HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended September 30, 1996
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 1-11484
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3652685
(State or other jurisdiction of (I.R.S. Employer Identification No.
incorporation or organization)
100 First Stamford Place, Stamford, CT 06902
(Address of principal executive)
offices)
(203)348-9069
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the lastest possible date:
Common Stock, $.001 par value 4,179,626 Shares
(Class) (Outstanding at November 14, 1996)
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information
Consolidated Condensed Balance Sheets 2
Consolidated Condensed Statements of Operations 3
Consolidated Condensed Statements of Stockholders' Equity 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 20
Signature 21
1
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
<S> <C> <C>
Assets September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 11,049 $ 16,192
Restricted cash 1,838 1,757
Accounts receivable 3,236 1,399
VAT receivable, net 5,091 4,432
Prepayments and other 130 131
Other current assets 2,114 1,598
----------- -----------
Total current assets 23,458 25,509
----------- -----------
Property, plant, and equipment 69,074 55,353
Less accumulated depreciation 3,309 1,131
----------- -----------
Property, plant and equipment, net 65,765 54,222
----------- -----------
Goodwill and intangibles, less accumulated amortization 14,467 19,768
Other assets 974 6,570
Restricted cash 5,037
Construction deposits 16,344 4,318
----------- -----------
Total assets $ 126,045 $ 110,387
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 8,854 $ 9,699
Short-term loans 74,827 33,982
Accounts payable 9,303 8,835
Due to related parties 7,749 3,075
Accruals 2,758 5,564
Other current liabilities 4,514 2,253
----------- -----------
Total current liabilities 108,005 63,408
----------- -----------
Long-term debt, excluding current installments 33,194 23,467
Advance subscriber payments, long term 2,136
Due to related parties 4,314
----------- -----------
Total liabilities 145,513 89,011
----------- -----------
Commitments and contingencies
Minority interest 1,611 5,637
Stockholders' equity:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued 4,171,626 shares
in 1996 and 4,015,039 shares in 1995 4 4
Additional paid-in capital 48,008 45,358
Accumulated deficit (60,688) (26,192)
Foreign currency translation adjustment (7,660) (2,381)
Deferred compensation (743) (1,050)
----------- -----------
Total stockholders' equity (21,079) 15,739
----------- -----------
Total liabilities and stockholders equity $ 126,045 $ 110,387
============ ===========
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
2
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the Three and Nine Month Periods Ended September 30, 1996 and 1995
( In thousands, except share and
per share data) ( Unaudited )
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
TELEPHONE SERVICES REVENUES, NET $ 5,034 $ 965 $ 14,727 $ 2,204
Operating expenses:
Operating and maintenance expenses 4,594 5,572 16,068 12,248
Depreciation and amortisation 1,109 364 3,026 1,129
Management fees 1,476 445 4,829 1,333
Cost of termination of former Officers
and Directors 6,260 6,260
------- ------ ------- ------
Total Operating Expenses 13,439 6,381 30,183 14,710
------- ------ ------- ------
LOSS FROM OPERATIONS (8,405) (5,416) (15,456) (12,506)
Other income (expenses):
Foreign exchange losses (506) (1,008) (2,096) (2,154)
Interest expense (4,265) (583) (11,146) (1,492)
Interest income 50 80 942 484
Other, net (554) (95)
------------ ------------- ----------- --------
LOSS BEFORE MINORITY INTEREST (13,680) (6,927) (27,851) (15,668)
MINORITY INTEREST 575 912 1,541 2,280
------- ------ ------- ------
LOSS BEFORE EXTRAORDINARY ITEM (13,105) (6,015) (26,310) (13,388)
EXTRAORDINARY ITEM (8,186)
------------ ------------- ---------- ---------
NET LOSS $ (13,105) $ (6,015) $ (34,496) $ (13,388)
======= ====== ======== ========
LOSS PER SHARE OF COMMON STOCK
BEFORE EXTRAORDINARY ITEM $ (3.14) $ (1.93) $ (6.31) $ (4.64)
EXTRAORDINARY ITEM $ $ (1.96)
------- ------- --------- ----------
NET LOSS $ (3.14) $ (1.93) $ (8.27) $ (4.64)
========== ====== ========- =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,167,006 3,116,784 4,166,610 2,887,776
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
For the Nine Month Period Ended September 30, 1996
(In thousands, except share data)
( unaudited )
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Foreign
Additional Currency Total
Common Paid-in Accumulated Translation Deferred Stockholders
Shares Stock Capital Deficit Adjustment Compensation Equity
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 4,015,039 $ 4 45,358 (26,192) (2,381) (1,050) $ 15,739
Common stock issuance 250,000 3,219 3,219
Exercise of warrants 3,016 31 31
Cancellation of shares (101,429) (1,775) (1,775)
Exercise of options 5,000 50 50
Options granted in connection
with termination agreement 1,125 1,125
Net loss (34,496) (34,496)
Foreign currency translation adjustment (5,279) (5,279)
Earned compensation 307 307
- ----------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1996 4,171,626 $ 4 48,008 (60,688) (7,660) (743) $ (21,079)
========= = ====== ======== ======= ===== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Month Periods Ended September 30, 1996 and 1995
(In thousands) ( Unaudited )
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
---- ----
Net cash used in operating activities $ (20,665) $ (313)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (32,060) (10,208)
Cash received from sale of subsidiaries stock 1,464
Acquisition of interests in subsidiaries (330) (2,784)
Adjustment of minority interest 546
Proceeds from sale of interest in affiliate 130 198
Increase in intangible assets (792)
Loan receivable (11)
--------- ---------
Net cash used in investing activities (33,052) (10,795)
--------- ---------
Cash flows from financing activities:
Borrowings under long-term debt 8,772 6,258
Proceeds from short-term loans 94,303 5,562
Proceeds from exercise of options and warrants 31
Repayments of long-term debt (1,890)
Deferred offering costs paid (37)
Repayment of short-term loans (53,458)
--------- ---------
Net cash provided by financing activities 47,758 11,783
--------- ---------
Effect of foreign exchange rate changes on cash 816 (508)
--------- ---------
Net increase (decrease) in cash and cash equivalents (5,143) 167
Cash and cash equivalents at beginning of period 16,192 6,966
--------- ---------
Cash and cash equivalents at end of period $ 11,049 $ 7,133
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements have
been prepared without audit and, in the opinion of management,
include all adjustments consisting mainly of normal recurring
accruals necessary for fair presentation. Results for the interim
periods are not necessarily indicative of the results for a full
year.
(2) Cash and Cash Equivalents and Restricted Cash
(a) Cash and Cash Equivalents
At September 30, 1996, cash of $11,049,000 comprised the
following: $11,018,000 consisting of $2,702,500 denominated
in U.S. dollars, the equivalent of $16,500 denominated in
German Deutsche Marks and the equivalent of $8,299,000
denominated in Hungarian Forints on deposit with Hungarian
government-owned and foreign banks in Hungary, and; $31,000
on deposit in the United States.
(b) Restricted Cash
At September 30, 1996, approximately $1,838,000 of cash
denominated in Hungarian Forints was restricted under
concession contract fulfillment guarantees with restrictions
to be removed principally upon the successful attainment of
certain operational requirements as prescribed in the
concession agreements. The Company expects to satisfy the
operational requirements within one year and therefore the
restricted cash is shown as a current asset.
In addition, at September 30, 1996, approximately $5,037,000
of cash denominated in U.S. Dollars was deposited in escrow
accounts under terms of construction contracts.
(3) Related Parties
Current and long-term amounts due to related parties totalling
$12,063,000 at September 30, 1996 is comprised of the following:
$34,000 due to Hungarian Teleconstruct Corp. ("Teleconstruct") for
rent and other services, plus interest; $2,166,000 due to
TeleDanmark A/S ("TDI") for management fees accrued under the
management agreement; $4,929,000 due to a subsidiary of Citizens
Utilities Company (Citizens Utilities Company and its subsidiaries
are hereinafter referred to as "Citizens") for reimbursable
management costs and management fees accrued under the Management
Services Agreement; and $4,934,000 representing payments due to
former officers under separate termination agreements.
6
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
Included in other assets at September 30, 1996 is $250,000 due
from a former director of the Company for funds advanced on a
personal mortgage.
The Company purchased from Teleconstruct the premises used as
offices by the Company and its subsidiary HTCC Consulting Rt. in
Budapest, Hungary for a price of $393,000. The Company also
purchased from Teleconstruct a residential apartment in Budapest
for a price of $250,000.
The Company paid legal fees to a former officer of approximately
$146,000 during the nine months ended September 30, 1996. In
addition, the Company paid approximately $201,000 in the third
quarter to three former officers under separate termination
agreements.
The Company paid Citizens approximately $1.5 million in management
fees and reimbursable costs during the nine months ended September
30, 1996, and an additional $5.1 million in October, 1996 under
the terms of the Management Services Agreement.
Included in long-term debt at September 30, 1996, is approximately
$6.0 million borrowed from TDI by subsidiaries under subordinated
loan agreements.
(4) Credit Facility
On March 29, 1996, the Company entered into a $75.0 million
Secured Term Loan Credit Facility ("Credit Facility") and,
together with HTCC Consulting, a related Pledge and Security
Agreement with Citicorp North America, Inc. As of September 30,
1996, the Company had used $74.8 million from the Credit Facility
to repay all the funds advanced or guaranteed by Citizens and
Chemical Bank pursuant to certain loan agreements between the
Company and such parties, to meet contractual commitments
pursuant to construction contracts and operating expenses. In
April, 1996, the Company recorded an extraordinary loss of
approximately $8.2 million representing a non-cash charge relating
to the write off of the remaining unamortized deferred financing
costs pertaining to the Citizens Loan Agreement.
On October 15, 1996, the Company and its subsidiaries entered into
a $170 million 10-year Multi-Currency Credit Facility with
Postabank Es TakarEkpEnzto r ("Postabank"), a Hungarian commercial
bank (the "Postabank Credit Facility"). Proceeds from the loan may
be drawn entirely in Hungarian Forints and up to 20% of the
principal may be drawn in U.S. Dollars through March 31, 1999.
7
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
Under the terms of the Postabank Credit Facility, drawdowns in
Hungarian Forints will bear interest at a rate of 2.5% above the
weighted average of the yield on six- and twelve-month discounted
Hungarian treasury bills while drawdowns in U.S. Dollars will bear
interest at 2.5% above LIBOR. Interest for the first two years may
be deferred at the company's option. Amounts outstanding in
Hungarian Forints, including any deferred interest, will be
payable in 32 equal quarterly installments beginning on March 31,
1999. Amounts outstanding in U.S. Dollars will be payable in equal
quarterly installments through December 31, 2002.
Concurrently with the Postabank Credit Facility, each subsidiary
entered into a Mortgage and Pledge Agreement pursuant to which
each subsidiary granted a security interest to Postabank in all
assets acquired or to be acquired with the funds provided by the
loan. In addition, the Company and HTCC Consulting entered into a
Security Agreement whereby they pledged, subject to certain
consents, their respective ownership interests in each subsidiary
as collateral.
In October 1996, pursuant to the Postabank Credit Facility, the
Company borrowed the equivalent of $82.3 million in Hungarian
Forints. Approximately $77.2 million of this amount was
used to repay Citicorp all funds advanced pursuant to the Credit
Facility, as amended, which includes $2.0 million in fees and
costs representing settlement in connection with the cancellation
of the Company's proposed private placement of debt securities.
The remaining $5.1 million was used to pay Citizens management
fees and reimbursable costs pursuant to the Management Services
Agreement with Citizens. An additional $5.6 million of the
facility was used to pay loan origination fees and costs to
Postabank under the terms of the loan agreement, $2 million of
which will be reimbursed to the Company in equal quarterly
installments over a two year period, and which will be amortized
over the life of the loan facility. The remainder of the proceeds
will be used to complete construction of its telecommunication
networks, provide additional working capital, and refinance or
repay other existing debt.
In connection with the Postabank Credit Facility, on October 18,
1996, the Company entered into certain agreements with Citizens in
consideration for, among other things, Citizens' support in
obtaining the Postabank Credit Facility and fulfilling all terms
under the Credit Facility. Under such agreements, the Company (i)
extended to September 12, 2000 the exercise periods of a warrant
and certain stock options to purchase approximately 2,500,000
million shares of common stock, (ii) granted Citizens the option
to purchase an additional 875,850 shares of common stock at an
exercise price of $12.75 exercisable through September 12, 2000,
and (iii) agreed to a cash payment to Citizens of $750,000. As a
result of these transactions and other transactions, Citizens owns
approximately 19.2% of the Company's outstanding shares of common
stock and has rights to purchase additional shares which
would, on a fully diluted basis, enable Citizens to increase its
ownership interest to 58% of the Company's common stock.
8
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
As a result of entering into the Postabank Credit Facility, the
Company terminated all loan agreements with Citicorp in addition
to the Company's proposed private placement of debt securities as
noted above.
(5) Construction Commitments
In September 1994, Kelet-Nograd Com ("KNC") entered into contracts
with an unrelated corporation to provide for the construction of a
local telephone network. The contracts, including subsequent
renegotiations, total approximately $33.5 million. Construction is
expected to be completed in the first quarter of 1997.
In September 1996, KNC entered into a $1.8 million contract with
an unrelated corporation to provide for additional network
construction within the concession area. Construction under this
contract is expected to be completed by the end of 1996.
In May 1996 Papa es Tersege Telefon Koncesszios Rt. ("Papatel")
entered into a contract with an unrelated corporation which
provides for the construction of a local telephone exchange in its
service area at a fixed price of approximately $13.2 million. The
contract requires full completion of construction in 1996.
In May 1996, Papatel entered into a contract with an unrelated
corporation to provide additional network construction in the Po
pa primary region at a fixed price of $2.9 million. The contract
requires 100% completion by the end of 1996.
In May 1996, Hungarotel To vk^zlEsi Rt. ("Hungarotel") entered
into a contract with an unrelated corporation to provide for
construction of a telephone network with capacity of 11,000 lines
in its Orosho za service area at a fixed price of $14.2 million.
The contract requires 60% completion by December 31, 1996, and
100% completion by the end of February, 1997.
In June 1996, Hungarotel entered into a contract with an unrelated
corporation to provide for the construction of a telephone network
with a capacity of 40,000 lines in its BEkEscsaba service area at
a fixed price of $45.0 million. The contract requires installation
of 14,000 lines by December 31, 1996, and the remaining 26,000
lines by December 31, 1997. Financing will be provided by the
contractor for the entire contract amount. The financing agreement
requires repayment in 19 quarterly installments commencing March
31, 1998, with final payment due December 31, 2002. Interest will
be charged at a variable rate computed as the weighted average of
the 6 and 12 month Hungarian National Treasury Bill interest rate
for each quarter plus 2.5%. Interest payments may be deferred at
the Company's option until December 31, 1997.
9
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The balance sheet at September 30, 1996 includes approximately
$16.3 million of advanced payments on construction contracts to be
applied against future contract invoices.
(6) Termination of Former Officers and Directors
On July 26, 1996, the Company entered into Termination and Release
Agreements, Consulting Agreements and Non-competition Agreements
with its former Chief Executive and Chairman of the Board of
Directors, former Vice Chairman of the Board of Directors, and
former Chief Financial Officer, Treasurer, Secretary and Director.
Pursuant to these agreements, the Company has agreed to make
payments for severance, consulting fees and non-compete agreements
amounting to $7.25 million, in equal monthly installments over a
72 month period commencing August 31, 1996. These commitments are
supported by letters of credits.
In connection with these agreements, the Company also issued
options to purchase 200,000 shares of common stock at an exercise
price of $14.00 per share.
The Company has recorded a charge of approximately $6.3 million in
the three month period ending September 30, 1996 related to these
agreements.
(7) Acquisition Adjustment
On May 21, 1996, the Company and Central Euro TeleKom, Inc. ( CET
) entered into a Settlement Agreement whereby the number of shares
to be issued to CET in connection with the acquisitions of
Hungarotel and Papatel was reduced based upon certain post-closing
purchase price adjustments. Pursuant to the Settlement Agreement,
the number of shares was reduced by 101,429. The reduction in
purchase price was reflected as a reduction to goodwill and the
reduction in the number of shares was reflected as a reduction to
common stock and additional paid-in-capital.
10
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended September 30, 1996 Compared With Three Months Ended
----------------------------------------------------------------------
September 30, 1995
------------------
Net Revenues
The company recorded net telephone service revenues of $5.0 million for the
three months ended September 30, 1996 as compared to revenues of $1.0
million for the three months ended September 30, 1995, an increase of $4.0
million.
Measured service revenues increased $4.0 million from $1.1 million for the
three months ended September 30, 1995 to $5.1 million for the three months
ended September 30, 1996. These revenues have been offset by net
interconnect charges which totalled $2.4 million for the three months ended
September 30, 1996 as compared to $500 thousand for the three months ended
September 30, 1995, an increase of $1.9 million. This increase in net
measured service revenues is the result of an increase in average access
lines in service from 15,824 lines for the three months ended September 30,
1995 to 76,441 lines for the three months ended September 30, 1996. The
principal reason for this significant increase in lines was the addition of
44,414 lines in the Hungarotel and Papatel areas which were acquired from
Matav, the former state-controlled monopoly telephone company, on December
31, 1995. Measured service revenues were also higher due to an increase in
the call tariff rates for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995.
The Company recognized $1.9 million of revenues from connection and monthly
subscription fees during the three months ended September 30, 1996, as
compared to $300 thousand for the three months ended September 30, 1995. The
principal reasons for this increase relate to the addition of subscription
fees from Hungarotel and Papatel, which were not owned by the Company in the
prior period, and the Company's ongoing network construction program in all
of the operating areas which resulted in the connection of 5,810 subscribers
in the three months ended September 30, 1996 as compared to the connection
of 306 subscribers in the three months ended September 30,1995. Subscription
fees also increased due to a 34.1% increase in monthly Hungarian Forint
subscription rates which was favorable in relation to the devaluation of the
Hungarian Forint versus the U.S. Dollar.
Other operating revenues increased to $400 thousand in the three months
ended September 30, 1996 as compared to $52 thousand in the comparable 1995
period. This increase reflects additional revenues from the provision of
direct lines, telephone leasing and telephone sales.
Operating and Maintenance Expenses
Operating and maintenance expenses for the three months ended September 30,
1996 decreased $1.0 million, or 18%, to $4.6 million as compared to $5.6
million for the three months ended September 30, 1995. The $5.6 million of
operating expenses incurred in the three month period ended September 30,
1995 included non-cash charges totalling $2.5 million relating to deferred
stock compensation. Included in operating and maintenance expenses for the
three months ended September 30, 1996 was deferred stock compensation of
$133 thousand. Operating and maintenance expenses adjusted to remove the
effect of the deferred stock compensation totalled $4.5 million and $3.1
million for the three months ended September 30, 1996 and 1995,
respectively, an increase of $1.4 million, or 45%. The increase in adjusted
operating and maintenance expenses resulted primarily from the inclusion of
operating and maintenance expenses of Hungarotel and Papatel. On a per line
basis, however, adjusted operating and maintenance expenses decreased to
approximately $59 per average access line for the three months ended
September 30, 1996 from $195 for the three months ended September 30, 1995
as the Company achieved productivity improvements, including the decreased
use of labor intensive manual switchboards and the increased use of modern
switching technology.
11
<PAGE>
Depreciation and Amortization
Depreciation and amortization charges increased $700 thousand to $1.1
million for the three months ended September 30, 1996 from $365 thousand for
the three months ended September 30, 1995. This increase was due to the
increase in the value of plant and lines in operation, including an
additional 48,527 average lines in Papatel and Hungarotel which were in
service during the three months ended September 30, 1996. As the Company
proceeds with its capital expenditure programs and adds additional access
lines in each of the Operating Areas, depreciation and amortization expenses
are expected to increase.
Management Fees
Management fees pursuant to management service agreements increased more
than $1 million to $1.5 million for the three months ended September 30,
1996 from $445 thousand for the comparable 1995 period. Citizens' monthly
management fees commenced July 1, 1995, and for the three months ended
September 30, 1996, amounted to $1.4 million, of which $400 thousand was for
reimbursable costs. The management services agreement between the Company
and TDI expired during the third quarter of 1996.
Cost of Termination of Former Officers and Directors
For the three months ended September 30, 1996, the Company recorded a charge
totalling $6.3 million representing the present value of payments due and
options granted to former officers and directors under separate termination
agreements.
Loss from Operations
Loss from operations increased $3.0 million to $8.4 million for the three
months ended September 30, 1996 from $5.4 million for the three months ended
September 30, 1995. Adjusted for deferred stock compensation in addition to
the costs of termination of former officers and directors incurred during
the third quarter of 1996, loss from operations decreased by $900 thousand
to $2.0 million for the three months ended September 30, 1996 from $2.9
million for the three months ended September 30, 1995. This decrease was
principally due to the $900 thousand of income from operations contributed
by Hungarotel which was acquired December 31, 1995.
Foreign Exchange Losses
Foreign exchange losses decreased $500 thousand from $1.0 million for the
three months ended September 30, 1995 to $500 thousand for the three months
ended September 30, 1996. Such foreign exchange losses resulted from the
devaluation of the Hungarian Forint against the U.S. Dollar and the German
Mark. The Company has incurred debt and other obligations which are
denominated in U.S. Dollars and German Marks in order to commence the
construction of its telecommunication networks. During the three months
ended September 30, 1996, the Hungarian Forint devalued against the U.S.
Dollar and the German Mark by 3.4% and 3.1%, respectively, as compared to
5.3% and 2.8% during the three months ended September 30, 1995. The decrease
in foreign exchange loss was primarily attributable to the reduced
devaluation of the Hungarian Forint during 1996. It is the policy of the
National Bank of Hungary to continue to devalue the Hungarian Forint in
order to ensure its relative competitiveness. For the remainder of 1996, the
National Bank of Hungary has announced that it will manage the devaluation
of the Hungarian Forint against a basket of major currencies at a 1.2% rate
per month. Since a substantial portion of the liabilities within the
operating companies are denominated in currencies other than their
functional currency, the Hungarian Forint, the Company expects to continue
to incur additional foreign currency losses in the future.
Interest Expense
Interest expense increased $3.7 million to $4.3 million for the three months
ended September 30, 1996 from $600 thousand for the three months ended
September 30, 1995. This increase was attributable to higher average debt
levels in the three months ended September 30, 1996 as compared to the three
months ended September 30, 1995 as the Company incurred indebtedness in
order to continue the construction of its telecommunications networks. The
average rate of interest accrued by the Company on its indebtedness
decreased from 21.7% for the three months ended September 30, 1995 to 11.4%
for the three months ended September 30, 1996 as the proportion of U.S.
dollar and German Mark denominated debt increased during the 1996 period.
12
<PAGE>
Interest Income
Interest income decreased $30 thousand to $50 thousand for the three months
ended September 30, 1996 from $80 thousand for the three months ended
September 30, 1995 primarily due to the available cash being applied to
expansion of the telecommunication networks during the quarter.
Other, net
Other, net increased from zero for the three months ended September 30, 1995
to net charges of $550 thousand for the three months ended September 30,
1996 principally due to non-operating expenses and charges.
Net Loss
As a result of the factors discussed above, for the three months ended
September 30, 1996, the Company recorded a net loss of $13.1 million
compared to a net loss of $6.0 million for the three month period ended
September 30, 1995.
Nine Months Ended September 30, 1996 Compared With Nine Months Ended
--------------------------------------------------------------------
September 30, 1995
------------------
Net Revenues
Net telephone service revenues increased $12.5 million from $2.2 million for
the nine months ended September 30, 1995 to $14.7 million for the nine
months ended September 30, 1996.
Measured service revenues increased $12.5 million to $15.0 million for the
nine months ended September 30, 1996 from $2.5 million for the nine months
ended September 30, 1995. These revenues have been offset by net
interconnect charges totalling $6.5 million for the nine months ended
September 30, 1996 and $1.1 million for the nine months ended September 30,
1995, an increase of $5.4 million. This increase in measured service
revenues reflects an increase in average access lines in service to 72,104
lines during the nine months ended September 30, 1996 compared to 12,745
lines in the comparable nine month period in 1995. The Company commenced
operations in Raba-Com on January 1, 1995, in KNC on March 1, 1995 and in
Hungarotel and Papatel on January 1, 1996. Hungarotel and Papatel have
contributed an average of 48,527 lines during 1996. Measured service
revenues also increased due to increased average rates and call volume for
the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995. Net measured service revenues per average access
line increased $8 to $118 per average access line for the nine months ended
September 30, 1996 from $110 for the comparable nine month period in 1995.
The Company realized revenues totalling $5.1 million from connection and
monthly subscription fees during the nine months ended September 30, 1996 as
compared to $650 thousand for the nine months ended September 30, 1995, an
increase of $4.5 million. This increase relates to the Company's ongoing
network construction program in all of the Operating Areas which resulted in
the connection of 15,463 lines during the nine months ended September 30,
1996 compared to the connection of 376 lines during the nine months ended
September 30, 1995, in addition to the acquisition of 44,414 lines in
Hungarotel and Papatel at December 31, 1995. Subscription fees also
increased due to a 34.1% increase in monthly Hungarian Forint subscription
rates which was favorable in relation to the devaluation of the Hungarian
Forint versus the U.S. Dollar.
Other operating revenues increased to $1.2 million for the nine months ended
September 30, 1996 compared to $150 thousand for the comparable 1995 period.
This increase reflects additional revenues from the provision of direct
lines, telephone leasing and telephone sales.
13
<PAGE>
Operating and Maintenance Expenses
Operating and maintenance expenses for the nine months ended September 30,
1996 increased $3.9 million, or 32%, to $16.1 million compared to $12.2
million for the three months ended September 30, 1995. Included in operating
and maintenance expenses for the nine month period ended September 30, 1995
is a non-cash charge of $6.1 million relating to deferred stock
compensation. Included in operating and maintenance expenses for the nine
months ended September 30, 1996 is deferred stock compensation of $300
thousand. Operating and maintenance expenses adjusted to remove the effect
of the deferred stock compensation increased $9.7 million to $15.8 million
for the nine months ended September 30, 1996 from $6.1 million for the nine
months ended September 30, 1995. This increase is primarily due to the
addition of $5.8 million in operating and maintenance expenses incurred in
Hungarotel and Papatel during the nine months ended September 30, 1996 in
addition to increased operating and maintenance expenses in Rabacom and KNC
due to an 11,909 increase in the number of average lines in service during
the nine month period in 1996 as compared to the nine month period in 1995.
Additional expenses were also incurred by the Company to meet its increased
managerial requirements. On a per line basis, however, operating and
maintenance expenses decreased from $441 per average access line for the
nine months ended September 30, 1995 to $219 for the nine months ended
September 30, 1996, primarily the result of economies of scale achieved as
more access lines are placed in service. A contributing factor to lower per
line costs is that high labor and maintenance intensive manual switchboards
are being eliminated by modern digital switching technology.
Depreciation and Amortization
Depreciation and amortization charges increased $1.9 million to $3.0 million
in the nine months ended September 30, 1996 from $1.1 million for the
comparable 1995 period. This increase is due to the significantly higher
number of average access lines in service during the nine months ended
September 30, 1996 as compared to the previous period. As the Company
proceeds with its capital expenditure programs and adds additional access
lines in each of the Operating Areas, depreciation and amortization expenses
are expected to increase.
Management Fees
Management fees pursuant to management service agreements increased more
than $3.5 million to $4.8 million for the nine months ended September 30,
1996 from $1.3 million for the nine months ended September 30, 1995.
Management fees payable to Citizens for the nine months ended September 30,
1996 amounted to $3.9 million, of which $1.5 million was for reimbursable
costs. The management services agreement between the Company and TDI expired
in the third quarter of 1996.
Cost of Termination of Former Officers and Directors
For the nine months ended September 30, 1996, the Company has recorded a
charge totalling $6.3 million representing the present value of payments due
and options granted to former officers and directors under separate
termination agreements.
Loss from Operations
Loss from operations increased from $12.5 million for the nine months ended
September 30, 1995 to $15.5 million for the nine months ended September 30,
1996. Adjusted for deferred stock compensation in addition to the costs of
termination of former officers and directors incurred during 1996, loss from
operations increased $2.5 million to $8.9 million for the nine months ended
September 30, 1996 from $6.4 million for the nine months ended September 30,
1995. The increase in adjusted operating losses in 1996 was primarily due to
additional expenses incurred by the Company to expand management, project
oversight, engineering design and systems, and marketing which are necessary
to achieve rapid line growth and higher revenues, and provide for the
introduction and control of new services.
14
<PAGE>
Foreign Exchange Losses
Foreign exchange losses decreased $100 thousand from $2.2 million for the
nine month period ending September 30, 1995 to $2.1 million for the nine
month period ending September 30, 1996. Such foreign exchange losses
resulted from the devaluation of the Hungarian Forint against the U.S.
Dollar and the German Mark. The Company has incurred debt and other
obligations which are denominated in U.S. Dollars and German Marks in order
to commence the construction of its telecommunication networks. During the
nine months ended September 30, 1996, the Hungarian Forint devalued against
the U.S. Dollar and the German Mark by 13.4% and 6.6%, respectively, and
19.7% and 30.7% during the nine months ended September 30, 1995,
respectively. As discussed previously, it is the policy of the National Bank
of Hungary to continue to devalue the Hungarian Forint in order to ensure
its relative competitiveness. Since a substantial portion of the liabilities
within the operating companies are denominated in currencies other than
their functional currency, the Hungarian Forint, the Company expects to
continue to incur additional foreign currency losses in the future.
Interest Expense
Interest expense increased $9.6 million to $11.1 million for the nine months
ended September 30, 1996 compared to $1.5 million for the nine months ended
September 30, 1995. This increase was attributable to higher average debt
levels in the nine months ended June 30, 1996 as compared to the comparable
1995 period in order to finance the construction of its telecommunications
networks. The average rate of interest accrued by the Company on its
indebtedness decreased to 14.0% for the nine months ended September 30, 1996
compared to 25.6% for the nine months ended September 30, 1995, as the
proportion of US dollar and German Mark denominated debt increased.
Interest Income
Interest income increased $400 thousand to $900 thousand for the nine months
ended September 30, 1996 from $500 thousand for the nine months ended
September 30, 1995 primarily due to the increased cash available for
short-term investment during the first two quarters of 1996 as a result of
cash generated by the Operating Companies.
Other, net
Other, net increased from zero for the nine months ended September 30, 1995
to net charges of $100 thousand for the nine months ended September 30, 1996
principally due to non-operating expenses and charges.
15
<PAGE>
Loss Before Extraordinary Item before Minority Interest
As a result of the factors discussed above, loss before extraordinary item
and minority interest increased $12.1 million to $27.8 million for the nine
months ended September 30, 1996 from $15.7 million for the nine months ended
September 30, 1995.
Extraordinary Item
For the nine months ended September 30, 1996, the Company recorded non-cash
extraordinary charge of $8.2 million charge relating to the write-off of the
remaining unamortized deferred financing costs pertaining to the Citizens
Loan Agreement, on repayment of the relevant loan.
Net Loss
As a result of the factors discussed above, for the nine months ended
September 30, 1996, the Company recorded a net loss of $34.5 million
compared to a net loss of $13.4 million for the nine month period ended
September 30, 1995.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company was considered a development stage company through March 31,
1995. It has historically funded its capital requirements primarily through
a combination of debt, equity and vendor financing. The ongoing development
and installation of the network in each of the Company's operating areas
requires significant capital expenditures. These expenditures, together with
associated operating expenses, will continue to result in substantial cash
requirements at least until a customer base large enough to provide
sufficient revenues and operating cash flow is established.
On March 29, 1996, the Company entered into a $75.0 million Secured Term
Loan Credit Facility ("Credit Facility") and, together with HTCC Consulting,
a related Pledge and Security Agreement with Citicorp North America, Inc. On
April 3, 1996, the Company used $50.8 million from the Credit Facility to
repay all the funds advanced or guaranteed by Citizens and Chemical Bank. As
of such date, all loan agreements with Citizens and Chemical Bank were
terminated. Accordingly, in April 1996, the Company incurred a non-cash
charge of approximately $8.2 million representing the remaining unamortized
deferred financing costs pertaining to the loan agreements with Citizens.
In order to meet contractual commitments pursuant to construction contracts
in addition to ongoing operating expenses, the Company used an additional
$24.0 million from the Credit Facility. As of September 30, 1996, the
Company had borrowed a total of $74.8 million from the Credit Facility.
On October 15, 1996, the company and its subsidiaries entered into a $170
million 10-year Multi-Currency Credit Facility with Postabank Es
TakarEkpEnzto r ("Postabank"), a Hungarian commercial bank (the "Postabank
Credit Facility"). Proceeds from the Postabank credit facility may be drawn
entirely in Hungarian Forints and up to 20% of the principal may be drawn in
U.S. Dollars through March 31, 1999. Drawdowns in Hungarian Forints will
bear interest at a rate of 2.5% above the average of the yield on six- and
twelve-month discounted Hungarian treasury bills while drawdowns in U.S.
Dollars will bear interest at 2.5% above LIBOR. Interest for the first two
years may be deferred at the company's option. Amounts outstanding in
Hungarian Forints, including any deferred interest, will be payable in 32
equal quarterly installments beginning on March 31, 1999. Amounts
outstanding in U.S. Dollars will be payable in equal quarterly installments
through December 31, 2002.
Concurrently with the Postabank Credit Facility, each subsidiary entered
into a Mortgage and Pledge Agreement pursuant to which each subsidiary
granted a security interest to Postabank in all assets acquired or to be
acquired with the funds provided by the loan. In addition, the Company and
HTCC Consulting entered into a Security Agreement whereby they pledged,
subject to certain consents, their respective ownership interests in each
subsidiary as collateral.
17
<PAGE>
In October 1996, pursuant to the Postabank Credit Facility, the Company
borrowed the equivalent of $82.3 million in Hungarian Forints. Approximately
$77.2 million of this amount was used to repay Citicorp all funds advanced
pursuant to the Citicorp Credit Facility, which includes $2.0 million in
fees and costs representing settlement in connection with the cancellation
of the Company's proposed private placement of debt securities. The
remaining $5.1 million was used to pay Citizens management fees and
reimbursable costs pursuant to the Management Services Agreement with
Citizens. An additional $5.6 million of the facility was used to pay loan
origination fees and costs to Postabank under the terms of the loan
agreement, $2 million of which will be reimbursed to the Company in equal
quarterly installments over a two year period, and which will be amortized
over the life of the loan facility. The remainder of the proceeds will be
used to complete construction of its telecommunication networks, provide
additional working capital, and refinance or repay other existing debt
obligations.
As a result of entering into the Postabank Credit Facility, the Company
terminated all loan agreements with Citicorp in addition to the Company's
proposed private placement of debt securities.
On June 28, 1996, the Company's subsidiary Hungarotel entered into a $45.0
million construction contract for the construction of a telephone network
with a capacity of 40,000 lines in its BEkEscsaba service area. Financing
will be provided by the contractor for the entire contract amount. The
financing agreement requires repayment in 19 quarterly installments
commencing on March 31, 1998, with final payment due December 31, 2002.
Interest will be charged at a variable rate computed as the weighted average
of the six and 12 month Hungarian National Treasury Bill interest rate for
each quarter plus 2.5%. Interest payments may be deferred until December 31,
1997.
In 1995, the Company applied for network construction subsidies from the
Hungarian government. In December 1995, certain of the Company's
applications were approved, subject to certain conditions, resulting in the
Company being awarded subsidies aggregating $0.9 million. The Company
expects to receive such subsidies in installments in the fourth quarter of
1996 and the first quarter of 1997. One-half of such funds will be received
in the form of a grant and one-half in the form of a non-interest bearing
loan repayable over a three year period.
Net cash used by operating activities increased to $20.7 million for the
nine months ended September 30, 1996 compared to $313 thousand for the nine
months ended September 30, 1995. For the nine months ended September 30,
1996, the Company used $33.1 million in investing activities compared to
$10.8 million for the nine months ended September 30, 1995. Of the $33.1
million used for investing activities through September 30, 1996, $32.1
million was used to fund the construction of the Company's
telecommunications networks. Financing activities provided net cash of $47.8
million and $11.8 million for the nine months ended September 30, 1996 and
1995, respectively.
18
<PAGE>
The Company anticipates that the capital expenditures necessary to complete
the modernization and construction of its networks will require
approximately $31.0 million through the end of 1996 and $50.4 million
through the end of 1997. Although the company expects that proceeds from the
Postabank Credit Facility, together with vendor financing, other borrowings
and internally generated funds will be sufficient to meet its capital
requirements under existing construction contracts, there can be no
assurance that any future financing (other than the Postabank Credit
Facility and vendor financing provided by existing contractors) will be
available.
In order to meet its financial obligations incurred in connection with the
acquisition and construction of its telecommunications networks and to meet
ongoing operational requirements and working capital needs, it is necessary
for the Company to increase its operating cash flows. The Company believes
that there will be sufficient customers in its operating areas willing and
able to pay for telecommunications services. The Company's ability to
generate revenues sufficient to meet its long-term financing obligations and
operating and other expenses will be dependent primarily on the Company's
ability to meet the telecommunications needs of its existing and potential
subscribers. There can be no assurance that the Company's operations will
achieve sufficient cash flows necessary to service its long-term financing
obligations, or that the Company will be able to obtain new financing
arrangements or raise new equity on commercially reasonable terms adequate
to meet its operational needs and payment obligations.
INFLATION AND FOREIGN CURRENCY
For the nine months ended September 30, 1996, inflation in Hungary was
approximately 22% on an annualized basis. It is the stated policy goal of
the Hungarian government to keep inflation from exceeding approximately 20%
for the entire year.
The Company's Hungarian operations generate revenues in Hungarian Forints
and incur operating and other expenses, including capital expenditures, in
Hungarian Forints, U.S. Dollars and German Deutsche Marks. The Company's
resulting foreign currency exposure cannot be practically hedged due to the
significant costs involved and the lack of a market for such hedging. In
addition, certain of the Company's balance sheet accounts are expressed in
foreign currencies other than the Hungarian Forint, the Company's functional
currency. Accordingly, when such accounts are converted into Hungarian
Forints, the Company is subject to foreign exchange gains and losses which
are reflected as a component of net income or loss. When the Company and its
subsidiaries' Forint-denominated accounts are translated into U.S. Dollars
for financial reporting purposes, the Company is subject to translation
adjustments, the effect of which are reflected in a component of
stockholders' equity.
While the Company has the ability to increase the prices it charges for its
services commensurate with increases in the Hungarian Producer Price Index
("PPI") pursuant to its licenses from the Hungarian government, it may
choose not to implement the full amount of the increase permitted due to
competitive and other concerns. In addition, the rate of increase in the
Hungarian PPI may be less than the rate at which the Hungarian Forint
devalues. As a result, the Company may be unable to generate cash flows to
the degree necessary to meet its obligation in currencies other than the
Hungarian Forint.
19
<PAGE>
PART II -- OTHER INFORMATION
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1 .Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security - Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-k
(a) Exhibits
Exhibits 10.75 English translation of Construction Contract between
Hungarotel Tavkozlesi Rt. and Ericcson Kft.dated May 17, 1996 (as amended)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated July 26, 1996 under Item 5.
"Other Events" reporting certain management and director changes.
20
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
(Registrant)
By /s/ James G. Morrison
---------------------
James G. Morrison
President and Chief
Executive Officer
By /s/ Richard P. Halka
---------------------
Richard P. Halka
Controller
21
<PAGE>
Exhibit 10.75
HUNGAROTEL TAVKOZLESI RESZVENYTARSASAG
ERICSSON KORLATOLT FELELOSSEGU TARSASAG
TURN-KEY CONTRACT
May 17, 1996
<PAGE>
1 INTRODUCTION
1.1 Purpose
This document constitutes the agreement between Hungarotel Rt. and
Ericsson Kft., governing the latter's provision, on a Turn-key basis,
of a telephone network of 7,500 telephone lines for the Oroshaza and
Bekescsaba Primary Regions based upon the tender invitation dated 1
October, 1995 from Owner.
1.2 Parties declare they have all the necessary authorizations to
conclude the present Contract.
2 DEFINITIONS
"Building(s)" means the premises as described in Attachment V used for
technical purposes which are necessary and suitable for the
accommodation of the telecommunication equipment and system included in
the Contract. The building can be ordinary construction or container.
"Change Order" means the process to handle the changes requested by
Owner or Contractor that will affect the value, schedule, or design of
the Contract.
"Connected Capacity/Connected Lines" means those Ordered Lines where
the connection to particular subscribers actually occurred and by
connecting a telephone set to it voice grade telephone calls can be
originated and terminated.
"Contract" means this Contract concluded between Owner and Contractor,
including all the documents being referred there as well as the
mutually accepted modifications and/or alterations.
"Contractor" means Ericsson Kft and includes its successors.
"Customer Premise Equipment" (CPE) means the subscriber
telephone instrument.
"Day" means calendar day unless stated otherwise.
"Goods" means all the equipment, material, components, software, or any
other component, which must be fully or provisionally type approved in
Hungary, where applicable, to be supplied by Contractor to Owner in
accordance with the Contract necessary for the normal, commercial
operation of the lines ordered for this Contract.
"Installation" an all inclusive term referring to the
placement of equipment and material and encompassing all
related general (e.g. construction, erection) and specific
(e.g. splicing, connecting, and testing) terms employed to
describe such activities.
<PAGE>
"Line Connection Certificate" means the form statement as defined as
Attachment VI/11 duly signed by the subscriber upon installation and
testing, as described in Attachment VI of a Connected Line which will
certify the full capability of the connection and for normal commercial
operation of the Connected Line.
"Line Price" means the fixed price of USD 1,300 per Ordered
Line.
"Ordered Capacity/Ordered Lines" mean any and all particular telephone
lines which Owner requested Contractor to build under the Contract
including those requested via Change Orders; the term comprises
Connected Lines and Rejected Lines.
"Ordered Spare Capacity/Ordered Spare Lines" means prospective
telephone lines which Owner requested Contractor to build under the
Contract where it is not required to implement the subscriber premises
radio equipment (FAU/SRT).
"Owner" means Hungarotel Rt. and includes its successors.
"Parties" mean the Owner and the Contractor together.
"Permit" means all official documents necessary for the implementation
and turning into commercial operation of the Project with special
regard to network and building construction, access to public
utilities, type approval if applicable, of all the Goods, radio
licenses for all relevant Goods required by law, or other access from
all government agencies or third parties.
"Project" means all Goods and Services to be delivered and
performed for the PRTN
"Project Manager" means the authorized representative of Owner and
Contractor being entitled to control all the activities to be performed
by Owner and Contractor as well as to give instructions and/or
approvals, including the express authority to hand over/take over of
completed work products of Contractor, which are necessary regarding
the daily completion of the Contract.
"Project Executive" means the authorized officers of both parties
having full authority to execute the Project.
"Project Schedule" A comprehensive, computer based schedule employing
Critical Path methodology, which identifies relationships between
project tasks and, based on the quantity of work required, resources
assigned, and expected productivity, predicts the achievement of key
project milestones.
<PAGE>
"PRTN" Primary Region Telephone Network, (Bekescsaba and Oroshaza
Primary region) including the telephone infrastructure to be provided
under this Contract.
"Rejected Lines" mean those Ordered Lines where Contractor was unable
to connect a subscriber even after Contactor's best effort, the minimum
of which is provided for in the Contract; the Rejected Lines shall in
effect be considered as additional Ordered Spare Capacity/Ordered Spare
Lines.
"Services" mean all the activities which appear in non-objectified form
(therefore are not "Goods") but form an integral, inseparable part of
the Project, assembly, commissioning, design, installation,
commissioning, and project management necessary to put the Ordered
Lines into commercial operation.
"Site" means locations, building and other places where the
implementation work will take place.
"Sub-Contractor" means those corporate bodies or entrepreneurs licensed
or qualified to perform activities on the commission of Contractor and
with the full and unlimited responsibility of the Contractor to fulfill
the Project.
"System Acceptance" Owners statement declaring that all contractual
obligations of the Contractor, except where explicitly provided
otherwise are fulfilled.
"System Integration" means those activities of Contractor which are
necessary for the connection and communication of the existing and the
new telephone system to be implemented by Contractor in the PRTN on the
level of the host exchanges within the relevant primary region.
"Technical Documentation" means all the technical documents for all
components and the network installed in accordance with the Contract
that Contractor has to deliver to Owner for the normal commercial
operation of the Project as required by law.
"Telecommunications Authority of Hungary" (HIF) means a government
agency authorized to issue telecommunication- related licenses and/or
related permits.
"Test" means the procedures and other measurements carried out by
Contractor on units of the Project according to the manufacturers'
instructions and the internal proceedings and practices of Contractor
and applicable Hungarian rules and regulations aimed to check the
compliance with the relevant technical and functional parameters for
the commercial operation of the Project delivered to the Owner in a
format approved in the Contract.
<PAGE>
"Technological Spare Capacity" means an excess number of prospective
telephone lines which were not ordered by Owner but instead arise from
technological circumstances and are therefore neither chargeable
against nor useable by Owner.
"Turn-key Project" The delivery of a complete and functioning telephone
system which provides normal commercial telephone services for the
Primary Regions (Bekescsaba and Oroshaza) capable of commercial
operation for public telephone services by Owner's employees capable of
operation for the purpose intended by Owners and in compliance with the
technical documentation of this Contract. This includes Engineering,
Furnishing, Installing and Testing (EFIT) of all system equipment and
components excluding Customer Premise Equipment with the exception of
installation and testing.
"Unit Price" means the price of goods and services listed in Attachment
I. Should the need of any unit price not listed in the Attachment I
mentioned above arise during implementation, Contractor shall define an
appropriate unit as approved by Owner.
3 SCOPE OF WORK
3.1 General
Contractor shall provide Goods and Services to be supplied in a
Turn-key Project for the development of a fully functional telephone
system of 7,500 new subscriber lines in the following priority: 64 pay
telephones in 32 settlements, the connection of subscribers in defined
6 villages, LB subscribers, and the exceeding amount of the Ordered
Lines shall be connected to subscriber selected by Contractor from the
waitlisted and CB subscribers at the Contractor's discretion and shall
take into account the technical conditions and subscriber ranking as
defined in Attachment V. The Project shall be implemented such that at
least 80% of the implemented Ordered Lines shall be Radio in the Local
Loop (RLL) technology comprising the Connected Lines and the Ordered
Spare Capacity in accordance with the requirements of Owner as set
forth in Attachment V hereof. Furthermore, the Project shall satisfy
the System Integration requirement as defined herein as well as the
satisfaction of Change Orders which are accepted pursuant to the
Contract. These activities and responsibilities of Contractor include
without limitation, regarding the content of this contract, the design,
engineering, manufacturing, supply, installation, obtaining of all
relevant permits and licenses, commissioning, testing, delivery of
technical documentation, and warranty of the following:
3.1.1 Switching - AXE
3.1.2 Wired and Optical Transmission Equipment
3.1.3 RAS 1000 Radio Access System
<PAGE>
3.1.4 DRA 1900 DECT/RLL
3.1.5 Microwave Transmission
3.1.6 Main Distribution Frame (MDF)
3.1.7 Power Supply to the Equipment
3.1.8 Digital Distribution Frame (DDF)
3.1.9 Trunk Network
3.1.10 Connection to the backbone network
3.1.11 Pay phones and booths
3.1.12 Buildings and environmental systems
3.1.13 Structures
3.1.14 Copper based network.
3.2 Network boundaries
On one side of the connection of the host exchanges to the DDF of the
existing EWSD exchange in Bekescsaba region, and connection to the DDF
of the secondary network in Oroshaza, and on the other side the wall
socket of the Customer Premise Equipment including testing and
installation of the CPE if provided by the Owner. The scope of work
excludes the extension and/or improvement of the existing telephone
network in the PRTN and the extension of the secondary exchanges.
3.3 Grade of service for the Project
The Grade of Service shall be P. 01 and the traffic
performance shall be .05 Erlang per subscriber.
3.4 Attachments
The following Attachments are considered, read and interpreted
as inseparable part of the Contract:
3.4.1 I Unit Prices
3.4.2 II Ericsson Retention Guarantee
3.4.3 III (Not used)
3.4.4 IV Text of Corporate Guarantee
3.4.5 V Owner Information
3.4.6 VI Technical Appendices (specifications and
descriptions), Tests Procedures
3.4.6.1 VI/1 Switching
3.4.6.2 VI/2 Wired Transmission (PDH)
3.4.6.3 VI/3 Microwave Transmission (MINILINK)
3.4.6.4 VI/4 Power Supply
3.4.6.5 VI/5 Main Distribution Frame (MDF)
3.4.6.6 VI/6 Digital Distribution Frame (DDF)
3.4.6.7 VI/7 Network Management (XMATE) - optional
3.4.6.8 VI/8 RAS 1000 RLL
3.4.6.9 VI/9 DRA 1900 (DECT) RLL
3.4.6.10 VI/10 Network Construction
3.4.6.11 VI/11 Training
3.4.6.12 VI/12 Line Connection Certificate
3.4.6.13 VI/13 Pay phones and booths
3.4.6.14 VI/14 General notes
3.4.7 VII Warranty Response Obligations
<PAGE>
3.4.8 VIII Change Order Form
4. CONTRACTOR'S OBLIGATIONS AND RESPONSIBILITY
4.1 Project Manager
Contractor will designate a Project Manager (with deputies for project
sub-elements, as appropriate) with overall responsibility for the day
to day conduct of the project. The Project Manager's responsibilities
and authority will be provided in writing. Contractor will not reassign
this responsibility without notifying the Owner. The Project Manager
will be replaced upon the Owner's request where such request
demonstrates due cause (including chronic delays, missed project
milestones, failure to be fully informed of project activities, and
failure to properly conduct progress meetings or provide agreed upon
project reports) for that replacement.
4.2 Project Schedule
Contractor shall supply to the Owner for information purposes only,
within fifteen (15) calendar days of contract signing, a preliminary
calendar of the Project and within forty-five (45) days a digitized
copy of the Project Schedule in a format compatible with Microsoft
Project, and a hard, paper copy of the Project Schedule GANTT chart.
4.3 Installation plan and technical content
Parties agree that the planning and completion of the Project shall be
performed in accordance with an installation plan reviewed by the
Owner. Contractor shall inform Owner in writing of the technical
content of the Project no later than forty-five (45) days from the
coming into force of the Contract. In case Contractor changes the
content of the documents on which information was given to Owner,
Contractor shall inform Owner on such changes in writing within five
(5) days.
4.4 Subcontracting
The Contractor may subcontract portions of the work to qualified
subcontractors. Use of Sub-Contractors does not relieve Contractor of
overall responsibility for the quality and timeliness of project
activities. Contractor shall be responsible for the subcontracted work
as if Contractor would have performed it.
4.5 Products and Services of Hungarian Origin
4.5.1 The Contractor will use best effort to ensure that
not less than 30% of the total value of products
purchased and services provided for the purposes of
<PAGE>
the Project shall be fulfilled with products and
services of Hungarian origin.
4.5.2 Contractor shall provide a certificate describing
the actual percentage of Goods and Services of
Hungarian origin prior to System Acceptance. Such
certificate can be adjusted by Contractor no later
than 28 February 1997. In the absence of an
adjusted certificate, the one provided by
Contractor shall be deemed final.
4.5.3 A product shall be deemed to be of Hungarian origin
if, (i) either 25% of the total value thereof was
produced in Hungary, or, (ii) proof can be given that
due to the manufacturing process having been carried
out in Hungary, the added value of such product
increased by 25%.
4.5.4 The Contractor acknowledges that an inspection may
be carried out by the Ministry of Transportation,
Telecommunication and Water Management (the
"Ministry") or by a competent agency at any time to
ensure compliance with such provision and
undertakes to fully cooperate with the Ministry or
the competent agency during such an inspection.
4.6 Test Procedures
As set forth in detail in Attachment VI hereto, Contractor shall carry
out formal Tests of all implemented Goods, where applicable. The
manufacturers' testing instructions for installation for the
implemented equipment and system shall be made available for Owner in
advance. Contractor shall invite Owner to these Tests in writing at
least five (5) days earlier unless the Test concerned was duly
indicated in the Project Schedule including its objective, exact time,
date and location. Owner shall have the right to participate in the
Tests and make comments on the test procedure and the results. Any
objection of the Owner must be recorded in the relevant Test protocol
(record) or attached thereto. All Test protocols shall be furnished to
Owner regardless of Owner's participation at the Test.
4.7 Insurance
4.7.1 Property
The Contractor and any associated subcontractors shall be
covered by insurance for the joint benefit of the Owner and
the Contractor in respect of the Project (including for the
purpose of this clause any unfixed materials or other
equipment delivered to the Site for incorporation therein) to
their full value against all loss or damage arising from any
cause for which the Contractor is
<PAGE>
responsible under the terms of the Contract.
4.7.2 Liability
The Contractor shall throughout the execution of the Project
maintain insurance against damage, loss, or injury for which
the Contractor is liable. The terms of such insurance shall
include a provision whereby in the event of any claim, being
brought or made against the Owner, for which the Contractor is
entitled to receive indemnity under the policy, the insurer
will indemnify the Owner against any such claims and any
costs, charges, and expenses in respect thereof. The liability
insurance of Contractor shall also cover the Warranty Period.
4.7.3 Term
Insurance shall be effected in such a manner that the Owner
and the Contractor are covered for the entire period of this
Contract.
4.7.4 Evidence of coverage
The Contractor shall comply with the terms of any policy
issued in connection with the Contract and shall, whenever
required, produce to the Owner the policy or policies of
insurance and notification of any changes to such policies.
4.8 Contractor Employee Conduct
The Contractor must take the expected and reasonable precautions at any
time, to forestall illegalities or any other kind of untolerated
misconduct on the part of the employee, and to avoid any kind of damage
to the property or to personal safety, during the process of
implementation of the project.
4.9 Indemnification
The Contractor shall indemnify and hold the Owner harmless against all
losses and claims for injury or damage to any person or property
whatsoever which may arise out of or in consequence of the Contractor's
action or inaction. The Contractor shall also indemnify the Owner
against all claims, demands, proceedings, damages, costs, charges, and
expenses whatsoever in respect thereof or in relation thereto.
4.10 Training
Contractor agrees to provide training to the extent needed for Owner's
employees to enable them to operate the system in accordance with a
separate agreement which the Parties shall make within 30 days after
the execution of the Contract.
<PAGE>
4.11 Additional Orders of Owner
In case Owner, beyond the scope of this Contract and subject to one or
more separate contracts, engages Contractor in deliveries and services
in addition to this Project provided that Owner's order for additional
lines will be made no later than 30 June, 1997, Contractor undertakes
to satisfy such order(s) for a line price not exceeding the limits set
forth below:
10-20 thousand Ordered Linesfor USD 1,175/line
20-30 thousand Ordered Linesfor USD 1,100/line
30-40 thousand Ordered Linesfor USD 1,050/line
40-50 thousand Ordered Linesfor USD 1,000/line
50-60 thousand Ordered Linesfor USD 975/line
4.12 Safety Management
The Contractor will provide to the Owner, within thirty (30) days after
execution of the Contract, a Safety Management program which is
designed to protect employees, the Owner, the general public,
subscribers, and public and private property from hazards which will
cause injury or damage. The program will be based on the following:
-national and local regulations
-hazardous materials, including disposition
-additional site precautions
4.13 Construction Book
The construction book is a basic document for the implementation of the
Contract. It shall be maintained on the site by the Contractor, and
shall be available any time for review by Owner's representative. The
book shall contain three copies for each page and only a representative
of the Contractor or the Owner are entitled to make entries. One copy
belongs to the Contractor and the other copy to the Owner: the original
copy shall be kept on the site. Contractor shall deliver the Owner copy
to the Owner each week.
4.14 Customer Service Agreement
Parties agree that a Customer Services Agreement, for value added
services provided by the Contractor, may be signed within ninety (90)
days following the execution of the Contract.
4.15 System documentation
Contractor shall provide to the Owner three copies of all installation,
maintenance, and operations documentation for all network components
necessary for Owner to manage and maintain the commercial operation of
the Project as
<PAGE>
implemented in accordance with the Contract.
4.16 Rejected Lines
Contractor shall use best efforts to connect all Ordered Lines to
subscribers. Where Contractor cannot have access to a subscriber's
premises upon a notice sent to the subscriber, Contractor shall mail a
second notice to same. Both notices shall be sent by registered mail
with a return receipt. If the subscriber fails to permit access to
Contractor upon such second notice, the line concerned shall be deemed
as a Rejected Line provided that Contractor provides evidence of both
notices sent. Upon request of Contractor, Owner may approve different
methods of evidencing a Rejected Line. However, Contractor shall notice
Owner on any of such failure of access and in case Owner subsequently
reports that Owner's representatives succeeded to secure access to said
subscriber's premises in five (5) days, Contractor shall complete the
subscriber line concerned.
4.17 Corporate Guarantee
Contractor will provide a Corporate Guarantee, as defined in Attachment
IV, issued by the Ericsson parent company which is binding and
enforceable according to Hungarian and/or the law of the seat of
guarantor company of Ericsson under which the guarantor undertakes to
guarantee the Owner complete fulfillment of Contractor's obligations
under this Contract and such Corporate Guarantee shall be valid from
the date of coming into force of this Contract until the complete
fulfillment of such obligation and be released upon System Acceptance .
The language of the Corporate Guarantee is attached hereto as
Attachment IV.
4.18 Permits and licenses
4.18.1 Government Permits and licenses
Contractor is responsible for obtaining the Construction
Permit and other permissions and/or licenses related to the
Project, including but not limited to microwave radio
frequency licenses, RLL frequency licenses, and the Project
commissioning license (in Hungarian: hasznalatbaveteli and/or
rendszeresitesi engedely) in the name of Owner to be issued by
Government Authorities including the approvals of the
Telecommunication Authority of Hungary where needed for
construction, right of way, and system operation of the
Project for commencing commercial traffic. The costs related
to this responsibility of the Contractor shall be borne by the
Contractor with the exceptions of the commissioning license
fees required by government agencies for the commercial
operation of the network which will be directly paid by the
Owner, and the documented Contractor
<PAGE>
costs related to the commissioning licenses.
4.18.2 Third Party Permits
The Contractor is obliged to apply for and obtain the Permits
of third parties not mentioned above (e.g. owners of affected
real properties). All compensations to be paid directly to
such third parties shall be borne by Owner. The Contractor in
consultation with the Owner shall identify third party-owned
real properties and leaseholds including their owners and
holders which are affected by the project during the designing
period. The process for third party approvals is as follows:
4.18.2.1 Contractor is responsible for third party
approvals;
4.18.2.2 Contractor will optimize network locations
for both PRTN and Contractor;
4.18.2.3 Contractor will take into account the
availability of free real estate, provided
either by Owner or local municipalities,
during equipment site selection;
4.18.2.4 Owner will approve or disapprove the
Contractor proposed solution
4.18.2.5 If Owner disapproves, Contractor may proceed
of its own accord
4.18.2.6 Owner has 15 days to prove that Contractor
site was more expensive while no less
beneficial to the Contractor than an
alternate, suitable site identified by Owner
4.18.2.7 If Owner meets the requirements of 4.18.2.6,
Contractor will compensate the Owner in an
amount equal to the difference between the
two sites. Compensation to be in kind or
performance at Contractor's resolution.
4.19 Handing over/taking over
The Contractor, at completion of the Project, but prior to System
Acceptance, shall deliver to Owner all related documents including but
not limited to:
- Statement of the Contractor,
- high quality of completion of implementation,
- conformance to applicable standards and related
requirements,
- delivery of a complete, detailed, and revised
documentation in three (3) copies of the Project as
completed,
- final test measurement records and documents,
- geodetic survey documentation in three (3) copies
(if applicable),
<PAGE>
4.20 Change Order
The Contractor may initiate a change in the value, schedule, or design
of the Contract via Change Order subject to the approval of Owner.
Owner's approval shall not be unreasonably withheld.
5 OWNER'S RIGHTS AND OBLIGATIONS
5.1 Owner's Representatives
The Owner will assign a Project Executive, Project Manager, Engineering
Manager, and such supporting staff as appropriate to maintain liaison
with the Contractor during the course of the project. Written
designation of such persons and their responsibility and authority
shall be provided within 15 days after the signing of the Contract. The
Project Manager shall be located at the project site and will provide
daily inspections of the work site, contract performance, and contract
compliance.
5.2 Information to be Provided
Owner shall provide necessary information as requested by the
Contractor for the successful design and installation of the Project as
set forth in Attachment V and agrees to provide further information
reasonably requested by the Contractor. Owner shall provide to
Contractor within five (5) days or earlier of coming into force of the
Contract the current waiting list and CB/LB subscribers with names,
addresses and type of service residential or business.
5.3 Access
Unless specially requested, Owner premises will be available only
during normal business hours. In the case of work requiring Contractor
access beyond such hours, access will be requested no less than 24
hours prior to expected use. Contractor staff working on Owner premises
will be supervised,
carry appropriate identification, and conform with the dress and
demeanor of Owner staff at that activity. Owner is obliged to issue
and/or obtain all permits for Contractor and/or its Subcontractors to
enter the premises owned and/or directed by Owner so that their
contractual obligations can be performed. The above permit shall enable
Contractor's or its Sub-contractor's authorized personnel to enter the
premises when necessary.
5.4 Owner Review and Approval
The Owner is responsible for the timely review and approval of
documents submitted by the Contractor, at its discretion, in accordance
with this Contract. Owner's approvals or the reason if one or any of
them is being withheld, if any, shall
<PAGE>
be passed to Contractor within 5 business days from the date of the
confirmed receipt, as defined under Article 12.8 Notification, of
application for approval.
5.5 Owner delay (other than financial)
Owner shall meet obligations under this Contract for only those
requirements specified in this Contract or in the latest version of the
Project Schedule received at least 15 days in advance of scheduled
obligations so that Contractor is able to follow and keep the timing.
In case of delay of Owner relating only to those requirements specified
in this Contract or in the Project Schedule, Contractor shall be
entitled to a reasonable extension of the performance deadline which
cannot exceed twice the duration of the Owner's delay. Contractor shall
be entitled to request an extension of the affected Contractor deadline
only within five (5) days of Owner's delay provided that such delay
affects Contractor's deadlines.
5.6 Authorization
After the Contract has come into force, Owner shall issue an
authorization for Contractor within fifteen (15) days. This
authorization shall entitle Contractor to act on Owner's behalf for
obtaining Permits and licenses.
5.7 Payment obligation
Owner shall be responsible for all the payments to be settled to
Contractor in accordance with Article 6 of this Contract.
5.8 Purchase of imports
The Owner hereby declares that the equipment to be supplied by the
Contractor will serve for investment purposes in the meaning according
to the Hungarian regulation. The Owner upon the request of the
Contractor shall provide the Contractor with a written declaration of
the above in the form required by the Contractor.
5.9 System Acceptance
The Owner will provide to the Contractor a written notice of System
Acceptance upon compliance with the terms and conditions of this
Contract including but not limited to receipt of all deliverables
including documentation, test records, or other requirements of Article
3.2 herein.
5.10 Change Order
The Owner may initiate a change in the value, schedule, or design of
the Contract via Change Order subject to the approval of Contractor.
Contractor's approval shall not be unreasonably withheld.
<PAGE>
6 FINANCIAL TERMS
6.1 Contract Price
The Owner shall pay as compensation to the Contractor the
Contract Price of
USD 14,175,000
which is the Line Price of USD 1,300 multiplied by 10,000 Ordered Lines
plus USD 1,175 multiplied by 1,000 Ordered Lines. The final Contract
Price will be adjusted according to the number of the Ordered Lines as
their price will be adjusted pursuant to this Article. If the
Contractor implements less than 80% RLL technology, the line price will
be equal to USD 1,000 per line for those lines between the actual
number of RLL lines and 80% of Ordered Lines.
6.2 Advance Payment
Advance Payment will be fifteen (15) percent of the calculated Contract
value i.e. USD 2,126,250 that is
Two-million-one-hundred-twenty-six-thousand-two-hundred-fifty US
dollars net shall be paid against Contractor's invoice at the execution
of this Contract.
6.3 Invoicing
The Price for Ordered Lines, Ordered Spare Lines, and accepted Change
Orders for Connected Lines shall be computed and invoiced weekly as the
payable amount was adjusted pursuant to Article 6.5 and then the actual
amount payable reduced in proportion to the Advance Payment (in
accordance with Article 6.2 which is 15%).
6.4 Invoice attachment
6.4.1 The Parties agree that the following documents
shall be, without exception, attached to the
invoices:
(i) Line Connection Certificates for each
Connected Line,
(ii) Contractor statements and supporting
documents as set forth in Article 4.16
pertaining to
Rejected Lines;
(iii) Contractor's statement pertaining to Ordered
Spare Lines stating appropriate
implementation;
(iv) Test documents and Contractor's statement
evidencing and stating complete and proper
delivery of Goods and/or provision of
Services furnished upon an accepted Change
Order in accordance with (i), (ii) or (iii)
above, as applicable.
<PAGE>
6.4.2 Contractor acknowledges that no payment (save the
Advance Payment) will be made by Owner without the
foregoing documents.
6.5 Price adjustment
Prices shall be applied only as adjustment in the following cases:
(i) Change Orders shall be priced on the basis of the
Unit Price List, or the per Line Price for
additional Ordered Lines.
(ii) Ordered Spare Lines shall be paid by Owner in
accordance with the Line Price less the price of
house wiring and FAU/SRT. Owner will order
FAU/SRT's for Ordered Spare Lines at Owner's
discretion.
(iii) Rejected Lines shall be priced as Connected Lines
less the Unit Price of house wiring; Contractor will
deliver and Owner will accept the FAU/SRT's as spare
parts.
6.6 Currency of invoice
Invoices shall be issued in Hungarian Forint (HUF). Therefore, the
invoiced HUF amount will be adjusted to the current USD/HUF foreign
exchange (in Hungarian:"deviza") middle rate valid on the date of issue
but not later than the Friday following the previous Sunday closing
date for billing of Connected Lines as evidenced by the latest date of
the Line Connection Certificate included in the supporting
documentation forwarded to Owner with the invoice. Notwithstanding the
foregoing, if a turn of calendar months occurs on such a Friday, the
exchange rate of the preceding Thursday i.e. the last day of the
preceding month shall apply. For the current rate of exchange the rate
defined by Hungarian Foreign Trade Bank (Magyar Kulkereskedelmi Bank)
shall be taken.
6.7 Payment deadline
Payments shall be effected against Contractor's invoice within five (5)
banking days upon receipt of an invoice. Any overdue payment shall
carry double (200 percent) the Hungarian National Bank base interest
rate for the actual period of delayed payment.
6.8 Payment Guarantee
Owner shall deposit as security USD 4,400,000 i.e. Four
million-four-hundred-thousand US dollars into an escrow account. The
escrow account will be used for approved payments pursuant to Article
6.3. Whenever the balance in the escrow account reaches USD 750,000 or
less the Owner shall
<PAGE>
deposit within five (5) banking days an amount of the USD equivalent to
the value of the amount necessary to restore the funds to the original
amount or the calculated balance of the Contract whichever is the
lesser.
6.9 Suspension of work
Contractor may suspend further performance on or after the eighth day
subsequent to a Payment Notice if Owner failed to settle the invoice
concerned. Contractor shall restart work no later than the third
business day after Owner's effecting payment of the invoice concerned,
but affected deadlines will be considered as extended by the duration
of such suspension.
6.10 Retention
6.10.1 Retention Guarantee
Contractor shall provide, upon final deposit of Owner to the
escrow account as defined in Article 6.8, an unconditional,
irrevocable bank guarantee (the "Retention Guarantee") as set
out in Attachment II in an amount not greater than five (5)
percent of the Contract Price as defined in Article 6.1 i.e.
USD 708,750 payable upon first demand, for retention against
uncorrected deficiencies including but not limited to
documentation to be provided to Owner, installation, waste
removal, restoration, or other deliverables including the
costs of the obtaining of license, and excluding Government
fees. Contractor and Corporate Guarantor shall, within fifteen
(15) days Notice given respectively by Owner correct all
Project with the exception of non-service affecting or
hazardous deficiencies which shall be corrected immediately
upon notice to the Contractor. Failure to correct said
deficiencies shall entitle the Owner to correct such
deficiencies and draw against the Retention Guarantee for all
associated costs. The Retention Guarantee shall be released
upon System Acceptance.
6.10.2 Failure to provide Retention Guarantee
Parties agree that should Contractor fail to provide the
Retention Guarantee as provided for in 6.10.1, upon final
deposit of Owner to escrow account as defined in Article 6.8,
Owner shall have the right to withhold as retention an amount
equal to USD 708,750 from any and all invoices payable to
Contractor.
6.11 Owner performed work
Owner reserves the right to complete the house wiring and SRT/FAU
installation. Owner shall notify Contractor of the intention to perform
such work within thirty (30) days of the Contract coming into force.
Those portions of the work
<PAGE>
completed by the Owner shall be deducted from the Line Price as defined
in 6.1 herein according to the Unit Prices set in Attachment I.
6.12 Value Added Tax
The Contract Prices and the Advance Payment given above do not include
Value Added Tax, therefore, the percentage as applicable from time to
time, as currently twenty-five (25) percent shall be added to all
prices and will be given to all invoices. However, VAT shall be paid
separately by Owner to Contractor thus that Contractor's bank account
shall be credited with the relevant amount no later than the day
preceding the statutory due date by which Contractor must pay such VAT.
6.13 Other payments
All costs, compensations, prices etc. related to real estate purchases,
rents, claims, and disputes of or with owners of real properties
affected by the Project shall be paid or otherwise borne by the Owner,
provided that Owner was duly advised in advance by Contractor and
approved such costs, compensations and prices against Third Parties'
invoices or other documents.
6.14 Taxes and Duties
The Contractor is responsible for all applicable taxes, official and
stamp duties, and authorization fees connected to the Contract and is
obliged to pay them. The Owner shall pay the government fee for the
commissioning license as it is not included in the Contract Price.
6.15 Transfer of Ownership Title
6.15.1 Ownership title of Ordered Lines, which have been
paid for by Owner, shall be deemed as transferred
to Owner on the date of deposit into the escrow
account of the last amount required in accordance
with Article 6.8 of the Contract or in case of the
Parties' failure to comply with the Contract due to
Force Majeure or Owner's termination of the
Contract.
6.15.2 In case the Contractor terminates the Contract for
any reason, the full ownership title over the
assets created by the implementation of the Project
shall be deemed as transferred to the Owner.
However, Contractor shall have the right to
repurchase these assets for a repurchase price
equal to the amount paid by the Owner less the
amount of costs determined by an arbitration award
which is rendered pursuant to Article 11.4 herein
<PAGE>
provided that the same arbitration award declares the
cause for Contractor's termination of the Contract
justified on the grounds of Owner's material breach
of the Contract as provided for in Article 10.2
herein.
7 DEADLINES
7.1 Implemented infrastructure
Contractor shall implement all Goods and render all Services other than
those needed for the final line connection of subscribers as soon as
possible but no later than twenty (20) weeks after the coming into
force of this Contract.
7.2 Line connections
Contractor shall complete at least ninety (90) percent the
implementation of the Ordered Lines that is the subscriber line
connections as soon as possible but no later than twenty-six (26) weeks
after the coming into force of this Contract. The remaining Ordered
Lines shall be completed within four (4) weeks.
7.3 System Acceptance Documents
Contractor shall provide to Owner within sixty (60) days of the
completion of Project in accordance with Article 7.2 all documentation
and deliverables as provided for in Article 4.19 and the commissioning
license.
7.4 Delay notification
Contractor shall provide at least thirty (30) days advance notification
of the potential failure to meet the deadlines for performances defined
in Article 7. Owner's claims related to Contractor's failure to meet
the deadlines will be determined pursuant to Article 7.4 hereof.
7.5 Liquidated damages
Contractor is obliged to pay liquidated damages to the Owner if - due
to any reason for which the Contractor or any of the Sub-contractors
are responsible - the relevant contractual obligations of the
Contractor are not fulfilled according to the deadlines for
performances as defined under Articles 7.1 and 7.2, even if no damage
or loss occurred to Owner.
7.5.1 Amount of liquidated damages
The liquidated damages shall be HUF One-hundred (100) per day
to a maximum amount of ten per cent (10%) of the original
contract value plus the value for each Ordered Line ordered
via Change Order which Contractor failed to
<PAGE>
implement as would have been required in Article 7.2 or as
agreed in a Change Order.
7.5.2 Payment of liquidated damages
The payment or set off of liquidated damages from any sums due
or becoming due to Contractor shall not relieve Contractor
from the obligation to finish the work and/or from other
obligations under this Contract. In case of Contractor delay,
liquidated damages shall be the exclusive remedying available
for Owners.
8 CONTRACTOR'S WARRANTIES
8.1 Warranty Period
The warranty period, shall be twelve (12) months for the Goods
commencing on the date when ninety (90) percent of the Line Connection
Certificates for Ordered Lines have been received by Owner.
8.2 Reliability
The network will provide the traffic performance and grade of service
as outlined in Article 3.3 herein.
8.3 Warranty claim
During the warranty period, Owner will inform Contractor in written
form and without delay regarding any problems which may require action
by Contractor.
8.4 Warranty response time constraint
During the warranty period, any fault occurring in case of proper use
of the equipment implemented in the frame of this Contract shall be
repaired by the Contractor free of charge for Goods and Services within
the time constraints set out in Attachment VII hereof. Contractor shall
be liable for damages certified by the Owner including the lost revenue
of Owner in case of a failure to meet the correction deadlines referred
to in the previous sentence for the period starting on the next day of
a missed deadline and lasting until the default is actually repaired.
8.5 Warranty exemptions
8.5.1 Extension of network
The warranty shall not apply to the part of the Project where
Owner or its Representatives executed extension, changes or
corrections, except the case of subscriber's connections,
outside the scope of the Contract during the warranty period.
If Owner notifies Contractor about
<PAGE>
these works previously, the Parties shall define the network
or system boundary from which the warranty obligations of
Contractor will remain valid.
8.5.2 Owner negligence
Contractor's liability does not cover damages caused by
Owner's failure to follow the technical standards regarding
the operation and maintenance of the Goods as defined in the
Technical Documentation.
8.6 Type Approval
Contractor shall replace any Goods supplied for the Project free of
charge if a competent authority rejects to provide final type approval
or withdraws a relevant type approval previously issued. This provision
shall survive the Warranty Period.
9. INTELLECTUAL PROPERTY
9.1 Contractor's Authorization
Contractor is the owner of the intellectual property rights in and to
all relevant Goods delivered by him under this Contract, or it is duly
authorized by the original owner of the said rights to grant any right
explained below to Owner.
9.1.1 Patent Rights and Trade Secrets Rights
Contractor shall grant to Owner an irrevocable, non-exclusive,
non-transferable license to use any invention incorporated in
any of the Goods, covered by patent(s). Such license shall be
deemed fully paid up for the purposes of use of the Goods
delivered under this Contract.
9.1.2 Terms of Use
Any other provisions of the Contract notwithstanding, with
respect to any inventions, including patented inventions, that
any person or entity is authorized by the Contract to use or
practice only under certain conditions or limitations, such
use or practice shall be:
9.1.2.1 free, unconditional and unlimited from and
after the time that the rights in inventions
come into the public domain, or
9.1.2.2 at the sole discretion of such person or
entity, on other terms from and after the
time that such rights in inventions become
otherwise lawfully available to such person
or entity on such other terms.
<PAGE>
9.1.3 Unaffected Rights and Obligations
This Article shall not be construed as limiting any rights of Owner or
obligations of Contractor under this Contract, including specifically
the right of Owner for no additional compensation to Contractor, to
use, have used, deliver, lease sell or otherwise dispose of, the Goods
or any part thereof, required to be delivered under this Contract.
9.2 Copyright
9.2.1 Ownership and Copyright
The ownership and copyrights in and to any Software, the
associated documentation or the documentation of the Hardware
shall remain with their original owners and/or any other
entities duly authorized by the former.
9.2.2 Use of Copyrighted Software
With the Software packages and documentation, protected by
others' copyright rights under the Hungarian copyright law
and/or international treaty, Owner, by virtue of this
Contract, is allowed to:
9.2.2.1 make copies solely for routine replacement and
back-up purposes, or
9.2.2.2 transfer the Software to a single hard disk,
provided that the Owner keeps the original solely
for back-up and archival purposes. In addition,
Owner shall be granted, via Contractor, by the
original copyright owners an irrevocable,
non-exclusive, non-transferable license to use such
copyrighted materials.
9.3 Copyright Restrictions
The copyright includes, among others, the prohibition of any
modification, alteration, de-compilation, disassembling, reverse
engineering, or making any derivative work such as translation,
recasting, transformation or adaptation.
9.4 Intellectual Property, Patent, and Copyright Indemnity
Contractor shall defend at its expense, suits against Owner upon claim
that the Goods, including the latest unmodified release of Software
supplied under this Contract, infringe property rights granted or
registered in Hungary, provided that
9.4.1 Notification of lawsuit
Owner promptly notifies Contractor in writing on the
<PAGE>
suit,
9.4.1.1 Contractor has sole control of the defence
and related settlement negotiations, and
9.4.1.2 Owner gives Contractor information and
assistance for the defence all at
Contractor's expense.
9.4.2 Indemnity
Contractor shall indemnify and hold Owner harmless from all
payments which by final judgments in such suits may be
assessed against Owner on account of such infringement and
shall pay resulting settlements, costs and damages finally
awarded against Owner by a court of law.
9.4.3 Remedy
Owner agrees that if the use, sale or distribution of the
Goods prohibited as a result of such suit, or in Contractor's
option are likely to be prohibited, Owner will permit
Contractor, at his option and expense, either to procure the
right for Owner to continue using such Goods or to replace or
modify same so that they become non-infringing.
10 TERMINATION
10.1 Termination on default
This Contract may be terminated by either Party in the event of default
by the other Party. In either event the Party initiating termination is
required to give the other party fifteen (15) calendar days advance
notice. In the event of termination for default, the initiating Party
agrees that the default notification will be rescinded if, within eight
(8) calendar days of notification, the defaulting Party corrects, to
the notifying Party's satisfaction, the material basis for default.
10.2 Grounds for termination
10.2.1 Owner's Right
Owner may justify Contractor's default on the basis of the
following cases:
10.2.1.1 the Contractor fails to commence the work
over a period of one (1) month,
10.2.1.2 the Contractor disrupted the performance of
its contractual obligations without
justified reasons and does not continue the
work within thirty (30) days,
10.2.1.3 the Contractor gives the whole Project to
<PAGE>
sub-contracting,
10.2.1.4 material failure to adequately carry out
Contractor's responsibilities. Such failures
include, but are not limited to:persistently
failing to supply enough properly skilled
workers or proper materials; persistently
disregarding laws or ordinances; or
substantial breach of the provisions of this
Contract,
10.2.1.5 before terminating the Contract pursuant to
the foregoing clauses, Owner shall request
the Ericsson parent company, providing the
Corporate Guarantee, to perform all
outstanding Contractor duties and
obligations in accordance with the Contract.
10.2.2 Contractor's Rights
The Contractor may justify Owner's default on the
basis of the following cases:
10.2.2.1 Owner fails to provide the Advance Payment
and open or refund the escrow account
pursuant to Articles 6.2 and 6.8 herein,
10.2.2.2 the Owner fails to provide or otherwise
ensure the Site(s) or to meet the
requirements as set forth in Article 4 over
a period of one (1) month,
10.2.2.3 the Owner's delay in payment exceeds
thirty-five (35) days provided that
Contractor sent a notice ("Payment Notice")
not earlier than the fifth day after the due
date of an invoice which was not fully paid
by Owner.
10.3 Compensation in Case of Termination
10.3.1 Termination by Owner
Owner will compensate Contractor on the basis of the Unit
Price List for delivered Goods and Contractor's work product
which Owner chooses to keep. Such compensation, however, must
not exceed that calculated on the grounds of the Line Price
set forth herein as it would have been required to be adjusted
under this Contract. Any payment to Contractor under this
Article shall be subject to Owner's claim for damages and/or
lost revenue.
10.3.2 Termination by Contractor
In accordance with the Unit Prices and the Line Price, Owner
will reimburse Contractor for the implemented portion of the
Project, Goods delivered, Services rendered, and expenses
incurred before the date of Contractor's termination and also
for tasks properly
<PAGE>
performed after the date of termination of the Contract and
those arising from obligations relating to the Contract if
undertaken bona fide. From the above amount all sums shall be
deducted which Contractor is obliged to pay to and/or which
Contractor owes Owner including the amounts previously paid by
Owner. Contractor shall be entitled to claim damages.
11 GOVERNING LAW AND DISPUTE RESOLUTION
11.1 Governing Law
This Contract shall be governed by Hungarian law. For issues not
expressly provided for by the Parties hereof the provisions of the
Hungarian Civil Code (Act No. IV of 1959 as amended) shall apply.
11.2 Amicable dispute resolution
If a dispute of any kind whatsoever arises between the Owner and the
Contractor, in connection with, or arising out of this Contract,
whether during the execution of the Project or after completion and
whether before or after repudiation or other termination of the
Contract, including any dispute as to any opinion, instruction,
determination, certificate or valuation, the Owner and the Contractor
shall, in the first place, seek to resolve the dispute amicably between
them.
11.3 Effect on the project
Unless the Contract has already been repudiated or terminated, the
Contractor shall, in every case, continue to proceed with the Project
with all due diligence and the Contractor and the Owner shall give
effect forthwith to every decision they take to resolve their dispute.
11.4 Arbitration
11.4.1 Notices of arbitration
If no amicable settlement is possible, then either the Owner
or the Contractor may give notice to the other party, of
intention to commence arbitration, as hereinafter provided, as
to the matter in dispute. Such notice shall establish the
entitlement of the party giving the same to commence
arbitration. Unless the parties otherwise agree, arbitration
may be commenced on or after the twentieth calendar day after
the day on which notice of intention to commence arbitration
of such dispute was given, even if no attempt at amicable
settlement thereof has been made.
11.4.2 Arbitration procedure
<PAGE>
Any dispute in respect of which amicable settlement has not
been reached shall be finally settled, unless otherwise
specified in the Contract, under Hungarian law and in
accordance with the Rules of Conciliation and Arbitration of
the Hungarian Chamber of Industry and Trade by one or more
arbitrators in Hungary appointed under such Rules. The place
of arbitration shall be Hungary and the language of the
arbitration shall be English. The said arbitrator(s) shall
have full power to open up, review and revise any decision,
opinion, instruction, determination, certificate or valuation
related to the dispute.
12 MISCELLANEOUS TERMS AND CONDITIONS
12.1 Assignment
This Contract or any of its provisions or any receipt of payment shall
not be assigned by either Party without the prior written consent of
the other.
12.2 Force Majeure
Neither party shall be considered in default in the performance of its
obligations under this Contract to the extent that the performance of
such obligation is prevented or delayed by any cause, existing or
future, which is beyond the reasonable control of such party.
12.2.1 Notices
Should any Party be affected by Force Majeure, such Party
shall notify the other Party in a written form within seven
(7) days from the occurrence of the Force Majeure. The
notification shall include details constituting the Force
Majeure as well as the positive evidences which prove that the
case was unavoidable and that it delays the fulfillment of the
contractual obligation of the Party. In the above
notification, the estimated duration of the Force Majeure
shall be included as well as a statement declaring the
inability of the effected Party to perform the concerned
obligation(s) as long as the case of Force Majeure
exists/remains.
12.2.2 Effect on Contract
Should the duration of Force Majeure exceed the period of five
(5) days, Parties shall negotiate the reasonable modification
of the Contract and equitable compensation for Contractor in
respect of work performed but not tested, if applicable, due
to Force Majeure. If Parties cannot come to an agreement
within the above period, they can submit the dispute to be
resolved pursuant to Article 11 herein.
<PAGE>
12.2.3 Limitation
The Contractor is not entitled to rely on any event otherwise
qualifying as Force Majeure if the scheduled deadline of the
Project was due before such event.
12.3 Data Ownership and Confidentiality
Any information or data, in the form of specifications, drawings,
technical data or other information, not a work product of this
Contract, furnished by the Owner or Contractor to the other party shall
remain the property of the furnishing party. Work product of this
Contract shall become the property of the Owner under the conditions
stipulated herein.
All work product and information marked as Proprietary by either party
prior to transfer to the other party shall be kept confidential by the
receiving party and receive the same degree of care in handling and
retention as that party applies to its own proprietary information. The
party receiving such proprietary information shall not disclose,
without the furnishing party's written permission, such information to
any other person or use such information itself for any purpose other
than the performance of this Contract. The obligations under this
paragraph shall survive the termination of this Contract for a period
of five (5) years.
12.4 Effect of Waiver
Owner's waiver of any Article of this Contract shall have no effect on
the Contract.
12.5 Severability
If any provision hereof, or the application of any such provision to
any person or circumstance, shall be held invalid or unenforceable by
an arbitration tribunal of competent jurisdiction, then the remainder
of this Contract, or the application of such provision to persons or
circumstances other than those as to which it is held invalid, shall
not be affected thereby and such invalid provisions shall be replaced
by a valid provision (and for this purpose the arbitrator(s) may act as
amiable compositor/s) which most closely gives effect to the intent and
purpose of the parties hereto and the allocation of risks and benefits
reflected in such provision.
12.6 Contract Amendment
Any contract terms can only be amended in written form duly signed by
both Parties.
12.7 Copies
The Contract was prepared in English language and was signed in four
(4) original copies of which each Party keeps two (2).
<PAGE>
12.8 Notification
Notices or communications required or permitted to be given under this
Contract will be deemed to be given; a) when delivered by hand, b) when
transmitted by facsimile and confirmed by returned facsimile, c) five
(5)calendar days after being sent by certified mail, in each case, to
the address or facsimile number following:
HUNGAROTEL Rt.
James Morrison, Chairman
1126 Budapest, Kiralyhago u. 2.
Tel.: 212-1100
Fax: 202-2974
ERICSSON Kft.
Fodor Istvan, President
1146 Budapest, Hungaria krt. 162.
Tel: 265-7100
Fax: 265-7373
12.9 Coming into Force
The Contract comes into force on the date when duly signed by the
authorized representatives of the both Parties but not before the
Corporate Guarantee, the advanced payment and the financial security
provided for in Articles 4.17, 6.2 and 6.8 are in place.
Parties have both read this Contract and mutually agreed and understood its
contents.
Budapest, May 17, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<CIK>0000889949
<NAME> Hungarian Telephone and Cable Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 12887
<SECURITIES> 0
<RECEIVABLES> 8327
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23458
<PP&E> 69074
<DEPRECIATION> 3309
<TOTAL-ASSETS> 126045
<CURRENT-LIABILITIES> 108005
<BONDS> 33194
<COMMON> 4
0
0
<OTHER-SE> (21083)
<TOTAL-LIABILITY-AND-EQUITY> 126045
<SALES> 14727
<TOTAL-REVENUES> 14727
<CGS> 0
<TOTAL-COSTS> 30183
<OTHER-EXPENSES> 2191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11146
<INCOME-PRETAX> 26310
<INCOME-TAX> 0
<INCOME-CONTINUING> 26310
<DISCONTINUED> 0
<EXTRAORDINARY> (8186)
<CHANGES> 0
<NET-INCOME> (34496)
<EPS-PRIMARY> (8.27)
<EPS-DILUTED> (8.27)
</TABLE>
