NETIA S.A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004

Transcription

1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2 REPORT OF INDEPENDENT ACCOUNTANTS To the Supervisory Board and Shareholders of Netia S.A. We have reviewed the accompanying condensed consolidated balance sheet of Netia S.A. and its subsidiaries (the Company ) as at, and the related condensed consolidated statements of operations, changes in shareholders equity and cash flows for the nine-month. These condensed consolidated financial statements are the responsibility of the Company s management. Our responsibility is to issue a report on these condensed consolidated financial statements based on our review. We conducted our review in accordance with the International Standard on Auditing applicable to review engagements. 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 have not been properly prepared, in all material respects, in accordance with International Accounting Standard 34 Interim Financial Reporting. Without qualifying our review opinion, we draw attention to Note 7 to the condensed consolidated financial statements of the Company, regarding the acquisition of Regionalne Sieci Telekomunikacyjne El-Net S.A. on January 29, and the related fair value accounting thereof. The convenience translations are disclosed as part of the condensed consolidated financial statements. The convenience translations have been presented in US dollars, as a matter of arithmetic computation using the official rate of the National Bank of Poland at of PLN to US Dollar We have not audited these translations and accordingly we do not express an opinion thereon. The US Dollar amounts presented in these condensed consolidated financial statements should not be construed as a representation that the PLN amounts have been or could have been converted to US dollars at this rate or at any other rate. PricewaterhouseCoopers Sp. z o.o. Warsaw, Poland November 8,

3 CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS Note (PLN) (Audited) (PLN) Current assets Cash and cash equivalents , ,001 Accounts receivable... Trade, net of allowance for doubtful accounts of PLN 65,345 and PLN 55, ,262 95,023 Tax receivables... 1,006 3,271 Other... 4,366 2,249 Inventories... 5, Prepaid expenses... 20,958 10,042 Total current assets , ,323 Available for sale investments Fixed assets, net ,815,477 1,583,277 Intangible assets... Licenses, net , ,732 Computer software, net... 81,010 91,429 Negative goodwill... 7 (80,819) (28,799) Other long term assets... 3,067 1,606 Total non-current assets... 2,046,851 1,900,254 Total assets... 2,453,024 2,239,577 Wojciech Madalski President of the Company Kent Holding Chief Financial Officer Warsaw, Poland November 8, The accompanying notes are an integral part of these condensed consolidated financial statements. 1

4 CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS Convenience Translation (USD) (USD) Current assets Cash and cash equivalents... 72,274 64,101 Accounts receivable... Trade, net of allowance for doubtful accounts of USD 18,371 and USD 15, ,967 26,715 Tax receivables Other... 1, Inventories... 1, Prepaid expenses... 5,892 2,823 Total current assets ,192 95,398 Available for sale investments Fixed assets, net , ,128 Intangible assets... Licenses, net... 64,119 71,054 Computer software, net... 22,775 25,705 Negative goodwill... (22,722) (8,097) Other long term assets Total non-current assets , ,245 Total assets , ,643 The accompanying notes are an integral part of these condensed consolidated financial statements. 2

5 CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS EQUITY Note (PLN) (Audited) (PLN) Current liabilities Short term liabilities for licenses ,164 4,759 Accounts payable and accruals... Trade... 48,556 64,751 Tax payables... 22,895 4,325 Accruals and other... 70,414 69,731 Deferred income... 10,130 9,751 Total current liabilities , ,317 Long term liabilities for licenses ,692 4,361 Long term installment obligations... 7,312 5,707 Other long term liabilities Total non-current liabilities... 64,504 10,576 Total liabilities , ,893 Minority interest... 4,909 4,328 Shareholders equity 10 Share capital (nominal par value of PLN 1 per share) , ,487 Share premium... 1,598,012 1,572,903 Other supplementary capital ,565 - Treasury shares... (2,812) (2,812) Other reserves ,816,325 Retained earnings / (Accumulated deficit)... 66,631 (3,659,547) Total shareholders equity... 2,227,452 2,071,356 Total liabilities and shareholders equity... 2,453,024 2,239,577 The accompanying notes are an integral part of these condensed consolidated financial statements. 3

6 CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS EQUITY Convenience Translation (USD) (USD) Current liabilities Short term liabilities for licenses... 1,171 1,338 Accounts payable and accruals... Trade... 13,650 18,205 Tax payables... 6,436 1,216 Accruals and other... 19,795 19,605 Deferred income... 2,848 2,741 Total current liabilities... 43,900 43,105 Long term liabilities for licenses... 15,939 1,226 Long term installment obligations... 2,056 1,604 Other long term liabilities Total non-current liabilities... 18,136 2,973 Total liabilities... 62,036 46,078 Minority interest... 1,380 1,217 Shareholders equity Share capital (nominal par value of PLN 1 per share) ,790 96,850 Share premium , ,212 Other supplementary capital... 57,231 - Treasury shares... (791) (791) Other reserves ,072,936 Retained earnings / (Accumulated deficit)... 18,733 (1,028,859) Total shareholders equity , ,348 Total liabilities and shareholders equity , ,643 The accompanying notes are an integral part of these condensed consolidated financial statements. 4

7 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited Year ended Note (Audited) (PLN) (PLN) (PLN) (PLN) (PLN) Revenue Telecommunication services revenue Direct voice services , , , , ,453 Installation fees Monthly fees ,160 36,541 93,007 31, ,835 Calling charges ,088 97, ,468 88, ,199 Local calls ,557 31,914 91,212 28, ,933 Domestic long distance calls... 61,758 20,361 55,399 18,487 73,947 International long distance calls... 27,111 8,844 22,232 7,735 30,384 Fixed-to-mobile... 90,949 31,345 88,428 28, ,950 Other... 18,713 5,441 13,197 4,417 16,985 Payphones... 3,116 1,059 2, ,572 Indirect voice... 77,999 27,352 47,710 18,430 66,728 Data... 65,052 22,828 42,590 17,546 61,495 Interconnection revenue... 43,685 23,181 3,933 1,062 5,108 Wholesale services... 31,037 11,745 30,607 10,253 41,409 Intelligent network services... 22,433 6,630 9,657 5,313 15,891 Other telecommunication revenue... 5,998 1,771 6,831 2,135 9, , , , , ,528 Other revenue... 7,936 2,554 8,466 3,407 11,587 Total revenue , , , , ,115 Other operating income... 2,842 (224) 6, ,394 Costs Interconnection charges... (119,357) (43,145) (92,217) (29,252) (122,045) Salaries and benefits... (87,718) (29,151) (84,772) (31,958) (114,943) Social security costs... (14,942) (3,379) (12,703) (3,907) (18,097) Professional services... (10,006) (3,211) (26,800) (5,971) (32,158) Insurance... (4,908) (1,551) (4,229) (2,034) (5,897) Taxes and fees... (32,485) (11,061) (27,759) (8,928) (37,422) Advertising and promotion... (16,008) (3,912) (18,844) (5,819) (28,281) Cost of rented lines and network maintenance... (52,155) (18,224) (38,771) (14,751) (55,026) Depreciation of fixed assets... (137,380) (46,949) (150,451) (52,444) (190,340) Amortization of negative goodwill... 17,745 5,039 22,513 3,132 25,828 Amortization of other intangible assets... (37,824) (12,444) (65,843) (23,382) (78,108) Impairment provision for non-current assets (799,695) (799,695) (799,695) Other operating expenses (87,781) (34,170) (68,886) (22,935) (93,423) Profit / (Loss) from operations... 85,981 29,331 (845,720) (818,810) (840,098) Effect of cancellation of license fee obligations ,940 Financial income / (expense), net ,408 15,718 (74,543) (5,566) (65,621) Profit / (Loss) before income tax ,389 45,049 (920,263) (824,376) (728,779) Income tax benefit / (charge)... 9 (390) (147) 371 (90) 254 Profit / (Loss) before minority interest ,999 44,902 (919,892) (824,466) (728,525) Minority share in profits of subsidiaries... (581) (215) (371) (172) (554) Net Profit / (Loss) ,418 44,687 (920,263) (824,638) (729,079) Basic Earnings per share (not in thousands) (2.68) (2.40) (2.12) Diluted Earnings per share (not in thousands) N/a N/a N/a The accompanying notes are an integral part of these condensed consolidated financial statements. 5

8 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Convenience translation (Unaudited Year ended (USD) (USD) (USD) (USD) (USD) Revenue Telecommunication services revenue Direct voice services ,781 38, ,052 33, ,606 Installation fees Monthly fees... 30, ,148 8,814 35,097 Calling charges... 84,368 27,525 76,040 24, ,267 Local calls... 28,552 8,972 25,644 8,106 34,843 Domestic long distance calls... 17,363 5,724 15,575 5,198 20,790 International long distance calls... 7,622 2,486 6,250 2,175 8,542 Fixed-to-mobile... 25,570 8,813 24,861 8,150 32,317 Other... 5,261 1,530 3,710 1,242 4,775 Payphones ,004 Indirect voice... 21,929 7,690 13,413 5,181 18,760 Data... 18,289 6,418 11,974 4,933 17,289 Interconnection revenue... 12,282 6,517 1, ,436 Wholesale services... 8,726 3,302 8,605 2,883 11,642 Intelligent network services... 6,307 1,864 2,715 1,494 4,468 Other telecommunication revenue... 1, , , ,000 64, ,786 49, ,856 Other revenue... 2, , ,258 Total revenue 187,231 65, ,166 50, ,114 Other operating income (63) 1, ,360 Costs Interconnection charges... (33,556) (12,130) (25,926) (8,224) (34,312) Salaries and benefits... (24,661) (8,196) (23,833) (8,985) (32,315) Social security costs... (4,201) (950) (3,571) (1,098) (5,088) Professional services... (2,813) (903) (7,534) (1,678) (9,041) Insurance... (1,380) (436) (1,189) (572) (1,658) Taxes and fees... (9,133) (3,110) (7,804) (2,510) (10,521) Advertising and promotion... (4,501) (1,100) (5,298) (1,636) (7,951) Cost of rented lines and network maintenance... (14,663) (5,124) (10,900) (4,147) (15,470) Depreciation of fixed assets... (38,624) (13,199) (42,298) (14,744) (53,513) Amortization of negative goodwill... 4,989 1,417 6, ,261 Amortization of other intangible assets... (10,634) (3,499) (18,511) (6,574) (21,960) Impairment provision for non-current assets (224,829) (224,829) (224,829) Other operating expenses... (24,679) (9,607) (19,369) (6,449) (26,265) Profit / (Loss) from operations... 24,174 8,244 (237,769) (230,203) (236,188) Effect of cancellation of license fee obligations ,746 Financial income / (expense), net... 7, (20,957) (1,565) (18,449) Profit / (Loss) before income tax... 32,161 12,663 (258,726) (231,768) (204,891) Income tax benefit / (charge)... (110) (41) 104 (25) 71 Profit / (Loss) before minority interest... 32,051 12,622 (258,622) (231,793) (204,820) Minority share in profits of subsidiaries... (163) (60) (104) (48) (156) Net Profit / (Loss)... 31,888 12,562 (258,726) (231,841) (204,976) Basic Earnings per share (not in thousands) (0.75) (0.67) (0.60) Diluted Earnings per share (not in thousands) N/a N/a N/a The accompanying notes are an integral part of these condensed consolidated financial statements. 6

9 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Share capital Share premium Other supplementary capital Treasury shares Other reserves Retained earnings / (Accumulat ed deficit) Total Shareholders equity (PLN) (PLN) (PLN) (PLN) (PLN) (PLN) (PLN) Balance as at (Audited)...344,487 1,572,903 - (2,812) 3,816,325 (3,659,547) 2,071,356 Issuance of series J shares, net of related costs... 16,798 25, ,907 Issuance of series K shares, net of related costs Transfers (see Note 10) (3,816,325) 3,816,325 - Profit appropriation pursuant to resolution of shareholders meeting of Netia S.A. (see Note 10) , (203,565) - Net profit , ,418 Balance as at...362,056 1,598, ,565 (2,812) - 66,631 2,227,452 Share capital Share premium Treasury shares Other reserves Accumulated deficit Total Shareholders equity (PLN) (PLN) (PLN) (PLN) (PLN) (PLN) Balance as at 2002 (Audited) ,285 1,713,865 (2,812) 3,819,712 (2,931,759) 2,802,291 Registration of series H shares ,626 25,831 - (338,457) - - Transfer of shares issuance costs up to the amount of share premium... - (25,831) - 25, Decrease of nominal value of shares... (171,866) 171, Issuance of series J shares, net of related costs Coverage of losses from previous years in individual entities... - (312,828) - 309,239 3,589 - Effect of full consolidation of certain subsidiaries (2,297) (2,297) Net loss (920,263) (920,263) Balance as at ,382 1,572,903 (2,812) 3,816,325 (3,850,730) 1,880,068 The accompanying notes are an integral part of these condensed consolidated financial statements. 7

10 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Note September 30, September 30, Year ended (Audited) (PLN) (PLN) (PLN) (PLN) (PLN) Cash flows from operating activities: Net profit / (loss) ,418 44,687 (920,263) (824,638) (729,079) Adjustments to reconcile net profit / (loss) to net cash provided by operating activities: Depreciation of fixed assets and amortization of licenses and other intangible assets ,204 59, ,294 75, ,448 Amortization of negative goodwill... (17,745) (5,039) (22,513) (3,132) (25,828) Reversal of amortization and financial expenses related to cancellation of license fee obligations (176,940) Amortization of notes issuance costs ,265-1,265 Amortization of discount on installment obligations Write-off of notes issuance costs ,161-40,211 Interest expense accrued on license liabilities... 2,118 1,439 6,685 2,338 8,985 Deferral of license fee obligations... (13,363) (13,363) Interest expense accrued on long term debt and restricted cash ,030-3,030 Minority share in profits of subsidiaries Impairment provision for non-current assets , , ,695 Increase in long term assets... (1,461) (729) (811) 295 (1,606) Other provisions... (51) (84) (580) (2,814) (715) Gain on sale of subsidiaries... (426) Foreign exchange losses / (gains)... (3,765) (811) 27,688 7,470 18,638 Changes in working capital... (24,607) 3,870 (7,548) 10,576 (4,766) Net cash provided by operating activities ,368 89, ,893 65, ,458 Cash flows provided by / (used in) investing activities: Purchase of fixed assets and computer software... (140,925) (49,019) (108,710) (32,184) (147,699) Decrease of restricted cash and cash equivalents , ,514 Purchase of subsidiary, net of received cash... (95,608) - 16,648 (54) 16,640 Disposal of subsidiaries... (504) Purchase of minority shareholdings in subsidiary (577) - (577) Payments for licenses... (4,790) - (9,160) - (9,160) Increase of investments (405) 10 (291) Net cash provided by / (used in) investing activities... (241,827) (49,019) 157,310 (32,228) 118,427 Net cash provided by / (used in) financing activities: Net proceeds from share issuance... 42, Redemption of notes (excluding interest paid on redemption) (198,988) - (198,988) Payment of interest on long term debt (5,205) - (5,205) Payments related to financial restructuring (24,817) (18,865) (24,634) Issuance / (redemption) of notes for warrants... (8) (3) Net cash provided by / (used in) financing activities... 42, (228,165) (18,646) (227,877) Effect of exchange rate change on cash and cash equivalents... (2,140) (1,356) 3,048 1,852 2,528 Net change in cash and cash equivalents... 29,071 39,900 77,086 16,909 95,536 Cash and cash equivalents at beginning of period , , , , ,465 Cash and cash equivalents at end of period , , , , ,001 The accompanying notes are an integral part of these condensed consolidated financial statements. 8

11 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosures: Year ended (Audited) (PLN) (PLN) (PLN) (PLN) (PLN) Interest paid ,205-5,205 Income taxes paid / (reimbursed) (356) (723) (723) Non-cash investing activities: The Company incurred the following liabilities at the end of each period that were related to fixed asset or construction in progress additions: September 30, Year ended (Audited) (PLN) (PLN) (PLN) 30,560 25,770 35,917 The accompanying notes are an integral part of these condensed consolidated financial statements. 9

12 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Convenience Translation Year ended (USD) (USD) (USD) (USD) (USD) Net profit / (loss) 31,888 12,562 (258,726) (231,841) (204,976) Adjustments to reconcile net profit / (loss) to net cash provided by operating activities: Depreciation of fixed assets and amortization of licenses and other intangible assets... 49,258 16,698 60,810 21,318 75,472 Amortization of negative goodwill... (4,989) (1,417) (6,329) (881) (7,261) Reversal of amortization and financial expenses related to cancellation of license fee obligations (49,746) Amortization of notes issuance costs Amortization of discount on installment obligations Write-off of notes issuance costs ,572-11,305 Interest expense accrued on license liabilities , ,526 Deferral of license fee obligations... (3,757) (3,757) Interest expense accrued on long term debt and restricted cash Minority share in profits of subsidiaries Impairment provision for non-current assets , , ,829 Increase in long term assets... (411) (205) (228) 83 (452) Other provisions... (14) (24) (163) (791) (201) Gain on sale of subsidiaries... (120) Foreign exchange losses / (gains)... (1,059) (228) 7,784 2,100 5,240 Changes in working capital... (6,917) 1,089 (2,122) 2,973 (1,340) Net cash provided by operating activities... 64,768 25,228 40,736 18,535 56,919 Cash flows provided by / (used in) investing activities: Purchase of fixed assets and computer software... (39,621) (13,781) (30,563) (9,048) (41,525) Decrease of restricted cash and cash equivalents ,961-72,961 Purchase of subsidiary, net of received cash... (26,880) - 4,680 (15) 4,678 Disposal of subsidiaries... (142) Purchase of minority shareholdings in subsidiary (162) - (162) Payments for licenses... (1,347) - (2,575) - (2,575) Increase of investments (114) 3 (82) Net cash provided by / (used in) investing activities... (67,990) (13,781) 44,227 (9,060) 33,295 Net cash provided by / (used in) financing activities: Net proceeds from share issuance... 11, Redemption of notes (excluding interest paid on redemption) (55,944) - (55,944) Payment of interest on long term debt (1,463) - (1,463) Payments related to financial restructuring (6,978) (5,304) (6,926) Issuance / (redemption) of notes for warrants... (2) (1) Net cash provided by / (used in) financing activities... 11, (64,147) (5,242) (64,066) Effect of exchange rate change on cash and cash equivalents... (602) (381) Net change in cash and cash equivalents... 8,173 11,217 21,672 4,754 26,859 Cash and cash equivalents at beginning of period... 64,101 61,057 37,242 54,160 37,242 Cash and cash equivalents at end of period... 72,274 72,274 58,914 58,914 64,101 The accompanying notes are an integral part of these condensed consolidated financial statements. 10

13 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosures: September 30, Year ended (Audited) (USD) (USD) (USD) (USD) (USD) Interest paid ,463-1,463 Income taxes paid / (reimbursed) (100) (203) (203) Non-cash investing activities: The Company incurred the following liabilities at the end of each period that were related to fixed asset or construction in progress additions: Convenience Translation September 30, Year ended (USD) (USD) (USD) 8,591 7,245 10,098 The accompanying notes are an integral part of these condensed consolidated financial statements. 11

14 1. The Company Netia S.A. (the Company or Netia ) was formed in 1990 as a limited liability company under the laws of Poland and was transformed into a joint stock company in On June 12,, a general meeting of shareholders adopted a resolution changing the Company s name from Netia Holdings S.A. to Netia S.A. This change became effective upon registration by the Polish court on July 25,. The Company is incorporated in Poland with its principal executive office located at ul. Poleczki 13, Warsaw, Poland. The Company is engaged in the design, construction and operation of modern digital telecommunication and data transmission networks, which is the main business segment of Netia Group. The Netia Group is also engaged in the installation and supply of specialized mobile radio services (public trunking) in Poland through its 58.2% owned subsidiary, Uni-Net Sp. z o.o. ( Uni-Net ). The unaudited condensed consolidated financial statements of the Company for the nine-month September 30, comprise the Company and its subsidiaries (collectively, the Netia Group ). The Company s former subsidiaries (merged into Netia S.A. on ) obtained licenses from the Ministry of Communications of Poland ( MOC ) for the provision of local telephone services in areas including six of the Poland s largest cities Warsaw, Gdansk, Krakow, Poznan, Katowice and Lublin. One of the Company s former subsidiaries, Netia 1 Sp. z o.o. ( Netia 1 ), obtained a license for domestic long distance telephone services. As of January 1, 2001, pursuant to the provisions of the Telecommunication Act introduced in 2001 ( 2001 Act ), all telephone licenses were converted by virtue of law into telecommunication permits. Currently, the Company is authorized under the 2001 Act to provide all kinds of telecommunication services throughout Poland, including rendering of international telecommunication services. The Company s backbone network that connects the largest Polish cities as well as its local access networks currently allows for provision of various voice telephone and data transmission services. These services include switched, fixed-line voice telephone service (including domestic long distance, international long distance and fixed-to-mobile services), Integrated Services Digital Network ( ISDN ), voice mail, dial-up and fixed-access Internet, leased lines, Voice over Internet Protocol ( VoIP ) and co-location services. The Company launched wholesale services, including the wholesale termination of inbound traffic, in early In September 2001, the Company began offering frame relay services. Since February 2002, the Company has been offering Freephone ( 0800 ) and Split Charge ( 0801 ) services based upon an Intelligent Network. The Company offers data transmission services utilizing its network. In the second half of 2002, the Company started offering duct, dark fiber and capacity leasing and co-location services. In accordance with provisions of the 2001 Act liberalizing the market for international long-distance calls, as of January 1, the Company started to offer international long distance services in selected zones, based on standard lines, in addition to alternative service based on VoIP technology, which were offered previously. The Company commenced offering premium rate services in April. In April the Company introduced a new service - Net24 - a broadband Internet access in ADSL technology, addressed to Netia s subscribers using either analogue or ISDN lines. The Company s ordinary shares have been listed on the Warsaw Stock Exchange since July 2000 and are part of the WIG-20 index. Between August 1999 and October 2002, the Company s American Depositary Shares ( ADSs ) were also listed for trading on the NASDAQ stock market. Until April 7, the Company has been subject to the periodic reporting requirements in the United States under the American Securities Exchange Act of 1934 (the Act ). On April 7,, the Company filed a Form 15 with the U.S. Securities and Exchange Commission to deregister the Company from the Act. Upon filing of the Form 15 periodic reporting obligations under the Act were immediately suspended. Deregistration from the Act became effective on July 6,. The Company continues to be subject to periodic reporting requirements under the Polish regulations on reporting requirements for companies listed on the Warsaw Stock Exchange. On July 1, The Bank of New York (the Depositary ) distributed a termination notice received from the Company (the Termination Notice ) to holders of the Company s ADRs under the Deposit Agreement dated August 3, 1999, as subsequently amended, (the Deposit Agreement ), between the Company, the Depositary and the owners and beneficial owners of ADRs issued there under. The Deposit Agreement terminated in accordance with its terms and pursuant to the Termination Notice on September 29,. Pursuant to the Deposit Agreement, holders of the Company s ADRs could submit their ADRs to the Depositary in order to exchange such ADRs for deposited shares until Friday, March 26,. By March 31,, the Depositary had sold all remaining deposited shares on the Warsaw Stock Exchange. The net proceeds of such sales are available for distribution by the Depositary to ADR holders who did not submit their ADRs for exchange for deposited shares. 12

15 In April the Company acquired Świat Internet S.A. ( Świat Internet ), formerly TDC Internet Polska S.A., a Polish Internet service provider. In January the Company acquired Regionalne Sieci Telekomunikacyjne El-Net S.A., an alternative fixed-line telecommunication operator (see also Note 7). In September the Company s subsidiary, Netia Mobile Sp. z o.o., with its seat in Warsaw ( Netia Mobile ), was registered by the relevant Polish court. The shares in Netia Mobile were acquired solely by Netia s wholly owned subsidiaries. The Company s activities are not subject to any seasonal or cyclical trends of operations. 2. Financial Restructuring Background of the restructuring In 2002, the Company went through a financial restructuring process. The restructuring process encompassed legal proceedings in three jurisdictions consisting of Dutch moratorium proceedings, Polish arrangement proceedings and proceedings in the United States of America under Section 304 of the U.S. Bankruptcy Code. Creditors of the Netia Group had an opportunity to subscribe with their reduced claims in the form of installment obligations for series H shares issued by the Company. On December 23, 2002, the Company s creditors subscribed for 312,626,040 (not in thousands) series H shares offered by the Company in exchange for such installment obligations. The par value of the Company s ordinary shares was reduced on January 30, from PLN 6.00 (not in thousands) to PLN 1.00 (not in thousands). On May 16,, the Company issued 64,848,442 (not in thousands) warrants pursuant to the prospectus, dated April 17, 2002, as subsequently amended, prepared under Polish law and made available in Poland on December 2, The Company issued the warrants to holders of record of the Company s shares as of December 22, 2002 at the strike price of PLN 2.53 (not in thousands). The warrant strike price is the issue price for series J ordinary shares. The warrants began trading on the Warsaw Stock Exchange on May 27,. The Company also plans to issue up to 18,373,785 (not in thousands) ordinary series K shares under a key employee stock option plan. As at, 17,240,086 (not in thousands) warrants have been exercised and the Company s share capital was accordingly increased by 17,240,086 (not in thousands) series J shares. Furthermore, as at the Company issued 771,011 (not in thousands) ordinary series K shares with a nominal value of PLN 1 each, due to the exercise by certain persons authorized thereto of their rights arising from the performance stock option plan adopted by Netia s Supervisory Board in Current Financial Condition The restructuring allowed the Company to regain solvency. The restructuring did not lead to the elimination of all of the Company s outstanding debt. The Company will have to repay the outstanding installment obligations at the nominal amount of PLN 11,872 (recorded at the present value of future obligations of PLN 6,173 at ) between 2007 and This represents indebtedness that was not exchanged for the ordinary series H shares offered by the Company in December In the Company performed an impairment test for the telecommunications segment. The test resulted in an impairment charge of PLN 799,695, which was recognized in the consolidated statements of operations for the year ended. For further details regarding the impairment test see Notes 5 and 6. As at, the shareholders equity amounted to PLN 2,227,452 and the Company had working capital of PLN 250,013. In the financial restructuring and cancellation of local license fee obligations of Netia were completed. Management of the Company believes that the outstanding local license fee obligations of El-Net, at fair value as at acquisition date, subsequently measured at amortized cost of PLN 56,692 (PLN 496,319 in nominal terms, including prolongation fees) will also be cancelled in accordance with the applicable law. For further details on the current situation and the Company s plans in this respect, see Note 5. In and during the nine-month the Company generated positive cash flows from operating activities. Based on that Management does not believe that events or conditions exist which may cast significant doubt on the Company s ability to continue as a going concern. 13

16 3. Basis of Presentation and Accounting Policies The Company maintains its accounting records and prepares statutory financial statements in accordance with Polish accounting and tax regulations. These unaudited condensed consolidated financial statements have been prepared based upon the Company s accounting records in order to present the consolidated financial position, results of operations and of cash flows in accordance with International Financial Reporting Standards ( IFRS ), including International Accounting Standards ( IAS ) and Interpretations issued by the International Accounting Standards Board ( IASB ). These interim unaudited condensed consolidated financial statements are prepared in accordance with IAS 34, Interim Financial Reporting. The accounting policies used in the preparation of the interim condensed consolidated financial statements are consistent with those used in the annual consolidated financial statements for the year ended. In the opinion of Management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation have been included. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes. 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. All U.S. Dollar amounts shown as supplementary information in the accompanying unaudited condensed consolidated financial statements have been translated from PLN only as a matter of arithmetic computation at the PLN exchange rate of PLN = USD 1.00, the average rate announced by the National Bank of Poland on. 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 PLN amounts have been or could be converted into U.S. dollars at this or any other rate. Certain prior periods amounts relating to have been reclassified to conform to the presentation for the three- and nine-month periods ended and the year ended. The major reclassifications relate to the presentation of data transmission, wholesale services and intelligent network services revenue as well as insurance costs and taxes and fees. 4. Fixed Assets and Network under Construction Assets at Adjusted Cost (Audited) Additions Purchase of subsidiary Transfers Disposals (PLN) (PLN) (PLN) (PLN) (PLN) (PLN) Buildings... 62,056-2,709 8,419 (12) 73,172 Land... 17, ,423 Transmission network... 1,615, ,244 32,268 (14) 1,808,342 Switching system... 1,198, ,876 67,174 (1,46 1,373,112 Base stations... 8, ,252 Machinery and equipment... 63,003 2,475 3, (603) 68,083 Office furniture and equipment ,469-6,768 16,942 (4,20 126,973 Vehicles... 14, ,035 (31) (2,84 12,352 3,086,569 2, , ,800 (9,136) 3,487,709 Network under construction ,184 87,262 1,067 (125,545) (11,418) 62,550 3,197,753 89, ,881 (745) (20,554) 3,550,259 14

17 Accumulated Depreciation (Audited) Depreciation Expense Transfers Disposals (PLN) (PLN) (PLN) (PLN) (PLN) Buildings... 11,811 1, (3) 14,227 Transmission network ,282 55,885 (79) (3) 418,085 Switching system ,611 62,736 (3,094) (815) 355,438 Base stations... 8, ,252 Machinery and equipment... 29,688 2, (173) 31,783 Office furniture and equipment... 76,633 14,366 4,607 (2,632) 92,974 Vehicles... 10, (31) (2,184) 8, , ,380 1,917 (5,810) 929,284 Accumulated Impairment (Audited) Transfers Disposals (PLN) (PLN) (PLN) (PLN) Buildings... 13, (3) 14,546 Land... 4, ,821 Transmission network ,409 4,253 (10) 489,652 Switching system ,689 2,067 (45) 268,711 Machinery and equipment... 9, (122) 9,396 Office furniture and equipment... 9,358 2,417 (269) 11,506 Vehicles... 1,302 - (209) 1, ,528 9,855 (658) 799,725 Network under construction... 28,151 (10,960) (11,418) 5, ,679 (1,105) (12,076) 805,498 Net Book Value (Audited) (PLN) (PLN) Buildings... 44,399 36,370 Land... 12,602 12,489 Transmission network , ,153 Switching system , ,222 Base stations Machinery and equipment... 26,904 24,234 Office furniture and equipment... 22,493 21,478 Vehicles... 2,734 2,298 1,758,700 1,500,244 Network under construction... 56,777 83,033 1,815,477 1,583,277 15

18 5. Licenses Telecommunication permits Prior to the completion of the merger of the Company with its operating subsidiaries on its subsidiaries held fixed term permits for the operation of local telecommunication networks on a non-exclusive basis in specified areas throughout Poland. Those permits were obtained through their conversion from telecommunication licenses issued under the regulations of the previous Telecommunication Act. The conversion took place by virtue of the 2001 Act on January 1, Licenses for telecommunications services in Poland were issued for 15-year periods, and all business plans, including the Company s, were made on the assumption that for such 15-year period the operators would be able to operate in an environment that was limited to two competitors. The Ministry of Infrastructure established license fees and the Company accepted them under the same assumption. Because the Company s subsidiaries obtained the licenses under the old regulatory regime, Netia Group incurred license fee obligations of EUR 215,756 (in nominal value). In December 2002, a law entered into force in Poland, which allowed the cancellation of outstanding local license fee obligations in exchange for telecommunication infrastructure capital expenditures or conversion of license fee obligations in exchange for shares or debt of companies that had outstanding license fees in connection with licenses for providing local services. Based on this law, the Company submitted applications for the cancellation of its outstanding local license fee obligations based on capital expenditures it had already incurred. On December 23,, the Ministry of Infrastructure issued decisions to the respective subsidiaries of the Company. In those decisions the Ministry cancelled all outstanding license fee obligations at nominal value amounting to EUR 91,385 (PLN 424,785 at the exchange rate prevailing at December 23, ) and the outstanding prolongation fees of PLN 15,799 (translated in the decision into EUR 3,601 using the exchange rate prevailing at July 31, ), based on capital expenditure in the telecommunication infrastructure incurred in 2001 and As a result of those decisions the Company as at December 23, reduced the total local license fee liability to zero. At the same time the reduction of the gross book value of the license asset was recorded of PLN 234,970 being the historical cost of the obligations forgiven. The accumulated amortization was decreased accordingly by PLN 63,412. The net effect of the cancellation of the local license fee liabilities of PLN 176,940, being the difference between the carrying value of the cancelled liability of EUR 74,973 (PLN 348,498 at the exchange rate prevailing on December 23, ) and the decrease in net book value of license assets of PLN 171,558 was recorded as a gain in the consolidated statements of operations for the year ended. The long distance license fee liabilities were not the subject of the new law regarding the cancellation of outstanding local license fee liabilities. Therefore on April 18,, Netia 1 paid the two outstanding license fee obligation installments in the amount of EUR 2,000 (PLN 8,526 at the exchange rate prevailing on that date) and the applicable prolongation fees of approximately PLN 320, and penalty interest amounting to approximately PLN 314. Furthermore, on February 18, the Company paid the installment due on January 31, of EUR 1,000 (PLN 4,761 at the exchange rate prevailing on that date) increased by penalty interest of PLN 29. On November 26, the President of the Office for Regulations of Telecommunications and Post granted to Netia S.A. a telecommunication permit. Based on that permit as of the Company performs the activities conducted previously by its operating subsidiaries. On September 3, the new Telecommunication Act (the Act ) came into force. Under the Act providing of the telecommunication activity is allowed after the registration by the President of the Office for Regulations of Telecommunications and Post. Netia S.A. as well as its wholly owned subsidiary Netia Mobile Sp. z o.o. have been entered to the telecom entrepreneurs register and therefore are entitled to provide telecommunication services in and use fixed and mobile public telephony and data transmission network. El-Net, the newly acquired subsidiary, obtained licenses from the MOC for the provision of local telephone services in areas including Warsaw, Bydgoszcz and smaller cities in the northern part of Poland. Those licenses were initially issued for 15-year periods. The nominal value of local license fee obligations as of the dates of grant amounted to EUR 287,650 (PLN 1,260,827 at the exchange rate prevailing on ), of which EUR 78,026 (PLN 342,004 at the exchange rate prevailing on ) were subsequently paid and EUR 105,000 (PLN 460,236 at the exchange rate prevailing on ) were cancelled in 2000 due to the issue of a local license to Netia Telekom Mazowsze S.A. ( Mazowsze ), a former operating subsidiary of the Company, for the same Warsaw area as El-Net s license. The cancelled amount was equal to the fee to be paid by Mazowsze. As of January 1, 2001, pursuant to the 2001 Act, all telephone licenses were converted by virtue of law into telecommunication permits. On the total nominal value of outstanding license fee obligations of El-Net was EUR 104,624 (PLN 458,586 at the exchange rate prevailing on September 30, ), increased by the outstanding prolongation fees of PLN 37,

19 On December 30, 2002, El-Net submitted applications for cancellation of certain outstanding local license fee obligations in accordance with the applicable law enacted in Following its purchase by the Company, El-Net filed an amendment to the previous application asking for cancellation of EUR 75,690 (PLN 331,764 at the exchange rate prevailing on September 30, ) and related prolongation fees of PLN 37,733, based on capital expenditure incurred between 2001 and as well as future investments to be incurred within the Netia Group. Consequently, on October 29,, El-Net has also filed an application for cancellation of remaining license fee installments payable in 2010 and 2011 amounting to nominal value of EUR 28,934 (PLN 126,824 at the exchange rate prevailing on ). On August 16, El-Net received a decision of the Minister of Infrastructure dated July 12, granting the promise to cancel the outstanding license fees obligations, amounting to EUR 75,690 and the prolongation fees amounting to EUR 9,039 (equivalent of PLN 37,733 translated using the exchange rate prevailing on November 29, 2002 and October 22, ). The above cancellation shall occur upon the verification of incurred capital expenditure in accordance with applicable law. The Minister of Infrastructure also decided that El-Net s capital expenditure can be incurred from January 1, 2001 till December 30, 2006, upon the assumption that capital expenditure already incurred by El-Net in amounted to PLN 85,459. Pursuant to this decision all license fee payments and prolongation fees subject to the decision have been deferred until December 30, The total outstanding license fee obligations of El-Net have been subject to review as regards their fair value upon purchase of El-Net by Netia. The fair value has been established based on the Management s best estimate of the probability of future payments in connection with the commenced cancellation process as at the acquisition date. Management has estimated that there is a 100% probability of cancellation in relation to the capital expenditure already incurred and 80% probability in relation to future capital expenditure. Based on those percentages as well as the estimation of capital expenditures planned beyond the nominal value of probable future payments as at January 29, has been established at EUR 17,452 increased by PLN 5,816 of prolongation fees. This nominal value has been further adjusted to reflect the present value of the probable future payments. As result of the above, the fair value allocated to license fee liabilities of El-Net as at January 29, was equal to EUR 14,260 (PLN 67,896) increased by PLN 5,816 of the prolongation fees. Pursuant to the decision on the deferral of payments extending them to December 30, 2006 the adjustment to the discounted fair value of future payments has been recorded as a gain in the statements of operations amounting to PLN 13,363 (See also Note 12). The following table presents the fair value of the outstanding local license fee obligations of El-Net as at January 29, as well as subsequent changes to the value of liabilities through : (EUR) (PLN) Nominal value of outstanding license fee obligations... Overdue installments (excluding prolongation fees)... 75, ,388 Prolongation fees (in PLN only)... 37,733 Installments payable later than 5 years... 28, , , ,887 Less fair value adjustment to opening balances... (87,172) (446,973) Nominal value of probable future payments as at January 29,... 17,452 88,914 Less imputed interest on license fee liabilities... (3,192) (15,202) Fair value as at January 29,,... 14,260 73,712 of which: Short term license fee liabilities (including prolongation fees)... 11,666 61,361 Long term license fee liabilities... 2,594 12,351 Fair value as at January 29,,... 14,260 73,712 Effect of deferral of future payments (including translation of prolongation fees into EUR)... (1,725) (13,363) Interest accrued in the ,799 Foreign exchange gains on the translation of EUR balances (5,456) Carrying value as at... 12,934 56,692 17

20 6. Impairment of non-current assets The significant changes in the current and expected market conditions, which followed the full liberalization of the telecommunications market, resulted in the development of a new strategy and a revision of the Company s previous business plans. The new business plan was approved by the Supervisory Board of the Company in. The revised financial projections excluding any mergers or acquisitions contained in the new business plan led the Company to evaluate non-current assets for their possible impairment. As a result the Company performed an impairment test for the telecommunications segment. In accordance with IAS 36 Impairment of Assets, the carrying values of the Company s non-current assets were compared with their recoverable amounts, represented by the higher of their net selling price and value in use. The entire telecommunications segment was identified as one cash-generating unit. The recoverable amount of the cash-generating unit was based on a calculation of the value in use. The value in use was derived from the financial projections of the new business plan, which covers the period to After that period, the projections, prepared for the purposes of the impairment test, make use of a long-term growth rate, which is compatible with the industry projections for the operations concerned. The discount rate used (of 10%) represented the estimated risk adjusted cost of capital at the time, when the impairment test was performed. The test resulted in an impairment charge of PLN 799,695, which was recognized in the consolidated statement of operations for the year ended and was allocated to the non-current assets in the telecommunications segment on a pro rata basis. The impact of the said charge on the particular groups of assets is as follows: (PLN) Tangible fixed assets ,007 Construction in progress... 25,912 Computer software... 29,254 Telecommunication licenses , ,695 While the calculation of the discounted future cash flows expected to arise from the use of assets is based upon Management s best estimates of such cash flows - and the appropriate discount rate - these estimates do include considerable additional uncertainty. The actual outcome is uncertain and management estimates may change in the future to reflect changes in the economic, technological and competitive environment in which the Company operates. 7. Acquisitions El-Net acquisition On January 29,, Netia Ventures Sp. z o.o. ( Ventures ), one of the Company s subsidiaries acquired 100% of the voting shares of Regionalne Sieci Telekomunikacyjne El-Net S.A. ( El-Net ), an alternative fixed-line telecommunication operator, having its main business activities in two big cities in Poland: Warsaw and Bydgoszcz. The purchase also included 100% of El-Net s debt to its previous shareholder and to a consortium of banks. This acquisition was effected in accordance with the Company s business plan, which assumes the Company s leading position in the consolidation of the Polish telecommunications market. On May 31, the Company entered into share purchase agreement with Ventures as a result of which it acquired 3,970,000 (not in thousands) registered shares of nominal value of PLN 100 (not in thousands) each, constituting (together with 30,000 shares acquired in February ) 100% of the share capital of EL-Net and a right to 100% of votes at the El-Net's general meetings of shareholders. The shares were transferred to the Company in order to repay the loans granted to Ventures in the total amount of PLN 100,834 (including interest). Along with El-Net's shares, the Company acquired also the receivables from El-Net in the total nominal value of PLN 125,653 (including interest). The Company accounted for the acquisition of El-Net using the purchase method and started consolidating the financial statements of El-Net as of February 1,, adjusting the consolidated statements of operations and the consolidated balance sheet for material transactions, which took place between January 29, and February 1,. The acquired business contributed revenue of PLN 91,630 and profit from operations of PLN 15,393 in the, after taking into account negative goodwill amortization of PLN 5,214 and intercompany transactions eliminations, and the carrying values of its assets and liabilities at were PLN 317,949 and PLN 86,186, respectively. Cash and cash equivalents held by El-Net amounted to PLN 18,292 as at. 18

21 Details of net assets acquired and goodwill are as follows: (PLN) Purchase consideration, including transaction costs of PLN 5,353 cash paid ,688 Less fair value of net assets acquired... (178,951) Negative goodwill... 77,263 The purchase consideration made by the Company in exchange for control over the net assets of El-Net encompassed: the price paid for 100% shares of PLN 3,100, the amounts paid for El-Net s liabilities to banks and the previous shareholder of PLN 93,235 and transaction costs of PLN 5,353. The Company performed the preliminary valuation of the assets and liabilities, including independent valuation of acquired fixed assets, during the three-month March 31,. This valuation has been up-dated during the threemonth based on additional information obtained. Further changes to the valuation may be introduced in if additional information in respect of acquired assets and liabilities is obtained. Such additional information may include information related to pre-acquisition contingencies and calculation of the related deferred income taxes. The Company will continue evaluating fair values of these assets and liabilities, which may result in further adjustments to the carrying amounts of identifiable net assets. The Company recorded El-Net s liabilities for telecommunication license fees based on the fair value of future payments taking into consideration estimates regarding the probability of positive outcome of the process of cancellation of license fee obligations (for details see Note 5). As a result, El-Net s license fee obligations had a significant impact on the currently estimated fair value of net assets acquired which resulted in negative goodwill as at the acquisition date of PLN 77,263 thousand compared with the goodwill of PLN 317,300 thousand provisionally accounted for before. The adjustment to the carrying value of license fee liabilities and the effect of depreciation and other changes, which would have resulted if the adjusted fair values had been applied from the date of acquisition, had the impact of decreasing the previously reported net profit of the Company for the six month June 30, by PLN 1,941 thousand. The Company will amortize the negative goodwill over the weighted average remaining useful life of the non-current assets of El-Net (9 years) up to the date of adoption of IFRS 3, i.e., January 1, At the date of adoption of IFRS 3, the whole amount of unamortized negative goodwill will be transferred to retained earnings. The total amortization of negative goodwill from the date of the purchase of El-Net recorded in the nine-month amounted to PLN 5,214. The assets and liabilities recognized in the consolidated balance sheet arising from the acquisition, as at the acquisition date, are as follows: (PLN) Cash and cash equivalents... 6,080 Receivables... 14,130 Inventories... 3,304 Prepayments... 1,042 Fixed assets ,882 Intangible assets Investments License fee liabilities... (73,712) Other liabilities... (56,563) Fair value of net assets acquired ,951 19