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23 August 2005

Conclusion of the shareholders agreement of Netia Mobile

The Management Board of Netia SA (“Issuer”) hereby informs that in connection with Netia Mobile Sp. z o.o. (“Company”) being announced as a winner of the mobile telephony UMTS frequency tender on May 9, 2005, the Company’s Shareholders’ Agreement (“Agreement”) was concluded on August 23, 2005.


The scope of activity of the Company shall be the provision of wireless telephony services.


The following entities are Parties to the Agreement: Issuer, Novator One L.P., Novator Telecom Poland S.a.r.l. (“Novator”), Netia Ventures Sp. z o.o. (“Netia Ventures”), Novator Poland Pledge Sp. z o.o. in organization (Novator and Netia Ventures hereby referred to as “Shareholders”) and the Company. Novator is a 100% subsidiary of Novator One L.P, and Netia Ventures is a 100% subsidiary of the Issuer.


According to the provisions of the Agreement, Novator has purchased 70 Company’s shares (“Shares”) at the price of PLN 70,000 and subscribed for 23,940 Shares issued as part of the Company’s capital increase at the price of PLN 11,970,000. As a result, Novator is the holder of 24,010 Shares constituting 70% of the Shares in the Company’s share capital. Netia Ventures has subscribed for 10,260 Shares in the increased Company’s share capital at the price of PLN 5,130,000 and, consequently, Netia Ventures is the holder of 10,290 Shares constituting 30% of the Shares in the Company’s share capital. In total, the Shareholders are obligated to make contributions of up to the amount of EUR 300,000,000 in proportion to their share in the Company’s share capital. At this stage, in addition to the above share capital payments, Novator and Netia Ventures will contribute jointly PLN 341,900,000 in order to cover UMTS frequency reservation fee and preliminary operational expenses. The Company’s business plan assumes further financing of the Company’s operational and investment activities through vendor financing and bank loans.


The supervisory board of the Company (“Supervisory Board”) shall consist of five members with a 5-year term of office. As long as Netia Ventures holds: (i) at least 20% of the Shares, it will be entitled to appoint, suspend and dismiss two members of the Supervisory Board, and (ii) 10% - 20% of the Shares – one member of the Supervisory Board, and to appoint the chairman of the Supervisory Board. Other members of the Supervisory Board shall be appointed by Novator or by the Shareholders’ Meeting of the Company.


The management board of the Company (“Management Board”) shall consist of up to five members appointed by the Supervisory Board according to specific procedures ensuring transparent and equitable decision making process for both Shareholders. Netia Ventures shall be entitled to suspend the activities of and to dismiss members of the Management Board in case their appointment is inconsistent with such procedures.


For a 3-year period of time following execution of the Agreement, the Shareholders may not dispose of their Shares without the consent of the other Shareholder, except for permitted transfers within their respective capital groups. In the event of a change of control of any Shareholder, the other Shareholder has the right to repurchase Shares held by such Shareholder which underwent the change of control.


Additionally, the Agreement includes standard procedures which regulate the sale of Shares by the Shareholders following the 3-year lock up period. If a Shareholder wishes to dispose of its Shares, the other Shareholder is entitled to require the potential third party buyer to purchase its Shares on the same terms in the amounts commensurate with the percentages of Shares held by each Shareholder. Moreover, in case Novator decides to sell all of its Shares, it is entitled to require the other Shareholder to sell all of its Shares on the same terms. These provisions are secured by contractual penalties in the maximum amount of EUR 25 million. The payment of the contractual penalties does not exclude the right of the parties to the Agreement to claim damages in the amount exceeding the amount of such penalties. Any transfer of shares in violation of these transfer restrictions will be ineffective against the Company.


The Agreement includes a list of specific matters requiring unanimous approvals from both Shareholders regarding potential alterations to the share capital or constitution, issuing securities, disposals and acquisitions of assets, certain business, trading and accounting matters, indebtedness and dividend levels. In the event at any time any shareholder who is a member of the Novator group transfers any shares in the Company to a person who is not a party to the Agreement, all resolutions of the shareholders’ meeting will require the consent of Netia Ventures and all resolutions of the supervisory board will require the consent of all members of the supervisory board appointed by Netia Ventures.


Following the expiration of the 3-year lock up period, in case of key issues regarding running the Company’s business cannot be agreed, the Agreement includes an option for Novator to purchase Netia Ventures’ Shares at market price plus 10% and an option for Netia Ventures to sell such Shares to Novator at market price with a 10% discount.


The Agreement includes material terms and conditions for commercial cooperation based on which the Issuer and the Company shall conclude the following commercial agreements: (i) framework commercial agreement, (ii) distribution agreement, (iii) co-development agreement, (iv) IT sharing agreement, (v) fixed telephony supply agreement, (vi) WiMax supply agreement, (vii) interconnection agreement, and (viii) intellectual property sharing agreement.  Parties’ obligations under the framework commercial agreement and the distribution agreement are secured by the contractual penalties in the maximum amount of EUR 50 million.


The Agreement shall expire following a valid sale of all Shares by the Shareholders in accordance with its provisions. The Agreement includes limitations of competing activities, non-disclosure clause and a ban on employee recruitment during the agreed period following the expiration of the Agreement. The Shareholders accept an option of the Company’s conversion into a joint stock company no earlier than after the 2-year period following the date of the Agreement, and an option to introduce the Company’s Shares to public trading following three years from the date of the Agreement.


The Company will be communicating its plans separately but in general, it expects to invest over 650 million EURO in infrastructure and to reach a 20% market share within 10 years.

The Agreement is perceived by the Issuer to be significant as its value exceeds 10% of the Issuer’s own capital.


Key implications for the Issuer

1.     The Issuer will be the Company’s exclusive direct sales channel focusing on business customers.

2.     The Issuer will have guaranteed access to mobile products and infrastructure for the long term regardless of any ownership changes in the Company.

3.      The Issuer’s total investment will not exceed 90 million EURO.

4.      Taking into account the negative impact of potential cannibalization of Issuer’s existing products and not counting the positive cross-selling effects, nor additional revenues from the Company to the Issuer, the incremental mobile revenues to be booked by the Issuer could reach as much as PLN 100 million in the first full year of the Company’s operation and as much as PLN 400 million by year 5.

5.      The fixed line services to be offered by the Issuer as the Company’s primary partner and potential outsourcing services to be provided by the Issuer to the Company will represent additional important sources of revenue streams to the Issuer as well as synergy benefits for the Company.

6.      On top of that, the Issuer expects additional benefits, not quantified at this time, from enhanced product offering including convergent services, which should increase customer loyalty and reduce churn, and from an extended geographic reach, which will help expand the Issuer’s customer base.