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NETIA HOLDINGS REPORTS 2001 THIRD QUARTER RESULTS  

Warsaw, Poland - November 6, 2001 - Netia Holdings (NASDAQ: NTIA, WSE: NET), Poland's largest alternative provider of fixed-line telecommunications services, today announced unaudited results for the nine-month period ended September 30, 2001.

Financial Highlights:

• Revenues for Q3 2001 amounted to PLN 136.8 m (US$ 32.3 m), a year-on-year increase of 20%. Year-to-date revenues amounted to PLN 394.0 m (US$ 93.0 m), a year-on-year increase of 26%.
  
  
• Three non-cash exceptional items totaling to PLN 334.1 m (US$ 78.9 m) affected financial results for Q3 2001, and were related to a write-off charge on goodwill, a provision for impairment of fixed assets (70,200 connected lines) and our withdrawal from a previously announced transaction with Millennium Communications S.A. ("Millennium").
  
  
• EBITDA before the allowance for Millennium related receivables for Q3 2001 amounted to PLN 17.7 m (US$ 4.2 m), representing an EBITDA margin of 13.0%. Year-to-date EBITDA before the above item improved to PLN 48.9 m (US$ 11.5 m), with an EBITDA margin of 12.4%.
  
  
• EBITDA (including the allowance for Millennium) for Q3 2001 amounted to PLN 0.8 m (US$ 0.2 m), representing an EBITDA margin of 0.6%. Year-to-date EBITDA amounted to PLN 31.9 m (US$ 7.5 m), with an EBITDA margin of 8.1%.
  
  
• Cash at September 30, 2001 amounted to PLN 643.4 m (US$ 151.9 m), excluding restricted cash and investments of PLN 111.9 m (US$ 26.4 m).
  
  
• Consolidated shareholders equity at end of Q3 2001 was negative PLN 113.9 m or US $(26.9 m).
  
  
• Extraordinary Shareholders Meeting will be convened to comply with Polish legal requirements, at which shareholders will be asked to approve stand-alone Netia Holdings S.A. continuing its operations.

Operational Highlights:

• Domestic long distance voice services based on indirect access launched in August 2001
  
  
• Frame relay data transmission services launched in September 2001
  
  
• Subscriber lines amounted to 343,634. Lines reported for Q1 and Q2 2001 have been revised downwards by 14,924 lines

Other Highlights:

• Outline of ten-year business plan approved by Netia Supervisory Board

Kjell-Ove Blom, Netia's acting CEO and Chief Operating Officer, commented: "Netia has continued to make operational progress despite the challenging macroeconomic environment in Poland and increasing competition in selected segments of the telecommunications market. With the launch of domestic long distance and data transmission services as well as penetration into the Warsaw market, our service offering is expanding. Our business customer base continues to grow and now accounts for 53% of telecom revenues for the year to date, evidencing our intensified focus on the corporate and SME segments.

"As of today, no solution has been found in relation to our funding gap issue, although we continue to explore a number of possible alternatives. In the meantime, Netia has introduced strict measures aimed at preserving its cash position as a top short-term priority. Namely, we have focused on reductions in both operational and capital expenditures. On the operational expenditures side, we have decided to further reduce the headcount by additional 10%. We have reviewed our capital expenditure plans for the next 12 months with the approach to cut or delay all investments and commitments, which have no, or limited impact on the short-term operating results.

"Lastly, we are pleased to announce that the Supervisory Board has approved the general outline of Netia's ten-year business plan, sharpening the company's focus on business customers and outlining key operational and financial goals."

Avi Hochman, Chief Financial Officer of Netia, added: "In the third quarter, Netia continued to deliver improvements in operational cashflow, driven both by revenue growth and cost cutting. Netia has recorded several exceptional items that impacted the net result for the quarter. We have decided to write off our investment in 70,200 connected lines, at net book value of PLN 96.9 m, which are geographically located outside the main urban areas of strategic interest to Netia. In addition, after a careful examination of the present market situation and following an impairment test, we have decided to write off PLN 220.3 m of goodwill. The third exceptional item is related to our withdrawal from the acquisition of Millennium Communications S.A. and a related write-off of PLN 16.9 m. All three exceptional items are non-cash items and their full impact will be recognized in the results for the Q3 2001.

"We do not have sufficient cash to fund our anticipated capital expenditures, license fee obligations and debt service through September 30, 2002, although, as noted previously, we have undertaken various measures to bridge this gap. Also due to the fact that at September 30, 2001, the stand-alone Netia Holdings S.A. losses exceeded the sum of its reserve capital, spare capital and one third of its share capital, Netia will call for an Extraordinary Shareholders' Meeting as required by the Polish Commercial Code, to confirm that stand-alone Netia Holdings S.A. should continue its activities."

Financial Information


2001 Year to Date vs 2000 Year to Date

Revenues increased by 26% to PLN 394.0 m (US$ 93.0 m) during the nine-month period ended September 2001, compared to PLN 313.9 m for the same period in 2000.

Revenues from telecommunications services increased by 34% to PLN 372.9 m (US$ 88.0 m) from PLN 278.5 m for the corresponding period of 2000. The increase was primarily attributable to a 12% increase in the total number of subscriber lines to 343,634 at September 30, 2001 from 307,160 at September 30, 2000. Other contributing factors were the overall increase in average monthly revenue per line by 12% to PLN 122 (US$ 29) for September 2001, compared to PLN 109 for September 2000, mainly due to increases in Netia's monthly subscription fees in May 2001.

Three exceptional items totaling PLN 334.1 m (US$ 78.9 m) impacted the financial results for the period, namely:

• write-off on goodwill in the amount of PLN 220.3 m (US$ 52.0 m),
  
  
• provision for the impairment of fixed assets of PLN 96.9 m (US$ 22.9 m) relating to 70,200 connected lines,
  
  
• allowance for receivables from Millennium of PLN 16.9 m (US$ 4.0 m).

The above write-off charges are non-cash items and their entire impact has been recorded in the third quarter of 2001.

The write-off charge on goodwill is a result of management's belief that there is no longer a future economic benefit associated with the goodwill as well as an impairment test performed by management. The provision for impairment of fixed assets relates to a write-off of our investment in 70,200 connected lines which, based on our recently approved long-term strategy to focus on the business segment, will not be converted into ringing lines. The allowance for receivables from Millennium follows Netia's withdrawal from the agreement to acquire the outstanding share capital of Millennium due to Millennium's refusal to perform its obligations under the agreement. Netia has claimed from Millennium compensation in the amount of PLN 8.5 m and additionally has demanded the repayment of PLN 11.5 m of extended loan.

EBITDA amounted to PLN 31.9 (US$ 7.5 m) compared with PLN 14.9 m for the nine-month period ended September 30, 2000. EBITDA for the nine-month period ended September 30, 2001 without taking into consideration the allowance for Millennium improved by 228% to PLN 48.9 m (US$ 11.5 m). EBITDA margin without taking into consideration the allowance for Millennium for this period increased to 12.4% from 4.7% for the same period in 2000.

"Other operating expenses" amounted to PLN 265.5 m (US$ 62.7 m) and represented 67% of total revenues for the nine-month period ended September 30, 2001, compared to 63% for the same period in 2000. This increase was mainly driven by the allowance for Millennium.

Amortization and write-off of goodwill increased to PLN 238.2 m (US$ 56.2 m) from PLN 19.6 m as a result of a write-off on goodwill of PLN 220.3 m (US$ 52.0 m).

Depreciation of fixed assets increased by 52% to PLN 126.7 m (US$ 29.9 m), from PLN 83.3 m for the nine-month period ended September 30, 2000, as the construction stage of additional parts of the network drew to completion.

Interconnection charges increased by 8% to PLN 89.7 m (US$ 21.2 m) from PLN 83.2 m for the first nine months of 2000. Interconnection charges as a percentage of calling charges decreased to 34% from 41%, reflecting the effect of direct interconnection to the mobile operators and the increased proportion of traffic carried through Netia's own backbone network.

Net financial expenses increased by 28% to PLN 389.3 m (US$ 91.9 m) from PLN 303.3 due to further depreciation of the Polish zloty against the euro and dollar and the full recognition in 2001 of interest costs relating to the 2000 Senior Notes.

Net loss amounted to PLN 862.8 m (US$ 203.7 m), compared to a net loss of PLN 415.0 m for the same period in 2000. The increased loss for the nine-month period ended September 30, 2001 was mainly attributable to an increase in net financial expenses as well as the three exceptional items described above.

Net fixed assets and computer software increased by 17% to PLN 2,489.5 m (US$ 587.6 m) as of September 30, 2001, compared to PLN 2,133.5 m at September 30, 2000.

Cash outflow from investing activities decreased by 40% to PLN 570.3 m (US$ 134.6 m) for the nine-month period ended September 30, 2001, from PLN 945.5 m for the same period of 2000 with net cash used for the purchase of fixed assets and computer software in the amount of PLN 513.9 m (US$ 121.3 m) for the first nine months of 2001.

Cash and cash equivalents at September 30, 2001 amounting to PLN 643.4 m (US$ 151.9 m) were available to fund Netia's operating losses, capital expenditures and network expansion as well as license and debt service obligations. The Company had in addition deposits in escrow amounting to PLN 104.8 m (US$ 24.7 m) to service interest payments on its 2000 Senior Notes until June 2002 and deposits in restricted cash of PLN 7.1 m (US$ 1.7 m).
 

2001 Third Quarter vs 2001 Second Quarter

Revenues for the third quarter 2001 increased by 2% to PLN 136.8 m (US$ 32.3 m) compared to PLN 134.3 m for the second quarter of 2001. This increase was attributable to a 3% increase in telecommunications revenues to PLN 131.0 m (US$ 30.9 m) compared to PLN 126.6 m for the second quarter 2001 and a 25% decrease in other revenues, representing the operations of Uni-Net, a joint venture with Motorola offering radio trunking services, to PLN 5.8 m (US$ 1.4 m) compared to PLN 7.7 m for the second quarter 2001.

EBITDA for the quarter was PLN 0.8 m (US$ 0.2 m), compared to PLN 16.0 m for the second quarter 2001. The decrease in EBITDA for the quarter was caused by the allowance for receivables from Millennium. The EBITDA before this allowance amounted to PLN 17.7 m (US$ 4.2 m). EBITDA margin before the allowance improved to 13.0% as compared to 11.9% in the second quarter 2001.

Net loss for the quarter totaled PLN 761.0 m (US$ 179.6 m) and was affected mainly by net financial expenses of PLN 376.9 m as well as the charges related to three exceptional items.
 

Operational Review

Following the recently approved general outline of the ten-year business plan and strategy to focus on providing services to business customers, the number of connected lines reported for the third quarter 2001 has been recalculated in order to reflect the write-off of 70,200 connected lines due to the future limited utilization of certain existing parts of Netia's local access network. In addition, the number of ringing lines reported previously for the first and second quarters of 2001 has been adjusted downwards by 14,924 lines to correct a previous error in the translation of ISDN channels into subscriber lines. Figures related to average monthly revenue per line, number of business lines, business mix and number of lines in service per employee have also been restated for the period to reflect this. The figures shown below reflect the restated numbers.

Connected lines at the end of the third quarter 2001 increased by 6% to 519,035 lines, up from 489,945 lines at September 30, 2000. The number of connected lines decreased in comparison with the number reported for the second quarter of 2001 due to write-off of 70,200 lines.

Subscriber lines in service increased by 12% to 343,634 at September 30, 2001 from 307,160 at September 30, 2000 and by 2% from 338,338 at June 30, 2001. The number of subscriber lines is net of customer churn and disconnections by the Company, which amounted to 8,092 and 6,104, respectively, for the third quarter 2001 and 19,416 and 17,420, respectively, for the first nine months of 2001.

Business lines as a percentage of total subscriber lines reached 27.3%, up from 23.6% at September 30, 2000 and 26.0% at June 30, 2001, reflecting the intensified focus on the corporate and SME market segments. Business customers accounted for all net additions in the quarter while the residential segment saw net disconnections reflecting termination of uneconomic accounts and churn. Year-to-date revenues from business customers accounted for 53.1% of telecommunications revenues at the end of September 2001.

Business customer lines in service increased by 29% to 93,713 at September 30, 2001 from 72,379 at September 30, 2000, and by 7% from 87,992 at June 30, 2001.

Average monthly revenue per line grew by 12% to PLN 122 (US$ 29) in September 2001, compared to PLN 109 in September 2000 and by 1% from PLN 121 in June 2001.

Average monthly revenue per business line increased by 3% to PLN 243 (US$ 57) compared to PLN 236 in September 2000 and by 2% from PLN 239 in June 2001.

Average monthly revenue per residential line increased by 10% to PLN 76 (US$ 18) from PLN 69 in September 2000 and decreased by 5% from PLN 80 in June 2001.

New tariff packages for analogue and ISDN lines were introduced effective October 1, 2001, offering more flexibility to customers depending on their usage pattern. We are now offering three packages with a different monthly fee and local call charges addressing low, medium and high-usage customers.

Frame relay data transmission service based on the ATM network was launched in September 2001, with a view to extend and supplement Netia's present services available to business customers.

Domestic long distance voice service based on indirect access was launched in August 2001. The service, addressed primarily to the business customer base, is initially provided in 15 numbering zones, including, among others, Poland's top ten cities. Netia has already applied to Telekomunikacja Polska S.A. to provide its interconnection so that Netia can offer domestic long distance indirect services country-wide. In addition, Netia filed with the Court of Warsaw a claim against the State Treasury of the Republic of Poland and the Ministry of Communications for compensation in the amount of PLN 183 m (approximately EUR 47 m or US$ 43 m) for delays that prevented the timely launch of its domestic long distance (DLD) services.

In the Warsaw metropolitan area Netia had 6,264 subscriber lines in service at September 30, 2001, out of which 94% were business lines. Netia is currently constructing a local access infrastructure in Warsaw. As of September 30, 2001, eight radio access base stations were installed and 40 kilometers of fiber-optic network constructed.

Internetia had 64,837 registered subscribers at September 30, 2001 as compared to 24,354 at September 30, 2000 and 50,789 at June 30, 2001. Average blended revenue per dial-up and call-back subscriber in September 2001 was PLN 21. Internetia has recently extended its offering and now provides Internet access without the need for a subscriber to register. This new service is currently offered to subscribers directly connected to Netia and, following agreement with TP S.A., will be offered to other potential customers.

Netia's nationwide backbone network connecting Poland's twelve largest urban areas now stretches to 3,250 kilometers and consists of 2,000 kilometers of fiber and 1,250 kilometers of leased lines. Netia is constructing additional infrastructure, planned for completion in 2001, of approximately 850 kilometers to replace most of the present leased lines.

Headcount at September 30, 2001 was 1,639, compared to 1,555 at September 30, 2000 and 1,639 at June 30, 2001. In August 2001 Netia initiated the headcount reduction process by 10% as announced earlier in March 2001. In addition, Netia's management decided in October 2001 to further reduce staffing levels by approximately another 10%. The results of those steps should be noticeable already by year-end 2001 and the process itself will continue in the first quarter of 2002.

The number of active lines in service per employee increased by 1% to an average of 211 in the nine-month period ended September 2001, from 208 in the same period of 2000. Monthly average telecommunications revenue per employee increased by 12% to PLN 26,078 (US$ 6,155) for the nine-month period ended September 30, 2001 from PLN 23,232 in the same period of 2000.

License payments. In May 2001, certain of our subsidiaries applied to the Ministry of Communications and the President of the Office for Regulation of Telecommunication ("URT") for confirmation that remaining license fee instalments are not due and requesting the return of EUR 92 million in license fees paid by such subsidiaries, due to the expiry of the licenses. Netia submitted these applications based on the fact that the amounts we agreed to pay for the licenses were directly connected to the foreseeable dates of receiving the licenses and the period of the license protection and forecast revenues from the license activities in a semi-closed market, which provided an economic justification for the cost of the licenses. As a result of the enactment of the new Telecommunications Act and the unanticipated premature expiry of the licenses, the protection period has been reduced from the expected fifteen years to, at most, three years, and in the case of Netia Telekom Mazowsze S.A., to six months. In parallel, Netia applied for a return of EUR 24 million in license fees paid for its domestic long distance license in April 2001. Netia is still awaiting response on the above issues from the authorities.
 

Key Figures

* The US$ amounts shown in this table and in the entire document have been translated using the exchange rate of PLN 4.2367 = US$ 1.00, the average rate announced by the National Bank of Poland at September 30, 2001. These figures are included for convenience only.

** Net debt is defined as long term debt less cash, restricted cash and both long and short term portion of escrow accounts.

^ Certain prior period amounts have been restated to reflect the impact of an adjustment to the nominal cost of licenses to reflect their net present values in accordance with IAS 38 "Intangible Assets".
 

Key operational indicators

* Following the recently approved general outline of the ten-year business plan and strategy to focus on providing services to business customers, the number of connected lines reported for the third quarter 2001 has been recalculated in order to reflect the write-off of 70,200 connected lines due to the future limited utilization of certain existing parts of Netia's local access network.

^ The number of ringing lines reported previously for the first and second quarters of 2001 has been adjusted downwards by 14,924 lines to correct a previous error in the translation of ISDN channels into subscriber lines. Figures related to average monthly revenue per line, number of business lines, business mix and number of lines in service per employee have also been restated for the period to reflect this.

This press release contains certain statements of a forward-looking nature with respect to plans and projections of future performance of Netia, the occurrence of which involves certain risks and uncertainties including but not limited to product and market acceptance risks, the impact of comparative pricing, product development, commercialization and technology. Investors are directed to Netia's reports and documents filed from time to time with the US Securities and Exchange Commission, including Netia's Annual Report on Form 20-F for the year ended December 31, 2000, for additional factors that should be considered before investing in Netia's securities.

NETIA HOLDINGS is the largest alternative fixed-line telecommunications operator in Poland. Netia has 24 licenses for local telecommunications services in territories, covering some 15 m people or approximately 40% of the Polish population, which include the most economically advanced parts of the country. The Company's existing local telephone license territories cover six of the country's ten largest urban areas including Warsaw, Krakow, Poznan, Gdansk, Lublin and Katowice. In August 2001, Netia launched its domestic long distance services based on indirect access. Netia has also secured the benefit of a nationwide data and IP license to provide data transmission and Internet-based services.