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Filed Pursuant to Rule 424(b)3
Registration Number 333-88833.
PROSPECTUS
EXCHANGE OFFERS FOR
[EURO]100,000,000 13 1/2% SENIOR NOTES DUE 2009
AND
$100,000,000 13 1/8% SENIOR NOTES DUE 2009
OF
NETIA HOLDINGS II B.V.
EACH ISSUE FULLY, UNCONDITIONALLY AND IRREVOCABLY GUARANTEED BY
NETIA HOLDINGS S.A.
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Netia Holdings II B.V. is offering a total of [EURO]100,000,000 13 1/2% Series B
Senior Notes due 2009 and $100,000,000 13 1/8% Series B Senior Notes due 2009,
all of which are fully and unconditionally guaranteed by Netia Holdings S.A. and
which have been registered with the Securities and Exchange Commission, to all
holders of 13 1/2% Senior Notes due 2009 and 13 1/8% Senior Notes due 2009 of
Netia Holdings B.V. II, respectively.
Material terms of the exchange offers:
- Expire at 12:00 Midnight, New York City time, on November 15, 1999, unless
extended.
- The only conditions to completing the exchange offers are that the
exchange offers not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission and
no injunction, order or decree has been issued which would prohibit,
prevent or materially impair our ability to proceed with the exchange
offers.
- All Old Notes that are validly tendered and not validly withdrawn will be
exchanged.
- Tenders of Old Notes may be withdrawn at any time prior to the expiration
of the exchange offers.
- The terms of the new Registered Notes to be issued in the exchange offer
are substantially identical to the Old Notes that we issued on June 10,
1999, except for the absence of transfer restrictions, registration rights
and liquidated damages.
- The Old Notes are, and the Registered Notes will be, fully,
unconditionally and irrevocably guaranteed on a senior, unsecured basis by
Netia Holdings S.A.
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CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 18 OF THIS
PROSPECTUS.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is October 18, 1999.
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TABLE OF CONTENTS
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Summary.................................................................................................... 3
Risk Factors............................................................................................... 18
Presentation of Financial Information...................................................................... 35
Exchange Rate Data and Foreign Exchange Controls........................................................... 36
The Exchange Offers........................................................................................ 38
Capitalization............................................................................................. 46
The Issuer................................................................................................. 47
The Guarantor.............................................................................................. 47
Selected Consolidated Statement of Operations and Balance Sheet Data....................................... 48
Selected Unaudited Pro Forma Condensed Consolidated Financial Data......................................... 51
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 56
The Polish Telecommunications Industry..................................................................... 69
Business................................................................................................... 74
Telecommunications Regulations............................................................................. 95
Management................................................................................................. 104
Principal Shareholders..................................................................................... 112
Certain Relationships and Transactions with Related Parties................................................ 115
Description of the Notes................................................................................... 123
Description of Certain Other Indebtedness.................................................................. 161
Tax Considerations......................................................................................... 165
Plan of Distribution....................................................................................... 172
Book-Entry; Delivery and Form.............................................................................. 174
Forward-Looking Statements................................................................................. 179
Validity of Securities..................................................................................... 179
Experts.................................................................................................... 179
Additional Information..................................................................................... 180
Enforceability of Certain Civil Liabilities................................................................ 180
Glossary of Selected Telecommunications Terms.............................................................. 182
The Republic of Poland..................................................................................... 184
Index to the Consolidated Financial Statements............................................................. F-1
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SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. IN PARTICULAR, YOU SHOULD
CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER THE HEADING "RISK FACTORS." THE
TERMS "NETIA," THE "COMPANY" AND "WE" AS USED IN THIS PROSPECTUS REFER TO NETIA
HOLDINGS S.A AND ITS SUBSIDIARIES AS A COMBINED ENTITY, EXCEPT WHERE WE MAKE
CLEAR THAT SUCH TERM MEANS ONLY THE PARENT COMPANY, NETIA HOLDINGS S.A. THE TERM
"ISSUER" REFERS TO NETIA HOLDINGS II B.V. THE TERM "PARENT" REFERS TO NETIA
HOLDINGS S.A.
NETIA GENERALLY
Netia is the largest alternative fixed-line telecommunications operator in
Poland. At June 30, 1999, we owned and operated approximately 1,150 route
kilometers (718 miles) of state-of-the-art local and regional digital
fiber-optic networks connecting 193,607 active subscriber lines. We provide a
broad range of telecommunications services, and we are aggressively targeting
large and medium-sized business customers
We have 23 licenses to provide local voice telephony services in territories
covering approximately 33% of the total population of Poland. Our local
telephone license territories cover five of the country's ten largest urban
areas, including many of the industrial and commercial centers of Poland. Our
licenses cover approximately 50% of the population living in these ten urban
areas. In April 1999, we secured the benefit of a license to provide Internet
and data transmission services throughout Poland.
We are operating and continuing to construct local access networks serving
business and residential customers in 21 of our 23 local voice telephony license
territories. We are designing, and in certain areas have begun construction of,
a fiber-optic backbone linking these local access networks and five major
cities, including Warsaw, not covered by our existing voice telephony licenses.
Under the new data transmission license, we plan to construct and interconnect
fiber-optic rings in these five major cities. Using this network infrastructure,
we plan to maximize our penetration of the growing market for business
telecommunications in Poland, which includes an increasing number of business
customers operating through multiple locations requiring advanced value-added
services such as Internet and data transmission services.
The range of telecommunications services we offer includes switched
fixed-line telephony for directly connected customers, ISDN, Internet services,
leased lines and voice mail. The advanced technology of our network, combined
with our emphasis on superior customer service, have allowed us to provide our
customers with reliable, high-quality services and to compete successfully with
our principal competitor, Telekomunikacja Polska S.A. ("TPSA"), the
state-controlled telecommunications carrier.
The Internet is just beginning to make an impact in Poland. We plan to
expand our current Internet-access services and focus on providing our target
client base with reliable Internet access on a dial-up or dedicated-line basis.
We have recently begun developing Netia-branded Internet service provider
("ISP") products for both the residential and business markets, and we plan to
establish Internet points of presence ("POPs") in each of Poland's ten largest
urban areas by the end of 2000. In addition, we plan to offer website hosting
and Internet housing facilities and to develop intranet services for business
customers. We believe that when we complete our fiber-optic network, we will be
able to provide an Internet backbone service for third-party ISPs in each of
Poland's key markets.
Our principal shareholders are Telia AB (publ.), ("Telia"), Dankner
Investments Ltd, ("Dankner"), Shamrock Holdings, Inc., ("Shamrock"), Trefoil
Capital Investors, L.P. ("Trefoil") and a group of funds sponsored by E.M.
Warburg, Pincus & Co. LLC, ("Warburg") who hold an aggregate of approximately
57.45% of our outstanding shares and have the right to appoint a substantial
majority of the members of our Supervisory Board.
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OPERATING DATA
At June 30, 1999, we had 335,974 connected lines and 193,607 subscriber
lines, including 34,943 business lines. During the six-month period ended June
30, 1999, 28.4% of our 45,473 new subscribers were business customers, and at
the end of the same period, we had achieved a cumulative business/ total
customer mix of 18.0%, more than double our cumulative business/total customer
mix at the end of 1997. In 1999, we activated service in the four major cities
for which we acquired licenses in March 1998. We also have major international
customers such as Ikea, Auchan, Philips and Office Depot, and local business
customers in the banking, printing, retail, mining and heavy industry sectors
such as Bank Pekao S.A., Rzeczpospolita, Huta Katowice Steel Works, Bank Slaski
S.A., the Bogdanka Coal Mine, Optimus S.A. and Amplico Life S.A. We believe the
activation of services in these four cities should continue to improve our
business/total customer mix in 1999. Our long-term goal is to raise our
cumulative business/total customer mix to 40% business customers.
The following table sets forth certain operating data that demonstrate our
continuing growth:
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AS OF AND
AS OF AND FOR THE YEAR ENDED FOR THE
DECEMBER 31, SIX-MONTH
------------------------------------------ PERIOD ENDED
1995 1996 1997 1998 JUNE 30, 1999
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NETWORK DATA:
Installed capacity(1)........................................... 11,4000 30,656 153,819 317,586 356,150
Connected lines(2).............................................. 9,200 28,878 130,117 283,900 335,974
Digital switches................................................ 2 5 16 25 26
SUBSCRIBER DATA:
Subscriber lines(3)............................................. 8,258 18,290 63,099 148,134 193,607
Billable units (in millions)(4)................................. N/A 28.0 64.5 290.0 N/A
Average monthly revenue per line (PLN)(5)....................... 32.00 42.8 51.6 62.4 77.7
Average monhtly revenue per business line (PLN)(6).............. N/A N/A 141.3 165.1 203.2
Period incremental business/total customer mix(7)............... N/A 8.3% 9.1% 19.4% 28.4%
Cumulative business/ total customer mix(8)...................... N/A 6.8% 8.4% 14.7% 18.0%
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(1) Installed capacity represents the number of active lines our switching nodes
have the capacity to accommodate after testing and technical acceptance at
the end of the referenced periods. Installed capacity is the benchmark used
by the Minister of Communications of Poland (the "MOC") to measure
compliance with the build-out milestones contained in our licenses.
(2) Connected lines represents the number of lines that have been connected to
our switching nodes and for which we had interconnection agreements with
TPSA at the end of the referenced periods.
(3) Subscriber lines represents the number of connected lines generating revenue
at the end of the referenced periods.
(4) Billable units ("pulses") represent the aggregate units of measurement for
which we billed our customers for each of the referenced periods. See
"Glossary of Selected Telecommunications Terms."
(5) Average monthly revenue per line is obtained by dividing the amount of
monthly sales of service (excluding installation fees) by the average number
of subscriber lines, in each case for the last month of the referenced
period.
(6) Average monthly revenue per business line is obtained by dividing the amount
of monthly sales of service to business customers (excluding installation
fees) by the average number of subscriber business lines, in each case for
the last month of the referenced period.
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(7) Period incremental business/total customer mix represents the number of
subscriber business lines added during the referenced periods as a
percentage of total subscriber lines added during those periods.
(8) Cumulative business/total customer mix represents the number of subscriber
business lines as a percentage of total subscriber lines at the end of the
referenced periods.
NETIA'S STRENGTHS
We have competitive strengths that we believe position us to continue to
take advantage of the significant unmet demand for high-quality
telecommunications services in Poland. These strengths include the following:
- We believe that our significant size and marketing, sales and customer
service experience give us a competitive advantage over most other
alternative providers whose networks are generally at earlier stages of
development.
- Our principal shareholders have provided us with substantial support and
expertise and continue to play a significant role in the development of
Netia's operations through a broad range of strategic, financial and
operational support.
- We believe that our fully digital fiber-optic network allows us to provide
our customers with a significantly higher quality of telephone service
than is generally available in much of Poland.
- Our licensed territories include several areas ranking among the most
economically developed in Poland.
- Our licenses have been acquired at costs which we believe are
comparatively lower than the prices paid by many other alternative
operators.
- We provide a level of customer service that we believe is superior to that
offered by our principal competitor, TPSA.
- Our senior management team has extensive experience in the management of
Western corporations involved in the telecommunications, media and
technology sectors. See "Business--Our Strengths."
STRATEGY
Our goal is to build upon our position as the leading alternative fixed-line
telecommunications operator in Poland and to increase cash flow and maximize
value by becoming the preferred provider to Polish telecommunications customers.
To accomplish this objective, Netia intends to focus on the following key areas:
- We are targeting primarily large and medium-sized business customers.
- We intend to expand our ability to provide our target customers with a
broad range of advanced value-added telecommunications services.
- We intend to utilize our customer service program as an important means
for distinguishing ourselves competitively.
- We will continue to offer telecommunications services at competitive
prices.
- We will seek to expand the scope of services we can offer by pursuing
licenses to provide additional telecommunications services throughout
Poland and we will continue to pursue a license to provide local telephone
service in the city of Warsaw.
- We also will continue to evaluate the possibility of expanding the scope
of our network through the acquisition of holders of licenses in areas
that complement our existing licensed territories.
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- In order to enhance our ability to provide a full range of services to our
target customers nationally, we will continue to strategically expand the
areas covered by our network. See "Business--Strategy."
RECENT DEVELOPMENTS
We have completed several significant transactions after June 30, 1999.
First, in July 1999, Warburg purchased 2,597,403 of our ordinary shares at
$19.25 per share in a private placement. Warburg obtained the right to appoint
one member to our supervisory board.
Also, in August, 1999, we sold 5.5 million of our American Depositary
Shares, or ADSs, in an underwritten initial public offering (the "IPO") at the
offering price of $22.00 per ADS (before underwriting commissions and
transaction expenses). Each ADS represents one common share of Netia Holdings
S.A. Pursuant to an agreement between Netia and Bank Rozwoju Eksportu SA, a
Polish bank ("BRE Bank"), BRE Bank purchased approximately 16% of the ADSs we
issued in the IPO. We received net proceeds of approximately $114.6 million from
the IPO.
In July and August 1999, we entered into new interconnection agreements with
two mobile telephone network operators which should lower our interconnection
costs for calls through these operators. We anticipate that these agreements
will have a positive impact on our results of operations since we believe that
the amount of traffic between our network and cellular operators will at least
remain at the current level.
In September 1999, we acquired Topnet, a private Internet service provider
with operations throughout Poland, for approximately $0.8 million.
EXECUTIVE OFFICES
Our principal executive office is located at ul. Poleczki 13, 02-822 Warsaw,
Poland, and our telephone number is + 48 22 648 4500. Our Internet address is
www.netia.pl. The principal executive office of Netia Holdings II B.V. is
located at Herengracht 548, Amsterdam, the Netherlands, telephone number + 31 20
527 4729.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFERS
On June 10, 1999, we issued in a private placement [EURO]100 million in
aggregate principal amount of our 13 1/2% Senior Notes due 2009 ("Old Senior
Euro Notes") and $100 million in aggregate principal amount of our 13 1/8%
Senior Notes due 2009 ("Old Senior Dollar Notes"). In this prospectus, we refer
to the Old Senior Euro Notes and the Old Senior Dollar Notes collectively, as
the Old Notes. All of the Old Notes were issued by Netia Holdings II B.V., our
special purpose finance subsidiary, and are guaranteed by Netia Holdings S.A. We
entered into a registration rights agreement (the "Registration Rights
Agreement") with the initial purchasers of the Old Notes in which we agreed to
deliver to you this prospectus and to complete the exchange offers on or prior
to January 27, 2000. The exchange offers are scheduled to expire on November 15,
1999. You are entitled to exchange your Old Notes in the exchange offers for a
like principal amount of new Series B Notes (the "Registered Notes") which will
have substantially identical terms. We believe that the Registered Notes to be
issued in the exchange offers may be resold by you without compliance with the
registration and prospectus delivery requirements of the Securities Act of 1933,
subject to certain limited conditions. You should read the discussion under the
headings "The Exchange Offers" and "Description of the Notes" for further
information regarding the Registered Notes. In this prospectus, we refer to the
Old Notes and the Registered Notes, collectively, as the Notes.
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Registration Rights Agreement....... You are entitled under the Registration Rights
Agreement to exchange your Old Notes for Registered
Notes with substantially identical terms. The
exchange offers are intended to satisfy these rights.
After the exchange offers are complete, except as set
forth in the next paragraph, you will no longer be
entitled to any exchange or registration rights with
respect to your Old Notes.
The Registration Rights Agreement requires us to file
a registration statement for a continuous offering in
accordance with Rule 415 under the Securities Act for
your benefit if you would not receive freely
tradeable Registered Notes in the exchange offers or
you are ineligible to participate in the exchange
offers and indicate that you wish to have your Old
Notes registered under the Securities Act. See "The
Exchange Offers--Procedures for Tendering."
The Exchange Offers................. We are offering to exchange [EURO]1,000 principal
amount of new 13 1/2% Series B Senior Notes due 2009
(the "Registered Senior Euro Notes") which have been
registered under the Securities Act for each
[EURO]1,000 principal amount of Old Senior Euro Notes
and $1,000 principal amount of new 13 1/8% Series B
Senior Notes due 2009 (the "Registered Senior Dollar
Notes") which have been registered under the
Securities Act for each $1,000 principal amount of
Old Senior Dollar Notes due 2009, which were issued
on June 10, 1999 in a Rule 144A private offering (the
"Notes Offering"). In order to be exchanged, an Old
Note must be properly tendered and accepted. All Old
Notes that are validly tendered and not validly
withdrawn will be exchanged.
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As of this date, there are, respectively, [EURO]100
million aggregate principal amount of Old Senior Euro
Notes and $100 million aggregate principal amount of
Old Senior Dollar Notes outstanding.
We will issue the Registered Notes promptly after the
expiration of the exchange offers.
Resales of the Registered Notes..... We believe that Registered Notes to be issued in the
exchange offers may be offered for resale, resold and
otherwise transferred by you without compliance with
the registration and prospectus delivery provisions
of the Securities Act if you meet the following
conditions:
(1) the Registered Notes are acquired by you in the
ordinary course of your business;
(2) you are not engaging in and do not intend to
engage in a distribution of the Registered Notes;
(3) you do not have an arrangement or understanding
with any person to participate in the distribution of
the Registered Notes; and
(4) you are not an affiliate of Netia, as that term
is defined in Rule 405 under the Securities Act.
If you do not meet the above conditions, you may
incur liability under the Securities Act if you
transfer any registered note without delivering a
prospectus meeting the requirements of the Securities
Act. We do not assume or indemnify you against that
liability.
Each broker-dealer that is issued Registered Notes in
the exchange offers for its own account in exchange
for Old Notes which were acquired by that
broker-dealer as a result of market-making activities
or other trading activities must acknowledge that it
will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resales of
the Registered Notes. A broker-dealer may use this
prospectus for an offer to resell or to otherwise
transfer these Registered Notes.
Expiration Date..................... The exchange offers will expire at 12:00 Midnight,
New York City time, on November 15, 1999, unless we
decide to extend the exchange offers. We do not
intend to extend the exchange offers, although we
reserve the right to do so. If we determine to extend
the exchange offers, we do not intend to extend them
beyond November 19, 1999.
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Conditions to the Exchange Offers... The only conditions to completing the exchange offers
are that the exchange offers not violate applicable
law or any applicable interpretation of the staff of
the Commission and no injunction, order or decree has
been issued which would prohibit, prevent or
materially impair our ability to proceed with the
exchange offers. See "The Exchange Offers--
Conditions."
Procedures for Tendering Old Notes
Held in the Form of Book-Entry
Interests......................... The Old Notes were issued as global securities in
fully registered form without coupons. Beneficial
interests in the Old Notes which are held by direct
or indirect participants in The Depository Trust
Company ("DTC"), Euroclear or Cedelbank through
certificateless depositary interests are shown on,
and transfers of the Notes can be made only through,
records maintained in book-entry form by DTC,
Euroclear or Cedelbank, as applicable, with respect
to its participants.
If you are a holder of an Old Note held in the form
of a book-entry interest and you wish to tender your
Old Note for exchange pursuant to the exchange
offers, you must transmit to State Street Bank and
Trust Company, N.A., as exchange agent, on or prior
to the expiration of the exchange offers either:
- a written or facsimile copy of a properly completed
and executed letter of transmittal and all other
required documents to the address set forth on the
cover page of the letter of transmittal; or
- a computer-generated message transmitted by means
of DTC's Automated Tender Offer Program system with
respect to the Senior Dollar Notes, or such similar
system of Euroclear or Cedelbank with respect to
the Senior Euro Notes, and received by the exchange
agent and forming a part of confirmation of
book-entry transfer in which you acknowledge and
agree to be bound by the terms of the letter of
transmittal.
The exchange agent must also receive on or prior to
the expiration of the exchange offers either:
- a timely confirmation of book-entry transfer of
your Old Notes into the exchange agent's account at
DTC or Euroclear and/or Cedelbank, in accordance
with the procedure for book-entry transfers
described in this prospectus under the heading "The
Exchange Offers-- Book-Entry Transfer," or
- the documents necessary for compliance with the
guaranteed delivery procedures described below.
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A letter of transmittal accompanies this prospectus.
By executing the letter of transmittal or delivering
a computer-generated message, you will represent to
us that, among other things:
(1) the Registered Notes to be acquired by you in the
exchange offer are being acquired in the ordinary
course of your business;
(2) you are not engaging in and do not intend to
engage in a distribution of the Registered Notes;
(3) you do not have an arrangement or understanding
with any person to participate in the distribution of
the Registered Notes; and
(4) you are not our affiliate.
Procedures for Tendering Definitive
Notes............................. If you are a holder of Notes in definitive registered
form ("Definitive Notes") you are entitled to
receive, in limited circumstances, in exchange for
your book-entry interests, Definitive Notes which are
in equal principal amounts to your book-entry
interests. See "Book Entry; Delivery and Form." No
Definitive Notes are issued and outstanding as of the
date of this prospectus. If you acquire certificated
Old Notes prior to the expiration of the exchange
offer, you must tender your certificated Old Notes in
accordance with the procedures described in this
prospectus under the heading "The Exchange
Offers--Procedures for Tendering--Definitive Notes."
Special Procedures for Beneficial
Owner............................. If you are the beneficial owner of Old Notes and they
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee, and
you wish to tender your Old Notes, you should
promptly contact the person in whose name your Old
Notes are registered and instruct that person to
tender on your behalf. If you wish to tender on your
own behalf, you must, prior to completing and
executing the letter of transmittal and delivering
your Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in your name
or obtain a properly completed bond power from the
person in whose name your Old Notes are registered.
The transfer of registered ownership may take
considerable time. See "The Exchange
Offers--Procedures for Tendering--Procedures
Applicable to All Holders."
Guaranteed Delivery Procedures...... If you wish to tender your Old Notes and:
(1) they are not immediately available,
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(2) time will not permit your Old Notes or other
required documents to reach the exchange agent before
the expiration of the exchange offers, or
(3) you cannot complete the procedure for book-entry
transfer on a timely basis,
you may tender your Old Notes in accordance with the
guaranteed delivery procedures set forth in "The
Exchange Offers--Procedures for Tendering--Guaranteed
Delivery Procedures."
Acceptance of Old Notes and Delivery
of Registered Notes............... Except under the circumstances described above under
"The Exchange Offers--Procedures for Tendering--
Conditions," we will accept for exchange any and all
Old Notes which are properly tendered in the exchange
offers prior to 12:00 Midnight, New York City time,
on the expiration date. The Registered Notes to be
issued to you in the exchange offers will be
delivered promptly following the expiration date. See
"The Exchange Offers--Terms of the Exchange Offers."
Withdrawal.......................... You may withdraw the tender of your Old Notes at any
time prior to 12:00 Midnight, New York City time, on
the expiration date. We will return to you any Old
Notes not accepted for exchange for any reason
without expense to you as promptly as we can after
the expiration or termination of the Exchange Offers.
Exchange Agent...................... State Street Bank and Trust Company, N.A., is serving
as the exchange agent in connection with the exchange
offer.
Consequences of Failure to If you do not participate in the exchange offer, upon
Exchange.......................... completion of the exchange offer, the liquidity of
the market for your Old Notes could be adversely
affected. See "The Exchange Offers--Consequences of
Failure to Exchange."
U.S. Federal Income Tax The exchange of the Old Notes should not be a taxable
Consequences...................... event for U.S. federal income tax purposes. See "Tax
Considerations--United States--U.S. Federal Income
Tax Considerations."
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SUMMARY OF THE TERMS OF THE REGISTERED NOTES
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Securities Exchanged................ The Registered Notes will consist of:
[EURO]100 million in aggregate principal amount of
13 1/2%
Series B Senior Notes due 2009. These securities will
be denominated in Euros (or "[EURO]").
$100 million in aggregate principal amount of 13 1/8%
Series B Senior Notes due 2009. These securities will
be denominated in U.S. Dollars.
Issuer.............................. Netia Holdings II B.V.
Guarantor........................... Netia Holdings S.A. is the guarantor of the Notes. If
the Issuer cannot make payments on the Notes when
due, the guarantor must make them instead.
Maturity............................ June 15, 2009.
Interest............................ The Registered Senior Euro Notes will accrue interest
at the rate of 13 1/2% per annum. Interest on the
Registered Senior Euro Notes will be payable
semiannually in cash in arrears on June 15 and
December 15 of each year, commencing December 15,
1999.
The Registered Senior Dollar Notes will accrue
interest at the rate of 13 1/8% per annum. Interest
on the Registered Senior Dollar Notes will be payable
semiannually in cash in arrears on June 15 and
December 15 of each year, commencing December 15,
1999.
Optional Redemption................. On or after June 15, 2004, we may redeem some or all
of the Notes at any time at the redemption prices
listed in the section "Redemption" under the heading
"Description of the Notes."
Before June 15, 2002, we may redeem up to [EURO]33.0
million principal amount of the Old Senior Euro Notes
and/or Registered Senior Euro Notes (collectively,
the "Senior Euro Notes") and $33.0 million principal
amount of the Old Senior Dollar Notes and/or the
Registered Senior Dollar Notes (collectively, the
"Senior Dollar Notes") with the proceeds of certain
sales of the guarantor's common shares at the prices
listed in the section "Redemption" under the heading
"Description of the Notes."
Mandatory Offer to Repurchase....... If we sell certain assets or experience specific
kinds of changes in control, followed by a specified
ratings decline, we must offer to purchase the Notes
at the prices listed in the section "Redemption"
under the heading "Description of the Notes."
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Investment Securities............... The Investment Agreements (as defined herein) require
that Investment Securities (as defined herein) be
deposited with the appropriate trustees for the Notes
in an amount that will be sufficient upon receipt of
scheduled interest and/or principal payments of such
securities to provide for the payment in full of the
first four scheduled interest payments due on each
series of the Notes. We used approximately [EURO]26.3
million and $24.8 million of the net proceeds from
the original issuance of the Old Notes to acquire the
Investment Securities. Under the Investment
Agreements, assuming that we make the first four
scheduled interest payments on the Notes when due,
any remaining Investment Securities will be released
to or at the direction of Netia Holdings S.A. or its
affiliates. See the sections "Investment Securities"
under the heading "Description of the Notes" and "The
Investment Securities Are Unsecured Assets" under the
heading "Risk Factors."
Ranking............................. The Notes and the Guarantees are general unsecured
obligations of the Issuer and the guarantor,
respectively.
The Notes and the Guarantees are PARI PASSU in right
of payment with each other and with all existing and
future unsecured unsubordinated indebtedness of the
Issuer and the guarantor, respectively.
The Notes and the Guarantees are senior in right of
payment to all future obligations of the Issuer and
the guarantor, respectively, expressly subordinated
in right of payment to the Notes or the Guarantees.
The Guarantees are effectively subordinated to
secured obligations of the guarantor with respect to
the assets of the guarantor securing those
obligations, as well as to the indebtedness incurred
by subsidiaries of the guarantor.
Transfer Restrictions............... We have not registered the Old Notes under the
Securities Act, and, unless exchanged for the
Registered Notes, the Old Notes will continue to be
subject to significant restrictions on transfer. See
"Risk Factors--Your Rights as a Holder May Be
Affected If You Fail to Exchange Old Notes."
Listing............................. The Notes are eligible for trading in the PORTAL
market of the National Association of Securities
Dealers, Inc. We listed the Old Notes and will apply
to list the Registered Notes with the Luxembourg
Stock Exchange.
Use of Proceeds..................... We will not receive any proceeds from the exchange
offers.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Basic Covenants of Indenture........ We will issue the Registered Notes under indentures
with State Street Bank and Trust Company, N.A., which
also govern the Old Notes The indentures place
limitations on our ability and the ability of our
restricted subsidiaries to, among other things:
- borrow money;
- pay dividends on stock or repurchase stock;
- make investments;
- use assets as security in other transactions;
- sell certain assets or merge with or into other
companies; and
- enter into transactions with affiliates.
For more details see the section "Certain Covenants"
under the heading "Description of the Notes."
Taxation............................ For a discussion of the material tax consequences of
an investment in the Notes, please see "Tax
Considerations."
Form of Notes....................... The Notes will initially be represented by global
notes in registered form (the "Global Notes"). The
Global Notes representing the Registered Senior Euro
Notes will be deposited with a common depositary for
Euroclear and Cedelbank, or its nominee. Ownership of
interests in the Registered Senior Euro Notes will be
limited to participants in Euroclear, Cedelbank or
persons that may hold interests through those
participants. Book-entry interests in the Senior Euro
Notes will be shown on, and transfers thereof will be
effected only through, records maintained in book-
entry form by Euroclear and Cedelbank and their
participants.
The Global Notes representing the Registered Senior
Dollar Notes will be deposited with the trustee for
the Registered Senior Dollar Notes as custodian for
DTC and registered in the name of Cede & Co. as
nominee of DTC. Ownership interests in the Registered
Senior Dollar Notes will be limited to participants
in DTC or persons that may hold interests through
those participants. Book-entry interests in the
Senior Dollar Notes will be shown on, and transfers
thereof will be effected only through, records
maintained in book-entry form by DTC and its
participants.
</TABLE>
14
<PAGE>
SUMMARY CONSOLIDATED STATEMENT OF OPERATIONS AND BALANCE SHEET DATA
The following data have been derived from our audited consolidated financial
statements as of and for the three years ended December 31, 1996, 1997 and 1998
and the unaudited interim condensed consolidated financial statements as of and
for the six-month periods ended June 30, 1998 and 1999 (together, in each case,
with the notes thereto, the "Financial Statements") included elsewhere in this
prospectus. In the opinion of our management, the unaudited interim condensed
financial statements contain all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations of Netia as of and for the six-month
periods ended June 30, 1998 and 1999. We have prepared the Financial Statements
in accordance with International Accounting Standards ("IAS"), which differ in
certain important respects from accounting principles generally accepted in the
United States ("U.S. GAAP") (see Note 24 to the December 31, 1998 Financial
Statements and Note 11 to the June 30, 1999 Financial Statements).
The summary consolidated financial data should be read in conjunction with
the Financial Statements, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data" included elsewhere in this prospectus. For your
convenience, certain Polish Zloty (or "PLN") amounts as of and for the year
ended December 31, 1998 and as of and for the six-month periods ended June 30,
1999, have been converted into U.S. Dollars at the rate of PLN 3.9297 per $1.00
(the effective exchange rate of the National Bank of Poland (the "NBP") on June
30, 1999). You should not view such translations as a representation that such
Polish Zloty amounts actually represent such U.S. Dollar amounts, or could be or
could have been converted into U.S. Dollars at the rates indicated or at any
other rate.
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD
FOR THE YEAR ENDED DECEMBER 31,(1) ENDED JUNE 30,
--------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1998 1999 1999
--------- ---------- ---------- ---------- ---------- ---------- ---------
<CAPTION>
PLN PLN PLN $ PLN PLN $
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
Telecommunications revenues............. 8,982 35,564 96,435 24,540 37,076 86,319 21,966
Non-telecommunications revenues(2)...... 12,679 14,642 23,945 6,093 11,793 10,476 2,666
--------- ---------- ---------- ---------- ---------- ---------- ---------
Total revenues...................... 21,679 50,206 120,380 30,633 48,869 96,795 24,632
Cost and expenses:
Interconnection charges................. (1,355) (5,692) (22,900) (5,828) (8,707) (24,395) (6,209)
Cost of equipment....................... (7,929) (6,975) (11,425) (2,907) (4,671) (2,980) (758)
Depreciation and amortization........... (7,465) (16,926) (41,040) (10,443) (16,835) (54,009) (13,744)
Other operating expenses(3)............. (61,259) (86,901) (124,317) (31,635) (54,308) (85,417) (21,738)
--------- ---------- ---------- ---------- ---------- ---------- ---------
Total costs and expenses............ (78,008) (116,494) (199,682) (50,813) (84,521) (166,801) (42,449)
Loss from operations.................... (56,329) (66,288) (79,302) (20,180) (35,652) (70,006) (17,817)
Financial expense, net(4)............... (2,205) (32,681) (151,596) (38,577) (43,910) (196,807) (50,082)
Write-off of loan origination
expenses.............................. -- (24,241) -- -- -- -- --
Other losses............................ (4,302) -- (1,148) (292) -- (62) (16)
Gain on dilution of interest in
subsidiaries.......................... 38,903 2,137 -- -- -- -- --
Income tax (charge)/credit.............. (2,710) (1,055) (8,802) (2,241) (7,017) (1,334) (339)
Minority share in (income)/losses of
subsidiaries.......................... 10,832 36,703 35,353 8,996 21,286 (161) (40)
--------- ---------- ---------- ---------- ---------- ---------- ---------
Net loss................................ (15,811) (85,425) (205,495) (52,294) (65,293) (268,370) (68,294)
Basic and diluted net loss per common
share(5).............................. (2.52) (9.46) (19.78) (5.03) (6.28) (19.94) (5.07)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD
FOR THE YEAR ENDED DECEMBER 31,(1) ENDED JUNE 30,
--------------------------------------------- ---------------------------------
1996 1997 1998 1998 1998 1999 1999
--------- ---------- ---------- ---------- ---------- ---------- ---------
PLN PLN PLN $ PLN PLN $
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. GAAP:
Revenues................................ 21,679 50,206 120,380 30,633 48,869 96,795 24,632
Loss from operations.................... (60,631) (68,047) (86,743) (22,074) (39,170) (73,865) (18,797)
Net loss................................ (54,042) (90,530) (214,363) (54,549) (61,163) (272,640) (69,379)
Basic and diluted net loss per common
share(5).............................. (8.61) (10.02) (20.63) (5.25) (5.89) (20.26) (5.16)
OTHER DATA:
EBITDA(6)............................... (48,864) (49,362) (38,262) (9,737) (18,817) (15,997) (4,071)
Net cash used in operating activities... (32,571) (89,836) (156,413) (39,803) (15,734) (15,706) (3,995)
Net cash used in investing activities... (56,247) (198,336) (480,319) (122,228) (218,628) (339,241) (86,327)
Net cash (used in)/ provided by
financing activities.................. 90,591 1,195,891 (1,688) (430) (1,338) 870,870 221,609
Capital expenditures.................... 148,029 222,964 395,943 100,757 201,790 335,518 85,380
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
AS AS
ACTUAL ADJUSTED(7) ACTUAL ADJUSTED(7)
---------- ----------- --------- -----------
<CAPTION>
PLN PLN $ $
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... 846,649 1,487,278 215,449 378,471
Restricted investments(8)..................................... 319,107 319,107 81,203 81,203
Total assets.................................................. 3,262,372 3,903,001 830,182 993,204
Total assets (U.S. GAAP)...................................... 3,285,326 3,925,955 836,025 999,047
Total long-term debt.......................................... 2,575,765 2,575,765 655,461 655,461
Total non-current liabilities(9).............................. 2,874,974 2,874,974 731,601 731,601
Total shareholders' equity.................................... 176,595 821,548 44,936 209,058
Total shareholders' equity (U.S. GAAP)........................ 170,359 815,312 43,352 207,474
</TABLE>
- ------------------------
(1) For the period ended December 31, 1996, Poland was considered to be a
hyperinflationary economy. The Financial Statements for that period are
prepared in accordance with the historical cost convention as adjusted for
the effects of inflation. In accordance with IAS 29, "Financial Reporting in
Hyperinflationary Economies," the Financial Statements are restated to show
amounts expressed in terms of the constant purchasing power of the Polish
Zloty at December 31, 1996. The amounts shown in the restated currency do
not represent appraised value, replacement cost or any other measure of the
current value of assets or the prices at which transactions would take place
currently. The adjustment was calculated based on conversion factors derived
from the Polish Consumer Price Index (the "CPI") published by Poland's Main
Office of Statistics ("GUS"). Based on a CPI rate of 100 as at January 1,
1990, the cumulative inflation index as at December 31, 1996 was 2,104.
(2) Our historical results include our non-telecommunications businesses, which
in the past have accounted for a significant portion of our revenues. In
1997, we sold the part of our non-telecommunications businesses relating to
the sale of specialized radio equipment, and we intend to dispose of our
remaining non-telecommunications businesses when a favorable commercial
opportunity to do so becomes available, although presently we do not have a
formal plan or agreement of disposal. See "Selected Unaudited Pro Forma
Condensed Consolidated Financial Data."
16
<PAGE>
(3) Other operating expenses primarily includes salaries and benefits, general
and administrative expenses and external services. See the December 31, 1998
Financial Statements and June 30, 1999 Financial Statements included
elsewhere in this prospectus.
(4) Includes non-cash financial expenses of PLN 2.6 million, PLN 19.6 million,
PLN 106.5 million ($27.1 million), PLN 51.8 million, and PLN 53.0 million
($13.5 million) for the years 1996, 1997 and 1998 and for the six-month
periods ended June 30, 1998 and 1999, respectively.
(5) Basic and diluted net loss per common share under IAS and under U.S. GAAP is
calculated by dividing net loss by the weighted average number of shares of
Netia's capital stock outstanding during each period. The weighted average
number of shares used in calculating net loss per share were 6,280; 9,033
and 10,391 for the years ended December 31, 1996, 1997 and 1998,
respectively, and were 10,391 and 13,456 for the six-month periods ended
June 30, 1998 and 1999, respectively. As at June 30, 1999, there were no
dilutive potential common shares.
(6) EBITDA consists of net loss adjusted for depreciation and amortization,
financial expense, income taxes, minority interest, share of losses of
equity investees and non-recurring items (write-off of loan origination
expense, other losses and gain on dilution of interest in subsidiaries) as
each would be determined under IAS. EBITDA computed based on the foregoing
elements determined in accordance with U.S. GAAP would be PLN (48.9)
million, PLN (51.1) million, PLN (45.3) million ($(11.5) million), PLN
(22.3) million and PLN (19.6) million ($(5.0) million) for the years 1996,
1997 and 1998 and for the six-month periods ended June 30, 1998 and 1999,
respectively. EBITDA is not a U.S. GAAP or IAS measure and should not be
considered as an alternative to U.S. GAAP or IAS measures of net
(loss)/income or as an indicator of Netia's operating performance or to cash
flow from operations under U.S. GAAP or IAS as a measure of liquidity. The
calculation of EBITDA does not differ in any material respect if calculated
based upon financial statements prepared under IAS principles. However,
potential investors should note that EBITDA is not a uniform or standardized
measure, and the calculation of EBITDA may vary significantly from company
to company and by itself provides no grounds for comparison of Netia with
other companies.
(7) Adjusted to give effect to (i) the IPO and the issuance of the 50,022 common
shares in accordance with a Stock Appreciation Agreement with a company
controlled by Netia's President and described under "Certain Relationships
and Transactions with Related Parties--Additional Agreements," and (ii) the
Warburg private placement. For pro forma financial information that also
gives effect to the disposition of the non-telecommunications businesses,
see "Selected Unaudited Pro Forma Condensed Consolidated Financial Data."
(8) Restricted investments includes short- and long-term portions of the
proceeds from the issuance in November 1997 of three series of senior notes
by a financing subsidiary, guaranteed by Netia Holdings S.A. (the "1997
Senior Notes") and the proceeds from the issuance in June 1999 of the Old
Notes, in each case restricted pursuant to escrow agreements for payment of
cash interest.
(9) Includes current and long-term portion of long-term debt, license fee
obligations and customer deposits. The amount reflected would not differ
under U.S. GAAP.
17
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THESE RISKS ARE NOT THE ONLY ONES THAT WE FACE. ADDITIONAL
RISKS NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO
IMPAIR OUR BUSINESS OPERATIONS. IN GENERAL, INVESTING IN THE SECURITIES OF
ISSUERS WITH SUBSTANTIAL OPERATIONS IN MARKETS SUCH AS POLAND INVOLVES A HIGHER
DEGREE OF RISK THAN INVESTING IN THE SECURITIES OF ISSUERS WITH SUBSTANTIAL
OPERATIONS IN THE UNITED STATES AND OTHER SIMILAR JURISDICTIONS.
THE ISSUER IS A FINANCING SUBSIDIARY WITH LIMITED ASSETS AND THE GUARANTOR IS A
HOLDING COMPANY
The Issuer is a finance vehicle with limited assets and no operations of its
own. Netia Holdings S.A., the parent company of the Issuer and the guarantor of
the Notes, is a holding company with limited assets of its own that conducts
substantially all of its business through its operating subsidiaries. The
ability of Netia's creditors, including holders of the Notes by virtue of the
guarantee, to participate in the assets of any of those operating subsidiaries
upon any liquidation or administration of any such subsidiary will be limited by
the prior claims of such subsidiary's creditors, including the holders of any
indebtedness for money borrowed, trade creditors of such subsidiaries and other
persons granted priority claim rights under the Polish Code of Civil Procedure.
The Issuer advanced the proceeds of the Notes Offering to Netia South Sp. z o.o.
("Netia South") and Netia Telekom S.A. ("Netia Telekom"), direct subsidiaries of
Netia Holdings S.A., through the issuance by these subsidiaries of bonds to the
Issuer. Netia South and Netia Telekom, in turn, advanced the proceeds to Netia
Holdings S.A., which will advance the net proceeds of the Notes Offering to our
operating subsidiaries.
As of June 30, 1999, we had approximately $731.2 million of long-term
liabilities outstanding (including current maturities and license obligations)
and our subsidiaries had $141.2 million of liabilities (excluding the 1997
Senior Notes, the Notes and intercompany debt, but including current maturities
and license obligations).
The Notes are obligations solely of the Issuer, and the Guarantees are
obligations solely of Netia Holdings S.A. The ability of the Issuer to make
payments on the Notes will depend upon its receipt of funds, either as an
investment or otherwise, from its parent, Netia Holdings S.A., or from payment
of the intercompany bonds by Netia South and Netia Telekom, as the case may be.
The ability of Netia Holdings S.A., Netia South or Netia Telekom, as the case
may be, to make funds available to the Issuer to pay interest (or premium, if
any) on the Notes or to repay the Notes at maturity or otherwise, and of Netia
Holdings S.A. to pay such amounts directly through the Guarantees, will depend
upon either the cash flows of their respective subsidiaries and the payment of
funds by those subsidiaries to their parent companies in the form of repayment
of loans, dividends or otherwise or such parent company's ability to otherwise
realize economic benefits from their equity interests in their respective
subsidiaries. There can be no assurance that Netia Holdings S.A., Netia South or
Netia Telekom will receive timely payments from their respective subsidiaries,
if at all, or other economic benefits from their equity interests in such
subsidiaries, in order to make funds available to the Issuer to make payments on
the Notes, or directly under the Guarantees to make payments on the Notes or
otherwise satisfy its cash flow needs. In addition, the Netia South Bank
Facility (as defined herein) limits the ability of Netia South and its
subsidiaries to make dividend payments to Netia Holdings S.A. and thereby limits
one source from which Netia Holdings S.A. could make funds available to the
Issuer and could fund the Guarantees. Furthermore, the indentures governing the
Notes and the Senior Notes that we issued in 1997 permit subsidiaries of Netia
Holdings S.A. to incur additional indebtedness, including under new credit
facilities, that may limit the ability of the subsidiaries to make funds
available to their respective parent entities, which in turn would limit funds
available for payment on the Notes.
18
<PAGE>
YOUR RIGHTS AS A HOLDER MAY BE AFFECTED IF YOU FAIL TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any state
securities laws and therefore may not be offered, sold or otherwise transferred
except in compliance with the registration requirements of the Securities Act
and any other applicable securities laws, or pursuant to an exemption. The Old
Notes that currently bear legends restricting transfers that remain outstanding
after consummation of the exchange offer will continue to bear those legends. In
addition, upon consummation of the exchange offers, holders of Old Notes which
remain outstanding will not be entitled to any rights to have those Old Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement. We currently do not intend to register under the
Securities Act any Old Notes which remain outstanding after consummation of the
exchange offers.
To the extent that the Old Notes are tendered and accepted in the exchange
offers, we will reduce the principal amount of outstanding Old Notes by the
principal amount so tendered and exchanged. Accordingly a holder's ability to
sell untendered Old Notes could be adversely affected. As a result, the
liquidity of the market for such non-tendered Old Notes could be adversely
affected upon completion of the exchange offers.
Based on an interpretation by the staff of the Commission set forth in
no-action letters and interpretative letters issued to third parties, we believe
that the Registered Notes issued pursuant to the exchange offers in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by such
holder (other than a broker-dealer who purchased Old Notes directly from the
Issuer for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Registered Notes are acquired in the ordinary course of the holder's
business and that the holder is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate, in any distribution of the Registered Notes.
However, if any holder acquires the Registered Notes in the exchange offers
for the purpose of distributing or participating in a distribution of the
Registered Notes, such holder cannot rely on the position of the staff of the
Commission enunciated in the no-action letters regarding MORGAN STANLEY & CO.,
INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION
(available May 13, 1998), or interpreted in the Commission interpretative letter
to SHEARMAN & STERLING (available July 2, 1993), or similar no-action or
interpretative letters. Accordingly, the holder will not be entitled to validly
tender Old Notes in the exchange offer and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or transfer of such Old Notes, unless he makes such sale or transfer
pursuant to an exemption from, or in a transaction not subject to, such
requirements. Each broker-dealer that receives Registered Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making or other trading activities,
acknowledges thereby that it will deliver a copy of this prospectus meeting the
requirements of the Securities Act in connection with any resale of these
Registered Notes. In addition, to comply with the securities or blue sky laws of
certain jurisdictions, if applicable, the Registered Notes may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and complied with.
The Old Notes provide for certain interest rate increases if the exchange
offers are not consummated by January 13, 2000. Upon consummation of the
exchange offers, holders of Old Notes will not be entitled to increase in the
interest rate thereon or any further registration rights under the Registration
Rights Agreement.
WE ARE EXPERIENCING OPERATING LOSSES AND HAVE NEGATIVE OPERATING CASH FLOW
We incurred losses of PLN 15.8 million, PLN 85.4 million, PLN 205.5 million
($52.3 million) and PLN 268.4 million ($68.3 million) for the years 1996, 1997
and 1998 and for the first six months of
19
<PAGE>
1999, respectively. For the same periods, we had negative operating cash flows
of PLN 32.6 million, PLN 89.8 million, PLN 156.4 million ($39.8 million) and PLN
15.7 million ($4.0 million), respectively. At June 30, 1999, we had an
accumulated deficit of PLN 620.5 million ($157.9 million). Our future success
depends upon the successful construction, marketing and operation of our
telecommunications network, which will depend upon, among other things, our
ability to successfully develop our network and comply with the terms of our
licenses. In addition, because we are developing one of the first privately
owned Polish telecommunications networks, we will be limited in our ability to
benefit from the operating experience of other market participants or personnel.
We expect to continue to generate negative cash flows and losses from
operating activities while we concentrate on the build-out of our network. We
cannot guarantee that we will be able to implement our business strategy
successfully or that we will ever be able to achieve or maintain positive cash
flow or profitable operations or have sufficient resources at any time to
service or repay our existing indebtedness or to pay cash dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and the other financial information
included elsewhere in this prospectus.
WE ARE HIGHLY LEVERAGED
As of June 30, 1999, we had, on a consolidated basis, approximately PLN
2,575.8 million ($655.5 million) principal amount of indebtedness outstanding,
in addition to approximately PLN 297.7 million ($75.8 million) of license fees
which will be payable over the next four years based on licenses we currently
hold. See "Capitalization." Our debt instruments limit, but do not prohibit, the
incurrence of additional indebtedness. We anticipate that, in light of the
amount of our existing indebtedness and the need to incur additional
indebtedness to finance the build-out of our operations, we will continue to
have substantial leverage for the foreseeable future. Such leverage poses the
risks that:
- a significant portion of our cash flow from operations, if any, must be
dedicated to servicing our indebtedness;
- we may not be able to generate sufficient cash flow or access sufficient
additional financing to service our outstanding indebtedness and to
adequately fund our planned capital expenditures and operations;
- we could be more vulnerable to changes in general economic conditions;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
may be impaired; and
- our operating and financial ability may be impaired by restrictions
imposed by various debt instruments on operations and investments.
In addition, various restrictive covenants contained in our existing and
future debt instruments (and described under the headings "Description of the
Notes" and "Description of Certain Other Indebtedness") limit or may limit our
ability to:
- borrow money;
- pay dividends or repurchase our capital stock;
- make investments;
- use assets as security in other transactions;
- sell certain assets or merge with or into other companies; and
- enter into transactions with affiliates.
20
<PAGE>
These covenants could materially and adversely affect our ability to finance
our future operations or capital needs or to engage in other business activities
that may be in our best interests.
We must substantially increase our net cash flow in order to meet our debt
service obligations. Substantially all our interest commitments through 2000
have been pre-funded or consist of non-cash interest. Beginning in 2001, we will
have significant cash interest payment service obligations under both the Notes
and the 1997 Senior Notes. In addition, we believe that we will need to
refinance the Notes and the 1997 Senior Notes upon their maturity dates in 2009
and 2007, respectively. There can be no assurance that we will be able to meet
these obligations. If we are unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments, or if we otherwise
fail to comply with the various covenants under our indebtedness, we would be in
default under the terms of such covenants, which would permit holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness. Such default or defaults would have a
material adverse effect on us and would adversely affect our ability to service
our indebtedness, including the Notes.
WE WILL NEED SIGNIFICANT ADDITIONAL CAPITAL
The development, construction, maintenance and operation of our network
requires substantial amounts of capital. Currently, we have approximately $459.7
million of funds (including restricted investments) which includes the proceeds
of the IPO, and the purchase by a group of investment funds sponsored by Warburg
of 2,597,403 of our common shares for $50.0 million (the "Warburg Transaction").
We estimate that, excluding any capital expenditures and license fees we would
incur if we were to bid successfully for or otherwise obtain additional
licenses, we will require approximately $304.8 million of additional capital to
fund our capital expenditures, cash operating losses, cash debt service and
other cash needs through 2003. We plan to use a substantial majority of our
available cash plus any cash generated from operations for capital expenditures,
including the planned completion of the network in our existing territories and
the construction of the planned fiber-optic backbone and data transmission
facilities. These requirements are based upon our current estimates of capital
expenditures and operating results, which are based on a variety of assumptions
that may not be accurate, and our actual needs may increase significantly in the
future. We would require additional funds in the event of delays, cost overruns
or other adverse developments.
In addition, if we acquire licenses for the provision of domestic long
distance or international telecommunications services or if we obtain
concessions to provide local telecommunications service in new territories, we
would expand our network beyond what is currently planned and pay additional
license fees and incur acquisition costs. Such changes will require substantial
amounts of additional financing, particularly if we were successful in obtaining
a long distance license or a Warsaw local license. We also may require
additional financing to build more lines in our licensed territories to meet
build-out milestone requirements. See "--We Face Risks Due to Our Build-out
Strategy and Our Failure to Meet Build-out Milestones" and "--We Operate in a
Rapidly Changing Regulatory Environment."
We also expect that it will be necessary to refinance the 1997 Senior Notes
and the Notes prior to or at maturity in 2007 and 2009, respectively, because
our cash flow from operations is not expected to be sufficient to meet all of
our debt service obligations.
Moreover, we may need to obtain additional financing sooner than is
currently anticipated if our plans or assumptions change, our assumptions prove
inaccurate, we make investments in or acquisitions of other companies or we
experience unexpected costs or competitive pressures.
Sources of financing may include public or private debt or equity
financings, sales of assets or other financing arrangements. We cannot assure
you that such additional financing will be available or available on acceptable
terms or within the limitations contained in our financing arrangements. The
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indentures governing the 1997 Senior Notes and the Notes also limit, and we
expect any future credit agreement or other debt agreement to limit, our ability
to incur additional debt and these limits could adversely affect our ability to
finance our business plan.
In the recent past, there have been several significant disruptions in the
availability of financing in the public markets for companies based in emerging
markets, including Netia. In the event we are unable to obtain such financing or
are unable to obtain such financing on acceptable terms, we may be required to
reduce our current operations or the scope of our expansion. Any such event
would have a material adverse effect on us and our ability to service our
indebtedness, including the Notes.
WE FACE RISKS DUE TO OUR BUILD-OUT STRATEGY AND OUR FAILURE TO MEET BUILD-OUT
MILESTONES
Telecommunications operators in Poland, including Netia, are required to
comply with conditions and obligations set forth in the Communications Act and
the terms of their licenses. If we fail to comply with any of those conditions
and obligations the Minister of Communications (the "MOC") could sanction us by
revoking our licenses.
Our licenses required us to construct 407,850 telephone lines by the end of
1998 and require us to construct 846,000 telephone lines by the end of 1999 and
1,213,750 telephone lines by the end of 2000. As of December 31, 1998, we had
constructed 283,900 lines and had failed to meet the build-out milestones in all
of our licensed territories. We also failed to meet the build-out requirements
of many of our licenses in 1997. Under our current plans, we intend to have
approximately 428,000 lines by the end of 1999 and 558,000 lines by the end of
2000, focusing our build-out efforts in the larger cities within our licensed
territories. Accordingly, even if we achieve our own internal goals, we will not
meet the build-out milestones in many, if not all, of our licenses. We applied
for waivers with respect to our failure to meet the 1997 build-out milestones
and received written assurance from the MOC that the MOC did not intend to take
any action against us as a result of such failure. However, based on our
assessment of the position the MOC has consistently taken in the past, we have
not sought or received similar assurance from the MOC with respect to the 1998
milestones. While we may in the future, if necessary, seek amendments or waivers
to build-out milestones that we are not able to achieve, we cannot assure you
that the MOC will grant such amendments or waivers.
In addition to build-out milestones, we must ensure equal access to
telecommunications services (subject to customer demand) for both urban and
rural customers. See "Telecommunications Regulations--Licensing Framework and
Principal Terms of Our Licenses." However, we presently intend to focus our
build-out efforts in the major cities and industrial areas within our licensed
territories and to focus our marketing efforts on attracting business customers
who generally are located in these areas. Accordingly, even if we meet our line
build-out requirements, we may not satisfy these equal access requirements.
Should the MOC choose not to waive or amend our build-out milestones, we
would be forced to either construct additional lines to satisfy the build-out
milestones, possibly in areas where the likely return on our investment would
not justify the additional expense, or face possible revocation of, or the
imposition of limitations on, our licenses. Alternatively, the MOC could also
choose to allow additional competitors into our licensed territories. To date,
the MOC has not initiated any of these responses against us. However, in
February 1998, the MOC announced its intention to evaluate in 1999 the results
achieved by holders of licenses. This review could possibly lead to the MOC
conducting another round of tenders for additional concessions for the areas in
which they consider the performance by operators who had been granted the
original licenses unsatisfactory.
The MOC has revoked the licenses of certain other private operators in
Poland for failure to meet build-out milestones; however, in each instance the
operator had failed to begin construction of a network. We cannot assure you
that the MOC will continue to grant requests we may make to waive or amend the
build-out milestones contained in our licenses in the event that we are unable
to meet them,
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or that the MOC will not impose sanctions against us, including revoking or
limiting our licenses, if we fail to meet our build-out milestones in the
future. The revocation or limitation of one or more of our licenses would have a
material adverse effect on us and our ability to service our indebtedness,
including the Notes.
Although failure to meet build-out milestones in the past has not prevented
us from acquiring additional licenses, as demonstrated by our receipt of several
licenses in March 1998 and our recent receipt of the benefit of a data license,
it is possible that failure to meet our build-out milestones will have an
adverse effect on our ability to acquire additional licenses. In addition, if we
do not meet our build-out milestones in a particular licensed territory, the
MOC, rather than revoking our license, could choose to grant another private
operator a license to operate within that territory.
Our inability to build out the network in accordance with our plans has had
and in the future may have an adverse impact on our ability to obtain
third-party financing. In September 1997, Netia South and its subsidiaries
entered into a multicurrency term loan facilities agreement with a syndicate of
banks to provide up to $95 million of financing for the construction of a
portion of the network by Netia South (the "Netia South Bank Facility"). The
Netia South Bank Facility contained a covenant requiring Netia South and its
subsidiaries to achieve a minimum number of subscriber lines by certain dates,
including 29,500 lines by December 31, 1997 and 37,500 lines by March 31, 1998.
Netia South failed to meet both of these milestones, resulting in defaults under
the Netia South Bank Facility which precluded Netia South from borrowing funds
under the Netia South Bank Facility in excess of an initial drawdown of
approximately $11.4 million. Subsequently, these defaults were waived and Netia
South and the lenders under the Netia South Bank Facility agreed to modify the
facility to be an $11.4 million term loan. Our build-out performance therefore
effectively precluded us from accessing the bank financing market. See
"Description of Certain Other Indebtedness--Netia South Bank Facility."
WE FACE RISKS DUE TO MODIFICATION OR LOSS OF LICENSES
Our ability to retain our existing licenses and to renew them when they
expire, and to obtain new licenses in the future, is essential to our
operations. However, these licenses are typically granted by the MOC, and we
cannot assure you that the MOC will not seek to limit, revoke or otherwise
adversely modify the terms of these licenses in the future. Any such action by
the MOC would have a material adverse effect on us and our ability to service
our indebtedness, including the Notes. We may have limited or no legal recourse
if any of these events occur. In addition, our licenses were granted for initial
terms of ten to fifteen years and will expire between 2007 and 2013. While we
intend to apply for new licenses as these existing licenses reach the end of
their terms, there can be no assurance that such applications will be approved
or that new licenses will be granted to us on the same terms as the existing
licenses, or at all.
WE OPERATE IN A RAPIDLY CHANGING REGULATORY ENVIRONMENT
The provision of telecommunications services in Poland is subject to
extensive government regulation. The regulated areas include the issuance,
renewal, revocation, terms and conditions of, and compliance with, the licenses
required to provide telecommunications services. The MOC has the right to
establish maximum telephone rates and to regulate interconnection. These
regulations are relatively new and subject to further change. The Communications
Act was substantially revised in 1995 and additional revisions are currently
under consideration in order to conform Polish telecommunications legislation to
EU standards and Poland's commitments under the WTO Accord on Basic
Telecommunications. In addition, the Polish parliament is presently considering
a new communications law intended to conform the Polish regulatory environment
more closely to EU standards and Poland's commitments under the WTO Accord on
Basic Telecommunications. We cannot predict the outcome or timing of any of
these proposed amendments or modifications or their impact on Netia. In
addition, the current Minister of Communications has been appointed only
recently, and we cannot predict the nature of any
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changes he may institute in MOC policies or practices. Any such changes could
have a material adverse effect on us and our ability to service our
indebtedness, including the Notes, by requiring us to comply with additional,
more onerous regulations. Such changes could also have an adverse effect on the
competitive environment, such as by mandating additional licensing opportunities
for new market entrants in our territories. See "Telecommunications
Regulations--Proposed New Telecommunications Law."
Other government regulations, such as tax increases, could also adversely
affect our operations. For example, increases in the value added tax ("VAT")
applicable to telephone services could adversely affect the usage of the network
which, in turn, could have a material adverse impact on us and on our ability to
service our indebtedness, including the Notes.
WE MAY BE UNABLE TO COMPLETE OUR NETWORK OR INCREASE TRAFFIC AS PLANNED
OUR NETWORK BUILD-OUT PLANS. Our ability to achieve our strategic
objectives will depend in large part upon the successful, timely and
cost-effective completion of our network. Our present plans contemplate the
completion by the end of 2003 of the build-out of a 750,000-line network and the
completion of a national backbone, which will allow us to connect our local
networks and provide Internet and data transmission services. However, the
construction of the network will be affected by a variety of factors,
uncertainties and contingencies. Among these factors are our ability to manage
the build-out of the network effectively and cost-efficiently, to finance
construction and to acquire additional rights-of-way in a timely manner.
Successful completion of the network on schedule will also depend upon the
timely and satisfactory performance by third-party contractors of their
obligations. Portions of the network are being constructed by third-party
contractors, either under our direct supervision or, to a lesser extent, under
"turn-key" contracts. This reduces to varying degrees our control over
construction and, in the past when a more significant portion of our network
construction was performed under turn-key contracts, has led to delays.
We cannot assure you that our entire network will be completed as planned,
or at all, at the costs and in the time frame currently planned. Although we
currently believe that our cost estimates and build-out schedule are reasonable,
the actual construction costs or time required to complete our network could
substantially exceed estimates. Moreover, the installation and expansion of our
network has entailed and will continue to entail considerable expenses in
advance of anticipated revenues and may cause substantial fluctuations in our
operating results and cash flows.
OUR NEED TO INCREASE TRAFFIC ON OUR NETWORK. We also must substantially
increase the current traffic volume on our network in order to realize the
anticipated cash flow from, and operating efficiencies and cost benefits of, our
network. In order to increase traffic on our network, we must retain existing
customers, acquire additional customers and achieve increased usage. This will
be the case even if we are successful in constructing our network, including the
national backbone in a timely and cost-effective manner, because the build-out
of our network will not necessarily result in a corresponding increase in number
of subscribers and usage.
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OUR NEED TO INCREASE THE NUMBER OF BUSINESS CUSTOMERS. To maximize the
profitability of our network, we intend to optimize our ratio of business
customers to total customers by increasing the number of business customers. Our
plans are in large part predicated on being successful in these efforts. To
accomplish this goal, we intend to continue to focus our immediate build-out
efforts in the major cities for which we acquired licenses in December 1997. We
believe that by building out the network in these areas we will increase network
usage volume because of the higher concentration of businesses in larger cities
and the generally higher disposable income of city residents. However, we will
be competing for these more profitable customers with TPSA and other providers
of telecommunications services, including other fixed-line operators and cable
television operators and we may not be successful in realizing our goals of
retaining and attracting our desired mix of customers or in achieving customer
utilization of the network that will meet our expectations. By focusing our
build-out efforts in cities, we increase the likelihood that we may not satisfy
the build-out requirements of our licenses in other regions. See "--We Face
Risks Due to Our Build-out Strategy and Our Failure to Meet Build-out
Milestones."
Also, our hopes to expand the scope of our network into Warsaw and Lodz,
Poland's two largest cities, were set back by our failure to win the concessions
for these cities in the tenders completed in December 1998. It is also possible
that our inability to offer local service in Warsaw could have an adverse impact
on our ability to attract business customers with multiple offices in Poland
even though we plan to access Warsaw business customers through our data
transmission and Internet network.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR GROWTH AND EXPANSION
Our strategy of continuing growth and expansion has placed, and is expected
to continue to place, a significant strain on our management, operational and
financial resources and greater demands on our systems and controls. We are
continuing to build out our network by adding switches and fiber-optic cable in
our licensed areas. In addition, we are also just beginning the design and
construction planning of our data transmission network and the expansion of our
Internet services. In order to manage our growth effectively, we must continue
to implement and improve our operations and financial systems and controls;
recruit, train and retain highly productive sales, marketing and technical
personnel; and expand our administrative and back-office staff. As we proceed
with our development, there will be additional demands on our customer support,
billing systems and support, sales and marketing and administrative resources,
network infrastructure and senior management. We cannot assure you that our
operating and financial control systems and infrastructure will be adequate to
maintain and effectively manage future growth, or that we will otherwise be able
to manage effectively the planned increase in the scope of our operations.
Our failure to continue to upgrade our administrative, operating and
financial control systems or the emergence of unexpected expansion difficulties
could have a material adverse effect on us. We are in the process of
implementing a new operating support system to assist in managing our network
growth; however, the new system may not work as planned or be sufficient to meet
our needs. In addition, the expansion of our business may involve acquisitions
which, when made, could divert our resources and management time and require
integration with our existing operations. We cannot assure you that any
acquisition will be made in a timely manner or on terms and conditions
acceptable to us, or that we will be able to successfully integrate any acquired
businesses into our operations or operate them profitably.
We continue to examine opportunities to expand into other related
telecommunications services, including, when applicable laws and regulations
allow, domestic long distance and international service. In April 1999, we
secured the benefit of a license for data transmission services throughout
Poland. As we expand into new areas of telecommunications services, we will face
additional risks in connection with such expansion, including technological
risks, competitive risks and legal and regulatory risks, such
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as potential foreign ownership restrictions. See "--The Foreign Investor
Restrictions Under the Communications Act May Impose Limitations on Our
Business."
THE FOREIGN INVESTOR RESTRICTIONS UNDER THE COMMUNICATIONS ACT MAY IMPOSE
LIMITATIONS ON OUR BUSINESS
The Communications Act imposes restrictions on the activities that can be
carried out by foreign-controlled entities such as Netia. Although there are
currently no foreign-ownership limitations on companies that provide local
telecommunications services in Poland, the Communications Act places foreign
ownership limitations on companies that may receive licenses to provide domestic
long distance telecommunications and dedicated data transmission services in
Poland. Domestic long distance telecommunications and dedicated data
transmission services may be provided in Poland only by an operator in which the
equity interest and voting power of such operator held by non-Polish entities
does not exceed 49% and in which Polish citizens domiciled in Poland constitute
a majority of the members on the management and supervisory boards.
We currently do not meet the foreign ownership limitation requirements
applicable to those activities. We intend to bid for a license to provide
domestic long distance service when such licenses are put up for tender. To
facilitate our acquisition of a domestic long distance license, we formed a
joint venture through Netia Network S.A. ("Netia Network"). Under the joint
venture arrangement we hold a 49% equity and voting interest in Netia Network,
with the remaining interest held by a Polish national who is also a member of
our Supervisory Board (the "Supervisory Board"). In April 1999, Netia Network
acquired a license to provide dedicated data transmission services throughout
Poland. We have entered into a services agreement with Netia Network under which
data transmission services authorized by the license will be provided to our
customers. We believe that through this arrangement we have effectively
structured our operations to meet the requirements of the Communications Act for
domestic ownership of the data license, without for the present time sacrificing
the economic benefits of our investments in the data network. However, if this
arrangement or any similar future arrangement is challenged, the validity of the
data license and our ability to provide data transmission services could be
adversely affected as well as our ability to participate in a tender for long
distance licenses and the validity of any domestic long distance license we may
obtain. Alternatively, if a challenge to this arrangement were to occur or if,
as expected, it becomes necessary to provide significant amounts of capital to
Netia Network to fund the development of a data transmission network in areas
outside the scope of our local licenses, we may be required to relinquish a
significant ownership interest or control over those operations to an
unaffiliated third party in order to continue to retain the benefit of the
license. Such a restructuring could have an adverse impact on our ability to
exploit and realize the potential full value of this license and business
opportunity. See "Business--Data Transmission Network." The indentures governing
the Notes and the 1997 Senior Notes would not allow us to make substantial
investments in licensees that are not our subsidiaries, except on a pro rata
basis with other investors.
Based on public statements by the MOC regarding Poland's plans to join the
European Union ("EU"), and the related requirement that Poland harmonize its
laws in accordance with EU requirements, we believe that these foreign ownership
limitations may eventually be eliminated with regard to EU nationals. However,
if the foreign-ownership limitations are not eliminated, and if the structure of
our joint-venture arrangements for acquiring interests in licenses is not
effective, Netia may not be able to provide domestic long distance services or
dedicated data transmission services. Such a result would cause a material
adverse effect on our ability to realize our goal to be a facilities-based
full-service provider of telecommunications services in Poland. Under the
present regulatory scheme private operators may not provide international long
distance services. While the Polish government has announced its intention to
allow private operators to provide those services by the year 2003 and removed
all foreign ownership restrictions from its draft new telecommunications law
(except for international
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telecommunications services), the final legislation may retain some foreign
ownership restrictions that could limit our ability to provide such services.
WE ARE DEPENDENT ON TPSA FOR INTERCONNECTION WITH ITS NETWORK
Our ability to provide viable telecommunications services is dependent on
our ability to interconnect with the TPSA telephone network. Interconnection
with TPSA is required to complete calls that originate on our network but
terminate outside our network. All of these calls must be connected using the
TPSA network, including all domestic long distance and international calls
placed by our customers. The Communications Act requires TPSA to interconnect
private telecommunications operators such as Netia with the TPSA network. This
permits private operators to receive customers' incoming calls from, and to send
outgoing calls over, the TPSA network. We have successfully entered into
interconnection agreements with TPSA in each of our licensed territories where
we currently operate and our interconnection rights have been recognized by, and
successfully enforced in, the Polish legal system. However, we have historically
experienced delays and difficulties in reaching interconnection agreements with
TPSA, which have delayed the commencement of commercial operations in some of
our licensed territories. Any difficulties or delays in interconnecting with the
TPSA network may have a material adverse effect on us and on our ability to
service our indebtedness, including the Notes.
In addition, a material increase in the interconnection charges associated
with new interconnection agreements (excluding renewals) that we must pay or the
failure of interconnection charges to decline in line with any future general
reductions in retail telephone call charges could result in reduced margins for
Netia or an inability to offer telephone services at competitive prices. Either
of these factors may have a material adverse effect on us and on our ability to
service our indebtedness, including the Notes. Furthermore, the interconnection
charges that we pay for domestic long distance and international calls placed by
our customers are based upon a percentage of TPSA's tariff for these calls
(including any increase in TPSA's tariffs), not upon the rates we charge our
customers. Therefore, a reduction in our tariffs that is not matched by a
corresponding decrease in TPSA's tariffs or any increase in TPSA's tariffs (such
as the 14% increase in TPSA tariffs for local calls announced as of July 1,
1999) that is not matched by a corresponding increase in our tariffs could have
a material adverse effect on us and on our ability to service our indebtedness,
including the Notes.
Also, while the MOC has recently issued a decree containing a new
interconnection framework in which it took into account suggestions made by
Netia and other alternative operators, we cannot predict when the new
interconnection regime will become effective, or the impact it will have on us.
WE MUST OBTAIN LOCAL APPROVALS AND RIGHTS-OF-WAY TO DEVELOP OUR NETWORK
The development, expansion and operation of our network will depend on,
among other things, our ability to obtain regional governmental approvals and
agreements for public and private rights-of-way on satisfactory terms and
conditions. We cannot assure you that we will be able to obtain regional and
local governmental approvals or that we will be able to obtain, on acceptable
terms, the rights-of-way required to build out our network in our licensed
territories or other areas we plan to cover with our data network. The inability
to obtain governmental approvals or rights-of-way to expand in accordance with
our plans could have a material adverse effect on us and on our ability to
service our indebtedness, including the Notes. We have historically experienced,
and expect to continue to experience in the future, certain delays in obtaining
governmental approvals and rights-of-way which have led to construction delays.
These delays may increase as we seek to expand our network into historic city
districts. Accordingly, we may be forced (and in certain areas we have already
found it necessary) to utilize alternative technologies, such as wireless local
loop, to minimize the impact of these factors.
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WE FACE SIGNIFICANT COMPETITION
We compete with TPSA, other providers of fixed-line telephone services in
some markets and providers of alternative forms of telecommunications services.
We generally compete on the basis of quality of service, service offerings and
price.
TPSA. With respect to fixed-line telephone services, we are subject to
competition from TPSA in all of its licensed territories. TPSA:
- is significantly larger than us;
- has substantially greater financial, technical and marketing resources;
- has a far larger network than us;
- controls far more transmission lines;
- has long-standing relationships with certain of our target customers,
including most businesses in our licensed territories; and
- has infrastructure in the major cities, including Gdansk, Katowice,
Krakow, Lublin, Opole and Poznan, that is generally as technologically
advanced as our network.
All these factors could have a significant impact on our current and future
business.
In addition, TPSA currently has a monopoly on the provision of domestic long
distance and international fixed-line telephone services in Poland, which gives
TPSA greater flexibility in setting its tariff structure. While it is impossible
to predict how TPSA will react to Netia in terms of pricing policy, targeting of
specific markets, access to infrastructure and interconnection arrangements as
we build out our network and begin to compete more actively with TPSA in various
areas of Poland, our experience to date indicates that TPSA will attempt to
match our pricing in areas and for customers that it believes are most
attractive. In situations where TPSA competes more aggressively with us, we have
in the past and may in the future be forced to provide discounts in order to
attract new customers or maintain our existing customers. This would have a
negative effect on our revenues per line and overall results. It is also
impossible to predict what effect, if any, the privatization of TPSA commenced
by the government in November 1998 will have on us. See "--The Privatization of
TPSA May Adversely Affect Our Competitive Position."
OTHER ALTERNATIVE OPERATORS. The Communications Act allows for free
competition among providers of local telephone services and places no
restriction on the MOC's ability to issue additional licenses in our licensed
areas. While generally in the past the MOC has issued licenses to no more than
one private operator (in addition to TPSA) to provide local telephone services
within any particular geographic territory, we believe, based on recent
statements from the MOC, that this practice is likely to change. The issuance of
additional licenses within our licensed territories may result in increased
competition for us in the provision of fixed-line voice telephone services. See
"--We Operate in a Rapidly Changing Regulatory Environment." Certain of the
large business organizations in our licensed territories operate their own
internal telecommunications networks (some of which include local residents as
customers), which reduces the potential business that we might receive from such
organizations as customers and provides a potential source of competition in the
future. In addition, the recently initiated process of consolidation among other
private operators may result in a significant increase in competition,
especially with regard to long distance licenses to be awarded in 1999.
OTHER SOURCES OF COMPETITION. We also face competition in the local
telephone market from alternative forms of telephone services, including
wireless telephone service (such as the fast-growing cellular telephone
companies) and may face the possibility of competition from providers of such
services as telephone-over-cable when they become available in Poland.
Currently, one analog and two GSM
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privately owned cellular networks have commenced operations in Poland and a
fourth DCS 1800 system became operational in Warsaw and other major cities in
1998. Moreover, in July 1999 the MOC awarded additional GSM licenses to certain
existing operators. It is estimated that the number of cellular telephone
subscribers in Poland exceeded two million as of March 31, 1999. Furthermore, as
we expand our service offering to include, among others, dedicated data
transmission services, we may face competition from other possible providers of
such services, such as cable television operators. Cable television networks may
become another potential source of competition if certain cable television
operators consolidate and commence offering integrated television, Internet and
telephony service using their proprietary networks in large cities. We cannot
predict the effect on our operations that competition from these
telecommunications service providers will have in the future.
POSSIBLE REGULATORY DEVELOPMENT AFFECTING COMPETITION. Under the World
Trade Organization ("WTO") Accord on Basic Telecommunications, Netia could face
increased competition in the telecommunications services market. Under this
agreement, Poland and other members of the WTO have committed themselves to
opening their respective telecommunications markets to service suppliers and
services from other WTO member countries. In addition, any future developments
in the regulation of the telecommunications industry in Poland which are made to
ensure compliance with the minimum standards of liberalization mandated by EU
law and policy and Poland's obligations under the WTO Accord on Basic
Telecommunications could result in shifting tariff structures for providers of
telecommunications services in Poland. At present, fixed monthly charges and
local calls are relatively less expensive in Poland, and long distance calls are
relatively more expensive, than in other countries with more developed
telecommunications industries. Shifts in these tariffs are likely to result in a
more liberal and competitive market for Netia. Because our current local network
licenses cover only local calls within the licensed areas, these developments
may be beneficial to us to the extent they result in local tariff increases.
However, it is also possible that such shifts could be adverse to us if the
higher local tariffs attract additional competition if and when regulatory
policies permit and by reducing the profit potential of any long distance
license we might bid for and win. All of these developments may result in
increased competition in our licensed territories.
THE PRIVATIZATION OF TPSA MAY ADVERSELY AFFECT OUR COMPETITIVE POSITION
The government of Poland has announced that it intends to privatize TPSA,
the state-owned former monopoly provider of telecommunications services in
Poland and our primary competitor. In furtherance of this plan, in November
1998, the government sold a 15% equity interest in TPSA in a public offering.
The government is required to distribute an additional 15% interest to TPSA
employees in 1999, and it has announced that it intends to sell an additional
25% to 35% equity interest in TPSA to one or more strategic investors by the end
of 1999 or in 2000. We believe a new strategic investor will likely insist on
substantial changes in TPSA's operations and improvements in its management and
could provide extensive strategic assistance to TPSA. A strategic investor could
also improve TPSA's access to capital. Although it is impossible to predict the
effect of this privatization on Netia or the telecommunications market in
Poland, we believe privatization will likely make TPSA a much more effective
competitor than it already is. It is possible that, among other things, TPSA
could engage in more aggressive price competition in order to retain market
share, deploy or develop new technologies that could require us to incur
significant additional capital expenditures in order to remain competitive or
implement numerous other measures designed to improve the competitive position
of TPSA and enhance its shareholder value.
In addition, it is possible that the Polish government could enact
legislation altering the present tariff and other interconnection relationships
between TPSA and other telecommunications service providers, such as Netia, in
favor of TPSA in order to maximize the proceeds from the privatization. Any of
the foregoing could have a material adverse effect on us and on our ability to
service our indebtedness, including the Notes.
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INFLATION AND CURRENCY FLUCTUATIONS AFFECT OUR BUSINESS
Inflation and currency exchange fluctuations have had, and may continue to
have, an effect on our financial condition and results of operations. A
substantial portion of our operating expenses and capital expenditures are, and
are expected to be, denominated in Polish Zloty and tend to increase with
inflation. In addition, since our revenues are expected to be generated
primarily in Polish Zloty, we are exposed to foreign exchange risk on any debt
or other liability denominated in any other currency, including the 1997 Senior
Notes and the Notes. As of June 30, 1999, we had approximately PLN 2,575.8
million ($655.5 million) of non-Polish Zloty-denominated debt, all of which was
denominated in U.S. Dollars, Euros or German Marks and PLN 297.7 million ($75.8
million) of liability for licenses denominated in Euros and U.S. Dollars.
In addition, to the extent that we require additional financing, and such
financing is raised through the incurrence of debt, such debt will most likely
be denominated in U.S. Dollars, Euros or other hard currencies. Changes in the
exchange rate could have a material adverse effect on us and our ability to
service our non-Polish Zloty-denominated indebtedness, including the 1997 Senior
Notes and the Notes. At the present time, it is not economically feasible to
hedge our exposure to movements in the value of the Polish Zloty. Although we
may attempt to enter into transactions to hedge the risk of exchange rate
fluctuations, in the future we cannot assure you that we will engage in such
transactions or, if we engage in such transactions, that they will be
successful. Finally, despite the effects such fluctuations could have on our
operating results, it may not be feasible or desirable to increase tariffs in
Polish Zloty terms to offset the impact of any continuing devaluation of the
Polish Zloty on our hard currency obligations.
THE INVESTMENT SECURITIES ARE UNSECURED ASSETS
The Investment Securities held by the appropriate trustee for the Notes or
its respective agent to provide for payment in full of the first four scheduled
interest payments on each series of the Notes are our general unsecured assets
and, therefore, in the event of insolvency, liquidation, reorganization,
dissolution or other winding up of Netia, the Investment Securities would be
available to satisfy the claims of our creditors. As a result, in the event of
any distribution or payment of the assets of Netia in any foreclosure,
dissolution, winding up, liquidation, reorganization or other bankruptcy
proceeding, other holders of indebtedness of Netia may have a prior claim to the
Investment Securities or may participate ratably with all holders of our
unsecured Indebtedness, and potentially with all other general creditors of
Netia, based upon the respective amounts owed to each holder or creditor, in the
Investment Securities.
WE CANNOT GUARANTEE CUSTOMER ACCEPTANCE AND MARKET DEMAND FOR OUR SERVICES
Our long-term success depends in large part upon our ability to attract and
retain customers, particularly business customers. We cannot assure you that
Netia will be able to compete successfully with TPSA for business customers or
that business customers will find our services or prices attractive. See "--We
Face Significant Competition." It is also possible that our inability to offer
local telephone service in Warsaw could have an adverse impact on our ability to
attract business customers with multiple offices throughout Poland. In addition,
there can be no assurance that customers in our licensed territories will be
willing or able to pay the installation charges and the fixed monthly fees
associated with telephone service. If actual demand for our services falls short
of projections, it could have a material adverse effect on us and on our ability
to service our indebtedness, including the Notes. This situation may be
exacerbated as a result of the government's decision to raise the VAT on
telecommunication services implemented in February 1998, described under "We
Operate in a Rapidly Changing Regulatory Environment," although to date we have
not experienced any significant adverse effects from this particular change.
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Netia's business plan assumes that over time we will be able to sell various
enhanced telecommunication services, such as ISDN, Internet access and other
dedicated data transmission services, which are generally more profitable than
basic telephone services. Demand for Internet and data transmission services is
just beginning to emerge in Poland, and we cannot predict the size or
profitability of this market, or whether it will grow to justify our planned
investments. We also cannot predict whether we will be able to compete
successfully for the demand that will arise. Our business plan also assumes that
tariffs for local calls will increase and for long distance calls will decrease
as TPSA is privatized and the telecommunications market in Poland is
deregulated, consistent with recent tariff rebalancing by TPSA. We cannot
predict whether actual pricing patterns will continue to follow this trend.
Under the present Polish regulatory scheme, it may be necessary for us to
provide certain of these enhanced services together with or through third
parties, which could dilute our interest in these operations. See "--The Foreign
Investor Restrictions Under the Communications Act May Impose Limitations on Our
Business."
If sufficient demand for our services does not develop, our business and our
ability to service our indebtedness, including the Notes, would be materially
adversely affected.
WE MAY BE UNABLE TO RETAIN QUALIFIED PERSONNEL
We compete with other telecommunications service providers for qualified
operating, sales, marketing, administrative and technical personnel. Our success
will depend in part upon our ability to hire and retain such personnel. There
can be no assurance that we will be able to attract, recruit and retain
sufficient qualified personnel. Furthermore, our business is currently managed
by a small number of key management and operating personnel (such as Meir
Srebernik, Avraham Hochman, Kjell-Ove Blom and George Makowski, Netia's
President, Chief Financial Officer, Chief Operations Officer and Chief Marketing
Officer, respectively). The loss of any of these persons could have a material
adverse effect on us and on our ability to service our indebedteness, including
the Notes. We do not maintain key-man insurance on any of our executive
officers.
OUR BUSINESS IS SUBJECT TO RISKS POSED BY RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. We are utilizing flexible and modern technology in our network's
design, but we cannot predict the effect on our business of technological
changes, such as changes relating to emerging fixed-line and wireless
transmission technologies and telephony-over-cable television.
COMPUTER SYSTEMS MAY FAIL TO RECOGNIZE YEAR 2000
We are highly dependent on our computer software programs and operating
systems in operating the network. We also depend on the proper functioning of
computer systems of third parties, such as TPSA and telecommunications equipment
suppliers. The failure of any of these systems to appropriately interpret the
upcoming calendar year 2000 could have a material adverse effect on us and on
our ability to service our indebtedness, including the Notes. We have identified
our own applications that will not be Year 2000 compliant and taken steps to
determine whether relevant third parties are doing the same. We are implementing
on a network-wide basis a plan to prepare our computer systems to be Year 2000
compliant by the end of the first half of 1999. We are currently replacing our
billing and financial reporting systems, for business reasons, with the added
benefit that the new systems are certified Year 2000 compliant. Otherwise, we do
not think that our Year 2000 expenditures will be material. We expect that the
installation of these systems will be completed by September 1999. We currently
require all vendors of new equipment to provide us with certification of Year
2000 compliance. No assurance can be given that our Year 2000 program will be
effective or that our estimates about the timing and cost of completing our
program will be accurate. Also, due to the many points of
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contact and inter-relationships between our systems and those of TPSA, we may be
adversely affected by any failure of TPSA's system to be Year 2000 compliant. We
have not yet formulated a contingency plan to address any significant problems
that may be caused by the failure of our internal systems or those of TPSA.
We cannot predict the impact of the Year 2000 on our customers or on the
Polish economy. If they are adversely affected, demand for our services could
fall and we could in turn be materially adversely affected. Our inability to
remedy our own Year 2000 problems or the failure of third parties to do so may
cause business interruptions and shutdowns, financial loss, regulatory action,
reputational harm and/or legal liability. This could have a material adverse
effect on us and on our ability to service our indebtedness, including the
Notes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources Year 2000 Compliance."
THERE ARE RISKS ASSOCIATED WITH INVESTING IN EMERGING MARKETS SUCH AS POLAND
Poland has undergone significant political and economic change since 1989.
These changes have thus far been largely beneficial for alternative
telecommunications providers but they could adversely affect us in the future.
In particular, future changes in laws or regulations affecting
telecommunications providers or Polish economic growth (or in the interpretation
of existing laws or regulations), whether caused by changes in the government of
Poland or otherwise, could have a material adverse effect on us and on our
ability to service our indebtedness, including the Notes. For example, while
there is no limitation for most foreign exchange transactions conducted by
businesses, we cannot assure you that foreign exchange control restrictions,
taxes or limitations will not be imposed or increased in the future with regard
to repatriation of earnings and investments from Poland.
Due to the many formalities required for compliance with the laws in
Poland's regulated economy and the rapid changes that Polish laws have undergone
in the 1990s, we may from time to time have violated, may be violating and may
in the future violate, the requirements of certain Polish laws, including
provisions of labor, foreign exchange, customs, tax and corporate laws and
provisions related to notice filings to the Office of Consumer and Competition
Protection ("CCPO"). We do not believe that any such violations have had or will
have a material adverse effect on us, but there can be no assurance that such
will be the case.
Poland is generally considered by international investors to be an emerging
market. As a result, we cannot assure you that political, economic, social and
other developments in other emerging markets will not have an adverse effect on
the market value and on our ability to service our indebtedness, including the
Notes.
In particular, emerging markets have been and may continue to be affected by
the financial and economic crises in Russia, Southeast Asia and Brazil. For
example, during the period from August 10, 1998 to October 12, 1998 when the
crisis in Russia worsened and received significant publicity, the Warsaw Stock
Exchange listed company index fell by approximately 29.8%, and access to the
capital markets for Polish companies largely disappeared. Any such shifts and
any corresponding downward shifts in PLN to U.S. Dollar or Euro exchange rates
would have an adverse effect on Polish enterprises such as Netia which generate
revenues in local currency but have substantial U.S. Dollar--or Euro-denominated
obligations. In recent periods, the exchange rate of the Polish Zloty, to U.S.
Dollar has deteriorated, from PLN 3.93 per $1.00 at June 30, 1999, to PLN 4.07
per $1.00 at October 1, 1999. See "--Inflation and Currency Fluctuations Affect
Our Business."
Also, while to date these developments in Russia and other emerging markets
do not appear to have had a significant impact on the Polish economy, they may
nevertheless affect investor confidence and result in downward movements in the
trading prices of the securities of Polish companies. We cannot assure you that
the continuation and/or escalation of the disruptions in Russia and recurrence
of problems in Southeast Asia, Brazil or other emerging markets will not have an
adverse effect on Polish
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exchange and inflation rates and, therefore, on the trading prices of the
securities of Polish companies in general and Netia in particular, including the
Notes.
POLISH INSOLVENCY LAWS MAY DIFFER IN CERTAIN RESPECTS FROM COMPARABLE U.S. LAWS
As a Polish company, any insolvency proceedings by or against Netia Holdings
S.A. as the guarantor would be based on Polish bankruptcy law, which differs in
several significant respects from, and is in certain aspects more favorable to
secured creditors (and less favorable to, unsecured creditors, such as the
holders of the Notes) than the comparable provisions of U.S. law.
Under Polish bankruptcy law, the liability of the guarantor in respect of
the Notes would be paid only after certain debts of the guarantor which are
entitled to priority under Polish law have been satisfied. Such preferential
debts include, among other things, money owed to the State Treasury of Poland in
respect of taxes, social security contributions, remuneration owed to employees
and claims of the secured creditors. Also, Polish law does not require a
bankruptcy administrator to give effect to intercreditor arrangements such as
subordination agreements (although the law does not preclude creditors from
attempting to enforce such rights in separate proceedings outside of the
bankruptcy). Therefore, the claims of all unsecured creditors would be paid on a
PARI PASSU basis in the bankruptcy proceeding.
Under Polish law, the administrator does not have any right to apply to a
court to rescind certain transactions, such as the making of a guarantee, if
such transactions were validly entered prior to a company's bankruptcy. Also,
under Polish insolvency law, the debtor may seek to commence a conciliation
procedure. Such conciliation procedures may result in an agreement to
restructure a debtor's obligations, which will be binding on all creditors if
approved by creditors holding at least two-thirds of the aggregate amount of the
indebtedness and the bankruptcy court.
It is not clear whether Polish courts would have jurisdiction over a
debtor's property located outside Poland. Such jurisdiction would not exist in
respect of real estate or other property rights located abroad. Furthermore,
courts outside Poland may not recognize Polish bankruptcy court jurisdiction.
Under Polish bankruptcy law, any debt payable in a currency other than
Polish Zloty (such as U.S. Dollars in the case of the Senior Dollar Notes and
Euros in respect of Senior Euro Notes) must be converted into Polish Zloty at
the NBP average exchange rate prevailing on the date the bankruptcy court issues
a decision on the debtor's bankruptcy. Accordingly, in the event of a bankruptcy
of the guarantor, holders of the Notes may be subject to exchange rate risk
between the date of bankruptcy and receipt of any amounts which the holders of
the Notes ultimately receive in the proceeding.
IT MAY BE DIFFICULT FOR INVESTORS TO EFFECT SERVICE AND ENFORCEMENT OF LEGAL
PROCESS
Service of process upon individuals or firms that are not resident in the
United States may be difficult to obtain within the United States. Most of the
members of the Supervisory Board and Netia's Management Board (the "Management
Board") and the senior management of Netia reside outside the United States.
Furthermore, since most of Netia's and such persons' assets are located outside
the United States, any judgment obtained in the United States against Netia or
such persons may not be collectible within the United States. We have appointed
CT Corporation System, 1633 Broadway, 23rd Floor, New York, New York 10019, as
our agent to receive service of process in any action against us in any federal
court or court in the State of New York arising out of the offering and the sale
of the Notes. We have not given consent for such agent to accept service of
process in connection with any other claim.
We have been advised by Weil, Gotshal & Manges Sp. z o.o., our legal counsel
in Poland, that final judgments of the courts of the United States are
enforceable in Poland on the condition that there
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is reciprocity in the United States of enforcement of judgments obtained in
Polish courts, and provided that:
- the judgment is final and enforceable in the United States;
- a party to the dispute has not been deprived of the right of defense or
due representation;
- the judgment would not (A) be contrary to Polish public policy, (B)
conflict with any pending action or judgment of a Polish court on the same
subject matter between the same parties or (C) infringe upon the exclusive
jurisdiction of Polish or other non-U.S. courts pursuant to Polish law or
international treaty; and
- if the matter is one in which Polish law should have been applied, such
law was applied unless the foreign law applied does not differ essentially
from Polish law.
We have also been advised by our legal counsel that there is doubt as to
enforceability in Poland, in original actions or in actions for enforcement of
judgments of the U.S. courts, of civil liabilities predicated upon U.S. federal
securities laws.
WE MAY NOT BE ABLE TO PURCHASE YOUR NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of specified "change of control" events and a ratings
decline, we are required to offer to purchase each holder's Notes at a price of
101% of their principal amount plus accrued interest. We have a similar
obligation in respect of the 1997 Senior Notes. We may not have sufficient
financial resources to purchase all of the Notes and the 1997 Senior Notes that
holders may tender to us upon a change of control. The occurrence of a change of
control could also constitute an event of default under the Netia South Bank
Facility and/or any future credit agreement of Netia or any of our subsidiaries.
In addition, if the requirement that the Notes be purchased upon a Change of
Control is triggered, such an event would constitute a default under the 1997
Indentures (as defined herein). Our bank lenders may also have the right to
prohibit any such purchase, in which event we would be in default on the Notes.
See "Description of the Notes--Redemption."
YOU MAY NOT BE ABLE TO SELL YOUR NOTES EASILY
The Notes are eligible for trading in the PORTAL market, a subsidiary of The
Nasdaq Stock Market, Inc. However, we do not intend to apply for a listing of
the Registered Notes on any securities exchange or automated dealer quotation
system, with the exception of the Luxembourg Stock Exchange. The liquidity of
any market for the Registered Notes will depend upon the number of holders of
the Registered Notes, our own financial performance, the market for similar
securities, the interest of securities dealers in making a market in the
Registered Notes and other factors.
MARKET TRADING PRICES FOR THE NOTES MAY BE VOLATILE
Historically, the market for high-yield debt securities, such as the Notes,
has been subject to disruptions that have caused substantial volatility in the
prices of those securities. This has been particularly true for companies
operating in emerging markets. The trading price of the Notes also could
fluctuate in response to such factors as period-to-period variations in our
operating results, developments in the telecommunications industry in general
and the Polish telecommunications industry in particular, and changes in
securities analysts' recommendations regarding our securities.
CERTAIN CONSIDERATIONS RELATING TO BOOK-ENTRY INTERESTS
Unless and until notes in definitive registered form ("Definitive Notes")
are issued in exchange for book-entry interests, owners of book-entry interests
will not be considered owners or holders of Notes. DTC (or its nominee) will be
the sole holder of the Global Notes representing the Senior Dollar
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Notes, and the common depositary for Euroclear and Cedelbank (or its nominee),
will be the sole holder of the Global Notes representing the Senior Euro Notes.
After payment to the relevant depositary, we will have no responsibility for
DTC, Euroclear and Cedelbank, as applicable, to make such payments to the owners
of book-entry interests. Accordingly, if you own a book-entry interest, you must
rely on the procedures of DTC, Euroclear and Cedelbank, as applicable, and if
you are not a participant in DTC, Euroclear or Cedelbank, as applicable, on the
procedures of the participant through which you own your interest, to exercise
any rights and obligations of a holder under the relevant Indenture. See
"Book-Entry; Delivery and Form."
Unlike the holders of the Notes themselves, owners of book-entry interests
will not have the direct right to act upon our solicitations for consents or
requests for waivers or other actions from holders of the Notes. Instead, if you
own a book-entry interest you will be permitted to act only to the extent you
have received appropriate proxies to do so from DTC, Euroclear or Cedelbank, as
applicable. There can be no assurance that procedures implemented for the
granting of such proxies will be sufficient to enable you to vote on any
requested actions on a timely basis.
Similarly, upon the occurrence of an event of default under the relevant
Indenture, unless and until Definitive Notes are issued in respect of all
book-entry interests, if you own a book-entry interest, you will be restricted
to acting through DTC, Euroclear or Cedelbank, as applicable. We cannot assure
you that the procedures to be implemented through DTC, Euroclear or Cedelbank,
as applicable, will be adequate to ensure the timely exercise of remedies under
the Notes. See "Book-Entry; Delivery and Form."
PRESENTATION OF FINANCIAL INFORMATION
Unless otherwise indicated, (i) all financial information presented in this
prospectus has been prepared in accordance with IAS which differ in certain
respects from U.S. GAAP and (ii) amounts in this prospectus are expressed in
Polish Zloty and in certain cases, solely for your convenience have been
converted into U.S. Dollars at the rate of PLN 3.9297 per $1.00 which was the
exchange rate quoted by the NBP and effective on June 30, 1999.
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EXCHANGE RATE DATA AND FOREIGN EXCHANGE CONTROLS
EXCHANGE RATE DATA
Polish Zloty exchange rates are controlled by the National Bank of Poland,
or the "NBP", the Polish central bank, which sets sliding exchange rate bands
for Polish interbank foreign exchange transactions. At the end of each trading
day, the NBP publishes a rate that represents the average of the rates on such
trading day at which it purchased and sold foreign currencies. The Federal
Reserve Bank of New York does not certify for customs purposes a noon buying
rate for Polish Zloty.
The following table sets forth, for the periods indicated, the exchange rate
quoted by the NBP. Such rates are set forth as Polish Zloty per one U.S. Dollar.
The exchange rates were PLN 3.52 per $1.00 on December 31, 1997, PLN 3.50 per
$1.00 on December 31, 1998 and PLN 3.93 per $1.00 on June 30, 1999. As of May 1,
1999, the Polish Zloty follows a sliding exchange rate band of +/- 15.0% against
the currency basket consisting of 45% U.S. Dollars and 55% Euros and is being
devalued at present by 0.3% per month against that currency basket by the NBP.
See "Annex A The Republic of Poland."
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of period.......................................... 2.44 2.47 2.87 3.52 3.50
Average exchange rate during period(1).................................. 2.28 2.41 2.71 3.31 3.50
Highest exchange ratio during period.................................... 2.45 2.54 2.87 3.56 3.82
Lowest exchange ratio during period..................................... 2.14 2.32 2.47 2.86 3.39
<CAPTION>
AS OF
AND FOR THE
SIX-MONTH
PERIOD ENDED
JUNE 30,
1999
---------------
<S> <C>
Exchange rate at end of period.......................................... 3.93
Average exchange rate during period(1).................................. 3.91
Highest exchange ratio during period.................................... 4.04
Lowest exchange ratio during period..................................... 3.41
</TABLE>
- ------------------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
At October 1, 1999, the exchange rate published by the NBP was PLN 4.07 per
$1.00.
FOREIGN EXCHANGE CONTROLS
The convertibility of the Polish Zloty is regulated by the Foreign Exchange
Law of December 18, 1998, which became effective on January 12, 1999 (the
"Foreign Exchange Law"). The Foreign Exchange Law provides for equal treatment
of the Polish Zloty and foreign currencies in the conduct and settlement of
foreign exchange transactions with parties located abroad. Accordingly, payments
to persons who are non-residents of Poland (as defined therein) may be made and
expressed in foreign currencies or in Polish Zloty with no difference in
treatment. Also, obligations resulting in payments from non-residents to
residents of Poland may be expressed in Polish Zloty.
Generally, residents of Poland may engage in foreign exchange transactions
and hold foreign currency without special permits. However, the Foreign Exchange
Law specifies several instances in which a foreign exchange permit must be
obtained. In principle, the necessity of obtaining such a permit is determined
by
- the duration of the transaction at issue,
- the location of parties to the transaction and
- the character of the transaction.
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The restrictions contained in the Foreign Exchange Law affect such
transactions as, among other things:
- making investments in short-term securities and derivatives (with the
exception of such securities listed in Poland's regulated markets),
- entering into loan or credit agreements for periods shorter than one year,
- opening and maintaining bank accounts abroad by residents of Poland,
- making bank deposits in Polish Zloty shorter than three months and
exceeding PLN 500,000 by non-residents of Poland, and
- the purchase by residents of Poland of equity shares in companies
registered in non-OECD countries.
With some exceptions, all payments and transfers abroad involving foreign
exchange transactions must be made through one of a group of banks authorized to
make such transfers. Both residents and non-residents must provide the relevant
bank, upon request, with documentation confirming that such transfer does not
require a foreign exchange permit. Such documentation is obligatory in case of
transfers by residents to non-residents of amounts in excess of the equivalent
of [EURO]20,000. Investments by residents in foreign capital markets may be
conducted only through authorized Poland-based brokers unless residents obtain a
special foreign exchange permit releasing them from these obligations.
Under the Foreign Exchange Law, prior to making transfers of non-resident
income (such as dividends, interest, rent, etc.) abroad, a bank generally must
be furnished with documents evidencing title for the payment, as well as with a
certificate issued by the Polish tax authorities confirming the expiration of
tax liability in Poland or a foreign exchange permit releasing the transferor
from this obligation. If the income to be transferred is not subject to taxation
in Poland a written declaration to this effect may be sufficient.
Considering that the Foreign Exchange Law has come into effect recently and
no detailed rules and regulations under it have been issued to date by the
Polish authorities, the interpretation of the law's provisions will remain, in
the near term, subject to considerable uncertainty.
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THE EXCHANGE OFFERS
PURPOSE AND EFFECT
We issued the Old Notes on June 10, 1999 in a Rule 144A offering. At that
time, we entered into the indentures governing the Notes and the Registration
Rights Agreement. These agreements require that we file a registration statement
under the Securities Act with respect to the Registered Notes to be issued in
the exchange offers and, upon the effectiveness of the registration statement,
offer to you the opportunity to exchange your Old Notes for a like principal
amount of Registered Notes. These Registered Notes will be issued without a
restrictive legend and, except as set forth below, may be reoffered and resold
by you without registration under the Securities Act. After we complete the
exchange offers, our obligations with respect to the registration of the Notes
will terminate, except as provided in the last paragraph of this section. A copy
of the indentures relating to the Notes and the Registration Rights Agreement
have been filed as exhibits to the registration statement of which this
prospectus is a part. We refer to these indentures in this prospectus as the
"Indentures." The Registration Rights Agreement required us to complete the
exchange offer by January 13, 2000. The exchange offers are scheduled to expire
on November 15, 1999. See "Description of the Notes--General."
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, if you are not our "affiliate" within
the meaning of Rule 405 under the Securities Act or a broker-dealer referred to
in the next paragraph, we believe that Registered Notes to be issued to you in
the exchange offer may be offered for resale, resold and otherwise transferred
by you, without compliance with the registration and prospectus delivery
provisions of the Securities Act. This interpretation, however, is based on your
representation to us that:
(1) the Registered Notes to be issued to you in the exchange offers are
acquired in the ordinary course of your business;
(2) you are not engaging in and do not intend to engage in a
distribution of the Registered Notes to be issued to you in the exchange
offers; and
(3) you have no arrangement or understanding with any person to
participate in the distribution of the Registered Notes to be issued to you
in the exchange offers.
If you tender in the exchange offers for the purpose of participating in a
distribution of the Registered Notes to be issued to you in the exchange offers,
you cannot rely on this interpretation by the staff of the Commission. Under
those circumstances, you must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. Each broker-dealer that receives Registered Notes in the
exchange offers for its own account in exchange for Old Notes that were acquired
by the broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of those
Registered Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
After we complete the exchange offers, if you have not tendered your Old
Notes, you will not have any further registration rights, except as set forth
above. Your Old Notes will continue to be subject to certain restrictions on
transfer. Therefore, the liquidity of the market for your Old Notes could be
adversely affected upon completion of the exchange offers if you do not
participate in the exchange offers.
TERMS OF THE EXCHANGE OFFERS
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all Old Notes validly
tendered and not withdrawn prior to 12:00
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Midnight, New York City time, on the expiration date. We will issue $1,000
principal amount of Registered Senior Dollar Notes in exchange for each $1,000
principal amount of Old Senior Dollar Notes accepted in the exchange offer and
[EURO]1,000 principal amount of Registered Senior Euro Notes in exchange for
each [EURO]1,000 principal amount of the Old Senior Euro Notes accepted in the
exchange offer. You may tender some or all of your Old Notes pursuant to the
exchange offers. However, Old Notes may be tendered only in integral multiples
of $1,000 or [EURO]1,000, as applicable, in principal amount.
The form and terms of the two series of Registered Notes are substantially
the same as the form and terms of the corresponding series of Old Notes, except
that the Registered Notes to be issued in the exchange offers have been
registered under the Securities Act and will not bear legends restricting their
transfer. The Registered Notes will be issued pursuant to, and entitled to the
benefits of, the Indentures. The Indentures also govern the Old Notes. The
Registered Notes and the Old Notes of each series will be deemed one issue of
notes under the applicable Indenture.
As of the date of this prospectus, respectively, [EURO]100 million aggregate
principal amount of the Old Senior Euro Notes and $100 million aggregate
principal amounts of the Old Senior Dollar Notes were outstanding. This
prospectus, together with the letter of transmittal, is being sent to all
registered holders and to others believed to have beneficial interests in the
Old Notes. You do not have any appraisal or dissenters' rights in connection
with the exchange offer under the Indentures. We intend to conduct the exchange
offers in accordance with the applicable requirements of the Exchange Act and
the rules and regulations of the Commission promulgated under the Exchange Act.
We will be deemed to have accepted validly tendered outstanding Old Notes
when, as, and if we have given oral or written notice of our acceptance to the
exchange agent. The exchange agent will act as our agent for the tendering
holders for the purpose of receiving the Registered Notes from us. If we do not
accept any tendered Old Notes because of an invalid tender, the occurrence of
certain other events set forth in this prospectus or otherwise, we will return
certificates for any unaccepted Old Notes without expense, to the tendering
holder as promptly as practicable after the expiration date.
You will not be required to pay brokerage commissions or fees or, except as
set forth below under "--Transfer Taxes," transfer taxes with respect to the
exchange of your Old Notes in the exchange offers. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offers. See "--Fees and Expenses" below.
EXPIRATION DATE; AMENDMENTS
The exchange offers will expire at 12:00 Midnight, New York City time, on
November 15, 1999, unless we determine, in our sole discretion, to extend the
exchange offers, in which case, they will expire at the later date and time to
which they are extended. We do not intend to extend the exchange offers,
although we reserve the right to do so. If we determine to extend the exchange
offers, we do not intend to extend them beyond November 19, 1999. If we extend
the exchange offers, we will give oral or written notice of the extension to the
exchange agent and give each registered holder notice by means of a press
release or other public announcement of any extension prior to 9:00 a.m., New
York City time, on the next business day after the scheduled expiration date.
We also reserve the right, in our sole discretion,
(1) to delay accepting any Old Notes or, if any of the conditions set
forth below under "--Conditions" have not been satisfied or waived, to
terminate the exchange offers or
(2) to amend the terms of the exchange offers in any manner, by giving
oral or written notice of such delay or termination to the exchange agent,
and by complying with Rule 14e-1(d) under the Exchange Act to the extent
that rule applies.
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We acknowledge and undertake to comply with the provisions of Rule 14e-l(c)
under the Exchange Act, which requires us to pay the consideration offered, or
return the Old Notes surrendered for exchange, promptly after the termination or
withdrawal of the exchange offer. We will notify you as promptly as we can of
any extension, termination or amendment.
PROCEDURES FOR TENDERING
BOOK-ENTRY INTERESTS
The Old Notes were issued as global securities in fully registered form
without interest coupons. Beneficial interests in the global securities, held by
direct or indirect participants in DTC, Euroclear or Cedelbank, are shown on,
and transfers of these interests are effected only through, records maintained
in book-entry form by DTC, Euroclear or Cedelbank, as applicable, with respect
to its participants.
If you hold your Old Notes in the form of book-entry interests and you wish
to tender your Old Notes for exchange pursuant to the exchange offers, you must
transmit to the exchange agent on or prior to the expiration date either:
(1) a written or facsimile copy of a properly completed and duly
executed letter of transmittal, including all other documents required by
such letter of transmittal, to the exchange agent at the address set forth
on the cover page of the letter of transmittal; or
(2) a computer-generated message transmitted by means of DTC's Automated
Tender Offer Program system with respect to the Senior Dollar Notes, or such
similar system of Euroclear or Cedelbank with respect to the Senior Euro
Notes, and received by the exchange agent and forming a part of a
confirmation of book-entry transfer, in which you acknowledge and agree to
be bound by the terms of the letter of transmittal.
In addition, in order to deliver Old Notes held in the form of book-entry
interests:
(A) a timely confirmation of book-entry transfer of such Old Notes
into the exchange agent's account at DTC or Euroclear and/or Cedelbank
pursuant to the procedure for book-entry transfers described below under
"--Book-Entry Transfer" must be received by the exchange agent prior to
the expiration date; or
(B) you must comply with the guaranteed delivery procedures described
below.
The method of delivery of Old Notes and the letter of transmittal and all
other required documents to the exchange agent is at your election and risk.
Instead of delivery by mail, we recommend that you use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
delivery to the exchange agent before the expiration date. You should not send
the letter of transmittal or Old Notes to us. You may request your broker,
dealer, commercial bank, trust company, or nominee to effect the above
transactions for you.
DEFINITIVE NOTES
Only registered holders of Definitive Notes may tender those notes in the
exchange offers. If your Old Notes are Definitive Notes and you wish to tender
those notes for exchange pursuant to the exchange offers, you must transmit to
the exchange agent on or prior to the expiration date, a written or facsimile
copy of a properly completed and duly executed letter of transmittal, including
all other required documents, to the address set forth below under "--Exchange
Agent." In addition, in order to validly tender your Definitive Notes:
(1) the Definitive Notes must be received by the exchange agent prior to
the expiration date or
(2) you must comply with the guaranteed delivery procedures described
below.
40
<PAGE>
PROCEDURES APPLICABLE TO ALL HOLDERS
If you tender an Old Note and you do not withdraw the tender prior to the
expiration date, you will have made an agreement with us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
If your Old Notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to tender your Notes, you
should contact the registered holder promptly and instruct the registered holder
to tender on your behalf. If you wish to tender on your own behalf, you must,
prior to completing and executing the letter of transmittal and delivering your
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in your name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by an eligible institution unless:
(A) Old Notes tendered in the exchange offers are tendered either (1) by
a registered holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the letter
of transmittal or (2) for the account of an eligible institution; and
(B) the box entitled "Special Registration Instructions" on the letter
of transmittal has not been completed.
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantee must be by a financial institution,
which includes most banks, savings and loan associations and brokerage houses,
that is a participant in the Securities Transfer Agents Medallion Program, the
New York Stock Exchange Medallion Program or the Stock Exchanges Medallion
Program.
If the letter of transmittal is signed by a person other than you, your Old
Notes must be endorsed or accompanied by a properly completed bond power and
signed by you as your name appears on those Old Notes.
If the letter of transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless we waive this requirement, in
this instance you must submit with the letter of transmittal proper evidence
satisfactory to us of their authority to act on your behalf.
We will determine, in our sole discretion, all questions regarding the
validity, form, eligibility, including time of receipt, acceptance and
withdrawal of tendered Old Notes. This determination will be final and binding.
We reserve the absolute right to reject any and all Old Notes not properly
tendered or any Old Notes our acceptance of which would, in the opinion of our
counsel, be unlawful. We also reserve the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. Our
interpretation of the terms and conditions of the exchange offers, including the
instructions in the letter of transmittal, will be final and binding on all
parties.
You must cure any defects or irregularities in connection with tenders of
your Old Notes within the time period we will determine unless we waive that
defect or irregularity. Although we intend to notify you of defects or
irregularities with respect to your tender of Old Notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
this notification. Your tender will not be deemed to have been made and your
notes will be returned to you if:
(1) you improperly tender your Old Notes;
(2) you have not cured any defects or irregularities in your tender; and
41
<PAGE>
(3) we have not waived those defects, irregularities or improper tender.
The exchange agent will return your Notes, unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration of the
exchange offer.
In addition, we reserve the right in our sole discretion to:
(1) purchase or make offers for, or offer Registered Notes for, any Old
Notes that remain outstanding subsequent to the expiration of the exchange
offers;
(2) terminate the exchange offers; and
(3) to the extent permitted by applicable law, purchase Notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any of these purchases or offers could differ from the terms of
the exchange offers.
By tendering, you will represent to us that, among other things:
(1) the Registered Notes to be acquired by you in the exchange offers
are being acquired in the ordinary course of your business,
(2) you are not engaging in and do not intend to engage in a
distribution of the Registered Notes to be acquired by you in the exchange
offers,
(3) you do not have an arrangement or understanding with any person to
participate in the distribution of the Registered Notes to be acquired by
you in the exchange offers and
(4) you are not our "affiliate," as defined under Rule 405 of the
Securities Act.
In all cases, issuance of Registered Notes for Old Notes that are accepted
for exchange in the exchange offers will be made only after timely receipt by
the exchange agent of certificates for your Old Notes or a timely book-entry
confirmation of your Old Notes into the exchange agent's account at DTC,
Euroclear or Cedelbank, as applicable, a properly completed and duly executed
letter of transmittal, or a computer-generated message instead of the letter of
transmittal, and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the exchange
offers or if Old Notes are submitted for a greater principal amount than you
desire to exchange, the unaccepted or non-exchanged Old Notes, or Old Notes in
substitution therefor, will be returned without expense to you. In addition, in
the case of Old Notes tendered by book-entry transfer into the exchange agent's
account at DTC, Euroclear or Cedelbank, as applicable, pursuant to the
book-entry transfer procedures described below, the non-exchanged Old Notes will
be credited to your account maintained with DTC, Euroclear or Cedelbank, as
applicable, as promptly as practicable after the expiration or termination of
the exchange offers.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your Old Notes and your Old Notes are not
immediately available or one of the situations described in the immediately
preceding paragraph occurs, you may tender if:
(1) you tender through an eligible financial institution with respect to
the Senior Dollar Notes or pursuant to the standard operating procedures of
Euroclear or Cedelbank;
(2) on or prior to 12:00 Midnight, New York City time, on the expiration
date, (i) with respect to the Senior Notes, the exchange agent receives from
an eligible institution, a written or facsimile copy of a properly completed
and duly executed letter of transmittal and notice of guaranteed delivery,
substantially in the form provided by us or (ii) with respect to the Senior
42
<PAGE>
Euro Notes, Euroclear or Cedelbank receives an electronic transmission which
contains the character by which the participant acknowledges its receipt and
agrees to be bound by the guaranteed delivery procedures set forth herein;
and
(3) the certificates for all certificated Old Notes, in proper form for
transfer, or a book-entry confirmation, and all other documents required by
the letter of transmittal, are received by the exchange agent within three
NYSE trading days after the date of execution of the notice of guaranteed
delivery.
The notice of guaranteed delivery may be sent by facsimile transmission,
mail or hand delivery. The notice of guaranteed delivery must set forth:
(1) your name and address;
(2) the amount of Old Notes you are tendering; and
(3) a statement that your tender is being made by the notice of
guaranteed delivery and that you guarantee that within three New York Stock
Exchange trading days after the execution of the notice of guaranteed
delivery, the eligible institution (with respect to the Senior Dollar Notes)
will deliver the following documents to the exchange agent:
(A) the certificates for all certificated Old Notes being tendered,
in proper form for transfer or a book-entry confirmation of tender;
(B) a written or facsimile copy of the letter of transmittal, or a
book-entry confirmation instead of the letter of transmittal; and
(C) any other documents required by the letter of transmittal.
BOOK-ENTRY TRANSFER
The exchange agent will establish an account with respect to the book-entry
interests at DTC, Euroclear or Cedelbank, as applicable, for purposes of the
exchange offers promptly after the date of this prospectus. You must deliver
your book-entry interest by book-entry transfer to the account maintained by the
exchange agent at DTC, Euroclear or Cedelbank, as applicable. Any financial
institution that is a participant in DTC's, Euroclear's or Cedelbank's systems
may make book-entry delivery of book-entry interests by causing DTC, Euroclear
or Cedelbank, as applicable, to transfer the book-entry interests into the
exchange agent's account at DTC, Euroclear or Cedelbank, as applicable, in
accordance with DTC's, Euroclear's or Cedelbank's, as applicable, procedures for
transfer.
If one of the following situations occur:
(1) you cannot deliver a book-entry confirmation of book-entry delivery
of your book-entry interests into the exchange agent's account at DTC,
Euroclear or Cedelbank, as applicable; or
(2) you cannot deliver all other documents required by the letter of
transmittal to the exchange agent prior to the expiration date, then you
must tender your book-entry interests according to the guaranteed delivery
procedures discussed above.
WITHDRAWAL RIGHTS
You may withdraw tenders of your Old Notes at any time prior to 12:00
Midnight, New York City time, on the expiration date.
For your withdrawal to be effective, the exchange agent must receive a
written or facsimile transmission notice of withdrawal at its address set forth
below under "--Exchange Agent" prior to 12:00 Midnight, New York City time, on
the expiration date.
43
<PAGE>
The notice of withdrawal must:
(1) state your name;
(2) identify the specific Old Notes to be withdrawn, including the
certificate number or numbers and the principal amount of withdrawn notes;
(3) be signed by you in the same manner as you signed the letter of
transmittal when you tendered your Old Notes, including any required
signature guarantees or be accompanied by documents of transfer sufficient
for the exchange agent to register the transfer of the Old Notes into your
name; and
(4) specify the name in which the Old Notes are to be registered, if
different from yours.
We will determine all questions regarding the validity, form, and
eligibility, including time of receipt, of withdrawal notices. Our determination
will be final and binding on all parties. Any Old Notes withdrawn will be deemed
not to have been validly tendered for exchange for purposes of the exchange
offers. Any Old Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to you without cost as soon as
practicable after withdrawal, rejection of tender, or termination of the
exchange offers. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "--Procedures for Tendering" above at any time
on or prior to 12:00 Midnight, New York City time, on the expiration date.
CONDITIONS
Notwithstanding any other provision of the exchange offers and subject to
our obligations under the registration rights agreement, we will not be required
to accept for exchange, or to issue Registered Notes in exchange for, any Old
Notes and may terminate or amend the exchange offers, if at any time before the
acceptance of any Old Notes for exchange any of the following events shall
occur:
(1) any injunction, order or decree shall have been issued by any court
or any governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offers; or
(2) the exchange offers shall violate any applicable law or any
applicable interpretation of the staff of the Commission.
These conditions are for our sole benefit and we may assert them regardless
of the circumstances giving rise to any condition, subject to applicable law. We
also may waive in whole or in part at any time and from time to time any
particular condition in our sole discretion. If we waive a condition, we may be
required in order to comply with applicable securities laws, to extend the
expiration date of the exchange offers. Our failure at any time to exercise any
of the foregoing rights will not be deemed a waiver of these rights and these
rights will be deemed ongoing rights which may be asserted at any time and from
time to time.
In addition, we will not accept for exchange any Old Notes tendered, and no
Registered Notes will be issued in exchange for any of those Old Notes, if at
the time the Notes are tendered any stop order shall be threatened by the
Commission or be in effect with respect to the registration statement of which
this prospectus is a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.
The exchange offers are not conditioned on any minimum principal amount of
Old Notes being tendered for exchange.
44
<PAGE>
EXCHANGE AGENT
We have appointed State Street Bank and Trust Company, N.A. as exchange
agent for the exchange offers. Questions, requests for assistance and requests
for additional copies of the prospectus, the letter of transmittal and other
related documents should be directed to the exchange agent addressed as follows:
By Registered or Certified Mail
or by Overnight Courier:
State Street Bank and Trust Company, N.A.
Attention: Kellie Mullen/McKenzie Elijah
Corporate Trust Window
Two Avenue de Lafayette
Boston, MA 02111-1724
By Facsimile:
(617) 662-1452
The exchange agent also acts as trustee under the Indenture.
FEES AND EXPENSES
We will not pay brokers, dealers, or others soliciting acceptances of the
exchange offers. The principal solicitation is being made by mail. Additional
solicitations, however, may be made in person or by telephone by our officers
and employees.
We will pay the estimated cash expenses to be incurred in connection with
the exchange offers. These are estimated in the aggregate to be approximately
$360,000 which includes fees and expenses of the exchange agent, accounting,
legal, printing and related fees and expenses.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with a
tender of your Old Notes for exchange unless you instruct us to register
Registered Notes in the name of, or request that Old Notes not tendered or not
accepted in the exchange offers be returned to, a person other than the
registered tendering holder, in which event the registered tendering holder will
be responsible for the payment of any applicable transfer tax.
ACCOUNTING TREATMENT
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offers.
45
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of June 30, 1999, on an
actual basis and as adjusted to give effect to the IPO, the Warburg Transaction
and common shares to be issued in accordance with the Stock Appreciation
Agreement, and the application of the proceeds therefrom. The table should be
read in conjunction with the Financial Statements included elsewhere in this
prospectus. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------
ACTUAL AS ACTUAL(2) AS
---------- ADJUSTED(1) ---------- ADJUSTED(2)
----------- -----------
PLN $
PLN $
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................................... 846,649 1,487,278 215,449 378,471
Restricted investments(3)...................................... 319,107 319,107 81,203 81,203
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Long-term liabilities:(4)
Netia South Bank Facility.................................... 44,928 44,928 11,433 11,433
1997 Senior Dollar Notes..................................... 785,940 785,940 200,000 200,000
1997 Senior Dollar Discount Notes............................ 592,018 592,018 150,652 150,652
1997 Senior DM Discount Notes................................ 336,291 336,291 85,577 85,577
1999 Senior Euro Notes(5).................................... 405,930 405,930 103,298 103,298
1999 Senior Dollar Notes..................................... 392,970 392,970 100,000 100,000
Other long-term liabilities(6)............................... 315,381 315,381 80,256 80,256
---------- ----------- ---------- -----------
Total long-term liabilities................................ 2,873,458 2,873,458 731,216 731,216
Shareholders' equity:
Share capital................................................ 123,749 172,633 31,490 43,930
Share premium................................................ 673,367 1,269,436 171,353 323,035
Accumulated deficit.......................................... (620,521) (620,521) (157,907) (157,907)
---------- ----------- ---------- -----------
Total shareholders' equity................................. 176,595 821,548 44,936 209,058
---------- ----------- ---------- -----------
Total capitalization....................................... 3,050,053 3,695,006 776,152 940,274
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
- ------------------------
(1) Adjusted to give pro forma effect to the IPO, the Warburg Transaction, and
50,022 common shares issued in satisfaction of a Stock Appreciation
Agreement with a company controlled by Netia's President and described under
"Certain Relationships and Transactions with Related Parties-- Additional
Agreements."
(2) Conversions of Polish Zloty into U.S. Dollars have been made at the rate of
PLN 3.9297 per $1.00 (the exchange rate quoted by the NBP and effective on
June 30, 1999). Such translations are provided solely for the convenience of
the reader.
(3) Restricted investments include the short- and long-term portions of the
proceeds from the sale of the Notes and the 1997 Senior Notes restricted
pursuant to agreements for payment of cash interest.
(4) Includes current portion of long-term debt and license fee obligations.
(5) Conversion of Euros into Polish Zloty has been made at the rate of PLN
4.0593 per [EURO]1.00 (the exchange rate quoted by the NBP and effective on
June 30, 1999).
(6) Includes liability for existing licenses and vendor and other financing and
excludes customer deposits, deferred tax liabilities and minority interest.
46
<PAGE>
THE ISSUER
GENERAL
Netia Holdings II B.V. (the "Issuer") was formed as a private company with
limited liability (BESLOTEN VENNOOTSCHAP MET BEPERKTE AANSPRAKELIJKHEID) for an
unlimited duration on June 10, 1998 under the laws of the Netherlands. The
Issuer is registered with the trade register of the Chamber of Commerce and
Industry in Amsterdam under number 33303717 and has its registered office in
Amsterdam. The Issuer's address is Herengracht 548, 1017 CG Amsterdam, the
Netherlands. The Issuer is a wholly owned subsidiary of Netia Holdings S.A. and
has no subsidiaries.
The purpose of the Issuer is to issue the Notes, and it has no operations of
its own.
FINANCIAL YEAR
The financial year of the Issuer runs from January 1st to December 31st.
However, the first financial year of the Issuer began on June 10, 1998 and ended
on December 31, 1998. The Issuer has not yet published any audited financial
statements.
MANAGEMENT
The Issuer is managed by a board of managing directors, whose members are
appointed by the Issuer's shareholders at a general meeting of the Issuer's
shareholders and may be suspended or removed from office by the Issuer's
shareholders at any time. At present, the Issuer has two managing directors,
Meir Srebernik (the President of Netia Holdings S.A.) and MeesPierson Trust B.V.
Under the Issuer's articles of association, the Issuer's shareholders may give
the board of managing directors instructions regarding the general direction of
the financial and economic policies to be pursued by the Issuer, and the board
of managing directors shall adhere to any such instructions.
THE GUARANTOR
Netia Holdings S.A. is a privately owned Polish joint-stock company that was
formed in 1990 by Polish entrepreneurs with backing from several U.S. and
international investors as a vehicle for pursuing telecommunications-related
activities in Poland. Since its inception, Netia has pursued government licenses
to construct local telephone networks throughout Poland. Historically, in
seeking a license, Netia on occasion has joined with the local municipality to
be covered by such license and, in certain cases, other investors, to form
joint-venture companies. As Netia gained experience and enhanced its position in
the Polish telecommunications market, it principally applied for licenses on its
own and will attempt to acquire the remaining minority ownership in some of its
operating companies currently held by certain municipalities. We conduct all of
our telecommunications activities through two principal wholly owned
subsidiaries, Netia Telekom and Netia South. Netia Telekom and Netia South are
holding companies for 12 individual operating companies formed to acquire and
hold the licenses for the regional territories. The licensed territories in the
Central, East, North and West Regions of Poland are managed by Netia Telekom and
the licensed territories in the South Region are managed by Netia South. Uni-Net
Sp. z o.o. ("Uni-Net") is a subsidiary of Netia Holdings S.A. which conducts
specialized mobile radio operations and comprises a portion of Netia's
non-telecommunications business, which we intend to sell if and when a favorable
commercial opportunity to do so becomes available. See "Business--Operating
Companies."
47
<PAGE>
SELECTED CONSOLIDATED STATEMENT OF OPERATIONS
AND BALANCE SHEET DATA
The following tables present selected consolidated statement of operations
and balance sheet data as of December 31, 1994, 1995, 1996, 1997 and 1998 and
June 30, 1998 and 1999, and for the five years ended December 31, 1998 and the
six-month periods ended June 30, 1998 and 1999. The selected consolidated
statement of operations and balance sheet data as of December 31, 1997 and 1998
and for the three years ended December 31, 1998 have been derived from the
Financial Statements included elsewhere in this prospectus. The selected
consolidated statement of operations and balance sheet data as of December 31,
1994, 1995 and 1996 and for the years ended December 31, 1994 and 1995 have been
derived from financial statements which are not included in this prospectus. The
selected consolidated statement of operations and balance sheet data as of June
30, 1998 and 1999 and for the six-month periods then ended have been derived
from the June 30, 1999 Financial Statements included elsewhere in this
prospectus. We have prepared the Financial Statements in accordance with IAS,
which differ in certain important respects from U.S. GAAP (see Note 24 of the
December 31, 1998 Financial Statements and Note 11 of the June 30, 1999
Financial Statements). The selected consolidated financial data should be read
in conjunction with the Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. In the opinion of management, the unaudited interim condensed
financial information contains all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations as of and for the six-month periods ended
June 30, 1998 and June 30, 1999. For the convenience of the reader, certain
Polish Zloty amounts as of and for the year ended December 31, 1998 and for the
six-month period ended June 30, 1999 have been converted into U.S. Dollars at
the rate of PLN 3.9297 per $1.00 (the effective NBP exchange rate on June 30,
1999). Such translations should not be construed as a representation that such
Polish Zloty amounts actually represent such U.S. Dollar amounts, or could be or
could have been, converted into U.S. Dollars at the rates indicated or at any
other rate.
48
<PAGE>
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH
PERIOD
FOR THE YEAR ENDED DECEMBER 31,(1) ENDED
---------------------------------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1998 ---------
--------- --------- --------- --------- --------- ---------
PLN PLN PLN PLN PLN $
1998
---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) PLN
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Telecommunication revenues....................... 1,599 6,219 8,982 35,564 96,435 24,540 37,076
Non-telecommunication revenues(2)................ 4,371 9,573 12,697 14,642 23,945 6,093 11,793
--------- --------- --------- --------- --------- --------- ---------
Total revenues................................. 5,970 15,792 21,679 50,206 120,380 30,633 48,869
Costs and expenses:
Interconnection charges........................ (57) (679) (1,355) (5,692) (22,900) (5,828) (8,707)
Cost of equipment.............................. (2,732) (6,533) (7,929) (6,975) (11,425) (2,907) (4,671)
Depreciation and amortization.................. (3,452) (3,885) (7,465) (16,926) (41,040) (10,443) (16,835)
Other operating expenses(3).................... (14,238) (33,494) (61,259) (86,901) (124,317) (31,635) (54,308)
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses....................... (20,479) (44,591) (78,008) (116,494) (199,682) (50,813) (84,521)
Loss from operations............................. (14,509) (28,799) (56,329) (66,288) (79,302) (20,180) (35,652)
Financial expense, net(4)........................ (379) (258) (2,205) (32,681) (151,596) (38,577) (43,910)
Write-off of loan origination expenses........... -- -- -- (24,241) -- -- --
Other losses..................................... -- (402) (4,302) -- (1,148) (292) --
Share in losses of equity investees.............. (662) (471) -- -- -- -- --
Gain on dilution of interest in subsidiaries..... -- 3,329 38,903 2,137 -- -- --
Income tax (charge)/credit....................... -- -- (2,710) (1,055) (8,802) (2,241) (7,017)
Minority share in (income)/losses of
subsidiaries................................... 82 1,454 10,832 36,703 35,353 8,996 21,286
--------- --------- --------- --------- --------- --------- ---------
Net loss......................................... (15,468) (25,147) (15,811) (85,425) (205,495) (52,294) (65,293)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic and diluted net loss per common share(5)... (4.11) (5.56) (2.52) (9.46) (19.78) (5.03) (6.28)
U.S. GAAP
Revenues....................................... N/A 15,792 21,679 50,206 120,380 30,633 48,869
Loss from operations........................... N/A (29,201) (60,631) (68,047) (86,743) (22,074) (39,170)
Net loss....................................... N/A (28,929) (54,042) (90,530) (214,363) (54,549) (61,163)
Basic and diluted net loss per common share(5)... N/A (6.39) (8.61) (10.02) (20.63) (5.25) (5.89)
Other Data:
EBITDA(6)...................................... (11,057) (24,914) (48,864) (49,362) (38,262) (9,737) (18,817)
Net cash used in operating activities.......... (7,769) (27,059) (32,571) (89,836) (156,413) (39,803) (15,734)
Net cash used in investing activities.......... (41,961) (36,357) (56,247) (198,336) (480,319) (122,228) (218,628)
Net cash (used in)/provided by financing
activities(7)................................ 49,608 73,031 90,591 1,195,891 (1,688) (430) (1,338)
Capital expenditures........................... 21,340 42,882 148,029 222,964 395,943 100,757 201,790
Ratio of earnings to fixed charges(8).......... -- -- -- -- -- -- --
<CAPTION>
1999 1999
--------- ---------
PLN $
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Telecommunication revenues....................... 86,319 21,966
Non-telecommunication revenues(2)................ 10,476 2,666
--------- ---------
Total revenues................................. 96,795 24,632
Costs and expenses:
Interconnection charges........................ (24,395) (6,209)
Cost of equipment.............................. (2,980) (758)
Depreciation and amortization.................. (54,009) (13,744)
Other operating expenses(3).................... (85,417) (21,738)
--------- ---------
Total costs and expenses....................... (166,801) (42,449)
Loss from operations............................. (70,006) (17,817)
Financial expense, net(4)........................ (196,807) (50,082)
Write-off of loan origination expenses........... -- --
Other losses..................................... (62) (16)
Share in losses of equity investees.............. -- --
Gain on dilution of interest in subsidiaries..... -- --
Income tax (charge)/credit....................... (1,334) (339)
Minority share in (income)/losses of
subsidiaries................................... (161) (40)
--------- ---------
Net loss......................................... (268,370) (68,294)
--------- ---------
--------- ---------
Basic and diluted net loss per common share(5)... (19.94) (5.07)
U.S. GAAP
Revenues....................................... 96,795 24,632
Loss from operations........................... (73,865) (18,797)
Net loss....................................... (272,640) (69,379)
Basic and diluted net loss per common share(5)... (20.26) (5.16)
Other Data:
EBITDA(6)...................................... (15,997) (4,071)
Net cash used in operating activities.......... (15,706) (3,995)
Net cash used in investing activities.......... (339,241) (86,327)
Net cash (used in)/provided by financing
activities(7)................................ 870,870 221,609
Capital expenditures........................... 335,518 85,380
Ratio of earnings to fixed charges(8).......... -- --
</TABLE>
<TABLE>
<CAPTION>
AS AT
AS AT DECEMBER 31, JUNE 30,
---------------------------------------------------------------- ---------
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- --------- 1998
---------
PLN PLN PLN PLN PLN $
(IN THOUSANDS) PLN
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash(9).................................. 3,185 12,800 14,573 922,292 298,790 76,034 677,309
Total assets(10)............................... 65,506 124,739 303,320 1,911,083 2,082,675 529,983 2,124,408
Total long-term debt(11)....................... 2,067 572 57,934 1,472,522 1,581,030 402,328 1,499,159
Other long-term liabilities for licenses(12)... 358 603 1,442 1,472 269,179 68,499 318,812
Total long-term obligations.................... 2,425 1,175 59,376 1,473,994 1,850,209 470,827 1,817,971
Total shareholders' equity..................... 48,984 99,623 130,313 118,921 (86,463) (22,002) 53,739
Total shareholders' equity (U.S. GAAP)......... N/A 98,951 130,313 104,715 (95,465) (24,293) 50,699
<CAPTION>
1999 1999
--------- ---------
PLN $
<S> <C> <C>
BALANCE SHEET DATA:
Total cash(9).................................. 846,649 215,449
Total assets(10)............................... 3,262,372 830,182
Total long-term debt(11)....................... 2,575,765 655,461
Other long-term liabilities for licenses(12)... 299,209 76,140
Total long-term obligations.................... 2,874,974 731,601
Total shareholders' equity..................... 176,595 44,936
Total shareholders' equity (U.S. GAAP)......... 170,359 43,352
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
49
<PAGE>
(FOOTNOTES FROM PREVIOUS PAGE)
- ------------------------------
(1) For the periods ended December 31, 1994, 1995 and 1996, Poland was
considered to be a hyperinflationary environment. The Consolidated Financial
Statements for those periods are prepared in accordance with the historical
cost convention as adjusted for the effects of inflation. In accordance with
IAS 29,"Financial Reporting in Hyperinflationary Economies," the
Consolidated Financial Statements are restated to show amounts expressed in
terms of the constant purchasing power of the Polish Zloty at December 31,
1996. The amounts shown in the restated currency do not represent appraised
value, replacement cost or any other measure of the current value of assets
or the prices at which transactions would take place currently. The
adjustment was calculated based on conversion factors derived from the CPI
published by GUS. Based on a CPI rate of 100 as at January 1, 1990, the
cumulative inflation indices as at December 31, 1994, 1995 and 1996 were
1,453.2, 1,772.3 and 2,103.6, respectively.
(2) Our historical results include the non-telecommunications businesses, which
has accounted for a significant portion of our revenue. In 1997, we sold the
part of our non-telecommunications business relating to the sale of
specialized radio equipment, and we intend to dispose of our remaining
non-telecommunications businesses when a favorable commercial opportunity to
do so becomes available, although presently we do not have formal plan or
agreement of disposal. See"Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
(3) Other operating expenses primarily includes salaries and benefits, general
and administrative and external services. See the December 31, 1998
Financial Statements and the June 30, 1999 Financial Statements elsewhere in
this prospectus.
(4) Includes non-cash financial expenses of PLN 2.6 million, PLN 19.6 million,
PLN 106.5 million ($27.1 million), PLN 51.8 million, and PLN 53.0 million
($13.5 million), for the years 1996, 1997 and 1998 and for the six-month
periods ended June 30, 1998 and 1999, respectively.
(5) Basic and diluted net loss per common share under IAS and under U.S. GAAP is
calculated by dividing net loss by the weighted average number of shares of
Netia's capital stock outstanding during each period. The weighted average
number of shares used in calculating net loss per share were 3,762; 4,524;
6,280; 9,033 and 10,391 for the years ended December 31, 1994, 1995, 1996,
1997 and 1998, respectively, and were 10,391 and 13,456 for the six-month
periods ended June 30, 1998 and 1999, respectively. As at June 30, 1999,
there were no dilutive potential common shares.
(6) EBITDA consists of net loss adjusted for depreciation and amortization,
financial expense, income taxes, minority interest, share of losses of
equity investees and non-recurring items (write-off of loan origination
expenses, other losses and gains on dilution of interest in subsidiaries),
as each would be determined under IAS. EBITDA computed based on the
foregoing elements determined in accordance with U.S. GAAP would be PLN N/A,
PLN (24.9) million, PLN (48.9) million, PLN (51.1) million, PLN (45.3)
million ($(11.5) million), PLN (22.3) million and PLN (19.6) million ($(5.0)
million) for the years ended 1994, 1995, 1996, 1997 and 1998 and for the
six-month periods ended June 30, 1998 and 1999, respectively. EBITDA is not
a U.S. GAAP or IAS measure and should not be considered as an alternative to
U.S. GAAP or IAS measures of net (loss)/income as an indicator of Netia's
operating performance or to cash flow from operations under U.S. GAAP or IAS
as a measure of liquidity. The calculation of EBITDA does not differ in any
material respect if calculated based upon financial statements prepared
under IAS principles. However, potential investors should note that EBITDA
is not a uniform or standardized measure the calculation of which,
accordingly, may vary significantly from company to company, and by itself
provides no grounds for comparison of Netia with other companies.
(7) For a discussion of the Warburg Transaction and the IPO, both of which were
completed after June 30, 1999, see "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
(8) Due to our losses for the years ended December 31, 1994, 1995, 1996, 1997
and 1998 and for the six-month period ended June 30, 1998 and 1999, the
ratio of earnings to fixed charges was less than 1:1 for each period. Netia
would have had to have generated additional earnings of PLN 14.8 million,
PLN 26.1 million, PLN 23.2 million, PLN 120.4 million, PLN 232.0 million,
PLN 79.6 million, PLN 266.9 million for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 and for the six-month periods ended June 30, 1998
and 1999 in order to bring this ratio to 1:1 for each of those periods,
respectively.
(9) Total cash does not include restricted investments.
(10) Total assets on a U.S. GAAP basis would have been PLN 3,285.3 million
($836.0 million) at June 30, 1999.
(11) Includes current and long-term portion of long-term debt. The amount
reflected would not differ under U.S. GAAP.
(12) Includes current and long-term portion of liabilities for licenses and
customer deposits.
50
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The selected unaudited pro forma financial data set forth below consist of a
pro forma consolidated balance sheet and pro forma consolidated statements of
operations giving effect to (a) the disposition of our non-telecommunications
businesses, (b) the Warburg Transaction and (c) the IPO, as described in the
accompanying notes, as if they had occurred on June 30, 1999 for the balance
sheet and on January 1, 1998 and January 1, 1999 for the statements of
operations for the year ended December 31, 1998 and the six months ended June
30, 1999, respectively. For pro forma financial information on certain balance
sheet items giving effect to the IPO and the Warburg Transaction and the
application of proceeds therefrom, without giving effect to the disposition of
our non-telecommunications businesses, see "Summary Consolidated Statement of
Operations and Balance Sheet Data."
We have prepared the unaudited pro forma consolidated financial information
from:
- Our Unaudited Condensed Consolidated Financial Statements as at and for
the six-month period ended June 30, 1999 and
- Our Audited Consolidated Financial Statements for the year ended December
31, 1998.
You should read this information in conjunction with the Audited
Consolidated Financial Statements and the Unaudited Condensed Consolidated
Financial Statements and the notes thereto included elsewhere in this
prospectus. The unaudited pro forma consolidated financial information is
provided for illustrative purposes only and does not purport to represent what
our actual results of operations or financial position would have been, had the
transactions giving rise to the pro forma adjustments occurred on the dates
assumed, nor is it indicative of our future operating results or consolidated
financial position.
Our consolidated financial statements have been prepared in accordance with
IAS, which differ from U.S. GAAP in certain respects. For a discussion of the
principal differences between IAS and U.S. GAAP relevant to our financial
statements, see Note 24 to our Audited Consolidated Financial Statements. All
historical information included in the selected unaudited pro forma condensed
consolidated financial data has been presented on the basis of IAS. A
reconciliation of the pro forma net loss and pro forma shareholders' equity to
U.S. GAAP is included in the notes to the pro forma financial information.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA TOTAL
ACTUAL ADJUSTMENT ADJUSTMENT ADJUSTMENT ADJUSTMENT PRO FORMA
PLN PLN(1) PLN(2) PLN(3) PLN(4) PLN
--------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, IN THOUSANDS)
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
INFORMATION AT
JUNE 30, 1999:
Assets:
Current assets.............................. 1,126,038 1,312 190,099 450,530 -- 1,767,979
Restricted investments...................... 140,334 -- -- -- -- 140,334
Investments at cost......................... 13 -- -- -- -- 13
Fixed assets, net........................... 1,311,218 (5,646) -- -- -- 1,305,572
Investments in real estate.................. 4,805 (4,805) -- -- -- --
Licenses.................................... 325,300 -- -- -- -- 325,300
Deferred financing costs.................... 86,901 -- -- -- -- 86,901
Goodwill, net............................... 267,763 -- -- -- -- 267,763
--------- ------ ----------- ----------- ------ -----------
Total assets................................ 3,262,372 (9,139) 190,099 450,530 -- 3,893,862
--------- ------ ----------- ----------- ------ -----------
--------- ------ ----------- ----------- ------ -----------
Liabilities and shareholders' equity:
Current liabilities......................... 199,595 (5,839) -- -- (4,324) 189,432
Long-term obligations (5)................... 2,885,948 (3,066) -- -- -- 2,882,882
Minority interest........................... 234 (234) -- -- -- --
Share capital............................... 123,749 -- 15,584 33,000 300 172,633
Share premium............................... 673,367 -- 174,515 417,530 4,024 1,269,436
Accumulated deficit......................... (620,521) -- -- -- -- (620,521)
--------- ------ ----------- ----------- ------ -----------
Total liabilities and shareholders'
equity.................................... 3,262,372 (9,139) 190,099 450,530 -- 3,893,862
--------- ------ ----------- ----------- ------ -----------
--------- ------ ----------- ----------- ------ -----------
Amounts in accordance with U.S. GAAP:
Total assets................................ 3,916,816
Total shareholders' equity (6).............. 815,312
</TABLE>
51
<PAGE>
- ------------------------
(1) The pro forma adjustment reflects the disposal of Netia's
non-telecommunications businesses for an aggregate price equal to their net
book value of PLN 5,039 at June 30, 1999. This price does not necessarily
reflect the price which Netia may obtain if and when these businesses are
actually sold.
(2) The pro forma adjustment reflects the Warburg Transaction involving a
capital increase of $50 million through issuance of 2,597,403 common shares
at a price of $19.25 per share less placement agent fees of 3.25%.
(3) The pro forma adjustment reflects the IPO of 5,500,000 common shares at
$22.00 less underwriting discount of 5.25%.
(4) The pro forma adjustment reflects the effect of the issuance of 50,022
common shares in accordance with the Stock Appreciation Agreement resulting
from the IPO.
(5) Long-term obligations include all non-current liabilities, current
maturities of long-term debt of PLN 45,242 and current license obligations
of PLN 117,724.
(6) IAS differ in certain material respects from U.S. GAAP. A summary of the
significant differences as they affect Netia is set forth in Note 24 to the
Audited Consolidated Financial Statements of Netia included elsewhere
herein. The calculation of pro forma shareholders' equity under U.S. GAAP is
as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999
PLN
---------------
<S> <C>
Pro forma shareholders' equity per IAS............................................ 821,548
Purchase of EBRD (as defined herein) interest in Netia............................ (14,756)
Increase in equity related to the Telia incentive stock option.................... 24,626
Fixed assets, including depreciation.............................................. 28,577
Financial expense................................................................. (30,476)
Deferred taxes.................................................................... (4,196)
Amortization of goodwill.......................................................... 3,168
Other operating expenses.......................................................... (12,313)
Stock Option Plan................................................................. (67)
Minority interest................................................................. (799)
-------
Pro forma shareholders' equity (U.S. GAAP)........................................ 815,312
-------
-------
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ACTUAL ADJUSTMENT ADJUSTMENT ADJUSTMENT ADJUSTMENT ADJUSTMENT ADJUSTMENT
PLN PLN (1) PLN (2) PLN (3) PLN (4) PLN (5) PLN (6)
---------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1998:
Revenues.......................... 120,380 (23,945) -- -- -- -- --
Costs and expenses:
Interconnection charges......... (22,900) -- -- -- -- -- --
Cost of equipment............... (11,425) 11,425 -- -- -- -- --
Other operating expenses........ (124,317) 9,523 (1,748) (679) (863) -- (863)
Depreciation and amortization... (41,040) 1,887 (18,608) -- -- -- --
---------- ----------- ----------- ----------- ----- ----------- -----
Loss from operations.............. (79,302) (1,110) (20,356) (679) (863) -- (863)
Financial expense, net............ (151,596) 158 -- -- -- (101,834) --
Other losses...................... (1,148) -- -- -- -- -- --
Provision for income tax.......... (8,802) -- -- -- -- -- --
Minority share in losses.......... 35,353 401 -- -- -- -- --
---------- ----------- ----------- ----------- ----- ----------- -----
Net loss.......................... (205,495) (551) (20,356) (679) (863) (101,834) (863)
---------- ----------- ----------- ----------- ----- ----------- -----
---------- ----------- ----------- ----------- ----- ----------- -----
Basic and diluted net loss per
common share.................... (19.78) -- -- -- -- -- --
Weighted average number of shares
outstanding..................... 10,391 -- 3,727 1,447 2,597 -- 2,597
Amounts in accordance with U.S.
GAAP:
Net loss(9).....................
Basic and diluted net loss per
common share.................. (20.63) -- -- -- -- -- --
<CAPTION>
PRO FORMA PRO FORMA TOTAL
ADJUSTMENT ADJUSTMENT PRO FORMA
PLN (7) PLN (8) PLN
----------- ----------- -----------
<S> <C> <C> <C>
PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
INFORMATION FOR THE YEAR ENDED
DECEMBER 31, 1998:
Revenues.......................... -- -- 96,435
Costs and expenses:
Interconnection charges......... -- -- (22,900)
Cost of equipment............... -- -- --
Other operating expenses........ (1,070) (1,108) (121,125)
Depreciation and amortization... -- -- (57,761)
----------- ----------- -----------
Loss from operations.............. (1,070) (1,108) (105,351)
Financial expense, net............ -- -- (253,272)
Other losses...................... -- -- (1,148)
Provision for income tax.......... -- -- (8,802)
Minority share in losses.......... -- -- 35,754
----------- ----------- -----------
Net loss.......................... (1,070) (1,108) (332,819)
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted net loss per
common share.................... -- -- (12.65)
Weighted average number of shares
outstanding..................... 5,500 50 26,309
Amounts in accordance with U.S.
GAAP:
Net loss(9)..................... (341,687)
Basic and diluted net loss per
common share.................. -- -- (12.99)
</TABLE>
- ----------------------------------
(1) The pro forma adjustment reflects the disposal of Netia's
non-telecommunications businesses for an aggregate price equal to their net
book value of PLN 5,039 at June 30, 1999. This price does not necessarily
reflect the price which Netia may obtain if and when these businesses are
actually sold. No gain or loss results from disposition. Costs allocated to
the non-telecommunications businesses include all costs of Uni-Net Sp. z
o.o. ("Uni-Net"), which is a separately managed, 58.2%-owned subsidiary of
Netia.
(2) The pro forma adjustment reflects the impact on Netia's compensation expense
resulting from the share appreciation reflected in the issuance of shares to
Telia from the exercise of the Telia Exchange Option described under
"Certain Relationships and Transactions with Related Parties--Option
Exercise Agreement." The pro forma effect on compensation expense of the
issuance of 3,727,340 shares at an average price of $16.51 per share was
calculated in accordance with the terms of the Stock Appreciation Agreement
disclosed in Note 4(d) to the Audited Consolidated Financial Statements
included elsewhere herein. In addition, the pro forma adjustment also
reflects the impact of recording amortization expense based on 13-year life
for the goodwill of PLN 241,907 to be recorded at the fair value of the
shares issued by Netia as disclosed in Note 4 of the Unaudited Condensed
Consolidated Financial Statements included elsewhere herein.
(3) The pro forma adjustment reflects the impact on Netia's compensation expense
resulting from the share appreciation reflected in the issuance of shares to
Telia from the exercise of the Telia Incentive Option. The pro forma effect
on compensation expense of the issuance of 1,447,168 shares at an average
price of $16.51 per share was calculated in accordance with the terms of the
Stock Appreciation Agreement.
(4) The pro forma adjustment reflects the impact on Netia's compensation expense
resulting from the share appreciation reflected in the issuance of shares to
Telia from the Telia Capital Increase of $50 million from existing
shareholders. The pro forma effect on compensation expense of the issuance
of 2,597,402 shares at a price of $19.25 per share was calculated in
accordance with the terms of the Stock Appreciation Agreement.
(5) The pro forma adjustment reflects the issuance of the Notes. The pro forma
effect of interest expense on the Notes has been calculated under the
effective interest method using an effective interest rate of 13.5% and
13.125% for the Euro and U.S. Dollar denominated Notes, respectively.
Foreign exchange gains or losses on the Notes have not been calculated since
exchange rate governments were not significant in 1998.
(6) The pro forma adjustment reflects the Warburg Transaction involving a
capital increase of $50 million. The pro forma effect of issuance of
2,597,403 common shares at a price of $19.25 per share was calculated in
accordance with the terms of the Stock Appreciation Agreement.
(7) The pro forma adjustment reflects the offering of 5,500,000 common shares at
$22.00 less underwriting discount of 5.25% and the impact of the offering
price on previously issued shares.
(8) The pro forma adjustment reflects the effect of the issuance of 50,022
common shares in accordance with the Stock Appreciation Agreement.
53
<PAGE>
(9) IAS differ in certain material respects from U.S. GAAP. A summary of the
significant differences as they affect Netia is set forth in Note 24 to the
Audited Consolidated Financial Statements of Netia included elsewhere
herein. The calculation of pro forma net loss under U.S. GAAP is as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
PLN
------------------
<S> <C>
Pro forma net loss per IAS................................................. (332,819)
Foreign exchange losses.................................................... (355)
Interest expense........................................................... 504
Depreciation of U.S. GAAP fixed asset basis differences.................... (1,369)
Deferred taxes............................................................. (2,981)
Minority interest.......................................................... 257
Amortization of goodwill................................................... 2,112
Other operating expenses................................................... (7,036)
--------
Pro forma net loss (U.S. GAAP)............................................. (341,687)
--------
--------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA TOTAL
ACTUAL ADJUSTMENT ADJUSTMENT ADJUSTMENT ADJUSTMENT PRO FORMA
PLN PLN (1) PLN (2) PLN (3) PLN (4) PLN
--------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS INFORMATION FOR THE SIX-MONTH PERIOD
ENDED JUNE 30, 1999:
Revenues...................................... 96,795 (10,476) -- -- -- 86,319
Cost and expenses:
Interconnection charges....................... (24,395) -- -- -- -- (24,395)
Cost of equipment............................. (2,980) 2,980 -- -- -- --
Other operating expenses...................... (85,417) 4,859 -- -- (1,108) (81,666)
Depreciation and amortization................. (54,009) 977 -- -- -- (53,032)
--------- ----------- ----------- ------------- ------------- -----------
Loss from operations.......................... (70,006) (1,660) -- -- (1,108) (72,774)
Financial expense, net........................ (196,807) 1,276 -- -- -- (195,531)
Other losses.................................. (62) -- -- -- -- (62)
Provision for income tax...................... (1,334) -- -- -- -- (1,334)
Minority share in losses...................... (161) 161 -- -- -- --
--------- ----------- ----------- ------------- ------------- -----------
Net loss...................................... (268,370) (223) -- -- (1,108) (269,701)
--------- ----------- ----------- ------------- ------------- -----------
--------- ----------- ----------- ------------- ------------- -----------
Basic and diluted net loss per common share..... (19.94) -- -- -- -- (12.48)
Weighted average number of shares outstanding... 13,456 -- 2,597 5,500 50 21,603
Amounts in accordance with U.S. GAAP:...........
Net loss(5)................................... (273,971)
Basic and diluted net loss per common share... (20.26) -- -- -- -- (12.68)
</TABLE>
- ------------------------
(1) The pro forma adjustment reflects the disposal of Netia's
non-telecommunications businesses at their net book value of PLN 5,039 at
June 30, 1999. This price does not necessarily reflect the price which Netia
may obtain if and when these businesses are actually sold. No gain or loss
results from disposition. Costs allocated to the non-telecommunications
businesses include all costs of Uni-Net, which is a separately managed,
58.2%-owned subsidiary of Netia.
(2) The pro forma adjustment reflects the Warburg Transaction involving a
capital increase of $50 million.
(3) The pro forma adjustment reflects the IPO of 5,500,000 common shares at
$22.00 per share.
(4) The pro forma adjustment reflects the effect of the issuance of 55,022
common shares in accordance with the Stock Appreciation Agreement.
(5) IAS differ in certain material respects from U.S. GAAP. A summary of the
significant differences as they affect Netia is set forth in Note 24 to the
Audited Consolidated Financial Statements included elsewhere herein. The
calculation of pro forma net loss under U.S. GAAP is as follows (in
thousands):
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
JUNE 30, 1999
PLN
---------------
<S> <C>
Pro forma net loss per IAS........................................................ (269,701)
Foreign exchange losses........................................................... (5,838)
Interest expense.................................................................. 6,733
Depreciation of U.S. GAAP fixed asset basis differences........................... (1,335)
Deferred taxes.................................................................... (1,301)
Amortization of goodwill.......................................................... 1,056
Stock Option Plan................................................................. (67)
Other operating expenses.......................................................... (3,518)
---------------
Pro forma net loss (U.S. GAAP).................................................... (273,971)
---------------
---------------
</TABLE>
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We conduct substantially all of our operations through our subsidiaries. Our
two principal subsidiaries are Netia Telekom and Netia South. Netia Telekom and
Netia South are holding companies that conduct substantially all of their
operations through their operating companies.
We provide basic telephone services in our licensed territories. We also
provide call waiting, call forwarding and dial-in Internet access in our basic
monthly service package and, for an additional charge, services such as
personalized ("easy-to-remember") telephone numbers, conference calling and
itemized billing. Netia also provides services such as call barring and pay
telephone services. Other additional services Netia offers include ISDN and
leased lines.
In addition to our telecommunications operations, we own and operate certain
non-telecommunications businesses that we intend to sell when a favorable
commercial opportunity to do so becomes available. The non-telecommunications
businesses consist of the provision of specialized mobile radio services, the
sale of related equipment and the development of residential real estate. We
conduct our specialized mobile radio business through Uni-Net, a majority-owned
subsidiary of Netia Holdings S.A. See "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
We also have two special purpose finance subsidiaries, Netia Holdings B.V.
and Netia Holdings II B.V., which issued the 1997 Senior Notes and the Notes,
respectively, in 1997 and 1999.
REVENUES
Substantially all of our telecommunications revenues are currently derived
from usage fees, fixed monthly charges and one-time installation fees, and
revenues for providing additional services are presently immaterial. We expect
that as our network and our subscriber base grow, fixed monthly charges and
usage fees will continue to account for a significant amount of our total
revenues and additional services, including Internet and data transmission
services, will increase as a percentage of revenues, while one-time installation
fees will account for a declining percentage of our total revenues.
Our revenue trends depend on the number of customers and our mix of business
to total customers, as we realize greater revenue per customer from our business
customers. During the six-month period ended June 30, 1999, 28.4% of our new
subscribers were business customers and at the end of the period our cumulative
business/total customer mix was 18.0%, nearly double our business customer
concentration at the end of 1997. The following table shows the period
incremental business/total customer mix and the cumulative business/total
customer mix for each quarter of 1996, 1997, 1998 and the first two quarters of
1999.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------------ ------------------------------------------ ---------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Period incremental business/
total customer mix(1)...... N/A N/A N/A N/A 8.6% 8.7% 6.8% 10.8% 19.6%
Cumulative business/total
customer mix(2)............ 5.7% 6.5% 6.6% 6.8% 7.9% 8.1% 7.7% 8.4% 10.5%
<CAPTION>
1999
--------------------
Q2 Q3 Q4 Q1 Q2
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Period incremental business/
total customer mix(1)...... 19.6% 16.1% 21.8% 29.5% 28.4%
Cumulative business/total
customer mix(2)............ 12.3% 13.0% 14.7% 16.7% 18.0%
</TABLE>
- ------------------------
(1) Period incremental business/total customer mix represents the number of
subscriber business lines added during the referenced periods as a
percentage of total subscriber lines added during those periods.
(2) Cumulative business/total customer mix represents the number of subscriber
business lines as a percentage of total subscriber lines at the end of the
referenced periods.
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The usage fees charged for any telephone call originated over our network
depend on a number of factors, including type of customer, type of call (local,
domestic long distance or international), duration of call, time of day and day
of the week on which the call has been placed. We generally establish our fees
on a network-wide basis, although occasionally we will negotiate individualized
fee agreements with large business customers. Beginning on July 1, 1997, we
began to offer an alternative package under which usage fees were lowered while
the fixed monthly fee was raised. See "Business--Services and Pricing--Pricing."
We believe the revised tariff structure, among other factors, has stimulated
usage of our network.
As TPSA is further privatized and the telecommunications market in Poland is
deregulated, we are experiencing tariff changes that are having a positive
impact on our revenues. In the first four months of 1999 TPSA increased its
local tariffs and connection fees by 10% and 15%, respectively, and we have
matched those increases. TPSA increased its local tariffs again as of July 1,
1999, this time by 14% and decreased its long distance tariffs by 16-18%. In
April 1999, TPSA also introduced an increase in its monthly fee which we also
matched. In September 1998, TPSA decreased its long distance tariffs by 20% to
25%. We expect that Poland's telecommunications market will continue to undergo
further tariff rebalancing as the country moves toward EU standards. The MOC has
recently announced that the process of tariff rebalancing should continue until
the end of 2003. Since our revenues are derived primarily from local tariffs, we
expect to benefit if this rebalancing trend continues.
EXPENSES
We divide our costs and expenses into the following categories: operating
expenses; selling, general and administrative expenses; depreciation and
amortization; cost of equipment; and interconnection charges.
Our operating expenses primarily include maintenance and related expenses
necessary to service, maintain and operate our network, billing and collection
expenses, marketing expenses (except for certain costs incurred by operating
companies prior to individual networks becoming operational which are included
in selling, general and administrative expenses) and customer service expenses.
We expect that our operating expenses will increase in connection with the
expansion in geographic scope of our network and the corresponding expansion in
our operations. In addition, we expect our operating expenses to increase if we
acquire licenses to provide domestic long distance and international
telecommunications services or if we acquire licenses for additional
territories.
Selling, general and administrative expenses consist principally of
administrative costs, including office-related expenses, professional fees and
salaries, wages and benefits of operating personnel, advertising, certain
pre-operational marketing expenses and bank fees. As we open additional customer
service centers, hire more employees, expand product offerings and otherwise
expand our operations, we expect selling, general and administrative costs to
increase.
Depreciation and amortization expenses consist of the depreciation of
property, plant and equipment, primarily related to our network, and
amortization of intangible assets. We commence amortization of licenses for a
territory when we commence operations in that territory. We expect depreciation
and amortization expenses to increase in the future as we expand our network.
Cost of equipment is related exclusively to our non-telecommunications
businesses. We do not expect these expenses to be significant in future periods.
Each of our operating subsidiaries with commercial operations has an
interconnection agreement with TPSA which establishes both technical
specifications for interconnection and payment settlement procedures. There are
no interconnection fees for local calls. TPSA is currently the only entity
authorized to provide domestic fixed-line long distance and international
telecommunications services (until
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<PAGE>
1999 and 2003, respectively) over its own network. Accordingly, we must access
TPSA's network in order to send or receive domestic long distance or
international traffic originating from our customers, for which we must pay
interconnection fees. Generally, pursuant to the interconnection agreements,
settlement costs paid to TPSA for outgoing (I.E., those originating from our
customers) international calls are 70% of TPSA's tariffs for such calls.
Settlement costs for outgoing domestic long distance calls range from 28% to 40%
of TPSA's tariffs for such calls. These settlement costs are independent of the
rates we charge our customers for placing such calls, although one of the tariff
options to our customers is effectively pegged to the rates charged by TPSA for
similar calls. We generally are not paid for incoming traffic (I.E., calls
terminating on our network). In July and August 1999, we signed two agreements
with mobile telephony companies for direct interconnection arrangements which
are believe should enhance our profitability due to lower interconnection costs
as compared to the previous status where interconnection had to be arranged
through the TPSA.
In April 1999, we instituted anti-monopoly proceedings against TPSA relating
to interconnection fees. No assurance can be given that the proceedings will be
successful or that they will result in our obtaining a more favorable
interconnection arrangement with TPSA. See "Business Legal Proceedings."
EBITDA
In addition to other operating statistics, we measure our financial
performance by EBITDA. Netia defines EBITDA as net income/(loss) as measured by
IAS adjusted for depreciation and amortization, financial expense, income taxes,
minority interest, share of losses of equity investees and non-recurring items
(other losses and gains on dilution). We believe that EBITDA and related
measures of cash flow from operating activities serve as useful financial
indicators in measuring the operating performance of telecommunications
companies. EBITDA is not a U.S. GAAP or IAS measure and should not be considered
as an alternative to U.S. GAAP or IAS measures of net income/(loss) as an
indicator of our operating performance or to cash flow from operations under
U.S. GAAP or IAS as a measure of liquidity. Potential investors should note that
EBITDA is not a uniform or standardized measure, the calculation of which,
accordingly, may vary significantly from company to company, and by itself
provides no grounds for comparison with other companies.
TAXES
The Polish tax system does not provide for grouping of tax losses for
multiple legal entities under common control, such as Netia and our
subsidiaries, including Netia Telekom, Netia South and our operating companies
in our local territories. Thus, the separate companies will only be able to
utilize their own tax losses to offset taxable income in subsequent years.
Utilization of tax losses is limited to one-third of the tax loss in each of the
three 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 fully reserved for. As a result of a change in Polish tax law,
tax losses incurred in 1999 and subsequent years will be permitted to be
utilized over five years with a 50% utilization restriction per annum.
Changes to Poland's tax laws, which took effect January 1, 1999, limit a
Polish company's ability to claim tax deductions for interest paid on loans
received after January 1, 1999 from certain affiliated entities, including
shareholders owning 25% or more of a Polish company's voting shares if such
loans exceed three times the company's share capital. Recently proposed further
amendments to these rules (which, if adopted, would take effect January 1, 2000)
would further limit the availability of these deductions, and could also impose
stamp duties of between 0.1% and 2.0% on various intercompany funding
arrangements (in addition to those already covered by rules presently in force).
These changes could have an adverse effect on us because we generally provide
funds to our principal subsidiaries, Netia Telekom and Netia South, and those
companies provide funds to our operating companies through the use of loans and
other funding devices which would fall within the coverage of the
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<PAGE>
proposed rules. While we believe we have structured our intercompany funding
arrangements to accommodate the rules that are presently in effect, we cannot be
certain that the tax authorities will concur with our position, or that we will
be able to structure our funding arrangements to accommodate the proposed new
rules, if they are adopted. As a result, we may be required to either pay
increased amounts of Polish corporate taxes and/or stamp duties or restructure
our intercompany funding arrangements further in a manner that could be less
tax-efficient than our present arrangements.
MINORITY INTERESTS
Minority interests (which represent that part of the net results of
operations of the subsidiaries that are not 100% owned, directly or indirectly
through subsidiaries, by Netia Holdings S.A.) are adjusted out of the net loss
of the group in accordance with IAS. Accordingly, the portion of the losses
assigned to the minority interest shareholders is not recognized by Netia
Holdings S.A. Negative minority interest resulting from negative net assets of
subsidiaries is not recognized unless there is a contractual commitment. In
large part, the effects of minority interests in future periods will be
eliminated or significantly reduced as a result of the exercise by Telia of the
Telia Exchange Option and the Telia Incentive Option effective March 1999. See
"Certain Relationships and Transactions with Related Parties--Option Exercise
Agreement."
SEGMENT REPORTING
Netia operates in two distinct business line segments: the
telecommunications business and other businesses, otherwise referred to herein
as our non-telecommunications businesses. Our non-telecommunications businesses
consist of the provision of specialized mobile radio services, the sale of
related equipment and the development of residential real estate. Netia conducts
its specialized mobile radio business through Uni-Net, a majority-owned
subsidiary of Netia Holdings S.A. We intend to sell these businesses when a
favorable commercial opportunity to do so becomes available. For a presentation
of pro forma financial information giving effect to the disposition of our
non-telecommunications businesses, see "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
The following table shows certain financial data related to our
telecommunications businesses and non-telecommunications business (with "Q2"
data being for the six-month periods ended June 30, 1998 and June 30, 1999).
<TABLE>
<CAPTION>
REVENUES OPERATING PROFIT/(LOSS)
------------------------------- -------------------------------
YEAR Q2 Q2 YEAR
----------------- --------- ----- -----------------
1996 1997 1998 1998 1999 1996 1997 1998
----- ----- --------- --------- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(POLISH ZLOTY IN MILLIONS)
Telecommunications businesses....... 9.0 35.6 96.4 37.1 86.3 (51.3) (63.1) (80.4)
Non-telecommunications businesses... 12.7 14.6 23.9 11.8 10.5 (5.0) (3.2) 1.1
--- --- --------- --------- --- --------- --------- ---------
21.7 50.2 120.3 48.9 96.8 (56.3) (66.3) (79.3)
--- --- --------- --------- --- --------- --------- ---------
--- --- --------- --------- --- --------- --------- ---------
<CAPTION>
EBITDA
-------------------------------
Q2 Q2 YEAR Q2 Q2
--------- --------- ----------------- --------- ---------
1998 1999 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Telecommunications businesses....... (36.4) (71.7) (45.4) (47.1) (41.5) (20.5) (18.6)
Non-telecommunications businesses... 0.8 1.7 (3.5) (2.3) 3.2 1.7 2.6
--------- --------- --------- --------- --------- --------- ---------
(35.6) (70.0) (48.9) (49.4) (38.3) (18.8) (16.0)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
HYPERINFLATIONARY ACCOUNTING
At December 31, 1995 and 1996 and for the periods then ended, Poland was
considered to be a hyperinflationary economy. We prepared the financial
statements for those periods in accordance with the historical cost convention
as adjusted for the effects of inflation. As of January 1, 1997, Poland ceased
to be considered a hyperinflationary economy. The December 31, 1996 inflated
values became the new historical basis for financial statements prepared from
January 1, 1997.
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<PAGE>
RECENT DEVELOPMENTS
We have completed several significant transactions after June 30, 1999.
First, in June 1999, a group of funds sponsored by Warburg purchased 2,597,403
of our ordinary shares at $19.25 per share in a private placement. Payment for
the shares was made on July 1, 1999 and the related capital increase was
registered with the Commercial Court in Warsaw on July 16, 1999. Warburg
obtained the right to appoint one member to our supervisory board.
Also, in August, 1999, we sold 5.5 million of our American Depositary
Shares, or ADSs, in the IPO at the offering price of $22.00 per ADS (before
underwriting commissions and transaction expenses). Each ADS represents one
common share of Netia Holdings S.A. Pursuant to an agreement between Netia and
BRE Bank, BRE Bank purchased approximately 16% of the ADSs we issued in the IPO.
We received net proceeds of approximately $114.6 million from the IPO. In
September 1999, we completed the registration of the related capital increase
with the Commercial Court in Warsaw. We intend to use the net proceeds from the
Warburg transaction and the IPO principally to fund a portion of the capital
requirements for the build-out of our network, including capital expenditures,
to finance our working capital requirements and operating costs and for other
general corporate purposes.
In July and August 1999, we entered into new interconnection agreements with
two mobile telephone network operators which should lower our interconnection
costs for calls through these operators. We anticipate that these agreements
will have a positive impact on our results of operations since we believe that
the amount of traffic between our network and cellular operators will at least
remain at the current level.
In September 1999, we acquired Topnet, a private Internet service provider
with operations throughout Poland, for approximately $0.8 million.
RESULTS OF OPERATIONS
SIX-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30,
1998
TELECOMMUNICATION BUSINESS
REVENUES. Telecommunications revenues increased by 133% to PLN 86.3 million
during the six-month period ended June 30, 1999 from PLN 37.1 million during the
six-month period ended June 30, 1998. The increase was primarily attributable to
the 102% increase in the number of total subscribers to 193,607 at June 30, 1999
from 96,022 at June 30, 1998. Revenue grew at a greater rate than the total
subscriber base due to the increase in the number of business customers (who
generate greater average monthly revenue per line than residential customers)
which grew from 11,769 at June 30, 1998 to 34,943 at June 30, 1999.
Average monthly revenue per line increased to PLN 77.68 for the six-month
period ended June 30, 1999 from PLN 55.29 for the six-month period ended June
30, 1998. Furthermore, the average monthly revenue per line for business
customers increased to PLN 203.25 for the six-month period ended June 30, 1999
from PLN 162.74 for the six-month period ended June 30, 1998.
The increase in revenues was also partially attributable to an increase in
our local tariffs by 10% in January 1999 and by 14% in July 1999, offset in part
by a comparable decrease of long distance tariffs imposed by TPSA. We benefited
from this change since the majority of our traffic is local.
COSTS AND EXPENSES. Total costs and expenses increased to PLN 158.0 million
during the six-month period ended June 30, 1999 from PLN 73.5 million during the
six-month period ended June 30, 1998, or 115%. This increase was primarily due
to an increase in interconnection charges, as we increased the usage of our
network and depreciation charges, as more of the network was placed online, as
well as increases in other operating expenses due to an increase in the number
of employees, marketing
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<PAGE>
expenses and other costs necessary to support the change in our business from
one primarily engaged in constructing a network to one with substantial
operations as well as significant construction activity.
During the second quarter 1999 we also incurred the final settlement costs
associated with certain stock appreciation rights previously granted to a senior
executive. Details are provided in Note 4 to the Condensed Consolidated
Financial Statements.
FINANCIAL EXPENSES, NET. Financial expenses increased to PLN 195.6 million
during the six-month period ended June 30, 1999, from PLN 44.0 million during
the six-month period ended June 30, 1998. The increase in financial expenses was
primarily attributable to foreign exchange losses of PLN 182.1 million recorded
during the six-month period ended June 30, 1999 compared to foreign exchange
losses of PLN 12.9 million recorded during the six-month period ended June 30,
1998. During the first six-month period of 1999, the Polish Zloty declined
against the U.S. Dollar more than in the corresponding period of 1998. The
comparatively greater decline in the foreign exchange rate of the Polish Zloty
against the U.S. Dollar resulted in an increase in the amount of Polish Zloty
required to service Netia's debt payable in U.S. Dollars.
TAXES. Tax expense decreased to PLN 1.3 million during the six-month period
ended June 30, 1999 from an expense of PLN 7.0 million during the six-month
period ended June 30, 1998, as a result of deferred tax differences in the
treatment of capitalized costs and depreciation rates between book and tax
accounting.
NET LOSSES. We incurred net losses of PLN 268.8 million during the
six-month period ended June 30, 1999 as compared to net losses of PLN 66.2
million during the six-month period ended June 30, 1998, primarily as a result
of the increase in financial expenses.
NON-TELECOMMUNICATIONS BUSINESSES
Revenues from our non-telecommunications businesses decreased to PLN 10.5
million in the six-month period ended June 30, 1999 from PLN 11.8 million in the
six-month period ended June 30, 1998, or 11%. This decrease was primarily
attributable to a decrease in the sales of equipment to Polish Mining and Gas
Refinery S.A. Operating profit for the non-telecommunications businesses
increased moderately, due in part to improved management of costs.
EBITDA
EBITDA of the telecommunications and non-telecommunications activities for
the six-month period ended June 30, 1999 was negative PLN 16.0 million while for
the six-month period ended June 30, 1998 it was negative PLN 18.8 million.
EBITDA for six-month period ended June 30, 1999 without taking effect of the
above described stock appreciation rights was negative PLN 3.1 million.
THREE-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THREE-MONTH PERIOD ENDED JUNE
30, 1998
TELECOMMUNICATIONS BUSINESS
REVENUES. Telecommunications revenues increased by 119% to PLN 46.5 million
during the three-month period ended June 30, 1999 from PLN 21.2 million during
the three-month period ended June 30, 1998. The increase is mainly attributable
to an increase in the number of subscriber lines and an increase in business
customers as a result of an increased focus on promotional programs.
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<PAGE>
COSTS AND EXPENSES. Total costs and expenses increased to PLN 93.5 million
during the three-month period ended June 30, 1999 from PLN 40.3 million during
the three-month period ended June 30, 1998, or 132%. This increase was
attributable to the increase in scope of our operations, primarily an increase
in the number of employees and legal, financial and marketing expenses as well
as an increase in depreciation expenses due to the expansion of the network
during 1999 and the inclusion of the Stock Appreciation rights costs described
above.
FINANCIAL EXPENSES, NET. Financial expenses decreased to PLN 1.9 million in
the three-month period ended June 30, 1999 from PLN 36.8 million in the 1998
period, primarily as a result of a favorable movement in the exchange rate of
the U.S. Dollar.
TAXES. Tax expense increased to PLN 4.3 million in the quarter ended June
30, 1999 from PLN 80 thousand in the 1998 quarter, as a result of the reversal
of deferred tax differences in the treatment of capitalized costs and
depreciation rates between book and tax accounting.
NET LOSSES. As a result of the factors discussed above, we incurred net
losses of PLN 53.4 million in the quarter ended June 30, 1999 as compared to net
losses of PLN 42.4 million in the same 1998 quarter
EBITDA
EBITDA of the telecommunications and non-telecommunications activities for
the three-month period ended June 30, 1999 was negative PLN 14.5 million while
for three-month period ended June 30, 1998 it was negative PLN 10.2 million.
EBITDA for three-month period ended June 30,1999 without taking effect of the
above described stock appreciation rights was negative PLN 1.6 million.
NON-TELECOMMUNICATIONS BUSINESSES
Revenues from our non-telecommunications businesses decreased to PLN 5.4
million in the three-month period ended June 30, 1999 from PLN 6.0 million in
the three-month period ended June 30, 1998, or 10%. This decrease was primarily
attributable to a decrease in the sales of equipment to Polish Mining and Gas
Refinery S.A. Operating profit for the non-telecommunications business increased
moderately, due in part to improved management of costs.
YEAR ENDED DECEMBER 30, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TELECOMMUNICATIONS BUSINESS
REVENUES. Telecommunication revenues increased by 171% to PLN 96.4 million
during the year ended December 30, 1998 from PLN 35.6 million during the year
ended December 31, 1997. The increase was primarily attributable to the 135%
increase in the number of total subscribers to 148,134 at December 30, 1998 from
63,099 at December 31, 1997. Revenue grew at a greater rate than the subscriber
base due to the increase in the number of business customers to 21,792 at
December 30, 1998 from 5,324 at December 31, 1997. Billable units increased to
290.0 million (including 103.4 million for business customers) for the year
ended December 30, 1998 compared to 64.5 million (including 19.7 million for
business customers) for the year ended December 31, 1997. Average monthly
revenue per line also increased to PLN 62.35 for 1998 from PLN 51.60 for 1997.
Furthermore, the average monthly revenue per line for business customers
increased to PLN 165.09 from PLN 141.33 for 1997.
COSTS AND EXPENSES. Total costs and expenses increased to PLN 176.9 million
during the year ended December 30, 1998 from PLN 98.7 million during the year
ended December 31, 1997, or 79%. This increase was attributable to the increase
in scope of our operations, primarily an increase in the
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<PAGE>
number of employees and legal, financial and marketing expenses as well as an
increase in depreciation expenses due to the expansion of the network during
1998.
FINANCIAL EXPENSES, NET. Financial expenses increased to PLN 151.3 million
in 1998 from PLN 55.3 million in 1997, primarily as a result of the increase in
interest expense due to the substantially higher level of average debt
outstanding during 1998 compared to 1997.
TAXES. Tax expense increased to PLN 8.8 million in 1998 from PLN 1.1
million in 1997, as a result of deferred tax differences in the treatment of
capitalized costs and depreciation rates between book and tax accounting.
NET LOSSES. As a result of the factors discussed above, we incurred net
losses of PLN 206.1 million in 1998 as compared to net losses of PLN 81.2
million in 1997.
NON-TELECOMMUNICATIONS BUSINESSES
Revenues from the non-telecommunications businesses increased to PLN 23.9
million in 1998 from PLN 14.6 million in 1997, or 64%. This increase was
primarily attributable to increased market penetration in the specialized mobile
radio services in Poland as a result of increased marketing efforts. The
positive operating result of PLN 1.1 million during the year ended December 30,
1998 compared to an operating loss of PLN 3.2 million was primarily due to an
increase in revenues.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
TELECOMMUNICATIONS BUSINESS
REVENUES. Telecommunications revenues increased to PLN 35.6 million during
the year ended December 31, 1997 from PLN 9.0 million during the year ended
December 31, 1996. The increase was primarily attributable to the increase in
the number of subscribers from approximately 18,290 at December 31, 1996 to
63,099 at December 31, 1997. Revenues for 1997 were derived primarily from
monthly subscription fees, usage fees and installation fees. Billable units
increased to 64.5 million during the year ended December 31, 1997 compared with
28.0 million during the year ended December 31, 1996. Average monthly revenue
per line also increased from PLN 42.8 during 1996 to PLN 51.6 during 1997.
COSTS AND EXPENSES. Total costs and expenses increased to PLN 98.7 million
in 1997 from PLN 60.3 million, or 63.7%. This increase was attributable to the
increase in scope of our operations, primarily an increase in the number of
employees and legal, financial and marketing expenses.
FINANCIAL EXPENSE, NET. Financial expenses increased to PLN 55.3 million in
1997 from PLN 1.8 million in 1996, primarily as a result of interest expense,
foreign exchange losses and guarantee fees associated with borrowings as well as
the write-off of loan origination fees relating to early extinguishment of
loans. These costs were partially offset by interest income from the temporary
investment of funds from the issuance of the 1997 Senior Notes.
TAXES. Tax expense decreased to PLN 1.1 million in 1997 from PLN 2.7
million in 1996, as a result of deferred tax differences in the treatment of
capitalized costs and depreciation rates between book and tax accounting.
NET LOSSES. Netia incurred net losses of PLN 81.2 million in 1997 compared
to net losses of PLN 12.9 million in 1996. The change was due primarily to a
gain on dilution of Netia Holdings S.A.'s interest in Netia Telekom from 100.0%
to 65.0%, totalling PLN 38.9 million in 1996, and increased operating expenses,
general, selling and administrative expenses, as well as financial expenses in
1997 as described above.
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NON-TELECOMMUNICATIONS BUSINESSES
Revenues from the non-telecommunications businesses increased to PLN 14.6
million in 1997 from PLN 12.7 million in 1996, or 15%. This increase was
primarily attributable to increased market penetration in specialized mobile
radio services in Poland as a result of increased marketing efforts. Total costs
and expenses increased to PLN 17.8 million in 1997 from PLN 17.7 million in
1996, or 0.6%. This small increase relative to revenues was due mainly to
cost-cutting measures implemented by Netia's management.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred operating losses and negative cash flows primarily as a
result of the development and operation of our network. We expect that our net
losses will continue for at least the next several years as we continue to build
our network and develop our customer base. We also expect that for at least the
next several years, our operating cash flow will not be sufficient to cover our
planned capital expenditures, license fee obligations, working capital needs,
operating losses and debt service obligations.
Net cash used in operating activities was PLN 32.6 million in 1996, PLN 89.8
million in 1997 and PLN 156.4 million ($39.8 million) in 1998 and PLN 15.7
million ($4.0 million) in the six-month period ended June 30, 1999. The negative
operating cash flows for each of the years and periods presented were due to the
fact that telecommunications revenues have not been at a level sufficient to
support the growing working capital requirements associated with our build-out
phase.
Net cash used in investing activities was PLN 56.2 million in 1996, PLN
198.3 million in 1997 and PLN 480.3 million ($122.2 million) in 1998 and PLN
339.2 million ($86.3 million) in the six-month period ended June 30, 1999. As of
June 30, 1999, Netia had PLN 846.6 million ($215.4 million) in cash and cash
equivalents (excluding restricted investments). We made capital expenditures of
PLN 148.0 million in 1996, PLN 223.0 million in 1997 and PLN 395.9 million
($100.7 million) in 1998 and PLN 335.5 million ($85.4 million) in the six-month
period ended June 30, 1999. Netia's capital expenditures are primarily related
to our investment in network assets, including switches, fiber-optic cable,
license and concession fees and construction of our network.
Net cash provided by financing activities was PLN 90.6 million in 1996, PLN
1,195.9 million in 1997 and PLN 870.9 million ($221.6 million) in the six-month
period ended June 30, 1999. The net cash inflows resulted primarily from
borrowings in 1996, the issuance of the 1997 Senior Notes and the exercise of
the Telia Incentive Option, the Telia Capital Increase and the issuance of the
Notes in 1999. There was no significant financing activity in 1998. Since June
30, 1999, we have received an additional equity contribution of $114.6 million
(PLN 450.3 million) as a result of the IPO and approximately $48.4 million (PLN
190.2 million) in net proceeds from the Warburg Transaction. See "Certain
Relationships and Transactions with Related Parties."
To date, our capital requirements have been funded primarily through (i)
equity investments and subordinated loans from the shareholders, (ii) borrowings
under available credit facilities and (iii) in more recent periods, the proceeds
from the issuance of the 1997 Senior Notes and the Notes, the Telia Capital
Increase, the Warburg Transaction and the IPO. Netia is not generating
sufficient revenues from its operations to fund its planned capital
expenditures, license fee obligations, working capital needs, operating losses
and debt service obligations and, therefore, will be dependent on the remaining
proceeds from the issuance of the 1997 Senior Notes, the Notes, the Telia
Capital Increase, the Warburg Transaction, additional cash on hand, the proceeds
of the IPO and additional future debt or equity offerings or other third-party
financings to fulfill its obligations and planned commitments. We do not
presently have a credit facility available as a source of liquidity. No
assurance can be given that we will be able to complete any of these future
financing transactions and therefore to continue the development of our network
and continue our operations.
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We plan to complete our fiber-optic backbone and data transmission
facilities by the end of 2000. By the end of 2003, we plan for our network to
grow to approximately 750,000 lines. We presently have approximately $459.7
million (PLN 1,806.5 million) of funds (including restricted investments). We
estimate that, excluding any capital expenditures and license fees we would
incur if we were to bid successfully for additional licenses, we will require
approximately $304.8 million (PLN 1,197.8 million) of additional capital to fund
our capital expenditures, cash operating losses, cash debt service and our other
cash needs through 2003. We plan to use a substantial majority of our available
cash plus any cash generated from operations for capital expenditures including
the planned completion of the network in our existing territories and the
construction of the planned fiber-optic backbone and data transmission
facilities. However, we would require additional funds in the event of delays,
cost overruns or other adverse developments.
Furthermore, if we acquire licenses for the provision of domestic long
distance or international telecommunications services or if we obtain
concessions to provide local telecommunications services in other territories
(which could possibly include Warsaw), we will expand our network beyond what is
currently planned and would pay additional license fees, which will require
substantial amounts of additional financing. Additional funding sources may
include equity and debt financings, in either the public or private markets, and
other financing arrangements such as vendor financing. There can be no assurance
that additional financing arrangements will be available, or if available, that
they can be concluded on terms acceptable to us. Moreover, based on restrictions
in the indentures governing the 1997 Senior Notes and the Notes, respectively,
if we desire to incur additional indebtedness to meet our cash requirements
after giving effect to the IPO, we will likely be required to raise additional
equity to satisfy the debt covenants in those indentures. Subject to various
exceptions, on an aggregate basis we would have to raise equity capital which,
together with the net proceeds of the IPO and the Warburg Transaction, equals
approximately 50% of the amount of the additional debt we seek to incur. We
cannot assure you that we would be able to raise additional equity in amounts
sufficient to support future borrowings. The indentures governing the 1997
Senior Notes and the Notes also limit, and we expect any future credit agreement
or other debt agreement to limit, our ability to incur additional debt.
In addition to our capital expenditure requirements, we will require
substantial capital to fund our debt service and license fee obligations.
Substantially all our interest commitments through 2000 have been pre-funded or
consist of non-cash interest. Beginning in 2001, we will have significant cash
interest payment service obligations under both the 1997 Senior Notes and the
Notes. As of June 30, 1999, we had, on a consolidated basis, approximately PLN
2,575.8 million ($655.5 million) principal amount of indebtedness outstanding in
addition to approximately PLN 297.7 million ($75.8 million) of license fees,
which will be payable over the next four years. We cannot assure you that our
business will generate cash flows at the necessary levels which, together with
available additional financing, will allow us to meet our anticipated
requirements for working capital, capital expenditures, interest payments and
scheduled principal payments. We anticipate that, in light of the amount of our
existing indebtedness and the need to incur additional indebtedness to finance
the build-out of our operations, we will continue to have substantial leverage
for the foreseeable future. We must substantially increase our net cash flow in
order to meet our debt service and other obligations. See "Risk Factors--We Are
Highly Leveraged" and "Capitalization."
Certain important differences between U.S. GAAP and IAS are explained in
Note 24 to the December 30, 1998 Financial Statements and Note 11 to the June
30, 1999 Financial Statements.
YEAR 2000 COMPLIANCE
GENERAL. We are highly dependent on our computer software programs and
operating systems in operating the network. We also depend on the proper
functioning of computer systems of third parties, such as TPSA or
telecommunications equipment suppliers. The failure of any of these systems to
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<PAGE>
appropriately address Year 2000 issues could have a material adverse effect on
Netia's business, financial condition and results of operations.
The "Year 2000 issue" relates to the way computers and systems use a
two-digit year presentation in order to conserve computer memory. The Year 2000
issue may materialize if computers or other information systems fail to
recognize that the year 1999 is followed by the year 2000, that the year 2000 is
a leap year, or that the figures 99 or 00 do not mean the end of the file. In
the event of such a failure, a malfunction might occur in products or processes
using a microprocessor with a two-digit year presentation.
We have established processes to evaluate and manage the possible risks and
costs associated with the Year 2000 issue and have identified the potential risk
areas, increased risk awareness, and introduced action plans and guidelines for
managing the Year 2000 issue.
Our Year 2000 compliance project is managed by a Year 2000 committee which
is appointed by and reports to our Management Board.
Our Year 2000 compliance project addresses several Year 2000 issues related
to switches, other network infrastructure, customer management systems, billing
systems, financial systems and all other systems. Progress in each of these
areas is reported to a central Year 2000 project manager, who reports to the
Year 2000 committee.
SWITCHES AND OTHER NETWORK INFRASTRUCTURE. We are co-operating with vendors
to test and verify the Year 2000 related status of their switches and other
network infrastructure and to appropriately resolve the relevant Year 2000
issues.
To address the Year 2000 compliance issues for our telecommunications
infrastructure, we have established testing plans with the switch suppliers and
with other hardware suppliers. The majority of our infrastructure products and
services to date are Year 2000 compliant, according to testing and certification
by the vendors. We have recently upgraded switches that were not yet Year 2000
compliant. We currently require all vendors of new equipment to provide us with
guarantees of Year 2000 compliance.
BILLING AND CUSTOMER MANAGEMENT SYSTEM. As part of a pre-planned program,
we are currently installing new billing and customer management systems to
replace the previous, non-Year 2000 compliant systems. Full installation is
scheduled to be completed by the end of 1999. The software vendor issued a
certificate that the base system as delivered is fully Year 2000 compliant.
However, we have modified the base system to meet our specific needs, and these
modifications have not been independently tested for Year 2000 compliance. We
also continue to upgrade other systems hardware and software and to conduct
tests for their Year 2000 compliance.
OTHER TELECOMMUNICATIONS COMPANIES. Long distance and international calls
either to or from our customers must involve connections with TPSA. We have
communicated with TPSA which generally indicated that TPSA expects to resolve
all Year 2000 issues. In addition, we have issued a letter to the MOC requesting
that more detail on Year 2000 progress be disclosed.
COSTS. Our direct Year 2000 cost estimate is currently PLN 4 million
(excluding the implementation costs of the billing, financial information,
customer care and network systems which were previously planned). By the end of
1998, we had spent approximately one-third of the estimated aggregate amount.
Our Year 2000 project has not resulted in deferral of spending for other systems
and equipment as planned. Cost estimates may vary in the future and will be
updated as we learn additional information concerning the status of our and
third parties' Year 2000 compliance.
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<PAGE>
RISKS AND CONTINGENCY PLANS. We realize that failing to correct material
Year 2000 issues could result in an interruption or failure of certain normal
business activities and that such failures could have a material adverse effect
on us.
Our Year 2000 project is intended to identify and address Year 2000 issues
in our systems and infrastructure, and to evaluate Year 2000 readiness of third
parties on whom we rely. Although we have not yet formulated a contingency plan
to address any significant problems that may be caused by the failure of our
internal systems or those of TPSA, to the extent we determine that Year 2000
issues have not been appropriately addressed we intend to develop contingency
plans and to take steps so that all such contingency plans are in place by
September 30, 1999. Due to general uncertainties related to the Year 2000 issue,
partly resulting from the uncertainties of the Year 2000 readiness of third
parties, the actual effects of the Year 2000 issues on us will be unknown until
Year 2000 and beyond. However, we believe that our Year 2000 project reduces the
level of this uncertainty and together with the planned compliance programs as
well as subsequent contingency plans will reduce these risks.
Our inability to remedy our Year 2000 problems or the failure of third
parties, particularly TPSA, to do so may cause business interruptions and
shutdowns, financial loss, regulatory action, reputational harm and/or legal
liability. We cannot assure you that our Year 2000 program will be effective or
that the estimates about the timing and cost of completing our program will be
accurate. See "Risk Factors--Computer Systems May Fail to Recognize Year 2000."
INFLATION
In connection with its transition from a state-controlled to a free-market
economy, Poland experienced high levels of inflation and significant fluctuation
in the exchange rate for the Polish Zloty.
The Polish government adopted policies that slowed the annual rate of
consumer price inflation from an average of 250.0% in 1990 to approximately
19.9% in 1996, 14.9% in 1997 and 11.8% (8.6% year-to-year) in 1998. See "The
Polish Telecommunications Industry" and "Annex A--The Republic of Poland." A
substantial portion of our operating expenses are, and are expected to be,
denominated in Polish Zloty and tend to increase with inflation. Inflation has
had and, especially in light of the Polish Zloty's rapid devaluation in the
first quarter of 1999, may continue to have, a material adverse effect on the
financial condition and results of operations of Netia. See "Risk
Factors--Inflation and Currency Fluctuations Affect Our Business." We may
increase our rates to account for Polish price inflation. The Polish
Telecommunications Act of 1990, as amended (the "Communications Act"), however,
provides that the MOC may impose a ceiling on the prices that Netia and other
telecommunications service providers can charge for their services. See
"Telecommunications Regulations--Tariffs and Price Regulation."
FOREIGN EXCHANGE RISK
We face foreign exchange risk as our revenues are denominated in Polish
Zloty, and a significant portion of our capital expenditures are denominated in
currencies other than Polish Zloty. These include our liabilities to the
suppliers of switching and transmission equipment, a portion of our construction
costs and our obligations under the OSSAs (as defined herein) with Telia, which
are generally denominated in U.S. Dollars. See "Certain Relationships and
Transactions with Related Parties--Operational Support and Supervision
Agreements." In addition, our liabilities under the Notes, the 1997 Senior Notes
and the Netia South Bank Facility are denominated in U.S. Dollars, Euros or
German Marks. Any devaluation of the Polish Zloty against the U.S. Dollar, the
German Mark or the Euro that Netia is unable to offset through price adjustments
will require it to use a larger portion of its revenues to service its
non-Zloty-denominated debt. While we may consider entering into transactions to
hedge the risk of exchange rate fluctuations, it is unlikely that we would be
able to obtain hedging arrangements on commercially satisfactory terms.
Accordingly, shifts in currency exchange rates may have an
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adverse effect on our ability to service our non-Zloty-denominated obligations
and, thus, our financial condition and results of operations.
The net foreign exchange gains and losses for the years ended December 31,
1996, 1997 and 1998 were PLN (1,938), PLN (19,523) and PLN (45,301),
respectively; and the net foreign exchange losses for the six-month periods
ended June 30, 1998 and 1999 were PLN (32.8) and PLN (106.8), respectively.
INTEREST RATES
We have very little floating rate debt. We have fixed-rate borrowings in
U.S. Dollars, German Marks and in Euros. If interest rates fall in those
currencies the fair value of our fixed-rate debts denominated in those
currencies would rise, and we would not benefit from any opportunity to borrow
at lower rates after an interest rate decrease. We do not use any derivative
financial instruments to hedge our interest rate risk in Polish Zloty or foreign
currencies, because we consider that the cost of doing so would be uneconomic.
The table below provides information about our financial instruments that
are sensitive to changes in interest rates and foreign exchange rates as of June
30, 1999. The table presents the maturities of debt and the related weighted
average interest rates by expected maturity date. The information is presented
in Polish Zloty, which is our reporting currency.
INTEREST RATE AND FOREIGN EXCHANGE RISK MANAGEMENT
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
JUNE 30, 1999
<TABLE>
<CAPTION>
FAIR VALUE
AT
JUNE 30,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
--------- --------- --------- --------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
Debt, including current portion:
Fixed rate ($)........................ -- -- -- -- -- 1,770,928 1,770,928 1,770,928
Interest rate (fixed)................. 11.22% 11.22% 11.22% 11.22% 11.22% 11.22%
Variable rate ($)..................... -- 33,227 3,519 1,946 1,539 8,894 49,125 49,125
Interest rate (variable).............. 8.59% 8.59% 9.15% 9.47% 10.00% 10.00%
Fixed rate (Euro)..................... -- -- -- -- -- 405,930 405,930 405,930
Interest rate (fixed)................. 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Fixed rate (DM)....................... -- -- -- -- -- 336,291 336,291 336,291
Interest rate (fixed)................. 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%
Variable rate (DM).................... -- 13,491 -- -- -- -- 13,491 13,491
Interest rate (variable).............. 8.30% 8.30% -- -- -- --
</TABLE>
In addition to the debt included above, we have long-term obligations of PLN
28,867 denominated in U.S. Dollars and long-term obligations of PLN 268,826
denominated in Euros.
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THE POLISH TELECOMMUNICATIONS INDUSTRY
OVERVIEW
With approximately 39 million people and a 22% fixed-line telephone
penetration rate as of December 31, 1998, Poland represents, in our view, a
highly attractive, dynamic market for private fixed-line telephone providers
such as Netia.
THE POLISH ECONOMY
Poland has experienced significant growth in its economy in recent years.
The country's real gross domestic product ("GDP") grew at annualized rates of
6.1%, 6.9% and 4.8% in 1996, 1997 and 1998, respectively, which were among the
highest growth rates in Europe for each respective time period. In recent years,
the government has encouraged foreign direct investment, which has risen from
$0.1 billion in 1990 to approximately $30.7 billion in 1998. Poland has also
successfully reduced its average annual inflation rate from 250.0% in 1990 to
approximately 14.9% in 1997 and approximately 11.8% in 1998, and unemployment in
Poland recently declined to 10.4% as of the end of 1998. However, unemployment
had risen to 11.9% by October 1, 1999. Partly due to these factors, the
sovereign credit rating of the country was upgraded in early 1996 to investment
grade by Moody's (Baa3) and S&P (upgraded to BBB in June 1999 with a positive
outlook).
DEVELOPMENT OF THE POLISH FIXED-LINE TELEPHONE INDUSTRY AND INDUSTRY TRENDS
The Polish government has taken a number of steps to liberalize Poland's
telecommunications regulatory framework in order to improve the quality and
increase the geographic coverage of Poland's telecommunications infrastructure.
Until 1991, the state held the exclusive right to engage in telecommunications
activities in Poland. The Polish parliament then abolished the state monopoly on
local telecommunications services and the government commenced granting licenses
to private operators to build, own and operate local telecommunications
networks. Initially, the government's practice was to exclude major cities from
licenses granted to private operators; however, in 1996, the government began to
offer licenses for the major cities in Poland. In the second half of 1997, the
Polish government accelerated its licensing process for the remaining licensed
territories, Lodz and Warsaw. The process for the awarding of a license for Lodz
was completed in January 1999.
In late 1998, the MOC issued a tender for a local telephone license for the
city of Warsaw. We participated in this tender. Following completion of the
tender process, the MOC announced that another operator would be awarded the
license. Netia and one other bidder contested the award and Netia resubmitted
its bid for the Warsaw license. Also during this period, the government replaced
the head of the MOC.
In June 1999, the MOC formally announced the award of a Warsaw local license
to El-Net, a subsidiary of Elektrim S.A. ("El-Net"). The MOC also recently
announced that it intends to grant two licenses rather than one, for the Warsaw
region. The other license will be awarded following a second tender, expected to
be announced later in 1999. If this were to occur, we would likely bid for the
second license.
The MOC also recently asserted that, in its view, there is no legal
requirement for limiting competition within local license areas to TPSA plus one
alternative operator. Rather, the MOC has expressed its belief that increased
competition throughout the country would be beneficial to subscribers.
In 1992, the Polish government transferred its telecommunications operations
to TPSA, which assumed the role of the state-owned monopoly provider of
fixed-line voice, domestic long distance and international telephone service. In
November 1998, the government began the privatization of TPSA by selling a 15%
interest in TPSA through a public offering of TPSA's shares. The government is
required to distribute an additional 15% interest to TPSA employees by 2000, and
it has announced that it
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intends to sell an additional 25% to 35% interest in TPSA to one or more
strategic investors by the end of 1999 or in 2000. TPSA is currently the only
entity that provides domestic long distance and international voice telephone
services in Poland over its own network. The government has recently offered for
tender licenses to private operators to provide domestic long distance service
by the end of 1999 and international service by 2003, which will allow
alternative telecommunications operators to compete against TPSA in these
markets. We intend to bid for these licenses when they are offered for tender,
which may require us to enter into one or more joint-venture arrangements with
third parties.
In this increasingly deregulated environment, the Polish telecommunications
marketplace is undergoing significant changes. Mobile telephony operators have
been growing rapidly, consolidation transactions have commenced and additional
transactions are being considered by a number of network operators,
comprehensive new legislation has been introduced and regulatory requirements
are changing. Against this background, which includes a variety of opportunities
and risks, we believe that the Polish telecommunications market represents a
substantial opportunity for alternative telecommunications providers such as
Netia for the following reasons:
- HIGH DEMAND POTENTIAL. We believe that there is a substantial unmet demand
for telecommunications services in Poland, as evidenced by a low
fixed-line telephone penetration rate and generally long waiting periods
for connection of telephone services. Poland's fixed-line telephone
penetration rate was approximately 22% as of December 31, 1998, which is
significantly lower than penetration rates in Western Europe. Furthermore,
until recently the growing business sector in Poland has not had access to
the advances in telecommunications, especially in data transmission,
commonly available in Western Europe.
- INCREASINGLY STABLE, RAPIDLY GROWING ECONOMY. Poland is one of the
fastest-growing economies in Europe. Poland's GDP grew at annualized rates
of 6.1%, 6.9% and 4.8% in 1996, 1997 and 1998, respectively. In recent
years, the Polish government has encouraged foreign private investment,
which totaled approximately $30.7 billion between 1990 and 1998, with a
substantial majority of this investment being made over the last two
years. Poland has also successfully reduced its inflation rate from an
average rate of 250% in 1990 to approximately 11.8% in 1998, although the
Polish Zloty has experienced significant volatility against Western
currencies, including volatility in the first half of 1999.
- INTEGRATION WITH WESTERN EUROPE. Poland has been steadily integrating with
Western Europe. In 1994, in an effort to expand its trade opportunities in
Europe, Poland applied for membership in the EU. Negotiations for Poland's
accession into the EU commenced in March 1998.
In this context, the European Commission has entered into an "Accession
Partnership" with Poland, which will provide a framework for pre-accession
negotiations and assist Poland in its preparation for EU membership. The
Accession Partnership establishes priority areas for further regulatory, legal
and other harmonization, linking progress in this process to financial
assistance by the EU.
The Accession Partnership with Poland identified the acceleration of the
privatization restructuring of state enterprises (including TPSA) as a
short-term priority that needed to be addressed in 1998 and 1999. Accordingly,
in November 1998, the government commenced the privatization of TPSA by selling
a minority stake to the public. Medium-term priorities include, among many other
items, further improvements and efficient enforcement in the field of
competition, reinforcement of the antitrust and state aid authorities and
alignment with EU legislation on telecommunications. In its November 3, 1998
report on Poland's progress towards accession, the European Commission noted
that Poland needed to accelerate its progress towards a new telecommunications
regime, including the establishment of an independent regulator. See
"Telecommunications Regulation--The Polish Telecommunications Industry and the
European Union."
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- ACCESSION INTO OTHER TRADE ORGANIZATIONS. In 1996, Poland joined the
Organization for Economic Cooperation and Development (the "OECD"), which
is comprised of 29 of the world's wealthiest economies, all of which have
a commitment to open-market economics, pluralistic democracy and human
rights. In February 1997, Poland signed the World Trade Organization (the
"WTO") Accord on Basic Telecommunications and in March 1999, Poland became
a member of the North Atlantic Treaty Organization ("NATO").
- IMPROVING REGULATORY ENVIRONMENT. The current regulatory structure has
created a favorable environment for alternative telecommunications
operators such as Netia. Since the enactment of the Communications Act,
the Polish government has been liberalizing the regulatory environment,
and we believe that recent and anticipated changes in Poland's regulatory
regime may further improve the competitive and regulatory environment. In
1999, the Polish parliament began debating a new draft telecommunications
law and we expect that if it is implemented as proposed, the new law
should bring the country's telecommunications regime closer to EU
standards. We expect that possible benefits of this legislation, if
adopted, would include further tariff rebalancing and a revised
interconnection framework. Furthermore, regulatory authorities in Poland
have announced their intention to deregulate domestic long distance voice
service by the end of 1999 and international voice service at a later
date, expected to be 2003.
- FAVORABLE LICENSING TERMS AND LIMITED COMPETITION IN LICENSED TERRITORIES.
The Polish government has provided private telecommunications operators
with long-term licenses in order to provide sufficient time for these
operators to build out their networks and to provide stability in the
telephone industry. In general, Netia's licenses have terms of 10 to 15
years and may be extended after government approval. The Polish government
historically has also helped to create a favorable environment by
generally licensing only one private telecommunications operator (in
addition to TPSA) to provide fixed-line voice telephone services in any
particular geographic territory. As a result, in substantially all of our
licensed territories where local telephone service is available, our only
fixed-line competitor to date is TPSA. Even though this practice is likely
to change in one or more of our territories, the cost of adding a third
fixed-line network in any territory would be substantial, and we believe
our existing licenses and infrastructure provide us with a significant
competitive advantage over potential new entrants.
GROWTH OF THE POLISH FIXED-LINE TELEPHONE INDUSTRY
The Polish fixed-line telephone industry has experienced rapid growth in
recent years. Based on public information reported by TPSA, between 1993 and
1997, the number of TPSA subscriber lines in Poland grew by approximately 67%,
and during the same period the number of TPSA subscribers grew from 4.4 million
to 7.5 million. Total telecommunications revenues of TPSA were PLN 7.0 billion
($2.6 billion), PLN 8.9 billion ($2.7 billion) and PLN 10.1 billion ($2.9
billion) in 1996, 1997 and 1998, respectively, using the exchange rate at the
end of each such relevant period.
Future growth of the Polish telecommunications industry is expected to
result from both increasing penetration of newly constructed lines reaching
areas previously unserved or underserved by telephone service and increased
usage of lines in service. The MOC has stated that reaching the desired
penetration rate of at least 40% will require an estimated $10.0 billion of
investment by TPSA and all other operators by the year 2005. TPSA has reported
that in 1996 it connected approximately 804,000 new lines in 1996, approximately
937,000 lines in 1997 and an estimated 850,000 lines in 1998. Therefore, we
believe that, in order to achieve the government's stated objectives, a
significant number of the required new lines must be constructed by private
operators such as Netia. The demand for new lines and increased telephone usage
is expected to be driven by expected growth in GDP and a commensurate increase
in disposable income levels and business activity, as well as the number of
foreign corporations entering the Polish market which generally have
sophisticated telephone needs.
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MARKET CHARACTERISTICS AND EXISTING TECHNOLOGY AND SERVICE
As a result of the government's historical practice of licensing only one
private telecommunications operator to provide fixed-line telephone service in
any particular geographic territory, in substantially all of our licensed
territories where local telephone service is available, our only fixed-line
competitor is TPSA. Recent MOC statements indicate that the practice is likely
to change, which could increase competition in one or more territories, although
the cost to another operator of adding a third fixed-line network in any
territory could be substantial. In addition, while other private fixed-line
operators exist in Poland, their presence is currently limited. However, in the
first half of 1999 there has been movement on the part of some operators, such
as El-Net and its parent company, to consolidate the market for alternative
service providers. See "Business--Competition."
Despite the rapid growth in its economy, Poland is significantly underserved
by current telecommunications service providers, and demand for telephone
service substantially outweighs the supply of existing fixed-line telephone
service. Unmet demand for telephone service in Poland is evidenced by waiting
periods (which may vary substantially by region) for connection of telephone
services from TPSA averaging three years, with over 2.15 million people waiting
for connection as of March 31, 1998. Furthermore, of the lines that are in
service in Poland, a substantial majority are in urban areas. Suburban and rural
areas are generally characterized by more-limited telephone service and longer
waiting times. The following chart compares Poland's fixed-line penetration rate
for telephone service with those of certain other European countries by year end
1997, the latest date for which such international data were available:
FIXED-LINE PENETRATION RATES OF SELECTED EUROPEAN COUNTRIES
<TABLE>
<CAPTION>
COUNTRY 1997 ACTIVE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Sweden............................................................................ 67.9
Switzerland....................................................................... 66.1
Denmark........................................................................... 63.3
Norway............................................................................ 62.1
France............................................................................ 57.5
Netherlands....................................................................... 56.4
Finland........................................................................... 55.6
Germany........................................................................... 55.0
United Kingdom.................................................................... 54.0
Greece............................................................................ 51.6
Austria........................................................................... 49.2
Belgium........................................................................... 46.9
Italy............................................................................. 44.7
Ireland........................................................................... 41.1
Spain............................................................................. 40.3
Portugal.......................................................................... 40.2
Czech Republic.................................................................... 31.9
Hungary........................................................................... 30.4
Turkey............................................................................ 25.0
Poland............................................................................ 19.4(1)
Romania (2)....................................................................... 14.0
</TABLE>
SOURCE: INTERNATIONAL TELECOMMUNICATIONS UNION.
- ------------------------
(1) ITU data for 1997. The figure reported for 1998 by various Polish sources
was approximately 22%.
(2) 1996 data. 1997 data not available.
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Poland also lags behind most of its European counterparts in terms of
existing technology for fixed-line telephone services. In many regions, TPSA's
infrastructure contains old copper lines and a large number of old analog
switches. However, TPSA's infrastructure in major cities, including Gdansk,
Katowice, Krakow, Lublin and Poznan, is generally as technologically advanced as
our network. Additional technological developments and growing demand for data
transmission services on the part of business customers may force the existing
operators to accelerate the upgrading of their respective networks.
Digital switching capacity provides customers with quicker connection,
better transmission quality and fewer outages while providing the supplier with
the capability to provide advanced services. The following chart demonstrates
that, as of December 31, 1997, the latest date for which such international data
were available, the percentage of digital lines (lines connected to a digital
switch) as a percentage of all fixed telephone lines in Poland fell well short
of that in most European countries:
PERCENTAGE OF DIGITAL LINES
<TABLE>
<CAPTION>
COUNTRY % OF DIGITAL
- --------------------------------------------------------------------------------- ---------------
<S> <C>
Finland.......................................................................... 100
United Kingdom................................................................... 100
Norway........................................................................... 100
Germany.......................................................................... 100
Netherlands...................................................................... 100
Switzerland...................................................................... 99
Sweden........................................................................... 99
France........................................................................... 96
Italy............................................................................ 94
Ireland.......................................................................... 92
Portugal......................................................................... 88
Denmark.......................................................................... 86
Table Average.................................................................... 82
Austria.......................................................................... 82
Spain............................................................................ 81
Belgium.......................................................................... 78
Hungary.......................................................................... 74
Greece........................................................................... 65
Poland........................................................................... 58
Czech Republic................................................................... 54
Romania(1)....................................................................... 23
</TABLE>
SOURCE: INTERNATIONAL TELECOMMUNICATION UNION.
- ------------------------
(1) 1996 data. 1997 data not available.
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BUSINESS
GENERAL
Netia is the largest alternative fixed-line telecommunications operator in
Poland. As of June 30, 1999, we owned and operated approximately 1,150 route
kilometers (718 miles) of state-of-the-art local and regional digital
fiber-optic networks connecting 193,607 active subscriber lines. We provide a
broad range of telecommunications services, and we are aggressively targeting
large and medium-sized business customers.
We have 23 licenses to provide local voice telephony services in territories
covering approximately 33% of the total population of Poland. Our local
telephone license territories cover five of the country's ten largest urban
areas, including many of the industrial and commercial centers of Poland. Our
licenses cover approximately 50% of the population living in these ten urban
areas. In April 1999, we secured the benefit of a license to provide Internet
and data transmission services throughout Poland.
We are operating and continuing to construct local access networks serving
business and residential customers in 21 of our 23 local voice telephony license
territories. We are designing and, in certain areas, have begun construction of
a fiber-optic backbone linking these local access networks and five major
cities, including Warsaw, not covered by our existing voice telephony licenses.
Under the new data transmission license, we plan to construct and interconnect
fiber-optic rings in these five major cities. Using this network infrastructure,
we plan to maximize our penetration of the growing market for business
telecommunications in Poland, which includes an increasing number of business
customers operating through multiple locations requiring advanced value-added
services such as Internet and data transmission services.
The range of telecommunications services we offer includes switched
fixed-line telephony for directly connected customers, ISDN, Internet services,
leased lines and, since June 1999, voice mail. The advanced technology of our
network, combined with our emphasis on superior customer service, have allowed
us to provide our customers with reliable, high-quality services and compete
successfully with our principal competitor, TPSA, the state-controlled
telecommunications carrier.
The Internet is just beginning to make an impact in Poland. We plan to
expand our current Internet-access services and focus on providing our target
client base with reliable Internet access on a dial-up or dedicated-line basis.
We have recently begun developing Netia-branded ISP products for both the
residential and business markets, and we plan to establish Internet POPs in each
of Poland's ten largest urban areas by the end of 2000. In addition, we plan to
offer website hosting and Internet housing facilities and to develop intranet
services for business customers. We believe that when we complete our
fiber-optic network, we will be able to provide an Internet backbone service for
third-party ISPs in each of Poland's key markets.
OUR HISTORY
Netia is a privately owned Polish joint-stock company that was formed in
1990 by Polish entrepreneurs with backing from several U.S. and international
investors as a vehicle for pursuing telecommunications-related activities in
Poland. Since its inception, Netia has pursued government licenses to construct
local telephone networks throughout Poland. Historically, in seeking a license,
Netia on occasion has joined with the local municipality to be covered by such
license and, in certain cases, other investors, to form joint-venture companies.
As Netia gained experience and enhanced its position in the Polish
telecommunications market, it principally applied for licenses on its own and
will attempt to acquire the remaining minority ownership in some of its
operating companies currently held by certain municipalities. We conduct all of
our telecommunications activities through two principal wholly owned
subsidiaries, Netia Telekom and Netia South. Netia Telekom and Netia South are
holding companies
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for 12 individual operating companies formed to acquire and hold the licenses
for the regional territories. The licensed territories in the Central, East,
North and West Regions of Poland are managed by Netia Telekom and the licensed
territories in the South Region are managed by Netia South. Uni-Net is a
subsidiary of Netia Holdings S.A. which conducts specialized mobile radio
operations and comprises a portion of Netia's non-telecommunications businesses,
which we intend to sell if and when a favorable commercial opportunity to do so
becomes available. See "Business--Operating Companies."
To raise capital and to enhance the development of its business operations,
beginning in 1994 Netia sold equity interests to Dankner and Trefoil. In 1995,
Dankner and Trefoil sold a portion of their equity interests in Netia to GSCP
and the GS Entities.
We determined that identifying an investor with significant operational
telecommunications experience could assist us in developing all of our existing
and future licenses and could thereby help us achieve our goal of becoming the
preferred provider of the Polish business and residential telecommunications
customer. Thus, in 1995, we entered into a shareholders' agreement with Telia
pursuant to which Netia and Telia agreed to form Netia Telekom and pursuant to
which Netia transferred its interests in nine of its operating companies to
Netia Telekom, with the parent company and Telia owning 75% and 25%,
respectively, of the outstanding equity interests in Netia Telekom. We selected
Telia as a partner because Telia is a well-established European
telecommunications company based in a country with close historical links to
Poland, and has experience building and operating local telephone networks in
both developed and emerging market countries. In October 1996, Netia and Telia
entered into a separate shareholders' agreement to pursue the development of a
local telecommunications network within the Katowice region through Netia South,
with the parent company and Telia owning 75% and 25%, respectively, of the
outstanding equity interests in Netia South. Netia South had previously been a
wholly owned subsidiary of Netia.
In September 1997, (i) Netia granted Telia an option (the "Telia Exchange
Option") to effectively exchange all, but not less than all, of its interests in
Netia Telekom and Netia South for a 26.4% direct equity interest in Netia within
18 months of the execution of the Telia Exchange Option and (ii) Netia granted
Telia an option (the "Telia Incentive Option") to purchase 10.0% of the equity
interests in the parent company. See "Certain Relationships and Transactions
with Related Parties."
Following a period during which our sole source of funding for the
construction of our network was equity capital provided by Netia's shareholders,
including Telia, Dankner, Trefoil, Shamrock and the GS Entities and, to a much
lesser extent, financing from vendors such as the Alcatel Consortium
("Alcatel"), in the third quarter of 1996, we arranged credit facilities with
the European Bank for Reconstruction and Development (the "EBRD") for DM 114.75
million and $85 million, and with the Nordic Investment Bank for $20 million, to
finance the build-out of the network in Netia Telekom's licensed territories
(the "EBRD Facility") and sold to the EBRD a 10% interest in Netia Telekom. In
September 1997, Netia and Telia agreed to purchase the EBRD's equity interest in
Netia Telekom on a pro rata basis. In September 1998, we completed the purchase
of the entire interest in Netia Telekom previously owned by the EBRD. See
"Certain Relationships and Transactions with Related Parties-- EBRD Equity
Agreements."
Also in September 1997, Netia South and its subsidiaries entered into the
Netia South Bank Facility. This facility was restructured in October 1998. See
"Description of Certain Indebtedness-- Netia South Bank Facility."
In November 1997, Netia Holdings B.V. ("Holdings B.V."), a wholly owned
subsidiary of Netia Holdings S.A., issued the 1997 Senior Notes, consisting of
$200,000,000 aggregate principal amount of 10.25% Senior Dollar Notes due 2007,
$193,550,000 aggregate principal amount at maturity of 11.25% Senior Dollar
Discount Notes due 2007 and DM 207,062,000 aggregate principal amount at
maturity of 11.0% Senior DM Discount Notes due 2007. See "Description of Certain
Indebtedness--The 1997 Senior Notes."
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In July 1998, Telia notified Netia of Telia's determination to exercise the
Telia Exchange Option and the Telia Incentive Option. Accordingly, in August
1998, Telia, Dankner, Trefoil, Shamrock and Netia entered into an option
exercise agreement, a shareholders' agreement and other related agreements. The
completion of the transactions contemplated by those agreements was conditioned
upon Netia having completed an initial public offering of its common shares by
December 31, 1998. Thereafter, Telia determined to exercise the Telia Exchange
Option and the Telia Incentive Option without regard to whether Netia completed
an initial public offering by December 31, 1998. Telia, Dankner, Trefoil,
Shamrock and Netia entered into a series of amended and restated agreements to
effect the exercise of Telia's options and to set forth their agreement on
certain matters relating to their ownership interests and the governance of
Netia. See "Management," "Principal and Selling Shareholders" and "Certain
Relationships and Transactions with Related Parties." These agreements
effectively replaced a series of agreements and undertakings previously entered
into among or made by Telia, Dankner, Trefoil, Shamrock, the GS Entities and
Netia, Netia Telekom and Netia South with respect to the funding, management and
operation of Netia and its subsidiaries, including certain funding commitments
made by Telia, Dankner, Trefoil, Shamrock and the GS Entities with respect to
Netia, Netia Telekom and Netia South for the benefit of each other and that of
certain creditors of Netia.
The transactions to effect the exercise of the Telia Exchange Option and the
Telia Incentive Option were completed in March 1999 and Telia received 3,727,340
common shares of Netia pursuant to the Telia Exchange Option in exchange for its
interests in Netia Telekom and Netia South, and 1,447,168 common shares of Netia
upon the exercise of the Telia Incentive Option for an aggregate cash purchase
price of approximately $23.9 million.
In April 1999, Telia, Dankner, Trefoil, Shamrock, the GS Entities and Netia
executed an agreement pursuant to which the parties caused Netia to open a new
share emission for the purpose of effecting the Telia Capital Increase described
in "Certain Relationships and Transactions with Related Parties--Option Exercise
Agreement." In May 1999, we consummated the Telia Capital Increase by issuing an
aggregate of 2,597,402 shares of our common shares to Telia and certain existing
shareholders for the aggregate amount of $50 million. Of that amount, Telia paid
approximately $49.6 million for 2,575,847 shares, thereby increasing its
interest in Netia at that time to 42.7%. The registration of the shares issued
pursuant to the Telia Capital Increase was completed in June 1999. The Telia
Capital Increase is not a condition to this Offering.
In May 1999, Warburg and Netia executed a subscription agreement (the
"Warburg, Pincus Subscription Agreement") pursuant to which Warburg agreed to
purchase newly issued shares of Netia representing approximately 12.4% of
Netia's common shares (prior to the IPO) for $50 million. The Warburg
Transaction was funded in June 1999 and registration by the Commercial Court in
Warsaw of the common shares issued to Warburg was completed in July 1999. See
"Certain Relationships and Transactions with Related Parties Agreements to be
Entered into in Connection with the Warburg Transaction."
In June 1999, we issued the Old Notes.
In August 1999, Netia sold 5.5 million of its ADSs in the IPO at the
offering price of $22.00 per ADS (before underwriting commissions and
transaction expenses). Each ADS represents one common share of Netia Holdings
S.A. The ADSs are administered by The Bank of New York as depositary and are
listed and traded on the Nasdaq Stock Exchange (the National Market) under the
symbol NTIA. The ADSs have also been approved for quotation on the SEAQ
International automated quotation system. We received net proceeds of
approximately $114.6 million from the IPO.
CORPORATE STRUCTURE
Netia Holdings S.A. is a holding company with limited assets of its own that
conducts all of its telecommunications activities through two principal
subsidiaries, Netia Telekom and Netia South, which
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in turn are holding companies for 12 individual operating companies (the
"Operating Companies") formed to acquire and hold the licenses for the regional
territories. The licensed territories in the Central, East, North and West
Regions of Poland are managed by Netia Telekom and the licensed territories in
the South Region are managed by Netia South. Uni-Net is a subsidiary of Netia
Holdings S.A. which conducts specialized mobile radio operations and comprises a
portion of Netia's non-telecommunications businesses (the
"Non-telecommunications Businesses") which we intend to sell if and when a
favorable commercial opportunity to do so becomes available. While Uni-Net is
marginally profitable, Netia intends to sell this subsidiary because its
business is not part of Netia's overall business strategy and because it is
obligated to do so under certain obligations to Telia.
The following chart outlines the organizational structure of Netia after
giving effect to the IPO.
[LOGO]
(1) Gives effect to Warburg Transaction.
(2) Netia Holdings B.V. and Netia Holdings II B.V. are special-purpose
finance subsidiaries formed in August 1997 and June 1998,
respectively, to issue the 1997 Senior Notes and the Notes,
respectively.
(3) Two of the licenses belonging to Netia South are managed by the
North Region and the West Region because of the proximity of their
licensed territories.
(4) Certain of the Operating Companies are not wholly owned by Netia.
See "Business-- Operating Companies."
PRINCIPAL SHAREHOLDERS
We benefit from significant support and expertise from our largest
shareholder, Telia, which presently owns a 29.25% equity interest in Netia.
Telia, which is owned by the Swedish government, has over six million
telecommunications customers and is the largest telecommunications company in
the region comprised of Denmark, Finland, Norway and Sweden. Telia operates
primarily through joint-venture companies in locations that include Estonia,
Latvia, Lithuania, Russia, South America, India, Southeast Asia and the United
Kingdom.
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Telia has invested an aggregate of $109.8 million in Netia and after
completion of the IPO has three representatives, including the Chairman, on our
11-person supervisory board. One of Telia's representatives on our supervisory
board serves as Head of Business-Area International for Telia. Telia has played
a significant role in our development, assisting with the design, operation and
maintenance of our network and in the formation and execution of our business
strategy. Telia has also contributed its expertise in data and Internet network
design, sales, marketing, training, advanced technology support, equipment
procurement, billing and customer services and the development of pricing
strategies.
In March 1999, the governments of Sweden and Norway agreed to consummate the
merger of Telia and Telenor, the Norwegian state-owned national
telecommunications company. The merger has been approved by the relevant
competition authorities and the parliaments of Sweden and Norway. Upon
completion, the combined company should be one of the leading telecommunications
companies in Europe, and it is expected to be privatized by the end of 2000.
Based on publicly reported information, 1998 pro forma revenue and operating
income for the combined businesses would have been SEK 81 billion (approximately
$9.7 billion) and SEK 10 billion (approximately $1.1 billion), respectively.
Based on information provided by Telia, we believe that the merged entity will
continue Telia's investment in Netia consistent with Telia's existing policy of
investing in the Baltic region.
Netia's other principal shareholders include Warburg, Dankner (a publicly
traded investment company located in Israel with substantial investments in
telecommunications), Trefoil, and Shamrock. Upon completion of the IPO and the
Warburg Transaction, Telia, Dankner, Trefoil and Shamrock, the GS Entities and
Warburg owned 29.25%, 9.39%, 5.93%, 3.08%, 4.67% and 9.80% of our common shares,
respectively. Telia has the right to appoint up to three members, Dankner,
Trefoil and Shamrock, acting together, has the right to appoint up to three
members; Warburg has the right to appoint one member; and Telia, Dankner,
Trefoil, Shamrock and Warburg, acting together, have the right to appoint one
additional member to our 11-member Supervisory Board, in each case subject to
these investors maintaining certain share ownership levels. Pursuant to an
agreement between Netia and BRE Bank, BRE Bank purchased approximately 16% of
our ADSs in the IPO and Telia, Dankner, Trefoil, Shamrock and Warburg agreed to
vote their shares in favor of electing a BRE Bank representative. to our
Supervisory Board.
OUR STRENGTHS
We have competitive strengths that we believe position us to continue to
take advantage of the significant unmet demand for high-quality
telecommunications services in Poland. These strengths include the following:
- ESTABLISHED MARKET POSITION. Since commencing commercial operations in
1994, we have made significant investments in establishing our brand name,
network operations and corporate infrastructure. We believe that our
significant size and marketing, sales and customer service experience give
us a competitive advantage over most other alternative providers whose
networks are generally at earlier stages of development.
- SIGNIFICANT SHAREHOLDER SUPPORT AND EXPERTISE. Telia, one of Europe's
leading telecommunications providers, continues to play a significant role
in the development of Netia's operations through a broad range of
strategic, financial and operational support. Telia has invested an
aggregate of $109.8 million and, after giving effect to the Warburg
Transaction and the IPO, owns a 29.25% equity interest in Netia.
- TECHNOLOGICALLY ADVANCED DIGITAL NETWORK. We believe that our fully
digital fiber-optic network allows us to provide our customers with a
significantly higher quality of telephone service than is generally
available in much of Poland.
- ATTRACTIVE CONCESSION AREAS. Our licensed territories include several
areas ranking among the most economically developed in Poland, and
collectively have a GDP per capita that is higher
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than, and an unemployment rate that is lower than, the national average.
Businesses typically generate up to four times the average revenues per
line of residential customers and we believe that they are generally
underserved in our licensed territories.
- LOW COST OF OUR LICENSES. We have secured our licenses on relatively
attractive terms as measured by license fees paid and payable per capita
for each license area. Our licenses have been acquired at costs which we
believe are comparatively lower than the prices paid by many other
alternative operators. We consider this cost comparison to be particularly
favorable in light of the average demographics of our licensed
territories.
- SUPERIOR CUSTOMER SERVICE. We believe that the level of customer service
offered by our principal competitor, TPSA, generally has not been up to
the standards of Western telecommunications companies. We believe that the
quality of our customer service is a key competitive advantage over TPSA.
- EXPERIENCED MANAGEMENT. Our senior management team has extensive
experience in the management of Western corporations involved in the
telecommunications, media and technology sectors. We combine this
experience with our strong shareholder support to apply centralized
Western management policies and techniques in areas such as financial
accounting, treasury, network construction, marketing and customer
service, while working with local managers to adapt such policies and
techniques to the Polish market.
STRATEGY
Our goal is to build upon our position as the leading alternative fixed-line
telecommunications operator in Poland and to increase cash flow and maximize
value by becoming the preferred provider to Polish telecommunications customers.
To accomplish this objective, Netia intends to focus on the following key areas:
- TARGET BUSINESSES. We are targeting primarily large and medium-sized
business customers. Business customers often purchase multiple lines,
generate a significantly higher level of telecommunications traffic and
purchase more value-added services than do residential customers. We will
continue to pursue opportunities to expand the scope and quality of the
service we offer to business customers.
- INTENSIFY PROMOTION OF ADVANCED VALUE-ADDED TELECOMMUNICATIONS SERVICES.
We intend to expand our ability to provide our target customers with a
broad range of advanced value-added telecommunications services. We plan
to leverage our significant investment in our network by promoting
high-value services such as Internet access, including dial-up and
dedicated-line services, leased lines, data transmission services,
including frame relay and managed intranet services, and enhanced voice
services, including voice mail and toll-free services.
- PROVIDE SUPERIOR CUSTOMER-ORIENTED SERVICES. We are seeking to build a
sustainable competitive advantage by offering services to all of our
customers that are consistently superior to those available from TPSA.
Delivering a level of customer service similar to that provided by leading
Western telecommunications operators is a key element in establishing
customer loyalty and attracting new customers, and we intend to utilize
our customer service program as an important means for distinguishing
ourselves competitively.
- PRICE OUR SERVICES COMPETITIVELY. We will continue to offer
telecommunications services at competitive prices. We believe our cost
structure allows us to continue to charge competitive prices. In
particular, we believe the advanced nature and high quality of our fully
digital network, which enhances our ability to control operating and
maintenance costs, and the relatively low cost of our licenses are cost
advantages.
- OBTAIN ADDITIONAL LICENSES TO EXPAND THE SCOPE OF OUR SERVICES. We will
seek to expand the scope of services we can offer by pursuing licenses to
provide additional telecommunications services throughout Poland.
Consistent with this strategy, we recently secured the benefit of a
national
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license to provide Internet and data transmission services. We also plan
to bid for licenses to provide domestic long distance and international
service when they are offered for tender by the government. If we are
successful in obtaining these licenses, we will be able to offer these
services directly to our customers over our network instead of paying TPSA
or other operators an interconnection fee to carry these calls. In
addition, we will continue to pursue a license to provide local telephone
service in the city of Warsaw. We also regularly evaluate the possibility
of expanding the scope of our network through the acquisition of the
holders of local licenses for areas that are complementary to our existing
licensed territories. However, it is impossible to predict whether we will
complete any such acquisitions or if so on what terms. If we do determine
to proceed with an acquisition, it is likely that we will need to obtain
additional financing to pay for the acquisition and to build out our
network in those new areas.
- EXPAND THE GEOGRAPHIC COVERAGE OF OUR NETWORK TO REACH TARGET CUSTOMERS.
In order to enhance our ability to provide a full range of services to our
target customers nationally, we will continue to strategically expand the
areas covered by our network. We have designed our network to access
business customers first. We then plan to build out the network to reach
surrounding residential areas and premium residential customers. We plan
to focus our efforts on constructing a geographically contiguous
fiber-optic backbone with data transmission capabilities which would link
our regional and local access networks, and which will include the
fiber-optic rings we are constructing in major cities and metropolitan
areas.
SERVICES AND PRICING
SERVICES
We provide our customers with a broad range of basic and value-added
telecommunications services under the "Netia" brand name. Our services include
the following:
- SWITCHED TELEPHONY FOR DIRECTLY CONNECTED CUSTOMERS. We provide a full
range of switched telephone services including local, national and
international calls. We also provide a full range of enhanced services
such as call waiting, call forwarding and categorized billing which are
included in the basic monthly service package. For an additional charge,
we offer other special services such as personalized ("easy-to-remember")
phone numbers, conference calling, itemized billing and call barring.
- ISDN. All of Netia's switches are ISDN-equipped and all of our existing or
potential customers have access to this service.
- VOICE MAIL. In June 1999, Netia became the first Polish fixed-line
operator to announce the availability of voice mail services across all of
its networks. The basic voice mail package may eventually be included in
one of our two basic pricing plans.
- LEASED LINES. We currently offer our customers leased line connections
within our existing license areas having transmission speeds from 64
kilobytes per second to 2 megabytes per second. As our network expands and
as we implement additional services under the new data transmission
license, we expect significant growth in this area.
- INTERNET SERVICES. Together with local ISPs, we currently provide basic
Internet access to all of our customers. We have recently begun developing
Netia-branded ISP products for both the residential and business markets
and we plan to establish Internet POPs in each of Poland's ten largest
urban areas by the end of 2000.
- OTHER SERVICES. Other services include PABX solutions and private
corporate networks.
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PRICING
The usage fees charged for any telephone call originated over our network
depend on a number of factors, including the type of call (local, domestic long
distance or international), duration of call, time of day and day of the week on
which the call has been placed. We are required to pay interconnection fees to
TPSA for all domestic long distance and international telephone calls and
outgoing mobile network calls that originate on our network. See
"Interconnection Agreements and Fees." Pursuant to the Communications Act,
operators are allowed to determine tariffs independently based on competition
and other market factors. The government, however, may determine price ceilings
for basic services, and each operator is required to report its fee structure to
the MOC. To date, the MOC has not implemented any price ceilings on
telecommunications services. Pursuant to Netia's licenses, in cases where
Netia's lines are replacing existing TPSA lines, Netia is not able to charge
installation fees to new subscribers. However, Netia is able to charge
installation fees on all new and incremental lines.
Historically our pricing strategy had been to set installation fees, fixed
monthly fees and usage fees precisely in line with those currently established
by TPSA, except in certain instances where high-usage business customers had
been given discounts on connection fees as an incentive to subscribe to our
services. Originally, Netia offered its customers a package that matched TPSA's
pricing structure (the "Blue Tariff"). Beginning on July 1, 1997, Netia began to
offer an alternative package that targets high-usage customers, in which usage
fees were lowered while the fixed monthly fee was raised (the "Green Tariff").
The Green Tariff provides us with a marketing distinction by offering customers
a pricing option not presently available to TPSA customers.
The table below contains a summary of our two pricing plans (excluding 22%
VAT) as of July 1, 1999. Our customers may choose between the Blue Tariff (lower
monthly fee and higher usage fees) and the Green Tariff (higher monthly fee and
lower usage fees). Historically, we have followed TPSA's practice of adjusting
tariffs semi-annually to account for inflation.
TARIFF STRUCTURE
<TABLE>
<S> <C> <C>
Installation fee (new connection to our network)..................... PLN 460.00 $ (117.06)
Installation fee (reconnection of existing line)..................... PLN 40.00 $ (10.18)
Fixed monthly fee (the Blue Tariff).................................. PLN 15.00 $ (3.82)
Fixed monthly fee (the Green Tariff)................................. PLN 18.00 $ (4.58)
</TABLE>
<TABLE>
<CAPTION>
WEEKDAYS 6PM-10PM;
SATURDAY, SUNDAY AND
WEEKDAYS 8AM-6PM HOLIDAYS WEEKDAYS 10PM-8AM
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
GREEN GREEN GREEN
BLUE TARIFF TARIFF BLUE TARIFF TARIFF BLUE TARIFF TARIFF
----------- ----------- ----------- ----------- ----------- -----------
LOCAL(1)..................................... PLN 0.24 PLN 0.23 PLN 0.24 PLN 0.23 PLN 0.24 PLN 0.23
DOMESTIC LONG DISTANCE
Up to 25 km(1)............................. 0.24 0.23 0.24 0.23 0.24 0.23
25 km-100 km(2)............................ 0.48 0.46 0.36 0.35 0.24 0.23
Over 100 km(2)............................. 0.64 0.61 0.48 0.46 0.32 0.31
INTERNATIONAL(2)(3)
Zone 1 (including the Czech Republic and
Ukraine)................................. 1.39 1.31 1.39 1.31 1.39 1.31
Zone 2 (including Sweden and Germany)...... 1.55 1.46 1.55 1.46 1.55 1.46
Zone 3 (including the United Kingdom and
France).................................. 1.69 1.59 1.69 1.59 1.69 1.59
Zone 4 (including Spain and Iceland)....... 1.87 1.76 1.87 1.76 1.87 1.76
Zone 5 (including Algeria)................. 2.10 1.98 2.10 1.98 2.10 1.98
Zone 6 (including the United States and
Australia)............................... 3.46 3.27 3.46 3.27 3.46 3.27
Zone 7 (including China and India)......... 6.21 5.86 6.21 5.86 6.21 5.86
</TABLE>
- ------------------------
(1) Charges for each three-minute connection (for each six-minute connection
from 10 pm--8 am).
(2) Charges for each one-minute connection (for each two-minute connection from
10 pm--8 am).
(3) Zones are divided primarily based on country and distance.
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INTERCONNECTION AGREEMENTS AND FEES
Each of Netia's operating subsidiaries with commercial operations has an
interconnection agreement with TPSA which establishes both technical
specifications for interconnection and payment settlement procedures. TPSA is
currently the only entity authorized to provide domestic fixed-line long
distance and international telephone services in Poland over its own network.
Accordingly, Netia must access the TPSA network in order to send or receive
domestic long distance and international calls originating from, or received by,
our customers. All operators of public networks, including TPSA, are obliged by
law to provide interconnection to Netia, the terms of which must be specified in
interconnection agreements. In an effort to avoid any abuse by TPSA, functional
sharing guidelines were issued by the MOC which have formed the basis for
interconnection agreements between TPSA and the private local operators,
although such guidelines have since been revoked. See "Telecommunications
Regulations--Interconnection."
Generally, pursuant to the interconnection agreements, settlement costs paid
to TPSA for outgoing (I.E., those originating from our customers) international
calls are 70% of TPSA's tariffs for such calls. Settlement costs for outgoing
domestic long distance calls range from 28% to 40% of TPSA's tariffs for such
calls. These settlement costs are independent of the rates Netia charges its
customers for placing such calls, although one of our tariff options to our
customers is effectively pegged to the rates charged by TPSA for similar calls.
Netia is not paid for incoming traffic (I.E., calls terminating on our network).
In April 1999, we instituted anti-monopoly proceedings against TPSA relating
to interconnection fees. We cannot assure you that the proceedings will be
successful or that they will result in our obtaining more favorable
interconnection arrangements. See "--Legal Proceedings."
In October 1998, the MOC stated that it intends to introduce in 1999 a
universal framework for all interconnection settlements between fixed-line
telecommunications operators. The planned new interconnection regime would
specify standard cooperation terms, principles of settlement and procedures for
negotiations and dispute resolutions among parties. The MOC has stated that in
the future, settlement rates among operators should be based on actual costs
incurred and the investments undertaken by each operator, as well as by
reasonable overhead costs. The MOC has also stated that in some cases cost
allocation may be based on well-documented estimates. In early 1999, the Polish
parliament began debating a new draft telecommunications law that contemplates
cost-based interconnection settlement rates. In September 1999, the MOC
introduced a new, cost-based interconnection regime. However, we do not
currently know what effect the new interconnection regime will have on our
operations when fully implemented.
In August 1999, Netia entered into direct cooperation agreements with
operators of the GSM 900 MHz mobile networks, Polska Telefonia Cyfrowa S.A.
("Era") and Polkomtel S.A. ("GSM Plus"). Netia began negotiations with Era and
GSM Plus in January 1999. We have concluded cooperation agreements which should
permit us to interconnect directly with ERA and GSM Plus and to provide a direct
exchange of traffic between Netia's local networks and Era and GSM Plus via
interconnection points that will be constructed by the parties. Netia's goal is
to interconnect directly with these mobile networks, thereby bypassing TPSA. We
expect that the interconnection charges payable by Netia to these mobile
operators will be lower than those currently paid by Netia for calls connected
through TPSA.
TARIFF REBALANCING
TPSA has stated that, historically, it has not based its tariffs (and hence
also the interconnection fees charged to other operators such as Netia) on the
actual cost of services provided. The lack of cost transparency, according to
TPSA, has resulted in an imbalance between relatively low charges for local
traffic and relatively high charges for long distance and international traffic.
In 1998, TPSA announced that it had begun rebalancing its tariff structure by
decreasing the ratio of tariffs for certain long distance and international
calls to tariffs for local calls.
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In the first four months of 1999, TPSA increased its local tariffs and
connection fees by 10% and 15%, respectively, and we have matched these
increases. In April 1999, TPSA also announced an increase in its monthly fee
which we also matched. Most recently, TPSA raised local tariffs by another 14%
and decreased its long distance tariffs by 16-18% as of July 1, 1999. In
September 1998, TPSA decreased its long distance tariffs by 20% to 25% and we
expect that Poland's telecommunications market will continue to undergo further
tariff rebalancing as the country moves toward EU standards. In July 1999, MOC
announced that the process of tariff rebalancing should continue until the end
of 2003. Since our revenues are derived primarily from local tariffs, we expect
to benefit if this rebalancing trend continues.
MARKETING AND SALES
Our marketing and sales operations are organized into two groups:
centralized marketing, which promotes consistent and unified marketing at a
national level; and regional sales, which offers personalized sales and customer
services. The responsibilities of Netia's central marketing group include
conducting market research and customer surveys, promoting the "Netia" brand
name and advertising to stimulate usage of our services. Public relations and
relations with investors are conducted by a separate group of employees. In
addition, Netia has formed a centralized sales force to concentrate on acquiring
large national accounts in Poland. Our regional sales forces identify potential
customers, conduct door-to-door marketing, effect sales to customers and conduct
customer care. As of June 30, 1999, Netia employed 268 marketing and sales
personnel (including temporary salespersons).
MARKETING AND SALES STRATEGY
Our marketing and sales strategy consists of the following elements:
- - FOCUSING ON BUSINESSES AND HIGH-VOLUME CUSTOMERS. In focusing its marketing
and sales efforts on high-volume customers, Netia divides the
telecommunications market into business and residential segments and uses a
different marketing program for each.
BUSINESS CUSTOMERS. Netia focuses the majority of its direct sales
efforts on identifying and acquiring business customers. In marketing to
potential business customers, Netia uses its trained business sales force.
In each of the Company's regions, a sales and marketing manager leads a team
of salespersons that focuses on acquiring additional business customers.
These employees participate in training programs covering our services and
the general telecommunications needs of our business customers. Our sales
force identifies and then makes formal presentations and personal visits to
each potential business customer. During the marketing process, Netia's
sales force, assisted by its technicians, works with the potential customer
to assess its specific telecommunications needs and, where appropriate,
offers a package of services designed specially to meet those needs. Netia's
sales and marketing department is in the process of organizing a dedicated
team of business managers for large accounts who will serve "high-volume"
business accounts. In April 1999, we launched a promotional campaign
exclusively targeting the business sector. This campaign includes a new
"Netia Business" brand label and special tariff schedule for business
customers.
RESIDENTIAL CUSTOMERS. In marketing to potential residential customers,
Netia primarily relies on mass advertising and its customer service centers.
Netia's residential marketing efforts in a geographic area are conducted by
its local customer service representatives and are focused on targeting
potential high-use residential customers. Many of our customer service
employees are also responsible for marketing and support of residential
customers. These employees participate in training programs covering our
services and customer service practices. These employees currently operate
out of local customer service and sales centers. Before our network becomes
operational in an area, our customer service representatives begin marketing
efforts by distributing a
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newsletter describing our services and encouraging potential subscribers to
contact our local customer service center to sign contracts.
- - PROMOTING A NATIONAL BRAND NAME. Our advertising and promotional strategy
centers around the promotion of a nationwide brand name, "Netia," which is
viewed positively by the Polish consumer and that is associated with quality
and advanced technology. Although we believe that the "Netia" brand name is
generally well recognized and well regarded throughout our licensed
territories, we intend to continue efforts to broaden its market recognition.
Netia maintains a national uniformity in the coloring and signage of its
equipment, its fleet of approximately 300 vehicles, its buildings and the
uniforms of its technical personnel in order to create brand awareness and
reinforce the professional image of Netia.
Netia has registered the trade names "Netia" and "Netia Telekom" and the
trademark "Netia" (logo with diamond) and is currently seeking to register the
trade names "Netia on Line," "Netia Business," "Inter-Netia," "Netia ISDN" and
"Netia.com" in Poland. The Polish intellectual property law protecting trade
names is substantially comparable to similar laws of the EU and the United
States. However, the enforcement of intellectual property laws in Poland may
be less stringent than in the EU and the United States.
Beginning in 1999, Netia began developing its "Netia Business" concept, which
included an extensive image-building campaign featured in all key
Polish-language and English-language business publications and an aggressive
outdoor advertising campaign. Netia has also begun to run testimonial
advertising under the banner "The Biggest Companies in Poland have chosen
Netia." In 1999, we began positioning ourselves as a viable alternative
provider in large big cities such as Gdansk, Poznan, Katowice, Krakow, Opole
and Lublin, that are located within our license territories. Supporting this
activity, we are also launching one of our largest direct mail campaigns
targeted at the business sector. In May and June 1999 we mailed 125,000 direct
mail packages, including a promotional CD-ROM, to prospective clients
informing them of the benefits they will gain by switching to Netia.
- - EMPHASIZE SUPERIOR-QUALITY SERVICE. Our promotional strategy emphasizes
superior-quality service at competitive prices. Our initial campaign featured
such promotional offers as two-week guaranteed installation time, a two-month
no-monthly-fee promotion and 300 minutes of free calls. In November 1998, we
commenced a new campaign in which we offer 24-hour repair service with a
money-back guarantee. New efforts are planned to project Netia's image as a
quality service provider in a nationwide marketing campaign.
- - STIMULATE TELEPHONE USAGE. An important element of our marketing and sales
strategy is an effort to stimulate telephone usage. Netia's sales and customer
service personnel have been trained to recognize opportunities for encouraging
increased telephone usage. For example, Netia's sales force works to identify
telephone applications for business customers that will enhance productivity,
such as telemarketing. To support the efforts of its sales force in
encouraging telephone usage, all of our recent promotions have included
traffic-stimulating value-added service packages. We are also providing a
low-cost ISDN line to encourage business usage.
BILLING AND SUBSCRIBER MANAGEMENT
We believe that our subscriber management and billing system provides Netia
with a competitive advantage. Unlike TPSA, Netia provides service category
billing at no extra cost and itemized call billing for additional cost. Our
customers are billed on a monthly basis for monitored usage and other fees. We
presently utilize software that collects data on a region-by-region basis from
each switch, and other customer service software packages that process such
data, produce bills and generate accurate and timely subscriber information and
analyses. This capability allows us to monitor any of our customers'
delinquencies.
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Due to the expected growth of our customer base and in keeping with our goal
of providing superior customer care, Netia is in the process of implementing an
advanced integrated operating support system (the "OSS"). Through the
installation of the OSS Netia will introduce a centralized billing and
collection system with a view to assuring accurate and timely billing and
minimizing bad debts. The OSS's main features will be:
- - centralized customer care and centralized billing and collections, based on a
common customer database and
- - a centralized hardware platform based on high-reliability servers and a
centralized printing house to print and envelop customer invoices.
The OSS is being installed in Netia's headquarters in Warsaw, with the
printing house located in the Warsaw area. The system will initially provide
support for 350,000 lines, with an upgrade available to one million lines. All
regions will be connected to the OSS over Netia's existing corporate network.
Computer hardware has already been installed and we plan to have the OSS
operational in all our licensed territories before the end of 1999. To ensure a
smooth transition to the OSS, Netia will initially run the OSS parallel with its
existing billing system and will be assisted in the transition by a dedicated
staff of technical personnel from Logica UK, the vendor of the OSS.
Customers are billed in arrears and, as is customary in Poland, most of
Netia's customers pay their bills monthly through their local post office or
bank. Netia has strict revenue collection policies to encourage timely payment
and is taking steps to improve cash collection. Such policies include notices of
late payment, visits from service personnel and, ultimately, disconnection of
non-paying customers within 60 days of a past-due bill. In 1998, bad debt
expense was approximately PLN 3.8 million, representing less than 4% of total
revenues.
Our overall churn rate for the first six months of 1999, based on the number
of disconnected lines in our network, is 2.87%. Churn was calculated as the
number of lines that became disconnected (for non-payment and any other reasons)
over that time divided by the total number of subscriber lines at the end of the
period. As for TPSA, its churn rates to Netia in those areas in which Netia has
been an established operator for the last two to three years, such as Kalisz,
Torun, Wloclawek, Modlin and Ostrowiec, averaged approximately 5%. In newer
licensed areas, such as Poznan, Gdansk, Katowice and Krakow, the churn rate from
TPSA to Netia is relatively lower (remaining at 1% on average). However, in an
under-penetrated market such as Poland, we believe churn rates are not an exact
indicator of performance by a telecommunications operator such as Netia.
NETWORK
OVERVIEW
Our goal is to expand our network to approximately 750,000 lines by the end
of 2003. In addition, Netia is designing, and in the second half of 1999 will
begin construction of, a fiber-optic backbone linking our local access networks
and five major cities, including Warsaw. In order to provide data transmission
services, Netia acquired a 49% interest in Netia Network, which acquired a
license in April 1999 to provide data transmission services throughout Poland.
Should we obtain an international telecommunications license, we expect that we
would need to expand the fiber-optic backbone network, acquire international
gateway switches and secure international transmission capacity.
TECHNOLOGY AND ARCHITECTURE
Netia uses the latest technologies and network architectures to develop a
highly reliable infrastructure for delivering high-speed, quality digital
transmissions of voice and data telecommunications. The basic transmission
platform consists primarily of optical fiber equipped with high-capacity SDH
equipment deployed in bi-directional rings. These SDH rings give us the
capability of routing customer
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traffic simultaneously in both directions around the ring, thereby eliminating
loss of service in the event of a cable cut. Networks based on alternative
designs, such as star network architecture (which is used in significant
portions of TPSA's network) are vulnerable to service loss in the event of a cut
cable because transmissions have only one route to reach the nodes.
Netia's switching elements within a licensed territory are connected with a
series of bi-directional fiber-optic rings. Netia services a majority of its
customers through remote switching units ("RSUs") which collect traffic and send
it to a switch. RSUs are also connected to switches by a series of
bi-directional fiber-optic rings. Customers are connected to RSUs or, in the
case of customers located near a switch, directly to switches, by copper cables.
The following diagram shows a schematic of the network layout:
[LOGO]
Historically, we have used only fully digital Alcatel System 12 switches in
our network. However, in August 1998 we entered into a cooperation agreement to
obtain in the first phase four new switches from Lucent Technologies Inc.
("Lucent Technologies") that are being installed in the largest cities where we
have licenses. The first Lucent Technologies switch was put into operation in
November 1998 in Gdansk. Our switches have the capacity to provide advanced
services such as ISDN services. In order to exchange traffic with TPSA, certain
of our switches are interconnected with TPSA's network. Each switch in the
network that is not interconnected to TPSA's network is linked by fiber-optic
cable to another switch that is interconnected with TPSA's network. We have
designed our network so that it interconnects with the parts of TPSA's network
that use the international S7 signalling standard. The use of this standard
makes the two networks compatible and reduces interconnection difficulties. We
have also designed our network so that where we interconnect with TPSA, we will
always connect with at least two switches, of which at least one is digital,
thereby protecting our signal quality.
Netia utilizes RSUs to collect and send customer traffic to a switch from
where it can be routed to its ultimate destination. RSUs reduce network
build-out costs because they
- - are inexpensive to install,
- - reduce the number of switches required in a network,
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- - are easily upgraded to accommodate additional customers and
- - reduce the distance between a customer and our switching equipment.
Because of the extensive use of RSUs in the network, the average distance
between a customer and the RSU, or the switch, that is covered by copper cable
is less than 500 meters. This enables us to provide broadband services using our
existing network on a cost-effective basis.
Netia has begun to implement wireless local loop technology in certain areas
where fixed-line build-out of the network is not practicable (for example,
because the areas include historical city centers where any construction is
severely restricted). After testing six wireless local loop systems from three
different vendors, Netia provided 6,500 wireless local loop connections as of
December 31, 1998. Netia entered into agreements with Tadiran Innowave Ltd.
("Tadiran") in August 1998 for an additional 30,000 lines to be implemented in
1999, and with Bosch (on a pilot project basis) in December 1998 to provide
broadband radio systems for businesses. In 1998, Netia implemented seven Tadiran
systems and in 1999 Netia plans to implement 31 Tadiran systems. In March 1999,
Netia and ZWUT S.A., a Polish subsidiary of Siemens A.G. ("Siemens"), entered
into a preliminary agreement pursuant to which Netia will purchase Hicom servers
from Siemens for use in providing ISDN, Internet protocol and ATM services.
Business customers are increasingly demanding further and better service in
Poland. We are planning to introduce two new technologies to meet these demands.
The first is "Fiber in the Loop," which is a set of network fiber elements that
make it economically reasonable to reduce the distance between the location of
the network copper cable and the customer, thereby enabling the customers,
mostly business customers, to gain a substantial increase in bandwidth. The
second planned system is broadband radio which, once the central base station
and antenna are installed, will make it possible to connect business customers
requiring two megabytes per second (and multiples thereof) connections within
two months after receiving the order.
In order to prevent line cuts or damage, our fiber-optic and copper cables
are installed in either protective tubing or in subducted PVC pipes and placed
approximately two feet underground. In addition, the fiber-optic cable network
is constructed in rings, so as to allow the transmission of signals along two
different routes, one of which is active and one of which is a spare. Any
interruption to the active line due to line cuts or damage automatically
activates the spare route. We generally bury an empty protective tubing or
subducted PVC pipe along with our cable to provide additional capacity and
flexibility. In constructing our network, we acquire the majority of the
rights-of-way we need from municipalities or private parties. In addition, where
possible, we are installing our cable along railroad tracks in order to reduce
costs and speed construction of the network. See "--Business Strategy."
Network oversight is conducted at our regional network management centers.
We monitor our network 24 hours a day and have technicians on call to rapidly
respond to any problems. Since our inception, we have not experienced any
material network failure.
NETWORK EQUIPMENT AND CONSTRUCTION
We use subcontractors for the build-out of our network. We initially chose
Alcatel as our primary contractor to design, construct and deliver
telecommunications networks to us on a turn-key basis. Alcatel agreed to
construct approximately 132,000 lines, most of which have been delivered.
However, we are no longer issuing orders for additional turn-key projects
because we believe that the turn-key projects have not provided the flexibility
and the cost advantage needed in constructing our network so as to optimize the
mix of business customers. Currently we use local construction contractors to
build our network. In 1999, we plan to have a total of approximately 110,000
lines built by local contractors. These contracts are on terms that are
competitive with the Alcatel arrangements and provide us with a significant cost
advantage and flexibility in constructing the network.
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Historically, Alcatel Polska S.A. has supplied all of our switching and
transmission equipment as one of the three suppliers certified by the MOC to
provide switching and transmission equipment in Poland. However, in August 1998
Netia entered into an agreement to obtain a new generation of switching
equipment from Lucent Technologies. We obtain wireless local loop technology and
equipment from Tadiran and Bosch.
DATA TRANSMISSION NETWORK
In April 1999, Netia, through its joint venture in Netia Network, obtained
the benefit of a data communication license which permits us to construct a data
transmission network and to produce and sell data transmission services
throughout Poland. We plan to design the data transmission network to reach the
ten largest urban areas of Poland, including Warsaw, by the end of 2000. This
data transmission network will constitute the first phase of the network needed
to provide long distance voice services in the event we were to be granted a
license to provide such services. See "Risk Factors--The Foreign Investor
Restrictions Under the Communications Act May Impose Limitations on Our
Business."
OPERATING COMPANIES
We conduct our local telecommunications business in our licensed territories
through 12 Operating Companies, most of which conduct their businesses within a
single pre-1999 voivodship. Historically, we have pursued a policy of engaging
the cooperation and support of local municipal governments which in some
instances hold a minority stake in the local Operating Company.
The operating companies are: Netia Telekom Kalisz S.A. ("Telekom Kalisz"),
Netia Telekom Pila Sp. z o.o. ("Telekom Pila"), Netia Telekom Wloclawek S.A.
("Telekom Wloclawek"), Netia Telekom Torun S.A. ("Telekom Torun"), Netia Telekom
Ostrowiec S.A. ("Telekom Ostrowiec"), Netia Telekom Swidnik S.A. ("Telekom
Swidnik"), Netia Telekom Lublin S.A. ("Telekom Lublin"), Netia Telekom Warszawa
S.A. ("Telekom Warszawa"), Netia Telekom Modlin S.A. ("Telekom Modlin"), Netia
Telekom Mazowsze S.A. ("Telekom Mazowsze"), Netia Telekom Silesia S.A. ("Telekom
Silesia") and Netia Telekom Telmedia S.A. ("Telmedia").
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The table set forth below contains certain information about each of the
Operating Companies as of March 31, 1999, and certain general statistical
information about the pre-1999 voivodship in which each company operates.
<TABLE>
<CAPTION>
OWNED NUMBER OF
BY POPULATION(1) REGISTERED INSTALLED SUBSCRIBER
OPERATING COMPANY LICENSED TERRITORY NETIA (IN THOUSANDS) BUSINESSES(2) CAPACITY LINES BACKLOG
- ---------------------- ---------------------- ----------- --------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
WEST REGION
Telekom Kalisz........ Kalisz voivodship 96.7% 723.5 48,238 37,744 18,324 1,183
Telekom Pila.......... Pila voivodship 99.5% 496.5 22,897 14,344 5,996 396
Telmedia (Poznan Poznan voivodship 100.0% 1,360.8 106,092 12,006 6,212 3,683
branch)(3)........... (including the city of
Poznan)
NORTH REGION
Telekom Wloclawek..... Wloclawek voivodship 100.0% 434.9 18,266 16,362 8,689 1,393
Telekom Torun......... Torun voivodship 94.0% 673.9 30,521 41,174 22,603 1,295
Telmedia (Gdansk Gdansk voivodship 100.0% 1,464.8 79,674 13,800 4,885 1,782
branch)(3)........... (including the cities
of Gdansk, Sopot and
Gdynia)
EAST REGION
Telekom Ostrowiec..... City of Ostrowiec 99.3% 114.1 4,433 13,536 11,075 358
Swietokrzyski and four
communities in the
eastern Kielce
voivodship
Telekom Lublin........ Lublin voivodship and 91.6% 1,276.9 13,927 24,136 11,639 1,390
the Chelm voivodship
(including the cities
of Lublin and Chelm)
Telekom Swidnik....... Cities and communities 97.0% 54.2 2,270 11,720 9,854 266
of Swidnik, Melgiew
and Glusk and the
district of Felin in
the city of Lublin
CENTRAL REGION
Telekom Warszawa...... Southeastern Warsaw 100.0% 93.5 5,285 11,756 4,871 757
voivodship
Telekom Modlin........ Nowy Dwor Mazowiecki 88.3% 55.2 2,895 7,720 2,240 328
and four additional
communities in the
Warsaw voivodship
<CAPTION>
TELEPHONE
PENETRATION
PER 100
OPERATING COMPANY MAIN INDUSTRIES INHABILITANTS
- ---------------------- ---------------------- ----------------
<S> <C> <C>
WEST REGION
Telekom Kalisz........ food and wood 17.3
processing, textile
industry, machinery
Telekom Pila.......... agriculture, food 17.1
processing, tourism,
wood processing
Telmedia (Poznan machine industry, 22.4
branch)(3)........... automotive
manufacturing,
chemical
manufacturing, food
processing
NORTH REGION
Telekom Wloclawek..... food processing, 15.8
chemical
manufacturing,
electric power
generation
Telekom Torun......... chemical 17.5
manufacturing,
equipment
manufacturing, food
processing
Telmedia (Gdansk petroleum processing, 23.4
branch)(3)........... shipbuilding, food
production and
processing, tourism
EAST REGION
Telekom Ostrowiec..... steel industry 16.6
Telekom Lublin........ automotive 19.9
manufacturing, food (Lublin)
processing, mineral 16.85
processing, coal (Chelm)
mining
Telekom Swidnik....... aircraft industry, same as Lublin
food processing
CENTRAL REGION
Telekom Warszawa...... manufacturing, 39.2
metallurgy, chemical
manufacturing,
cosmetics, food
processing
Telekom Modlin........ manufacturing, (the Warsaw
cosmetics, food voivodship as a
processing whole)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
OWNED NUMBER OF
BY POPULATION(1) REGISTERED INSTALLED SUBSCRIBER
OPERATING COMPANY LICENSED TERRITORY NETIA (IN THOUSANDS) BUSINESSES(2) CAPACITY LINES BACKLOG
- ---------------------- ---------------------- ----------- --------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Telekom Mazowsze...... Southern Warsaw 99.4% 323.6 18,292 22,254 8,328 8,982
voivodship; northern
Radom voivodship;
southwestern Siedlce
voivodship
SOUTH REGION
Telekom Silesia....... Katowice voivodship 96.6% 3,903.3 142,740 82,255 52,692 1,671
(including the cities
of Katowice, Gliwice,
Bytom, Mikolow,
Sosnowiec and Tychy)
Telmedia (Krakow Krakow voivodship 100.0% 1,233.6 94,261 2,256 438 78
branch)(3)........... (including the city of
Krakow)
Telmedia (Opole Opole voivodship 100.0% 1,023.2 42,084 17,776 3,113 551
branch)(3)........... (including the city of
Opole)
<CAPTION>
TELEPHONE
PENETRATION
PER 100
OPERATING COMPANY MAIN INDUSTRIES INHABILITANTS
- ---------------------- ---------------------- ----------------
<S> <C> <C>
Telekom Mazowsze...... food processing, 15.8 (Radom)
textile manufacturing 10.5 (Siedlce)
SOUTH REGION
Telekom Silesia....... resource mining, steel 15.9
production, electric
power generation,
machinery production
Telmedia (Krakow metallurgy, 25.4
branch)(3)........... pharmaceuticals,
chemical industry
Telmedia (Opole food processing, 18.3
branch)(3)........... machinery
manufacturing,
chemical industry
</TABLE>
- ----------------------------------
(1) Data are as of December 31, 1997, based upon the GUS Statistical Yearbook
1998.
(2) Data are as of December 31, 1995, based upon the GUS Statistical Yearbook
1996.
(3) Telmedia owns licenses in the voivodship of Poznan, Gdansk, Krakow and
Opole. Netia acquired Telmedia in December 1996 before its December 1998
receipt of licenses for the urban areas of Poznan, dansk and Krakow
OTHER VENTURES
In November 1997, we entered into an agreement with the owner of a minority
interest in the capital stock of Telbank S.A. ("Telbank"), a Polish
telecommunications firm that holds a limited license for dedicated data
transmission services which it provides principally to Polish banks. Under this
agreement, we have the right to acquire, or may be required to acquire, until
November 1999, any currently held or newly acquired shares of the license holder
from such minority holder, from a minimum of 25% up to a maximum of 49% of the
capital stock of the license holder. As of December 31, 1998, we have deposited
approximately PLN 12.4 million (approximately $3.1 million) in escrow in
furtherance of this project.
During the same period, Netia Telekom and certain of our Operating Companies
entered into an Agreement of Cooperation of Operators with Telbank. Acting
within the scope of their respective licenses, Telbank and Netia Telekom agreed
to integrate the services offered by each of them in their respective
territories. Prices for services will be based on the respective price lists of
the parties; mutual settlements will be based on the respective price lists,
with Netia and Telbank granting discounts, finder's fees and other commissions
to the other party, with the goal of serving customers together at a single
location. Netia's employees have received or will receive training from Telbank
to facilitate marketing Telbank services to Netia's existing and new
subscribers. The term of the agreement is two years, with automatic extensions
for successive two-year periods unless terminated by either party and subject to
review and possible renegotiation one year after execution.
In order to become a provider of diverse telecommunications services
throughout Poland, Netia is currently exploring cooperative business
arrangements with other parties. Thus, in April 1999, Netia Network, a company
in which Netia owns a 49% interest, acquired a license to provide data
transmission services throughout Poland. Under a services agreement entered into
with Netia Network, we are the exclusive beneficiary of all services provided
under the license. Accordingly, we expect to be able to offer data transmission
services to Netia's customers in all major cities in Poland, including those
cities currently not located within our licensed territories. However, if we
wish to develop and expand this part of our network under the current regulatory
regime relating to foreign ownership of data transmission networks and the
restrictions in the agreements governing our existing indebtedness, it will
likely
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be necessary to bring into this venture third parties to provide a portion of
the required capital, which could dilute our economic interest in and control
over this part of our network. See "--Data Transmission Network" and "Risk
Factors--The Foreign Investor Restrictions Under the Communications Act May
Impose Limitations on Our Business."
Furthermore, in July 1998, we entered into a cooperation agreement with
Tel-Energo S.A., a joint venture which includes the Polish Power Grid Company,
31 Polish power distribution companies and the Polish Transmission and
Distribution Association. Tel-Energo S.A. is the owner of a large fiber-optic
network in Poland. In the Tel-Energo Cooperation Agreement, certain of our
Operating Companies from the North Region, on the one hand, and Tel-Energo, on
the other hand, have agreed to conduct mutual investments and provide access to
their respective telecommunications infrastructure on a nationwide basis with a
view to increasing data transmission opportunities and network coverage in our
North Region.
COMPETITION
We compete with TPSA, other providers of fixed-line telecommunications
services in our markets and providers of alternative forms of telecommunications
services. We generally compete on the basis of quality of service, service
offerings and price.
TPSA is significantly larger than Netia, has substantially greater
financial, technical and marketing resources and a larger network than Netia,
controls more transmission lines and has long-standing relationships with
certain of Netia's target customers, including most businesses in our licensed
territories. In addition, although in many regions (including certain of our
licensed territories) TPSA's infrastructure is of a lower quality than our
network, TPSA's infrastructure in the major cities is generally as
technologically advanced as our network. TPSA has also embarked on an aggressive
program to expand and modernize its international and long distance backbones
and local networks in major cities. Furthermore, TPSA currently has a monopoly
on the provision of domestic long distance and international fixed-line
telephone services in Poland. It is impossible to predict how TPSA will react to
Netia in terms of pricing policy, targeting of specific markets, access to
infrastructure and interconnection arrangements as Netia builds out its network
and begins to compete more actively with TPSA in various areas of Poland. It is
also impossible to predict what effect, if any, the privatization of TPSA,
commenced in November 1998, will have on Netia. The Minister of the State
Treasury has announced and commenced a process to seek a strategic partner for
between 25% and 35% of TPSA. The entry of a strategic partner is likely to
improve TPSA's strength and performance as a principal competitor of Netia. See
"Risk Factors The Privatization of TPSA May Adversely Affect Our Competitive
Position."
The Communications Act allows for free competition among providers of local
telephone services and places no restriction on the MOC's ability to issue
additional licenses in Netia's licensed areas. There are a number of independent
local telephone services providers who have begun operations and have
established themselves in Poland. As of March 1999, those providers included
Poland Telecom Operators N.V. ("PTO"), Telefonia Polska Zachod, Szeptel, Pilicka
Telefonia S.A., Telefonia Lokalna (which recently obtained local telephony
licenses for the cities of Wroclaw and Lodz) and El-Net. In the aggregate, as of
December 31, 1998, these and other smaller operators, including corporate
networks, operated approximately 150,000 lines within their respective licensed
territories.
Until recently, local telecommunications providers other than Netia were
generally fragmented and lacked funding. However, the telecommunications
industry is consolidating internationally and this process now is under way
among local operators in Poland, which may result in rapid changes in the
competitive environment. Certain of those local operators have publicly
announced that they pursuing such consolidation transactions. In March 1999,
Elektrim S.A., the parent company of El-Net, announced that it intended to
purchase 100% of Bresnan International Partners Poland ("Bresnan"), which is the
owner of Telefonia Polska Zachod and Aster City, a cable television network in
Warsaw. The acquisition of Bresnan by Elektrim S.A. was completed in July 1999.
Furthermore, in May 1999,
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Elektrim S.A. announced that it also intended to purchase a majority interest in
Pilicka Telefonia S.A. and possibly in PTO, in each case subject to obtaining
financing and regulatory approvals. While these companies are not in direct
competition with Netia, the presence of one or more consolidated operators may
affect our business in the future, especially if the new entity is eventually
combined with a mobile operator such as Era (a GSM mobile telephone operator
partially owned by Elektrim S.A.) or if the new entity obtains a license for
long distance services. Also, if and to the extent that Polish
telecommunications companies combine with international operators, the resulting
entities could make the competitive environment more challenging. The first step
in this direction was taken by Elektrim S.A., which in June 1999 announced that
it intends to consolidate its telecommunications assets in one subsidiary and to
sell up to 30% of such subsidiary to Vivendi, a French industrial and
telecommunications conglomerate. The first stage of the Vivendi sale was
concluded in August 1999.
In addition, as noted above, the MOC has awarded a local telecommunications
license for the city of Warsaw to El-Net. If we are not successful in obtaining
another license for the city of Warsaw when and if one is awarded, our business
could be adversely affected, given the strategic importance of the Warsaw
telecommunications market in Poland.
Also, while Netia believes that in general the MOC in the past has issued
licenses to no more than one private operator (in addition to TPSA) to provide
local telephone services within any particular geographic territory, recent
statements by the MOC indicate that this practice is likely to change. The
potential issuance of additional licenses within our licensed territories may
result in increased competition in the provision of telecommunications services
within our licensed territories. See "Risk Factors-- We Operate in a Rapidly
Changing Regulatory Environment."
In addition, the MOC has granted a number of licenses that allow large
companies within Netia's licensed territories to run their own private telephone
networks. The main purpose for granting these licenses was to enable large
corporations, particularly in the coal mining and utilities industries, to build
their own internal networks. However, limited telephone services are currently
offered to some individuals and businesses living in the vicinity of these
corporations. The existence of these private networks reduces the potential
business that we might receive from such organizations and provides a potential
source of competition for Netia in the future.
Any future developments in the regulation of the telecommunications industry
in Poland that are made to ensure compliance with the minimum standards of
liberalization mandated by EU law and policy and Poland's obligations under the
WTO Accord on Basic Telecommunications are likely to result in a more liberal
and competitive market for Netia. These developments may result in increased
competition in our licensed territories. Under the WTO Accord on Basic
Telecommunications Services, we could face increased competition in the
telecommunications services market. Under this agreement, Poland and other
members of the WTO have committed themselves to opening their respective
telecommunications markets to service suppliers and services from other WTO
member countries.
We also face increasing competition in the local telephone market from
alternative forms of telephone service, including wireless telephone services
(such as mobile telephone service) and telephone over cable. Currently, mobile
telecommunications services in Poland are provided through Centertel, a cellular
network operator with an analog and a DCS 1800 network, and two GSM network
operators, GSM Plus and Era. Centertel covers all of Poland and the two GSM
operators cover 85% of the territory of Poland. In 1998, a fourth mobile system
became operational in Warsaw and other major cities. In August 1999, the MOC
also awarded additional DCS 1800 mobile licenses to the existing GSM network
operators while a GSM 900 license was awarded to Centertel. We expect mobile
operators to increase their penetration and market share especially by
attracting business customers in those areas where fixed-line penetration rates
are low or where waiting periods for connection are particularly long. It is
estimated that the number of cellular phone subscribers in Poland exceeded two
million by June 30, 1999. However, we believe that in the short term mobile
telephones will continue to suffer
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from significant price, coverage and quality disadvantages compared to
fixed-line telephones. Eventually, we believe, as has been the case in other
markets, mobile service providers will stimulate overall telephone usage in
Poland which we believe would be complementary to our business.
Another possible source of competition is the current consolidation among
Polish cable television, Internet and telephone operators. In June 1999 a
Netherlands-based company, United Pan-Europe Communications ("UPC"), which is a
provider of video, telephone, Internet and satellite services, announced that it
was going to acquire At Entertainment, a U.S.-owned Polish cable television,
Internet and telephone operator. UPC is reported to contemplate offering
integrated televison, Internet and telephone services throughout Poland.
As Netia expands its service offering to include Internet and data
transmission services, we will face increasing competition from other providers
of such services. These include Telbank, Tel-Energo S.A., NASK, Polpak (TPSA)
and Kolpak. We cannot predict the effect on our operations that competition with
these competing service providers will have in the future.
EMPLOYEES
As of June 30, 1999, Netia had 1,028 employees. Of that number, 195
employees were employed in the Technical Department and 567 in the Customer
Service Department. None of our employees are covered by a collective bargaining
agreement or similar arrangement. We believe that our relations with our
employees are good.
LEGAL PROCEEDINGS
On January 31, 1998, Sofitec International, a company incorporated in France
("Sofitec"), commenced proceedings in the Commercial Court of Paris against
Netia and two of its officers, Andrzej Radziminski and Aleksander Szwarc,
claiming payment of approximately $4.1 million together with damages of
$350,000. Sofitec's claim relates to work and services allegedly performed under
an agreement that was entered into in January 1992 (the "Sofitec Agreement")
under which Netia agreed to pay Sofitec a fee in the event that Netia obtained
financing or other benefits from an entity or entities to whom it had been
introduced by Sofitec acting pursuant to the Sofitec Agreement.
In the proceedings, Sofitec alleges that, as a result of the work and
services performed by it under the Sofitec Agreement, Netia obtained financing
from the EBRD in 1996. Netia denies that Sofitec or any of its agents or
employees performed any work or services under the Sofitec Agreement which would
entitle it to payment of a fee. Specifically Netia denies that Sofitec either
introduced the EBRD to it or that Sofitec performed any work or services in
connection with the financing that Netia obtained from the EBRD in 1996 which
would entitle it to payment of any fee under the Sofitec Agreement.
The first hearing in the proceedings took place on March 18, 1998. At that
hearing, Sofitec was ordered to produce the documents and evidence in support of
its claim by April 29, 1998, at which time there was a further hearing. Netia
presented its defense motion at a hearing held on September 16, 1998. It is
anticipated that another hearing will be held in 1999 at which Sofitec will
respond to Netia's defense motion.
In April 1999, Netia filed a complaint against TPSA with the CCPO alleging
that the interconnection fees by TPSA are excessive, do not include any
mechanism to offset TPSA's cross-subsidization of public tariffs for local calls
with revenue from its monopoly services (including long distance and
international) and that TPSA has refused to negotiate in good faith with Netia
to establish more balanced interconnection arrangements. Netia's complaint
alleges that TPSA is thereby abusing its dominant position in the Polish market
in violation of Polish law. The complaint is presently pending before the CCPO.
In August 1999, Mr. Alexsander Szwarc a founder shareholder of Netia and a
former member of the Supervisory Board, filed a complaint with a division of the
Regional Court in Warsaw, seeking to
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annul a resolution of the General Assembly of Netia's shareholders convened on
July 26, 1999. The resolution approved the increase of the size of our
Management Board from five to six members. Mr. Szwarc has had, and continues to
have the right to co-nominate one member of our Supervisory Board. No hearings
in the proceedings have taken place as of the date of this prospectus. We
believe that the shareholder resolution at issue did not affect Mr. Szwarc's
rights as a shareholder and intend to present our position in court if the
proceedings continue.
PROPERTIES
Our principal properties consist of telecommunications network
infrastructure and customer service offices and related buildings throughout
Poland. We have approximately nine major lease agreements for offices, storage
space and land adjacent to buildings. The aggregate area leased totals
approximately 2,500 square meters (most of which is land adjacent to buildings).
The respective agreements are for specified and unspecified periods of time and
may be terminated with relatively short notice periods by either party, usually
three months. In addition, Netia owns or has a perpetual usufruct right to
various real property such as land and buildings. In Warsaw, Netia owns its main
office space which, including the adjacent land, comprises approximately 13,200
square meters. On this land there are two office buildings which comprise 4,700
square meters and 2,800 square meters, respectively. A new headquarters building
is also being constructed on the land, with approximately 11,300 square meters
of class B quality office space. The construction, which includes costs already
incurred of approximately $5.7 million, is scheduled for completion in late
1999. See "--Non-telecommunications Businesses--Certain Real Estate."
NON-TELECOMMUNICATIONS BUSINESSES
Netia currently owns or conducts certain non-telecommunications businesses
that it intends to sell when a favorable commercial opportunity to do so becomes
available. The following is a description of the non-telecommunications
businesses.
UNI-NET
Netia has a 58.2% equity interest in Uni-Net, a specialized mobile radio
("SMR") network providing public trunked analog mobile telecommunications
services. The other shareholders of Uni-Net include Motorola International
Development Corporation, which has a 37.8% equity interest in Uni-Net, and two
individuals who each own 2.0%. Uni-Net has a long-term agreement with TPSA
relating to TPSA's radio trunking license, which covers all of Poland. This
agreement provides for Uni-Net to construct and maintain a radio public trunking
network in accordance with TPSA's license and to provide operating services
during a mutually agreed period. Uni-Net services approximately 8,500
subscribers in 23 base stations covering 21 cities in Poland. The coverage
distance of Uni-Net's SMR network base stations range from 30 to 50 kilometers
depending on the terrain. Uni-Net does not own any material real estate and has
approximately 70 employees. In 1998, in furtherance of its determination to sell
this and the other non-telecommunications businesses, Netia offered the other
shareholders in Uni-Net the opportunity to purchase Netia's shares as required
by Uni-Net's organizational documents and the Commercial Code. These
shareholders declined to accept Netia's offer.
CERTAIN REAL ESTATE
Netia owns 18 residential apartments of approximately 100 square meters
each, which are in a newly developed area in western Warsaw. Netia originally
placed 20 such apartments with a real estate broker for selling purposes; four
apartments have already been sold.
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TELECOMMUNICATIONS REGULATIONS
THE COMMUNICATIONS ACT
Telecommunications activities in Poland are governed by the Communications
Act, which in 1991 ended the state monopoly on the provision of local
telecommunications services. In 1992, in connection with the separation of the
state-owned postal and telecommunications businesses, the government transferred
its telecommunications operations to TPSA, a joint-stock company wholly owned by
the Polish State Treasury. TPSA continues to be the DE FACTO monopoly provider
of domestic long distance service and the legal monopoly provider of
international fixed-line voice telephone services and related infrastructure in
Poland. Pursuant to the Communications Act, the MOC grants licenses to private
operators to provide local and domestic long distance telecommunications
services. To date, the MOC has granted approximately 96 licenses (excluding
licenses for private corporate networks) to local telecommunications service
providers. As of August 1999, no license has been issued to provide domestic
long distance fixed-line voice telecommunications services.
On May 12, 1995, several significant amendments to the Communications Act
were adopted which, among other things, introduced a dual regime of
"concessions" and "permits." Under such dual regime, concessions are granted for
the provision of telecommunications services and permits are granted for the
installation of equipment and the operation of telecommunications networks. A
further difference between a concession and a permit is that, subject to certain
exceptions specified in the Communications Act, the granting of a concession
requires a public tender procedure. No such public tender procedure is required
with respect to the granting of permits.
Pursuant to the amendments to the Communications Act, the MOC was obligated
to convert all telecommunications permits issued prior to such amendments into
concessions by July 7, 1997. Upon conversion, each permit held is replaced with
a concession, which allows the holder to provide telecommunications services
within a particular area, and a permit, which allows the holder to install,
construct and utilize telecommunications lines and other equipment within the
same area. Except as otherwise provided in this prospectus, the term "license"
refers to both a concession and the related permit or to a permit that has not
yet been converted.
The Communications Act also imposes various limitations on the activities of
foreign entities and companies with foreign participation in the field of
telecommunications. In general, such entities may not obtain a permit or, as the
case may be, a concession to operate a domestic long distance, data transmission
or mobile telephone network. These restrictions do not apply, however, if
- the operator is a Polish company with a foreign participation in its share
capital not exceeding 49%;
- the company's by-laws provide that Polish citizens domiciled in Poland
will constitute a majority of the company's management and supervisory
boards;
- the voting power of the foreign entity or foreign-controlled entity in the
general shareholders meetings of the company does not exceed 49% of the
total number of votes; or
- the operator provides only local telephone services (such as those
provided by Netia).
In addition, guidelines issued in 1996 as a basis for the formulation of
amendments to Polish telecommunications laws were the first indication that the
Polish authorities accept the need to gradually reduce such restrictions, in
line with Poland's international obligations.
While the Communications Act authorizes the MOC to grant licenses to provide
domestic long distance telecommunications services, currently no such license
has been granted and TPSA remains
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the sole provider of domestic long distance telecommunications services. The MOC
has recently reiterated its intention to encourage competition in the provision
of domestic long distance telecommunications services, with the first tender for
such services contemplated by the end of 1999. The Communications Act maintains
TPSA's monopoly over international telecommunications services in Poland. The
government of Poland, however, is committed to liberalizing international
telecommunications services by 2003, although this process may be accelerated in
connection with Poland's accession to the EU. See "--The Polish
Telecommunications Industry and the European Union" and "--WTO Accord on Basic
Telecommunications."
A new telecommunications act has been prepared by the MOC in order to
conform Polish telecommunications legislation to EU standards. See "--The Polish
Telecommunications Industry and the European Union." A draft of the new
telecommunications act has been approved by the Council of Ministers and was
recently presented to the Polish parliament for debate in 1999. A revised
parliamentary draft is reported to no longer contain the ownership percentage
limitations that currently apply to foreign investors (except with respect to
licenses to provide international services). If these limitations were to be
eventually removed, Poland's telecommunications market may become significantly
more competitive. See "--Proposed New Telecommunications Law."
REGULATORY BODIES
The telecommunications industry in Poland is regulated and overseen by the
MOC, which has the power under the Communications Act to regulate, among other
things, licensing, interconnection and prices. The transfer of control of TPSA
from the MOC to the Minister of State Treasury in March 1997 was intended to
introduce more independent regulation and supervision of TPSA. Moreover, in view
of the preparations necessary for Poland's future accession to the EU and its
membership in the WTO, the Polish government is expected to establish an
"independent" agency to regulate the Polish telecommunications industry, as also
contemplated in the draft new telecommunications act. Under EU law, member
states are required to appoint an independent and impartial regulatory authority
for the telecommunications industry.
The Polish antitrust regulatory body, the CCPO supervises the activities of
telecommunications operators with respect to monopolistic practices of such
companies operating in Poland. The CCPO investigates abuses of dominant market
position and anti-competitive business arrangements, and has the power to impose
financial penalties and measures designed to prevent such practices. The CCPO
has been active in its investigation of TPSA's activities and practices,
particularly with respect to network access and pricing issues. Since the
creation of the CCPO in 1990 until December 31, 1998, the CCPO has issued
approximately 40 decisions involving TPSA. In 25 of these decisions TPSA was
found to be engaging in monopolistic practices and TPSA managers were fined in
two such cases. See "--Interconnection."
LICENSING FRAMEWORK AND PRINCIPAL TERMS OF OUR LICENSES
Telecommunications concessions and permits from the MOC are generally
required for the provision of telecommunications services and the installation
and operation of a telecommunications network in Poland. TPSA, however, is
exempt from this requirement and its activities are effectively authorized under
the Communications Act.
A permit or concession, including those held by Netia, usually contains a
grant of the right to engage in specifically enumerated telecommunications
activities, a description of the licensed area and an allocation of digit
capacity for telephone numbers (if applicable), the date of commencement of
telecommunications activities, the time period for which the permit is valid and
various other requirements depending on the kind of activities to be carried out
by the holder. Each permit or concession, including those held by Netia, also
contains a set of specific conditions and obligations imposed by the
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MOC with which a telecommunications operator must comply throughout the license
period in order to enjoy the rights granted thereunder. Each of Netia's permits
and concessions is subject to specific terms and conditions the general terms of
which obligate each operator to provide public telecommunications services
through its local network and through interconnection with the regional and
international networks of TPSA and to install, operate and maintain telephone
lines and network and switching equipment in accordance with international
standards.
In addition to residential and business telephone services, each operator is
also required to provide public pay telephone services. Provision of
telecommunications services must ensure equal access (subject to demand) for
both urban and rural customers. Each operator is also required to provide a
telephone number information service both within the licensed area and to other
operators and to establish and publicize the rules governing the provision of
its services. In addition, each operator is obligated to construct exchanges
with the capacities indicated in the licenses. Each operator must pay annual
fees and make certain other payments, in the amounts and subject to the
exemptions determined by the MOC, and inform the MOC of the obtaining of
financing. The MOC must also be informed of the prices charged for services, any
agreements (interconnection or fixed-asset purchase agreements) with TPSA, and
any acquisition by any person of more than 10% of the voting rights of the
operator. In addition, following the conversion of Netia's permits into
concessions, prior approval of the MOC must be obtained if any person or entity
intends to acquire shares in the operator (I.E., in the case of Netia, the
relevant Operating Company) exceeding 10%, 25%, 33% or 50% of the total number
of votes eligible to vote at a shareholders meeting of such operator.
All of Netia's permits have been converted by the MOC into concessions and
modified to comply with the amendments to the Communications Act referred to
above. While the permits authorized Netia to provide a wide variety of
telecommunications services, the concessions expressly authorize Netia's
activities to include only telephone services, covering both telephone and
telegraphic communications and the ability to provide such services as ISDN and
leased lines. We unsuccessfully appealed these limitations before the MOC, and
subsequently before the Supreme Administrative Court in Poland.
All permits and concessions for local telecommunications activities are
generally similar in form and substance. Prior to the amendment to the
Communications Act requiring the conversion of permits into concessions, a
typical telecommunications permit contained a grant of the right to engage in
the installation and use of telecommunications equipment, the construction and
use of a telecommunications network and the performance of general
telecommunications services in a defined geographic area. Following the
conversion of permits into concessions, each operating company holds both a
concession for such telecommunications services and a separate permit for the
installation and use of telecommunications equipment and the construction and
use of a telecommunications network. The permits and concessions are
non-transferable by the licensed entity and are issued on a non-exclusive basis.
Based upon past practice and with certain exceptions, in addition to TPSA (which
currently does not need a license), the MOC has historically not issued licenses
for the same license territory to more than one private operator. However, there
is no legal obstacle to changing this policy should the MOC determine to do so
in the future. The license period is generally between 10 and 15 years. Although
the Communications Act does not address license renewals, permits or concessions
(including those held by Netia), it does contain a provision allowing
application for renewal to be made no later than six months prior to the
expiration date of such permit or concession.
In general, each operator (including each of Netia's operating companies) is
prohibited from taking certain actions, including, but not limited to, accepting
advance payments from customers until the local telephone network is
operational; entering into any agreement for services that is conditioned upon
the disposal of assets or shares of the operator; or entering into agreements
with customers on terms and conditions to which, if such customers could freely
choose in the competitive market, they
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would not agree. Telecommunications operators, including Netia and TPSA, are
also subject to requirements such as the publication of information with respect
to services and prices and the obligation to provide services to customers in
compliance with standards established in conjunction with the MOC.
Under the terms of our current licenses, we were required to construct an
installed capacity of 177,100 telephone lines by the end of 1997 (which did not
include the licenses for major cities that we acquired in December 1997) and
407,850 telephone lines by the end of 1998, and we are required to construct
846,000 telephone lines by the end of 1999 and 1,213,750 telephone lines by the
end of 2000. As of December 31, 1998, we had constructed 283,900 lines and
accordingly failed to meet the build-out milestones in all of our licensed
territories. Under our plan for such licensed territories, we intend to
construct approximately 428,000 lines by the end of 1999 and 558,000 lines by
the end of 2000, focussing our build-out efforts in the large cities within our
licensed territories. Accordingly, even if we achieve our own internal goals, we
will not meet the build-out milestones in many, if not all, of our licenses. We
applied for waivers with respect to our failure to meet the 1997 build-out
milestones and received written assurances from the MOC that the MOC did not
intend to take any action against us as a result of such failure. We may in the
future, if necessary, seek amendments to other build-out milestones that we are
not able to achieve. We cannot assure you that the MOC will grant such waivers
in the future. Should the MOC choose not to waive or amend these build-out
milestones, we would be forced to either construct additional lines to satisfy
the build-out milestones, possibly in areas where the likely return on our
investment would not justify the additional expense, or face possible revocation
of these licenses. Alternatively, the MOC could also choose to allow additional
competitors into these licensed territories. In February 1998, the MOC announced
its intention to evaluate in 1999 the results achieved by holders of licenses,
which review could possibly lead to the MOC conducting another round of tenders
for additional concessions for the areas in which the performance by the
operators who had been granted the original licenses was unsatisfactory. See
"Risk Factors--We Face Risks Due to Our Build-out Strategy and Our Failure to
Meet Build-out Milestones."
Furthermore, our Operating Companies from time to time have not met certain
build-out milestones contained in their respective licenses. While the MOC has
never taken action against any of our Operating Companies when they have been in
default of their build-out milestones, and has eventually granted license
milestone modifications each time that we sought such a modification, including
a one-year extension of the build-out period for each of our licenses granted in
March 1997, in the event that, in the future, we are unable to meet the
build-out milestones required by any of our licenses, and are unable to obtain
further modifications, these licenses could be revoked. Such an event would have
a material adverse effect on us.
The MOC has wide powers to revoke or limit permits and concessions, although
before any decision to revoke or limit a license may be made, the
telecommunications operator must be given the opportunity to take remedial
steps. Circumstances in which the MOC is obligated to revoke a license include a
breach by the telecommunications operator of the Communications Act or the
conditions of its license, failure to fulfill build-out milestones or to pay
annual fees, and changes in the capital structure of the licensee in violation
of the Communications Act's rules with respect to the acquisition of shares in
the telecommunications operator by foreign entities beyond certain thresholds.
In addition, the MOC has discretion to revoke or limit a license in cases where
another entity acquires direct or indirect control over the licensed activity of
the licensee or in case of the bankruptcy of a licensee or non-commencement of
its operations. On finding non-compliance, the MOC may also limit a license with
respect to the permitted services that a licensee may offer.
INTERCONNECTION
All telecommunications operators, including Netia, are obligated by the
Communications Act to provide interconnection to other telecommunications
networks established in Poland, the terms of which must be specified in an
interconnection agreement. TPSA is currently the only entity allowed to
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provide domestic long distance and international telephone services in Poland.
As a result, all other fixed-line telephone operators in Poland must access the
TPSA network in order to send calls to, or receive calls from, outside their
licensed territories. Accordingly, functional sharing guidelines were issued by
the MOC governing the relationship between TPSA and the private local operators
in order to avoid abuse by TPSA of its monopoly position, which have since been
revoked. The short-term general settlement guidelines assumed that the volumes
of incoming and outgoing traffic were equal. Local licensed companies would not
be compensated for incoming traffic (or outgoing calls in the Torun territory)
and would retain 100% of revenues generated from outgoing local traffic, between
60% and 80% of revenues generated from outgoing long distance traffic and 30% of
revenues generated from outgoing international traffic.
The short-term general settlement policy was intended to provide a framework
for individual contracts to be negotiated by the relevant parties. According to
the Communications Act, if agreement cannot be reached between the parties
within three months from the request for interconnection by a private operator,
the operator may apply to the MOC for a decision on conditions of
interconnection and settlement. The MOC has established procedures for legal
action in order to finalize such agreements.
According to the Communications Act's implementing regulations, the
principles to be taken into consideration in determining the provisions of
interconnection agreements are, among others:
- the enhancement of benefits and revenues for both parties;
- the investments already made and planned by the operator of the network to
be interconnected to;
- the objective that the operator of the network to be interconnected to
receives the return of its justified costs and a justified profit; and
- that settlement is not dependent on the amount of the tariff.
In addition, the Communications Act provides that a network constructed by a
private operator must comply with the standards provided under the
Communications Act and the terms and conditions established in its permits or
concessions in order to interconnect with the TPSA network. Otherwise, TPSA may
rightfully deny access to its network. The burden of proof that such operator
does not comply with provisions of the Communications Act rests with TPSA. The
Communications Act protects private operators from TPSA by providing a mediation
process whereby the MOC determines the conditions of cooperation and
profit-sharing between private operators in the event that an agreement has not
been concluded within three months following the date the request to
interconnect to the TPSA network was made.
In addition to mediation, if a telecommunications operator is wrongfully
denied access to the TPSA network by TPSA, the operator may commence an action
before the CCPO or in the civil courts of Poland for unfair competition and
trade practices. Private telecommunications operators, including Netia, have
experienced some difficulties in establishing acceptable interconnection
arrangements with TPSA and have had to pursue legal remedies on several
occasions. However, their rights of interconnection have been recognized by, and
successfully enforced in, the Polish legal system.
In September 1999, the MOC introduced a universal framework for all
interconnection settlements among fixed-line telecommunications operators. The
new interconnection regime specifies standard cooperation terms, principles of
settlement and procedures for negotiations and dispute resolutions among
parties. The MOC has stated that settlement rates among operators should, in the
future, be based on actual costs incurred and the investments undertaken by each
operator, as well as by reasonable overhead costs. The MOC has also stated that
in some cases cost allocation may be based on well-documented estimates. We
believe that the introduction of the new interconnection regime, and
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the ongoing rebalancing of the TPSA tariff structure, may have an impact on
Netia's financial results due to the anticipated reduction in settlement costs
with TPSA following the introduction of such new interconnection framework and
to the expectation that a future rebalancing of such tariffs for local calls
(which constitute the bulk of Netia's current traffic) would result in increased
charges for such calls. We cannot assure you, however, regarding the extent to
which interconnection settlement costs may be reduced or local call charges
increased.
In April 1999, Netia filed a complaint against TPSA with the CCPO alleging
that the interconnection fees by TPSA are excessive, do not include any
mechanism to offset TPSA's cross-subsidization of public tariffs for local calls
with revenue from its monopoly services (including long distance and
international) and that TPSA has refused to negotiate in good faith with Netia
to establish more balanced interconnection arrangements. Netia's complaint
alleges that TPSA is thereby abusing its dominant position on the Polish market,
in violation of Polish law. The complaint is presently pending before the CCPO.
TARIFFS AND PRICE REGULATION
Private telecommunications operators, including Netia, may, at their
discretion, determine the prices charged to their customers in accordance with
the provisions of the Communications Act. However, they are obligated to keep
the MOC informed of the tariffs, rates and fees which they charge and to provide
certain services free of charge in the event of a national emergency. The MOC
may set maximum charges for all operators for the provision of basic telephone
services, although to date it has not done so. International tariffs must be
agreed upon with the MOC before they may be implemented. In addition,
telecommunications operators, including Netia, are required to publish their
domestic and international tariffs. Tariffs of all operators are also subject to
Polish antitrust rules, which prohibit activities such as price-fixing, abuse of
dominant position and predatory pricing.
TARIFF REBALANCING
TPSA has stated that, historically, it has not based its tariffs (and hence
also the interconnection fees charged to other operators such as Netia) on the
actual cost of services provided. The lack of cost transparency, according to
TPSA, has resulted in a marked imbalance between relatively low charges for
local traffic and relatively high charges for long distance and international
traffic. In November 1998, TPSA announced that it had commenced steps to
rebalance its tariff structure by decreasing the ratio of tariffs for certain
long distance and international calls to tariffs for local calls. In August
1998, TPSA announced a reduction in its tariffs for certain long distance
connections effective September 1, 1998 by 15% to 21%, followed by a 10%
increase in tariffs for local calls in January 1999. Most recently, TPSA has
announced that will increase local tariffs by another 14% as of July 1, 1999 and
decrease tariffs for long distance connections by 16% to 18%. TPSA has also
announced that the reduction was aimed at bringing its tariff structure closer
to those prevalent in the EU countries. Concurrently, the MOC stated that the
process of tariff rebalancing should continue until the end of 2003 and that the
TPSA tariffs should follow the cost accounting system TPSA was originally
required by the MOC to adopt by September 1999, which eventually would allow the
tariffs to be based on the actual costs incurred. We cannot assure you, however,
regarding the timing of the tariff rebalancing process or the extent to which
tariffs will ultimately be rebalanced.
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PROPOSED NEW TELECOMMUNICATIONS LAW
In 1998, the MOC prepared a draft new telecommunications law, which was
subsequently approved by the government and sent to the parliament for debate in
April 1999. The new telecommunications law, which is not expected to take effect
before 2001, is intended to bring the Polish telecommunications regime closer to
EU standards and to introduce novel concepts drawing from EU and international
experience.
The draft law is reported to contain important differences from the current
Communications Act including, for instance, removing the ownership percentage
limitations currently applied to foreign investors (except with respect to
licenses to provide international services). The draft new law contemplates
issuance of government concessions for the provision of telecommunications
services through public telephony networks, the distribution or diffusion of
radio and television signals through public networks and the provision of
services requiring the reservation of radio frequencies. Each concession will
specify the relevant frequencies, numbers and other technical specifications to
be used by the holder. However, the law, as currently drafted, places no limit
on the number of such concessions issuable to operators. The draft law also
contains provisions aimed at preventing price-fixing and subsidizing the price
of services by operators. In addition, the draft law introduces a revised
interconnection framework. Lastly, the draft new telecommunications law
establishes an independent regulatory body whose duties will include the
regulation of the Polish telecommunications sector in collaboration with the
MOC. The MOC would retain a policy-making function and the right to issue
ordinances. However, the draft law has undergone numerous revisions and we
cannot be certain as to what provisions will be ultimately enacted into law.
THE POLISH TELECOMMUNICATIONS INDUSTRY AND THE EUROPEAN UNION
The Polish regulatory environment for telecommunications services is
expected to undergo further change as a result of Poland's increasing
commitments to the EU. In 1994, Poland applied for membership in the EU and in
June 1997 the European Commission issued a positive opinion with regard to
Poland's application. As a result, negotiations on Poland's admission to the EU
commenced on March 31, 1998, with membership contemplated at the earliest in
2003. In this context, the European Commission has entered into an "Accession
Partnership" with Poland, which will provide a framework for pre-accession
negotiations and assist Poland in its preparation for EU membership. The
Accession Partnership establishes priority areas for further regulatory, legal
and other harmonization, linking progress in this process to financial
assistance by the EU.
The Accession Partnership with Poland identified the acceleration of the
privatization restructuring of state enterprises (including TPSA) as a
short-term priority that needed to be addressed in 1998. Accordingly, in
November 1998 the government commenced the privatization of TPSA by selling a
minority stake to the public. Medium-term priorities include, among many other
items, further improvements and efficient enforcement in the field of
competition, reinforcement of the antitrust and state aid authorities and
alignment with EU legislation on telecommunications. In its November 3, 1998
report on Poland's progress towards accession, the European Commission noted
that Poland needed to accelerate its progress towards a new telecommunications
regime, including the establishment of an independent regulator.
In 1991, Poland signed an agreement establishing an association between the
EU and Poland based on progressive economic integration. The agreement remains
the current basis for the European Union's relations with Poland. The agreement
went into effect in 1994 and imposed progressive obligations on Poland to
harmonize its competition rules with those of the EU insofar as they may affect
trade between the EU and Poland. In addition, Poland agreed to promote EU
telecommunications standards, systems of certification and regulatory
approaches. By themselves, such broadly worded objectives cannot be said to
create legally binding obligations that Poland is obligated to fulfill pursuant
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to its existing agreement with the EU. However, they may be considered
prerequisites to Poland's admission to the EU. Therefore, they provide at least
some general guidance as to the likely future direction of telecommunications
legislation in Poland and, given the current state of development in Polish-EU
relations, it appears that the future telecommunications regime in Poland will
most likely have to be broadly aligned with EU law and policy. Moreover, certain
provisions of Poland's agreement with the EU require Poland to align its
competition rules with those of the EU. These rules have provided an important
legal basis for the liberalization of telecommunications in the EU. They can
therefore be relied upon already as a basis for the future harmonization of at
least certain features of the Polish telecommunications regime with relevant EU
standards.
In this regard, the EU has adopted a number of directives that are intended
to liberalize telecommunications and harmonize technical interface standards and
related approval procedures, the licensing of telecommunications services and
other related issues affecting market access. Pursuant to the EU Services
Directive, EU member states were obliged to withdraw special and exclusive
rights for all telecommunications services and networks as of January 1, 1998.
However, the European Commission has granted additional transitional periods for
Spain, Portugal, Ireland and Greece on account of their "less developed
networks." Although a maximum of five years was originally envisioned as the
additional transitional period, the European Commission decided on an individual
assessment of the situation in each member state. Pursuant to such assessments
shorter periods were established, which included three years for Greece, two
years for Ireland and Portugal and 11 months for Spain. Luxembourg, on account
of its "very small network," was permitted a deferment of seven months.
Depending on the timetable of its accession to the EU, Poland could be in a
position to justify a request for a transitional period using similar arguments
to those employed by these EU member states. However, the policies followed by
the European Commission so far and a recent tendency to shorten the derogation
periods granted to certain EU member states all suggest that the margin for
derogations, if any, that Poland could expect to receive from the EU would not
be substantial. Therefore, Poland may come under increasing pressure to ensure
full liberalization of its telecommunications environment by the date of its EU
accession or shortly thereafter.
In addition to the above measures, which are largely based on EU competition
rules, an important component of EU law and policy in the telecommunications
sector consists of so-called "Open Network Provision" rules. Essentially, these
rules seek to ensure that dominant public telecommunications operators grant new
entrants access to their network on non-discriminatory terms and conditions, in
accordance with a minimum set of technical characteristics and at cost-oriented
tariffs. To date, the EU has adopted legally binding rules in this area for the
supply by telecommunications operators of leased circuits, voice services and
interconnection. At least as a political matter, pre-accession adoption of these
EU telecommunications rules by Poland would improve its position as a candidate
for EU membership.
The EU is also committed to ensuring that basic telecommunications services
are available to all consumers. Specifically, certain public telecommunications
operators are required to provide basic services to all users at an affordable
cost and must also fulfill various other related obligations that serve social
policy objectives. Under relevant EU law and policy, such obligations may be
imposed, in the first place, on the principal public fixed-line
telecommunications operator. However, other telecommunications operators may
also be required to contribute to the provision of such services. Thus, if the
Polish telecommunications law is harmonized with EU law and policy in this
respect, Netia as well as other operators may become subject to similar
obligations.
The EU Licensing Directive sets out the conditions governing national
licensing regimes in the EU for telecommunications services and networks.
Individual licenses may only be required in certain specified cases, and the
remaining telecommunications activities are either freely accessible or subject
to general authorizations only. The Licensing Directive also provides a maximum
list of conditions that may be attached to telecommunications licenses and
defines procedural rules for granting such licenses.
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WTO ACCORD ON BASIC TELECOMMUNICATIONS
Poland became a member of the WTO on July 1, 1995 and is a signatory to the
General Agreement on Trade in Services. Pursuant to the WTO Accord on Basic
Telecommunications, which was signed on February 15, 1997 and ratified by Poland
on July 29, 1998, Poland has committed to treat telecommunications service
suppliers and services from other WTO members on a "most favored nation" basis.
Poland has also committed to provide, among other things, market access to
service suppliers and services of other WTO members, although many of its
commitments provide for market access at some future time. For example, Poland
has committed to provide market access for the provision of international
telephone services on a facilities or resale basis by 2003. However, Poland did
not commit to permit foreign ownership of over 49% in suppliers of wireless,
long distance and international services and networks. Furthermore, Poland has
also accepted WTO regulatory principles relating to, among other things,
competitive safeguards to prevent anti-competitive measures by major service
providers. Under these commitments, any universal service obligations must be
administered in a transparent and non-discriminatory manner without placing
unnecessary burdens on telecommunications operators. The principles committed to
by Poland also refer to interconnection with major suppliers and obligate them
to provide interconnection at any technically feasible point, on
non-discriminatory terms, in a timely manner and at cost-oriented, reasonable,
transparent and unbundled tariffs.
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MANAGEMENT
Netia is governed by a management board (the "Management Board"), a
supervisory board (the "Supervisory Board") and the general assembly of its
shareholders.
Generally, the shareholders of a Polish company such as Netia elect the
members of its supervisory board and (although not the case with Netia, as
described below) its management board and, as a group, hold decision-making
power over the distribution and designation of profits, the issuance of shares,
increases or decreases in share capital and potential mergers or divestitures of
the company. The shareholders also vote on proposed amendments to that company's
statute.
The supervisory board generally maintains supervision over a limited number
of the company's activities specified by law and the company's statute.
Specifically, consistent with Polish legal requirements, the Supervisory Board
reviews Netia's annual Polish statutory accounts, the Management Board's reports
and the matters proposed to be presented at Netia's shareholders meetings. The
Supervisory Board also sets the salaries of, imposes and enforces appropriate
disciplinary action on, and examines issues raised by, the Management Board. In
addition, the Supervisory Board approves the motions of the Management Board
pertaining to the sale or encumbrance of real estate.
Netia's statute presently requires a simple majority of votes cast in a
meeting with a quorum of at least 50% of the members of the Supervisory Board
present in order to adopt a valid resolution, except with respect to certain
matters described below. The term of the members of the Supervisory Board is
three years and may be renewed.
The Management Board is responsible for matters not specifically reserved to
either the shareholders or the Supervisory Board and effectively oversees the
day-to-day management of Netia. In particular, the Management Board manages
Netia's operations under the supervision of its President, serves as legal,
governmental and third-party representative of the Company and issues
resolutions concerning the business activities that Netia may undertake.
NETIA'S MANAGEMENT UNDER THE POST-IPO SHAREHOLDERS' AGREEMENT
Telia, Dankner, Shamrock, Trefoil, the GS Entities, Warburg and the Company
entered into the Post-IPO Shareholders' Agreement which became effective upon
the completion of the IPO. Under the Post-IPO Shareholders' Agreement, among
other things, our Supervisory Board was restructured so as to consist of 11
members, of whom Dankner, Trefoil and Shamrock, collectively, have the right
(subject to maintaining certain share ownership thresholds) to appoint up to
three members; Telia has the right (also subject to maintaining certain share
ownership thresholds) to appoint up to three members, including the Chairman;
Warburg has the right (also subject to maintaining a certain share ownership
threshold) to appoint one member; and the remaining four members are elected by
the general assembly of shareholders and will be "independent" (except for one
member elected by a group of Netia's founding shareholders and for one member
appointed jointly by Telia, Dankner, Shamrock, Trefoil and Warburg, subject to
Warburg maintaining a certain share ownership threshold). In connection with the
purchase of approximately 16% of our ADS's in the IPO, Telia, Dankner, Shamrock,
Trefoil and Warburg agreed to vote their shares to elect a representative of BRE
Bank to our supervisory board.
Under the Post-IPO Shareholders' Agreement, Dankner, Trefoil and Shamrock,
acting together, have the right to appoint three members of the Supervisory
Board only for as long as Dankner, Trefoil, Shamrock, the GS Entities and their
Permitted Controlled Affiliate Transferees (as defined in the Post-IPO
Shareholders' Agreement) collectively own 10% or more of the outstanding voting
securities of Netia. As long as they own 5% or more (but less than 10%) of the
outstanding voting securities of Netia, they have the right to appoint two
members. Their right to appoint directors shall terminate completely at such
time as those shareholders cease to own, in the aggregate, at least 5% of the
outstanding voting securities of Netia.
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Telia has the right to appoint three members of the Supervisory Board only
for as long as Telia and its Permitted Controlled Affiliate Transferees own 10%
or more of the outstanding voting securities of Netia, and two members for as
long as they own 5% or more of the outstanding voting securities of Netia.
Telia's right to elect directors shall terminate completely at such time as it
ceases to own at least 5% of the outstanding voting securities of Netia.
Warburg has the right to appoint one member of the Supervisory Board only
for as long as Warburg and its Permitted Controlled Affiliate Transferees own 5%
or more of the outstanding voting securities of Netia. Warburg's right to elect
a director shall terminate completely at such time as it ceases to own at least
5% of the outstanding voting securities of Netia.
At such time that the number of members of the Supervisory Board appointed
respectively by Telia, Dankner, Trefoil and Shamrock, or Warburg, is reduced as
a result of their share ownership being reduced below one of the foregoing
levels, the relevant party shall cause the requisite number of its appointees to
the Supervisory Board to resign and the vacancy will be filled by a person or
persons elected by Netia's shareholders generally.
Dankner, Trefoil, Shamrock, Telia and Warburg also have the right to jointly
appoint one additional member of the Supervisory Board, it being their intention
to appoint a person with experience and expertise in international
telecommunications activities, only for as long as Warburg and its Permitted
Controlled Affiliate Transferees own 5% of the outstanding voting securities of
Netia.
Under the Post-IPO Shareholders' Agreement, the following matters require
the approval of a majority of the total number of members of the Supervisory
Board:
- presentation to Netia's general assembly of shareholders of a written
report on the results of the Supervisory Board's examination of Netia's
balance sheet and the profit and loss account;
- presentation to Netia's general assembly of shareholders of a written
report on the results of the Supervisory Board's examination of the report
and the recommendations of the Management Board with respect to the
division of profits or coverage of losses;
- appointment and removal of the members of the Management Board (except for
any members with respect to whom Netia's statute reserves the right of
appointment to one or more shareholders) and the issuance of by-laws for
the Management Board;
- setting or changing the compensation of the Management Board or approving
the employment contracts of the members of the Management Board, and the
setting and changing of any incentive plan for the Management Board and
other key Netia employees;
- approval of business plans and annual budgets for Netia;
- unless otherwise provided in the most recent business plan or budget of
Netia approved by the Supervisory Board, consent to incurring or making
loans or other indebtedness in excess of $100,000 in a single or series of
related transactions or the equivalent amount in Polish Zloty or any other
currencies;
- unless otherwise provided in the most recent business plan or budget of
Netia approved by the Supervisory Board, the authorization of capital
expenditures, obligations or commitments in excess of $100,000 in a single
transaction or series of related transactions or the equivalent amount in
Polish Zloty or any other currencies;
- unless otherwise provided in the most recent business plan or budget of
Netia approved by the Supervisory Board, the giving of any guarantee or
indemnity with respect to the obligations or liability of any other
entity, which guaranty or indemnity shall be in excess of $100,000 in a
single transaction or series of related transactions or the equivalent
amount in Polish Zloty or any other currencies;
- unless otherwise provided in the most recent business plan or budget of
Netia approved by the Supervisory Board, the acquisition of real estate
for a purchase price exceeding $100,000 in a
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single transaction or series of related transactions or the equivalent
amount in Polish Zloty or any other currencies;
- unless otherwise provided in the most recent business plan or budget of
Netia approved by the Supervisory Board, consent to the sale, lease,
pledge, hypothecation, encumbering or transferring of any of Netia's
assets having a value in excess of $100,000 in a single transaction or
series of related transactions or the equivalent amount in Polish Zloty or
any other currencies; provided, however, that sales of products and
obsolete equipment in the ordinary course of business will be subject to
no such restriction;
- unless otherwise provided in the most recent business plan or budget of
Netia approved by the Supervisory Board, the making of any investment or
funding of any amounts in or with respect to any
non-telecommunications-related businesses or operations of Netia
(including, for this purpose, Uni-Net), whether under existing contractual
arrangements or otherwise;
- consent to the commencement, settlement, assignment, compromise or release
of any claim of or against Netia in excess of $100,000 in a single
transaction or series of related transactions or the equivalent amount in
Polish Zloty or any other currencies;
- bidding for any license or concession or agreeing to the material
modification of any existing license of Netia or any subsidiary;
- consenting to acquiring shares of or investing in other entities other
than existing subsidiaries of the Company; and
- any matter concerning which the Management Board has reached a voting
deadlock and which has been certified to the Supervisory Board by the
Chairman of the Management Board.
Under the Post-IPO Shareholders' Agreement, at any meeting of the
Supervisory Board, a quorum consists of a majority of the members of the
Supervisory Board, but must include at least one member of the Supervisory Board
appointed by Telia (for so long as Telia and its Permitted Controlled Affiliate
Transferees own at least 8% of Netia's outstanding voting securities), at least
one member of the Supervisory Board appointed by Dankner, Trefoil, Shamrock and
the GS Entities (for so long as Dankner, Trefoil, Shamrock, the GS Entities and
their Permitted Controlled Affiliate Transferees collectively own at least 8% of
Netia's outstanding voting securities) and the member of the Supervisory Board
appointed by Warburg (for so long as Warburg and its Permitted Controlled
Affiliate Transferees own at least 8% of Netia's outstanding voting securities).
If at any meeting of the Supervisory Board the requisite quorum is not present,
the members present are entitled to adjourn the meeting (by written notice to
the other members) to a date not sooner than five business days following the
date originally proposed for such meeting and the quorum required at the
adjourned meeting consists of the members of the Supervisory Board present at
that meeting.
These provisions of the Post-IPO Shareholders' Agreement have been
incorporated into Netia's statutes, which became effective subsequent to the
closing of the IPO. On July 26, 1999, the shareholders of Netia approved the
revised statute of Netia. Although one shareholder of Netia objected to the
resolution approving the amendments to the statute, this shareholder did not
object to the issuance of the common shares being issued pursuant to the IPO.
See "--Legal Proceedings."
Prior to completion of the IPO and the effectiveness of the Post-IPO
Shareholders' Agreement, the relations among Netia and its principal
shareholders were governed by a Pre-IPO Shareholders' Agreement, dated as of
June 30, 1999 (the "Pre-IPO Shareholders' Agreement"). The terms of this
agreement were substantially similar to those of the Post-IPO Shareholders'
Agreement, except that it provided for a ten-person Supervisory Board, of which
Danker, Trefoil, Shamrock and the GS Entities had the right to elect up to three
members; Telia had the right to elect up to three members; Warburg had the right
to appoint one member; Dankner, Trefoil, Shamrock, the GS Entities and Warburg
jointly had the right to appoint one member (all subject to maintaining certain
share ownership thresholds);
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and, of the remaining two members, one was to be elected by the general assembly
of shareholders and one by a group of Netia's founding shareholders; and it did
not provide for "independent" directors.
Set forth below is a list of the current members of the Supervisory Board:
<TABLE>
<CAPTION>
NAME AGE APPOINTED BY
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Kaj Juul-Pedersen (Chairman)......................... 55 Telia
Lars Rydin........................................... 52 Telia
Hans Golteus......................................... 57 Telia
Shmuel Dankner....................................... 67 Dankner/Trefoil/Shamrock/GS Entities
Uri Levit............................................ 61 Dankner/Trefoil/Shamrock/GS Entities
Michael Geiger....................................... 60 Dankner/Trefoil/Shamrock/GS Entities
Roberto Italia....................................... 33 Warburg
David Oertle......................................... 53 All shareholders
Andrzej Radziminski.................................. 55 Holders of certain Class A shares
Jan Guz.............................................. 54 All shareholders
Donald Mucha......................................... 66 All shareholders
</TABLE>
In connection with BRE's participation in the IPO, Telia, Dankner, Shamrock,
Trefoil and Warburg undertook to vote their shares in favor of adding a
representative of BRE to the Supervisory Board. On September 24, 1999, Netia's
shareholders voted to increase the size of the Supervisory Board to twelve
members. It is anticipated that Telia, Dankner, Shamrock, Trefoil and Warburg
will designate a BRE member shortly. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Recent Developments."
Netia's Management Board consists of six members, all of whom are appointed
by the Supervisory Board (except for one member who is appointed by certain
founding shareholders of Netia pursuant to Netia's statute). See "Legal
Proceedings." Under the Post-IPO Shareholders' Agreement, if the Management
Board is deadlocked on any matter, the deadlock will be resolved by the
Supervisory Board upon certification of the issue by the Chairman of the
Management Board.
Set forth below is a list of the current members of the Management Board:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Meir Srebernik....................................... 40 President and Chief Executive Officer
Kjell-Ove Blom....................................... 56 Chief Operating Officer
Maxymilian Bylicki................................... 42 Member
Avraham Hochman...................................... 43 Chief Financial Officer/Vice President-Finance
Jan Lobaszewski...................................... 49 Member (appointed by holders of certain Class A
shares)
George Makowski...................................... 45 Chief Marketing Officer
</TABLE>
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NETIA TELEKOM AND NETIA SOUTH
Netia Telekom and Netia South each is governed by a supervisory board and a
management board. Under the Pre-IPO Shareholders' Agreement, the statutes of
Netia Telekom and Netia South were amended and restated to be substantially
identical to the parent company's statutes and the members of the supervisory
and management boards of Netia Telekom and Netia South were made substantially
identical to the Supervisory Board and the Management Board.
BIOGRAPHIES
The following is a brief biography for each of the current members of the
Supervisory Board and the Management Board of Netia.
KJELL-OVE BLOM has served as a member of Netia Telekom's and Netia South's
management boards since October 1997 and its Chief Operating Officer since June
1999. Between 1986 and 1994, Mr. Blom held various positions in Telia such as
Director of Sales in Stockholm and Director and Vice President of Network
Services and served as a member of the supervisory boards of various of Telia's
subsidiaries. Between 1994 and 1997, Mr. Blom was Vice President of Strategy and
Vice President of Operations for Unisource, a pan-European telecommunications
operator 33% owned by Telia. Before joining Telia, he worked as a sales
representative for IBM and as an information technology director in two Swedish
companies. Mr. Blom has a Ph.D. degree in Human Ecology and an M.S. degree in
Civil Engineering.
MAXYMILIAN BYLICKI has served as a Human Resources and Administrative
Director of Netia Telekom since June 1998 and as a member of Supervisory Board
of Netia Telekom Torun and Netia Telekom Wloclawek since July 1998. Between 1993
and June 1998, he was the Organization Development Director and the Warsaw
Region Director of Centertel, Poland's first cellular telephone operator. From
1989 to 1993, Mr. Bylicki was head of The State Agency for Artistic Education in
Poland. Mr. Bylicki holds an M.A. degree in Music and in 1997 received an M.B.A.
degree from the University of Calgary.
SHMUEL DANKNER has served as a member of the Supervisory Board since May
1996, as a member of Netia Telekom's supervisory board since October 1995 and as
a member of Netia South's supervisory board since February 1997. Mr. Dankner has
also been Chairman of the boards of directors of Dankner and Matav Cable Systems
Media Ltd. ("Matav") for more than the past five years. In addition, Mr. Dankner
served as Chairman of the board of directors of Dor Chemicals Limited from
October 1963 until May 1996 and of Dor Energy (1988) Limited from July 1988
until May 1996. Mr. Dankner has a B.Sc. degree in Chemical Engineering from the
University of California at Berkeley and an M.Sc. degree in Chemical Engineering
from Columbia University in New York.
MICHAEL GEIGER has served as a member of the Supervisory Board since May
1996, as a member of Netia Telekom's supervisory board since October 1995 and as
a member of Netia South's supervisory board since February 1997. For more than
the past five years, Mr. Geiger has been engaged in business management and
consulting and has rendered consulting services to Shamrock. Mr. Geiger has a
B.Sc. degree in Economics from Tel Aviv University and an M.A. degree in
Economics from the University of California at Los Angeles.
HANS GOLTEUS has served as a member of the Supervisory Board since March
1999. Prior to joining Telia in March 1999 as Head of Business Area
International, Mr. Golteus served as President and Chief Operating Officer of
Norwegian Cruise Line Ltd. and Kloster Cruise Ltd. in the United States. Between
1970 and 1987, Mr. Golteus served with the Swedish telecommunications company
Ericsson in a number of capacities in Sweden and Latin America. Between 1978 and
1980, Mr. Golteus headed Ericsson's department for signalling systems, and
between 1980 and 1986 he served as General Manager for Ericsson do Brasil in Sao
Paulo. He also served as Vice President of L.M. Ericsson in Stockholm. Mr.
Golteus has an M.Sc. degree in Electronics Engineering from Kungliga Tekniska
Hogskolan in Stockholm.
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JAN GUZ has served as Vice Chairman of Netia Telekom's supervisory board
since April 1997 and Vice Chairman of Netia South's supervisory board since
February 1997. Mr. Guz is also Chairman of the supervisory board of Heros Life
Insurance Company. From 1996 to January 1997, Mr. Guz was the President of Netia
Telekom's management board. From 1994 to 1995, Mr. Guz was General Director of
the Department of Economic Policy at the Prime Minister's Office. During 1993,
Mr. Guz was Commercial Counsellor at the Embassy of Poland in Thailand. Mr. Guz
has an M.A. in Economics and Operational Research from the Warsaw School of
Economics and a Ph.D. in Economics from the Warsaw School of Economics, and in
1997 graduated from the International Institute for Management Development in
Lausanne.
AVRAHAM HOCHMAN was appointed Chief Financial Officer/Vice President-Finance
of Netia Holdings S.A., Netia Telekom and Netia South effective October 1, 1998.
Until recently, Mr. Hochman served as the Chief Financial Officer of Bezeq, the
Israel Telecommunication Corp. Limited, the main telecommunications network
operator in Israel. From 1987 to 1994, Mr. Hochman served as Chief Financial
Officer and Vice President of Finance of the Israeli Postal Authority.
ROBERTO ITALIA has served as a member of the Supervisory Board since July
1999. Mr. Italia is a vice president of E.M. Warburg, Pincus & Co. LLC and has
been associated with the firm since September 1994. Prior to joining Warburg,
Mr. Italia was an officer in the international business development unit of STET
SpA, now Telecom Italia. He is a director of WPJV Mediterranean
Telecommunications B.V., Worldlink Telecomunicazioni S.p.A., Socratel Iberica
S.A., Telecom Dynamics S.A., and Lister Healthcare Group Ltd. Mr. Italia has a
B.A. degree in economics from LUISS of Rome, Italy and a M.B.A. degree from
INSEAD of Fontainebleau, France.
KAJ JUUL-PEDERSEN was appointed as a member of each of Netia Telekom's
Supervisory Board and Netia South's supervisory board during October 1997, and
in January 1998 was elected Chairman of the supervisory boards of both
companies. He was elected Chairman of the Supervisory Board in March 1999. Mr.
Juul-Pedersen joined Telia in August 1997 to serve as President of Telia A/S
(Denmark) after 25 years of service with Ericsson in a number of capacities in
Denmark, the United Kingdom and Sweden, and later as Vice President of Ericsson
AB and President of Ericsson Sp. z o.o., Ericsson's Polish company. Between 1995
and 1997, Mr. Juul-Pedersen was President of ECTEL, the European
Telecommunication and Professional Electronic Industry.
URI LEVIT has served as a member of the Supervisory Board since May 1999.
Since December 1997, Mr. Levit has served as Acting Vice Chairman of Dankner
Investments Ltd. and Matav-Cable Systems Media Ltd. and as a director of Partner
Communication Company Ltd. Prior to December 1997, Mr. Levit was the Managing
Director of Hapoalim Investments Ltd. and served as a director of various
companies, including Taldor Computer Systems 1986 Ltd., Ophir Holdings Ltd.,
Hapoalim Electronic Communication Ltd., Toren Insurance Agencies Ltd., Orlite
Industries (1959) Ltd., Hazera (1939) Ltd., Hapoalim Leasing Ltd., Teledata
Communication Ltd., Industrial Building Corporation Ltd., Transclal Trade Ltd.
and Maximedia Outdoor Advertising Ltd. Mr. Levit has a B.A. in Economics and
Social Sciences from the Hebrew University in Jerusalem.
JAN LOBASZEWSKI has served as a member of the Management Board since May
1996 and has been a member of the management board of the law office "Lex" Co.
Ltd. since 1988. Mr. Lobaszewski graduated from the Faculty of Law at Warsaw
University.
GEORGE MAKOWSKI joined Netia in August 1998 as its Vice President of Sales
and Marketing. Previously he had worked as the Chief Operating Officer of PCI,
Poland's largest cable television operator serving in excess of 860,000
subscribers. From August 1993 to January 1997, Mr. Makowski held the position of
Vice President of Marketing for Ameritech International. During this time he
served as Sales and Marketing Director of Centertel S.A., Poland's first
cellular telephony operator, in which Ameritech has an equity interest. From
1986 to 1993, Mr. Makowski held various senior management roles within Groupe
Bull S.A. Mr. Makowski holds a degree in Engineering and in 1985 graduated from
Cranfield School of Management with an M.B.A.
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DONALD MUCHA has served as a member of the Supervisory Board since April
1992. Mr. Mucha is also Chairman of the boards of directors of each of MMP
Investments, Inc., a company specialized in international investments with its
main emphasis in Poland; Pro-Invest International Ltd., one of Poland's leading
consulting companies; and Avid Group, a multimedia company in the United States.
Mr. Mucha is also on the supervisory board of Pro-Capital S.A., a Polish
brokerage company. Mr. Mucha has studied at the University of Illinois, the
University of Chicago and Kent College of Law. He holds B.S. and M.B.A. degrees.
DAVID OERTLE was appointed as a member of the Supervisory Board on September
24, 1999. Mr. Oertle is Chairman of UK's First Telecom Group Ltd and
Mediterranean Communications and has been Chief Executive Officer of Esprit
Telecom Group Ltd, U.K. and Techcomm Group Ltd, Australia, as well as Chief
Operating Officer of Telstra, Australia and Senior Officer of AT&T and Sprint,
U.S.A. Mr. Oertle holds a B.S. degree in economics and a B.S. degree in
political science from University of Wisconsin.
ANDRZEJ RADZIMINSKI has served as a member of the Supervisory Board since
May 1996. Mr. Radziminski was the President of the Management Board since
Netia's establishment in 1990 until his election as Chairman. Mr. Radziminski
has also been a member of Netia Telekom's supervisory board since October 1995
and of Netia South's supervisory board since February 1997. Until recently, Mr.
Radziminski was Deputy Director General of Polska Poczta Telegraf i Telefon. He
has an M.Sc. degree from the Faculty of Electronics of the Warsaw Technical
University and a postgraduate studies diploma from the Faculty of Law of the
University of Warsaw.
LARS RYDIN was appointed as a member of each of Netia Telekom's supervisory
board and Netia South's supervisory board during October 1997. Mr. Rydin has
held various positions at Telia since 1984 and has been Vice President of the
Network Services Division at Telia since 1992. Mr. Rydin is a board member of
each of Unisource Computer Services, Telia A/S Danmark and Telia A/S Norge. Mr.
Rydin has a B.A. degree from the University of Stockholm.
MEIR SREBERNIK has served as a member of the Management Board since November
1994, as President of the Management Board since May 1996, and as President and
Chief Executive Officer of Netia Telekom's and Netia South's management boards
since January 1998 and December 1997, respectively. Mr. Srebernik served as a
member of Netia Telekom's supervisory board from October 1995 to December 1997
and as a member of Netia South's supervisory board from February 1997 to
December 1997. Between 1993 and 1994, Mr. Srebernik was Vice President for
Telecommunications of the Dankner Group. From 1987 to 1993, Mr. Srebernik was
head of the Cable Television Division of the Israeli Ministry of
Telecommunications. Mr. Srebernik graduated from the Business School of
Economics of the Hebrew University in Jerusalem.
REMUNERATION OF THE MEMBERS OF THE MANAGEMENT AND SUPERVISORY BOARDS
In 1998, Netia Holdings S.A., Netia Telekom and Netia South paid an
aggregate of PLN 6.4 million ($1.6 million) to the members of their respective
management boards for services in all capacities (excluding, with respect to Mr.
Srebernik, PLN 0.9 million ($0.2 million) paid pursuant to a consulting
agreement between Netia and Galopus Co. Ltd. ("Galopus"), as described below
under "Certain Relationships and Transactions with Related Parties--Additional
Agreements." Netia also has granted Galopus various "phantom stock options"
described under "Certain Relationships and Transactions with Related
Parties--Additional Agreements." Currently, the members of the supervisory
boards of each of Netia, of Netia Telekom and Netia South do not receive any
remuneration for their positions on such supervisory boards. Netia also has
granted Galopus certain "phantom stock options" described under "Certain
Relationships and Transactions with--Related Parties Additional Agreements,"
Netia Holdings S.A., Netia Telekom and Netia South have not set aside any
amounts for pension, retirement or similar benefits for or on account of the
members of their respective management boards and supervisory boards except for
social security payments made to the applicable Polish authorities with
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respect to those individuals who are employees as required under Polish law. See
"Certain Relationships and Transactions with Related Parties--Additional
Agreements."
STOCK OPTION PLAN
In April 1999, Netia's shareholders approved the creation of the Stock
Option Plan, pursuant to which Netia may issue options to purchase a number of
common shares representing not more than 5.0% of the number of common shares
that are outstanding immediately prior to an initial public offering of Netia's
stock to executive management, directors, officers and other employees of Netia.
The Stock Option Plan is intended to provide incentives to executive management,
officers and other employees of Netia. All options granted under the Stock
Option Plan will vest over periods up to three years after the date of the
grant. Upon the occurrence of certain events such as consolidations, mergers or
stock dividends payable in the capital stock of Netia, warrants or other rights
to acquire such stock, an optionee's rights with respect to options granted are
to be adjusted as provided in the Stock Option Plan. The Stock Option Plan will
be administered by a committee selected from among members of the Supervisory
Board, which will determine to whom options are granted, the number of shares
subject to particular options and the other terms and conditions of the exercise
thereof.
The concept of authorized but unissued share capital does not exist in
Poland. Accordingly, to facilitate future implementation of the Stock Option
Plan, we issued 233,488 Series W common shares to a Jersey corporation at par
value (I.E., PLN 6.00 per share). The shares, which currently comprise
approximately 1.1% of all outstanding common shares of Netia but whose number
may be increased to 1.5% in the near future, will be held by a company
established by the trust for that purpose, to be issued to the holders of the
options upon exercise thereof. Upon exercise of the options the trust will pass
the exercise price back to Netia. Netia has no economic interest in, and it is
not a parent company of, that corporation. It is our intention ultimately to
increase the number of shares available for employee options to approximately
1,100,000 common shares.
Option grants will be made to employees of Netia under grant agreements
which will provide, among other things, that the vesting of certain unvested
options granted to such individuals will accelerate (i) upon such individual's
termination of employment without cause, as a result of death or as a result of
disability and (ii) upon certain changes in control (each, an "Acceleration
Date"). Pursuant to such agreements, the options otherwise exercisable within up
to three years will vest upon the occurrence of an Acceleration Date.
Netia has entered into letter agreements with companies controlled by each
of Avraham Hochman, Kjell-Ove Blom, and George Makowski and Maxymilian Bylicki
under which Netia agrees to grant these officers options to purchase shares
representing 0.2%, 0.2%, 0.15% and 0.15%, respectively, of Netia's common stock
issued and outstanding immediately prior to an initial public offering at
exercise prices ranging between $8.40 and 75% of the price per share in the
initial public offering. The options when granted will vest in three equal
installments, with the first vesting of any of these options having taken place
in April 1999.
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PRINCIPAL SHAREHOLDERS
As of September 1, 1999 (and giving effect to the IPO and the Warbug
Transaction), Telia, Dankner, Trefoil, Shamrock and Warburg own 29.25%, 9.39%,
5.93%, 3.08% and 9.80%, respectively, of the outstanding voting securities of
Netia. See "Certain Relationships and Transactions with Related Parties."
TELIA
Telia, the Swedish public telephone company established in 1853, owns a
29.25% interest in Netia. Telia is a well-established European
telecommunications company with experience in building and operating local
telephone networks in areas experiencing competition in the local telephony
market. The Swedish market has been open to competition since 1990 and today is
considered to be one of the most deregulated telecommunications markets in the
world. Telia has over six million telecommunications customers and is the
largest telecommunications company in the region comprised of Denmark, Finland,
Norway and Sweden. In addition, Telia also operates, primarily through
joint-venture companies, in a number of other locations including Estonia,
Latvia, Lithuania, Russia, Southeast Asia, India, South America and the United
Kingdom. Telia has advised us that it regards its investment in Netia as an
important element of this investment strategy. Telia is wholly owned by the
Swedish government.
Telia is rapidly expanding outside Sweden in both fixed and mobile
telecommunications. In March 1999, the governments of Sweden and Norway agreed
to consummate the merger of Telia and Telenor, the Norwegian state-owned
national telecommunications company. Upon completion, the combined company
should be one of the leading telecommunications companies of Europe and is
expected to be privatized by the end of 2000. Based on publicly reported
information, 1998 pro forma revenue and operating income would have been SEK 81
billion (approximately $9.7 billion) and SEK 10 billion (approximately $1.1
billion), respectively.
The net sales and operating income for 1998 for Telia and its subsidiaries
(the "Telia Group") were SEK 51.2 billion (approximately $6.1 billion) and SEK
7.6 billion (approximately $917 million), respectively. With over 30,000
employees, the Telia Group is one of the largest Swedish business groups.
Telia has played a significant role in Netia, assisting with the design,
operation and maintenance of our network and the execution of business strategy.
Telia has also contributed its expertise in operations, maintenance, sales,
marketing, training, advanced technological support, equipment procurement and
recruiting.
DANKNER
Dankner is a company through which the Dankner Group, one of the leading
privately owned concerns in Israel (the "Dankner Group"), carries out its real
estate and communications activities. Dankner is listed on the Tel Aviv Stock
Exchange. Dankner is 84.04% owned by members of the Dankner family and 10.51% by
the Gilinski family, with the remaining 5.4% owned by the public. No single
entity possesses voting or investment control over Dankner. Dankner holds a
42.9% equity interest in Matav, an Israeli cable television company traded on
the Tel Aviv and New York Stock Exchanges, with a market value of $484 million
as of May 13, 1999. Matav has approximately 275,000 subscribers in a
435,000-household licensed territory. Matav holds a 20.3% stake in Partner, the
consortium that in April 1998 won the tender for the third cellular license in
Israel and which is building Israel's first and only GSM network. Partner
started commercial operations in January 1999 and the investment in its GSM
network is expected to reach $1 billion. Dankner also has a broad range of real
estate developments in Israel. Dankner also has interests in a range of
residential and commercial projects and specializes in integrated residential
neighborhoods, with special stock market capitalization as of May 13, 1999 of
approximately $167 million.
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Outside the communications and real estate sectors, the Dankner Group has
operations in the energy industry, where it owns 64.7% of Dor Energy Ltd. and
100.0% of Dor Gas Ltd. Dor Energy Ltd. is traded on the Tel Aviv Stock Exchange
and the London Stock Exchange; it commenced operations in 1990 and in eight
years has gained about 16% of the fuel market in Israel, with a turnover of over
$450 million in 1998. Dor Gas Ltd. is one of the leading liquid petroleum and
gas marketing companies in Israel with about a 30% share of the Israeli market.
The Dankner Group is also involved in petrochemicals, through a 67% shareholding
in Dor Chemicals Ltd.; in the production of salt, through an 85% holding in
Israel Salt Industries; and in the production of molding compounds, through a
100% holding in Carmel Chemicals Ltd. The Dankner Group holds an approximate 12%
shareholding in Bank Hapoalim, the largest bank in Israel, and it constitutes
25% of that bank's controlling group.
TREFOIL AND SHAMROCK
Shamrock, founded in 1978, is the privately owned investment company of the
Roy E. Disney family and is controlled by Roy E. and Patricia A. Disney.
Shamrock is headquartered in Burbank, California. Trefoil, an investment fund,
was organized in 1990 by the senior executives of Shamrock. Roy E. and Patricia
A. Disney and Stanley P. Gold have investment control over Trefoil by virtue of
their control over the general partner of Trefoil. Over a period of
approximately 20 years, Shamrock and its affiliates (the "Shamrock Group") have
made significant investments in a broad range of businesses including: Central
Soya Company, a leading agribusiness company; Enterra Corporation, an
international energy services company; Show Industries, Inc. and Sound
Warehouse, Inc., recorded music and video retailers; Shamrock Broadcasting Inc.,
a radio broadcasting company; Matav; L.A. Gear, Inc., an athletic and lifestyle
footwear company; The Grand Union Company, a retail food store chain; Applause
Enterprises, Inc., a marketer of licensed and branded gift and toy products;
Fantastic Foods, Inc.; Cascadian Farm Incorporated; Muir Glen, LLC, natural and
organic food companies; and Koor Industries Limited, the largest industrial
holding company in Israel.
WARBURG, PINCUS
E. M. Warburg, Pincus & Co., LLC and its affiliates comprise a major global
private equity investment firm that manages approximately $7 billion of
investments in its private equity investing activities, with a further $5
billion available for investment.
The table below sets forth certain information regarding the beneficial
ownership of Netia's capital stock as of September 3, 1999 (including the IPO
and the Warburg Transaction) by (i) each beneficial owner of 10% or more of
Netia's voting securities and (ii) the total amount of Netia's voting securities
owned by Netia's officers and directors as a group.
<TABLE>
<CAPTION>
CAPITAL
NAME OF BENEFICIAL OWNER STOCK PERCENTAGE
- --------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Dankner Investments Ltd.(1) ......................................... 2,488,862 9.39%
5 Hashla Street
Tel Aviv, Israel 62283
Shamrock Holdings Inc.(1) ........................................... 815,365 3.08%
4444 Lakeside Drive
Burbank, CA 91505 U.S.A.
Telia AB ............................................................ 7,750,355 29.25%
Marbackagatan 11
Farsta, Sweden SE-123 86
</TABLE>
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<TABLE>
<CAPTION>
CAPITAL
NAME OF BENEFICIAL OWNER STOCK PERCENTAGE
- --------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Trefoil Capital Investors, L.P.(1) .................................. 1,571,163 5.93%
4444 Lakeside Drive
Burbank, CA 91505 U.S.A.
Warburg, Pincus Equity Partners, L.P.(2) ............................ 2,597,403 9.80%
Warburg, Pincus Ventures International, L.P.
c/o E.M. Warburg, Pincus & Co. LLC
466 Lexington Avenue
New York, New York 10019
Members of the Supervisory Board and Management Board and other 143,910 0.54%
officers of Netia, as a group(3)...................................
</TABLE>
- ------------------------
(1) Does not give effect to an agreement among Dankner, Trefoil and Shamrock
concerning the voting of shares of capital stock owned by them. See "Certain
Relationships and Transactions with Related Parties."
(2) The sole general partner of Warburg, Pincus Equity Partners, L.P. ("WPEP")
and Warburg, Pincus Ventures International, L.P. ("WPVI") is Warburg, Pincus
& Co., a New York general partnership ("WP"). Warburg, a New York limited
liability company, manages both WPEP and WPVI. The members of Warburg are
substantially the same as the partners of WP. Lionel I. Pincus is the
managing partner of WP and the managing member of Warburg and may be deemed
to control both WP and Warburg. WP has a 20% interest in the profits of both
WPEP and WPVI as the general partner, and also owns approximately 2.0% of
the limited partnership interests in WPEP and approximately 1.25% of the
limited partnership interests in WPVI.
(3) This excludes the common shares subject to options which may be granted
under the Stock Option Plan when it becomes effective and to shares issuable
upon the exercise of certain rights and options granted to a company
controlled by Mr. Srebernik.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH RELATED PARTIES
OPTION EXERCISE AGREEMENT
In August 1998, Telia, Dankner, Trefoil, Shamrock and the GS Entities
entered into an option exercise agreement which was amended and restated in
December 1998 (the "Option Exercise Agreement") pursuant to which Telia
exercised the Telia Exchange Option and Telia Incentive Option. See "Principal
and Selling Shareholders." Effective March 1999 upon the closing of the
transactions contemplated by the Option Exercise Agreement, Telia received
approximately 3,727,340 common shares in exchange for its interests in Netia
Telekom and Netia South and an additional 1,447,168 common shares pursuant to
the Telia Incentive Option for an aggregate purchase price of $23.9 million. The
Option Exercise Agreement contains representations and warranties, and
corresponding indemnities relating to breaches thereto, from Netia, Dankner,
Trefoil, Shamrock and the GS Entities to Telia, and from Telia to Netia and
Dankner, Trefoil, Shamrock and the GS Entities.
In April 1999, the parties to the Option Exercise Agreement entered into an
amendment to that agreement and in May 1999 consummated the Telia Capital
Increase, pursuant to which we issued an aggregate of 2,597,402 shares of our
common stock to Telia and certain existing shareholders for the aggregate amount
of $50 million. The Telia Capital Increase became effective upon registration of
all shares with the Commercial Court in Warsaw.
POST-IPO SHAREHOLDERS' AGREEMENT
As noted above under "Management," upon completion of the IPO, Telia,
Dankner, Trefoil, Shamrock, the GS Entities, Warburg and Netia entered into two
post-IPO shareholders' agreements (with the GS Entities being parties to only
one of these agreements) which sets forth the understanding of the parties as to
their ownership interests and the governance of Netia. In addition to the
provisions concerning the governance of Netia described under "Management," the
Post-IPO Shareholders' Agreement contains the agreement of the parties on the
following:
RIGHT OF FIRST OFFER
If any shareholder who is a party to the Post-IPO Shareholders' Agreement
wishes to transfer any portion of the shares held by it, such selling
shareholder must notify the other such shareholders of the proposed sale or
transfer. Upon such notification, each non-selling shareholder who is party to
the Post-IPO Shareholders' Agreement may submit an unconditional offer to
purchase the shares being offered at the price and upon the terms set forth in
such transfer notice. (Furthermore, Dankner, Trefoil, Shamrock and the GS
Entities have agreed that if any of them wishes to transfer any portion of their
shares of Netia stock, it must notify the others of the proposed sale and offer
them the opportunity to purchase such shares prior to offering such shares to
Telia and Warburg.) If none of the non-transferring parties submits such offer
to purchase, then the selling shareholder has the right to consummate a sale to
a third party at a price not lower than the price, and upon the terms, set forth
in the transfer notice.
DISPOSAL OF CERTAIN ASSETS
The parties to the Post-IPO Shareholders' Agreement have agreed, as also set
forth in the Pre-IPO Shareholders' Agreement, to cause Netia to sell, transfer,
spin off or otherwise dispose of our Non-telecommunications Businesses as soon
as practicable and to use all commercially reasonable efforts to cause such
sale, transfer, spin-off or disposition (i) to be effected by December 12, 1999
and (ii) to be effected in such a manner so as to avoid Netia assuming or
retaining any liabilities or obligations relating to such operations.
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NON-COMPETITION
Each of the shareholders who is a party to the Post-IPO Shareholders'
Agreement has agreed that, as long as such shareholder owns 5.0% or more of the
outstanding voting securities of Netia (or, if earlier, upon the termination of
the agreement with respect to such shareholder), and in each case for a period
of one year thereafter, it shall not, directly or indirectly, own, manage,
operate, join, control or participate in, be compensated by or invest in, or be
connected with, any telecommunications entity or otherwise engage in any
telecommunications activities (such as fixed-line, cellular, value-added, CPE
and content provision for cable television), in any such case, in the territory
of the Republic of Poland, other than Netia or its subsidiaries. However, the
following activities shall be exempt from the scope of this clause:
- the wireless public trunked radio activities of Uni-Net,
- the activities conducted by Unisource N.V., a Dutch company of which Telia
is a shareholder (provided that Telia may not provide any advice or
support in connection with the activities conducted by Unisource N.V. in
Poland) and the conduct by Telia of its ordinary course of business
activities as a provider of telecommunications services in Sweden and
other countries which may involve the interaction and exchange of services
with providers of telecommunications services in Poland;
- investment banking activities by Goldman Sachs International and/or its
affiliates; provided that such shareholder implements and maintains
appropriate "Chinese Wall" safeguards;
- an investment or other engagement by a shareholder in an entity that is
not engaged in local, domestic long distance, international fixed-line
telephony and/or voice-over Internet services, but rather is engaged in
other telecommunications activities such as cellular or other wireless
mobile services or cable television in Poland. However, this last
exemption only applies if, prior to making such an investment or otherwise
engaging in such activity, such shareholder offers Netia the opportunity
to make such investment or otherwise engage in such activity on the same
terms offered to such shareholder or offered by such shareholder to a
third party, and the Supervisory Board elects not to pursue such
opportunity; and
- an investment by a shareholder of up to 1.0% of the securities of any
publicly traded enterprise, provided that the shareholder is not entitled
to any board representation, veto rights or other special rights relating
thereto.
- any investment by Warburg in a company that is neither (i) organized under
the laws of Poland nor (ii) whose principal place of business is in Poland
and is engaged in one or more aspects of the telecommunications business
and that at the time of Warburg's investment does not have as its
principal objective the provision of telecommunications services (such as
fixed line, cellular, IP, data, value-added, CPE or content provisions
such as cable television) in Poland; provided that, if in the course of
such investment such company comes to derive more than 15% of its annual
consolidated revenues from such services in Poland, then: (x) Warburg
shall give prompt notice to Netia and the other parties to the Post-IPO
Shareholders' Agreement of such investment; (y) no representative of
Warburg who is then serving, or within the immediately preceding 12 months
has served, as a member of the Supervisory Board, shall hold any position
as a director, officer or consultant to the company in which Warburg has
made such an investment and (z) Warburg's representatives on the
Supervisory Board shall exclude themselves from any discussions involving
matters related to direct competition between Netia and such other Warburg
investment; and
- any investment by Warburg in a company engaged in direct competition with
Netia in Poland from and after the later of (i) December 31, 2001 or (ii)
the completion of the second consecutive fiscal year of Netia in which
Netia has failed to meet any one of the following parameters:
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at least 90% of the revenue target (in PLN); at last 90% of the EBITDA
target (in PLN); or at least 90% of the network build-out target, in each
case as set forth in the Company's ten-year business plan as approved by
the Supervisory Board and Warburg; provided that, (x) Warburg gives prompt
notice to us and the other parties to the agreement of such investment,
(y) no representative of Warburg who is then serving, or within the
immediately preceding 12 months has served, as a member of the Supervisory
Board, shall hold any position as a director, officer or consultant to the
company in which Warburg has made such investment and (z) the
representatives of Warburg on the Supervisory Board shall exclude
themselves from any discussions involving matters related to direct
competition between Netia and such other Warburg investment.
REGISTRATION RIGHTS AGREEMENT
Telia, Dankner, Trefoil, the GS Entities, Warburg and Netia also have agreed
to enter into a registration rights agreement (the "Registration Rights
Agreement"), pursuant to which Netia will grant to the other parties thereto the
right to initiate up to a total of seven demand registrations and unlimited
"piggyback" registrations of their shares under the Securities Act. The
Registration Rights Agreement sets forth procedures for initiating registrations
of shares, exceptions to our obligation to effect such registrations, conditions
to such registrations, representations, warranties and indemnities. In
connection with any such registration, Netia has agreed to indemnify the other
parties, their officers and directors and each underwriter, if any, and
controlling persons of the other parties or any such underwriter, against
certain liabilities arising under the laws of any country (including liabilities
under U.S. securities laws) in respect of any registration or other offering
covered by the Registration Rights Agreement. Subject to certain limitations
specified in the Registration Rights Agreement, Netia will pay all expenses
incidental to such registration.
PREVIOUS AGREEMENTS AMONG SHAREHOLDERS
Upon the effective date of the Pre-IPO Shareholders' Agreement, a series of
agreements entered into by and among Netia, Netia Telekom, Netia South, Telia,
Dankner, Trefoil, Shamrock, the GS Entities and certain other shareholders of
Netia (including agreements containing certain guarantees of third-party
financing and other forms of credit enhancement for the benefit of Netia) all
terminated and certain rights thereunder effectively were waived. This group of
agreements included a series of agreements that governed the funding, governance
and operations of Netia, Netia Telekom and Netia South. The agreements,
described in more detail below, provided, among other things, that Danker,
Trefoil, Shamrock and the GS Entities, acting together, had the right to
nominate a majority of the members of the Supervisory Board and the Management
Board, Netia had the right to appoint a majority of the members of the
supervisory boards and the management boards of Netia Telekom and Netia South,
and Telia had the right to appoint certain members to each of these
subsidiaries' boards. These agreements also set forth commitments of Telia,
Dankner, Trefoil, Shamrock and the GS Entities with respect to funding of Netia,
Netia Telekom and Netia South.
Dankner, Trefoil, Shamrock and the GS Entities also have entered into a
separate shareholders agreement setting forth certain agreements with respect to
the voting and transfer of their shares.
In September 1997, Dankner, Shamrock and GSCP entered into an equity
undertaking (the "Principal Holdings Shareholders' Undertaking") with Netia with
respect to the obligations of Netia in support of the Netia South Bank Facility,
which obligations were assigned by way of security for the benefit of the banks
providing the Netia South Bank Facility. Under this equity undertaking, Dankner,
Shamrock and GSCP undertook, severally and not jointly, to provide Netia with
40.0%, 40.0% and 20.0%, respectively, of equity or subordinated shareholder
loans that Netia was obligated to provide Netia South in support of the Netia
South Bank Facility, and would have been required to fund their
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respective obligations only if and to the extent we did not satisfy our support
obligations for the Netia South Bank Facility from other sources.
Also in September 1997, Dankner, Shamrock, the GS Entities and Netia entered
into a Shareholders' Equity Commitment Agreement (the "Principal Holdings
Shareholders' Equity Commitment Agreement") pursuant to which Dankner, Shamrock
and the GS Entities have committed, severally and not jointly, effective upon
the issuance of the 1997 Senior Notes, to provide their respective pro rata
portion of an aggregate of approximately $32.0 million in incremental equity or
subordinated shareholder loans to Netia upon the occurrence of certain events.
The commitment was to be reduced by any amounts of equity or subordinated
shareholder loan financing obtained by Netia from alternative sources, which
could include private placements or an initial public offering or rights
offering. Dankner, Shamrock and the GS Entities also agreed to vote their shares
in Netia in favor of any necessary increase in the share capital of Netia to
enable them to comply with the obligations of Dankner, Shamrock and the GS
Entities to Netia under the agreement.
Dankner, Shamrock, Trefoil and the GS Entities and Netia Holdings S.A. had
also entered into a funding implementation agreement (the "Funding
Implementation Agreement"), which describes the manner in which Dankner,
Shamrock, Trefoil and the GS Entities subscribe for additional equity in, or
make subordinated loans to, Netia Holdings S.A. in order to satisfy their
support obligations in connection with the Netia South Bank Facility.
Effectively, the Funding Implementation Agreement provides that if Dankner,
Shamrock, Trefoil and the GS Entities were required to make payments in respect
of their support obligations in connection with the Netia South Bank Facility or
under certain principal holdings shareholders' equity commitments, they would
have the right to fund such obligations by purchasing additional shares of Netia
(or subordinated notes convertible into shares of Netia) at a price of
approximately $11.20 per share, as adjusted. In addition, the Funding
Implementation Agreement provides that Netia Holdings S.A. will pay each of
Dankner, Shamrock, Trefoil and the GS Entities an annual commitment fee of 5.0%
on the outstanding amount of their undertakings in connection with the Netia
South Bank Facility.
As noted above, each of these agreements has been terminated.
Netia and Telia are parties to an agreement pursuant to which Netia granted
Telia the Telia Exchange Option and the Telia Incentive Option. Pursuant to the
Telia Exchange Option, Netia granted Telia an option to effectively exchange
all, but not less than all, of its interests in Netia Telekom and Netia South
and any other entities formed by Netia and Telia for a 26.4% direct equity
interest in Netia, within 18 months of the execution of the Telia Exchange
Option (the "Exchange Option Period"). Pursuant to the Telia Incentive Option,
Telia was granted options to purchase 10.0% of the equity interests of Netia as
of the date of exercise of the Telia Incentive Option. In September 1998, Telia
determined to exercise the Telia Exchange Option and the Telia Incentive Option
and, in March 1999, when these transactions were completed, Telia, Dankner,
Trefoil, Shamrock and Netia entered into the Pre-IPO Shareholders' Agreement
described above.
Dankner and Shamrock are also parties to a voting agreement entered into in
1994 with certain other shareholders of Netia in connection with Dankner's and
Shamrock's initial investment in Netia, pursuant to which such other
shareholders agreed to vote all of their shares as directed by Dankner and
Shamrock with respect to certain matters, including capital increases. This
agreement will terminate upon completion of the Offering.
EBRD EQUITY AGREEMENTS
In August 1996, Netia Telekom and the EBRD entered into a subscription
agreement (the "EBRD Subscription Agreement") pursuant to which the EBRD agreed
to subscribe in tranches for a number of new shares issued in Netia Telekom
equivalent to approximately $7.7 million and, subsequently, the
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EBRD purchased a portion of these shares which, at that time, represented 10.0%
of Netia Telekom's outstanding share capital.
In September 1997, Netia and Telia purchased the EBRD's equity interest in
Netia Telekom on a pro rata basis for a purchase price of $7.6 million and $2.9
million, respectively. The payment of the purchase price was deferred until
September 1998 (subject to acceleration under certain circumstances) and was
secured by a pledge of the purchased shares. In connection with the exercise by
Telia of the Telia Exchange Option and the Telia Incentive Option, Netia and
Telia entered into an agreement pursuant to which in September 1998 Netia paid
the entire $10.5 million purchase price to EBRD and thereby acquired the entire
interest in Netia Telekom previously owned by EBRD.
OPERATIONAL SUPPORT AND SUPERVISION AGREEMENTS (THE "OSSAS")
In the second half of 1997, Netia Telekom and Netia South entered into the
OSSAs with Telia. The OSSAs are each for a term of three years. Under the OSSAs,
Telia will provide personnel and services upon the request of the Chief
Executive Officer of Netia Telekom or Netia South, as the case may be. Payment
for such personnel and services will be reimbursement of direct costs plus 15%.
The OSSAs are terminable upon the occurrence of certain customary events.
ADDITIONAL AGREEMENTS
In December 1996, Netia completed the Telmedia acquisition in which Netia
Telekom acquired Telmedia from Optimus Corporation Sp. z o.o., a wholly owned
subsidiary of Optimus S.A. ("Optimus"). Telmedia owns seven telecommunications
licenses in three different regions of Poland that include the entire pre-1999
voivodships of Gdansk, Krakow, Poznan and Opole, and cover approximately 2.8
million people. Netia Telekom subsequently transferred its interest in Telmedia
to Netia South.
In connection with the Telmedia acquisition, Netia Telekom granted Optimus
an option, exercisable on June 30, 1998, to either: purchase shares in Netia
based on a price formula designed to take into account the actual ringing
telephone lines and potential growth opportunities in the areas covered by the
Telmedia licenses as of June 30, 1998, or to receive a cash payment also based
on a predetermined formula. In June 1998, Optimus exercised its option and
agreed to receive a cash payment of $10.0 million and entered into a consultancy
agreement with Netia pursuant to which Optimus will provide consulting and
advisory services to Netia with respect to the public tender of additional
telecommunication licenses to provide fixed-line telephone services and domestic
long distance and international services for a fee of $1.0 million, which was
paid upon entering such agreement. The consultancy agreement terminates in June
2000. The first $2.7 million installment of the aggregate cash payment of $10.0
million was made to Optimus and the transaction was completed in August 1998.
During 1997, Netia and Telia made loans of $6.4 million and $2.2 million,
respectively, to Telekom Silesia, a subsidiary of Netia South. Such loans bear
interest at LIBOR plus 5% and are payable on demand. These loans were converted
into an equity interest in Netia South. As noted above, Telia exchanged all of
its interest in Netia South and Netia Telekom for a direct interest in Netia
pursuant to the exercise of the Telia Exchange Option.
Netia is currently a party to a consulting agreement with an entity
controlled by Andrzej Radziminski. Pursuant to that consulting agreement, this
entity performs certain consulting and advisory services for Netia and receives
payments of $25,000 per month. Netia is not obligated to make such payments if
the entity is terminated for cause. In June 1999, Netia notified the consultant
that it was terminating the agreement as of September 30, 1999.
In December 1996, Dankner, Shamrock Capital Advisors, Inc. and Netia entered
into a management services agreement (the "Management Services Agreement")
pursuant to which Dankner and
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Shamrock Capital Advisors, Inc. have agreed to provide management services to
Netia for an annual fee of $300,000 each plus reimbursement of certain expenses.
The Management Services Agreement was terminated pursuant to the terms of the
Pre-IPO Shareholders' Agreement.
In July 1997, Netia sold its commercial distribution department, which
distributes radio trunking equipment, to ARAS Sp. z o.o. ("ARAS"), a company
owned by Aleksander Szwarc and Andrzej Radziminski. In connection with this
sale, ARAS paid $80,000 for the sale of the commercial distribution department's
fixed assets and inventory of computer terminals. In addition, ARAS entered into
a license agreement with Netia pursuant to which ARAS agreed to pay to Netia a
royalty amounting to 2.5% of its gross sales related to radio and trunking
equipment and for the right to use the "R.P. Telekom" name. In March 1999, Netia
and ARAS entered into a termination and settlement agreement pursuant to which
ARAS will pay Netia a fee of PLN 137,423.
Netia is a party to a legal services agreement with a company controlled by
Jan Lobaszewski, a member of the Management Board of Netia. Pursuant to this
agreement, such entity will provide legal services to Netia that include
day-to-day legal assistance in Netia's business. The agreement provides for
retainer payments of $2,800 per month (plus extra charges computed on a per-hour
basis) and can be terminated by either party upon three months' notice.
In 1996, Netia Telekom entered into a consulting agreement with a company
controlled by Jan Guz pursuant to which such entity will provide consulting
services to Netia Telekom that include assisting in the acquisition of new
licenses, initiating new business opportunities and taking part in political
lobbying and industry groups. The agreement provides for payment of $240,000 per
year and terminates in 1999.
In consideration of certain undertakings provided in connection with the
EBRD Facility and the Netia South Bank Facility by Shamrock, Dankner and the GS
Entities (which undertakings have been terminated) such shareholders were
entitled to a fee from Netia equal to 5% of such undertakings. As of June 30,
1999, Netia owed such shareholders an aggregate of approximately $593,000 in
respect of such fees. See "--Previous Agreements Among Shareholders."
In September 1996, Netia entered into a consulting agreement with Galopus, a
company controlled by Meir Srebernik, pursuant to which Galopus agreed to cause
Mr. Srebernik to be responsible for the management of Netia or any matters as
decided by Netia's Supervisory Board. The agreement provided for a payment to
Galopus of $20,970 per month, net of VAT, which was paid by Netia, and a
one-time minimum bonus of $75,000. In January 1998, Netia entered into a new
agreement with Galopus, pursuant to which Galopus was engaged to render
consulting, advisory and other services to Netia. Under this agreement, Galopus
agreed to render the aforementioned services to Netia in return for the same
monthly fee as provided in the original consulting agreement and a bonus,
calculated according to the number of ringing telephone lines, including a
specific number of ringing business telephone lines, within a given year, in
each case plus any applicable VAT.
Also in 1996, Netia granted Galopus "phantom stock options" pursuant to
which Galopus would be deemed to have acquired up to 1.5% of the share capital
of Netia that would be outstanding upon the occurrence of certain
capital-raising transactions, whereupon Galopus would have the right to be
"cashed-out" of the vested portion of such phantom shares. These options vested
in full upon completion of the Telia Capital Increase and, as a result, Galopus
became entitled to receive a cash payment of approximately $2.4 million, which
became subject to further increase when Netia raised additional equity capital
pursuant to the Warburg Transaction.
In May 1999, we further amended the agreement with Galopus to extend the
term of this arrangement through August 15, 2000, although each party may
terminate the agreement before this date under certain circumstances.
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In addition, in May 1999, Galopus agreed, effective upon consummation of the
Warburg Transaction and the Notes Offering, to extend the term of its consulting
agreement initially through December 31, 2000, with an additional automatic
renewal period ending on December 31, 2001 unless either party provides 90 days'
written notice of its election not to renew. Netia has the right to terminate
the consulting agreement with or without "cause" at any time following 90 days'
written notice. Galopus will be entitled to receive an annual consulting fee of
$400,000, net of VAT. In addition, the consultant will be entitled to an annual
$200,000 bonus if the budgeted EBITDA target of Netia is realized. The annual
bonus will be increased or decreased by up to 20% if performance is above or
below 100% of the budgeted EBITDA target. However, no bonus will be payable if
EBITDA performance is below 80% of the budgeted amount. Netia is not obligated
to make such payments if Galopus is terminated for cause. Galopus also agreed,
upon consummation of the IPO, to apply 25% of the cash out value of its existing
phantom shares to subscribe for shares of Netia at a subscription price of
$16.3625 per share. Galopus also had the right, which it has elected not to
exercise, to apply an additional 25% of the cash-out value of its phantom shares
to subscribe for shares at the same subscription price. Galopus will also be
granted 100,000 options on each of August 15, 1999, August 15, 2000 and August
15, 2001. These options will vest if Galopus continues to be engaged or is ready
and willing to be engaged by Netia through certain specified dates. The options
are subject to accelerated and proportional vesting in the event Galopus's
engagement is terminated sooner by Netia without "cause." The exercise price of
the options will be $17.33 for the options to be granted in August 1999, $19.06
for the options to be granted in August 2000 and $27.72 for the options to be
granted in August 2001.
In January 1998, Netia issued two letters of comfort to ING Lease (Polska)
Sp. z o.o. in support of the obligations of Uni-Net, Netia Holdings S.A.'s 58.2%
subsidiary, under two agreements pursuant to which Uni-Net leases equipment from
ING Lease (Polska). Similar comfort letters were provided to ING Lease (Polska)
by the other principal shareholder of Uni-Net. Under the comfort letters, which
expressly provide that they do not constitute guarantees, Netia agreed to ensure
that Uni-Net will have sufficient funds at its disposal to satisfy its
obligations under the underlying leases. Netia further agreed that if it desired
to sell more than 51% of its interest in Uni-Net, it would either (i) arrange
for the purchaser to assume our obligations under the comfort letters or (ii)
provide a guarantee to ING Lease (Polska) of Uni-Net's obligations under the
leases, up to a maximum amount of approximately DM 1,040,000.
In May 1998, Netia received shareholders' loans from Dankner and Shamrock in
the aggregate amount of approximately $710,000. These loans bear interest at the
annual rate of six-month LIBOR plus 5% and were advanced by Dankner and Shamrock
in anticipation of a capital increase by Netia which was subsequently
terminated. These loans were repaid in May 1999.
In anticipation of the new tenders for long distance services, in June 1998
we acquired a 49% equity stake in a newly created Polish entity, Netia Network,
and agreed to contribute up to $25 million toward the operating expenses of
Netia Network in the event Netia Network acquires any long distance licenses.
The remaining 51% of Netia Network is currently owned by Mr. Jan Guz, presently
a member of the supervisory boards of Netia Telekom and Netia South. However,
pursuant to a separate agreement between Netia and Mr. Guz, Netia may at any
time exercise a call option to cause Mr. Guz to transfer, in exchange for
approximately $1 million, a 47% stake in the total equity of Netia Network to a
third party. Such third party (a potential provider of long distance
transmission services) could then apply for long distance service licenses
jointly with Netia, participating in the tenders through the organizational
structure of Netia Network. Subsequently, in April 1999, Netia and Netia Network
entered into a services agreement pursuant to which Netia paid Netia Network the
sum of [EURO]1.1 million as an exclusive recipient of Netia Network data
transmission services for which Netia Network holds a license. It is currently
expected that, in connection with the recently announced tender by Netia Network
for a domestic long distance license, (i) the 51% interest in Netia Network
currently held by Mr. Guz will be purchased by one or more of Polish banks, (ii)
the 49% interest in Netia Network held by Netia Telekom will be transferred to
Netia Holdings S.A., and (iii) the new shareholders of Netia
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Network will enter into a shareholders' agreement setting forth the corporate
governance and financing mechanisms for that company. See "Risk Factors--The
Foreign Investor Restrictions Under the Communications Act May Impose
Limitations on Our Business."
Netia was a party to a consulting agreement with a company controlled by
Aleksander Szwarc which was terminated on August 1998. In order to compensate
such company for early termination under the agreement, Netia agreed to pay
$343,478, from which $136,478 was paid upon execution of the termination
agreement and the remaining part will be paid in nine monthly installments,
starting October 1998.
Effective as of October 1, 1998, Mr. Joseph Ganor resigned from the position
of Vice President-Finance of Netia. On that date, Netia entered into a
consulting agreement with Mr. Ganor that provides that for a period of one year,
Mr. Ganor will receive from Netia a retainer fee and consulting fees in the
aggregate amount of approximately $360,000 and will retain the benefits due to
him under his original employment arrangements with Netia. In addition, Netia
entered into an agreement with a company controlled by Mr. Ganor pursuant to
which Netia agreed to grant such company options to purchase 0.075% of Netia's
common stock issued and outstanding immediately prior to an initial public
offering at an exercise price equal to $15.75. The options granted will vest
immediately upon completion of the IPO.
In December 1998, Netia entered into a consulting agreement with a company
controlled by Avraham Hochman. Pursuant to this agreement such company agreed to
cause Mr. Hochman to perform certain advisory service for Netia for an initial
fee of $37,000, monthly payments of $18,500 and discretionary bonuses. The
agreement was concluded for a term of three years and may be extended for an
additional one-year term by mutual consent of the parties. Also, Netia granted
to this company options to purchase Netia shares as described below. The
agreement with Mr. Hochman's company also provides that adjustments should be
made to his compensation and option grants in the event of changes to the
compensation of our chief executive officer, and we expect that we will make
certain adjustments to these arrangements as a result of the recent changes to
our arrangements with Galopus. Netia is not obligated to make such payments if
the entity is terminated for cause.
In April 1999, Netia entered into letter agreements with companies
controlled by each of Avraham Hochman, Kjell-Ove Blom, George Makowski and
Maxymilian Bylicki under which Netia agreed to grant these officers options to
purchase shares representing 0.2%, 0.2%, 0.15% and 0.15%, respectively, of
Netia's common stock issued and outstanding immediately prior to an initial
public offering at exercise prices ranging from between $8.40 and 75% of the
price per share in the IPO. The options, when granted, will vest in three equal
installments with the first vesting, if any, of these options taking place in
April 1999.
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DESCRIPTION OF THE NOTES
The Senior Dollar Notes were issued under an indenture, dated as of June 10,
1999 (the "Senior Dollar Notes Indenture"), between Netia Holdings II B.V. (the
"Issuer"), Netia Holdings S.A. ("Parent"), as guarantor, and State Street Bank
and Trust Company, N.A., as trustee (the "Senior Dollar Notes Trustee"). The
Senior Euro Notes were issued under an indenture, dated as of June 10, 1999 (the
"Senior Euro Notes Indenture"), between the Issuer, Parent, as guarantor, and
State Street Bank and Trust Company, N.A., as trustee (the "Senior Euro Notes
Trustee"). The Senior Dollar Notes Indenture and the Senior Euro Notes Indenture
are hereinafter collectively referred to as the "Indentures." The Senior Dollar
Notes Trustee and the Senior Euro Notes Trustee are hereinafter collectively
referred to as the "Trustees." Any reference to a "Trustee" means the Senior
Dollar Notes Trustee or the Senior Euro Notes Trustee, as the context may
require.
The form and terms of both series of Registered Notes are identical in all
material respects to the form and terms of the corresponding series of Old
Notes, except that the Registered Notes will not bear legends restricting their
transfer or contain interest rate step-up provisions upon failure to register
the Old Notes. However, the Registered Notes may not be offered, transferred or
sold, as part of their initial distribution or at any time thereafter, to any
individual or legal entity established, domiciled or resident in the
Netherlands.
Upon the issuance of the Registered Notes, or the effectiveness of the Shelf
Registration Statement, the Indentures will be subject to the Trust Indenture
Act of 1939, as amended (the "TIA"). The following summary of certain provisions
of the Notes and the Indentures does not purport to be complete and is subject
to, and qualified in its entirety by reference to the provisions of the Notes
and the Indentures, including the definitions of certain terms contained therein
and those terms made part of the Indentures through the incorporation by
reference of the TIA. Copies of the Indentures, the Registration Rights
Agreement and the Investment Agreements are available upon request from the
Issuer or the Trustees. For definitions of certain capitalized terms used in
this "Description of the Notes," see "Certain Definitions" below.
GENERAL
The Senior Dollar Notes will mature on June 15, 2009 and will be
unsubordinated and unsecured obligations of the Issuer. The Issuer issued Senior
Dollar Notes with a maximum aggregate principal amount of $100 million. Each
Senior Dollar Note bears interest at the rate of 13 1/8% from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
payable semiannually on each Interest Payment Date and until the principal
thereof is paid or duly provided for to the Person in whose name the Senior
Dollar Note (or any predecessor Senior Dollar Note) is registered at the close
of business on the June 1 or December 1 next preceding such Interest Payment
Date. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Subject to compliance with the covenant described below
under the subheading "--Certain Covenants-Limitation on Indebtedness," the
Issuer is permitted to issue more Senior Dollar Notes under the Senior Dollar
Notes Indenture in an unlimited principal amount at maturity (the "Additional
Senior Dollar Notes"). The circumstances under which the Issuer may be required
to pay additional amounts in cash on the Senior Dollar Notes are described below
under "--Additional Amounts."
The Senior Euro Notes will mature on June 15, 2009 and will be
unsubordinated and unsecured obligations of the Issuer. The Issuer issued Senior
Euro Notes initially with a maximum aggregate principal amount of [EURO]100
million. Each Senior Euro Note bears interest at the rate of 13 1/2% from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, payable semiannually on each Interest Payment Date and until the
principal thereof is paid or duly provided for to the Person in whose name the
Senior Euro Note (or any predecessor Senior Euro Note) is registered at the
close of business on the June 1 or December 1 next preceding such Interest
Payment Date.
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Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. Subject to compliance with the covenant described below under the
subheading "--Certain Covenants--Limitation on Indebtedness," the Issuer is
permitted to issue more Senior Euro Notes under the Senior Euro Notes Indenture
in an unlimited principal amount (the "Additional Senior Euro Notes" and,
together with the Additional Senior Dollar Notes, the "Additional Notes"). The
circumstances under which the Issuer may be required to pay additional amounts
in cash on the Senior Euro Notes are described under "--Additional Amounts."
Principal of, premium, if any, and interest and Special Interest, if any, on
Senior Euro Notes will be payable at the corporate trust office or agency of the
Euro Paying Agent (as defined below) maintained in the City of New York, the
City of London and in Luxembourg for such purposes. Principal of, premium, if
any, and interest and Special Interest, if any, on Senior Dollar Notes will be
payable at the corporate trust office or agency of the Dollar Paying Agent (as
defined below) maintained in the City of New York or Luxembourg for such
purposes. All payments will be made by transfer of immediately available funds
to an account of the Holder in accordance with instructions given by the Holder.
The Notes will be issued only in fully registered form without coupons and
only in denominations of $1,000 or [EURO]1,000, as applicable, principal amount
and any integral multiple thereof. No service charge will be made for any
registration of transfer or exchange or redemption of Notes, but the Issuer may
require payment in certain circumstances of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith.
The obligations of the Issuer under the Notes and the Indentures are fully
and unconditionally guaranteed by Parent on an unsubordinated and unsecured
basis pursuant to the Guarantees. The Issuer is a wholly owned finance
subsidiary of Parent formed for the purpose of issuing the Notes.
The Issuer has listed the Old Notes and intends to apply for listing of the
Registered Notes on the Luxembourg Stock Exchange.
Any reference in this "Description of the Notes" to U.S. Dollars or "$"
shall mean, to the extent the context requires, the United States Dollar
Equivalent thereof.
RANKING
The Issuer is a wholly owned finance subsidiary of Parent formed to issue
the Notes. Parent is a holding company that conducts substantially all of its
business through its subsidiaries. Any right of Parent and its creditors,
including holders of the Notes and the 1997 Senior Notes, to participate in the
assets of any of Parent's subsidiaries (other than the Issuer) upon any
liquidation or administration of any such subsidiary will be subject to the
prior claims of the subsidiary's creditors, including trade creditors. For a
discussion of certain adverse consequences of Parent being a holding company and
of the terms of certain existing and potential future indebtedness of Parent and
its subsidiaries, see "Risk Factors--The Issuer is a Financing Subsidiary with
Limited Assets and the Guarantor is a Holding Company."
The Indebtedness evidenced by the Notes and the Guarantees ranks PARI PASSU
in right of payment with each other and with all other existing and future
unsecured and unsubordinated obligations of the Issuer and Parent, respectively,
and senior in right of payment to all existing and future obligations of the
Issuer and Parent, respectively, expressly subordinated in right of payment to
the Notes or the Guarantees. The Issuer currently has no obligations
outstanding. The Guarantees are effectively subordinated to secured obligations
of Parent with respect to the assets of Parent securing such obligations. The
Guarantees are PARI PASSU in right of payment to the guarantees issued by Parent
of $200,000,000 aggregate principal amount of 10 1/4% Senior Notes due 2007 (the
"1997 Senior Dollar Notes"), $193,550,000 aggregate principal amount at maturity
of 11 1/4% Senior Discount Notes due 2007 (the
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"1997 Senior Discount Notes"), and DM 207,062,000 aggregate principal amount at
maturity of 11% Senior Discount Notes due 2007 (the "1997 Senior DM Discount
Notes" and, collectively with the Existing Senior Notes and the Existing Senior
Discount Notes, the "1997 Senior Notes") of Holdings B.V., a finance subsidiary
that was established by Parent solely for the purpose of issuing the 1997 Senior
Notes in 1997 and loaning the proceeds thereof to Parent in exchange for the
issuance of the intercompany notes dated November 3, 1997 issued by Parent to
Netia Holdings B.V. The aggregate principal amount of the 1997 Senior Dollar
Notes and the accreted value of the 1997 Senior Discount Notes and the 1997
Senior DM Discount Notes was $436.2 million at June 30, 1999. Parent's
intercompany obligation to Holdings B.V. is also PARI PASSU with Parent's
obligations under the Guarantees. The Guarantees are effectively subordinated to
the obligation of Parent under its guarantee of the next three interest payments
on the 1997 Senior Dollar Notes, which is secured by an escrow account
containing funds sufficient to make such interest payments.
The Guarantees also are effectively subordinated to all current and future
liabilities of Parent's subsidiaries, including trade payables. As of June 30,
1999, we had approximately $731.2 million of long term liabilities outstanding
(including current maturities and license obligations) and our subsidiaries had
$141.2 million of liabilities (excluding the 1997 Senior Notes, the Notes and
intercompany debt, but including current maturities and license obligations). In
addition, the Indentures permit Parent's subsidiaries to incur substantial
additional Indebtedness, including Indebtedness under Credit Facilities up to
$300 million.
SINKING FUND
The Notes are not be entitled to the benefit of any sinking fund.
REDEMPTION
The Notes will be redeemable, at the option of the Issuer, as a whole or
from time to time in part, at any time on or after June 15, 2004 on not less
than 30 nor more than 60 days' prior notice at the redemption prices (expressed
as percentages of principal amount) set forth below, together with accrued
interest, if any, to the redemption date, if redeemed during the 12-month period
beginning on June 15 of the years indicated below (subject to the right of
holders of record on relevant record dates to receive interest due on a relevant
Interest Payment Date):
FOR THE SENIOR DOLLAR NOTES
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2004............................................................................. 106.563%
2005............................................................................. 104.375%
2006............................................................................. 102.188%
2007 and thereafter.............................................................. 100.000%
</TABLE>
FOR THE SENIOR EURO NOTES
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2004............................................................................. 106.750%
2005............................................................................. 104.500%
2006............................................................................. 102.250%
2007 and thereafter.............................................................. 100.000%
</TABLE>
At any time or from time to time prior to June 15, 2002 the Issuer may
redeem within 60 days of one or more Public Equity Offerings up to $33 million
of the initial aggregate principal amount of the
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Senior Dollar Notes with the net proceeds of such offering, upon its receipt of
such proceeds or a portion thereof from an Investment by Parent in the Issuer or
a prepayment by Netia Telekom or Netia South under the Intercompany Bonds at a
redemption price equal to 113.125% of the aggregate principal amount thereof as
of the redemption date, together with accrued interest, if any, to the date of
redemption (subject to the right of holders of record on record dates to receive
interest due on Interest Payment Dates); provided that immediately after giving
effect to any such redemption, at least two-thirds of the aggregate principal
amount of the Senior Dollar Notes initially issued on the date of the Indenture
remains outstanding.
At any time or from time to time prior to June 15, 2002 the Issuer may
redeem within 60 days of one or more Public Equity Offerings up to [EURO]33
million of the initial aggregate principal amount of the Senior Euro Notes with
the net proceeds of such offering, upon its receipt of such proceeds or a
portion thereof from an Investment by Parent in the Issuer or a prepayment by
Netia Telekom or Netia South under the Intercompany Bonds, at a redemption price
equal to 113.500% of the aggregate principal amount thereof as of the redemption
date, together with accrued interest, if any, to the date of redemption (subject
to the right of holders of record on record dates to receive interest due on
Interest Payment Dates); provided that immediately after giving effect to any
such redemption, at least two-thirds of the aggregate principal amount of the
Senior Euro Notes initially issued on the date of the Indenture remains
outstanding.
In addition, (i) upon the occurrence of a Change of Control Triggering
Event, the Issuer is obligated to make an offer to purchase all outstanding
Notes at a price of 101% of the aggregate principal amount thereof together with
accrued interest, if any, to the date of redemption, and (ii) upon the
occurrence of an Asset Sale, the Issuer may be obligated to make an offer to
purchase all or a portion of the outstanding Notes at a price of 100% of the
principal amount thereof together with accrued interest, if any, to the date of
redemption. See "Certain Covenants--Purchase of Notes upon a Change of Control
Triggering Event" and "Limitation on Sale of Assets," respectively.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date by
the applicable Trustee by such method as such Trustee will deem fair and
appropriate; PROVIDED, HOWEVER, that no such partial redemption will reduce the
principal amount of a Note not redeemed to less than $1,000 or [EURO]1,000, as
the case may be. Notice of redemption will be mailed, first class postage
prepaid, at least 30 but not more than 60 days before the redemption date to
each holder of Notes to be redeemed at its registered address. So long as the
Notes may be listed on the Luxembourg Stock Exchange and the rules of the
Luxembourg Stock Exchange so require, the Issuer shall, once in each year in
which there has been a partial redemption of any of the Notes, cause to be
published in a leading daily newspaper of general circulation in Luxembourg
(which is expected to be the LUXEMBOURGER WORT) a notice specifying the
aggregate principal amount of Notes outstanding and a list of the Notes drawn
for redemption but not surrendered. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption and
accepted for payment.
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The Notes will be subject to redemption as a whole, but not in part, at the
option of the Issuer at any time at 100% of the aggregate principal amount
thereof, together with accrued interest thereon to the redemption date, if the
Issuer or Parent has become or would become obligated to pay, on the next date
on which any amount would be payable with respect to such Notes or the related
Guarantees, respectively, any Additional Amounts (as defined below) as a result
of a change in laws (including any regulations promulgated thereunder) or in the
interpretation or administration thereof, if such change is announced and
becomes effective on or after the Issue Date.
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ADDITIONAL AMOUNTS
All payments made by the Issuer under or with respect to the Notes or made
by Parent under or with respect to the Guarantees will be made free and clear
of, and without withholding or deduction for or on account of, any present or
future Taxes imposed or levied by or on behalf of any Taxing Authority within
the Netherlands or the Republic of Poland, or within any other jurisdiction in
which the Issuer or Parent is organized or engaged in business for tax purposes,
unless the Issuer or Parent, as the case may be, is required to withhold or
deduct Taxes by law or by the interpretation or administration thereof. If the
Issuer or Parent, as the case may be, is required to withhold or deduct any
amount for or on account of Taxes imposed by a Taxing Authority within the
Netherlands or the Republic of Poland, or within any other jurisdiction in which
the Issuer or Parent is organized or engaged in business for tax purposes, from
any payment made under or with respect to the Notes or the Guarantees,
respectively, the Issuer or Parent, as the case may be, will pay such additional
amounts ("Additional Amounts") as may be necessary so that the net amount
received by each holder of Notes (including Additional Amounts) after such
withholding or deduction will not be less than the amount the holder and
beneficial owner would have received if such Taxes had not been withheld or
deducted; provided that no Additional Amounts will be payable with respect to a
payment made to a holder of Notes or to a third party on behalf of a holder
(each an "Excluded Holder") with respect to any Tax which would not have been
imposed, payable or due: (i) but for the existence of any present or former
connection between the holder (or the beneficial owner of, or person ultimately
entitled to obtain an interest in, such Notes) and the Netherlands, the Republic
of Poland or any other jurisdiction in which the Issuer or Parent is organized
or engaged in business for tax purposes other than the holding of the Notes;
(ii) but for the failure to comply upon written notice by the Issuer delivered
60 days prior to any payment date with a request by the Issuer to satisfy any
certification, identification or any other reporting requirements, whether
imposed by statute, treaty, regulation or administrative practice concerning
nationality, residence or connection with the Netherlands, the Republic of
Poland or any other jurisdiction in which the Issuer or Parent is organized or
engaged in business for tax purposes; (iii) if the presentation of certificated
notes for payment had occurred within 30 days after the date such payment was
due and payable or was provided for, whichever is later; (iv) if the beneficial
owner of, or person ultimately entitled to obtain an interest in, such Notes had
been the holder of the Notes and would not be entitled to the payment of
Additional Amounts; or (v) any estate, inheritance, gift, sales or excise tax.
The Issuer or Parent, as the case may be, will also (i) make such withholding or
deduction and (ii) remit the full amount deducted or withheld to the relevant
authority in accordance with applicable law. The Issuer or Parent, as the case
may be, will make reasonable efforts to obtain certified copies of tax receipts
evidencing the payment of any Taxes so deducted or withheld from each Taxing
Authority imposing such Taxes. The Issuer or Parent, as the case may be, will
furnish to the holders of the Notes, within 60 days after the date the payment
of any Taxes so deducted or withheld is due pursuant to applicable law, either
certified copies of tax receipts evidencing such payment by the Issuer or
Parent, as the case may be, or, if such receipts are not obtainable, other
evidence of such payments by the Issuer or Parent, as the case may be.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if the Issuer or Parent (if Parent
intends to make such payments under the Guarantees), as the case may be, will be
obligated to pay Additional Amounts with respect to such payment, the Issuer or
Parent, as the case may be, will deliver to the applicable Trustee an officers'
certificate stating the fact that such Additional Amounts will be payable and
the amounts so payable and will set forth such other information necessary to
enable such Trustee to pay such Additional Amounts to the holders of Notes on
the payment date.
Whenever in the Indentures or in this "Description of the Notes" there is
mentioned, in any context, the payment of principal, premium, if any, interest
or of any other amount payable under or with respect to any of the Notes, such
mention shall be deemed to include mention of the payment of
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Additional Amounts to the extent that, in such context, Additional Amounts are,
were or would be payable in respect thereof.
INVESTMENT SECURITIES
The Investment Agreements required that upon issuance of the Notes a deposit
with the applicable Trustees Investment Securities in such amount as will be
sufficient upon receipt of scheduled interest and/or principal payments of such
securities, as certified by the Chief Financial Officer of Parent, to provide
for payment in full of the first four scheduled interest payments due on each
series of the Notes. Approximately [EURO]26.3 million and $24.8 million of the
net proceeds of the Notes Offering were used to acquire the Investment
Securities. The Investment Securities will be held by the respective Trustees in
the Investment Accounts, pending disposition pursuant to the Investment
Agreements. Pursuant to the Investment Agreements, immediately prior to each of
the first four scheduled interest payment dates with respect to each series of
the Notes, Parent or one of its Affiliates may either (a) deposit with the
applicable Trustee from funds otherwise available to Parent or one of its
Affiliates cash sufficient to pay the interest scheduled to be paid on such date
or (b) direct the applicable Trustee to release from the Investment Accounts
proceeds sufficient to pay interest then due. In the event that Parent or, if
applicable, its Affiliate, exercises the option under clause (a) above, Parent
or such Affiliates may thereafter direct the applicable Trustee to release to
the Issuer or such Affiliate proceeds or Investment Securities from the
Investment Accounts in like amount. A failure by the Issuer or its applicable
Affiliate to pay interest on the Notes in a timely manner through the first four
scheduled interest payment dates will constitute an immediate Event of Default
under the applicable Indenture, with no grace or cure period.
Interest earned on the Investment Securities will be added to the Investment
Accounts. In the event that the funds or Investment Securities held in the
Investment Accounts exceed the amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants selected by Parent, to provide
for payment in full of the first four scheduled interest payments due on the
Notes (or, in the event an interest payment or payments have been made, an
amount sufficient to provide for payment in full of any interest payments
remaining, up to and including the fourth scheduled interest payment), the
applicable Trustee will be permitted to release to the Issuer or, if applicable,
its Affiliate, at the Issuer's request, any such excess amount.
The Investment Securities will be general unsecured assets of Parent (or its
applicable Affiliate), and, therefore, in the event of insolvency, liquidation,
reorganization, dissolution or other winding up of Parent or such Affiliate, the
Investment Securities will be available to satisfy the claims of holders of
other Indebtedness and other creditors of Parent or such Affiliate.
Under the Investment Agreement, assuming that the Issuer makes the first
four scheduled interest payments on the Notes in a timely manner, any remaining
Investment Securities will be released from the Investment Accounts.
CERTAIN COVENANTS
The Indentures contain, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. Parent will not, and will not permit any of its
Restricted Subsidiaries to, create, issue, assume, guarantee or in any manner
become directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Indebtedness (including any Acquired Indebtedness)
other than Permitted Indebtedness, except that Parent or any Financing
Subsidiary (including the Issuer) may incur Indebtedness and any Restricted
Subsidiary other than a Financing Subsidiary may incur Acquired Indebtedness if,
at the time of such incurrence the Consolidated Indebtedness to Annualized
Consolidated Operating Cash Flow Ratio of the Parent would have been greater
than 0 and less than or equal to 5.5 to 1.0.
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In making the foregoing calculation, pro forma effect will be given to: (i)
the incurrence of such Indebtedness and (if applicable) the application of the
net proceeds therefrom, including to refinance other Indebtedness, as if such
Indebtedness was incurred, and the application of such proceeds occurred, on the
first day of the latest fiscal quarter for which consolidated financial
statements of Parent are available immediately preceding the date of the
incurrence of such Indebtedness, (ii) the incurrence, repayment or retirement of
any other Indebtedness by Parent and its Restricted Subsidiaries since the first
day of such fiscal quarter as if such Indebtedness were incurred, repaid or
retired on the first day of such fiscal quarter (except that, in making such
calculation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during such fiscal quarter) and (iii) the acquisition (whether by purchase,
merger or otherwise) or disposition (whether by sale, merger or otherwise) of
any company, entity or business acquired or disposed of by Parent or its
Restricted Subsidiaries, as the case may be, since the first day of such fiscal
quarter, as if such acquisition or disposition occurred on the first day of such
fiscal quarter.
This covenant will not prohibit the incurrence of the accrual of interest,
the accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms, or the payment of dividends on Redeemable Capital Stock in the form
of additional shares of the same class of Redeemable Capital Stock, each of
which will not be deemed to be an incurrence of Indebtedness or an issuance of
Redeemable Capital Stock for purposes of this covenant; provided, in each such
case, that the amount thereof is included in Consolidated Interest Expense of
the Parent as accrued, accreted or paid, as applicable.
LIMITATION ON RESTRICTED PAYMENTS.
(a) Parent will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, take any of the following actions:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Capital Stock of Parent (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire such s hares of Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of Capital Stock of Parent or any Capital Stock of
any Affiliate of Parent (other than Capital Stock of any Wholly Owned
Restricted Subsidiary) or any options, warrants or other rights to acquire
such shares of Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness
(other than Subordinated Indebtedness payable to Parent or a Restricted
Subsidiary); or
(iv) make any Investment (other than any Permitted Investment and
subject to the provisions of the "Limitation on Investments in Unrestricted
Subsidiaries" covenant); or
(v) make any principal or interest payment on any Deeply Subordinated
Shareholder Loan
(such payments or other actions described in (but not excluded from) clauses
(i) through (v) are collectively referred to as "Restricted Payments"), unless
at the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Management Board, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall have
occurred and be continuing, (2) Parent could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness)
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pursuant to the "Limitation on Indebtedness" covenant and (3) the aggregate
amount of all Restricted Payments declared or made after the date of the
Indentures shall not exceed the sum of:
(A) the remainder of (x) the cumulative Consolidated Operating Cash
Flow of Parent during the period (taken as a single accounting period)
beginning on the first day of the fiscal quarter of Parent beginning
after the date of the Indentures and ending on the last day to the last
full fiscal quarter immediately preceding the date of such Restricted
Payment for which quarterly or annual consolidated financial statements
of Parent are available minus (y) the product of 1.5 times cumulative
Consolidated Interest Expense of Parent during such period; plus
(B) the aggregate Net Cash Proceeds received by Parent after the date
of the Indentures as capital contributions or from the issuance or sale
(other than to any of its Subsidiaries) of shares of Qualified Capital
Stock of Parent (including upon the exercise of options, warrants or
rights) or warrants, options or rights to purchase shares of Qualified
Capital Stock of Parent; plus
(C) the aggregate Net Cash Proceeds received after the date of the
Indentures by Parent from the issuance or sale (other than to any of its
Subsidiaries) of debt securities or Redeemable Capital Stock that have
been converted into or exchanged for Qualified Capital Stock of Parent,
to the extent such securities were originally sold for cash, together
with the aggregate net cash proceeds received by Parent at the time of
such conversion or exchange; plus
(D) to the extent not otherwise included in the Consolidated
Operating Cash Flow of Parent, an amount equal to the sum of (i) the net
reduction in Investments in any Person (other than Permitted Investments)
resulting from the payment in cash of dividends, repayments of loans or
advances or other transfers of assets, in each case to Parent or any
Restricted Subsidiary after the date of the Indentures from such Person
and (ii) the portion (proportionate to Parent's equity interest in such
Subsidiary) of the fair market value of the net assets of any
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that in the case
of (i) or (ii) above the foregoing sum shall not exceed the amount of
Investments previously made (and treated as a Restricted Payment) by
Parent or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary; plus
(E) $3.0 million; minus
(F) 50.0% of the principal amount of all Indebtedness incurred
pursuant to clause (h) of the definition of Permitted Indebtedness in
excess of $175.0 million.
(b) Notwithstanding paragraph (a) above, Parent and any Restricted
Subsidiary, as applicable, may take the following actions so long as (with
respect to clauses (ii), (iii), (iv), (v), (vi), (vii) and (viii) below) no
Default or Event of Default shall have occurred and be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such dividend would have
complied with the provisions of paragraph (a) above and such payment will be
deemed to have been paid on such date of declaration for purposes of the
calculation required by paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of Parent, in exchange for, or out of
the Net Cash Proceeds of, a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of Qualified Capital Stock of
Parent;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness in exchange for, or
out of the Net Cash Proceeds of, a substantially
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concurrent issuance and sale (other than to a Subsidiary) of shares of
Qualified Capital Stock of Parent;
(iv) the purchase of any Subordinated Indebtedness at a purchase price
not greater than 101% of the principal amount (including accreted value, if
applicable) thereof in the event of a Change of Control Triggering Event in
accordance with provisions similar to the "Purchase of Notes upon a Change
of Control Triggering Event" covenant; provided that prior to such purchase
Parent has caused the Issuer to make the Change of Control Offer as provided
in such covenant with respect to the Notes and has caused the Issuer to
purchase all Notes validly tendered for payment in connection with such
Change of Control Offer;
(v) the purchase, redemption, defeasance or other acquisition or
retirement for value by Parent of Subordinated Indebtedness in exchange for,
or out of the net cash proceeds of a substantially concurrent incurrence
(other than to a Subsidiary) of, new Subordinated Indebtedness so long as
(A) the principal amount (including accreted value, if applicable) of such
new Subordinated Indebtedness does not exceed the principal amount (or, if
such Subordinated Indebtedness being refinanced provides for an amount less
than the principal amount thereof to be due and payable upon a declaration
of acceleration thereof, such lesser amount as of the date of determination)
of the Subordinated Indebtedness being so purchased, redeemed, defeased,
acquired or retired, plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such Subordinated
Indebtedness being refinanced or the amount of any premium reasonably
determined by Parent as necessary to accomplish such refinancing, plus, in
either case, the amount of expenses of Parent incurred in connection with
such refinancing, (B) such new Subordinated Indebtedness is subordinated to
the Guarantees to the same extent as such Subordinated Indebtedness so
purchased, redeemed, defeased, acquired or retired and (C) such new
Subordinated Indebtedness has an Average Life longer than the Average Life
of the Notes and a final Stated Maturity of principal later than the final
Stated Maturity of principal of the Notes;
(vi) the purchase, redemption or other acquisition or retirement for
value of shares of Capital Stock of any non-Wholly Owned Restricted
Subsidiary if, as a result of such purchase, redemption, other acquisition
or retirement, Parent increases its percentage ownership, directly or
indirectly through its Restricted Subsidiaries, of such non-Wholly Owned
Restricted Subsidiary;
(vii) the payment of any dividend by a Restricted Subsidiary to the
holders of its common equity on a pro rata basis; and
(viii) the purchase of Capital Stock of Parent by a Restricted
Subsidiary for a price equal to the par value thereof in an aggregate amount
not to exceed $3.0 million solely for use in stock option or purchase plans
for the benefit of employees of Parent or any Subsidiaries.
The actions described in clauses (i), (ii), (iii), (iv) and (viii) of this
paragraph (b) shall be Restricted Payments that shall be permitted to be taken
in accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph (a)
and the actions described in clauses (v), (vi), and (vii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in accordance
with this paragraph (b) and shall not reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph(a) above.
The application of the net cash proceeds of any issuance or sale of Capital
Stock under clauses (ii) or (iii) of the preceding paragraph shall not be
"substantially concurrent" with the issuance or sale if the amount of such
proceeds has been included in any calculation of Total Incremental Equity:
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Parent will not, and will not permit any Restricted Subsidiary
to, issue or sell any Capital Stock of any Restricted Subsidiary
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(other than to Parent or a Restricted Subsidiary); PROVIDED, HOWEVER, that this
covenant shall not prohibit (i) the ownership by directors of director's
qualifying shares or the ownership by foreign nationals of Capital Stock of any
Restricted Subsidiary, to the extent mandated by applicable law, (ii) the
issuance and sale of all, but not less than all, of the issued and outstanding
Capital Stock of any Subsidiary owned by Parent and the Restricted Subsidiaries
in compliance with the "Limitation on Sale of Assets" covenant and (iii)
issuances of Qualified Capital Stock (other than Preferred Stock) by a
non-Wholly Owned Restricted Subsidiary if, after giving effect to such issuance,
Parent and all other Restricted Subsidiaries at least maintain their percentage
ownership of such non-Wholly Owned Restricted Subsidiary.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. Parent will not, and will not
permit any Restricted Subsidiary to enter into, amend or suffer to exist,
directly or indirectly, any transaction or series of related transactions
(including, without limitation, the sale, purchase, exchange or lease of assets,
property or services) with, or for the benefit of, any Affiliate of Parent or
any Restricted Subsidiary unless (i) such transaction or series of related
transactions are on terms that are no less favorable to Parent, or such
Restricted Subsidiary, as the case may be, than those that could have been
obtained in an arm's length transaction with unrelated third parties who are not
Affiliates, (ii) with respect to any transaction or series of related
transactions involving aggregate consideration equal to or greater than $5.0
million, Parent will deliver an officers' certificate to the Trustees certifying
that such transaction or series of related transactions complies with clause (i)
above and (iii) with respect to any transaction or series of related
transactions including aggregate consideration in excess of $10.0 million,
Parent shall deliver the officers' certificate described in clause (ii) above
which shall also certify that such transaction or series of related transactions
has been approved by a majority of the Disinterested Members of the Management
Board of Parent, or that Parent has obtained a written opinion from a nationally
recognized U.S. investment banking firm certifying that such transaction or
series of related transactions is fair to Parent or such Restricted Subsidiary,
as the case may be, from a financial point of view; provided, however, that this
provision will not restrict (1) any transaction or series of related
transactions among Parent and Restricted Subsidiaries or among Restricted
Subsidiaries, (2) Investments in Qualified Capital Stock of Parent by any
Person, including an Affiliate of Parent, (3)(x) transactions between Parent or
any Restricted Subsidiary and Telia or its Affiliates and (y) any other
transaction, in each case pursuant to contractual arrangements existing on the
date of the Indentures (the "Existing Affiliate Agreements"), (4) Parent from
paying reasonable and customary regular compensation and fees to directors of
Parent or any Restricted Subsidiary who are not employees of Parent or any
Restricted Subsidiary, (5) Parent or any Restricted Subsidiary from making any
Restricted Payment in compliance with the "Limitation on Restricted Payments"
covenant, (6) Parent from incurring Permitted Indebtedness to any of the
Principal Shareholders if, in each case, Parent delivers the officers'
certificate described in clause (ii) above with respect to the transaction in
which any such Permitted Indebtedness is incurred, irrespective of the aggregate
consideration included therein, (7) Parent from entering into any customary and
reasonable employment and consulting agreements which have been approved by a
majority of the Disinterested Members of the Management Board of Parent, or (8)
transactions between Parent or any Restricted Subsidiary and any holder of less
than 10.0% of the outstanding Voting Stock of Parent entered into in the
ordinary course of business.
LIMITATION ON LIENS. Parent will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) on or with respect to any of its property
or assets, including any shares of stock or indebtedness of any Restricted
Subsidiary, whether owned at the date of the Indentures or thereafter acquired,
or any income, profits or proceeds therefrom, or assign or otherwise convey any
right to receive income thereon, unless (x) in the case of any Lien securing
Subordinated Indebtedness, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien and (y) in the case
of any other Lien, the Notes are equally and ratably secured with the obligation
or liability secured by such Lien.
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ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY SUBSIDIARIES.
(a) Parent may permit any Restricted Subsidiary to guarantee any
Indebtedness of Parent. If a Restricted Subsidiary issues such a guarantee of
Indebtedness of Parent, or otherwise assumes or in any manner becomes liable
with respect to such Indebtedness of Parent, Parent shall cause such Restricted
Subsidiary simultaneously to execute and deliver a supplemental Indenture
providing for the guarantee of payment of the Notes by such Restricted
Subsidiary on a basis senior to any guarantee of Subordinated Indebtedness or at
least PARI PASSU with any guarantee of Indebtedness that is PARI PASSU in right
of payment with the Guarantees; provided that this paragraph (a) shall not be
applicable to any guarantee of any Restricted Subsidiary constituting Acquired
Indebtedness. The foregoing requirement will not apply to the guarantee by Netia
South and Netia Telekom of the intercompany loan payable by Parent to Netia
Holdings B.V. issued by Netia South and Netia Telekom upon issuing the
Intercompany Bonds.
(b) Notwithstanding the foregoing, any guarantee of the Notes created
pursuant to the provisions described in the foregoing paragraph (a) shall
provide by its terms that it shall be automatically and unconditionally released
and discharged upon (i) any sale, exchange or transfer to any Person who is not
an Affiliate of Parent, of all of Parent's Capital Stock in, or all or
substantially all the assets of, such Subsidiary (which sale, exchange or
transfer is not prohibited by the Indentures) or (ii) the release by the holders
of the Indebtedness of Parent described in the preceding paragraph of their
guarantee by such Subsidiary (including any deemed release upon payment in full
of all obligations under such Indebtedness, except by or as a result of payment
under such guarantee), at a time when (A) no other Indebtedness of Parent has
been guaranteed by such Subsidiary or (B) the holders of all such other
Indebtedness which is guaranteed by such Subsidiary also release their guarantee
by such Subsidiary (including any deemed released upon payment in full of all
obligations under such Indebtedness).
PURCHASE OF NOTES UPON A CHANGE OF CONTROL TRIGGERING EVENT. If a Change of
Control Triggering Event shall occur at any time (the date of such occurrence
being the "Change of Control Date"), then each holder of Notes will have the
right to require that the Issuer purchase such holder's Notes, in whole or in
part in integral multiples of $1,000 or [EURO]1,000, as the case may be, at a
purchase price (the "Change of Control Purchase Price") in cash in an amount
equal to 101% of the aggregate principal amount of the Notes plus, in each case,
accrued and unpaid interest, if any, to the date of purchase (the "Change of
Control Purchase Date"), pursuant to the offer described below (the "Change of
Control Offer") and the other procedures set forth in the Indentures. Parent
shall make an Investment in the Issuer or cause Netia South or Netia Telekom to
prepay under the Intercompany Bonds an amount of funds sufficient to consummate
the Change of Control Offer.
Within 30 days following any Change of Control Date, the Issuer shall notify
the Trustees thereof and give written notice of such Change of Control
Triggering Event to each holder of Notes by first class mail, postage prepaid,
at the address appearing in the applicable security register, stating, among
other things, (i) the purchase price and the purchase date, which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed, or such later date as is necessary to comply with requirements
under the Exchange Act or any applicable securities laws or regulations; (ii)
that any Note not tendered will continue to accrue interest and/or accrete
original issue discount, as the case may be; (iii) that, unless the Issuer
defaults in the payment of the purchase price, any Notes accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest after the
Change of Control Purchase Date; and (iv) certain other procedures that a holder
of Notes must follow to accept a Change of Control Offer or to withdraw such
acceptance.
If a Change of Control Offer is made, there can be no assurance that Parent
will have available to make an Investment in the Issuer or that Netia South or
Netia Telekom will be able to make a payment on the Intercompany Bonds in an
amount sufficient to pay the Change of Control Purchase Price for all of the
Notes that might be delivered by holders of the Notes seeking to accept the
Change
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of Control Offer. The failure of the Issuer to make or consummate the Change of
Control Offer or pay the Change of Control Purchase Price when due would result
in an Event of Default and would give the Trustees and the holders of the Notes
the rights described under "Events of Default."
One of the events which constitutes a Change of Control under the Indentures
is the disposition of "all or substantially all" of Parent's assets. This term
has not been interpreted under New York law (which is the governing law of the
Indentures) to represent a specific quantitative test. As a consequence, in the
event holders of the Notes elect to require the Issuer to purchase the Notes and
the Issuer elects to contest such election, there can be no assurance as to how
a court interpreting New York law would interpret the phrase.
The existence of a holder's right to require the Issuer to purchase such
holder's Notes upon a Change of Control Triggering Event may deter a third party
from acquiring Parent in a transaction which constitutes a Change of Control.
The definition of "Change of Control" in the Indentures is limited in scope.
The provisions of the Indentures may not afford holders of Notes the right to
require the Issuer to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with Parent's management or its affiliates,
including a reorganization, restructuring, merger or similar transaction
involving Parent (including, in certain circumstances, an acquisition of Parent
by management or its affiliates) that may adversely affect holders of the Notes,
if such transaction is not a transaction defined as a Change of Control. See
"Certain Definitions" for the definition of "Change of Control." In addition, as
holders of the stock of Parent, the Principal Shareholders, collectively, have
the right to appoint a majority of the members of the Supervisory Board of
Parent and, accordingly, there could be a significant shift in economic
ownership of Parent through the transfer of other classes of Capital Stock of
Parent without triggering a Change of Control. A transaction involving Parent's
management or its affiliates, or a transaction involving a recapitalization of
Parent, would result in a Change of Control only if it is the type of
transaction specified by such definition.
The Issuer will comply with the applicable tender offer rules, including
Rule14e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
The occurrence of certain of the events which would constitute a Change of
Control could constitute a default under Credit Facilities and might constitute
a default under future indebtedness of Parent. In addition, the exercise by the
holders of the Notes of their right to require the Issuer to repurchase the
Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on
Parent. In addition, if the requirement that the Notes be purchased upon a
Change of Control is triggered such an event would constitute a default under
the 1997 Notes Indentures.
LIMITATION ON SALE OF ASSETS.
(a) Parent will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, engage in any Asset Sale unless (i) the consideration
received by Parent or such Restricted Subsidiary for such Asset Sale is not less
than the fair market value of the shares or assets sold (as determined by the
Management Board whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) the consideration received by Parent or the relevant
Restricted Subsidiary in respect of such Asset Sale consists of at least 75.0%
cash or Cash Equivalents.
(b) If Parent or any Restricted Subsidiary engages in an Asset Sale, Parent
may use the Net Cash Proceeds thereof, within 15 months after such Asset Sale,
to (i) permanently repay or prepay any then outstanding secured Indebtedness of
Parent secured solely by assets not pledged to secure the Guarantees of the
Notes or Indebtedness of any Restricted Subsidiary except a Financing Subsidiary
(other
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than pursuant to the Asset Sale provisions of any Existing Note Indentures) or
(ii) invest (or enter into a legally binding agreement to invest) in properties
and assets to replace the properties and assets that were the subject of the
Asset Sale or in properties and assets that will be used in the business of
Parent or a Restricted Subsidiary (other than the Non-Core Business), as the
case may be or (iii) honor the Excess Proceeds Offer requirement of the Existing
Note Indentures. If any such legally binding agreement to invest such Net Cash
Proceeds pursuant to clause (ii) is terminated, then Parent may, within 90 days
of such termination or within 15 months of such Asset Sale, whichever is later,
apply or invest such Net Cash Proceeds as provided in clause (i), (ii) or (iii)
(without regard to the parenthetical contained in such clause (ii)) above. The
amount of such Net Cash Proceeds not so used as set forth above in this
paragraph (b) constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10.0 million the
Issuer shall, within 30 business days of the completion of an Excess Proceeds
Offer under the Existing Note Indentures, make an offer to purchase (an "Excess
Proceeds Offer") from all holders of Notes and all holders of other Indebtedness
that is PARI PASSU with the Notes and that contains an asset sale offer
requirement that has not been satisfied, on a pro rata basis, in accordance with
the procedures set forth below, the aggregate principal amount of Notes
(expressed as a multiple of $1,000 or [EURO]1,000, as the case may be) and
principal amount or accreted value, as applicable, of such PARI PASSU
Indebtedness that may be purchased with those Excess Proceeds. The offer price
as to each Note shall be payable in cash in an amount equal to 100% of the
aggregate principal amount of the Notes as of the date of purchase plus, in each
case, accrued interest, if any (the "Offered Price") to the date an Excess
Proceeds Offer is consummated. Parent shall make an Investment in the Issuer or
cause Netia South or Netia Telekom to make a prepayment under the Intercompany
Bonds in the amount of Excess Proceeds required to consummate the Excess
Proceeds Offer. To the extent that the aggregate Offered Price of Notes tendered
pursuant to an Excess Proceeds Offer is less than the Excess Proceeds, Parent
may use such deficiency for general corporate purposes. If the aggregate Offered
Price of Notes and the aggregate principal amount or accreted value, as
applicable, of such other PARI PASSU Indebtedness validly tendered and not
withdrawn by holders thereof exceeds the Excess Proceeds, Notes and such other
PARI PASSU Indebtedness to be purchased will be selected on a pro rata basis.
Upon completion of such offer to purchase, the amount of Excess Proceeds shall
be reset to zero.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
(a) Parent will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on or in respect of its Capital Stock, (b) pay any
Indebtedness owed to Parent or any other Restricted Subsidiary, (c) make
Investments in Parent or any other Restricted Subsidiary, or (d) transfer any of
its properties or assets to Parent or any other Restricted Subsidiary except for
such encumbrances or restrictions existing under or by reason of (i) any
agreement in effect on the date of the Indentures and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those contained in
such agreements, as in effect on the date of the Indentures, (ii) applicable
law, (iii) customary non-assignment provisions of any lease governing a
leasehold interest of Parent or any Restricted Subsidiary, (iv) any agreement or
other instrument of a Person acquired by Parent or any Restricted Subsidiary in
existence at the time of such acquisition (but not created in contemplation
thereof), which encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, (v) any such customary encumbrance or
restriction contained in a security document creating a Lien permitted under the
Indentures to the extent relating to the property or asset subject to such Lien,
(vi) purchase
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money obligations for property acquired in the ordinary course of business that
impose restrictions on the property so acquired of the nature described in
clause (d) of the preceding paragraph, (vii) any agreement for the sale or other
disposition of a Subsidiary that restricts distributions by that Subsidiary
pending its sale or other disposition, (viii) provisions with respect to the
disposition of assets or property in joint venture agreements, asset sale
agreements, stock sale agreements and other similar agreements entered into in
the ordinary course of business; and (ix) any encumbrance or restriction
contained in the terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if (A) either (i) the encumbrance or restriction
applies only in the event of and during the continuance of a payment default or
a default with respect to a financial covenant contained in such Indebtedness or
agreement, or (ii) the Parent determines at the time any such Indebtedness is
incurred (and at the time of any modification of the terms of any such
encumbrance or restriction) that any such encumbrance or restriction will not
materially affect Parent's ability to make principal or interest payments on the
Notes and (B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in comparable
financings or agreements (as determined by Parent in good faith).
(b) Notwithstanding anything contained in the Indentures to the contrary,
the Parent will not, and will not permit any Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction of any kind on the ability of the Issuer or the
applicable Affiliate to satisfy fully its obligations under the Investment
Agreement.
LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES. Parent will not
make, and will not permit any of its Restricted Subsidiaries to make, any
Investment in Unrestricted Subsidiaries if, at the time thereof, the amount of
such Investment would exceed the amount of Restricted Payments then permitted to
be made pursuant to the "Limitation on Restricted Payments" covenant (including,
without limitation, as a Permitted Investment). Any Investments in Unrestricted
Subsidiaries permitted to be made pursuant to this covenant (i) will be treated
as the making of a Restricted Payment in calculating the amount of Restricted
Payments made by Parent or a Restricted Subsidiary (without duplication under
the provisions of clause (iv) of paragraph (a) of the "Limitations on Restricted
Payments" covenant) and (ii) may be made in cash or property (if made in
property, the fair market value thereof as determined by the Management Board
(whose determination shall be conclusive and evidenced by a Board Resolution)
shall be deemed to be the amount of such Investment for the purpose of clause
(i)).
PERMITTED BUSINESS. Parent will not, and will not permit any of its
Restricted Subsidiaries to, engage in any business activity other than (i) the
delivery of telephony, cable television or other telecommunications or data
transmission services in the Republic of Poland or any country bordering the
Republic of Poland and (ii) any business or activity reasonably related thereto,
including, without limitation, any business conducted by any Restricted
Subsidiary on the date of the Indentures (other than the Non-Core Business) and
the acquisition, holding or exploitation of any telecommunication license
related to the delivery of the services described in clause (i) above; provided
that this covenant shall not be violated by reason of the operation of the
Non-Core Business prior to the sale of the Non-Core Business by Parent.
THE ISSUER. (a) Parent will ensure that the Issuer remains a Wholly Owned
Subsidiary and will not permit the Issuer to consolidate with or merge with or
into any other Person; provided that nothing in the Indentures shall limit a
voluntary dissolution of the Issuer or merger of the Issuer into Parent solely
for the purposes of permitting Parent to assume all of the Issuer's obligations
as if it were the direct obligor with respect thereto and in which all assets of
the Issuer are transferred to Parent and no material payment or distribution is
made to creditors.
(b) Notwithstanding anything contained in the Indentures to the contrary,
the Issuer will not engage in any business activity or undertake any other
activity, except any activity relating to the offering, sale or issuance of the
Notes and other Indebtedness and the lending or otherwise advancing
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the proceeds thereof to Parent or any of its Restricted Subsidiaries and any
other activities in connection therewith.
PROVISION OF FINANCIAL STATEMENTS AND REPORTS. Parent or the Issuer, as
appropriate, will file on a timely basis with the Commission, to the extent such
filings are accepted by the Commission and whether or not Parent or the Issuer
has a class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that Parent or the Issuer, as appropriate,
would be required to file if it were a foreign private issuer subject to Section
13 or 15(d) of the Exchange Act; provided however, that in addition to such
requirements the Parent or the Issuer, as appropriate, shall file: (i) within 60
days after the end of each of its first three fiscal quarters, quarterly
financial reports on Form 6-K which contain the information specified on Form
10-Q, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operation" and (ii) within 120 days after the end of its fiscal
year, annual financial reports on Form 20-F, including a report on the annual
financial statements by Parent's certified independent accounts, which quarterly
and annual reports shall contain a reconciliation to GAAP. Parent or the Issuer,
as appropriate, will also be required (a) to file with the Trustees, and provide
to each holder of Notes, without cost to such holder, copies of such reports and
documents within 15 days after the date on which such reports and documents are
filed with the Commission or the date on which Parent or the Issuer, as
appropriate, would be required to file such reports and documents if Parent or
the Issuer were so required, and (b) if filing such reports and documents with
the Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at Parent's cost copies of such reports and documents to
any prospective holder of Notes promptly upon written request.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Parent will not in a single transaction or a series of related transactions
consolidate with or merge with or into any other Person or sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties and assets substantially as an entirety to any other Person or
Persons or permit any Subsidiary to enter into any such transaction or series of
related transactions, if such transaction or series of related transactions, in
the aggregate, would result in the sale, assignment, conveyance, transfer, lease
or other disposition of all or substantially all of the properties and assets of
Parent and its Subsidiaries on a consolidated basis substantially as an entirety
to any Person or Persons, unless at the time and immediately after giving effect
thereto: (i) either (a) Parent will be the continuing corporation or (b) the
Person (if other than Parent) formed by such consolidation or into which Parent
or such Subsidiary is merged or the Person which acquires by sale, conveyance,
transfer, lease or other disposition, all or substantially all of the properties
and assets of Parent and its Subsidiaries on a consolidated basis substantially
as an entirety (the "Surviving Entity"), (1) will be a corporation organized and
validly existing under the laws of the Republic of Poland, the Netherlands or
the United States of America, any state thereof or the District of Columbia and
(2) will expressly assume, by a supplemental indenture to each Indenture in form
satisfactory to the relevant Trustee, Parent's obligation pursuant to the
Guarantees for the due and punctual payment of the principal of, premium, if
any, on and interest on all the Notes and the performance and observance of
every covenant of the relevant Indenture on the part of Parent to be performed
or observed; and (ii) immediately before and after giving effect to such
transaction or series of transactions on a pro forma basis (and treating any
obligation of Parent or any Subsidiary incurred in connection with or as a
result of such transaction or series of transactions as having been incurred at
the time of such transaction), no Default or Event of Default shall have
occurred and be continuing; (iii) immediately before and immediately after
giving effect to such transaction or series of transactions on a pro forma basis
(on the assumption that the transaction or series of transactions occurred on
the first day of the latest fiscal quarter for which consolidated financial
statements of Parent are available immediately prior to the consummation of such
transaction or series of transactions with the appropriate adjustments with
respect to the transaction or series of transactions being included in such pro
forma calculation), either (A) Parent or the
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Surviving Entity, as the case may be, could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the provisions of the
"Limitation on Indebtedness" covenant or (B)(i) Parent or the Surviving Entity,
as the case may be, would have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of Parent
immediately preceding the transaction, and (ii) Parent or the Surviving Entity,
as applicable, would have a Consolidated Indebtedness to Annualized Consolidated
Operating Cash Flow Ratio that is greater than zero, and that is equal to or
lower than such ratio of Parent immediately preceding such transaction, and (iv)
if any of the property or assets of Parent or any of its Restricted Subsidiaries
would thereupon become subject to any Lien, the provisions of the "Limitation on
Liens" covenant are complied with.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, Parent or the Surviving Entity
shall have delivered to the Trustees, in form and substance reasonably
satisfactory to the Trustees, an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, and if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture, comply with the requirements of the relevant Indenture and that all
conditions precedent therein provided for relating to such transaction have been
complied with. Notwithstanding the foregoing, the provisions of this paragraph
will not apply to any transaction for the sole purpose of changing such
Restricted Subsidiary's corporate organization from a Polish limited liability
company to a Polish joint stock company or from a Polish joint stock company to
a Polish limited liability company.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all of substantially all of the properties and
assets of Parent in accordance with the immediately preceding paragraphs in
which Parent is not the continuing obligor under the Indentures, the Surviving
Entity shall succeed to, and be substituted for, and may exercise every right
and power of, Parent under the Indentures with the same effect as if such
successor had been named as Parent therein. When a successor assumes all the
obligations of its predecessor under the Indentures or the Guarantees, the
predecessor shall be released from those obligations; provided that in the case
of a transfer by lease, the predecessor shall not be released from the payment
of principal and interest on the Notes.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indentures:
(i) default in the payment of any interest on any Senior Dollar Notes or
Senior Euro Notes when they become due and payable and continuance of such
default for a period of 30 days, except that a default in payment of interest on
the Notes on or before June 15, 2001 shall not be entitled to any such 30 day
grace period;
(ii) default in the payment of the principal of or premium, if any, on any
Senior Dollar Notes or Senior Euro Notes, as the case may be, at their Maturity;
(iii) (A) default in the performance, or breach, of any covenant or
agreement of the Issuer or Parent contained in the applicable Indenture (other
than a default in the performance, or breach, of a covenant or agreement which
is specifically dealt with in the immediately preceding clauses (i) and (ii) or
in clauses (B), (C), (D) or (E) of this clause (iii)) and continuance of such
default or breach for a period of 30 days after written notice shall have been
given to the Issuer by the applicable Trustee or to the Issuer and the
applicable Trustee by the holders of at least 25% in aggregate principal amount
of the Senior Dollar Notes or Senior Euro Notes, as the case may be, then
outstanding; (B) default in the performance or breach of the provisions of the
"Limitation on Sale of Assets" covenant; (C) default in the performance or
breach of the provisions under "Consolidation, Merger and Sale of Assets"; (D)
failure to make or consummate a Change of Control Offer in accordance with the
provisions of the "Purchase of Notes upon a Change of Control Triggering Event"
covenant; and (E) declaration by Parent of any dividend in violation of the
"Limitation on Restricted Payments" covenant;
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(iv) (A) one or more defaults in the payment of principal of or premium, if
any, or interest on Indebtedness of Parent or any Restricted Subsidiary
aggregating $10.0 million or more when the same becomes due and payable at the
stated maturity thereof, and such default or defaults shall have continued after
any applicable grace period and shall not have been cured or waived or (B)
Indebtedness of Parent or any Restricted Subsidiary aggregating $10.0 million or
more shall have been accelerated or otherwise declared due and payable, or
required to be prepaid or repurchased (other than by regularly scheduled
required prepayment and other than pursuant to any "Change of Control" or "Asset
Sale" mandatory repurchase provision thereof), prior to the Stated Maturity
thereof;
(v) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against Parent or any Significant Subsidiary
or their respective properties for the payment of money, either individually or
in an aggregate amount, in excess of $10.0 million (or, to the extent not
denominated in U.S. Dollars, the United States Dollar Equivalent thereof) and
either (A) an enforcement proceeding shall have been commenced by any creditor
upon such judgment or order or (B) there shall have been a period of 45 days
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, was not in effect;
(vi) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Issuer, Parent or any Significant Subsidiary;
(vii) any Guarantee becomes, or Parent asserts or acknowledges in writing
that a Guarantee is, invalid or unenforceable; or
(viii) with respect to the Senior Euro Notes or the Senior Dollar Notes, as
applicable, the Investment Agreements become, or either the Issuer, Parent or
any subsidiary of Parent that is a party thereto asserts or acknowledges in
writing that the Investment Agreements are, invalid, unenforceable or not in
full force and effect before payment in full of the obligations thereunder.
If an Event of Default (other than an Event of Default arising from an event
of bankruptcy, insolvency or reorganization with respect to the Issuer, Parent
or any Significant Subsidiary) shall occur and be continuing, the appropriate
Trustee or the holders of not less than 25.0% in aggregate principal amount of
the Senior Dollar Notes or the Senior Euro Notes, as the case may be, then
outstanding, by written notice to the Issuer (and to the appropriate Trustee if
such notice is given by the holders), may, and the relevant Trustee upon the
written request of such holders shall, declare the aggregate principal amount
of, premium, if any, and accrued interest on all of such outstanding Notes
immediately due and payable, and upon any such declaration all such amounts
payable in respect of the Senior Dollar Notes or the Senior Euro Notes, as the
case may be, shall become immediately due and payable. If an Event of Default
specified in clause (vi) above occurs and is continuing, then the aggregate
principal amount of, premium, if any, and accrued interest on all of the
outstanding Notes shall ipso facto become immediately due and payable without
any declaration or other act on the part of the applicable Trustee or any holder
of Notes.
At any time after a declaration of acceleration under either Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the relevant Trustee, the holders of a majority in aggregate principal amount of
the outstanding Senior Dollar Notes or Senior Euro Notes, as the case may be, by
written notice to the Issuer and the relevant Trustee, may rescind such
declaration and its consequences if (a) the Issuer or Parent has paid or
deposited with the relevant Trustee a sum sufficient to pay (i) all overdue
interest on all outstanding Senior Dollar Notes or Senior Euro Notes, as the
case may be, (ii) all unpaid principal of or premium, if any, on any outstanding
Senior Dollar Notes or Senior Euro Notes, as the case may be, that has become
due otherwise than by such declaration of acceleration and interest thereon at
the rate borne by the Senior Dollar Notes or Senior Euro Notes, as the case may
be, (iii) to the extent that payment of such interest is lawful, interest upon
overdue interest and overdue principal at the rate borne by the Senior Dollar
Notes or Senior Euro Notes, as the case may be and (iv) all sums paid or
advanced by the relevant Trustee under the
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relevant Indenture and the reasonable compensation, expenses, disbursements and
advances of the relevant Trustee, its agents and counsel; (b) all Events of
Default, other than the non-payment of, premium, if any, or interest on the
Senior Dollar Notes or the Senior Euro Notes, as the case may be, that has
become due solely by such declaration of acceleration, have been cured or
waived, and (c) the rescission would not conflict with any judgment or decree of
a court of competent jurisdiction. No such rescission shall affect any
subsequent default or impair any right consequent thereon.
The holders of not less than a majority in aggregate principal amount of the
outstanding Senior Dollar Notes or Senior Euro Notes, as the case may be, may,
on behalf of the holders of all the Senior Dollar Notes or the Senior Euro
Notes, as the case may be, waive any past defaults under the relevant Indenture,
except a default in the payment of the principal of, premium, if any, or
interest on any Senior Dollar Note or Senior Euro Note, as the case may be, or
in respect of a covenant or provision which under the applicable Indenture
cannot be modified or amended without the consent of the holder of each Senior
Dollar Note or Senior Euro Note, as the case may be, outstanding.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each holder of the Senior Dollar Notes or
the Senior Euro Notes, as the case may be, notice of the Default or Event of
Default within 30 days after the occurrence thereof. Except in the case of a
Default or an Event of Default in payment of principal of, or premium, if any,
or interest on any Senior Dollar Notes or Senior Euro Notes, as the case may be,
the Trustee may withhold the notice to the holders of such Notes if a committee
of its trust officers in good faith determines that withholding the notice is in
the interests of the holders of such Notes.
Parent is required to furnish to the relevant Trustee annual statements as
to the performance by Parent and the Issuer of their obligations under the
relevant Indenture and as to any default in such performance. The Issuer and
Parent are also required to notify the Trustees within five days of the
occurrence of any Default.
DEFEASANCE OR COVENANT DEFEASANCE OF THE INDENTURE
The Issuer may, at its option and at any time, elect to have the obligations
of the Issuer and Parent upon the Senior Dollar Notes or the Senior Euro Notes,
as the case may be, discharged with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Issuer will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Senior Dollar Notes or Senior Euro Notes, as the case may be, and to have
satisfied all its other obligations under such Notes and the applicable
Indenture insofar as such Senior Dollar Notes or Senior Euro Notes, as the case
may be, are concerned except for (i) the rights of holders of outstanding Senior
Dollar Notes or Senior Euro Notes, as the case may be, to receive payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due, (ii) the Issuer's obligations to issue temporary Senior
Dollar Notes or Senior Euro Notes, as the case may be, register the transfer or
exchange of any such Notes, replace mutilated, destroyed, lost or stolen Notes,
maintain an office or agency for payments in respect of such Notes and segregate
and hold such payments in trust, (iii) the rights, powers, trusts, duties and
immunities of the applicable Trustee and (iv) the defeasance provisions of the
applicable Indenture. In addition, the Issuer may, at its option and at any
time, elect to have the obligations of the Issuer and Parent released with
respect to certain covenants set forth in either Indenture, and any omission to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the related Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Issuer must irrevocably deposit or cause to be deposited with the applicable
Trustee, as trust funds in trust, specifically pledged as security for, and
dedicated solely to, the benefit of the holders of the relevant Notes, cash in
U.S. Dollars, U.S. Government Securities, or a combination thereof in the case
of the Senior Dollar Notes, or cash in Euros, Government Securities of a member
of the European Union, or a combination
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thereof in the case of the Senior Euro Notes, in such amounts as will be
sufficient, in the opinion of an internationally recognized firm of independent
public accountants or an internationally recognized investment banking firm, to
pay and discharge the principal of, premium, if any, and interest on the
relevant outstanding Notes on the Stated Maturity (or upon redemption, if
applicable) of such principal, premium, if any, or installment of interest; (ii)
no Default or Event of Default with respect to the relevant Notes will have
occurred and be continuing on the date of such deposit or, insofar as an event
of bankruptcy under clause (vi) of "Events of Default" above is concerned, at
any time during the period ending on the 91st day after the date of such
deposit; (iii) such defeasance or covenant defeasance will not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument (other than the relevant Indenture) to which the Issuer or Parent is
a party or by which either is bound; (iv) in the case of defeasance, the Issuer
shall have delivered to the applicable Trustee an opinion of counsel in the
United States stating that the Issuer or Parent has received from, or there has
been published by, the Internal Revenue Service a ruling, or since the date of
this offering memorandum, there has been a change in applicable U.S. federal
income tax law, in either case to the effect that, and based thereon such
opinion shall confirm that, the holders of the relevant outstanding Notes will
not recognize income, gain or loss for U.S. federal income tax purposes as a
result of such defeasance and will be subject to U.S. federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred; (v) in the case of covenant
defeasance, the Issuer shall have delivered to the applicable Trustee an opinion
of counsel in the United States to the effect that the holders of the applicable
Notes outstanding will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such covenant defeasance and will be subject
to U.S. federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such covenant defeasance had not
occurred; and (vi) the Issuer shall have delivered to the applicable Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Senior Dollar Notes Indenture or the Senior Euro Notes Indenture, as the
case may be, will cease to be of further effect (except as to surviving rights
of registration of transfer or exchange of the respective Notes as expressly
provided for in the respective Indenture) and the Trustee, at the expense of
Parent, will execute proper instruments acknowledging satisfaction and discharge
of such Indenture when (i) either (a) all the respective Notes theretofore
authenticated and delivered (other than destroyed, lost or stolen Notes which
have been replaced or paid) have been delivered to the Trustee for cancellation
or (b) all the respective Notes not theretofore delivered to the Trustee for
cancellation (x) have become due and payable, (y) will become due and payable at
Stated Maturity within one year or (z) are to be called for redemption within
one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of the Issuer, and
the Issuer has irrevocably deposited or caused to be deposited with the Trustee
trust funds in trust for such purpose an amount sufficient to pay and discharge
the entire Indebtedness on such Notes not theretofore delivered to the Trustee
for cancellation, for principal of, premium, if any, and interest on the Notes
to the date of such deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or redemption date, as the case may be; (ii)
the Issuer or Parent has paid or caused to be paid all other sums payable under
the respective Indenture by the Issuer or Parent; and (iii) the Issuer has
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent provided in such Indenture relating
to the satisfaction and discharge of such Indenture have been complied with.
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MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Senior Dollar Notes Indenture or the
Senior Euro Notes Indenture, as the case may be, may be made by a supplemental
indenture entered into by the Issuer, Parent and the Trustee with the consent of
the holders of a majority in aggregate outstanding principal amount of the
Senior Dollar Notes or the Senior Euro Notes, as the case may be; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby, (i) change the Stated Maturity
of the principal of, or any installment of interest on, any Senior Dollar Note
or Senior Euro Note, as the case may be, or reduce the principal amount thereof
or premium, if any, or the rate of interest thereon or change the coin or
currency in which any such Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity thereof (or, in the case of redemption, on or
after the redemption date); (ii) amend, change or modify the amount payable by
the Issuer pursuant to an Excess Proceeds Offer with respect to any Asset Sale
in accordance with the "Limitation on Sale of Assets" covenant or the amount
payable by the Issuer pursuant to a Change of Control Offer in the event of a
Change of Control Triggering Event in accordance with the "Purchase of Notes
upon a Change of Control Triggering Event" covenant; (iii) reduce the percentage
in principal amount of outstanding Senior Dollar Notes or Senior Euro Notes, as
the case may be, the consent of whose holders is required for any waiver of
compliance with certain provisions of the respective Indenture; (iv) modify any
of the provisions relating to supplemental indentures requiring the consent of
holders or relating to the waiver of past defaults or relating to the waiver of
certain covenants, except to increase the percentage of outstanding Senior
Dollar Notes or Senior Euro Notes, as the case may be, required for such actions
or to provide that certain other provisions of the respective Indenture cannot
be modified or waived without the consent of the holder of each Note affected
thereby; or (v) amend or modify any of the provisions of the Senior Dollar Notes
Indenture or the Senior Euro Notes Indenture, as the case may be, relating to
any guarantee of the Senior Dollar Notes or the Senior Euro Notes (including the
Guarantees), as the case may be, in any manner adverse to the holders of such
Notes; and provided further that, except as otherwise permitted under
"Consolidation, Merger and Sale of Assets," no such modification or amendment
may, without the consent of the holders of 66 2/3% of the aggregate principal
amount of outstanding Senior Dollar Notes or Senior Euro Notes affected thereby,
as the case may be, consent to the assignment or transfer by the Issuer or
Parent of any of their respective rights or obligations under the respective
Indenture.
Notwithstanding the foregoing, without the consent of any holder of the
Senior Dollar Notes or the Senior Euro Notes, as the case may be, the Issuer,
Parent and the Trustee may modify or amend the respective Indenture: (a) to
evidence the succession of another Person to the Issuer, Parent or any other
obligor on the respective Notes, and the assumption by any such successor of the
covenants of the Issuer, Parent or such obligor in the respective Indenture and
in the respective Notes in accordance with "Consolidation, Merger and Sale of
Assets"; (b) to add to the covenants of the Issuer, Parent or any other obligor
upon the Notes for the benefit of the holders of such Notes or to surrender any
right or power conferred upon the Issuer, Parent or any other obligor upon such
Notes, as applicable, in the respective Indenture or in such Notes or in any
guarantee; (c) to cure any ambiguity, or to correct or supplement any provision
in the respective Indenture or the respective Notes or in any guarantee or make
any other provisions with respect to matters or questions arising under the
respective Indenture or the respective Notes or guarantee; provided that, in
each case, such provisions shall not adversely affect the interest of the
holders of such Notes; (d) to comply with the requirements of the Commission in
order to effect or maintain the qualification, if any, of the respective
Indenture under the Trust Indenture Act; (e) to add a guarantor of the Senior
Dollar Notes or the Senior Euro Notes, as the case may be, under the respective
Indenture; (f) to evidence and provide the acceptance of the appointment of a
successor Trustee under the respective Indenture; or (g) to mortgage, pledge,
hypothecate or grant a security interest in favor of the Trustee for the benefit
of the holders of the Senior Dollar Notes or the Senior Euro Notes, as the case
may be, as additional security for the payment and performance of
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the Issuer's, Parent's and any Guarantor's obligations under the respective
Indenture, in any property, or assets, including any of which are required to be
mortgaged, pledged or hypothecated, or in which a security interest is required
to be granted to the Trustee pursuant to the respective Indenture or otherwise.
The holders of a majority in aggregate principal amount of the Senior Dollar
Notes or the Senior Euro Notes, as the case may be, outstanding may waive
compliance with certain restrictive covenants and provisions of the respective
Indenture.
PAYING AGENTS AND REGISTRAR FOR THE NOTES
The Issuer will maintain one or more paying agents and transfer agents for
the Senior Euro Notes (i) in Luxembourg, for as long as the Senior Euro Notes
are listed on the Luxembourg Stock Exchange, (ii) in London and (iii) in the
Borough of Manhattan, City of New York (each a "Euro Paying Agent") and a "Euro
Transfer Agent," respectively). The initial Euro Paying Agents and Euro Transfer
Agents are Bankers Trust Luxembourg S.A. in Luxembourg and Bankers Trust Company
in London and New York.
The Issuer will maintain one or more paying agents and transfer agents for
the Senior Dollar Notes (i) in Luxembourg, for so long as the Senior Dollar
Notes are listed on the Luxembourg Stock Exchange and (ii) in the Borough of
Manhattan, City of New York (each a "Dollar Paying Agent" and a "Dollar Transfer
Agent," respectively, and together with the Euro Paying Agents and the Euro
Transfer Agents, the "Paying Agents" and the "Transfer Agents," respectively).
The initial Dollar Paying Agents are State Street Bank and Trust Company, N.A.
in New York and Bankers Trust Luxembourg S.A. in Luxembourg.
The Issuer will also maintain one or more registrars (each a "Registrar")
with offices or agents in the Borough of Manhattan, City of New York and in
Europe. The initial Registrar for the Senior Dollar Notes is State Street Bank
and Trust Company, N.A. The initial Registrar for the Senior Euro Notes is
Bankers Trust Company in New York. The Registrar will maintain a register
reflecting ownership of the relevant Definitive Registered Notes outstanding
from time to time.
The Issuer and Parent reserve the right at any time to vary or terminate the
appointment of any Paying Agent Registrar, Transfer Agent or other agent and/or
to appoint additional or other Paying Agents, Registrars, Transfer Agents or
other agents without prior notice to the Holders.
THE TRUSTEE
Each Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in such Indenture. If an Event of Default has occurred and is continuing, the
Trustee will exercise such rights and powers vested in it under the respective
Indenture and use the same degree of care and skill in its exercise as a prudent
Person would exercise under the circumstances in the conduct of such Person's
own affairs.
Each Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein, contains limitations on the rights of the Trustee thereunder
should it become a creditor of the Issuer or Parent, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest (as defined in the Trust Indenture Act) it must eliminate such conflict
or resign.
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NOTICES
All notices to holders of the Notes shall be deemed to have been duly given
upon (i) the mailing by first class mail, postage prepaid, of such notices to
registered holders of the Notes at their registered addresses as recorded in the
registers; and (ii) publication in a leading daily newspaper with general
circulation in a major western European capital or, if not practicable, in a
leading daily English language newspaper having general circulation in Europe
previously approved by the Trustee. Any notice referred to in (ii) above shall
be deemed to have been given on the date of such publication or, if published
more than once or on different dates, on the first date on which publication is
made in the manner required in the newspaper or in one of the newspapers
referred to above. For Notes which are represented by global certificates held
on behalf of Euroclear or Cedelbank, notices may be given by delivery of the
relevant notices to Euroclear or Cedelbank for communication to entitled account
Parent in substitution for the aforesaid publication. So long as any Notes are
listed on the Luxembourg Stock Exchange and the rules and regulations of the
Luxembourg Stock Exchange so require, any such notice shall also be published in
a leading daily newspaper of general circulation in Luxembourg. Such publication
is expected to be the Luxembourger Wort.
GOVERNING LAW
The Indentures and the Notes will be governed by, and construed in
accordance wiht the laws of the State of New York.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Subsidiary or such acquisition; provided that, for purposes of the
"Limitation on Indebtedness" covenant, such Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (ii) any other Person that
owns, directly or indirectly, 5.0% or more of such specified Person's Voting
Stock or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any Person having a relationship
with such Person by blood, marriage or adoption not more remote than first
cousin. For the purposes of this definition, "control," when used with respect
to any specified Person, means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Annualized Consolidated Operating Cash Flow" means Consolidated Operating
Cash Flow for the latest fiscal quarter for which consolidated financial
statements of Parent are available immediately preceding the date of the
transaction giving rise to the need to calculate Annualized Consolidated
Operating Cash Flow (the "Transaction Date") multiplied by four. For purposes of
calculating "Consolidated Operating Cash Flow" for any fiscal quarter for
purposes of this definition, (i) any Subsidiary that is a Subsidiary on the
Transaction Date shall be deemed to have been a Subsidiary at all times during
such fiscal quarter and (ii) any Subsidiary that is not a Subsidiary on the
Transaction Date shall be deemed not to have been a Subsidiary at any time
during such fiscal quarter.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of
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any Subsidiary; (ii) all or substantially all of the properties and assets of
Parent or its Subsidiaries; or (iii) any other properties or assets of Parent or
any Subsidiary, other than in the ordinary course of business. For the purposes
of this definition, the term "Asset Sale" shall not include any transfer of
properties or assets (A) that is governed by the provisions of the Indentures
described under "Consolidation, Merger and Sale of Assets," (B) of Parent to any
Restricted Subsidiary, or of any Restricted Subsidiary to Parent or any
Restricted Subsidiary, in each case, in accordance with the terms of the
Indentures, (C) having a fair market value of less than $1.0 million (or, to the
extent not denominated in U.S. Dollars, the United States Dollar Equivalent
thereof) in any given fiscal year, or (D) any transfer by Parent or a Subsidiary
of property or equipment to a Person who is not an Affiliate of Parent in
exchange for property or equipment that has a fair market value at least equal
to the fair market value of the property or equipment so transferred; provided
that, in the event of a transfer described in this clause (D) Parent shall
deliver to the Trustees an officers' certificate certifying that such exchange
complies with this clause (D).
"Attributable Debt" means, with respect to any lease at the time of
determination, the present value (discounted at the interest rate implicit in
the lease or, if not known, at Parent's incremental borrowing rate) of the
obligations of the lessee of the property subject to such lease for rental
payments during the remaining term of the lease included in such transaction,
including any period for which such lease has been extended or may, at the
option of the lessor, be extended, or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of penalty (in
which case the rental payments shall include such penalty), after excluding from
such rental payments all amounts required to be paid on account of maintenance
and repairs, insurance, taxes, assessments, water utilities and similar charges.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness multiplied by (ii) the amount of
each such principal payment by (b) the sum of all such principal payments.
"Board of Directors" means the managing board of the Issuer.
"Board Resolution" means (i) if issued by the Issuer, a copy of a resolution
certified by a member of managing board of the Issuer to have been duly adopted
by the Board of Directors and to be in full force and effect on the date of such
certification and (ii) if issued by Parent, a copy of a resolution certified by
the Secretary or an Assistant Secretary of Parent to have been duly adopted by
the Management Board and to be in full force and effect on the date of such
certification and, in each case, delivered to the applicable Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated) of such Person's equity interest, and any rights (other
than debt securities convertible into capital stock), warrants or options
exchangeable for or convertible into such capital stock, whether now outstanding
or issued after the date of the Indenture.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of
180 days or less issued or directly and fully guaranteed or insured by the
United States of America, the Federal Republic of Germany or the Republic of
Poland or any agencies or instrumentalities thereof (provided that the full
faith and credit of the United States of America, the Federal Republic of
Germany or the Republic of Poland, as the case may be, is pledged in support
thereof); (ii) time deposit accounts,
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money market deposits or certificates of deposit with a maturity of 180 days or
less of Citibank (Poland) S.A., ING Bank N.V., ABN Amro (Poland), Bank Handlowy
w Warszawie S.A., BE S.A. or any other financial institution that is a (a)
member of the Federal Reserve System or (b) a bank or trust company which is
organized under the laws of the Republic of Poland or any other country
recognized by the United States of America and whose long-term debt is rated
"A-" or higher according to S&P or "A-3" or higher according to Moody's, in each
of (a) and (b) above having combined capital and surplus and undivided profits
of not less than $500 million; (iii) commercial paper with a maturity of 180
days or less issued by a corporation that is not an Affiliate of Parent and is
organized under the laws of any state of the United States, the District of
Columbia or rated at least A-1 by S&P or at least P-1 by Moody's; (iv)
repurchase obligations with a term of not more than seven days for underlying
securities issued or directly and fully guaranteed or insured by the United
States of America or any agency or instrumentality thereof (provided that the
full faith and credit of the United States of America is pledged in support
thereof) entered into with a bank meeting the qualifications described in clause
(ii) above; (v) any evidence of indebtedness with a maturity of 180days or less
issued by the National Bank of Poland; and (vi) money market funds at least 95%
of the assets of which constitute Cash Equivalents of the kinds described in
clauses (i) through (v) of this definition.
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than the Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 40.0% of the total outstanding Voting Stock of Parent;
(b) Parent consolidates with, or merges with or into another Person (other than
Telia) or conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person (other than Telia), or any Person
(other than Telia) consolidates with or merges with or into Parent, in any such
event pursuant to a transaction in which the outstanding Voting Stock of Parent
is converted into or exchanged for cash, securities or other property, other
than any such transaction where (i) the outstanding Voting Stock of Parent is
not converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of Parent) or is converted into or
exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of the
surviving or transferee corporation or (B) Voting Stock (other than Redeemable
Capital Stock) of the surviving or transferee corporation and cash, securities
and other property (other than Capital Stock of the Surviving Entity) in an
amount that could be paid by Parent as a Restricted Payment as described under
the "Limitation on Restricted Payments" covenant and (ii) immediately after such
transaction, no "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than the Permitted Holders, is the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 40.0% of the total outstanding Voting Stock of the
surviving or transferee corporation; (c) Parent is liquidated or dissolved or a
special resolution is passed by the shareholders of Parent approving the plan of
liquidation or dissolution other than in a transaction which complies with the
provisions described under "Consolidation, Merger and Sales of Assets"; (d)
Telia, any Unisource Shareholder, a Strategic Investor (who is a direct or
indirect transferee of equity interests in Parent or a Restricted Subsidiary
previously held by Telia) or Unisource (for as long as at least 51% of the
shareholders of Unisource are Strategic Investors) at any time prior to the
earlier of (i) the date on which a Public Equity Offering occurs and (ii)
November 3, 2000 ceases to own, directly or indirectly, in the aggregate, at
least 20.0% of the total outstanding equity interests in Parent (excluding any
Restricted Subsidiaries engaged in the Non-Core Business) other than as a result
of issuances by Parent after the date of the Indenture of shares of its Capital
Stock to other Persons or (e) a Change of Control occurs under any of the 1997
Notes Indentures.
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"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of Parent and all Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding, without
duplication, (a) any net after-tax extraordinary gains or losses (less all fees
and expenses relating thereto), (b) any net after-tax gains or losses (less all
fees and expenses relating thereto) attributable to asset dispositions other
than in the ordinary course of business, (c) the portion of net income (or loss)
of any Person (other than Parent or a Restricted Subsidiary), including
Unrestricted Subsidiaries, in which Parent or any Restricted Subsidiary has an
ownership interest, except to the extent of the amount of dividends or other
distributions actually paid to Parent or any Restricted Subsidiary in cash
dividends or distributions during such period, (d) net income (but not loss) of
any Person combined with Parent or any Restricted Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary, to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary is not at the date of determination permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary or its stockholders and (f) any gain or
loss, net of taxes, realized upon the termination of any employee benefit plan.
"Consolidated Indebtedness to Annualized Consolidated Operating Cash Flow
Ratio" means, at any date of determination, the ratio of (i) the aggregate
amount of Indebtedness of Parent and the Restricted Subsidiaries outstanding at
the date of determination as determined on a consolidated basis in accordance
with GAAP to (ii) Annualized Consolidated Operating Cash Flow for the latest
full fiscal quarter for which consolidated financial statements of Parent are
available preceding the date of the transaction giving rise to the need to
calculate the Consolidated Indebtedness to Annualized Consolidated Operating
Cash Flow Ratio.
"Consolidated Interest Expense" of Parent means, for any period, without
duplication, the sum of (a) the interest expense of Parent and its Restricted
Subsidiaries for such period, including, without limitation, (i) amortization or
accretion of debt discount, (ii) the net cost of Interest Rate Agreements
(including amortization of discounts), (iii) the interest portion of any
deferred payment obligation, (iv) accrued interest, (v) the consolidated amount
of any interest capitalized by Parent and (vi) amortization of debt issuance
costs, plus (b) the interest component of Capitalized Lease Obligations of
Parent and its Restricted Subsidiaries paid, accrued and/or scheduled to be paid
or accrued during such period, plus (c) cash and non-cash dividends due (whether
or not declared) on Redeemable Capital Stock or Preferred Stock by Parent and
any Restricted Subsidiary (to any Person other than Parent and any Wholly Owned
Subsidiary), in each case as determined on a consolidated basis in accordance
with GAAP; provided that the Consolidated Interest Expense attributable to
interest on any Indebtedness computed on a pro forma basis and (A) bearing a
floating interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (B) which was
not outstanding during the period for which the computation is being made but
which bears, at the option of Parent, a fixed or floating rate of interest,
shall be computed by applying, at the option of Parent, either the fixed or the
floating rate.
"Consolidated Net Worth" means, with respect to any specified Person as of
any date, the sum of: (i) the consolidated equity of the common stockholders of
such Person and its consolidated Subsidiaries as of such date; plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of Preferred Stock (other than Redeemable Capital Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such Preferred Stock.
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"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Adjusted Net Income for such period (a) increased by (to the extent
included in computing Consolidated Adjusted Net Income) the sum of (i) the
Consolidated Tax Expense for such period (other than taxes attributable to
extraordinary, unusual or non-recurring gains or losses); (ii) Consolidated
Interest Expense for such period; (iii) depreciation of Parent and the
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; (iv) amortization of Parent and the Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP; and (v) any other non-cash charges that were deducted in computing
Consolidated Adjusted Net Income (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period) of Parent and
Restricted Subsidiaries for such period in accordance with GAAP and (b)
decreased by any non-cash gains that were included in computing Consolidated
Adjusted Net Income.
"Consolidated Tax Expense" means, for any period, the provision for federal,
state, provincial, local and foreign income taxes of Parent and all Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP.
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Netia South Bank Facility or commercial paper facilities, in
each case with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to specialpurpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements, including, without limitation, the hedging arrangement to be
entered into in connection with Indebtedness incurred under Credit Facilities,
entered into by Parent or any of its Restricted Subsidiaries designed solely to
protect against or manage exposure to fluctuations in currency exchange rates.
"Dankner" means Dankner Investments Limited, a public company incorporated
under the laws of Israel.
"Deeply Subordinated Shareholder Loans" means any Indebtedness of any Person
for money borrowed from a holder of Capital Stock of such Person; provided such
Indebtedness (i) has been expressly subordinated in right of payment and
postponed as to all payments of interest and principal to the Notes, (ii)
provides for no payments of interest or principal prior to the earlier of (a)
the end of the sixth month after the final maturity of the Notes and (b) the
indefeasible payment in full in cash of all Notes (or due provision therefor
which results in the discharge of all obligations under the Indentures);
provided further that, notwithstanding the foregoing, Parent and any Restricted
Subsidiary may make principal or interest payments on any Deeply Subordinated
Shareholder Loans as Restricted Payments in accordance with clause (a) of the
"Limitation on Restricted Payments" covenant.
"Default" means any event that after notice or passage of time or both would
be an Event of Default.
"Disinterested Member" means, with respect to any transaction or series of
transactions in respect of which the Management Board is required to deliver a
resolution of the Management Board under the Indentures, a member of the
Management Board who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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"Existing Note Indentures" means the Senior Notes Indenture between Netia
Holdings B.V., Netia Holdings S.A. and the State Street Bank and Trust Company
dated November 3, 1997, as amended by a Supplemental Indenture dated December 1,
1998; the Senior Dollar Discount Notes Indenture between Netia Holdings B.V.,
Netia Holdings S.A. and the State Street Bank and Trust Company dated November
3, 1997, as amended by a Supplemental Indenture dated December 1, 1998; and the
Senior DM Discount Notes Indenture between Netia Holdings B.V., Netia Holdings
S.A. and the State Street Bank and Trust Company dated November 3, 1997, as
amended by a Supplemental Indenture dated December 1, 1998.
"Existing Notes" or "1997 Senior Notes" means the $200,000,000 10 1/4%
Senior Notes due 2007, $193,550,000 11 1/4% Senior Discount Notes due 2007 and
DM 207,062,000 11% Senior Discount Notes due 2007 issued by Netia Holdings B.V.,
a financing subsidiary of Netia Holdings S.A., in November 1997.
"Existing Subsidiaries" means the Issuer, Netia Holdings B.V., Netia Telekom
S.A., Netia South Sp. z o.o., Netia Telekom Kalisz S.A., Netia Telekom Pila Sp.
z o.o., Netia Telekom Wloclawek S.A., Netia Telekom Torun S.A., Netia Telekom
Ostrowiec S.A., Netia Telekom Swidnik S.A., Netia Telekom Lublin S.A., Netia
Telekom Warszawa S.A., Netia Telekom Modlin S.A., Netia Telekom Mazowsze S.A.,
Netia Telekom Silesia S.A., Optimus Inwest S.A., Uni-Net Sp. z o.o., Telekom
Building Sp. z o.o. and Netia Telekom Telmedia S.A.
"Financing Subsidiary" means a Wholly Owned Restricted Subsidiary of Parent
established solely for the purpose of, and engaged exclusively in the business
of, issuing debt securities and loaning the proceeds thereof to Parent or to
another Restricted Subsidiary.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States on the date of the
Indentures.
"Government Securities" means securities that are (x) direct obligations of
the United States of America or a member of the European Union for the payment
of which its full faith and credit is pledged or (y) obligations of a person
controlled or supervised by and acting as an agency or instrumentality of the
United States of America or a member of the European Union, the payment of which
is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or the respective member of the European Union, as
appropriate, which, in either case, are not callable or redeemable at the option
of the Issuer thereof.
"GS Entities" means GSCP, Bridge Street Fund 1994, L.P. and Stone Street
Fund 1994 L.P.
"GSCP" means GS Capital Partners, L.P., a Delaware limited partnership.
"guarantee" means, as applied to any obligation, (a) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (b) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities, contingent or otherwise, of such Person: (i) for borrowed money
(including overdrafts), (ii) in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities, (iii) evidenced by bonds, notes, debentures or other
similar instruments, (iv) for the deferred purchase price of property or
services or created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, but
excluding trade accounts payable arising in the ordinary course of business or
guarantees thereof, or (v) for Capitalized
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Lease Obligations, (b) all obligations of such Person under or in respect of
Interest Rate Agreements or Currency Agreements, (c) all indebtedness referred
to in (but not excluded from) the preceding clauses of other Persons and all
dividends of other Persons, the payment of which is secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien upon or with respect to property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness
(the amount of such obligation being deemed to be the lesser of the value of
such property or asset or the amount of the obligation so secured), (d) all
guarantees by such Person of Indebtedness referred to in this definition of any
other Person and (e) all Redeemable Capital Stock of such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends. For the purposes hereof and for the avoidance of
doubt, the amount of any Indebtedness outstanding as of any date shall be: (x)
the accreted value thereof, in the case of any Indebtedness issued with original
issue discount; and (y) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness. For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Capital Stock as if
such Redeemable Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indentures, and if such price
is based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the Issuer of such Redeemable Capital Stock. Notwithstanding the
foregoing, trade accounts and accrued liabilities arising in the ordinary course
of business and any liability for federal, state or local taxes or other taxes
owed by such Person will not be considered Indebtedness for purposes of this
definition.
"Intercompany Bond" means the Indebtedness of Netia South and Netia Telekom
under the intercompany loan agreement or one or more bonds dated the date of the
Indentures made by Netia South and Netia Telekom for the benefit of the Issuer.
"Interest Rate Agreements" means any interest rate protection agreements and
other types of interest rate hedging agreements or arrangements (including,
without limitation, interest rate swaps, caps, floors, collars and other similar
agreements) designed solely to protect Parent or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of Parent or
any Restricted Subsidiary.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued or owned by, any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP. In addition, the fair market value of the net
assets of any Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary shall be deemed to be an "Investment" made by Parent in
such Unrestricted Subsidiary at such time. "Investments" shall exclude
extensions of trade credit on commercially reasonable terms in accordance with
normal trade practices.
"Investment Accounts" mean accounts established with the Trustees pursuant
to the terms of the Investment Agreements for the deposit of the Investment
Securities purchased by the Issuer and/or its affiliates with a portion of the
net proceeds from the Offering.
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"Investment Agreements" mean the Investment Agreements, dated as of the date
of the Indentures, between the Issuer and/or its affiliates and the Trustees,
governing the Investment Accounts and the disbursement of funds therefrom.
"Investment Securities" shall mean the securities purchased by the Issuer or
an Affiliate of the Issuer with a portion of the net proceeds from the Offering,
which shall consist of Cash Equivalents that are issued or directly and fully
guaranteed or insured by the United States of America or the Federal Republic of
Germany or any agencies or instrumentalities thereof (provided that the full
faith and credit of the United States of America or the Federal Republic of
Germany, as the case may be, is pledged in support thereof), in any case, to be
deposited in the Investment Accounts.
"Issue Date" means the date of the Indentures.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Management Board" means the Management Board of Parent.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein provided, whether at the Stated
Maturity with respect to such principal or by declaration of acceleration, call
for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to Parent or any Restricted
Subsidiary), net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of legal counsel and investment banks) related to
such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties which are the subject of
such Asset Sale, (iv) amounts required to be paid to any Person (other than
Parent or any Restricted Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and (v) appropriate amounts to be provided by Parent
or any Restricted Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by Parent or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an officers' certificate delivered to the Trustee and
(b) with respect to any issuance or sale of Capital Stock or options, warrants
or rights to purchase Capital Stock, or debt securities or Redeemable Capital
Stock that have been converted into or exchanged for Qualified Capital Stock, as
referred to under the "Limitation on Restricted Payments" covenant, the proceeds
of such issuance or sale in the form of cash or Cash Equivalents, including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed for, cash or Cash Equivalents (except
to the extent that such obligations are financed or sold with recourse to Parent
or any Subsidiary), net of attorneys' fees, accountants' fees and brokerage,
consultation, underwriting and other fees and expenses actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Netia South" means Netia South Sp. z o.o. and its successors.
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"Netia South Bank Facility" means the Amendment Agreement relating to a
Multicurrency Term Facilities Agreement dated October 21, 1998 (as amended)
among Netia South, Netia Telekom Silesia S.A., Netia Telekom Telmedia S.A.
(formerly Polskie Telmedia S.A.), Optimus Inwest S.A., as borrowers and
guarantors, Telekom Building Sp. z o.o., as guarantor, Chase Manhattan plc and
Bank Handlowy w Warszawie S.A., as arrangers, Chase Manhattan International
Limited, as agent and security trustee, Bank Handlowy w Warszawie S.A., as
security agent, and the other banks named therein, as such agreement may be
amended from time to time.
"Netia Telekom" means Netia Telekom S.A. and its successors.
"Non-Core Business" means (i) the business engaged in by Uni-Net on the date
of the Indentures and (ii) the real estate development business engaged in by
Parent on the date of the Indentures.
"Participant" means, with respect to DTC, Persons who have accounts with
DTC, with respect to Euroclear, Persons who have accounts with Euroclear and
with respect to Cedelbank, Persons who have accounts with Cedelbank.
"Permitted Holders" means (a) Telia and (b) the group consisting of the
Principal Shareholders so long as no single member of such group (including its
Affiliates), other than Telia, acquires or becomes the beneficial owner (as
beneficial ownership is defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, of more than 40.0% of the total outstanding Voting
Stock of Parent, except that (i) a member shall be deemed to have a "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time and (ii)
no Principal Shareholder shall be deemed to have "beneficial ownership" of any
securities owned by any other Principal Shareholder unless such other Principal
Shareholder is an Affiliate of such Principal Shareholder);
"Permitted Indebtedness" means any of the following Indebtedness of Parent
and its Restricted Subsidiaries (other than Financing Subsidiaries, except as
expressly provided):
(a) Indebtedness of the Issuer pursuant to the Senior Dollar Notes or the
Senior Euro Notes (other than Additional Notes) and of Parent pursuant to the
Guarantees of the Senior Dollar Notes or the Senior Euro Notes, in each case
including the Registered Notes and the guarantees of the Registered Notes;
(b) Indebtedness of Netia Holdings B.V. pursuant to the 1997 Senior Notes
and of Parent pursuant to the guarantee of the 1997 Senior Notes, and any other
Indebtedness of Parent and any Restricted Subsidiaries outstanding on the Issue
Date;
(c) Indebtedness of Parent owing to any Restricted Subsidiary (but only so
long as such Indebtedness is held by such Restricted Subsidiary); provided that
any Indebtedness of Parent owing to any such Restricted Subsidiary (other than
to any Financing Subsidiary in respect of proceeds of Indebtedness issued by
such Financing Subsidiary and borrowed by Parent from such Financing Subsidiary)
is subordinated in right of payment from and after such time as the Notes shall
become due and payable (whether at Stated Maturity, acceleration or otherwise)
to the payment and performance of Parent's obligations under the Guarantees and
the guarantees of the 1997 Senior Notes; provided further that any transaction
pursuant to which any Restricted Subsidiary, to which such Indebtedness is owed,
ceases to be a Restricted Subsidiary shall be deemed to be an incurrence of such
Indebtedness by Parent that is not permitted by this clause (c);
(d) Indebtedness of any Restricted Subsidiary to Parent or another
Restricted Subsidiary, but excluding Indebtedness of Financing Subsidiaries to
Parent or another Restricted Subsidiary;
(e) Indebtedness of any Restricted Subsidiaries under Vendor Credit
Facilities, in an aggregate principal amount not to exceed $25.0 million at any
one time outstanding;
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(f) Indebtedness of Parent and any Restricted Subsidiaries consisting of
guarantees, indemnities or obligations in respect of purchase price adjustments
in connection with the acquisition of or disposition of assets, including,
without limitation, shares of Capital Stock;
(g) Indebtedness of Parent and any Restricted Subsidiaries under letter of
credit facilities entered into in the ordinary course of business and under
which recourse to Parent is limited to the cash securing such letters of credit;
(h) Indebtedness incurred by Parent and any Restricted Subsidiaries
(including any Financing Subsidiary) for working capital or to finance the
construction, expansion, development or acquisition of Telecommunications Assets
or the acquisition of either (i) any licenses required to operate a
telecommunications, cable television or data transmission service in the
Republic of Poland or (ii) the Capital Stock of a Restricted Subsidiary
substantially all of the assets of which are Telecommunications Assets; provided
that, after giving effect to the incurrence of such Indebtedness (including
Acquired Indebtedness), the total aggregate amount of Indebtedness (and such
Acquired Indebtedness) incurred and outstanding at any time under this clause
(h) does not exceed $175.0 million plus 200.0% of Total Incremental Equity;
(i) Indebtedness incurred by Parent and any Restricted Subsidiaries under
Currency Agreements and Interest Rate Agreements; provided that such agreements
do not increase the Indebtedness of the obligor outstanding at any time other
than as a result of fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities and compensation payable thereunder; and
provided further that no such agreement shall have been entered into for
speculative purposes;
(j) Indebtedness of Parent and any Restricted Subsidiaries in respect of
performance bonds or surety bonds incurred in the ordinary course of business in
connection with the construction of the telecommunications network of Parent or
any Restricted Subsidiary;
(k) Deeply Subordinated Shareholder Loans incurred by Parent to any holder
of Capital Stock of Parent;
(l) (A) Indebtedness of Parent consisting of guarantees of Indebtedness of
any Restricted Subsidiary (including any Financing Subsidiary) permitted to be
incurred by such Restricted Subsidiary under the Indentures and (B) Indebtedness
of Restricted Subsidiaries (excluding any Financing Subsidiary) consisting of
guarantees of Indebtedness of Parent or any Restricted Subsidiary (i) so long as
such Restricted Subsidiary complies with the covenant "Issuances of Guarantees
of Indebtedness by Subsidiaries" or (ii) such Indebtedness is a guarantee by
Netia South and/or Netia Telekom of Parent's intercompany loan from Netia
Holdings B.V. relating to the Existing Notes;
(m) the incurrence by Parent and any Restricted Subsidiary of additional
Indebtedness and letters of credit under Credit Facilities in an aggregate
principal amount at any one time outstanding under this clause (m) (with letters
of credit being deemed to have a principal amount equal to the maximum potential
liability of the Parent and its Restricted Subsidiaries thereunder) not to
exceed $300.0 million less the aggregate amount of all repayments, optional or
mandatory, of the principal of any term Indebtedness under a Credit Facility
(other than repayments that are concurrently reborrowed) that have been made by
Parent or any of its Restricted Subsidiaries since the date of the Indenture and
less the aggregate amount of all commitment reductions with respect to any
revolving credit borrowings that have been made by Parent or any of its
Restricted Subsidiaries since the date of the Indenture;
(n) Acquired Indebtedness incurred by Parent or any Restricted Subsidiary in
connection with a merger satisfying the requirements of clause (B) of the
covenant "Consolidation, Merger and Sale of Assets";
(o) any renewals, extensions, substitutions, refinancings or replacements
(each, for purpose of this clause, a "refinancing") by Parent or any Restricted
Subsidiary to refund, refinance or replace any
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Indebtedness of Parent or any Restricted Subsidiary listed in clauses (a), (b),
(h) and (n) above, including any successive refinancings, so long as (i) any
such new Indebtedness shall be in a principal amount that does not exceed the
principal amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) so refinanced, plus the amount of any premium reasonably
determined as necessary to accomplish such refinancing and the amount of
expenses of Parent or any Restricted Subsidiary incurred in connection with such
refinancing, (ii) in the case of any refinancing of Subordinated Indebtedness,
such new Indebtedness is made subordinate to the Notes at least to the same
extent as the Indebtedness being refinanced, (iii) such new Indebtedness has an
Average Life longer than the Average Life of the Indebtedness refinanced and a
final Stated Maturity later than the final Stated Maturity of the Indebtedness
refinanced and (iv) such Indebtedness is incurred either by Parent or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, provided that Parent may
incur such refinancing in connection with Indebtedness of any Restricted
Subsidiary, including any such Indebtedness guaranteed by Parent; and
(p) Indebtedness of any Restricted Subsidiary to the extent the proceeds
thereof are used to refinance, defease or redeem, in whole or in part, either
series of the Notes.
"Permitted Investments" means any of the following:
(a) Investments in Cash Equivalents;
(b) Investments in Parent or any Restricted Subsidiary;
(c) Investments by Parent or any Restricted Subsidiary in another Person, if
as a result of such Investment (i) such other Person becomes a Restricted
Subsidiary or (ii) such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, Parent or a
Restricted Subsidiary; or
(d) Investments by Parent or any Restricted Subsidiary in any Permitted
Joint Venture; provided that no Investment in a Permitted Joint Venture (except
Investments which do not at any time of determination aggregate more than $25.0
million, with the amount of each such Investment measured on the date of such
Investment without giving effect to subsequent changes of value) shall be
permitted under this clause(d) if, after giving effect to such Investment, the
ratio of (x) the aggregate outstanding amount of Investments in such Permitted
Joint Venture by Parent and the Restricted Subsidiaries to (y) the aggregate
outstanding amount of Investments in such Permitted Joint Venture by all holders
of its outstanding equity interests does not exceed the ratio of (i) the
aggregate amount of outstanding equity interests of such Permitted Joint Venture
owned by Parent and the Restricted Subsidiaries to (ii) the aggregate amount of
outstanding equity interests of such Permitted Joint Venture owned by all
holders thereof; and provided further that upon the payment of any dividend or
distribution by any Permitted Joint Venture to holders of its equity interests
that is not pro rata by equity interest, all Investments in such Permitted Joint
Venture by Parent or any Restricted Subsidiaries will be deemed Investments made
at such time that are not permitted by this clause (d); or
(e) Investments in bonds, notes, debentures or other securities received as
a result of Asset Sales permitted under the covenant "Limitation on Sale of
Assets"; provided that Parent or a Restricted Subsidiary, as the case may be,
has received at least 75.0% of the net proceeds thereof in cash or Cash
Equivalents; or
(f) any acquisition of assets solely in exchange for the issuance of
Qualified Capital Stock of Parent;
(g) Interest Rate Agreements or Currency Agreements; and
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(h) other Investments in any Person other than Parent or an Affiliate of
Parent that is not also a Restricted Subsidiary having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (h) that are at the time outstanding
not in excess of $5.0 million.
"Permitted Joint Venture" means any Person (a) in which Parent and the
Restricted Subsidiaries, on an aggregate basis, own or acquire more than 25.0%
and less than 50.0% of the outstanding Voting Stock and (b) that was created to,
and that conducts no business activities other than activities in which Parent
and its Restricted Subsidiaries are permitted to engage under the "Permitted
Business" covenant.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date of the issuance of the Notes;
(b) Liens on any property or assets of a Restricted Subsidiary granted in
favor of Parent or any Restricted Subsidiary (other than a Financing
Subsidiary);
(c) Liens securing the Senior Dollar Notes or the Senior Euro Notes;
(d) any interest or title of a lessor under any Capitalized Lease Obligation
permitted to be incurred under the Indentures so long as the Attributable Debt
secured by such Lien does not exceed $15.0 million;
(e) statutory Liens or landlords and carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate proceeding, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor;
(f) Liens for taxes, assessments, government charges or claims, including,
without limitation, those in favor of Polish governmental fiscal authorities,
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor;
(g) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance bonds and other obligations of a like nature incurred in
the ordinary course of business (other than contracts for the payment of money);
(h) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of Parent
or any Subsidiary incurred in the ordinary course of business;
(i) Liens arising by reason of any judgment, decree or order of any court so
long as such Lien is adequately bonded and any appropriate legal proceedings
that may have been duly initiated for the review of such judgment, decree or
order shall not have been finally terminated or the period within which such
proceedings may be initiated shall not have expired;
(j) Liens securing Acquired Indebtedness permitted to be incurred by the
Indentures created prior to (and not in connection with or in contemplation of)
the incurrence of such Indebtedness by Parent or any Subsidiary; provided that
such Lien does not extend to any property or assets of Parent or any Subsidiary
other than the assets acquired in connection with the incurrence of such
Acquired Indebtedness;
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(k) Liens securing Interest Rate Agreements or Currency Agreements permitted
to be incurred pursuant to clause (g) of the definition of Permitted
Indebtedness or clause (i) of the definition of Permitted Indebtedness or any
collateral for the Indebtedness to which such Interest Rate Agreements or
Currency Agreements relate;
(l) Liens securing Indebtedness under the Credit Facilities permitted to be
incurred under clause (m) of the definition of Permitted Indebtedness;
(m) Liens on a portion of the proceeds of Indebtedness incurred after the
date of the Indenture and deposited with a trustee or escrow agent to secure the
payment of up to six semi-annual or twelve quarterly cash interest payments on
such Indebtedness;
(n) Liens securing Vendor Financing permitted to be incurred under clause
(e) of the definition of Permitted Indebtedness;
(o) to the extent not included elsewhere in this definition, Liens on any
property or assets of a Restricted Subsidiary that is not a Financing Subsidiary
(or on Capital Stock of a Restricted Subsidiary that is not a Financing
Subsidiary held by Parent) securing any Indebtedness of a Restricted Subsidiary
that is not a Financing Subsidiary permitted to be incurred under the
Indentures;
(p) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security;
(q) Liens on cash securing Indebtedness of Parent under letter of credit
facilities entered into in the ordinary course of business and under which
recourse to Parent is limited to the cash subject to the Liens; and
(r)any extension, renewal or replacement, in whole or in part, of any Lien
described in the foregoing clauses (a) through (q); provided that any such
extension, renewal or replacement shall be no more restrictive in any material
respect than the Lien so extended, renewed or replaced and shall not extend to
any additional property or assets.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Principal Shareholders" means Dankner, Trefoil, the GS Entities, Shamrock,
Telia and Warburg, provided that Warburg together with its Affiliates (including
for such purposes investment funds managed or controlled by Warburg), purchase
for cash $50 million or more of the Voting Stock of Parent from Parent.
"Public Equity Offering" means an underwritten public offering or flotation
of Common Stock of Parent which has been registered under the Securities Act or
admitted on the London Stock Exchange or a similar public offering in the
Republic of Poland.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such person other than Redeemable Capital Stock.
"Rating Agencies" means (i) S&P and (ii) Moody's and (iii) if S&P or Moody's
or both shall not make a rating of the Notes publicly available, a nationally
recognized securities rating agency or agencies, as the case may be, selected by
Parent, which shall be substituted for S&P or Moody's or both, as the case may
be.
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"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories), (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and
D (or equivalent successor categories); and (iii) the equivalent of any such
category of S&P or Moody's used by another Rating Agency. In determining whether
the rating of the Senior Dollar Notes or the Senior Euro Notes has decreased by
one or more gradations, gradations within Rating Categories (+ and! for S&P; 1,
2 and 3 for Moody's; or the equivalent gradations for another Rating Agency)
shall be taken into account (e.g., with respect to S&P, a decline in a rating
from BB+ to BB, as well as from BB! to B+, will constitute a decrease of one
gradation).
"Rating Date" means the date which is 60 days prior to the earlier of (x) a
Change of Control and (y) public notice of the occurrence of a Change of Control
or of the intention by Parent or any holder of Capital Stock of Parent to effect
a Change of Control.
"Rating Decline" means the decrease (as compared with the Rating Date) by
one or more gradations (including gradations within Rating Categories as well as
between Rating Categories) of the rating of the Senior Dollar Notes or the
Senior Euro Notes by either Rating Agency (a) on, or within four months after,
the date of public notice of the occurrence of a Change of Control or of the
intention by Parent or any holder of Capital Stock of Parent to effect a Change
of Control (which period shall be extended for so long as the rating of the
Senior Dollar Notes or the Senior Euro Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies) or (b) as a
result of, as stated by the relevant Rating Agency, a Change of Control.
"S&P" means Standard and Poor's Ratings Services, a division of McGraw-Hill,
Inc., and its successors.
"Shamrock" means Shamrock Holdings Inc.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its subsidiaries, (i) for the most recent fiscal
year of Parent accounted for more than 10.0% of the consolidated revenues of
Parent and the Restricted Subsidiaries, (ii) as of the end of such fiscal year,
was the owner of more than 10.0% of the consolidated assets of Parent and the
Restricted Subsidiaries, in each case as set forth on the most recently
available consolidated financial statements of Parent and the Restricted
Subsidiaries for such fiscal year, or (iii) owns one or more licenses or
concessions to provide telecommunications or data transmission services
throughout the Republic of Poland or in a portion thereof that contains, in the
aggregate for all licenses held by such Restricted Subsidiary, at least 200,000
persons.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Strategic Investor" means any Person (a) (i) that is (or a controlled
Affiliate of which is) engaged principally in the telecommunications business or
any business reasonably related thereto and (ii) that had aggregate revenues of
at least $750 million (or, to the extent not denominated in U.S. Dollars, the
United States Dollar Equivalent thereof) for the latest full fiscal year for
which financial statements of such Person are available immediately prior to the
date of the transaction giving rise to the need to determine whether such Person
is a Strategic Investor or (b) that has outstanding on the date of the
transaction giving rise to the need to determine whether such Person is a
Strategic Investor long-term, unsecured Indebtedness that has been rated at
least Aa2 by Moody's or AA by S&P.
"Subordinated Indebtedness" means Indebtedness of Parent that is expressly
subordinated in right of payment to the Guarantees.
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"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by Parent or by one
or more other Subsidiaries or by Parent and one or more other Subsidiaries.
"Tax" is defined to mean any tax, duty, levy, impost, assessment or other
governmental charge (including penalties, interest and any other liabilities
related thereto).
"Taxing Authority" is defined to mean any government or political
subdivision or territory or possession of any government or any authority or
agency therein or thereof having power to tax.
"Telecommunications Assets" means, with respect to any Person, any asset
that is utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration, operation, management or
provision of telecommunications systems or services in the Republic of Poland or
any country bordering on the Republic of Poland (other than the Non-Core
Business), including, without limitation, any businesses or services in which
Parent is engaged on the date of the Indentures (other than the Non-Core
Business) and including any computer systems used in the delivery of telephony,
cable television or other telecommunications or data transmission services in
the Republic of Poland or any country bordering on the Republic of Poland.
"Telia" means Telia AB (publ), a Swedish telecommunications company.
"Telia Capital Increase" means the $49 million investment of Telia in Parent
out of a total capital increase of $50 million funded in May 1999.
"Total Incremental Equity" means, at any date of determination, without
duplication (i) the aggregate net cash proceeds received by Parent after the
Issue Date from the issuance or sale of Qualified Capital Stock of Parent
(including Qualified Capital Stock issued upon the conversion of convertible
Indebtedness or from the exercise of options, warrants or rights to purchase
Qualified Capital Stock of Parent) to any Person other than a Subsidiary; minus
(ii) the aggregate amount of all Restricted Payments declared or made on or
after the Issue Date pursuant to clause (a) of the "Limitation on Restricted
Payments" covenant; minus (iii) the aggregate amount paid pursuant to clauses
(i), (ii), (iii), (iv), and (viii) of clause (b) of the "Limitation on
Restricted Payments" covenant; and minus (iv) the aggregate Net Cash Proceeds
received by Parent after the Issue Date from the issuance or sale of Qualified
Capital Stock of Parent if such issuance or sale is required either (A) under
the terms of any outstanding Indebtedness of Parent or any Restricted Subsidiary
or (B) to permit Parent or any Restricted Subsidiary to incur any Indebtedness
(other than Indebtedness incurred pursuant to the proviso to clause (h) of the
definition of Permitted Indebtedness or the corresponding provision of any
Existing Note Indenture or any other agreement for borrowed money to which
Parent or any Restricted Subsidiary is a party). For avoidance of doubt, Total
Incremental Equity does not include the Telia Capital Increase but would include
the net cash proceeds received by Parent on or after the Issue Date from the, if
completed.
"Trefoil" means Trefoil Capital Investors L.P., a Delaware limited
partnership.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Uni-Net" means Uni-Net Sp. z o.o.
"Unisource" means Unisource, N.V., a Netherlands joint venture company.
"Unisource Shareholders" means Royal PTT Nederland N.V. (KPN) and Swiss
Telecom PTT.
"United States Dollar Equivalent" means, with respect to any monetary amount
in a currency other than the U.S. Dollar, at any time for the determination
thereof, the amount of U.S. Dollars obtained by converting such foreign currency
involved in such computation into U.S. Dollars at the spot rate for the purchase
of U.S. Dollars with the applicable foreign currency as quoted by Reuters at
approximately 11:00 a.m. (New York City time) on the date not more than two
business days prior to
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such determination. For purposes of determining (a) whether any Indebtedness can
be incurred (including Permitted Indebtedness other than Indebtedness incurred
under the Credit Facilities), any Investment can be made and any transaction
described in the "Limitation on Transactions with Affiliates" covenant can be
undertaken (a "Tested Transaction"), the United States Dollar Equivalent of such
Indebtedness, Investment or transaction described in the "Limitation or
Transactions with Affiliates" covenant shall be determined on the date incurred,
made or undertaken and (b) the United States Dollar Equivalent of any
Indebtedness incurred or to be incurred under any Credit Facility pursuant to
clause (m) of the definition of Permitted Indebtedness, the United States Dollar
Equivalent of such Indebtedness shall be determined on the date incurred or, if
such Indebtedness is denominated in German Marks, shall be determined as of
August 27, 1997, and, in each case, no subsequent change in the United States
Dollar Equivalent shall cause such Tested Transaction or any incurrence of
Indebtedness under the Credit Facilities to have been incurred, made or
undertaken in violation of the Indentures.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the
Management Board of Parent, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Management Board of Parent may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither Parent nor any Restricted
Subsidiary is directly or indirectly liable for or provides credit support for
or guarantees any Indebtedness of such Subsidiary other than where recourse to
Parent and the Restricted Subsidiaries on such support or guarantee is limited
to a pledge permitted by the Indentures of shares of Capital Stock of that
Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of Parent or any other Subsidiary to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity, (iii) any Investment in such Subsidiary made as
result of designating such Subsidiary an Unrestricted Subsidiary will not
violate the provisions of the "Limitation on Investments in Unrestricted
Subsidiaries" covenant, (iv) neither Parent nor any other Subsidiary has a
contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than those that might be
obtained at the time from persons who are not Affiliates of Parent and (v)
neither Parent nor any other Subsidiary has any obligation (1) to subscribe for
additional shares of Capital Stock or other equity interest in such Subsidiary
or (2) to maintain or preserve such Subsidiary's financial condition or to cause
such Subsidiary to achieve certain levels of operating results. Any such
designation by the Management Board of Parent shall be evidenced to the Trustee
by filing a management board resolution with the Trustee giving effect to such
designation. The Management Board of Parent may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if immediately after giving effect to such
designation, there would be no Default or Event of Default under the Indentures
and Parent could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the "Limitation on Indebtedness" covenant. In no event
shall the Existing Subsidiaries be designated as Unrestricted Subsidiaries.
"Vendor Credit Facilities" means any credit facility entered into with any
vendor or supplier (or any financial institution acting on behalf of such a
vendor or supplier); provided that the Indebtedness thereunder is incurred
solely for the purpose of financing the cost of Telecommunications Assets.
"Voting Stock" means, with respect to any Person, any class or classes of
Capital Stock pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, management board, managers or trustees of such Person (irrespective
of whether or not, at the time, stock of any other class or classes shall have,
or might have, voting power by reason of the happening of any contingency).
"Warburg" means Warburg, Pincus & Co.
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"Warburg Transactions" means the agreement dated May 19, 1999 entered into
by Parent and a group of funds sponsored by Warburg pursuant to which Warburg
has agreed to purchase for cash $50 million or more of the Voting Stock of
Parent.
"Wholly Owned" means, with respect to any Subsidiary, such Subsidiary if all
the outstanding Capital Stock of such Subsidiary (other than any directors'
qualifying shares) is owned directly by Parent or by Parent and one or more
Wholly Owned Restricted Subsidiaries.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
THE 1997 SENIOR NOTES
As noted above, in November 1997, Netia Holdings B.V., a wholly owned
subsidiary of Netia, issued $200.0 million aggregate principal amount of 1997
Senior Dollar Notes, $193.6 million aggregate principal amount at maturity of
1997 Senior Dollar Discount Notes and DM 207.1 million aggregate principal
amount at maturity of 1997 Senior DM Discount Notes (collectively the "1997
Senior Notes"), all of which are fully, irrevocably and unconditionally
guaranteed by Netia Holdings S.A. on an unsubordinated and unsecured basis.
The 1997 Senior Dollar Notes bear interest at a rate of 10.25% per annum
payable on May 1 and November 1 of each year commencing on May 1, 1998. Upon
issuance of the 1997 Senior Dollar Notes, Netia deposited an amount of cash
which, together with interest received thereon, would be sufficient to pay the
first six interest payments on the 1997 Senior Dollar Notes. The 1997 Senior
Dollar Discount Notes and the 1997 Senior DM Discount Notes bear interest at a
rate of 11.25% and 11.0% per annum, respectively. The 1997 Senior Dollar
Discount Notes and the 1997 Senior DM Discount Notes were issued at a discount
in the amounts of $68,546,000 (PLN 239,156,000 (at the exchange rate on the day
of issuance)) and DM 72,062,000 (PLN 145,781,000 (at the exchange rate on the
day of issuance)), respectively, to reflect that interest thereon will not begin
to accrue until November 1, 2001. Commencing on November 1, 2001, interest will
accrue and be payable semi-annually on May 1 and November 1 of each year.
Repayment of the principal amounts of the 1997 Senior Notes is in 2007,
unless elected to be redeemed at Netia's option at an earlier date. The 1997
Senior Notes will be redeemable at Netia's option after November 1, 2002, in
whole or in part. In addition, at any time prior to November 1, 2000, Netia may
redeem up to 33.0% of the aggregate principal amount at maturity of each class
of the 1997 Senior Notes at a redemption price of 110.25% of the principal
amount thereof in the case of the 1997 Senior Dollar Notes, at a redemption
price of 111.25% of the accreted value thereof in the case of the 1997 Senior
Dollar Discount Notes, and at a redemption price of 111.0% of the accreted value
thereof in the case of the 1997 Senior DM Discount Notes, with the net proceeds
of one or more public equity offerings, provided that not less than $134 million
of the aggregate principal amount of the 1997 Senior Dollar Notes, $129.7
million of the aggregate principal amount at maturity of the 1997 Senior Dollar
Discount Notes and DM 138.7 million of the aggregate principal amount at
maturity of 1997 Senior DM Discount Notes remains outstanding immediately after
giving effect to such redemption.
COVENANTS CONTAINED IN THE 1997 SENIOR NOTES
The indentures governing the 1997 Senior Notes (the "1997 Senior Notes
Indentures") contain covenants which, among other things, restrict Netia and its
Restricted Subsidiaries (as defined therein) from incurring any indebtedness,
other than Permitted Indebtedness and Permitted Subsidiary Indebtedness (each as
defined therein), unless we maintain a ratio of Consolidated Indebtedness (as
defined therein) to Annualized Consolidated Operating Cash Flow Ratio (as
defined therein) that is greater than 0 and less than or equal to 5.5 to 1.0.
Permitted Indebtedness means, among other things, indebtedness of Netia
incurred for working capital to finance the build-out of our network or
acquisitions of:
- telecommunications licenses, or
- the capital stock of Restricted Subsidiaries all of whose assets are
telecommunications assets (as defined therein).
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However, after giving effect to such indebtedness, the total amount of such
indebtedness incurred and outstanding must not exceed (x) the difference between
(A) $175 million and (B) the total aggregate amount of Permitted Subsidiary
Indebtedness, plus (y) 200% of the total incremental equity of Netia.
Permitted Subsidiary Indebtedness means, among other things, secured
indebtedness incurred by any Restricted Subsidiary to finance working capital,
the build-out of the network or the acquisition of either (x) any
telecommunications licenses or (y) the capital stock of Restricted Subsidiaries
all of whose assets are telecommunications assets, if, in each case,
- such indebtedness is secured by a lien on telecommunications assets, and
- after giving effect to such indebtedness, the total aggregate principal
amount of indebtedness incurred and outstanding at any time under this
clause does not exceed (1) the difference between (A) $175.0 million and
(B) the total aggregate principal amount of the indebtedness of the parent
company incurred pursuant to clause (f) of the definition of Permitted
Indebtedness, plus (2) 300% of the Total Incremental Subsidiary Equity (as
defined therein).
In addition, Netia may not, and will not permit any of its Restricted
Subsidiaries (as defined therein), in each case subject to certain limited
exceptions, to:
- pay any dividend on or make any distribution to holders of, any shares of
the capital stock of Netia (other than solely in shares of its capital
stock, options, warrants or other rights to its capital stock);
- purchase, redeem or otherwise acquire or retire for value any shares of
the capital stock of Netia or its affiliates;
- retire for value before maturity any Subordinated Indebtedness (as defined
therein);
- make any investments, except as permitted by the indentures; and
- declare or pay any dividend or distribution on any capital stock of any
restricted subsidiary (as defined therein), except according to certain
formulas specified in the indentures and keyed, among other things, to the
net cash flows of Netia and the net cash proceeds from the issuance or
sale of the capital stock of Netia.
In addition, the 1997 Senior Notes Indentures contain several covenants
concerning the following:
- limitation on issuances and sales of capital stock of the Restricted
Subsidiaries;
- limitation on transactions with affiliates of Netia;
- limitation on liens;
- limitation on issuances of guarantees of indebtedness by subsidiaries of
Netia;
- limitation on sales of assets;
- limitation on dividends and other payment restrictions affecting the
Restricted Subsidiaries;
- limitations on investments in unrestricted subsidiaries of Netia; and
- limitations on the business of Netia and its subsidiaries.
The covenants also mandate provision of financial statements and reports to
holders of the 1997 Senior Notes.
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Events of default under the 1997 Senior Notes include:
- default in the payment of any interest on any of the 1997 Senior Notes
when such interest becomes due and payable after the expiration of a
30-day grace period;
- default in the payment of any principal of or premium on any of the 1997
Senior Notes;
- default in the performance or breach of any of the covenants contained in
the 1997 Senior Notes Indentures and, except in certain cases, continuance
of such default or breach for a period of 30 days after written notice has
been given to Netia Holdings B.V. of such breach;
- default in the payment of principal, premium or interest on indebtedness
of Netia or certain of its subsidiaries aggregating $10 million or more
when the indebtedness becomes due and payable and such default is not
cured or waived;
- any final judgment of any court or regulatory agency against Netia or
certain of its subsidiaries individually or in an aggregate amount, in
excess of $10 million or more when, upon such judgment, enforcement
proceedings have commenced and a stay of enforcement of such judgment was
not in effect for 45 days; and
- the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Netia, Netia Telekom or Netia South.
The occurrence of an event of default under the 1997 Senior Notes Indentures
can have the effect of accelerating the principal of or premium and interest on
the 1997 Senior Notes.
In addition, on December 1, 1998, Holdings B.V. and State Street Bank and
Trust, N.A. as the trustee under the 1997 Senior Notes Indentures executed
supplemental indentures (collectively, the "1997 Senior Notes Supplemental
Indentures") to each respective 1997 Senior Notes Indentures. The effect of the
1997 Senior Notes Supplemental Indentures was to enable Netia to incur certain
additional indebtedness through special-purpose wholly owned finance
subsidiaries and to guarantee such indebtedness, rather than directly incur such
indebtedness itself.
NETIA SOUTH BANK FACILITY
The Netia South Bank Facility was originally a multicurrency term facility
intended to provide up to $95.0 million of financing (which could be increased
to up to $155.0 million under certain circumstances) to fund the capital
expenditures, operating losses and general working capital needs of Netia South
and its subsidiaries associated with the construction, maintenance and operation
of the network by Netia South and the connection of up to 330,050 ringing
telephone lines by Telekom Silesia and Telmedia. However, as noted under "Risk
Factors--We Face Risks Due to Our Build-out Strategy and Our Failure to Meet
Build-out Milestones," Netia South and its subsidiaries were required under the
Netia South Bank Facility to achieve a minimum number of subscriber lines by
certain dates, including 29,500 lines by December 31, 1997 and 37,500 lines by
March 31, 1998. Netia South failed to meet both of these milestones, resulting
in defaults under the Netia South Bank Facility. In light of Netia's failure to
meet these build-out milestones and the Netia's belief that the Netia South Bank
Facility was not appropriate for Netia given the new licenses awarded in
December 1997, the defaults were waived and, in October 1998 the Netia South
Bank Facility was amended. Upon such amendment, different parties were released
from the obligations under the facility agreement and other agreements relating
thereto.
As amended, the total amount of debt outstanding under the Netia South Bank
Facility of approximately $11.4 million will not be increased and must be repaid
by January 31, 2000. Amounts outstanding under the Netia South Bank Facility
bear interest at LIBOR plus a margin.
The Netia South Bank Facility contains covenants that impose restrictions on
the incurrence of indebtedness, the creation of security interests, the giving
of guarantees, the making and giving of
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amendments or waivers to project documents, the making of loans, the formation
of subsidiaries, alterations to Netia South's capital structure and the disposal
of assets. The payment of dividends and other distributions from Netia South to,
and repayment of loans from, its shareholders is restricted.
The Netia South Bank Facility provides for various events of default,
including:
- an interest or payment default;
- a breach of the borrower's covenants, agreements, representations and
warranties under the Netia South Bank Facility;
- a material default under the facility or project documents by Netia;
- a default under certain subordinated loans from Alcatel described below
under "--Vendor Financing"; and
- certain changes of ownership as well as expropriation, insolvency,
cross-default and material adverse change defaults at the Netia South (and
its subsidiaries), Netia and Telia levels.
The amounts due under the Netia South Bank Facility are secured by a pledge
of shares in Telekom Silesia owned by Netia South. Additionally, all permitted
debts of the borrowers under the vendor financing and shareholders loans are
subordinated to the payments under the Netia South Bank Facility.
UNI-NET COMFORT LETTERS
In January 1998, Netia issued two letters of comfort to ING Lease (Polska)
in support of the obligations of Uni-Net, Netia's 58.2% subsidiary, under two
agreements pursuant to which Uni-Net leases equipment from ING Lease (Polska).
Similar comfort letters were provided to ING Lease (Polska) by the other
principal shareholder of Uni-Net. Under the comfort letters, which expressly
provide that they do not constitute guarantees, Netia agreed to ensure that
Uni-Net will have sufficient funds at its disposal to satisfy its obligations
under the underlying leases. Netia further agreed that if it desired to sell
more than 51% of its interest in Uni-Net, it would either:
- arrange for the purchaser to assume Netia's obligations under the comfort
letters or
- provide a guarantee to ING Lease (Polska) of Uni-Net's obligations under
the leases up to a maximum amount of approximately DM 1,040,000.
VENDOR FINANCING
As noted under "Business-Network-Network Equipment and Construction," Netia
and Alcatel are parties to a strategic alliance agreement (the "Strategic
Alliance Agreement") under which Alcatel contracted to construct approximately
132,000 lines on a turn-key basis. The Strategic Alliance Agreement provides for
vendor financing of up to 5% and 10%, respectively, of the purchase price of
each Netia Telekom and Netia South construction project on a long-term basis.
Borrowings under such financing bears interest at a rate of LIBOR plus 4%. As of
June 30, 1999, Netia had borrowed $3.6 million under the terms of the Strategic
Alliance Agreement. The subordinated loan agreements governing the vendor
financing contain restrictions on the incurrence of senior indebtedness, the
payment of dividends, mergers, sales of assets and the granting of security
interests by Netia Telekom and Netia South.
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TAX CONSIDERATIONS
Prospective purchasers of the Notes are advised to consult their own tax
advisers as to the tax consequences under the laws of the country of which they
are resident, of a purchase of Notes, including, without limitation, the
consequences of receipt of interest and premium, if any, and sale or redemption
of the Notes or any interest therein.
THE NETHERLANDS
The following general summary is based upon the tax laws of the Netherlands
as in effect on the date of this offering memorandum and is subject to any
change that may come into effect after that date.
WITHHOLDING TAX
All payments under the Notes may be made free of withholding or deduction
of, for or on account of any taxes of whatever nature imposed, levied, withheld
or assessed by the Netherlands or any political subdivision or taxing authority
thereof or therein.
TAXES ON INCOME AND CAPITAL GAINS
A holder of the Notes will not be subject to any Netherlands taxes on income
or capital gains in respect of any payment under the Notes or in respect of any
gain realized on the disposal of the Notes, PROVIDED that: (i) such holder is
neither resident nor deemed to be resident in the Netherlands; (ii) such holder
does not have an enterprise or an interest in an enterprise that is, in whole or
in part, carried on through a permanent establishment or a permanent
representative in the Netherlands and to which enterprise or part of an
enterprise, as the case may be, the Notes are attributable; and (iii) such
holder does not have a substantial interest in the share capital of the Issuer
or, if such holder does have such an interest, it forms part of the assets of an
enterprise. Generally, a holder of the Notes will not have a substantial
interest if he, his spouse, certain other relatives (including foster children)
or certain persons sharing his household, do not hold, alone or together,
whether directly or indirectly, the ownership of, or certain other rights over,
shares representing 5% or more of the total issued and outstanding capital (or
the issued and outstanding capital of any class of shares) of the Issuer, or
rights to acquire shares, whether or not currently issued, that represent 5% or
more of the total currently issued and outstanding capital (or the currently
issued and outstanding capital of any class of shares) of the Issuer.
A holder of the Notes will not be subject to taxation in the Netherlands by
reason only of the execution, delivery and/or enforcement of the documents
relating to the Notes and the issue of the Notes or the performance by the
Issuer of its obligations thereunder or under the Notes.
NET WEALTH TAX
A holder of the Notes will not be subject to Netherlands net wealth tax in
respect of the Notes, PROVIDED that such holder is not an individual or, if he
is an individual, PROVIDED that the conditions described in clauses (i) and (ii)
under "--Taxes on Income and Capital Gains" are met.
GIFT, ESTATE OR INHERITANCE TAXES
No gift, estate or inheritance taxes will arise in the Netherlands with
respect to an acquisition of the Notes by way of a gift by, or on the death of,
a holder of the Notes who is neither resident nor deemed to be resident in the
Netherlands, unless: (i) such holder at the time of the gift has or at the time
of his death had an enterprise or an interest in an enterprise that is or was,
in whole or in part, carried on through a permanent establishment or a permanent
representative in the Netherlands and to which enterprise or part of an
enterprise, as the case may be, the Notes are or were attributable; or
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(ii) in the case of a gift of the Notes by an individual who at the date of the
gift was neither resident nor deemed to be resident in the Netherlands, such
individual dies within 180 days after the date of the gift, while being resident
or deemed to be resident in the Netherlands.
TURNOVER TAXES
No Netherlands turnover tax will arise in respect of any payment in
consideration for the issue of the Notes or with respect to any payment by the
Issuer of principal, interest or premium (if any) on the Notes.
CAPITAL TAX
No Netherlands capital tax will be payable in respect of or in connection
with the execution, delivery and/or enforcement by legal proceedings (including
the enforcement of any foreign judgment in the courts of the Netherlands) of the
documents relating to the Notes or the performance of the Issuer of its
obligations thereunder or under the Notes, with the exception of capital tax
that may be due by the Issuer on capital contributions made or deemed to be made
to the Issuer under the Guarantees.
OTHER TAXES AND DUTIES
No Netherlands registration tax, custom duty, stamp duty or any other
similar documentary tax or duty other than court fees will be payable in the
Netherlands in respect of or in connection with the execution, delivery and/or
enforcement by legal proceedings (including the enforcement of any foreign
judgment in the courts of the Netherlands) of the documents relating to the
Notes or the performance of the Issuer of its obligations thereunder or under
the Notes.
EXCHANGE OFFERS
A holder of the Old Notes will not be subject to any Netherlands taxes on
income or capital gains in respect of any gain realized on the receipt of
Registered Notes in an exchange pursuant to this exchange offer, provided that:
(i) the holder is neither resident nor deemed to be resident in the
Netherlands; and
(ii) the holder does not have an enterprise or an interest in an
enterprise that is, in whole or in part, carried on through a permanent
establishment or a permanent representative in the Netherlands and to which
enterprise or part of an enterprise, as the case may be, the Notes are
attributable; and
(iii) the holder does not have a substantial interest or a deemed
substantial interest, as defined herein, in the Issuer or, if the holder
does have such an interest, it forms part of the assets of an enterprise.
The description of present Netherlands tax law above assumes that (i) any
payments under the Registered Notes will be at arm's length and (ii) the
Registered Notes do not constitute profit sharing bonds (I.E., that no
distributions can be made under the Registered Notes that are contingent upon
either profits or distributions of profits).
The exemptions from Netherlands taxation described above derive from
domestic Netherlands law and their availability does not depend on the existence
of the US-Netherlands Income Tax Treaty described below.
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US-NETHERLANDS INCOME TAX TREATY
Pursuant to Article 12 of the income tax treaty between the United States
and the Netherlands, as currently in force, interest arising in the Netherlands,
including income from debt-claims of every kind, whether or not secured by a
mortgage, and not carrying a right to participate in the debtor's profits and,
in particular, income from bonds or debentures, including premiums and prizes
attaching to such securities, bonds or debentures as well as other income that
is treated as income from money lent by the taxation laws of the Netherlands,
but not including income from profit sharing bonds, and beneficially owned by a
resident of the United States, shall be taxable only in the United States,
PROVIDED THAT:
(a) the beneficial owner of the interest has no permanent establishment
or fixed base in the Netherlands to which the interest paid is attributable;
and
(b) there is no special relationship between the payor and the
beneficial owner or between both of them and some, other person or, where
such a special relationship exists, the amount of interest, having regard to
the debt-claim for which it is paid, does not exceed the amount which would
have been agreed upon by the payor and the beneficial owner in the absence
of such relationship. In any such case, the excess part of the payments
shall remain taxable according to the laws of the Netherlands, due regard
being had to the other provisions of the treaty.
Article 12 of the treaty also provides rules for determining whether
interest arises from Netherlands sources.
Pursuant, however, to Article 26 of the treaty a person that is a resident
of the United States and derives income from the Netherlands may in some cases
not be entitled to all the benefits of the treaty. Beneficial owners of
Registered Notes should consult their own tax advisors as to their entitlements
to all the benefits of the treaty.
POLAND
The following general summary of the principal Polish tax consequences is
based upon the tax laws of Poland and the interpretations thereof by the Polish
Minister of Finance as in effect on the date of this offering memorandum and is
subject to any change that may come into effect after that date.
PAYMENTS OF PRINCIPAL, INTEREST AND REDEMPTION PREMIUM UNDER THE NOTES
All payments of interest, principal and redemption premium under the Notes
by the Issuer may be made free of withholding taxes withheld or assessed by
Poland or any political subdivision or taxing authority thereof or therein. A
holder of a Note who derives income from a Note or who realizes a gain on the
disposal or redemption of a Note will be subject to Polish taxation on income or
capital gains if the holder is, or is deemed to be, a resident of Poland for the
purposes of the relevant provisions in the tax laws of Poland.
PAYMENTS OF PRINCIPAL, INTEREST AND REDEMPTION PREMIUM UNDER THE GUARANTEES TO
HOLDERS OF THE NOTES
Generally, a Polish withholding tax of 20% applies to payments of interest
and the original issue discount under the Guarantees with respect to the Notes,
in each case paid by the Guarantor under the Guarantee to nonresidents of
Poland. Withholding tax may, however, be reduced by an appropriate double
taxation treaty to which Poland is a party and the "interest" article which
provides for full or partial exemption from withholding on interest payments.
Treaties providing for full exemption from withholding on interest payments are
currently in effect between Poland and (i) the United States and (ii) the United
Kingdom, among others.
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The difference between the issue price and the redemption price of the Notes
in the case of early redemption may be treated as income obtained in Poland and
such payment under the guarantee may be treated as interest for the purpose of
the withholding tax in Poland.
THE EXCHANGE OFFER
The holders of the Notes should not be subject to Polish taxation on income
or capital gains by reason only of the exchange offer or of the exchange of the
Old Notes for the Registered Notes.
UNITED STATES
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon the provisions of the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), the applicable U.S. Treasury
regulations promulgated or proposed thereunder, judicial authority and current
administrative rulings and practice. Legislative, judicial or administrative
changes or interpretations may be forthcoming that may be retroactive and that
could alter or modify the continued validity of the statements and conclusions
set forth below.
Except as specifically noted, this discussion is limited to the U.S. federal
income tax considerations applicable to a holder of a Registered Note who or
which is (i) a citizen or resident of the United States, (ii) a corporation
organized under the laws of the United States or any political subdivision
thereof or therein, (iii) an estate, the income of which is subject to U.S.
federal income tax regardless of the source, or (iv) a trust, if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have [the] authority to
control all substantial decisions of the trust (a "U.S. Holder") Certain aspects
of U.S. federal income taxation relevant to a holder other than a U.S. Holder (a
"Non-U.S. Holder") are also discussed below. This discussion does not address
all aspects of federal income taxation that might be relevant to particular
holders in light of their personal investment circumstances or status, nor does
it discuss the consequences to investors subject to special treatment under the
U.S. federal income tax laws, such as dealers in securities or foreign currency,
traders that have elected mark-to-market accounting, financial institutions,
insurance companies, tax-exempt organizations, taxpayers holding Notes as part
of a "straddle," "hedge," or "conversion transaction," or that have a
"functional currency" other than the U.S. Dollar, and investors in pass-through
entities. The discussion does not address any special rules that may apply if
the holder receives principal in installment payments or if the Note is called
before the maturity date. Moreover, the effect of any applicable state, local or
foreign tax laws or the applicability of U.S. federal gift or estate taxation is
not discussed. Prospective holders are urged to consult their own tax advisors
regarding the U.S. federal, state, local and other tax considerations of the
acquisition, ownership and disposition of the Notes.
Except as otherwise indicated below, this discussion is generally limited to
the tax consequences to U.S. holders that hold the Registered Notes as capital
assets (within the meaning of Section 1221 of the Code) and that purchased the
Notes at the "Issue Price." For this purpose, the "Issue Price" of a Registered
Note is the first price at which a substantial part of the Notes were sold to
the public for money (excluding sales to bond houses, brokers or similar persons
or organizations acting in the capacity of underwriters, placement agents or
wholesalers).
STATED INTEREST ON REGISTERED NOTES
Stated interest on a Registered Senior Dollar Note, including amounts paid
pursuant to the Guarantees, will be taxable to a U.S. Holder as ordinary income
either at the time it accrues or is received in accordance with such U.S.
Holder's method of accounting.
Interest paid on a Registered Senior Euro Note will be includable in income
by a U.S. Holder in an amount equal to the U.S. Dollar value of the payment,
regardless of whether the payment is in fact
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converted to U.S. Dollars at that time. If such U.S. Holder uses the cash method
of accounting for tax purposes, the U.S. Dollar value of such payment is
determined using the spot rate at the time such payment is received. If a U.S.
Holder uses the accrual method of accounting for tax purposes, the U.S. Dollar
value of such payment is determined using the average exchange rate during the
relevant accrual period (or partial accrual period with respect to interest paid
in a subsequent taxable year) or, if elected, the spot rate (a) on the last day
of the relevant accrual period (or partial accrual period) or (b) on the payment
date, if such date is within five business days of the last day of the accrual
period or taxable year. Any differences in the exchange rate between the rate at
which interest on a Registered Senior Euro Note is included in income and the
spot rate on the payment (or disposition) date for interest will result in
exchange gain or loss with respect to the related amount of interest, and will
generally be treated as ordinary income or loss for U.S. federal income tax
purposes. The U.S. Dollar value of interest accrued or received, adjusted for
any exchange gain or loss with respect to the amount accrued, generally will be
a U.S. Holder's tax basis in the Euros received as interest on a Registered
Senior Euro Note.
ADDITIONAL AMOUNTS
Assuming that the contingency that the Company will pay Additional Amounts
(i.e., the amount of interest provided in the Notes without reduction for
withholding taxes, determined using the withholding tax rate applicable to the
U.S. Holder) is remote or incidental (within the meaning of applicable U.S.
Treasury regulations), a U.S. Holder will treat the gross amount of any
Additional Amounts as ordinary interest income at the time such amount is
received or accrued in accordance with such U.S. Holder's method of accounting
for tax purposes. Consequently, the amount a U.S. Holder will include in gross
income with respect to a Note could exceed the amount includible by the U.S.
Holder as stated interest.
WITHHOLDING TAXES
Any foreign withholding taxes paid at the rate applicable to a U.S. Holder
will be treated as foreign income taxes eligible for credit against such
Holder's U.S. federal income tax liability, subject to generally applicable
limitations and conditions or, at the election of the U.S. Holder, eligible for
deduction in computing such U.S. Holder's taxable income. Additional Amounts
will constitute income from sources without the United States for foreign tax
credit purposes. Such income will generally constitute "high withholding tax
interest" for U.S. foreign tax credit purposes, unless the rate applicable to
the U.S. Holder is imposed at a rate below 5%, in which case such income
generally will constitute "passive income" or, in the case of a U.S. Holder that
is a financial services entity, as "financial services income." The calculation
of foreign tax credits and in the case of a U.S. Holder that elects to deduct
foreign taxes, the availability of deductions involves the application of
complex rules that depend on a U.S. Holder's particular circumstances.
Accordingly, investors are urged to consult their tax advisors regarding the
creditability or deductibility of those taxes.
NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, a Non-U.S. Holder of
a Registered Note generally will not be subject to U.S. federal income or
withholding tax on interest payments (including payments of OID), Additional
Amounts or Special Interest in respect of a Registered Note unless such income
is effectively connected with the conduct by the Non-U.S. Holder of a trade
business in the United States, or the Non-U.S. Holder is an individual present
in the United States for 183 days or more in the year of disposition and meets
certain other conditions.
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SALE, EXCHANGE OR REDEMPTION
Unless a non-recognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by us) or other disposition of a Registered Note
will be a taxable event for federal income tax purposes. In that event, a U.S.
Holder will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon the
sale, exchange, redemption or other taxable disposition and (ii) the U.S.
Holder's adjusted tax basis therein. A U.S. Holder's tax basis in a Note
generally will equal the cost of the Note to the U.S. Holder.
A U.S. Holder's tax basis in a Note generally will equal the cost of the
Note. The cost of a Senior Euro Note to the U.S. Holder will be the U.S. Dollar
value of the Euro purchase price translated at the spot rate for the date of
purchase (or, in some cases, the settlement date). The conversion of U.S.
Dollars into Euros and the immediate use of those Euros to purchase a Senior
Euro Note generally will not result in a taxable gain or loss for a U.S. Holder.
A U.S. Holder will have a tax basis in any Euro received on the sale, exchange
or retirement of a Senior Euro Note equal to the U.S. Dollar value of the Euro
on the date of receipt.
Gain or loss recognized by a U.S. Holder of a Senior Dollar Note should be
capital gain or loss, and will be long term capital gain or loss if the Senior
Dollar Note has been held by the U.S. Holder for more than one year at the time
of sale, exchange, redemption or other disposition. Upon the sale, exchange,
retirement or repayment of a Senior Euro Note, a U.S. Holder will recognize
exchange gain or loss to the extent that the rate of exchange on the date of
retirement or disposition differs from the rate of exchange on the date the
Senior Euro Note was acquired, or deemed acquired. Exchange gain or loss is
recognized, however, only to the extent of total gain or loss on the
transaction. For purposes of determining the total gain or loss on the
transaction, a U.S. Holder's tax basis in the Senior Euro Note will generally
equal the U.S. Dollar cost of the Senior Euro Note. Exchange gain or loss
recognized by a U.S. Holder will generally be treated as ordinary income or
loss.
Any gain realized by a U.S. Holder on the sale, exchange or redemption of a
Registered Note generally will be treated as U.S. source income or loss for U.S.
foreign tax credit purposes. Generally a loss realized upon such a sale,
exchange, redemption or other disposition of a Registered Note will be allocated
to U.S. source income.
EXCHANGE OFFERS
The exchange of Old Notes for Registered Notes pursuant to the exchange
offers will not be a taxable event for U.S. federal income tax purposes because
the Registered Notes should not be considered to differ materially in kind or
extent from Old Notes. As a result, no material U.S. federal income tax
consequences should result to U.S. Holders exchanging Old Notes for Registered
Notes. A U.S. Holder's tax bases in the Registered Notes will be the same as
such holder's tax basis in its Old Notes.
BACKUP WITHHOLDING (INCLUDING ADDITIONAL AMOUNTS)
Payments of interest and principal on a Note and the proceeds from the sale
of a Registered Note paid to a U.S. Holder (other than a corporation or other
exempt recipient) will generally be reported to the Internal Revenue Service. A
U.S. Holder may be subject to U.S. back-up withholding at the rate of 31% with
respect to interest paid on a Registered Note unless such U.S. Holder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from back-up withholding and
otherwise complies with the applicable requirements of the back-up withholding
rules.
Interest on a Registered Note paid to a Non-U.S. Holder is exempt from
information reporting and back-up withholding under current rules if paid
outside the United States, or if certain documentation and other requirements
are satisfied. Under regulations generally effective January 1, 2001, interest
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on a Registered Note paid outside the United States to a Non-U.S. Holder through
a U.S. person or a U.S. related person is subject to information reporting and
possible back-up withholding unless certain documentation and other requirements
are satisfied. The payment of principal on a Registered Note and on proceeds
from the disposition of a Note by a Non-U.S. Holder to or through the U.S.
office of any broker, U.S. or foreign, or the non-U.S. office of a U.S. person
or a U.S. related person, will be subject to information reporting and possible
backup withholding unless (i) the owner certified its non-U.S. status under
penalties of perjury or otherwise establishes an exemption and (ii) the broker
does not have actual knowledge that the holder is a U.S. Holder or that the
conditions of any other exemption are not, in fact, satisfied. A "U.S. related
person" is a person with certain enumerated U.S. relationships.
Any amount withheld under the backup withholding rules will be creditable
against the Holder's federal income tax liability, subject to satisfaction of
certain procedural requirements. Holders of Notes should consult their tax
advisors to determine whether they qualify for exemption from U.S. withholding
and the procedure for obtaining an exemption, if applicable.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Registered Notes for its own account
pursuant to the exchange offers (each a "Restricted Holder") must acknowledge
that it will deliver this prospectus in connection with any resale of such
Registered Notes. This prospectus, as it may be amended or supplemented from
time to time, may be used by a Restricted Holder in connection with resales of
Registered Notes received in exchange for Old Notes where such Old Notes were
acquired as a result of market-making activities or other trading activities.
For a period of 120 days after the Expiration Date, the Issuer will use its best
efforts to keep the Registration Statement continuously effective and to amend
and supplement this prospectus contained therein in order to permit such
prospectus to be lawfully delivered by any Restricted Holder for use in
connection with any such resale, PROVIDED that such Restricted Holder indicates
in the Letter of Transmittal that it is a broker-dealer (and makes the
representations required to be included in the Letters of Transmittal (see
"Exchange Offers--Terms of the Exchange Offers-- Procedures for Tendering Old
Notes")). However, if any holder is acquiring Registered Notes in the exchange
offer for the purpose of distributing or participating in a distribution of the
Registered Notes, such holder cannot rely on the position of the staff of the
Commission enunciated in the no-action letters regarding MORGAN STANLEY & CO.
INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION
(available May 13, 1988), or interpreted in the Commission's interpretative
letter to SHEARMAN & STERLING (available July 2, 1993), or similar no-action or
interpretive letters, will not be entitled to validly tender Old Notes in the
exchange offer, and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or transfer of
such Old Notes, unless such sale or transfer is made pursuant to an exemption
from, or in a transaction not subject to, such requirements.
The Issuer will not receive any proceeds from the exchange of Old Notes for
Registered Notes by Restricted Holders. Registered Notes received by Restricted
Holders for their own account pursuant to the exchange offers may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Registered Notes
or a combination of such methods of resale, and at market prices prevailing at
the time of resale, or at the prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through Restricted Holders who may receive compensation in the form of
commissions or concessions from any such Restricted Holder and/or purchasers of
any Registered Notes. Any Restricted Holder that resells Registered Notes that
were received by it for its own account pursuant to the exchange offer and any
person that participates in the distribution of such Registered Notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit of any such resale of Registered Notes or any commissions or concessions
received by any such Restricted Holders may be deemed to be underwriting
compensation under the Securities Act. The Letters of Transmittal state that by
acknowledging that it will deliver and be delivering a prospectus, a Restricted
Holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Issuer has agreed to pay all expenses incidental to the exchange offer
other than commissions or concessions of any broker-dealers and will indemnify
holders of the Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
By acceptance of these exchange offers, each Restricted Holder that receives
Registered Notes pursuant to the exchange offers agrees that, upon receipt of
notice from the Issuer of the happening of any event which makes any statement
in this prospectus untrue in any material respect or which requires the making
of any changes in this prospectus in order to make the statements therein not
misleading (which notice the Issuer agrees to deliver promptly so such
Restricted Holders), such Restricted Holder will suspend use of this prospectus
until the Issuer has amended or supplemented this prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
prospectus to such Restricted Holder or until such Restricted Holder is advised
in writing by the Issuer that the use of the prospectus may be resumed, and such
Restricted Holder has
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received copies of any additional or supplemental filings that are incorporated
by reference in the prospectus. If the Issuer gives any such notice to suspend
the use of this prospectus, it will extend the 90-day period referred to above
by the number of days during the period from and including the date of the
supplemented or amended prospectus or until such Restricted Holders have
received a statement in writing from the Issuer that the use of the prospectus
may be resumed and have received copies of any additional or supplemental
filings that are incorporated by reference in the prospectus necessary to permit
resales of the Registered Notes.
The Registered Notes are new securities for which there currently is no
market. Application will be made to list the Registered Notes on the Luxembourg
Stock Exchange. It is not intended that the Registered Notes will be listed on
any national or foreign securities exchange other than the Luxembourg Stock
Exchange and will not be authorized for trading on Nasdaq. There can be no
assurance that an active market for the Registered Notes will develop or as to
the liquidity of any such market.
The Registered Notes may not be offered, transferred or sold, as part of
their initial distribution or at any time thereafter, to any individual or legal
entity established, domiciled or resident in the Netherlands.
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BOOK-ENTRY; DELIVERY AND FORM
GENERAL
Senior Registered Dollar Notes will be issued in denominations of $1,000
principal amount and integral multiples thereof. Senior Registered Euro Notes
will be issued in denominations of [EURO]1,000 principal amount and integral
multiples thereof.
Book-entry interests in the Registered Notes will not be held in definitive
form. Instead, DTC, Euroclear or Cedelbank will credit on their respective
book-entry registration and transfer systems a participant's account with the
interest beneficially owned by such participant. The laws of some jurisdictions,
including certain states of the United States, may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. The foregoing limitations may impair the ability to own, transfer or
pledge of book-entry interests. In addition, while the Notes are in global form,
holders of book-entry interests will not be considered the owners or "Holders"
of Notes for any purpose.
So long as the Registered Notes are held in global form, DTC (or its
nominee), in the case of the Senior Dollar Notes, and the common depositary for
Euroclear and Cedelbank (or its nominee), in the case of the Senior Euro Notes,
will be considered the sole holders of Global Notes for all purposes under the
Indenture. In addition, participants must rely on the procedures of DTC,
Euroclear and Cedelbank and indirect participants must rely on the procedures of
the participants through which they own book-entry interests to exercise any
rights of Holders under the Indentures.
None of the Issuer, the Trustees or the Registrars will have any
responsibility or be liable for any aspect of the records relating to the
book-entry interests.
DEFINITIVE NOTES
Under the terms of the Senior Dollar Note Indenture, owners of book-entry
interests in the Senior Dollar Notes will receive Definitive Notes:
(1) if DTC notifies the Issuer that it is unwilling or unable to continue to
act as depositary or ceases to be a clearing agency registered under the
Exchange Act and, in either case, a successor depositary is not appointed by the
Issuer within 120 days;
(2) if DTC so requests following an Event of Default under the Senior Dollar
Note Indenture;
(3) in whole (but not in part) at any time if the Issuer in its sole
discretion determines that the Global Notes should be exchanged for Definitive
Notes; or
(4) the owner of such book-entry interest requests such exchange in writing
delivered through DTC (including following an Event of Default under the Senior
Dollar Note Indenture).
In such an event, the Registrar will issue Definitive Notes registered in
the name or names and issued in any approved denominations, requested by or on
behalf of DTC, Euroclear and/or Cedelbank, as applicable (in accordance with
their respective customary procedures and based upon directions received from
participants reflecting the beneficial ownership of book-entry interests).
Under the terms of the Senior Euro Note Indenture, owners of book-entry
interests in the Senior Euro Notes will receive Definitive Notes:
(1) if either Euroclear or Cedelbank notifies the Issuer that it is
unwilling or unable to continue to act as depositary and a successor depositary
is not appointed by the Issuer within 120 days;
(2) if Euroclear or Cedelbank so request following an Event of Default under
the Senior Euro Note Indenture;
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(3) in whole (but not in part) at any time if the Issuer in its sole
discretion determines that the Global Notes should be exchanged for Definitive
Notes; or
(4) the owner of such book-entry interest requests such exchange in writing
delivered through either Euroclear or Cedelbank following an Event of Default
under the Senior Euro Note Indenture.
Euroclear has advised the Company, with regard to such book-entry interests,
that its current practice, upon receipt of any request by an owner of a
book-entry interest for Definitive Notes, is to make a request to the Company
that all such owners of book-entry interests receive Definitive Notes.
REDEMPTION OF GLOBAL NOTES
In the event any Global Note (or any portion thereof) is redeemed, the
relevant Depositary will redeem an equal amount of the book-entry interests in
such Global Note from the amount received by it in respect of the redemption of
such Global Note. The redemption price payable in connection with the redemption
of such book-entry interests will be equal to the amount received by the
relevant Depositary in connection with the redemption of such Global Note (or
any portion thereof). The Issuer understands that under existing practices of
DTC, Euroclear and Cedelbank, if fewer than all of the Notes are to be redeemed
at any time, DTC, Euroclear and Cedelbank will credit their respective
participants' accounts on a proportionate basis (with adjustments to prevent
fractions) or by lot or on such other basis as they deem fair and appropriate;
PROVIDED, HOWEVER, that no book-entry interest in the Senior Dollar Notes of
less than $1,000 principal amount or book-entry interest in the Senior Euro
Notes of less than [EURO]1,000 principal amount may be redeemed in part.
PAYMENTS ON GLOBAL NOTES
Payments of any amounts owing in respect of the Global Notes (including
principal, premium, if any, interest and Special Interest, if any) will be made
by the Issuer in U.S. Dollars, in the case of Senior Dollar Global Notes, and
Euros, in the case of the Senior Euro Global Notes, to the relevant Paying
Agent. The relevant Paying Agent will, in turn, make such payments to DTC or the
common depositary for Euroclear and Cedelbank, as applicable, which will
distribute such payments to participants in accordance with its procedures.
Under the terms of the Indentures, the Issuer and the Trustees will treat
the registered holder of the Global Notes (e.g., DTC (or its nominee) and the
common depositary for Euroclear and Cedelbank (or its nominee)) as the owners
thereof for the purpose of receiving payments and for all other purposes.
Consequently, none of the Issuer, the Trustees or any agent of the Issuer or the
Trustees has or will have any responsibility or liability for:
(1) any aspect of the records of DTC, Euroclear, Cedelbank or any
participant or indirect participant relating to or payments made on account of a
book-entry interest or for maintaining, supervising or reviewing any of the
records of DTC, Euroclear, Cedelbank or any participant or indirect participant
relating to or payments made on account of a book-entry interest; or
(2) DTC, Euroclear, Cedelbank or any participant or indirect participant.
Payments by participants to owners of book-entry interests held through
participants are the responsibility of such participants, as is now the case
with securities held for the accounts of customers registered in "street name."
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
DTC, Euroclear and Cedelbank have advised the Issuer that they will take any
action permitted to be taken by a Holder of Notes (including the presentation of
Notes for exchange as described above) only at the direction of one or more
participants to whose account the book-entry interests in the
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Global Notes are credited and only in respect of such portion of the aggregate
principal amount of Notes as to which such participant or participants has or
have given such direction. The relevant Depositary will not exercise any
discretion in the granting of consents, waivers or the taking of any other
action in respect of the Global Notes. However, if there is an Event of Default
under the Notes, each of DTC, Euroclear and Cedelbank reserve the right to
exchange the Global Notes for Definitive Notes in certificated form, and to
distribute such Notes to its participants.
TRANSFER AND EXCHANGE
After the Notes have been registered under the Securities Act, all
certification requirements with respect to the Notes will cease.
All transfers of book-entry interests between participants in DTC,
participants in Euroclear or participants in Cedelbank will be effected by DTC,
Euroclear or Cedelbank pursuant to customary procedures and subject to the
applicable rules and procedures established by DTC, Euroclear or Cedelbank and
their respective participants.
Subject to the foregoing, a book-entry interest in one of the Global Notes
may be transferred to a person who takes delivery thereof in the form of a
book-entry interest in another of the Global Notes by means of an instruction
originated through DTC, Euroclear or Cedelbank, as applicable. Any book-entry
interest that is so transferred will, upon transfer, cease to be a book-entry
interest in the first mentioned Global Note and become a book-entry interest in
the other Global Note and will thereafter be subject to all transfer
restrictions, if any, and other procedures applicable to book-entry interests in
such other Global Note for as long as it remains such a book-entry interest. In
connection with such transfer, appropriate adjustments will be made to reflect a
decrease in the principal amount at maturity of the first mentioned Global Note
and a corresponding increase in the principal amount at maturity of the other
Global Note, as applicable.
Book-entry interests in a Global Note may be exchanged by the holder thereof
for Definitive Notes in denominations of $1,000 or [EURO]1,000 principal amount,
as applicable, and integral multiple thereof upon receipt by the registrar of
instructions relating thereto and any certificates and other documentation
required by the Indentures. It is expected that such instructions will be based
upon directions received by DTC, Euroclear or Cedelbank, as applicable, from the
participant which owns the relevant book-entry interests.
Definitive Notes may be transferred in whole or in part, in denominations of
$1,000 or [EURO]1,000 in principal amount, as applicable, or integral multiples
thereof to persons who take delivery thereof in the form of Definitive Notes or
in the form of book-entry interests in a Global Note. In connection with any
such transfer, the Indentures will require the transferor to, among other
things, furnish appropriate endorsements and transfer documents, to furnish
certain certificates and to pay any taxes, duties and governmental charges in
connection with such transfer.
Notwithstanding the foregoing, the Issuer is not required to register the
transfer of any Definitive Notes:
(1) for a period of 15 calendar days prior to any date fixed for the
redemption of the Notes;
(2) for a period of 15 calendar days immediately prior to the date fixed for
selection of Notes to be redeemed in part;
(3) for a period of 15 calendar days prior to the record date with respect
to any interest payment date; or
(4) which the holder has tendered (and not withdrawn) for repurchase in
connection with a Change of Control Offer or an Excess Proceeds Offer (as
defined in Indentures).
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Any such transfer will be made without charge to the holder, other than any
taxes, duties and governmental charges payable in connection with such transfer.
INFORMATION CONCERNING DTC, EUROCLEAR AND CEDELBANK
The Issuer understands as follows with respect to DTC, Euroclear and
Cedelbank:
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section17A of the Exchange Act. DTC was
created to hold securities of its participants and to facilitate the clearance
and settlement of transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. DTC
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. Access to the DTC book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, the ability of an owner of a
book-entry interest to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some states require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
book-entry interests to such persons may be limited. In addition, beneficial
owners of book-entry interests through the DTC system will receive distributions
attributable to the Global Notes only through DTC participants.
Euroclear and Cedelbank hold securities for participating organizations and
facilitate the clearance and settlement of securities transactions between their
respective participants through electronic book-entry changes in accounts of
such participants. Euroclear and Cedelbank provide to their participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Euroclear and Cedelbank interface with domestic securities markets. Euroclear
and Cedelbank participants are financial institutions such as underwriters,
securities brokers and dealers, banks, trust companies and certain other
organizations. Indirect access to Euroclear or Cedelbank is also available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodian relationship with a Euroclear or Cedelbank participant,
either directly or indirectly.
GLOBAL CLEARANCE AND SETTLEMENT UNDER THE BOOK-ENTRY SYSTEM
SETTLEMENT
Book-entry interests owned through DTC (other than through accounts at
Euroclear or Cedelbank) will follow the settlement applicable to U.S. corporate
debt obligations. The securities custody accounts of investors will be credited
with their holdings against payment in same-day funds on the settlement date.
Book-entry interests owned through Euroclear or Cedelbank accounts will
follow the settlement procedures applicable to conventional eurobonds in
registered form. Book-entry interests will be credited to the securities custody
accounts of Euroclear and Cedelbank holders on the business day following the
settlement date against payment for value on the settlement date.
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SECONDARY MARKET TRADING
The book-entry interests in the Senior Dollar Notes trade in DTC's Same-Day
Funds Settlement System, and secondary market trading activity in such
book-entry interests therefore settle in same-day funds. The book-entry
interests in the Senior Euro Notes trade through participants of Euroclear or
Cedelbank, and settle in same-day funds.
Since the purchase determines the place of delivery, it is important to
establish at the time of trading of any book-entry interests where both the
purchaser's and seller's accounts are located to ensure that settlement can be
made on the desire value date.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. These statements appear
in a number of places and include statements regarding our intentions, beliefs
or current expectations concerning, among other things:
- the build-out of Netia's telecommunications network and expansion of our
operations;
- our financing plans and the use of proceeds of the Notes Offering;
- trends affecting our financial condition or results of operations;
- the impact of competition on our business;
- the start-up of our data network and provision of Internet services; and
- acquisition opportunities, including our intention to seek to acquire
additional telecommunications licenses.
We caution prospective investors that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties. We
also caution prospective investors that actual results may differ materially
from those in the forward-looking statements as a result of various factors. The
information contained in this prospectus including, without limitation, the
information under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "The Polish Telecommunications
Industry" and "Business" identifies important factors that could cause such
differences. We undertake no obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise.
VALIDITY OF SECURITIES
The validity of the Registered Notes offered hereby will be passed upon for
Netia by Weil, Gotshal & Manges LLP, New York, New York, with respect to matters
of U.S. law. Certain matters of Polish law have been passed upon for Netia by
Weil, Gotshal & Manges Sp. z o.o., Warsaw, Poland. Certain matters of Dutch law
have been passed upon for Netia by De Brauw Blackstone Westbroek, Amsterdam, The
Netherlands.
EXPERTS
The Financial Statements of Netia as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 included in this
prospectus, have been included so in reliance on the report of
PricewaterhouseCoopers Sp. z o.o., independent accountants, given on the
authority of said firm as experts in auditing and accounting.
With respect to the Unaudited Condensed Consolidated Financial Statements of
Netia for the six-month and three-month periods ended June 30, 1999 and 1998
included in this prospectus, PricewaterhouseCoopers Sp. z o.o. reported that
they have applied limited procedures in accordance with professional standards
for a review of such information. However, their separate report dated August
24, 1999 appearing herein, states that they did not audit and they do not
express an opinion on that Unaudited Condensed Consolidated Financial
Statements. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied. PricewaterhouseCoopers Sp. z o.o is not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited consolidated financial information because that report is not a
"report" or a part of the registration statement prepared or certified by
PricewaterhouseCoopers Sp. z o.o. within the meaning of Sections 7 and 11 of the
Securities Act.
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ADDITIONAL INFORMATION
We have filed with the Commission in Washington D.C., a registration
statement on Form F-4 ("Registration Statement") under the Securities Act, with
respect to this exchange offer. This prospectus does not contain all of the
information included in the Registration Statement. All such information was
omitted in accordance with the rules and regulations of the Commission and we
will refer to it in this prospectus. Statements contained in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
Registration Statement summarize the material terms of such documents, but are
not necessarily complete. With respect to each such document, we make reference
to the copy of the document filed as an exhibit to the Registration Statement
for a more complete description of the matter involved.
For further information with respect to Netia and the Registered Notes being
offered by means of this prospectus, we refer the investors to the Registration
Statement, including the exhibits and the financial statements, notes and
schedules filed as a part of the Registration Statement. Netia is subject to the
informational requirements of the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and files periodic reports and other information
with the Commission. Netia has filed and will continue to file its annual
reports on Form 20-F and its interim reports on Form 6-K.
You may inspect and copy the Registration Statement and reports and other
information that we filed with the Commission at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and they will also be available for inspection and
copying at the regional offices of the Commission located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such material from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Netia will furnish the Trustee with annual reports in English, which will
include a review of operations and annual audited consolidated financial
statements, prepared in conformity with IAS. Such statements will include a
reconciliation of net income and shareholders' equity to amounts determined in
accordance with U.S. GAAP. Netia will also furnish the Trustee with quarterly
reports in English prepared in conformity with IAS, which will include unaudited
interim financial information.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
Many of our directors and executive officers, as well as some of the experts
named in this prospectus, are not citizens or residents of the United States.
These persons and substantially all of Netia's assets are located outside the
United States. As a result, it may not be possible for investors to effect
service of process within the United States upon these persons or Netia or to
enforce the judgments of U.S. courts based on the civil liability provisions of
U.S. laws including the federal securities laws.
We have been advised by our legal counsel in Poland, Weil, Gotshal & Manges
Sp. z o.o., that final judgments of the courts of the United States are
enforceable in Poland on the condition that there is reciprocity in the United
States of enforcement of judgments obtained in Polish courts, and provided that:
- the judgment is final and enforceable in the United States;
- a party to the dispute has not been deprived of the right of defense or
due representation;
- the judgment would not (A) be contrary to Polish public policy, (B)
conflict with any pending action or judgment of a Polish court on the same
subject matter between the same parties or (C) infringe upon the exclusive
jurisdiction of Polish or other non-U.S. courts pursuant to Polish law or
international treaty; and
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- if the matter is one in which Polish law should have been applied, that
law was applied unless the foreign law applied does not differ essentially
from Polish law.
We also have been advised by Weil, Gotshal & Manges Sp. z o.o. that there is
doubt as to the enforceability in Poland, in original actions or in actions for
enforcement of judgments of U.S. courts, of civil liabilities predicated upon
U.S. federal securities laws. See "Risk Factors--It May Be Difficult for
Investors to Effect Service and Enforcement of Legal Process."
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GLOSSARY OF SELECTED TELECOMMUNICATIONS TERMS
The following explanations are not intended as technical definitions, but
rather are intended to assist the general reader in understanding certain terms
used in this offering memorandum.
<TABLE>
<S> <C>
Analog.............................. A direct representation of a phenomenon in another
form; E.G., the representation of voice sound as
electrical audio signals.
Billable Units...................... The units of measurement (generally, a period of
time) by which Netia bills its customers, also
referred to as "pulses."
Broadband........................... A transmission medium that is capable of supporting a
wide range of frequency, typically based on fiber
optic infrastructure (such as fiber optic cable),
suitable for transmitting video and other such high
volume data. It can carry multiple signals by
dividing the total capacity of the medium into
multiple independent bandwidth channels, where each
channel operates only on a specific range of
frequencies.
Business/Total Customer Mix......... The number of our telephone lines subscribed for by
businesses as a percentage of total subscriber lines.
Coaxial Cable....................... A transmission medium particularly suited to high
volume uses, such as high speed and cable television
transmission. Coaxial cables consist of one or more
central wire conductors, surrounded by a dielectric
insulator and encased in either wire mesh or extruded
metal sheathing.
Connected Lines..................... Telephone lines that have been connected to Netia's
switching nodes and for which the company has
interconnection agreements with TPSA.
Digital............................. A mode of representing a physical variable such as
speech using numbers which vary in relation to the
variable being represented. The digits are
transmitted in binary form as a series of pulses
which allow for higher capacity and higher
flexibility through the use of computer-related
technology for the transmission and manipulation of
telephone calls. Digital systems offer lower noise
interference and can incorporate encryption as a
protection against external interference.
Domestic Long Distance Service...... The provision of telecommunication services between
local territories within Poland.
Fiber Optic Cable................... A transmission medium made from extremely pure and
consistent glass. Digital signals are transmitted
across fiber optic cable as pulses of light. While
signals transmitted over fiber optic cable travel at
the same speed as those transmitted over traditional
copper cable, fiber optic cable benefits from greater
transmission capacity and lower distortion of signals
transmitted.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Frame Relay......................... High-speed packet-switched data transmission service.
Installed Capacity.................. The number of active telephone lines that Netia's
switching nodes have the capacity to accommodate
after testing and technical acceptance.
International Service............... The provision of telecommunication services between
Poland and other countries.
Internet............................ A collection of interconnected networks spanning the
entire world, including university, corporate,
government and research networks from around the
globe. These networks all use the Internet Protocol
communications protocol.
Internet Protocol................... See "Internet" above.
ISDN (Integrated Services Digital A transmission system with the capacity to transmit
Network).......................... more than one stream of information (voice, text,
data or graphics) simultaneously on a single
telephone line, based upon end-to-end digitalization
and standardized out-of-band signaling.
Local Network....................... A fixed-line telecommunications net configuration (or
"network") covering one of our licensed territories.
Multimedia.......................... Computer technology with integration (generally using
digital technology) of at least three media, such as
text, video, voice graphics or animation in a single
tool.
OSS Billing System.................. A network-wide operational support system (OSS) for
billing and customer management. This system provides
integrated billing and call collection and allows
Netia to manage customer service orders and its
technical inventory.
Penetration Rate.................... A measure of the usage of services. Calculated as of
a given date by dividing the number of subscribers by
the number of inhabitants.
Pulse............................... A signal created periodically by a telephone network
that is used for calculating traffic charges.
Radio (Wireless) Local Loop......... Systems within which transmission at the local loop
level is by radio signal rather than through cable.
SDH (Synchronous Digital A transmission standard for synchronous transmission
Hierarchy)........................ networks, allowing direct access to particular band
spectra, even where these are included in a
comparatively high level of the organizational
hierarchy.
Subscriber Lines.................... Connected lines that have been subscribed for by
customers and are generating revenue.
</TABLE>
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ANNEX A
THE REPUBLIC OF POLAND
THE INFORMATION PRESENTED IN THIS SECTION IS PROVIDED FOR BACKGROUND
PURPOSES ONLY. INFORMATION PRESENTED HEREIN HAS BEEN EXTRACTED FROM, AND IS
PRESENTED ON THE AUTHORITY OF, VARIOUS PUBLICLY AVAILABLE DOCUMENTS WHICH HAVE
NOT BEEN PREPARED OR INDEPENDENTLY VERIFIED BY US OR OUR ADVISORS IN CONNECTION
WITH THE PREPARATION OF THIS OFFERING MEMORANDUM.
AREA AND POPULATION
Poland is the most populous country in Central Europe, with a population of
approximately 38.7 million people. Poland occupies approximately 313,000 square
kilometers and is strategically located south of the Baltic Sea, with Germany to
the west, the Czech and Slovak Republics to the south and Ukraine, Belarus,
Lithuania and Russia to the east. Warsaw is the capital of Poland and is the
country's commercial and institutional center with a population of 1.6 million.
In November 1996, Poland joined the OECD. In July 1997, the European
Commission proposed that Poland be included in the first group of Central
European countries to start negotiations on joining the EU. These negotiations
started in March 1998. The European Commission expects the first of the
countries to become full members by 2003 at the earliest. Poland joined NATO in
March 1999. Poland is a member, together with the Czech Republic, Hungary,
Romania, Slovakia and Slovenia, of the Central European Free Trade Agreement.
CONSTITUTION, GOVERNMENT AND POLITICAL PARTIES
Poland is a parliamentary republic with a bicameral legislature. The lower
house, or SEJM (which is the repository of the main legislative power), consists
of 460 seats, and the upper house, or Senate, consists of 100 members. The
legislative mandate lasts for four years, after which a parliamentary election
must be held.
The President is the Head of State and is elected by direct vote for a
five-year term and may be re-elected only once. The President does not have an
executive role, but is vested with considerable powers through his right to
appoint certain high-ranking state officials and to veto laws approved by
Parliament. However, the President cannot veto the law on the annual budget, and
any veto by him can be overturned by a 60% majority vote by Parliament. The
current President is Aleksander Kwasniewski, the former head of the Democratic
Left Alliance ("SLD"), who assumed the office of the President on December 21,
1995.
The supreme executive official of the state is the Prime Minister, who heads
the Council of Ministers. The Prime Minister is responsible to Parliament. The
current Prime Minister is Jerzy Buzek of the Solidarity Electoral Action
("AWS"), who was appointed in October 1997.
The last parliamentary elections were held in September 1997 and were won by
the AWS (a right-wing party with trade unionist roots), which took 201 of the
seats in the SEJM, with the SLD (a center-left party, which grew out of the
former communist party) taking 164 of the seats. The Freedom Union (a
center-right liberal party) took 60 seats in the SEJM and a coalition government
was formed between the AWS and the Freedom Union.
As of January 1, 1999, the regional administrative division of Poland
consists of 16 large "voivodships," each headed by a VOIVOD who represents the
central government at the local level. This new administrative system replaces
the former system, which divided Poland into 49 voivodships. The next
administrative level of government below the VOIVODSHIP level consists of the
POWIATS, which are governed by locally elected officials and possess a degree of
financial autonomy. There are 308 POWIATS in
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Poland. The lowest administrative level are the GMINAS, which are overseen by
the powiats. There are 2,489 GMINAS in Poland.
Judicial authority is vested in the Supreme Court, appellate, regional and
lower district courts. A separate Constitutional Tribunal has jurisdiction over
all matters relating to the interpretation of the provisions of the
Constitution.
COUNTRY RATING
The long-term foreign currency debt of the Republic of Poland is currently
rated Baa3 by Moody's, BBB by Standard & Poor's (upgraded in June 1999, with a
positive outlook) and BBB+ by Fitch IBCA (upgraded from BBB in November 1998).
ECONOMIC OVERVIEW
Until the late 1980s, the Polish economy was dominated by the state sector
and was characterized by central planning, administrative control of prices and
wages, a restrictive trade and foreign exchange regime and lack of an efficient
banking system and capital markets. A significant proportion of external trade
was conducted through bilateral agreement with the member countries of the
Soviet Bloc. Economic performance in the 1980s was characterized by slow growth
and high levels and multiple rescheduling of external debt, which led to
repeated recessions and high inflation.
In January 1990, the first freely elected government implemented a program
for rapid economic transformation known as the "Balcerowicz Plan" after the
then-serving Minister of Finance (who was reappointed in October 1997 as Finance
Minister and Deputy Prime Minister in the current government). This radical
economic reform program was designed to stabilize the economy and promote
structural reforms. Its key elements included a tight credit policy, a sharp
upfront devaluation of the currency, an end to subsidies to state enterprises
and elimination of administrative controls over most prices and imports. After a
sharp fall in GDP and a sharp rise in unemployment in 1990 and 1991 (all of
which were developments common to many other economies in Central Europe at that
time), Poland became the first country in the region to return to growth, with
strong rates of GDP growth for the years 1992 to 1998.
The private sector now accounts for approximately 65% of all production and
the Polish economy is characterized by lower rates of inflation, substantial
freedom of prices from administrative control, sustained growth, reduced levels
of external debt (following the conclusion of long-term restructuring agreements
with official and commercial creditors), a moderate state budget deficit,
growing exports (sold predominantly to EU member states), liberal rules on
foreign exchange transactions and a rising level of foreign exchange reserves.
Average per annum inflation was 11.8% in 1998 and unemployment has declined from
14.9% at year-end 1995 to approximately 10.4% at year-end 1998.
During this period of reform, successive governments have largely supported
structural transformation of the economy directed at reforming state-owned
enterprises, selling state-owned assets, modernizing the banking system and
creating a modern capital market. The process of structural reform is continuing
and not all state goals have been achieved. The main reform objectives of the
current government include the rapid privatization of the remaining state-owned
companies, including major banks and the state-owned telecommunications operator
TPSA (15% of which was sold in November 1998), the restructuring of the coal
mining and steel industries and the introduction of a partially privatized
pension system. The Social Insurance System Act, which came into effect on
January 1, 1999, addresses retirement pension insurance, pension insurance,
health insurance and maternity insurance, occupational hazards and occupational
accident insurance. A comprehensive reform of health care services also was
enacted as of January 1, 1999.
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RECENT ECONOMIC PERFORMANCE
GROSS DOMESTIC PRODUCT
Poland's economy is one of the fastest growing in Europe, with a real GDP
increase of 6.9% in 1997 and 4.8% in 1998, which followed an annual average 6.1%
growth between 1994 and 1996. This rapid growth follows a period of deep
recession from 1990 to 1991, during which real GDP fell by almost 18%, and a
period of slow growth in 1992 and 1993, when real GDP rose by an annual 3.2%.
The severe recession in 1990 and 1991 was mainly due to the disintegration of
COMECON, an organization which formerly integrated Central and Eastern Europe's
centrally planned economies, and to the economic decline and the eventual
disintegration of the Soviet Union, which played a predominant role within
COMECON. In spite of its initial recession, the Polish economy has produced the
best growth performance from among the former centrally planned economies of
Central and Eastern Europe since the region's political turnaround in 1989, as
its real GDP rose by a total 12% between 1990 and 1997. This success was due to
a rapid reorganization of the economy from a centrally planned regime to a
market-oriented system, and a comprehensive debt reduction and rescheduling
agreement with Poland's international creditors completed in 1994. Poland also
in large part avoided a significant adverse impact from the 1998 turmoil in
Russia, Asia and Latin America although its current position is negatively
influenced by the high levels of its current account deficit and a slowdown in
industrial production in the second half of 1998 resulting in an estimated GDP
increase of 3-3.5% in 1999.
FISCAL POLICY AND INFLATION
Conservative fiscal policy reduced the general government deficit from
nearly 7% of GDP in 1991 to 3.7% of GDP in 1997 and 2.49% (anticipated) in 1998.
The government has targeted a deficit of 2.15% of GDP for 1999. Total government
expenditure remains at approximately 50% of GDP (including municipal budgets and
extra-budgetary funds). However, the government's debt burden has been
decreasing systematically over recent years and the ratio of government debt to
GDP fell from 85% in 1992 to an estimated 50% in 1997 and 44.4% in 1998.
Following major currency devaluations and price liberalization, prices rose
by about 600% in 1989 and approximately 250% in 1990. Throughout the 1990s,
inflation has fallen gradually, from 60% in 1991 to 11.8% annual average in
1998. In 1999, inflation has continued to decrease although the process was less
rapid than in 1998.
EMPLOYMENT
Before 1989, for political reasons, unemployment was not officially
recognized in Poland and over-employment was evident in many enterprises.
However, total employment fell by 16% between 1990 and 1993, due to the
increasing liberalization of the economic system and the initial decline in
production.
Simultaneously, registered unemployment rose to a peak of 2,950,000 (16.7%
of the labor force) at the end of the first quarter of 1994. Unemployment has,
however, fallen gradually from this level to approximately 10.4% of the labor
force at the end of 1998. However, at October 1, 1999, unemployment had risen to
11.9%.
CURRENT ACCOUNT AND EXTERNAL DEBT
Poland's current account moved from a surplus of $5.4 billion in 1995 to a
deficit of $4.2 billion in 1997 and $6.8 billion in 1998 (3.1% and 4.63% of GDP,
respectively).
In December 1998, Poland's total external debt was approximately $33.1
billion. The present value of Poland's external debt was rescheduled by
approximately 50% as a result of agreements with the Paris Club in 1991 and the
London Club in 1994.
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Official foreign currency reserves increased from $3.8 billion in 1991 to
$20.4 billion at the end of 1997 and $26.4 billion at the end of 1998. The
growth in foreign currency reserves was particularly rapid during 1998,
reflecting the increased level of foreign direct investment, but slowed down in
the first quarter of 1999.
EXCHANGE RATE
The Polish Zloty is presently managed by the authorities through a crawling
peg system, combined with managed floating within an intervention band. The
intervention band is set at +/-15% around a central exchange rate, which is
calculated daily against a currency basket. The currency basket includes the
U.S. Dollar (with 45% weight) and the Euro (with 55% weight). At present, the
Polish Zloty is being devalued against the currency basket by 0.3% per month.
SELECTED ECONOMIC DATA
The following table sets forth selected economic data for Poland for the
periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
GDP (percent growth)..................................................... 5.2 7.0 6.1 6.9 4.8
GDP ($ billion).......................................................... 92.6 119.1 134.9 139.4 147.0
Unemployment (percent)................................................... 16.0 14.9 13.6 10.5 10.4
Inflation, average....................................................... 32.2 27.8 19.9 14.9 11.8
Fiscal balance/GDP (percent)............................................. (3.0) (2.7) (3.4) (3.7) (2.4)
Exports (goods and services) (percent growth)............................ 13.1 23.6 12.5 13.0 11.5
Imports (goods and services) (percent growth)............................ 11.3 24.3 28.0 20.0 14.0
Current account ($ billion).............................................. 1.9 5.4 (1.4) (4.2) (6.8)
Current account/GDP (percent)............................................ 2.1 4.5 (1.0) (3.1) (4.6)
External debt/GDP (percent).............................................. 47.1 38.0 30.9 29.2 22.9
Official reserves/GDP (percent).......................................... 6.5 12.6 13.4 14.8 19.0
</TABLE>
SOURCES: Central Statistical Office, Ministry of Finance, the NBP and THE
FINANCIAL TIMES.
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<PAGE>
NETIA HOLDINGS, S.A.
FINANCIAL STATEMENTS
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Audited Consolidated Financial Statements
Report of Independent Accountants.................................................................... F-2
Consolidated Balance Sheets.......................................................................... F-3
Consolidated Statements of Operations................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity........................................... F-5
Consolidated Statements of Cash Flows................................................................ F-6
Notes to Consolidated Financial Statements........................................................... F-7
Unaudited Condensed Consolidated Financial Statements
Report of Independent Accountants.................................................................... F-42
Consolidated Balance Sheets.......................................................................... F-43
Consolidated Statements of Operations................................................................ F-44
Consolidated Statements of Changes in Shareholders' Equity........................................... F-45
Consolidated Statements of Cash Flows................................................................ F-46
Notes to Condensed Consolidated Financial Statements................................................. F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors 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, 1997 and
1998, and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the years ended December 31, 1996,
1997 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with International Standards on
Auditing which are substantially identical to auditing standards generally
accepted in the United States. 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, 1997 and 1998 and the consolidated results of its
operations, of changes in shareholders' equity and of cash flows for the years
ended December 31, 1996, 1997 and 1998, in conformity with International
Accounting Standards.
The consolidated statements of operations, of changes in shareholders'
equity and of cash flows for the year ended December 31, 1996 are expressed in
the constant purchasing power of the Polish Zloty (PLN) as at December 31, 1996.
As of January 1, 1997, Poland was no longer considered to be a hyperinflationary
environment. The December 31, 1996 inflated values for balance sheet items at
that date became the new historical basis for subsequent periods.
International Accounting Standards vary in certain important respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of consolidated net income
for each of the years ended December 31, 1996, 1997 and 1998 and the
determination of consolidated shareholders' equity and consolidated financial
position as at December 31, 1997 and 1998 to the extent summarized in Note 24 to
the consolidated Financial Statements.
PRICEWATERHOUSECOOPERS SP. Z O.O.
Warsaw, Poland
March 3, 1999,
except for Note 25
which is as of
April 15, 1999
F-2
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED BALANCE SHEETS
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
$ (NOTE 2)
------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
NOTE 1997 1998 1998
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (UNAUDITED)
<CAPTION>
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
A S S E T S
Current Assets
Cash and cash equivalents.................................... 922,292 298,790 76,034
Restricted investments....................................... 3, 11 65,516 67,595 17,201
Accounts receivable
Trade, net of allowance for doubtful accounts of PLN 214
and PLN 4,046 (USD 1,009).............................. 9,783 26,358 6,707
Government--value added tax.............................. 29,114 42,376 10,784
Related parties.......................................... 4 1,786 487 124
Other.................................................... 1,983 5,457 1,389
Inventories.................................................. 3,250 998 254
Prepaid expenses............................................. 1,076 1,003 255
------------ ------------ ------------
Total current assets......................................... 1,034,800 443,064 112,748
Restricted investments....................................... 3, 11 131,032 67,595 17,201
Investments at cost.......................................... 5 1,222 75 19
Fixed assets, net............................................ 6 628,283 1,125,330 286,366
Investments in real estate................................... 6,295 6,964 1,772
Licenses..................................................... 7 -- 330,736 84,163
Deferred financing costs, net................................ 8 79,045 69,314 17,638
Goodwill, net................................................ 9 30,406 39,597 10,076
------------ ------------ ------------
Total Assets......................................... 1,911,083 2,082,675 529,983
------------ ------------ ------------
------------ ------------ ------------
L I A B I L I T I E S
Current Liabilities
Current maturities of long-term debt......................... 11 2,554 -- --
Accounts payable and accruals
Trade.................................................... 192,701 250,749 63,809
Government............................................... -- 4,794 1,220
Related parties.......................................... 4 24,005 14,380 3,659
Accruals and other....................................... 10 72,910 93,446 23,777
Deferred income.............................................. 828 799 203
------------ ------------ ------------
Total current liabilities.................................... 292,998 364,168 92,668
Long term liabilities for licenses........................... 7 -- 205,197 52,217
Long term debt............................................... 11 1,469,968 1,581,030 402,328
Refundable customer deposits................................. 1,472 1,519 387
Deferred tax liability....................................... 12 3,115 10,974 2,793
------------ ------------ ------------
Total liabilities............................................ 21, 22 1,767,553 2,162,888 550,393
Commitments and contingencies................................ 22
Minority interest............................................ 24,609 6,250 1,590
Shareholders' equity/(deficit)
Share capital (nominal par value of PLN 6 per share)......... 13 74,976 77,117 19,624
Share premium................................................ 190,601 188,571 47,989
Accumulated deficit.......................................... (146,656) (352,151) (89,613)
------------ ------------ ------------
Total shareholders' equity/(deficit)......................... 118,921 (86,463) (22,000)
------------ ------------ ------------
Total liabilities and shareholders' equity........... 1,911,083 2,082,675 529,983
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENT OF OPERATIONS
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
$ (NOTE 2)
------------
YEAR ENDED YEAR ENDED
----------------------------------------------------- ------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
NOTE 1996 1997 1998 1998
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (UNAUDITED)
<CAPTION>
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue
Telecommunication services revenue.......... 8,982 35,564 96,435 24,540
Non-telecommunication revenue:
Service................................... 4,206 6,408 8,771 2,232
Sales of equipment........................ 8,491 8,234 15,174 3,861
------------ ------------ ------------ ------------
21,679 50,206 120,380 30,633
Costs
Interconnection charges......................... (1,355) (5,692) (22,900) (5,828)
Cost of equipment............................... (7,929) (6,975) (11,425) (2,907)
Depreciation and amortization of goodwill....... 6, 9 (7,465) (16,926) (41,040) (10,443)
Other operating expenses........................ 14 (61,259) (86,901) (124,317) (31,635)
------------ ------------ ------------ ------------
Loss from operations............................ (56,329) (66,288) (79,302) (20,180)
Financial expense, net.......................... 15 (2,205) (32,681) (151,596) (38,577)
Write off of deferred financing costs........... 8 -- (24,241) -- --
Other losses.................................... 16 (4,302) -- (1,148) (292)
Gain on dilution of Parent Company's interest in
subsidiaries.................................. 17 38,903 2,137 -- --
------------ ------------ ------------ ------------
Loss before income tax.......................... (23,933) (121,073) (232,046) (59,049)
Income tax charge............................... 12 (2,038) (1,055) (8,802) (2,241)
Minority share in losses of subsidiaries........ 10,832 36,703 35,353 8,996
Cumulative effect of change in accounting for
deferred taxation............................. 12 (672) -- -- --
------------ ------------ ------------ ------------
Net loss........................................ (15,811) (85,425) (205,495) (52,294)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share before the cumulative effect of
change in accounting for deferred taxation
(not in thousands)............................ 18 (2.41) (9.46) (19.78) (5.03)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share including the cumulative effect
of change in accounting for deferred taxation
(not in thousands)............................ 18 (2.52) (9.46) (19.78) (5.03)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-4
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
<TABLE>
<CAPTION>
TOTAL
SHARE ACCUMULATED SHAREHOLDERS'
SHARE CAPITAL PREMIUM DEFICIT EQUITY/(DEFICIT)
------------- --------- ------------ --------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN)
<CAPTION>
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance as at January 1, 1996............................. 43,727 101,316 (45,420) 99,623
Net loss.............................................. -- -- (15,811) (15,811)
Issuance of shares, net of related costs.............. 17,800 28,701 -- 46,501
------ --------- ------------ --------------
Balance as at December 31, 1996........................... 61,527 130,017 (61,231) 130,313
------ --------- ------------ --------------
Net loss.............................................. -- -- (85,425) (85,425)
Issuance of shares, net of related costs.............. 13,449 60,584 -- 74,033
------ --------- ------------ --------------
Balance as at December 31, 1997........................... 74,976 190,601 (146,656) 118,921
------ --------- ------------ --------------
Net loss.............................................. -- -- (205,495) (205,495)
Issuance of shares, net of related costs
(Note 13)........................................... 2,141 (2,030) -- 111
------ --------- ------------ --------------
Balance as at December 31, 1998........................... 77,117 188,571 (352,151) (86,463)
------ --------- ------------ --------------
------ --------- ------------ --------------
</TABLE>
F-5
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
$ (NOTE 2)
------------
YEAR ENDED YEAR ENDED
---------------------------------------- ------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (UNAUDITED)
<CAPTION>
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... (15,811) (85,425) (205,495) (52,294)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization of goodwill.......... 7,465 16,926 41,040 10,443
Amortization of deferred financing costs........... 474 1,406 7,991 2,033
Amortization of discount on Notes.................. -- 13,246 84,602 21,527
Minority share in losses of subsidiaries........... (10,832) (36,703) (35,353) (8,996)
Provision for deferred income tax.................. 2,710 405 7,859 2,000
Other losses....................................... 4,302 -- 1,148 292
Write off of deferred financing costs.............. -- 24,241 -- --
Foreign exchange losses on translation of long term
debt............................................. 1,213 896 18,036 4,592
Gain on dilution of interest in subsidiaries....... (38,903) (2,137) -- --
Changes in working capital......................... 16,811 (22,691) (76,241) (19,400)
------------ ------------ ------------ ------------
Net cash used in operating activities.................. (32,571) (89,836) (156,413) (39,803)
Cash flows from investing activities:
Purchase of fixed assets........................... (148,029) (222,964) (395,943) (100,757)
Net cash effect on dilution of interest in
subsidiaries (Note 17)........................... 97,423 15,325 -- --
(Increase)/decrease in investments at cost......... (4,258) 4,274 -- --
Sale of marketable securities...................... 3,646 -- -- --
Sale/(Purchase) of short-term investments.......... (5,029) 5,029 -- --
Purchase of licenses............................... -- -- (84,376) (21,471)
------------ ------------ ------------ ------------
Net cash used in investing activities.................. (56,247) (198,336) (480,319) (122,228)
Net cash provided by financing activities
Net proceeds from issuance of shares............... 46,501 74,033 -- --
Capitalized deferred financing costs............... (20,252) (84,426) (4,288) (1,091)
Repayment of long term loans and liabilities....... (572) (384,707) -- --
Proceeds from long term loans and liabilities...... 54,723 1,587,275 -- --
Increase/(decrease) in short term borrowings....... 1,999 (1,999) -- --
Increase in related party borrowings............... 8,192 5,715 2,600 662
------------ ------------ ------------ ------------
Net cash provided by financing activities.............. 90,591 1,195,891 (1,688) (429)
Effects of exchange rate changes on cash and cash
equivalents.......................................... -- -- 14,918 3,796
Net change in cash and cash equivalents................ 1,773 907,719 (623,502) (158,664)
Cash and cash equivalents at beginning of year......... 12,800 14,573 922,292 234,698
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year............... 14,573 922,292 298,790 76,034
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying Notes are an integral part of these financial statements.
F-6
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
$ (NOTE 2)
-------------
YEAR ENDED YEAR ENDED
------------------------------------------- -------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (UNAUDITED)
<CAPTION>
(ALL AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Changes in working capital components, net of effects
of acquisition of subsidiaries on:
Trade receivables................................ (843) (6,088) (16,575) (4,218)
Government receivables........................... (9,355) (14,596) (13,262) (3,375)
Receivables from related parties................. 5,577 (1,786) (9,163) (2,332)
Other receivables................................ (639) 296 (3,474) (884)
Inventories...................................... (39) (2,459) 2,252 573
Prepaid expenses................................. (213) (557) 73 19
Trade creditors.................................. 8,033 2,643 (60,385) (15,365)
Government payables.............................. -- -- 4,794 1,120
Payables to related parties...................... 1,984 (2,219) 1,804 459
Accruals and other payables...................... 10,951 2,272 17,677 4,498
Refundable customer deposits..................... 839 30 47 12
Deferred income.................................. 516 (227) (29) (7)
------------- ------------- ------------- -------------
16,811 (22,691) (76,241) (19,400)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
SUPPLEMENTAL CASH DISCLOSURES:
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
$ (NOTE 2)
---------------
YEAR ENDED YEAR ENDED
--------------------------------------------------- ---------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1998
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (UNAUDITED)
Interest paid (net of amount capitalized)............ 312 24,082 41,811 10,640
Income taxes paid.................................... -- 650 -- --
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
In the year ended December 31, 1997, an amount of long term liabilities
(Notes) issued by the Company, but not reflected as cash proceeds in the
accompanying statement of cash flows, totaled PLN 194,928. The Company was
required to invest such amounts in restricted investments which are held in
escrow for repayment of interest on such indebtedness (Notes 3 and 11).
The Company incurred the following liabilities at the end of each year which
were related to fixed asset or construction in progress additions:
<TABLE>
<CAPTION>
CONVENIENCE
TRANSLATION
$ (NOTE 2)
---------------
YEAR ENDED YEAR ENDED
--------------------------------------------- ---------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1998
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (UNAUDITED)
7,040 167,738 188,353 47,931
</TABLE>
The Company incurred liabilities of PLN 26,737 in the year ended December
31, 1997 relating to the purchase of shares in Netia Telekom S.A. owned by the
European Bank for Reconstruction and Development ("EBRD") (Note 9). These
liabilities were paid in 1998. The Company incurred liabilities of PLN 267,660
in the year ended December 31, 1998 relating to the acquisition of local
telecommunications licenses (Note 7).
The accompanying Notes are an integral part of these financial statements
F-7
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
1. THE COMPANY
Netia Holdings S.A. ("Parent Company"), formerly known as R.P. Telekom S.A.,
and its subsidiaries (collectively, the "Company") was formed in 1990 and is a
privately owned joint stock company established under the laws of Poland. Parent
Company holds controlling interests in subsidiaries through which it is involved
in the design, construction and operation of modern digital telecommunication
networks. Parent Company is also engaged in 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") (Note 19).
As at December 31, 1998, Parent Company's subsidiaries had obtained twenty
three licenses granted by the Ministry of Communications of Poland for the
provision of local telephone services for 15 year periods. Parent Company's
subsidiaries are required to build and operate telephone networks for the
duration of each license with a specified installed capacity level (Note 21) for
each license. As at December 31, 1998, the Company's main activity is the
construction and operation of networks to provide telephone services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company maintains its accounting records and prepares statutory
financial statements in accordance with Polish accounting and tax regulations.
These financial statements have been prepared based upon the Company's
accounting records in order to present the financial position, results of
operations and of cash flows in accordance with International Accounting
Standards ("IAS").
International Accounting Standards vary in certain important respects from
accounting principles generally accepted in the United States ("U.S. GAAP"). See
Note 24 for a reconciliation of net loss and shareholders' equity from IAS to
U.S. GAAP.
INFLATION ACCOUNTING AND CURRENCY OF PRESENTATION
At December 31, 1996 and for the period then ended, Poland was considered to
be a hyperinflationary economy. The financial statements for that year are
prepared in accordance with the historical cost convention as adjusted for the
effects of inflation. In accordance with International Accounting Standard 29,
"Financial Reporting in Hyperinflationary Economies", the financial statements
for that year are restated to show amounts expressed in terms of the constant
purchasing power of the Polish Zloty at December 31, 1996. The amounts shown in
the restated currency do not represent appraised value, replacement cost, or any
other measure of the current value of assets or the prices at which transactions
would take place currently. The adjustment was calculated based on conversion
factors derived from the Polish Consumer Price Index ("CPI") published by the
Glowny Urzad Statystyczny. Based on a CPI rate of 100 as at January 1, 1990, the
cumulative inflation index as at December 31, 1996 was 2,103.61.
F-8
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MOVEMENT IN
CONSUMER
PLN EXCHANGE RATE PLN EXCHANGE RATE PRICE INDEX
OF THE GERMAN MARK (DM) OF THE U.S. DOLLAR FOR THE YEAR
--------------------------- --------------------- -------------
<S> <C> <C> <C>
December 31, 1996................................... 1.85 2.87 18.69%
</TABLE>
IAS 29 was applied as follows:
(1) Monetary assets and liabilities for the period ended above are
stated in constant purchasing power as of December 31, 1996.
(2) Non-monetary assets and liabilities and components of shareholders'
equity are linked to a monthly CPI and are restated based on the change
between that CPI and the CPI at the reporting date.
(3) All items in the statement of operations are restated by applying
the average conversion factor for the month in which the transaction
occurred.
(4) The effect of inflation on the Company's net monetary position is
included in the statement of operations as a component of financial expense.
As of January 1, 1997, Poland was no longer considered to be a
hyperinflationary economy. The inflated values in Polish Zloty (PLN), at
December 31, 1996 for balance sheet items became the new historical basis for
subsequent periods. Effective January 1, 1997 inflationary accounting for the
Company under IAS 29 ceased.
Information about exchange rate movements and inflation is as follows:
<TABLE>
<CAPTION>
MOVEMENT IN
CONSUMER
PLN EXCHANGE RATE PLN EXCHANGE RATE PRICE INDEX
OF THE GERMAN MARK (DM) OF THE U.S. DOLLAR FOR THE YEAR
--------------------------- --------------------- -------------
<S> <C> <C> <C>
December 31, 1997................................... 1.964 3.518 13.20%
December 31, 1998................................... 2.092 3.504 8.60%
</TABLE>
U.S. DOLLAR CONVENIENCE TRANSLATION (UNAUDITED)
The U.S. Dollar amounts shown in the accompanying financial statements have
been translated at December 31, 1998 and for the year ended December 31, 1998
from Polish Zloty only as a matter of arithmetic computation at the Polish Zloty
exchange rate of PLN 3.9297 = USD 1.00, the rate published by the National Bank
of Poland and effective on June 30, 1999. These amounts are unaudited and are
included for the convenience of the reader only. Such translation should not be
construed as a representation that the Polish Zloty amounts have been or could
be converted into U.S. Dollars at this or any other rate.
PRINCIPLES OF CONSOLIDATION
Subsidiary undertakings, which are those companies in which Parent 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 Parent Company and are no longer consolidated from the
date
F-9
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
of disposal. All intercompany transactions, balances and unrealized surpluses
and deficits on transactions between group companies have been eliminated.
Separate disclosure is made of minority interest. The consolidated financial
statements include the accounts of Parent Company's following direct
subsidiaries:
<TABLE>
<CAPTION>
OWNERSHIP PERCENTAGE
-------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
SUBSIDIARY 1996 1997 1998
- ---------------------------------------------------------------------- ----------------- ----------------- -----------------
Kabel Media S.A.(i)................................................... 85 85 85
Netia Telekom S.A.(ii)................................................ 65 72 75
Netia South Sp. z o.o.(iii)........................................... 100 75 75
Netia Telekom Pila Sp. z o.o.(iv)..................................... 73 -- --
Netia Telekom Silesia S.A.(v)......................................... 82 97 97
Uni-Net Sp. z o.o..................................................... 58 58 58
Netia Holdings B.V.(vi)............................................... -- 100 100
Netia Holdings B.V. II (vii).......................................... -- -- 100
</TABLE>
- ------------------------
(i) Kabel Media S.A. ("Kabel Media") is dormant (Note 16).
(ii) On September 22, 1997, Parent Company increased its ownership in Netia
Telekom S.A. ("Netia Telekom") through the purchase of shares held by EBRD
(Note 9).
(iii) Optimus Inwest S.A. ("Optimus") is a 100% subsidiary of Netia South Sp. z
o.o. ("Netia South") at December 31, 1997 and 1998. Netia Telekom Telmedia
S.A. ("Telekom Telmedia") is wholly owned by Optimus at December 31, 1996,
1997 and 1998. Shareholdings of 75% of Optimus were contributed to Netia
South effective on July 1, 1997. During the third quarter of 1997, Netia
South acquired the remaining 25% interest in Optimus.
(iv) This subsidiary was contributed and consolidated into Netia Telekom at
July 1, 1997 at an ownership percentage of 73%.
(v) This subsidiary was contributed to and consolidated into Netia South
effectively on March 31, 1997.
(vi) Netia Holdings B.V. ("Holdings B.V.") was formed on August 19, 1997 under
the laws of the Netherlands. This is a 100% subsidiary of Parent Company.
Its purpose was to be the issuer of certain Notes (Note 11) that were
issued in order to provide financing for the construction of the
telecommunications networks.
F-10
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
(vii) Netia Holdings B.V. II ("Holdings B.V. II") was formed on June 10, 1998
under the laws of the Netherlands. This is a 100% subsidiary of Parent
Company. At December 31, 1998 and throughout the year then ended, Holdings
B.V. II was dormant.
<TABLE>
<CAPTION>
NETIA TELEKOM S.A.'S
-------------------------------------------------------
<S> <C> <C> <C>
OWNERSHIP OWNERSHIP OWNERSHIP
PERCENTAGE PERCENTAGE PERCENTAGE
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
----------------- ----------------- -----------------
Netia Telekom Swidnik S.A.*........................................... 88 97 97
Netia Telekom Lublin S.A. ............................................ 92 92 92
Netia Telekom Ostrowiec S.A. ......................................... 99 99 99
Netia Telekom Mazowsze S.A. .......................................... 99 99 99
Netia Telekom Warszawa S.A. .......................................... 100 100 100
Netia Telekom Modlin S.A. ............................................ 88 88 88
Netia Telekom Kalisz S.A. ............................................ 97 97 97
Netia Telekom Torun S.A. ............................................. 94 94 94
Netia Telekom Wloclawek S.A. ......................................... 100 100 100
Netia Telekom Pila Sp. z o.o.**....................................... -- 99 99
Netia Network S.A.***................................................. -- -- 49
</TABLE>
- ------------------------
* Previously Lublin Telekom S.A.
** This subsidiary was contributed to Netia Telekom effectively on July 1,
1997. Previously, this was consolidated directly into Parent Company.
*** Netia Network S.A. ("Netia Network") was dormant during 1998. Due to the
significant control exercised by Netia Telekom, Netia Network was
consolidated into Netia Telekom in 1998.
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 reported revenues and expenses during the reported
period. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain prior periods amounts have been reclassified to conform with the
1998 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
Financial instruments carried on the balance sheet include cash and bank
balances, investments, receivables, trade creditors, leases and borrowings. The
particular recognition methods adopted are disclosed in the individual policy
statements associated with each item.
F-11
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
Disclosures about the Company's financial instruments are provided in Note
23.
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.
FIXED ASSETS AND NETWORK UNDER CONSTRUCTION
Fixed assets are stated at cost net of depreciation to date, plus related
inflation through December 31, 1996. Network under construction represents the
accumulation of costs associated with the construction of telephone networks and
other tangible fixed assets. The Company continually monitors the progress of
these construction projects and tracks each project by license area. The Company
includes in the construction cost of its networks all costs that are directly
attributable to the network development including an allocation of borrowing
costs (including interest costs and foreign exchange gains and losses) and
incremental overhead costs, including depreciation, directly associated with the
project during the period required to complete the asset. The cost of repairs
and maintenance are capitalized only if they improve the related asset or extend
its useful life.
Depreciation expense is recorded utilizing the straight-line method over the
estimated useful life of the assets. These lives are summarized as follows:
<TABLE>
<CAPTION>
TYPE TERM
- --------------------------------------------------------------------------- ---------------
<S> <C>
Buildings.................................................................. 40 years
Long term ground lease..................................................... 99 years
Base stations (Uni-Net).................................................... 7 to 13 years
Computer software.......................................................... 2 to 8 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
</TABLE>
INVESTMENTS IN REAL ESTATE
Investments in real property consist of certain residential real property
under construction. The investment represents the accumulation of costs
associated with construction plus related inflation through December 31, 1996
and incremental costs from January 1, 1997.
LICENSES
Licenses are stated at cost net of amortization to date. Amortization
commences once the related network is operational. Upon commencement of
amortization, amortization expense is recorded on a straight line basis over the
remaining period for which the license is granted (usual grant period is 15
years).
F-12
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
DEFERRED FINANCING COSTS
Costs incurred in obtaining financing are capitalized and amortized to
financial expense over the term of the credit facility.
GOODWILL
Goodwill represents the excess of the cost of an acquisition over the fair
value of the Company's share of the net assets of the acquired subsidiary at the
date of acquisition. Goodwill resulting from the acquisition of subsidiaries is
amortized over the period of the related licenses using the straight-line
method.
IMPAIRMENT
In 1998, the Company changed its accounting policy for impairments. There
was no effect on financial results as a result of this change in policy. The
Company periodically reviews the recoverability of goodwill, fixed assets,
investments in real estate and licenses through discounting the estimated
expected future cash flows (without interest charges) of these assets. An
impairment loss is recorded only if the carrying amount of the asset is less
than the higher of its fair value or value in use.
REFUNDABLE CUSTOMER DEPOSITS
Certain subsidiaries of Parent Company collected a refundable deposit from
customers when they were connected to the network. These deposits are recorded
as long term liabilities when collected and are refunded upon termination of the
consumer service agreement.
RETIREMENT BENEFITS
The Company pays social security taxes on each employee to the Polish
government. The Company has no other employee retirement plans.
REVENUE
(1) TELECOMMUNICATIONS REVENUE
Telecommunications revenue includes installation fees, fixed monthly charges
and calling charges. The Company records revenue from installation fees, which
are not in excess of direct selling cost, when the customer is connected to the
network.
(2) NON-TELECOMMUNICATIONS REVENUE
Non-telecommunications revenue includes revenue from specialized mobile
radio service (public trunking), through Parent 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.
FOREIGN EXCHANGE GAINS AND LOSSES
Foreign currency transactions in the Company 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 translation 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
F-13
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
Company's fixed assets capitalization policy when such amounts are considered to
be part of the financial cost of self constructed assets.
DEFERRED INCOME TAXES
The Company changed its method of accounting for deferred taxes to the
liability method of calculating deferred taxes as prescribed by International
Accounting Standards 12 (IAS 12) revised. The effective date of the adoption of
IAS 12 (revised) was January 1, 1996.
Deferred income taxes are computed in respect of temporary differences
between the amounts presented in these financial statements and those taken into
account for tax purposes.
Deferred tax balances are determined using the enacted tax rates in effect
during the period for which the temporary difference is scheduled to reverse.
Valuation allowances are recorded for deferred tax assets resulting from tax
losses when it is likely that tax benefits will not be realized.
EARNINGS/(LOSS) PER SHARE
Basic earnings/(loss) per share is calculated by dividing the net
profit/(loss) by the weighted average number of ordinary shares outstanding
during the year.
For diluted earnings/(loss) per share, the weighted average number of
ordinary shares in issue is adjusted to assume conversion of all dilutive
potential ordinary shares.
3. RESTRICTED INVESTMENTS
In November 1997, the Company deposited USD 55,213 (PLN 194,415 at the
exchange rate in effect on that date) in an "Escrow Account" with the trustee
for its Senior Dollar Notes (Note 11). All amounts are invested in U.S. Treasury
Notes bearing fixed interest rates ranging from 4.75% to 7.5%. The U.S. Treasury
Notes expire in six month increments set to coincide with the interest payment
dates established under the terms of the Senior Dollar Notes (Note 11). The
balance at December 31, 1998, including related interest, amounted to USD 38,582
(PLN 135,190 at the exchange rate in effect on that date). These amounts are
considered to be restricted investments at December 31, 1998.
F-14
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
4. RELATED PARTY TRANSACTIONS
(a) The following table details receivable balances with related parties:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
--------------- -----------------
<S> <C> <C>
(PLN) (PLN)
Parent Company's shareholders................................. 1,128 --
Telko Sp. z o.o. ............................................. 487 487
Telia Polska.................................................. 159 --
Telia A.B..................................................... 12 --
----- ---
1,786 487
----- ---
----- ---
</TABLE>
PARENT COMPANY'S SHAREHOLDERS
At December 31, 1997, a share issuance was closed. PLN 1,128 of shares
issued then were not paid until the end of the subscription period, which
occurred after the end of the year, and were included in related party
receivables.
TELKO
Parent Company owns 49% of the shares of Telko Sp. z o.o. ("Telko") which
was created by former members of Parent Company's Management Board. In the third
quarter 1997, Telko received a short term advance of PLN 487 from Parent
Company. The balance is payable by Telko upon the demand of Parent Company.
(b) The following table details payable balances with related parties:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- -------------
<S> <C> <C>
(PLN) (PLN)
Goldman Sachs................................................. 272 594
Shamrock/Trefoil.............................................. 402 3,218
Dankner....................................................... 1,151 4,930
Galopus (Note 4(d))........................................... 1,593 943
Telia loans (Note 4(c) and (d))............................... 13,907 --
Telia Swedtel................................................. 4,279 3,083
Other......................................................... 2,401 1,612
------ ------
24,005 14,380
------ ------
------ ------
</TABLE>
F-15
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
(c) Loans payable to related parties
<TABLE>
<CAPTION>
INTEREST DECEMBER 31, DECEMBER 31,
RATE 1997 1998
----------- ------------- -------------
<S> <C> <C> <C>
(PLN) (PLN)
Telia AB--USD loans (Note 4(d))...................... 10.74%* 13,907 --
------ ------
13,907 --
------ ------
------ ------
</TABLE>
- ------------------------
* The interest rate represents a weighted average of the interest rates
applicable to each tranche of this loan.
Motorola, one of the shareholders of Uni-Net, provided credit facilities as
described in Note 11.
(d) Transactions with related parties
GOLDMAN SACHS, SHAMROCK/TREFOIL AND DANKNER
These companies are shareholders of Parent Company. Transactions with these
parties included management and consulting fees of PLN 4,050 and guarantee fees
of PLN 1,614 for the year ended December 31, 1998, management and consulting
services of PLN 4,152 and guarantee fees of PLN 2,570 for the year ended
December 31, 1997. Management and consulting services are included in operating
expenses, and guarantee fees are included in financial expense.
In consideration of certain undertakings provided by Shamrock, Dankner and
Goldman Sachs in connection with credit facilities provided by the EBRD, such
shareholders were entitled to a guarantee fee from Parent Company equal to 5% of
such undertakings.
In December 1996, Dankner, Shamrock and Parent Company entered into a
management services agreement (the "Management Service Agreement") pursuant to
which Dankner and Shamrock agreed to provide management services to Parent
Company for an annual fee of USD 300 each. The Management Service Agreement was
terminated in January 1999 (Note 25).
GALOPUS
On September 13, 1996, Parent Company executed a consultancy agreement with
Galopus Co. Ltd. ("Galopus"), a company wholly owned by Parent Company's
president. Under the agreement, Galopus received a one time retention fee of PLN
201 and Galopus receives consulting fees. The Galopus is eligible for an annual
bonus based on the number of subscribers connected in each year, provided Parent
Company meets certain targets. In 1997, Galopus received PLN 1,024 for
consulting services and bonuses of PLN 922. In 1998, transactions with Galopus
included consulting services of PLN 893.
Parent Company and Galopus have entered into a Stock Appreciation Agreement
pursuant to which Galopus is entitled to receive certain compensation based upon
the appreciation in value of shares of Parent Company. Pursuant to this
Agreement, Parent Company granted Galopus certain economic rights which relate
to the value of Parent Company's common stock (the "Economic Right"). The
Economic Right of Galopus's deemed ownership of 1.5% of the outstanding share
capital of Parent Company was fully (100%) vested in August 1998. Based on the
terms of the Stock Appreciation Agreement, the value received by Galopus will be
a function of the share appreciation over the period, as determined by the most
recent issuance price of shares issued during the period. Payment is
F-16
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
to commence upon the earliest of the following: (i) Galopus's termination, (ii)
a 33.3% change in control of the Parent Company, (iii) an initial public
offering of Parent Company's common stock or (iv) after December 31, 1999 at
Galopus's request. The Economic Right expires December 31, 2000. Compensation
expense of PLN 506, PLN 384 and PLN 53 relating to this right was recorded for
the years ended December 31, 1996, 1997 and 1998, respectively (Note 25).
These transactions are included in the management and technical services by
shareholders category within other operating expenses.
MOTOROLA
Motorola has a shareholding of 37.8% in Uni-Net at December 31, 1998.
Transactions with Motorola amounted to PLN 1,459 for the year ended December 31,
1996. These items were included in other operating expenses. The Company had no
transactions with Motorola in 1997 or 1998.
TELIA AND TELIA SWEDTEL
At December 31, 1998, Telia A.B. (publ) ("Telia") had shareholdings of 25%
in Netia South and 25.4% in Netia Telekom (Note 25).
On June 2, 1998, loans from Telia amounting to PLN 14,609 (USD 4,163) were
converted into equity of Netia South.
Telia Swedtel is a subsidiary of Telia. Transactions with Telia Swedtel
include telecommunication technical services for Netia Telekom and Telekom
Silesia. The amounts for the year ended December 31, 1998 and 1997 were PLN
7,678 and PLN 17,488, respectively. A portion of these costs are capitalized as
a cost of constructing the network. The remainder is included in other operating
expense.
CONSULTING AGREEMENTS
Parent Company has consulting agreements with companies owned by two of its
shareholders and members of the Supervisory Board and Management Board.
The agreements with companies owned by shareholders will expire in June
1999. In 1998, these companies were paid PLN 1,071 and PLN 1,113. In 1997, these
companies were paid PLN 971 and PLN 1,104. Expenses related to these agreements
are included in other operating expense.
The company owned by the member of the Supervisory Board was paid PLN 882 in
1998 and PLN 303 in 1997.
The company owned by the member of the Management Board was paid PLN 125 in
1998 and PLN 131 in 1997.
Parent Company had a trade name license agreement with a company owned by
two of its shareholders which was terminated in 1998.
F-17
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
BOARD REMUNERATION
Compensation and other costs associated with members of the Parent Company's
management and supervisory boards during the twelve month periods ended December
31, 1996, 1997 and 1998 amounted to PLN 3,395, PLN 4,532 and PLN 6,400,
respectively.
OTHER
In December 1998, Goldman Sachs, Shamrock/Trefoil, Dankner and Telia
committed to assist Parent Company in obtaining additional funding. Should
Parent Company be unable to obtain such funding, they have committed to
contribute an additional USD 50 million to Parent Company (Note 25).
Other transactions include advances from the Company's current shareholders
for USD 707 (PLN 2,477 at the exchange rate in effect at December 31, 1998)
resulting from advance payment for a share issuance which was not effected in
1997.
5. INVESTMENTS AT COST
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
PERCENTAGE AMOUNT PAID AMOUNT PAID
OWNERSHIP FOR SHARES FOR SHARES
------------ --------------- -------------
<S> <C> <C> <C>
(PLN) (PLN)
Hydrocentrum S.A. (Note 16)............................................ 16 1,148 --
Huta Ostrowiec S.A..................................................... less than 1 62 62
Other investments at cost.............................................. various 12 13
----- -----
1,222 75
----- -----
----- -----
</TABLE>
6. FIXED ASSETS AND NETWORK UNDER CONSTRUCTION
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS AT ADJUSTED COST 1997 ADDITIONS TRANSFERS DISPOSALS 1998
- -------------------------------------------------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN) (PLN)
Buildings......................................... 24,756 -- 22,975 (5) 47,726
Land.............................................. 597 130 -- (115) 612
Long term ground lease(1)......................... 1,214 136 -- -- 1,350
Transmission network.............................. 88,848 -- 298,648 -- 387,496
Switching system.................................. 92,632 -- 178,785 -- 271,417
Base stations (Uni-Net)........................... 9,219 -- 1,072 -- 10,291
Machinery and equipment........................... 5,524 5,861 -- (112) 11,273
Office furniture and equipment.................... 18,045 5,605 -- -- 23,650
Vehicles.......................................... 10,676 3,927 -- (1,082) 13,521
Purchased software................................ 7,952 2,565 -- -- 10,517
------------ ----------- ---------- ----------- ------------
259,463 18,224 501,480 (1,314) 777,853
Network under construction(2)..................... 399,041 517,050 (501,480) -- 414,611
------------ ----------- ---------- ----------- ------------
658,504 535,274 -- (1,314) 1,192,464
------------ ----------- ---------- ----------- ------------
------------ ----------- ---------- ----------- ------------
</TABLE>
(1) A long term ground lease is owned by Netia Telekom and expires in 2092.
(2) Costs relating to the network are transferred to related fixed asset
accounts for each project as the project begins operations. Depreciation on
network components begins at that point.
F-18
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DEPRECIATION DECEMBER 31,
ACCUMULATED DEPRECIATION 1997 EXPENSE DISPOSALS 1998
- ----------------------------------------------------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN)
Buildings.................................................. 733 1,147 -- 1,880
Land....................................................... -- -- -- --
Long term ground lease..................................... 66 14 -- 80
Transmission network....................................... 4,836 10,682 -- 15,518
Switching system........................................... 7,050 15,816 -- 22,866
Base stations (Uni-Net).................................... 5,343 1,000 -- 6,343
Machinery and equipment.................................... 1,679 1,239 (27) 2,891
Office furniture and equipment............................. 4,980 3,601 -- 8,581
Vehicles................................................... 2,890 2,060 (467) 4,483
Purchased software......................................... 2,644 1,848 -- 4,492
------ ------ --- ------
30,221 37,407 (494) 67,134
------ ------ --- ------
------ ------ --- ------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
NET BOOK VALUE 1997 1998
- ------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
(PLN) (PLN)
Buildings............................................................................ 24,023 45,846
Land................................................................................. 597 612
Long term ground lease............................................................... 1,148 1,270
Transmission network................................................................. 84,012 371,978
Switching system..................................................................... 85,582 248,551
Base stations (Uni-Net).............................................................. 3,876 3,948
Machinery and equipment.............................................................. 3,845 8,382
Office furniture and equipment....................................................... 13,065 15,069
Vehicles............................................................................. 7,786 9,038
Purchased software................................................................... 5,308 6,025
------------ ------------
229,242 710,719
Network under construction........................................................... 399,041 414,611
------------ ------------
628,283 1,125,330
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was PLN 7,009, PLN 14,971 (net of PLN 851 which was
capitalized to network under construction as a part of incremental overheads)
and PLN 37,407 for the years ended December 31, 1996, 1997 and 1998,
respectively.
Total incremental overhead costs of PLN 28,010 and PLN 27,533 and total
financial costs of PLN 14,362 and 23,405 were capitalized to network under
construction in 1997 and 1998, respectively.
F-19
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
7. LICENSES
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
(PLN)
Licenses obtained in 1998.................................................... 295,906
Optimus licenses............................................................. 34,830
------------
330,736
------------
------------
</TABLE>
NEW LICENSES
In March 1998, certain subsidiaries of Parent Company obtained five new
fixed-term licenses for the installation and operation of local
telecommunication networks in specified areas of Poland, on a non-exclusive
basis. Under the terms of the licenses, the Company is required to pay for the
licenses over a five-year period. The total cost of these five licenses was
[EURO]78,525 (PLN 295,906 at the exchange rate on the date of the grant).
[EURO]19,412 (PLN 74,637 at the exchange rate in effect on the date of payment)
was paid during the year ended December 31, 1998 and the balance of [EURO]59,113
(PLN 241,921 at the exchange rate in effect on that date) is payable over the
next five years.
VALUE OF OPTIMUS LICENSES
Under a purchase agreement under which the Company acquired Optimus (and its
related licenses), Optimus had an option to either (i) receive a cash payment
based on a predetermined formula; or (ii) to acquire shares in the Netia group
of companies (Parent Company, Netia Telekom or Netia South). In June 1998, the
Company reached an agreement with Optimus to pay USD 10,000 (PLN 34,830 at the
exchange rate in effect on the date of the agreement) in full satisfaction of
the Company's obligation under the option. The amount payable has been accounted
for as additional purchase consideration and attributed to the value of licenses
acquired with the acquisition of Optimus.
The remaining payments for the licenses are as follows:
<TABLE>
<CAPTION>
NEW
LICENSES OPTIMUS TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Current portion (Note 10)......................................................... 60,481 1,982 62,463
--------- ----------- ---------
--------- ----------- ---------
Long term
One to two years................................................................ 60,481 23,757 84,238
Two to three years.............................................................. 60,481 -- 60,481
Three years and thereafter...................................................... 60,478 -- 60,478
--------- ----------- ---------
Total long term............................................................... 181,440 23,757 205,197
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
8. DEFERRED FINANCING COSTS
In June 1996 Netia Telekom arranged credit facilities with the EBRD and
Nordic Investment Bank (the "NIB"). Certain costs incurred in the process of
obtaining these facilities were capitalized as at December 31, 1996. In July
1997, Netia Telekom secured a credit facility with a consortium led by
F-20
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
Chase Manhattan Bank ("Chase") and repaid loans from the EBRD and Nordic
Investment Bank (Note 11). Upon repayment, Netia Telekom incurred a loss from
early extinguishment of debt equal to the remaining unamortized basis in
deferred financing costs of PLN 17,639. The credit facility with Chase was
repaid in November 1997 using proceeds from the issuance of certain long-term
Notes (Note 11). Deferred financing costs relating to this loan amounted to PLN
6,602. The combined write off of deferred financial costs related to these loans
was PLN 24,241.
In September 1997, Parent Company's subsidiaries, Telekom Silesia, Netia
South, Optimus and Telekom Telmedia secured a credit facility with a syndicate
of banks led by Chase ("the Chase Construction Loan") (Note 11). Also in
November 1997, Parent Company's subsidiary Netia Holdings B.V. issued certain
long-term Notes (Note 11). Deferred financing costs as at December 31, 1998
comprise certain costs incurred by the Company as a result of the process of
obtaining these facilities.
In 1998, Parent Company restructured the Chase Construction Loan. As a
result of this restructuring, the repayment terms were changed (Note 11). The
deferred financing costs relating to this loan are being amortized over the
shorter restructured life. Amortization charges related to the Chase
Construction Loan in 1998 were PLN 6,928.
The total amortization of deferred financing costs was PLN 14,019 in 1998.
PLN 6,028 was capitalized as a cost of constructing the network.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
(PLN) (PLN)
Bank charges, underwriting costs and commissions.............. 70,795 70,795
Legal and professional costs.................................. 9,656 13,944
------ ------------
80,451 84,739
Less accumulated amortization................................. (1,406) (15,425)
------ ------------
79,045 69,314
------ ------------
------ ------------
</TABLE>
9. GOODWILL
In March 1996, goodwill of PLN 6,144 arose due to the purchase of
shareholdings in companies that hold exclusive rights to certain licenses from a
former joint venture partner. Parent Company had an agreement to develop
networks with up to 162 lines in certain areas of Poland with a third party on
an exclusive basis. On March 26, 1996, Parent Company executed an agreement
pursuant to which the aforementioned agreement was rescinded in its entirety.
Parent Company agreed to purchase certain fixed assets and the third party's
shareholding in the companies formed to develop and operate the networks covered
by the agreement. Following this transaction, the assets were contributed to
Netia Telekom. Total payments under the agreement were PLN 17,249 of which PLN
7,105 was outstanding at December 31, 1996. The final payment of PLN 7,105 was
made in 1997.
In 1997, Netia South purchased shareholdings in Optimus, Telekom Telmedia
and Telekom Silesia and recorded goodwill of PLN 5,012 on these transactions.
F-21
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
On September 22, 1997, Parent Company and Telia purchased all the shares in
Netia Telekom owned by the EBRD (10% at December 31, 1996). Parent Company
recognized goodwill of PLN 21,104 on this transaction. In December 1998, Parent
Company purchased from Telia for PLN 10,462, the 2.4% interest in Netia Telekom
that Telia had purchased from the EBRD. Parent Company recognized goodwill of
PLN 12,824 on this transaction.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 INCREASES DECREASES 1998
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN)
Goodwill...................................................... 32,993 12,824 -- 45,817
Less accumulated amortization................................. (2,587) (3,633) -- (6,220)
------ ----------- ----------- ------
30,406 9,191 -- 39,597
------ ----------- ----------- ------
------ ----------- ----------- ------
</TABLE>
10. ACCOUNTS PAYABLE AND ACCRUALS
At December 31, 1998, PLN 58,307 of trade payables are denominated in U.S.
dollars and PLN 9,130 of trade payables are denominated in Swedish Krona.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------- -------------
<S> <C> <C>
(PLN) (PLN)
Accruals and other payables:
Short term payable for licenses (Note 7)..................... -- 62,463
Construction completed, not yet invoiced..................... 26,276 4,814
Interest and bank charges.................................... 739 --
Legal, financial and accounting services..................... 1,407 1,411
EBRD (Note 9)................................................ 26,737 --
Accrued interest on Senior Notes and
Chase Construction Loan.................................... 11,578 11,972
Stamp duty................................................... 2,364 1,792
Other payables............................................... 3,809 10,994
------ ------
72,910 93,446
------ ------
------ ------
</TABLE>
F-22
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
11. LONG TERM DEBT
<TABLE>
<CAPTION>
INTEREST DECEMBER 31, DECEMBER 31,
RATE 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
(PLN) (PLN)
Motorola, net of current maturity--USD loan................................ 5.80%* 739 3,014
USD Chase Construction Loan................................................ 8.30 28,144 28,032
DM Chase Construction Loan................................................. 6.13 12,763 13,595
Senior Notes--USD.......................................................... 10.25 703,600 700,800
Senior Dollar Discount Notes............................................... 11.25 448,049 499,142
Senior DM Discount Notes................................................... 11.00 269,955 320,828
Alcatel loan--USD.......................................................... 10.00 6,718 15,619
------------ ------------
1,469,968 1,581,030
------------ ------------
------------ ------------
</TABLE>
- ------------------------
* The interest rate represents a weighted average of the interest rate
applicable for each of the tranches of this loan.
CHASE CONSTRUCTION LOAN
On September 19, 1997, Parent Company's subsidiaries, Netia South, Telekom
Silesia, Optimus and Telekom Telmedia ("Borrowers") secured the Chase
Construction Loan for up to USD 95,000 to finance the build-out of up to 200
ringing telephone lines by Netia South and the other Borrowers. This loan was
restructured in 1998. As part of the restructuring the balance was frozen at DM
6,500 (PLN 13,595 at the exchange rate in effect at December 31, 1998) plus USD
8,000 (PLN 28,032 at the exchange rate in effect at December 31, 1998). No
further draw downs can be taken.
Interest on the Chase Construction Loan is paid on a quarterly basis. The
amounts drawn under this loan bear interest at LIBOR plus 2.5% which may be
reduced to 0.75% according to the Borrowers' financial performance.
The Chase Construction Loan is secured by a guarantee from the Borrowers and
Telekom Building, a 49% owned investment of Netia South, and a pledge of Netia
Telekom Silesia's shares owned by Netia South.
As restructured, the existing balance at December 31, 1998 must be repaid on
January 31, 2000.
THE SENIOR NOTES AND SENIOR DISCOUNT NOTES
On November 3, 1997, Netia Holdings B.V., a 100% subsidiary of Parent
Company, issued and sold Senior Dollar Notes of USD 200,000 due 2007, Senior
Dollar Discount Notes of USD 193,550 due 2007 and Senior DM Discount Notes of DM
207,062 due 2007 (the "Notes"). The Notes are fully guaranteed by Parent
Company. The Notes will be redeemable at Parent Company's option after November
1, 2002 in whole or in part at premiums to par.
In addition, at any time prior to November 1, 2000, the Company may redeem
up to 33% of the aggregate principal amount at maturity of each class of Notes
at a redemption price of 110.25% of the principal amount thereof, in the case of
the Senior Dollar Notes, at a redemption price of 111.25% of
F-23
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
the Accreted Value thereof in the case of the Senior Dollar Discount Notes, and
at a redemption price of 111% of the Accreted Value thereof in the case of the
Senior DM Discount Notes, with the net proceeds of one or more public equity
offerings; provided that not less than USD 134 million of the aggregate
principal amount of the Senior Dollar Notes, USD 129.7 million of the aggregate
principal amount at maturity of the Senior Dollar Discount Notes and DM 138.7
million of the aggregate principal amount at maturity of Senior DM Discount
Notes would remain outstanding immediately after giving effect to such
redemption.
The proceeds obtained from issuing the Notes were transferred, in the form
of intercompany loans with comparable terms, to Parent Company's subsidiaries to
finance the build-out of telephone networks.
The Senior Dollar Notes of USD 200,000 bear interest of 10 1/4% per annum
payable on May 1, and November 1, of each year commencing on May 1, 1998. The
Senior Dollar Discount Notes of USD 193,550 and Senior DM Discount Notes of DM
207,062 bear interest of 11 1/4% and 11% per annum, respectively.
Under the terms of the Senior Dollar Discount Notes and the Senior DM
Discount Notes, both were issued at a discount to reflect interest for the first
four years of the Notes in the amounts of DM 72,062 (PLN 145,781 at the exchange
rate in effect on that date) and USD 68,546 (PLN 239,156 at the exchange rate in
effect on that date), respectively. The discounts are amortized to interest
expense over the four year period they cover. The related interest expense in
1997 and 1998 was DM 2,486 (PLN 4,937 at the exchange rate in effect on that
date) and DM 15,910 (PLN 31,742 at the exchange rate in effect on December 31,
1998), respectively, and USD 2,355 (PLN 8,309 at the exchange rate in effect on
that date) and USD 15,090 (PLN 52,860 at the exchange rate in effect on December
31, 1998), respectively. After the initial four year period is completed,
interest will accrue and be payable in full each six months over the remaining
term of the Notes.
Repayment of the principal amounts of the Notes, pursuant to the terms of
the Notes, is in 2007, unless redeemed at Parent Company's option at an earlier
date, as discussed above. The Notes are included in the balance sheet at PLN
1,520,770 at December 31, 1998, which includes the discount on the Senior Dollar
Discount Notes and Senior DM Discount Notes of PLN 291,298.
RESTRICTED INVESTMENTS
Under the terms of the Senior Dollar Notes, the Company deposited USD 55,213
(PLN 194,415 at the exchange rate in effect on that date) in an "Escrow Account"
with the trustee for its Senior Dollar Notes. The money was invested in U.S.
Government securities (Note 3) which, together with the interest earned thereon,
will be utilized to pay the first six interest installments of the Senior Dollar
Notes. The current portion and the long term portion of the deposit including
accrued interest at December 31, 1998 amount to USD 19,291 (PLN 67,595 at the
exchange rate in effect on December 31, 1998) and USD 19,291 (PLN 67,595 at the
exchange rate in effect on December 31, 1998), respectively.
MOTOROLA LOAN
Parent Company's subsidiary, Uni-Net, has a loan with Motorola totaling USD
860 (PLN 3,014 at the exchange rate in effect on December 31, 1998). This loan
was granted under four separate agreements in 1996 and two in 1997. The loan
plus accrued interest, based upon the annual LIBOR rate
F-24
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
effective at the draw down date, is to be repaid as follows: PLN 561 in 2000,
PLN 1,121 in 2001 and PLN 1,332 in 2002. In 1997 part of the loan (PLN 2,554)
was classified as short term. The amount was not repaid. Repayment dates were
changed and the total amount is not due to start being repaid until 2000.
ALCATEL LOAN
The Company has entered into a loan agreement with a consortium led by
Alcatel Contracting S.A., a French registered company. The total credit facility
is USD 4,783 (PLN 16,760 at the exchange rate in effect on December 31, 1998),
of which USD 1,910 (PLN 6,718 at the exchange rate in effect on that date) and
USD 4,458 (PLN 15,619 at the exchange rate in effect on December 31, 1998) had
been drawn at December 31, 1997 and 1998, respectively. The loan, which is
denominated in USD, bears interest at the 7 year LIBOR SWAP rate plus 4% (the
effective rate was 10% at December 31, 1998). The loan is subordinate to those
referred to above. The purpose of the loan is to provide partial finance for the
turnkey contracts entered into with the Alcatel group of companies by Parent
Company's subsidiaries. The balance at December 31, 1998 will be repaid as
follows:
<TABLE>
<S> <C>
Due in 2000......................................................... 1,267
Due in 2001......................................................... 2,468
Due in 2002......................................................... 496
Due in 2003 and thereafter.......................................... 11,388
---------
15,619
---------
---------
</TABLE>
DEBT REPAYMENT SCHEDULE
<TABLE>
<S> <C>
Due in 1999...................................................... --
Due in 2000...................................................... 43,455
Due in 2001...................................................... 3,589
Due in 2002...................................................... 1,828
Due in 2003 and thereafter....................................... 1,532,158
---------
1,581,030
---------
---------
</TABLE>
F-25
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
TABLE OF INTEREST RATE RISK AT DECEMBER 31, 1998:
<TABLE>
<CAPTION>
FREQUENCY OF INTEREST RATE CHANGES
-----------------------------------
<S> <C> <C> <C>
30 DAYS -
180 DAYS FIXED TOTAL
----------- ---------- ----------
<CAPTION>
(PLN) (PLN)
<S> <C> <C> <C>
Motorola--USD loan........................................................... 3,014 -- 3,014
USD Chase Construction loan.................................................. 28,032 -- 28,032
DM Chase Construction loan................................................... 13,595 -- 13,595
Senior Notes--USD............................................................ -- 700,800 700,800
Senior Dollar Discount Notes................................................. -- 499,142 499,142
Senior DM Discount Notes..................................................... -- 320,828 320,828
Alcatel loan--USD............................................................ 15,619 -- 15,619
----------- ---------- ----------
60,260 1,520,770 1,581,030
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The variable rate loans which are based on LIBOR can, at the Borrowers'
option, be set for periods varying from one to six months. Interest rates
related to borrowings under these facilities at December 31, 1998 are fixed for
three months, and are included in the table under the 30-180 day category.
F-26
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
12. CORPORATE INCOME TAX
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Provision for income taxes:
Current........................................................... -- 650 943
Deferred.......................................................... 2,710 405 7,859
----- ----- -----
2,710 1,055 8,802
----- ----- -----
----- ----- -----
</TABLE>
The deferred tax assets/(liabilities) are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
(PLN) (PLN)
Liabilities
Capital items expensed for tax purposes................................ (4,637) (11,239)
Difference in depreciation and amortization rates...................... (1,262) (6,191)
Income deferred for tax purposes....................................... (6,314) (2,252)
------------ ------------
Gross deferred tax liability........................................... (12,213) (19,682)
Assets
Expenses capitalized for tax purposes.................................. 8,703 9,567
Deductions deferred for tax purposes................................... -- 3,222
Other temporary differences............................................ 395 405
Tax loss carry forwards................................................ 40,897 96,949
------------ ------------
Gross deferred tax asset............................................... 49,995 110,143
------------ ------------
Net deferred tax asset..................................................... 37,782 90,461
Valuation allowance........................................................ (40,897) (101,435)
------------ ------------
Net deferred tax liability................................................. (3,115) (10,974)
------------ ------------
------------ ------------
</TABLE>
The valuation allowance relates to deferred tax assets which are expected to
expire before use is available.
The provision for income taxes differs from the income tax determined by
applying the applicable Polish statutory income tax rate to pre-tax losses from
operations as a result of the following differences:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Tax benefit at Polish Statutory tax rate.................... 9,573 46,008 83,537
Increase (decrease) in tax benefits:
Tax loss carryforwards not expected to be utilized...... (23,864) (27,116) (82,853)
Non taxable/deductible items............................ 11,438 (19,970) (9,948)
Effect of enacted future rate changes on deferred
taxation.............................................. 143 23 462
------------ ------------ ------------
Effective tax expense....................................... (2,710) (1,055) (8,802)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-27
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
The corporate income tax rate in Poland for 1996, 1997 and 1998 was 40%,
38%, and 36% respectively. In 1998 an income tax rate change was enacted
resulting in a corporate income tax rate of 34% in 1999 and subsequent years.
As described in Note 2, the Company changed its method of accounting for
deferred income taxes under IAS to the liability method IAS 12 (revised)
effective January 1, 1996. The cumulative effect of the adoption which relates
to prior years was PLN 672.
Taxes which would apply in the event of the disposal of a subsidiary have
not been taken into account in computing deferred taxes. Other than Parent
Company's ownership interest in Uni-Net (Note 19), it is not management's
intention to sell or dispose of Parent Company's subsidiaries. The unrecorded
deferred tax liability relating to temporary differences between the book and
tax basis of investments in subsidiaries, which primarily relate to the gain on
dilution of Parent Company's interest in Netia Telekom, is approximately PLN
8,874 at December 31, 1998. Such amount has been determined based on the tax
rate of 20% applicable to dividend income.
The Polish tax system does not provide for grouping of tax losses for
multiple legal entities under common control, such as the Company. Thus, the
separate companies will only be able to utilize their own tax losses to offset
taxable income in subsequent years. Utilization of tax losses is limited to one-
third of the tax loss in each of the three 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 will be permitted to be
utilized over five years with a 50% utilization restriction per annum.
None of the individual companies included in the Company has been subject to
audit by the tax authorities. There is no procedure for final agreement of tax
assessment 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 such an audit. However, management is not aware of
any significant unaccrued potential tax liabilities which might arise in these
circumstances.
The Company has incurred tax losses since its inception and, therefore,
until 1997, did not paid income taxes.
As at December 31, 1998, based on returns filed or expected returns, the
Company has available the following income tax loss carryforwards for income tax
reporting purposes (in nominal amounts):
AVAILABLE FOR USE IN:
<TABLE>
<CAPTION>
1999 2000 2001 TOTAL
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN)
Netia Holdings S.A. .................................................. 5,488 1,761 339 7,588
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>
SUBSIDIARIES
Tax loss carryforwards of Parent Company's consolidated subsidiaries are as
follows (in nominal amounts):
F-28
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
AVAILABLE FOR USE IN:
<TABLE>
<CAPTION>
1999 2000 2001 TOTAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN)
Subsidiaries........................................ 110,747 94,587 72,223 277,557
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
13. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES AUTHORIZED,
ISSUED AND PAID FOR
(IN THOUSANDS) PAR VALUE (NOMINAL)
---------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(PLN) (PLN)
Common shares............................ 6,788 7,146 40,734 42,875
Common shares with preferred voting
rights................................. 3,245 3,245 19,470 19,470
------ ------ ------ ------
10,033 10,391 60,204 62,345
------ ------ ------ ------
------ ------ ------ ------
Inflation of par value................... 14,772 14,772
------ ------
Total par value.......................... 74,976 77,117
------ ------
------ ------
</TABLE>
ISSUANCE OF SHARES
During 1998, share premium of PLN 2,141 was transferred to share capital to
reflect the issuance of 358 shares of common stock.
SHAREHOLDERS' RIGHTS
Parent Company's capital stock consists of common shares and common shares
with preferred voting rights. The preferred voting rights entitle their holders
to three votes per share at a shareholders meeting. There are no preferences
with respect to dividends or liquidation distributions attributed to such
shares. The holder of 1,000 common shares with preferred voting rights has the
right to nominate one member of the Supervisory Board. The holders of 419 common
shares with preferred voting rights have the right to elect a majority of Parent
Company's management and supervisory board members. All other classes of shares
are stated PARI PASSU (Note 25).
EMPLOYEE SHARE PURCHASE INCENTIVE PROGRAM (NUMBER OF SHARES NOT IN THOUSANDS)
On May 19, 1994, the shareholders of Parent Company approved an employee
share purchase incentive program which allows Parent Company to issue shares to
management, supervisory board members and employees of the Company at a discount
of 25% from the price per share paid by other subscribers. The number of shares
issuable under this program will not exceed 1.5% of each new share issuance of
Parent Company. In 1997 and previous years shares were issued under this
program, in 1998 there were no shares issued under this program. Through
December 31, 1997, 124,425 shares were issued under this program. On December
18, 1998 the shareholders cancelled this program and approved a new plan
authorizing the issuance of up to 233,488 shares to management, supervisory
board members and employees of the Company. Shares will be awarded at the
discretion of management. Through December 31, 1998, no such shares were issued.
OUTSTANDING OPTIONS
See Note 22 for a description of the Telia Exchange Option and the Telia
Incentive Option.
F-29
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
14. OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------- ------------- ------------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Salaries and benefits....................................... 20,697 33,361 55,071
Legal and financial services................................ 11,169 9,457 19,409
Marketing and business expenses............................. 3,324 8,171 13,003
Office and car maintenance.................................. 6,648 10,355 11,305
Travel and accommodation.................................... 1,080 1,493 2,252
Other operating costs including services provided by
shareholders.............................................. 18,341 23,850 19,445
Bad debt expense............................................ -- 214 3,832
------ ------ ------------
61,259 86,901 124,317
------ ------ ------------
------ ------ ------------
</TABLE>
15. FINANCIAL EXPENSE, NET
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
<S> <C> <C> <C>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<CAPTION>
(PLN) (PLN) (PLN)
<S> <C> <C> <C>
Interest income............................................. 5,732 34,537 51,652
Foreign exchange gains...................................... 796 24,117 53,634
Interest expense............................................ (2,960) (43,719) (148,342)
Foreign exchange losses..................................... (2,734) (43,640) (98,935)
Loss on net monetary position............................... (2,277) -- --
Guarantee costs............................................. (288) (2,570) (1,614)
Amortization of deferred financing costs (Note 8)........... (474) (1,406) (7,991)
------------ ------------ ------------
(2,205) (32,681) (151,596)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
16. OTHER LOSSES
Other losses for 1998 consisted of a write off of PLN 1,148 of Parent
Company's investment in Hydrocentrum S.A.
Other losses for 1996 consisted of a write down of PLN 2,809 for certain
assets of two subsidiaries, Kabel Media and Netia South, as well as a write off
of capitalized costs determined to be impaired of PLN 1,493.
Kabel Media, which was originally organized by the Company with the view to
serve as the entity through which the Company could conduct cable television
operations, became dormant in 1996 before it commenced operation, when
management determined that it would not devote resources to developing this
business at that time. Assets that could not be utilized by Parent Company in
its other operations were written down to their net realizable value, resulting
in a charge of PLN 1,409.
F-30
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
From 1994 to 1996, Netia South, which during this period, directly or
through subsidiaries, held telecommunications licenses covering territories in
southern Poland, invested in certain design and other technical plans, including
related start-up costs and technical fees. In 1996, at a time when the Company
and its then (former) joint venture partner could not agree on a plan for
developing these licenses, management reassessed the work done to that date and
determined to redesign the network before Netia South commenced operation.
Amounts written off in respect of this decision totaled PLN 1,400; related
capitalized costs written off totaled PLN 1,493. The remaining assets of this
entity consisted primarily of items of equipment and vehicles which could be
utilized by the Company in its operations. Subsequently following the Company
reaching agreement with its current joint venture partner, Telia, Netia South
became, and still serves as, the holding company for certain of the Company's
telecommunications operations in the south of Poland.
17. GAIN ON DILUTION
In the first quarter 1997, Parent Company recognized a gain of PLN 1,638 on
dilution of its interest in Netia South from 100% to 75%. On July 1, 1997 Parent
Company contributed Telekom Pila to Netia Telekom and recognized a gain of PLN
499 on this transaction.
Parent Company formed Netia Telekom in 1995 and contributed its interest in
nine project companies during 1996. Telia and the EBRD contributed cash of PLN
74,814 and PLN 29,139, respectively. After completion of these transactions
Parent Company owned 65% of Netia with 25% and 10% held by Telia and the EBRD,
respectively. Parent Company recognized gains on dilution of its interest in
Netia Telekom of PLN 38,903. Cash flows including additional contributions made
by these minority shareholders to maintain their ownership interest throughout
1996 totaled PLN 97,423.
18. LOSS PER SHARE
BASIC:
Losses per share have been calculated based on net losses for each period
divided by the weighted average number of shares in issue.
The weighted average number of shares was 6,280, 9,033 and 10,391 for each
of the years ended December 31, 1996, 1997 and 1998, respectively.
DILUTED:
No diluted losses per share were computed in 1996, 1997 and 1998 as in 1996
there were no dilutive instruments and in 1997 and 1998 the effect of the Telia
Incentive Option and the Telia Exchange Option (Note 25) were anti-dilutive.
19. SEGMENTAL REPORTING
The following tables contain segment information for the Company's
telecommunications business and other non-telecommunication business lines
(primarily radio communications services and sales of
F-31
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
equipment through Uni-Net), as well as sales of equipment through Parent
Company, which were discontinued in 1997 (Note 20).
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Revenue
Telecommunication................................................. 8,982 35,564 96,435
Non-telecommunication:
Service....................................................... 4,206 6,408 8,771
Sale of equipment............................................. 8,491 8,234 15,174
------------ ------------ ------------
21,679 50,206 120,380
Operating Expenses
Telecommunication................................................. (60,298) (98,666) (176,847)
Non-telecommunication............................................. (17,710) (17,828) (22,835)
------------ ------------ ------------
(78,008) (116,494) (199,682)
Income/(Loss) from operations
Telecommunication................................................. (51,316) (63,102) (80,412)
Non-telecommunication............................................. (5,013) (3,186) 1,110
------------ ------------ ------------
(56,329) (66,288) (79,302)
Net income (loss)
Telecommunication................................................. (12,931) (81,259) (206,048)
Non-telecommunication............................................. (2,880) (4,166) 553
------------ ------------ ------------
(15,811) (85,425) (205,495)
Total capital expenditures
Telecommunication................................................. 147,660 222,171 477,919
Non-telecommunication............................................. 369 793 2,400
------------ ------------ ------------
148,029 222,964 480,319
Total depreciation
Telecommunication................................................. 5,549 14,509 35,520
Non-telecommunication............................................. 1,460 462 1,887
------------ ------------ ------------
7,009 14,971 37,407
Identifiable assets--before accumulated
depreciation and amortization
Telecommunication................................................. 295,787 1,928,304 2,131,691
Non-telecommunication............................................. 23,038 16,993 24,338
------------ ------------ ------------
318,825 1,945,297 2,156,029
Identifiable assets
Telecommunication................................................. 286,850 1,896,368 2,068,151
Non-telecommunication............................................. 16,470 14,715 14,524
------------ ------------ ------------
303,320 1,911,083 2,082,675
</TABLE>
All operations and revenues are derived and conducted within Poland.
F-32
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
20. DISCONTINUED OPERATIONS
Effective June 27, 1997, Parent Company sold its license to conduct
equipment sales. No gain or loss was recorded on the sale of the license as all
liabilities were settled by Parent Company and all remaining assets were sold
for their net book value. Equipment sales of Parent Company were included in the
non-telecommunications segment. Revenues and related costs which were included
in the ordinary operations of the Company are shown below:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------- --------------- -----------------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Revenue from sale of equipment.............................. 4,486 846 --
Cost of equipment........................................... (4,473) (839) --
Selling, marketing, general and administrative expenses..... (698) (680) --
------ --- ---
Net loss.................................................... (685) (673) --
------ --- ---
------ --- ---
</TABLE>
21. TELECOMMUNICATIONS LICENSES
As at December 31, 1998, certain subsidiaries of Parent Company had obtained
fixed term licenses for the installation and operation of local
telecommunication networks in specified areas throughout Poland, on a
non-exclusive basis (Note 7). Each license holder is obligated to provide public
telecommunications services through its network for local traffic and through
interconnection with the regional and international networks of Telekomunikacja
Polska S.A. for long-distance traffic. The terms of interconnection in each
license area are negotiated separately subject to guidelines established by the
Ministry of Communications.
The Company is required by the terms of its licenses to meet annual
milestones, as measured at the end of each year, in terms of connected capacity,
subject to demand in each of the respective areas. The Company had not met these
milestones for all 23 of its licenses as at December 31, 1998. Effective
December 31, 1997, the Ministry of Communications confirmed to the Company that
it did not intend to take any action as a consequence of the failure to meet the
annual milestones through December 31, 1997. Management does not believe that
the licenses will be revoked. However, in the event that they are revoked, the
effect on the Company, including the value of related network assets and its
ability to continue its operations, would be significant.
The costs of these licenses acquired in 1998 are included as an intangible
asset at December 31, 1998 (Note 7). The cost of these licenses through December
31, 1997 was approximately PLN 2,000 and are included in transmission network
under fixed assets.
22. COMMITMENTS AND CONTINGENCIES
As at December 31, 1998, certain subsidiaries of Parent Company had
commitments of USD 35,128 (PLN 123,089 at the exchange rate in effect on
December 31, 1998) primarily with the Alcatel consortium of companies and
Tadiran to construct telephone lines and additional network related assets in
several regions of Poland. These commitments call for the completion of the
construction over the next year.
F-33
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
In 1996, Netia Telekom entered into an Operational Assistance Contract with
Swedtel, a wholly owned subsidiary of Telia, pursuant to which Swedtel provided
Netia Telekom with network design and operations assistance. Such services were
provided at rates agreed upon by the parties. Effective December 31, 1998, this
agreement was cancelled.
In September 1997, Parent Company granted Telia an option (the "Telia
Exchange Option") to exchange all, but not less than all, of its interests in
Netia Telekom and Netia South for a proportional direct equity interest in
Parent Company. The Telia Exchange Option expires within 18 months or upon an
initial public offering. In March 1999, Telia exercised the Telia Exchange
Option (Note 25).
In September 1997, Netia Telekom and Netia South entered into Operational
Support and Supervision Agreements (the "OSSAs") with Telia. The OSSAs are for a
term of three years (subject to early termination under certain circumstances).
Under the OSSAs, Telia will provide personnel and services upon the request of
the Chief Executive Officer of Netia Telekom or Netia South, as the case may be.
Payment for such personnel and services will be reimbursement of direct costs
plus 15.0%. (Note 4(d)).
In connection with the OSSAs, Parent Company and certain shareholders
granted Telia an option (the "Telia Incentive Option") to purchase 10.0% of the
equity interests in Parent Company. Half of the options were to vest by
September 1998 and are exerciseable at a purchase price of USD 15.75 per share
by September 1999 and USD 17.50 per share after September 1999 until expiration
in September 2000. The other half of the options were to vest by September 1999
and will be exercisable at a purchase price of USD 17.50 per share if exercised
by September 2000 and USD 19.25 per share after September 2000 until expiration
in September 2001.
The exercise price for the Telia Incentive Options should be payable in cash
and would be adjusted under certain circumstances, including the issuance of
shares by Parent Company at a price set forth above. Parent Company is required
to provide Telia with 90 days' notice prior to an initial public offering,
giving Telia the right to exercise such option in full. If Telia were not to
exercise the Telia Incentive Option during such 90-day period, the Telia
Incentive Option would expire the day immediately prior to the consummation of
the initial public offering. Upon the exercise of the Telia Incentive Option,
Parent Company and certain shareholders had the right to either cause the
relevant shares (i) to be newly issued by Parent Company or (ii) to be sold to
Telia by certain shareholders. In February 1999 Telia exercised the Telia
Incentive Option (Note 25).
The Company received a letter dated January 8, 1999 for a claim of USD 10.0
million. The directors are of the opinion, having taken appropriate legal
advice, that, in the absence of legal proceedings having commenced, this matter
is still at too early a stage to determine whether any liability in respect of
this issue is likely to arise. No liability has been recorded for this claim, as
any liability is not probable and any amount cannot be reasonably estimated.
The Company has been notified of a legal claim brought in France. The amount
of the claim is USD 4.5 million. The directors are of the opinion, having taken
appropriate legal advice, that the legal proceedings related to this claim are
still at too early a stage to determine whether any liability in respect of this
issue is likely to arise. No liability has been recorded for this claim, as any
liability is not probable and any amount is not reasonably estimateable.
F-34
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except as otherwise stated, the financial information prior to January 1, 1997
is expressed
in terms of the constant purchasing power of the Polish Zloty at December 31,
1996
(All amounts in thousands)
23. FINANCIAL INSTRUMENTS
CREDIT RISK
Financial assets which potentially subject the Company and its subsidiaries
and affiliates to concentration of credit risk consist principally of cash and
cash equivalents, short-term securities, restricted cash and trade receivables.
The Company's cash deposits are with Chase Asset Management in London and with
various Polish banks. The Company does not consider there to be a significant
concentration of credit risk. An appropriate allowance for doubtful debts is
included in trade accounts receivable.
INTEREST RATE RISK
Investments at December 31, 1998 were at variable interest rates (Note 3).
Interest rates on borrowings are set out in Note 11.
FOREIGN CURRENCY RISK
The Company's revenues and costs are predominantly denominated in Polish
Zloty, other than payments made under the construction contracts which are
linked to the USD. The majority of the Company's borrowings and short term
investments are denominated in USD, DM and Euros. In view of the costs involved
management does not believe it is cost effective to use financial instruments to
further hedge or otherwise seek to reduce foreign currency risk.
FAIR VALUES
At December 31, 1998 the carrying amounts of cash and cash equivalents,
short term securities, accounts receivable, accounts payable and accrued
expenses, and investments approximated their fair values. The fair value of each
class of long term debt and liabilities also approximates their carrying values
since they bear interest at rates close to the prevailing market rates.
F-35
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
24. RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(PLN) (PLN) (PLN)
Net loss per IAS...................................................... (15,811) (85,425) (205,495)
Gain on dilution of interest in subsidiaries(1)....................... (38,903) (2,137) --
Foreign exchange losses(2, 6)......................................... -- (7,218) (355)
Interest expense(2, 6)................................................ -- 13,327 504
Financial expense(3).................................................. -- (6,348) --
Depreciation of U.S. GAAP fixed asset basis differences(2, 5)......... -- -- (1,369)
Deferred taxes(2, 3, 5, 6)............................................ -- 86 (2,981)
Minority interest(2, 6)............................................... -- (1,056) 257
Amortization of goodwill(3)........................................... -- -- 2,112
Other operating expenses(5)........................................... -- (1,759) (7,036)
Deferred taxes(4)..................................................... 672 -- --
------------ ------------ ------------
Net loss per U.S. GAAP................................................ (54,042) (90,530) (214,363)
------------ ------------ ------------
------------ ------------ ------------
U.S. GAAP loss per share information (not in thousands):
Loss per share from continuing operations, before extraordinary item
and discontinued operations......................................... (8.50) (7.27) (20.63)
Loss per share related to extraordinary item.......................... -- (2.86) --
Loss per share from discontinued operations........................... (0.11) (0.07) --
------------ ------------ ------------
Loss per share........................................................ (8.61) (10.02) (20.63)
------------ ------------ ------------
------------ ------------ ------------
Shareholders' equity/(deficit) per IAS................................ 130,313 118,921 (86,463)
Purchase of EBRD interest in Netia Telekom(3)......................... -- (14,756) (14,756)
Increase in equity related to Incentive Stock Option(5)............... -- 3,518 17,590
Fixed assets, including depreciation(2, 5)............................ -- 6,109 23,401
Financial expense(3, 6)............................................... -- (6,348) (24,860)
Deferred taxes(2, 3).................................................. -- 86 (2,895)
Amortization of goodwill(3)........................................... -- -- 2,112
Other operating expenses(5)........................................... -- (1,759) (8,795)
Minority interest(2, 6)............................................... -- (1,056) (799)
------------ ------------ ------------
Shareholders' equity/(deficit) per U.S. GAAP.......................... 130,313 104,715 (95,465)
------------ ------------ ------------
------------ ------------ ------------
Changes in Shareholders' equity/(deficit) on a U.S. GAAP basis
Shareholders' equity at beginning of year......................... 98,951 130,313 104,715
Net loss.......................................................... (54,042) (90,530) (214,363)
Issuance of shares, net of related costs.......................... 46,501 74,033 111
Purchase of EBRD interest in Netia(3)............................. -- (14,756) --
Increase in equity related to Incentive Stock Option(5)........... -- 3,518 14,072
Increase in equity related to dilution of interest in
subsidiaries.................................................... 38,903 2,137 --
------------ ------------ ------------
Shareholders' equity/(deficit) at end of period................... 130,313 104,715 (95,465)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-36
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
The following are descriptions of U.S. GAAP reconciling items:
(1) Under IAS, the Company reflects in the statement of operations the change in
the Parent Company's proportionate share of subsidiary equity resulting from
additional equity raised by the subsidiary. For U.S. GAAP, the Company's
accounting for such change is reflected as a capital transaction.
(2) Under IAS, the Company capitalizes foreign exchange losses and interest
expense related to borrowing used to fund construction in progress. Under
U.S. GAAP, foreign exchange gains (losses) 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 U.S. GAAP, which is
limited to the total amount of interest incurred by the Company from all
sources.
The effect of this difference in accounting was not material during 1996 and
prior years. The effect of this difference in accounting during the years
ended December 31, 1997 and 1998 of decreased interest expense of PLN 13,327
and PLN 24,060, respectively, and increased foreign exchange losses of PLN
7,218 and PLN 5,399, respectively, are summarized in the reconciliations,
including the related effect of depreciation of these differences, of
deferred taxes at a 34% effective tax rate and of the minority interest in
Netia Telekom and Netia South.
(3) Under IAS, the Company recorded goodwill of PLN 21,104 in 1997 relating to
the purchase of shares in Netia Telekom owned by the EBRD, For U.S. GAAP
purposes, the original issuance of shares in 1996 to the EBRD and the
subsequent purchase by Parent 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 Parent Company in 1997,
the excess paid by Parent 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 Parent Company (equivalent to the
original issue price to the EBRD) has been charged to shareholders' equity
for U.S. GAAP purposes. Accordingly, the total amount of goodwill recorded
under IAS has been reversed in the U.S. GAAP reconciliation.
In 1998, amortization of this goodwill for IAS purposes was PLN 2,112. For
U.S. GAAP purposes, since this was considered a capital transaction, no
amortization charge was recorded. Amortization expense for 1997 was not
considered material.
(4) Under IAS, the Company changed its method of accounting for deferred income
taxes to the liability method in accordance with IAS 12 (revised) effective
January 1, 1996. Under U.S. GAAP, the Company adopted SFAS 109, Accounting
for Income Taxes, as of January 1, 1993. The effect of the adoption of IAS
12 reflected in 1996 is reversed for U.S. GAAP purposes, and the related
deferred taxes are reflected in prior years under SFAS 109.
(5) Under IAS, the Telia Incentive Option issued in connection with the OSSAs
entered into with Telia is recognized when 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 Telia Incentive Option was PLN 42,216 and this is being
recognized over the service period of the OSSA as set out in Note 23.
F-37
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
The fair value of the Telia Incentive Option is based on an independent
valuation of the Company's shares using a binomial model and includes the
following assumption: (1) the number of shares under option is 1,586,525
(not in thousands); (2) a risk-free interest rate of 5.65%; (3) expected
volatility of 35%; (4) no expected dividends; (5) the option will be
exercised at the earliest available opportunity.
In the year ended December 31, 1997, PLN 1,759 has been recognized as other
operating expenses and PLN 1,759 has been capitalized as part of cost of the
network under construction. In the year ended December 31, 1998, PLN 7,036
has been recognized as other operating expenses and PLN 7,036 has been
capitalized as part of cost of the network under construction. The
depreciation and deferred tax effect at a 34% effective tax rate have been
included.
(6) Under IAS, the long term liability associated with obtaining the new
licenses from the Polish government (Note 7) is considered to be interest
free. For U.S. GAAP purposes, interest expense should be imputed based on
the Company's effective borrowing rate. The result is that the liability and
the licenses should be recorded at the discounted present value of the
liability (PLN 225,985); interest expense is recorded at an effective rate
of 11%; and foreign exchange differences are computed on the present value
of the liability, rather than the face value. For the year ended December
31, 1998, the effect on profit and loss from additional interest expense of
PLN 23,556 and a decrease to foreign exchange expense of PLN 5,044 is
summarized in the reconciliation, including the related effect of deferred
taxes at a 34% effective rate and of minority interest. No interest was
imputed on the liability for licenses obtained from Optimus as it would not
have a material effect on profit and loss.
No amounts in respect of imputed interest on this liability have been
capitalized since during 1998 build-out of the networks related to these
licenses was limited and any related interest to be capitalized under SFAS
34 would not be material.
Additional U.S. GAAP disclosures are as follows:
1. Under U.S. GAAP, the "Loss from Operations" would include "Other
Losses", which differs from the IAS presentation of such amounts in the
Statement of Operations, the expense from the Telia Incentive Stock
Option discussed in point (5) above, and be increased by the effect of
amortization of goodwill recorded for IAS, but not U.S. GAAP discussed in
point (3) above. Loss from operations under U.S. GAAP was PLN 60,631 and
PLN 68,047 and PLN 86,743 for the years ended December 31, 1996, 1997 and
1998, respectively.
2. Under U.S. GAAP, the "Write Off of Deferred Financing Costs" of PLN
24,241 during the year ended December 31, 1997 would be considered an
extraordinary item and shown after "Loss Before Income Tax." There is no
income tax associated with this loss.
3. For U.S. GAAP purposes, the Company adopted SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, as of January 1, 1996. The Company reviews the recoverability of
long-lived assets through estimating the future cash flows (undiscounted
and without interest charges). If the sum of expected cash flows is less
than carrying amount of the asset, an impairment loss is recognized. The
effect of adoption of SFAS 121 was not material.
F-38
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
4. For U.S. GAAP purposes, certain additional disclosures are required
under SFAS 123 Accounting for Stock-Based Compensation. Parent Company
had no employee stock option plan in place at any time during the periods
covered by these financial statements.
Under the Employee Purchase Incentive Program (see Note 13), employees
with at least three years of service to Parent Company may elect to
participate in any new share issuances at a 25% discount from the
issuance price. The maximum number of shares available under each
issuance is 1.5%. For IAS purposes, the discounted amount was included in
share premium, rather than as compensation expense as prescribed by U.S.
GAAP. Total compensation expense relating to these discounts would have
been PLN 222 and PLN 143 for the years ended December 31, 1996 and 1997,
respectively. In 1998 no shares were issued under the Employee Purchase
Incentive Program.
Parent Company also entered into a Stock Appreciation Agreement with a
company wholly owned by Parent Company's president (see Note 4). Under
the terms of this agreement, the consultant was partially vested in share
appreciation rights equivalent to 1.5% of the outstanding share capital
of Parent Company through December 31, 1997. Under IAS, 100% of the
appreciation in share value was recorded as compensation expense of PLN
506 and PLN 384 for the years ended December 31, 1996 and 1997,
respectively. For U.S. GAAP purposes only the appreciation of the vested
portion should have been recorded being PLN 258 and PLN 335 for the years
ended December 31, 1996 and 1997, respectively. The consultant was 100%
vested at December 31, 1998.
The total effect on compensation expense for U.S. GAAP purposes would be
an increase in compensation expense of PLN 297 and PLN 95 for the years
ended December 31, 1997 and 1998, respectively, and a reduction of
compensation expense of PLN 27 for the year ended December 31, 1996. Such
differences between compensation expense for IAS and U.S. GAAP are not
considered significant enough to warrant inclusion in the U.S. GAAP
reconciliation above.
5. For U.S. GAAP purposes, SFAS 109, Accounting for Income Taxes (SFAS
109), requires the adoption of the asset and liability approach as the
method for accounting for deferred income taxes. The asset and liability
approach requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities. The
liability method under IAS 12 (revised) is comparable to SFAS 109, but
under IAS 12 (revised) deferred tax assets may not be recognized if
recovery is not probable. Under SFAS 109 all deferred tax assets must be
recognized, however, a valuation allowance should be provided if recovery
is less than 50% likely. In order to comply with both IAS 12 (revised)
and SFAS 109, the Company has elected to recognize all deferred tax
assets and record a valuation reserve for those assets whose recovery is
less than 50% likely.
F-39
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
6. The significant valuation reserves for the Company were the FAS 109
reserves on the utilization of losses for tax purposes. Activity for
these reserves for U.S. GAAP purposes are included below:
<TABLE>
<CAPTION>
CHARGE FOR
NET LOSSES
NOT EXPECTED RELEASE OF
TO BE RESERVE FOR
JANUARY 1 UTILIZED EXPIRED LOSSES DECEMBER 31
----------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
(PLN) (PLN) (PLN) (PLN)
1998........................... 40,897 76,227 (15,689) 101,435
1997........................... 25,041 16,015 (159) 40,897
</TABLE>
7. Effective June 27, 1997, Parent Company disposed of its equipment sales
business (Note 20). For U.S. GAAP purposes the effect upon operations is
reported in one line called Loss from Discontinued Operations after the
Loss Before Income Taxes line in the Statement of Operations. The total
Loss from Discontinued Operations was PLN 685 and PLN 673 for the years
ended December 31, 1996, and 1997, respectively. There was no gain or
loss on the sale of the operations.
25. SUBSEQUENT EVENTS
SHAREHOLDERS AGREEMENT
In connection with the exercise of the Telia Exchange Option and the Telia
Incentive Option, Parent Company and certain shareholders entered into a
shareholders' agreement (the "Shareholders' Agreement"), effective January 31,
1999, which sets forth the parties' agreement with respect to the governance of
Parent Company. Pursuant to the Shareholders' Agreement, (i) the Supervisory
Board of Parent Company was restructured to consist of ten members, of whom
Telia will have the right to appoint up to three members, and Dankner, Trefoil,
Shamrock and Goldman Sachs will have the right to appoint up to four members (in
each case subject to maintaining certain share ownership levels), with the
remaining three members elected by the Company's general assembly of
shareholders (but including one such member appointed by the holders of 1,571
shares of common stock with preferred voting rights of Parent Company) and (ii)
the Management Board of Parent Company was restructured to consist of four
members appointed by the Supervisory Board. Also, as part of the amendment to
the Parent Company's statute approved by the Parent Company's shareholders to
implement the underwriting set forth in the Shareholders' Agreement, the
three-for-one vote preferences formerly applicable to certain of Parent
Company's shares were eliminated.
The Shareholders' Agreement sets forth matters requiring approval of at
least one member of the Supervisory Board appointed by Telia and at least one
member of the Supervisory Board appointed by Dankner, Trefoil, Shamrock and
Goldman Sachs, again subject to these parties maintaining certain share
ownership thresholds. These matters include amendments of Parent Company's
statutes and capital increases, appointment and removal of members of the
Management Board and investments in other entities.
In connection with the exercise of the Telia Incentive Option and the Telia
Exchange Option, as of January 31, 1999 Parent Company terminated consulting
agreements with companies owned by two of its shareholders who are parties to
the Shareholders' Agreement (Note 4(d)). Also as of January 31, 1999, Parent
Company terminated certain shareholders' agreements with Telia previously
entered into in connection with investments by Telia in Netia Telekom and Netia
South.
F-40
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCEPT AS OTHERWISE STATED, THE FINANCIAL INFORMATION PRIOR TO JANUARY 1, 1997
IS EXPRESSED
IN TERMS OF THE CONSTANT PURCHASING POWER OF THE POLISH ZLOTY AT DECEMBER 31,
1996
(ALL AMOUNTS IN THOUSANDS)
CAPITAL INCREASE
Following the closing of the exercise of the Telia Exchange Option and Telia
Incentive Option, in March 1999 Dankner, Trefoil, Shamrock, Goldman Sachs, Telia
and the Parent Company agreed to cause the Parent Company to open a share
emission to raise an additional $50 million in share capital at $19.25 per
share, and Telia committed to subscribe for any and all such shares not
otherwise taken up and paid for by the Parent Company's other shareholders. This
capital increase was approved by the general assembly of the Parent Company's
shareholders on April 15, 1999. This capital increase will satisfy and discharge
the commitment of the Parent Company's shareholders referred to in Note 4,
(Other).
The Company has entered into agreements with three members of its Management
Board under which they will be entitled to options to purchase shares in the
Company. Such options would vest over a three year period, with the earliest
vesting effective April 1999.
TELIA EXCHANGE OPTION
In March 1999, Telia exercised the Telia Exchange Option and received
3,727,340 (not in thousands) common shares in Parent Company at USD 16.51 (PLN
64.90) per share (not in thousands).
TELIA INCENTIVE OPTION
Under the terms of the Telia Incentive Option, all options would vest upon
Telia's notification by Parent Company of its intention to consummate an initial
public offering of stock within 90 days. Parent Company gave such notice and in
March 1999 Telia exercised the Telia Incentive Option in its entirety. Telia
received 1,447,168 (not in thousands) common shares in Parent Company for an
aggregate purchase price of USD 23,895 (PLN 93,923).
GALOPUS
The exercise price of the Telia options resulted in an increase in common
shares of 5,174 at an average exercise price of USD 16.51 (PLN 64.90) not in
thousands, requiring additional compensation expense of PLN 5,598 relating to
the stock Appreciation Agreement with Galopus, to be recognized at the first
quarter of 1999.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF NETIA HOLDINGS S.A.
We have reviewed the accompanying condensed consolidated balance sheets of
Netia Holdings S.A. and its subsidiaries (the "Company") as at June 30, 1999,
and the related condensed consolidated statements of operations, of cash flows
and of changes in shareholders' equity for the six month periods ended June 30,
1999 and 1998 and the three month periods ended June 30, 1999 and 1998. These
condensed consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to issue a report on these financial
statements based on our review.
We conducted our review in accordance with the International Standard on
Auditing applicable to review engagements, which is substantially similar to
review standards generally accepted in the United States. This standard requires
that we plan and perform the review to obtain reasonable assurance as to whether
the financial statements are free of material misstatement. A review is limited
primarily to inquiries of company personnel and analytical procedures applied to
financial data and thus provides less assurance than an audit. We have not
performed an audit and, accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to
believe that the accompanying condensed consolidated financial statements are
not presented fairly, in all material respects, in accordance with International
Accounting Standards.
We previously audited in accordance with International Standards on
Auditing, the consolidated balance sheet of the Company as at December 31, 1998
and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the year then ended, presented herein
for comparative purposes. In our report dated March 3, 1999, except for Note 25
which is as of April 15, 1999, we expressed an unqualified opinion on these
consolidated financial statements. In our opinion, the information set forth in
the condensed consolidated balance sheet as of December 31, 1998 and the related
condensed consolidated statements of operations, of changes in shareholders'
equity and of cash flows for the year then ended, is fairly stated in all
material respects in relation to the consolidated financial statements from
which it has been derived.
International Accounting Standards vary in certain important respects from
accounting principles generally accepted in the United States. The application
of the latter would have affected the determination of consolidated net losses
for the six month periods ended June 30, 1999 and 1998 and the determination of
consolidated shareholders' equity/(deficit) as at June 30, 1999 and 1998, to the
extent summarized in Note 11 to the condensed consolidated financial statements.
PricewaterhouseCoopers Sp. z o.o.
Warsaw, Poland
August 24, 1999
F-42
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. DOLLARS--
CONVENIENCE
TRANSLATION POLISH ZLOTY
-------------- -----------------------
JUNE 30, JUNE 30, DECEMBER 31,
NOTE 1999 1999 1998
--------- -------------- --------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................... 215,449 846,649 298,790
Restricted investments....................................... 45,492 178,773 67,595
Accounts receivable
Trade, net................................................. 12,586 49,461 26,358
Government................................................. 7,757 30,484 42,376
Related parties............................................ 124 487 487
Other...................................................... 1,985 7,799 5,457
Inventories.................................................. 220 864 998
Prepaid expenses............................................. 2,932 11,521 1,003
-------------- --------- ------------
TOTAL CURRENT ASSETS......................................... 286,545 1,126,038 443,064
NON-CURRENT ASSETS
Restricted investments....................................... 35,711 140,334 67,595
Investments at cost.......................................... 3 13 75
Fixed assets, net............................................ 8 333,669 1,311,218 1,125,330
Investments in real estate................................... 1,222 4,805 6,964
Licenses..................................................... 87,780 325,300 330,736
Deferred financing cost, net................................. 22,114 86,901 69,314
Goodwill, net................................................ 68,138 267,763 39,597
-------------- --------- ------------
TOTAL NON-CURRENT ASSETS..................................... 543,637 2,136,334 1,639,611
-------------- --------- ------------
TOTAL ASSETS................................................. 830,182 3,262,372 2,082,675
-------------- --------- ------------
-------------- --------- ------------
LIABILITIES
CURRENT LIABILITIES
Current maturities of long-term debt......................... 11,513 45,242 --
Accounts payable and accruals
Trade...................................................... 44,855 176,268 250,749
Government................................................. 1,774 6,971 4,794
Related parties............................................ 3,661 14,386 14,380
Accruals and other......................................... 30,236 118,819 93,446
Deferred income.............................................. 223 875 799
-------------- --------- ------------
TOTAL CURRENT LIABILITIES.................................... 92,262 362,561 364,168
NON-CURRENT LIABILITIES
Refundable customer deposits................................. 366 1,516 1,519
Long-term debt............................................... 9 643,948 2,530,523 1,581,030
Long-term liabilities for licenses........................... 45,797 179,969 205,197
Deferred tax liability....................................... 2,793 10,974 10,974
Minority interest............................................ 60 234 6,250
-------------- --------- ------------
TOTAL NON-CURRENT LIABILITIES................................ 692,984 2,723,216 1,804,970
SHAREHOLDERS' EQUITY
Share capital (nominal par value of PLN 6 per share)......... 31,490 123,749 77,117
Share premium................................................ 171,353 673,367 188,571
Accumulated deficit.......................................... (157,907) (620,521) (352,151)
-------------- --------- ------------
TOTAL SHAREHOLDERS' EQUITY / (DEFICIT)....................... 44,936 176,595 (86,463)
-------------- --------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... 830,182 3,262,372 2,082,675
-------------- --------- ------------
-------------- --------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-43
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
US DOLLARS--CONVENIENCE
TRANSLATION POLISH ZLOTY
---------------------------- ----------------------------------------------------------
SIX-MONTH THREE-MONTH SIX-MONTH SIX-MONTH THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1999 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Telecommunications
revenue--service................. 21,966 11,841 86,319 37,076 46,535 21,213
Non-telecommunications revenue:
Service.......................... 1,335 688 5,247 3,992 2,703 2,117
Sales of equipment............... 1,331 678 5,229 7,801 2,664 3,875
------------- ------------- ------------- ------------- ------------- -------------
24,632 13,207 96,795 48,869 51,902 27,205
COSTS
Interconnection charges............ (6,209) (3,551) (24,395) (8,707) (13,956) (5,151)
Cost of equipment.................. (758) (442) (2,980) (4,671) (1,739) (1,915)
Depreciation of fixed assets and
amortization of licences......... (12,027) (6.691) (47,262) (14,765) (26,292) (7,721)
Amortization of goodwill........... (1,717) (1,450) (6,747) (2,070) (5,699) (1,035)
Other operating expenses........... (21,738) (12,904) (85,417) (54,308) (50,703) (30,326)
------------- ------------- ------------- ------------- ------------- -------------
LOSS FROM OPERATIONS................. (17,817) (11,831) (70,006) (35,652) (46,487) (18,943)
FINANCIAL EXPENSE, NET............... (50,082) (487) (196,807) (43,910) (1,912) (36,747)
OTHER LOSSES......................... (16) -- (62) -- -- --
------------- ------------- ------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAX............... (67,915) (12,318) (266,875) (79,562) (48,399) (55,690)
INCOME TAX BENEFIT/(CHARGE).......... (339) (1,097) (1,334) (7,017) (4,310) (24)
------------- ------------- ------------- ------------- ------------- -------------
LOSS FROM ORDINARY ACTIVITIES........ (68,254) (13,415) (268,209) (86,579) (52,709) (55,714)
MINORITY SHARE IN (INCOME)/ LOSSES OF
SUBSIDIARIES....................... (40) (40) (161) 21,286 (161) 13,536
------------- ------------- ------------- ------------- ------------- -------------
NET LOSS............................. (68,294) (13,455) (268,370) (65,293) (52,870) (42,178)
------------- ------------- ------------- ------------- ------------- -------------
LOSS PER SHARE (not in thousands).... (5.07) (0.86) (19.94) (6.28) (3.37) (4.06)
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-44
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
POLISH ZLOTY
--------------------------------------------------
TOTAL
SHARE SHARE ACCUMULATED SHAREHOLDERS'
NOTE CAPITAL PREMIUM DEFICIT EQUITY/(DEFICIT)
--------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AS AT DECEMBER 31, 1998................... 77,117 188,571 (352,151) (86,463)
Net loss........................................ -- -- (268,370) (268,370)
Issuance of shares net of related costs: Telia
exchange option............................... 4 22,364 219,543 -- 241,907
Issuance of shares net of related costs:
Telia incentive option...................... 4 8,683 85,240 -- 93,923
Issuance of shares net of related costs: Telia
Capital Increase.............................. 4 15,585 180,013 -- 195,598
Issuance of shares for Stock Option Plan........ 4 1,401 -- -- 1,401
Less: Treasury Stock............................ 4 (1,401) -- -- (1,401)
--------- ---------- ------------ -------------
BALANCE AS AT JUNE 30, 1999....................... 123,749 673,367 (620,521) 176,595
--------- ---------- ------------ -------------
--------- ---------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-45
<PAGE>
NETIA HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
US DOLLARS--
CONVENIENCE TRANSLATION POLISH ZLOTY
---------------------------- ----------------------------------------------------------
SIX-MONTH THREE-MONTH SIX-MONTH SIX-MONTH THREE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1999 1999 1998 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss........................... (68,294) (13,455) (268,370) (65,293) (52,870) (42,178)
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization of
goodwill and licences............ 13,744 8,141 54,009 16,835 31,991 8,756
Amortization of deferred financing
costs............................ 1,653 766 6,498 6,713 3,009 4,498
Amortization of discount on
notes............................ 12,883 6,534 50,627 40,308 25,678 20,710
Minority share in income / (losses)
of subsidiaries.................. 41 41 161 (21,286) 161 (13,536)
Provision for deferred income
tax.............................. -- 801 -- 6,386 3,146 (73)
Other losses....................... 16 -- 62 -- -- --
Foreign exchange (gains)/losses.... 24,805 (18,261) 97,458 (6,078) (71,790) 10,579
Changes in working capital......... 11,157 15,641 43,849 6,681 61,473 24,757
------------- ------------- ------------- ------------- ------------- -------------
NET CASH (USED IN) / PROVIDED BY
OPERATING ACTIVITIES............... (3,995) 208 (15,706) (15,734) 798 13,513
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets........... (85,380) (53,710) (335,518) (201,790) (211,064) (117,036)
Purchase of licences............... (947) (947) (3,723) (16,849) (3,723) (16,849)
Increase in investments at cost.... -- -- -- 11 -- 11
------------- ------------- ------------- ------------- ------------- -------------
NET CASH USED IN INVESTING
ACTIVITIES......................... (86,327) (54,657) (339,241) (218,628) (214,787) (133,874)
NET CASH PROVIDED BY FINANCING
ACTIVITIES:
Net proceeds from issuance of
shares........................... 73,673 49,773 289,521 -- 195,598 --
Capitalized deferred financing
costs............................ (5,683) (5,683) (22,331) (3,950) (22,331) (3,011)
Proceeds from long-term loans and
liabilities 154,250 154,250 606,158 2,612 606,158 2,612
Increase in related party
borrowings....................... (631) (631) (2,478) -- (2,478) --
------------- ------------- ------------- ------------- ------------- -------------
NET CASH PROVIDED BY/(USED IN)
FINANCING ACTIVITIES............... 221,609 197,709 870,870 (1,338) 776,947 (399)
EFFECTS OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS.......... 8,128 (3,808) 31,936 (9,283) (14,954) 6,245
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................ 139,415 139,452 547,859 (244,983) 548,004 (114,515)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 76,034 75,997 298,790 922,292 298,645 791,824
------------- ------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... 215,449 215,449 846,649 677,309 846,649 677,309
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
CHANGES IN WORKING CAPITAL
COMPONENTS:
Trade receivables.................. (5,879) (4,474) (23,103) (7,158) (17,580) (4,173)
Government receivables............. 3,026 426 11,892 6,095 1,676 3,305
Receivables from related parties... -- -- -- 1,786 -- 576
Other receivables.................. (596) 607 (2,342) (1,613) 2,384 (1,613)
Inventories........................ 34 2 134 2,232 9 1,369
Prepaid expenses................... (2,677) (1,579) (10,518) (928) (6,204) 1,061
Trade creditors.................... 12,888 22,443 50,646 (10,360) 88,194 (6,768)
Due to government.................. 554 657 2,177 2,431 2,582 (260)
Payables to related parties........ 632 531 2,484 2,771 2,088 10,973
Accruals and other payables........ 3,157 (2,985) 12,406 11,459 (11,729) 20,236
Refundable customer deposits....... (1) (1) (3) 96 (3) (3)
Deferred income.................... 19 14 76 (130) 56 54
------------- ------------- ------------- ------------- ------------- -------------
11,157 15,641 43,849 6,681 61,473 24,757
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
F-46
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS)
1. THE COMPANY
Netia Holdings S.A. (the "Parent Company"), formerly known as R. P. Telekom
S.A., and its subsidiaries (collectively the "Company") was formed in 1990 and
is a privately owned joint stock company established under the laws of Poland.
The Parent Company holds controlling interests in subsidiaries through which it
is involved in the design, construction and operation of modern digital
telecommunication networks. The Company is also engaged in installation and
supply of specialized mobile radio services (public trunking) in Poland through
its 58.2% owned subsidiary Uni-Net.
As at June 30, 1999, The Company's subsidiaries had obtained twenty three
licences granted by the Ministry of Communications of Poland for the provision
of local telephone services for 15 year periods. The Company also had obtained,
through a joint venture, the benefit of a licence to provide internet and data
transmission service throughout the entire territory of Poland. The Company's
subsidiaries are required to build and operate telephone networks for the
duration of each licence with a specified installed capacity level for each
licence. As at June 30, 1999, the Company's main activity is the construction
and operation of networks to provide telephone services.
2. ACCOUNTING POLICIES
These interim condensed consolidated financial statements are prepared in
accordance with IAS 34 Interim Financial Reporting. The accounting policies used
in the preparation of the interim financial statements are consistent with those
used in the annual financial statements for the year ended December 31, 1998.
These consolidated interim financial statements should be read in conjunction
with the 1998 financial statements.
Costs that arise unevenly during the financial year are anticipated or
deferred in the interim financial statements only if it would be also
appropriate to anticipate or defer such costs at the end of the financial year.
Certain prior year and prior period amounts have been reclassified to
conform with the current period presentation.
The U.S. Dollar amounts shown in the accompanying financial statements have
been translated from Polish Zloty only as a matter of arithmetic computation at
the Polish Zloty exchange rate of PLN 3.9297 = USD 1.00, the average rate
announced by the National Bank of Poland at June 30, 1999. These amounts have
not been subject to review or audit procedures and are included for the
convenience of the reader only. Such translation should not be construed as a
representation that the Polish Zloty amounts have been or could be converted
into U.S. Dollars at this or any other rate.
F-47
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
3. EXCHANGE RATE AND CONSUMER PRICE INDEX CHANGES
The following are the changes in consumer price index and in the exchange
rate of U.S. Dollar at the end of the reported periods.
<TABLE>
<CAPTION>
EXCHANGE RATE
CONSUMER OF THE U.S.
PRICE INDEX DOLLAR
------------- -----------------
<S> <C> <C>
Three month period ended March 31,1998............................................. 5.48% (1.98)%
Six month period ended June 30, 1998............................................... 7.07% (1.00 )%
Twelve month period ended December 31,1998......................................... 8.46% (0.39 )%
Three month period ended March 31,1999............................................. 3.33% 14.44%
Six month period ended June 30, 1999............................................... 4.89% 12.15%
</TABLE>
4. RELATED PARTY TRANSACTIONS
TELIA OPTIONS
During March 1999, Telia AB exchanged its shares in Netia Telekom and Netia
South for 3,727,340 shares (not in thousands) of the Company's shares with a par
value of PLN 22,364 (the "Telia Exchange Option"). The fair value of the shares
received for this transaction was PLN 241,907. The Company has recorded this
amount as goodwill and will depreciate this goodwill over a period of thirteen
years, which is the unutilised period for which Netia South subsidiaries have
received telecommunication licenses. Additionally, Telia AB exercised its option
to acquire for cash an additional 1,447,168 (not in thousands) of the Company's
shares with a par value of PLN 8,683 for PLN 93,923 (the "Telia Incentive
Option"), net of related costs.
TELIA CAPITAL INCREASE (NOT IN THOUSANDS)
In May 1999, the Company issued 2,597,402 shares at the price of PLN 76
(equivalent of USD 19.25) per share. The issue was registered on June 26, 1999.
Telia AB purchased 2,575,847 shares from this issue.
STOCK OPTION PLAN (NOT IN THOUSANDS)
The Stock Option Plan was set up in order to provide the Management,
Supervisory Board Members and selected employees of the Company with options to
purchase ordinary shares in the Company. The Company has entered into letter
agreements with Avraham Hochman, Kjell-Ove Blom, George Makowski and Maxymilian
Bylicki under which the Company agreed to grant these officers options to
purchase shares representing 0.2%, 0.2%, 0.15% and 0.15%, respectively, of
Netia's common stock that were issued and outstanding immediately prior to the
Company's initial public offering at exercise prices ranging from between $8.40
and 75% of the price per share in the initial public offering. The options, when
granted, will vest in three equal installments with the first vesting of these
options taking place in April 1999.
In addition, the Company entered into an agreement with a company controlled
by its former Chief Financial Officer, pursuant to which the Company agreed to
grant such company options to purchase 0.075% of the common stock issued and
outstanding immediately prior to the initial public offering at an exercise
price equal to $15.75 per share. The options vested upon completion of the
Company's IPO (see Note 12).
F-48
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
The above options are generally exercisable up to four years. As of June 30,
1999, the total number of vested options was 33,728 and none had been exercised.
Under the Plan, ordinary shares are issued to the Trustee of the Plan, Netia
Holdings S.A. 1999 Share Incentive Plan Trust, a wholly owned subsidiary
undertaking which holds the ordinary shares until the Options are exercised.
In June 1999, the Company issued 233,488 shares at par. The shares were
subscribed for by the Trust using funds advanced to the Trust by the Company as
a bonus to the employee beneficiaries of the Trust. The issue was registered on
June 26, 1999. These shares will be used to meet the Company's obligations under
the above Options.
GALOPUS (NOT IN THOUSANDS)
As a result of the equity issues during the period, the Company has
recognized additional compensation expense of PLN 12,866,000 relating to the
Stock Appreciation Agreement with Galopus, an entity wholly owned by the
Company's President.
The Company has entered into a new Stock Incentive Option Agreement with
Galopus. On the basis of this agreement, upon the completion of the Company's
initial public offering, Galopus has the right to apply 25% to 50% of the
cash-out value of its existing phantom shares to subscribe for shares in the
Company at the price of USD 16.3625 per share. Galopus will also be granted
additional options to purchase 100,000 shares on each of August 15, 1999, August
15, 2000 and August 15, 2001 at exercise prices of USD 17.33, USD 19.06 and USD
27.72 respectively.
Galopus is also entitled to receive an annual consulting fee of USD 400,000
(PLN 1,572,000) and USD 200,000 (PLN 786,000) bonus if certain financial
conditions are met by the Company. The Company has recorded PLN 594,000 in the
period in respect of consulting fees
5. COMMITMENTS AND CONTINGENCIES
As at June 30, 1999 and December 31, 1998 certain subsidiaries of the
Company had commitments of USD 47,730 (PLN 187,564) and USD 31,322 (PLN
123,089), respectively, primarily with the Alcatel consortium of companies,
Ericsson, Lucent Technologies and Tadiran to construct telephone lines and
additional network related assets in several regions of Poland. These
commitments call for the completion of the construction over the next year.
The Company is required by the terms of its licenses to meet annual
milestones, as measured at the end of the each year, in terms of connected
capacity, subject to demand in each of the respective areas. The Company had not
met these milestones for all 23 of its licenses as at December 31, 1998.
Effective December 31, 1997, the Ministry of Communications confirmed to the
Company that it did not intend to take any action as a consequence of the
failure to meet the annual milestones through December 31, 1997. Management does
not believe that the licenses will be revoked. However, in the event that they
are revoked, the effect on the Company, including the value of related network
assets and its ability to continue its operation, would be significant.
In September 1997, Netia Telekom and Netia South entered into Operational
Support and Supervision Agreements (the "OSSAs") with Telia. The OSSAs are for a
term of three years (subject to early termination under certain circumstances).
Under the OSSAs, Telia will provide personnel and services
F-49
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
upon the request of the Chief Executive Officer of Netia Telekom or Netia South,
as the case may be. Payment for such personnel and services will be
reimbursement of direct costs plus 15.0%.
The Company received a letter dated January 8, 1999 with a claim for USD
10,000. The directors are of the opinion, having taken appropriate legal advice,
that this claim is still at too early a stage to determine whether any liability
in respect of this issue is likely to arise. No liability has been recorded for
this claim, as any liability is not probable and any amount is not reasonably
estimateable.
The Company is defending a legal claim brought in France. The amount of the
claim is USD 4,100 along with damages of USD 350. The directors are of the
opinion, having taken appropriate legal advice, that this claim is still at too
early a stage to determine whether any liability in respect of this issue is
likely to arise. No liability has been recorded for this claim, as any liability
is not probable and any amount is not reasonably estimateable.
6. SEGMENTAL REPORTING
The following tables contain segment information for the Company's
telecommunications business and non-telecommunication business (primarily radio
communications services and sales of equipment through Uni-Net).
<TABLE>
<CAPTION>
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
PLN PLN
Revenue
Telecommunication................................................................ 86,319 37,076
Non-telecommunication:
Service........................................................................ 5,247 3,992
Sale of equipment.............................................................. 5,229 7,801
------------ ------------
96,795 48,869
Income/(Loss) from operations
Telecommunication................................................................ (71,666) (36,444)
Non-telecommunication............................................................ 1,660 792
------------ ------------
(70,006) (35,652)
</TABLE>
All operations and revenues are derived and conducted within Poland.
7. EARNINGS PER SHARE
BASIC
Losses per share have been calculated based on net losses for each period
divided by the weighted average number of shares in issue.
F-50
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
The weighted average number of shares was: (not in thousands)
<TABLE>
<S> <C>
Three month period ended 30 June 1998:.......................................... 10,391,371
Six month period ended 30 June 1998:............................................ 10,391,371
Twelve month period ended 31 December 1998:..................................... 10,391,371
Three month period ended 30 June 1999:.......................................... 15,690,314
Six month period ended 30 June 1999:............................................ 13,455,719
</TABLE>
DILUTED
No diluted losses per share were computed during the six month period ended
June 30, 1999 and 1998 or the year ended December 31, 1998 as there were no
dilutive instruments and the effect of the Telia Incentive Option, Telia
Exchange Option, Stock Option Plan and Options issued to Galopus were
anti-dilutive during this periods.
8. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS AT ADJUSTED COST 1998 ADDITIONS TRANSFERS DISPOSALS 1999
- --------------------------------------------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
PLN PLN PLN PLN PLN
Buildings.................................... 47,726 -- 332 -- 48,058
Land......................................... 612 -- -- -- 612
Long term ground lease....................... 1,350 650 -- -- 2,000
Transmission network......................... 387,496 -- 132,874 -- 520,370
Switching system............................. 271,417 -- 146,136 -- 417,553
Base stations (Uni-Net)...................... 10,291 -- 1,935 -- 12,226
Machinery and equipment...................... 11,273 1,475 -- (12) 12,736
Office furniture and equipment............... 23,650 176 -- -- 23,826
Vehicles..................................... 13,521 521 -- (663) 13,379
Purchased software........................... 10,517 3,081 -- -- 13,598
------------ ----------- ----------- --- -----------
777,853 5,903 281,277 (675) 1,064,358
Network under construction................... 414,611 218,637 (281,277) -- 351,971
------------ ----------- ----------- --- -----------
1,192,464 224,540 -- (675) 1,416,329
------------ ----------- ----------- --- -----------
------------ ----------- ----------- --- -----------
</TABLE>
F-51
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DEPRECIATION JUNE 30,
ACCUMULATED DEPRECIATION 1998 EXPENSE DISPOSALS 1999
- ---------------------------------------------------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
PLN PLN PLN PLN
Buildings................................................. 1,880 656 -- 2,536
Land...................................................... -- -- -- --
Long term ground lease.................................... 80 16 -- 96
Transmission network...................................... 15,518 7,999 -- 23,517
Switching system.......................................... 22,866 14,809 -- 37,675
Base stations (Uni-Net)................................... 6,343 641 -- 6,984
Machinery and equipment................................... 2,891 735 (1) 3,625
Office furniture and equipment............................ 8,581 8,917 -- 17,498
Vehicles.................................................. 4,483 1,511 (125) 5,869
Purchased software........................................ 4,492 2,819 -- 7,311
------ ------ --- -----------
67,134 38,103 (126) 105,111
------ ------ --- -----------
------ ------ --- -----------
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
NET BOOK VALUE 1999 1998
- -------------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
PLN PLN
Buildings............................................................................. 45,522 45,846
Land.................................................................................. 612 612
Long term ground lease................................................................ 1,904 1,270
Transmission network.................................................................. 496,853 371,978
Switching system...................................................................... 379,878 248,551
Base stations (Uni-Net)............................................................... 5,242 3,948
Machinery and equipment............................................................... 9,111 8,382
Office furniture and equipment........................................................ 6,328 15,069
Vehicles.............................................................................. 7,510 9,038
Purchased software.................................................................... 6,287 6,025
----------- ------------
959,247 710,719
Network under construction............................................................ 351,971 414,611
----------- ------------
1,311,218 1,125,330
----------- ------------
----------- ------------
</TABLE>
Depreciation of fixed assets and amortization of licenses in the Statement
of Operations includes amortization of licenses of PLN 9,159 for the six month
period ended June 30,1999.
F-52
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
9. LONG TERM DEBT
<TABLE>
<CAPTION>
INTEREST JUNE 30, DECEMBER 31,
RATE 1999 1998
----------- ----------- ------------
<S> <C> <C> <C>
PLN PLN
Motorola, net of current maturity--USD loan............................. 5.800% 3,066 3,014
USD Chase Construction Loan............................................. 8.300% -- 28,032
DM Chase Construction Loan.............................................. 6.130% -- 13,595
1997 Senior Notes--USD.................................................. 10.250% 785,940 700,800
1997 Senior Dollar Discount Notes....................................... 11.250% 592,018 499,142
1997 Senior DM Discount Notes........................................... 11.000% 336,291 320,828
1999 Senior Notes--USD.................................................. 13.125% 392,970 --
1999 Senior Notes--Euro................................................. 13.500% 405,930 --
Alcatel loan--USD....................................................... 10.000% 14,308 15,619
----------- ------------
2,530,523 1,581,030
----------- ------------
----------- ------------
</TABLE>
The Chase Construction Loans have been reclassified to current maturities of
long-term debt during the six month period ended June 30, 1999. The outstanding
amount of this loan as at June 30,1999 is PLN 44,928. Also included in the
current maturities of long-term debt is a payable to Motorola of PLN 314. The
other changes in long term debt during the six month period ended June 30, 1999
principally include the addition of the 1999 Senior Notes and foreign currency
translation adjustments.
10. FINANCIAL EXPENSES
<TABLE>
<CAPTION>
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
1999 1998
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
PLN PLN
Interest income.................................................................... 14,217 20,895
Foreign exchange gains............................................................. 75,267 45,729
Interest expense................................................................... (97,737) (88,176)
Foreign exchange losses............................................................ (182,056) (12,946)
Guarantee costs.................................................................... -- (2,699)
Amortization of deferred financing costs........................................... (6,498) (6,713)
------------ ------------
(196,807) (43,910)
------------ ------------
------------ ------------
</TABLE>
F-53
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
11. RECONCILIATION TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
<TABLE>
<CAPTION>
SIX-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
PLN PLN
Net loss per IAS................................................................... (268,370) (65,293)
Foreign exchange losses (1,2)...................................................... (5,838) 2,833
Interest expense (1,2)............................................................. 6,733 12,913
Depreciation of US GAAP fixed assets
basis difference (1,3)............................................................. (1,335) --
Other operating expenses (3)....................................................... (3,518) (3,518)
Amortization of goodwill (4)....................................................... 1,056 --
Stock Option Plan (5).............................................................. (67) --
Deferred taxes (6) (1,301) (5,354)
Minority interest (6).............................................................. -- (2,744)
------------ ------------
Net loss per US GAAP............................................................... (272,640) (61,163)
------------ ------------
------------ ------------
Loss per share per US GAAP (not in thousands)...................................... (20.26) (5.89)
------------ ------------
------------ ------------
</TABLE>
F-54
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1999
-----------
<S> <C>
PLN
Shareholders' equity / (deficit) per IAS.......................................................... 176,595
Purchase of EBRD interest in Netia (4)............................................................ (14,756)
Increase in equity related to Incentive Stock Option (3).......................................... 24,626
Fixed assets, including depreciation (1, 3)....................................................... 28,577
Financial expense (2, 4).......................................................................... (30,476)
Deferred taxes (6)................................................................................ (4,196)
Amortization of goodwill (4)...................................................................... 3,168
Other operating expenses (3)...................................................................... (12,313)
Stock Option Plan (5)............................................................................. (67)
Minority interest (6)............................................................................. (799)
-----------
Shareholders' equity per US GAAP.................................................................. 170,359
-----------
-----------
Changes in Shareholders' Equity on a US GAAP basis Shareholders' equity/(deficit) at beginning of
year or period.................................................................................. (95,465)
Net loss........................................................................................ (272,640)
Issuance of shares, net of related costs........................................................ 531,428
Increase in equity related to Incentive Stock Option (3)........................................ 7,036
-----------
Shareholders' equity at end of period........................................................... 170,359
-----------
-----------
</TABLE>
The following are descriptions of U.S. GAAP reconciling items:
(1) Under IAS, the Company capitalizes foreign exchange losses and interest
expense related to borrowings used to fund construction in progress. Under
U.S. GAAP, foreign exchange gains (losses) 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 U.S. GAAP, which is
limited to the total amount of interest incurred by the Company from all
sources.
(2) Under IAS, the long term liabilities associated with obtaining the new
licenses from the Polish government is considered to be interest free. For
the U.S. GAAP purposes, interest expense should be imputed based on the
Company's effective borrowing rate. The result is that the liability and the
licenses should be recorded at the discounted present value of the
liability, interest expense is recorded at an effective rate of 11%, and
foreign exchange differences are computed on the present value of the
liability, rather than the face value. No interest was imputed on the
liability for licenses obtained from Optimus as it would not have a material
effect on profit and loss.
(3) Under IAS, the Incentive Stock Option issued in connection with the OSSA's
entered into with Telia is recognized when 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. For
each year and period presented 50% has been recognized as other operating
expenses and 50% has been capitalized as part of cost of the network under
construction.
(4) Under IAS the Company recorded goodwill relating to the purchase of shares
in Netia Telekom owned by the European Bank of Reconstruction and
Development. For U.S. GAAP purposes this was considered a capital
transaction, and therefore no amortization charge was recorded.
F-55
<PAGE>
NETIA HOLDINGS S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS IN THOUSANDS)
(5) Compensation expense as prescribed by U.S. GAAP in connection with the stock
option plan (using the intrinsic value method) in accordance with APB
opinion No. 25, "Accounting for Stock Issued to Employees". Under IAS no
compensation expense is recognized in connection with theses stock options.
In accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), the Company has
estimated the weighted-average fair value of options granted during the
six-month period ended June 30, 1999 to be USD 12.05 (PLN 47.35) per share
(not in thousands). This fair value was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: (1)
expected volatility of 50 per cent; (2) risk-free interest rate of 4.75 per
cent; (3) no expected dividends and (4) expected life of approximately 3.1
years. Had compensation expense been recognized based on the fair value at
the date of grant in accordance with SFAS No. 123, the U.S. GAAP net loss
for the six-month period ended June 30, 1999 would have been PLN 272,851 and
the basic net loss per common share for the six-month period ended June 30,
1999 would have been PLN 20.28 (not in thousands).
(6) This entry is the tax effect of the differences in accounting summarized in
the reconciliations and the effect of the minority interests in Netia
Telekom and Netia South.
12. SUBSEQUENT EVENTS
WARBURG PINCUS EQUITY PURCHASE
In July 1999, the Company issued 2,597,403 shares at PLN equivalent of USD
19.25 per share which have been purchased by a group of investment funds
sponsored by E.M. Warburg Pincus. The issue was paid for on July 1, 1999 and was
registered with an appropriate court on July 16, 1999.
INITIAL PUBLIC OFFERING AND NASDAQ LISTING
In August 1999, the Company issued 5,500,000 American Depositary Shares
representing 5,500,000 common shares at USD 22 per share in a registered public
offering. The proceeds of the offering are being hold in escrow pending
registration of the related capital increase by the registration court. Trading
in the ADSs on the Nasdaq commenced, on a "when-issued" basis on July 29, 1999.
INTERNETIA
Internetia Sp. z o.o. (previously Telekom Odra Sp. z o.o.), the Company's
subsidiary, has signed an Intention Letter with Top-Net Sp. z o.o., an Internet
Provider. The Purchase Agreement was not finalized at the date these Condensed
Consolidated Financial Statements were approved.
F-56
<PAGE>
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October 18, 1999
[LOGO]
13 1/2% SERIES B SENIOR NOTES DUE 2009
AND
13 1/8% SERIES B SENIOR NOTES DUE 2009
OF
NETIA HOLDINGS II B.V.
FULLY, UNCONDITIONALLY AND IRREVOCABLY GUARANTEED BY
NETIA HOLDINGS S.A.
-------------
PROSPECTUS
-------------
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WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF THE COMPANY
HAVE NOT CHANGED SINCE THE DATE HEREOF.
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