865
Treasury shares (2,812) (3,611)
Other reserves 3,819,712 0
Accumulated deficit (2,931,759) (2,256,787)
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) 2,802,291 (343,248)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) 3,492,819 3,904,347
- more -
- 12 -
CASH FLOW STATEMENT (ACCORDING TO IAS)
(PLN in thousands unless otherwise stated)
2002 2001 4Q02 3Q02
TIME PERIODS: AUDITED AUDITED UNAUDITED UNAUDITED
- ----------------------------------------------------------------------------------------------------------------------
NET (LOSS)/PROFIT (674,972) (1,149,217) 148,576 (328,131)
Adjustment to reconcile net loss to net cash
provided by operating activities
Depreciation of fixed assets and amortization of
goodwill, licenses and other intangible assets 268,680 253,565 61,664 73,136
Amortization of notes issuance costs 127 0 127 0
Amortization of discount on notes 0 106,830 0 0
Minority share in (losses)/profits of subsidiaries (7,309) (1,809) 435 (8,011)
Interest expense accrued on long term debt 220,428 285,995 (94,523) 109,520
Interest expense accrued on license liabilities 22,595 19,894 6,705 5,387
Impairment of goodwill 0 220,279 0 0
Impairment provision for long term assets 149,353 116,247 40,664 108,689
Effect of default on long term debt 0 112,047 0 0
Effect of canceling of hedge transactions 0 274,637 0 0
Allowance for debtors subject to court settlements 0 16,974 0 0
Increase in long term assets 0 1,425 0 0
Foreign exchange losses/(gains) 195,914 (157,314) (121,483) 88,412
Changes in working capital 23,660 78,059 3,305 24,473
NET CASH PROVIDED BY OPERATING ACTIVITIES 198,476 177,612 45,773 73,475
Purchase of fixed assets and computer software (270,548) (582,779) (49,477) (56,299)
Decrease of investments 0 8,500 0 0
Purchase of minority interest shareholdings in
subsidiaries 0 (60,883) 0 0
Payments for licenses 0 (3,998) 0 0
Increase in restricted investments (197,744) 0 (197,744) 0
NET CASH USED IN INVESTING ACTIVITIES (468,292) (639,160) (247,221) (56,299)
Payment of interest on long term debt 0 (111,355) 0 0
Payments related to restructuring (80,394) (8,740) (33,655) (13,851)
Payment for cancellation of swap transactions (29,279) (22,460) 0 0
NET CASH USED IN FINANCING ACTIVITIES (109,673) (142,555) (33,655) (13,851)
Effect of exchange rate change on cash and cash
equivalents 25,008 (51,801) (6,532) 5,838
NET CHANGE IN CASH & CASH EQUIVALENTS (354,481) (655,904) (241,635) 9,163
Cash & cash equivalents at the beginning of the
period 486,946 1,142,850 374,100 364,937
Cash & cash equivalents at the end of the period 132,465 486,946 132,465 374,100
Netia management will hold a conference call tomorrow, Friday, February 14, to
review the results at 3:00 PM (UK) / 4:00 PM (Continent) / 10:00 AM (Eastern).
To register for the call and obtain dial in numbers please contact Mark Walter
at Taylor Rafferty London on +44 (0) 20 7936 0400 or Abbas Qasim at Taylor
Rafferty New York on 212 889 4350.
- more -
- 13 -
Some of the information contained in this news release contains forward-looking
statements. 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. For a more detailed description of
these risks and factors, please see Netia's filings with the Securities and
Exchange Commission, including its Annual Report on Form 20-F filed with the
Commission on March 28, 2002, its Current Report on Form 6-K filed with the
Commission on April 3, 2002, its Current Reports on Forms 6-K filed with the
Commission on May 6, 2002, its Current Report on Form 6-K filed with the
Commission on May 7, 2002, its Current Report on Form 6-K filed with the
Commission on May 20, 2002, its Current Report on Form 6-K filed with the
Commission on May 24, 2002, its Current Report on Form 6-K filed with the
Commission on June 28, 2002, its Current Report on Form 6-K filed with the
Commission on July 2, 2002, its Current Report on Form 6-K filed with the
Commission on July 31, 2002, and its Current Report on Form 6-K filed with the
Commission on August 2, 2002, its Current Reports on Form 6-K filed with the
Commission on August 6, 2002, its Current Report on Form 6-K filed with the
Commission on August 9, 2002, its Current Report on Form 6-K filed with the
Commission on August 15, 2002 its Current Report on Form 6-K filed with the
Commission on August 16, 2002, its Current Report on Form 6-K filed with the
Commission on August 28, 2002, its Current Report on Form 6-K filed with the
Commission on August 30, 2002, its Current Report on Form 6-K filed with the
Commission on September 16, 2002, its Current Report on Form 6-K filed with the
Commission on September 20, 2002, its Current Report on Form 6-K filed with the
Commission on September 24, 2002, its Current Report on Form 6-K filed with the
Commission on October 1, 2002, its Current Report on Form 6-K filed with the
Commission on October 15, 2002, its Current Report on Form 6-K filed with the
Commission on October 17, 2002, its Current Report on Form 6-K filed with the
Commission on October 22, 2002, its Current Report on Form 6-K filed with the
Commission on October 25, 2002, its Current Report on Form 6-K filed with the
Commission on November 5, 2002, its Current Report on Form 6-K filed with the
Commission on November 5, 2002, its Current Report on Form 6-K filed with the
Commission on November 6, 2002, its Current Report on Form 6-K filed with the
Commission on November 18, 2002, its Current Report on Form 6-K filed with the
Commission on November 21, 2002, its Current Reports on Form 6-K filed with the
Commission on December 3, 2002, its Current Reports on Form 6-K filed with the
Commission on December 10, 2002, its Current Report on Form 6-K filed with the
Commission on December 23, 2002, its Current Report on Form 6-K filed with the
Commission on January 8, 2003 and its Current Report on Form 6-K filed with the
Commission on January 16, 2003, its Current Report on Form 6-K filed with the
Commission on January 29, 2003 and its Current Report on Form 6-K filed with the
Commission on February 3, 2003. Netia undertakes no obligation to publicly
update or revise any forward-looking statements.
# # #
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 Zloty ("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 - -
--------- ---------- --------
3,904,347 3,492,819 909,872
TOTAL ASSETS..............................
========= ========== =========
___________________________
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.
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.
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 10
assets........................... - (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.
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, 203,285 1,713,865 (3,611) - - (1,133,128) 780,411
2000...................
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 14
flow hedges, net of tax - - - - (249,213) - (249,213)
Fair value losses 14
reclassified and reported
in the statement of
operations............. - - - - 47,903 - 47,903
Canceling of swap 14
transactions........... - - - - 226,734 - 226,734
Net loss................. - - - - - (1,149,217) (1,149,217)
------- --------- ------ --------- -------- ---------- --------
BALANCE AS AT DECEMBER 31, 203,285 1,713,865 (3,611) - - (2,256,787) (343,248)
2001...................
Exchange of shares with 17
minority shareholder..... - - 799 - - - 799
Reduction of debt........ 2 - - - 3,553,712 - - 3,553,712
Subscription for series H 2
shares................. - - - 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.
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.
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:
CONVENIENCE
TRANSLATION
YEAR ENDED $ (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.
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.
7
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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
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 subsribed 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
8
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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 aldo 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.
9
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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 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.
10
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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.
11
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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.
12
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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.
13
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
14
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 TRANSFERS DISPOSALS DECEMBER 31,
2001 EXPENSE 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
================= =============== ============= ============== ===============
15
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
IMPAIRMENT CHARGE (SEE NOTE 10) DECEMBER 31, IMPAIRMENT DECEMBER 31,
2001 CHARGE DISPOSALS 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.
16
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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 connnection 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 financial statements the Company is
awaiting a response to the Applications. The Company plans to reverse their
license fee obligations to the statement of operations in the period when
formal approval is received from the Polish Government regarding the
cancellation of its 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.
In December 2002, the Company's Supervisory Board approved a plan to
consolidate its operating subsidiaries. The Netia Group currently has a
complex legal structure with over twenty-five subsidiaries. This structure
has primarily resulted from the need to establish a separate entity for each
telecommunication license held. The consolidation was approved in an effort
to reduce management costs, tax risks and operational problems as well as to
simplify the Company's intra-group financing and legal arrangements. The
plan to consolidate the Company's subsidiaries is expected to result in most
operating companies held by the Company being merged into it. The operating
subsidiaries' telecommunication licenses (converted to permits) are not
transferable. As a result, the Company believes that the existing
telecommunication permits, except for the permit issued to Telekom in 2002,
will expire when the operating subsidiaries are merged into the parent
company. The expiry of these permits will not give the Company the right to
claim the return of the license fees that were previously paid. It is not
certain whether the expiry of the permits would result in any exemption from
additional payments related to the Company's 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 2.5 in 2003. Netia plans to write-off its telecommunication
licenses when the Company has started to implement its plan to consolidate
its operating subsidiaries. This is expected to occur during the year ended
December 31, 2003.
17
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
The table below presents the movements of the assets recorded in relation
to the value of licenses obtained.
GROSS BOOK VALUE EFFECT OF
DECEMBER 31, PAYMENT DECEMBER 31,
2001 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
============ =========
LIABILITIES FOR LICENSES FEES AS AT DECEMBER 31, 2002
LOCAL DOMESTIC LONG
TELECOMMUNICATION 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
================ =============== ===============
18
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
LIABILITIES FOR LICENSES FEES AS AT DECEMBER 31, 2001
LOCAL DOMESTIC LONG
TELECOMMUNICATION DISTANCE
LICENSES/PERMITS LICENSE/PERMITS TOTAL
---------------- ---------------- -----------
(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.
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.
19
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
20
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
=================== =================
21
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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%
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 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.
22
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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 guaranted 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 guaranteee 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, 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.
23
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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
=================== ================== ==================
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 (76,433) (58,185) (82,134)
utilized....................................
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)
=================== ================== ==================
24
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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
=========== ============ ============ ============ ============ ============
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
=========== ============ ============ ============ ============ ============
25
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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 SHARES % OF SHARE
SHARES CAPITAL 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).
26
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:
DECEMBER 31, DECEMBER 31,
OPTIONS 2001 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:
DECEMBER 31, DECEMBER 31,
EXPIRY DATE EXERCISE PRICE 2001 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.
27
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.
28
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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
=================== ================== ==================
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).
29
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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
30
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.
31
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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 br ought 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.
32
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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.
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 committments and contingencies relating to telecomunications permits
held by the Company see Note 8.
33
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
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).
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
================= =================
34
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
CHANGES IN SHAREHOLDERS' EQUITY / (DEFICIT) ON A U.S. DECEMBER 31, DECEMBER 31,
GAAP 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 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.
35
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
(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
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.
36
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
The following table summarizes information about stock options at
December 31, 2001:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE FAIR VALUE WEIGHTED
PRICES OF OF OPTIONS AVERAGE
NUMBER OF OPTIONS (NOT (NOT IN EXPECTED LIFE
OPTIONS OPTIONS IN THOUSANDS) 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
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
37
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
4. With respect to the law enacted in December 2002 regarding the
conversion of the license fee obligations and the Company's
outstanding obligations in this matter (see also Note 8), for
purposes of the U.S. GAAP accounting, the Company plans to reverse
its license fee obligations against its intangible assets in the
period when formal approval is received from the Polish Government
regarding the cancellation of these obligations.
With respect to the Company's plan to consolidate its operating
subsidiries (see also Note 8), for purposes of U.S. GAAP accounting,
Netia is considering what impact the abandoment of its licenses will
have on its useful life, which may include revising the estimated
useful life of those licenses to a shorter period.
5. 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. Management is currently evaluating the impact that
adoption of SFAS 143 will have on its consolidated financial
statements.
6. 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. Management is currently evaluating the impact
that the adoption of SFAS 145 will have on our consolidated financial
statements.
7. 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 Extraordianry 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 Companys'
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.
38
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.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 13, 2003
NETIA HOLDINGS S.A.
By: /s/ AVRAHAM HOCHMAN
-------------------------------------
Name: Avraham Hochman
Title: Chief Financial Officer
Vice President, Finance
By: /s/ EWA DON-SIEMION
-------------------------------------
Name: Ewa Don-Siemion
Title: Vice President, Legal