MTA » Topics » Legal proceedings pending before the competent courts, affecting Magyar Telekom in excess of HUF 60 Million

This excerpt taken from the MTA 20-F filed May 11, 2005.

Legal proceedings pending before the competent courts, affecting Magyar Telekom in excess of HUF 60 Million

        In January, 2002, the Prime Minister's Office entered into a contract (effective February 1, 2002) with Magyar Telekom Rt. to revise and terminate the Nationwide Concession Contract and Local Concession Contracts signed in 1994, and to establish terms of universal telecommunications services to be provided by Magyar Telekom. According to the contract, the Universal Telecommunications Fund, established by the Act on Communications, was obliged to pay certain fees to universal service providers, as specified in the relevant laws. The Universal Telecommunications Fund failed to make this payment when due. Magyar Telekom Rt. unsuccessfully tried to compel payment in an out of court procedure. In June 2004, Magyar Telekom Rt. requested a municipal court to compel the legal successor of the Universal Telecommunications Fund (the Universal Electronic Telecommunications Fund) to pay HUF 194 million in interest for the late payment plus legal costs. In July 2004, Magyar Telekom Rt. increased its claim by HUF 3,294 million, the unpaid sum for 2003, i.e. our total claim is now HUF 3,488 million. The municipal court set a hearing date for March 2005. It is expected that Magyar Telekom will reduce its claim to approximately HUF 2 billion.

        In November 2002, the CAC designated TMH as an SMP in the national interconnection market. TMH, under statutory obligations, filed its cost calculation methodology and relevant cost/tariff data based on the mandatory LRIC model. Pannon was also designated by the CAC as an SMP in the same relevant market, but it chose to appeal the decision and refused to submit its cost data and LRIC model. To avoid competitive disadvantage and to seek non-discriminatory treatment, TMH filed an official request with the CAC for a temporary staying order for the execution of the decision regarding the implementation of its SMP obligations until the final settlement of the judicial review initiated by Pannon.

        The court of first instance issued a staying order on the execution of the SMP decision with respect to Pannon but this order was appealed successfully by the CAC. Pannon appealed that decision and the Supreme Court required the court of first instance to start a new proceeding, which is currently in progress. TMH intervened in the case in support of the NCA.

        TMH withdrew the LRIC model, which it originally filed in December 2002, because the legal situation was unclear and no valid regulation providing a guideline for the LRIC model existed. Lack of such guideline meant that equal treatment of market participants could not be ensured. Chairman of CAC informed TMH that the CAC accepted the withdrawal, but it had to continue the procedure and ordered TMH to decrease its fixed-to-mobile termination fees by about 10 percent, effective September 1, 2003. This resulted in inconsistency with respect to call termination charges as Pannon was not under the same legal obligation, due to the staying order issued by the court of first instance on the execution of the SMP decision. However, Pannon later chose to follow TMH on its own initiative and lowered its mobile termination charges by five percent, effective October 1, 2003. TMH challenged the CAC's decision in court on procedural grounds as the CAC had no legal right to continue to consider the procedure binding.

        The court of first instance in its decision on March 3, 2005 found that the CAC's decision was unlawful and ordered it to carry out a new procedure. The NCA did not appeal this decision while TMH appealed the choice of legal regulation ordered to be used in the new proceeding. The judgement on the

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merits of the case is now final and binding. Since in the new proceeding the court will be bound by the judgement regarding the merits of the case, the new proceeding cannot be initiated as long as TMH's appeal is not judged, during which time the original decision of the CAC remains annulled.

        In November 2003, the Supreme Court upheld the decision of the CAC in the Pannon case and ordered the telecommunications authority to re-launch the entire market analysis and SMP-designation procedure. As a result of these new proceedings finalized in November 2003, both TMH and Pannon were again designated as SMPs in the national interconnection market, but Pannon challenged that decision and failed to submit cost data. The Supreme Court then ruled that Pannon's SMP designation in 2002 was lawful. The case relating to Pannon's 2003 SMP designation is still pending.

        In May 2004, the NCA ordered TMH to apply 37 HUF/peak minute and 20.50 HUF/off-peak minute fixed-to-mobile termination tariffs (approximately 8.7 percent decrease), effective June 15, 2004. TMH challenged the decision in court and requested the court to suspend the execution of the resolution until the case is resolved. The court of first instance decided in favour of TMH, but did not suspend the resolution of the NCA. The NCA filed its appeal against the decision and TMH also appealed against certain parts of the reasoning, requesting again that the court suspend the execution of the resolution. The case is ongoing and the next hearing is scheduled for June 8, 2005.

        Pursuant to the Act on Electronic Communications, the NCA launched in March 2004 a new market assessment and analysis procedure to identify SMPs in certain relevant markets. The NCA completed the analysis on January 17, 2005 and found all three GSM mobile operators in Hungary as SMPs in their respective national voice call termination markets subject to regulatory obligations. The NCA's decision maintains the asymmetry in the mobile operators' termination fees, as it allows a 20 percent difference between the lowest and the highest termination fee. Because of this asymmetry, TMH filed a suit to challenge this decision in court. The first hearing is scheduled for June 8, 2005.

        The NCA passed a resolution in December 2004 which ordered TMH to pay HUF 1,131 million to the Universal Electronic Telecommunications Fund. The resolution was based on a law that was annulled on October 1, 2004. TMH therefore believes that the resolution has no legal grounds. TMH appealed the resolution to Chairman of the NCA Council. The appeal was rejected and TMH filed a suit to challenge this decision in court and requested suspension of the decision. The court suspended execution of the decision until the final resolution of the case. The first hearing is scheduled for September 15, 2005. TMH believes that it has good chance of prevailing in this case.

        There are numerous lawsuits in progress in which plaintiffs are claiming damages for alleged disturbance caused by base stations operated by TMH. The sum of all such claims amounts to HUF 607 million. TMH believes that these claims are ill founded since base stations do not disturb owners of the neighbouring houses and fields in the use of their properties. Under this rationale, some of the Courts of Appeals have annulled unfavourable decisions rendered by the courts of first instance and ordered initiation of new proceedings. The majority of the lawsuits are before the courts of first instance. Risk from a judicial point of view is high, since the courts tend to rule in favour of the plaintiff in similar cases. TMH made a provision in its financial statement for the full amount of these claims. TMH expects to face unfavourable outcome for the majority of these cases.

        Magyar Telekom's subsidiary, EPT Rt. has a telephone bill dispute with Dentel Kft. with respect to services rendered from February to June 2004. EPT claims USD 828,531 plus 0.5 percent default payment penalty from the defendant. The case is in the harmonization phase prior to litigation. The case represents considerable risk since the counterparty seems reluctant to seek an amicable resolution of the dispute.

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        A group of private individuals has alleged that their personal rights were violated as a result of unauthorized tapping and recording of their telephone conversations in the service area of Maktel and is seeking EUR 3,328,410 for damages. In January 2001, the leader of the opposition party (the current Prime Minister) published a report on widespread unauthorized tapping of telephone lines in Macedonia, which included as evidence several hand-written transcripts of tapped telephone conversations. This is the first case of its kind, without any precedent. As a result, Maktel is not able to assess the likely outcome of the case.

        Newsphone DOO Skopje in Macedonia initiated proceedings against Mobimak alleging that Mobimak unilaterally terminated a contract for collection of subscribers' debts and claimed damages for lost profit and compensation for delivered services (unpaid invoices). The claimed damage in a form of lost profit is MKD 978,660,988 (approximately EUR 15,976,000) plus interest from April 18, 2002. The compensation claimed for unpaid services is MKD 4,422,325 (approximately EUR 72,000) plus interest from May 15, 2002. Newsphone alleges that Mobimak terminated the contract unilaterally against its termination provisions. Newsphone also claims that Mobimak did not pay for services delivered while the contract was in force. It is Mobimak's view that during the trial period, Newsphone breached several of its contractual obligations and, in addition, Newsphone had a conflict of interest. Mobimak is of a view that the trial period was set up to evaluate the whole project and make necessary changes, and if such changes could not be agreed, each party had the right to terminate the contract. The case is in its initial (hearings) phase. Mobimak expects that this procedure will be long lasting and complex due to the large amount of the damages sought and therefore the outcome of the case cannot be predicted.

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