United States Securities Exchange Commission
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(D)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1995 1-11484
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3652685
(State or otherjurisdiction of (I.R.S. Employer
incorporation or organization)
Identification No.)
90 West Street, New York, NY 10006
(Address of principal executive offices)
(212) 571-7400
The 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 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Common Stock, $.001 par value 3,001,155 Shares
- ----------------------------- ----------------
(Class) (Outstanding at June 30, 1995)
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
INDEX
PART 1. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of June 30, 1995 (unaudited)
and December 31, 1994 (audited) 2
Consolidated statements of loss (unaudited)
for the three months ended June
30, 1995 and 1994 and the six months
ended June 30, 1995 and 1994 3
Consolidated statements of cash flows (unaudited) for the six
months ended June 30, 1995 and 1994 4
Consolidated statements of stockholders' equity (unaudited) for
the six months June 30, 1995 and 1994 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
PART II. Other Information 29
Signature 33
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 1995 December 31, 1994
------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,981 $ 6,966
Restricted cash 946 1,419
Accounts receivable 775
VAT receivable 1,059 1,127
Receivable from sale of subsidiaries
stock 1,464
Loan receivable - Hungarian
Broadcasting Corp. 11
Other 437 136
----------- -----------
Total current assets 11,209 11,112
Restricted cash 398 2,403
Investments in affiliates 287 656
Property and equipment, at cost,
less accumulated depreciation of
$234,980 and $88,378 6,307 925
Construction in progress 9,246 7,920
Advance payments to contractor 5,273
Intangible assets 3,522 4,546
Other 15
----------- -----------
$36,242 $27,577
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Loan payable to Telecom Denmark $ 511
Management fees payable to Telecom
Denmark 518
Note payable 300 $ 300
Current maturities of long-term debt 2,094 153
Short-term bank loans 354
Accounts payable and accrued expenses 5416 2,259
Payables to related parties 523 892
Advance subscriber payments 2,108
--------- -----------
Total current liabilities 11,824 3,604
Long-term debt, less current maturities 9,996 2,299
---------- -----------
Advance subscriber payment 1,402 2,448
---------- -----------
Minority interest 3,913 6,663
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value
- shares authorized
10,000,000; issued and
outstanding 3,001,155
and 2,704,683 3 3
Additional paid-in capital 22,479 18,728
Foreign currency translation
adjustment 166
Accumulated deficit (13,541) (6,168)
----------- -----------
Total stockholders' equity 9,107 12,563
----------- -----------
$36,242 $27,577
========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
CONSOLIDATED STATEMENTS OF LOSS
(dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
REVENUES $ 832 $ - $ 1,239 $ -
----- ---- ----- ----
Operating expenses:
Operating and Maintenance expenses 5,342 832 6,676 1,326
Management fees 466 - 888 -
Depreciation and amortization 309 17 765 24
----- ---- ------- -----
Total operating expenses 6,117 849 8,329 1,350
Loss from operations (5,285) (849) (7,090) (1,350)
Other income (expenses):
Foreign exchange (1,468) 13 (1,146) 1
Interest expense (664) (50) (909) (101)
Other, net 268 (29) 404 (63)
------ ----- ------ -----
Loss before minority interest (7,149) (915) (8,741) (1,513)
Minority interest $ 994 26 1,368 75
--------- ------- -------- --------
$ 6,155 $ (889) $ 7,373 $ (1,438)
========= ======= ======== ========
Net loss per share $ (2.17) $ (.41) $ (2.65) $ (.74)
========= ======= ======== ========
Weighted average number of common
shares outstanding 2,830,471 2,150,742 2,777,744 1,952,970
========== ========= ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
June 30,
----------------
1995 1994
---- ----
Net cash provided by operating activities 2,961 426
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of interest in subsidiaries 1,464
Reduction of investment in affiliates 293
Redemption of U.S. Treasury bills 1,498
(Increase)decrease in intangible assets 404 (3,046)
Loan receivable - Hungarian Broadcasting Corp. (11)
Acquisition of property and equipment and
construction in progress (7,449) (39)
Increase in advance payments to contractor (5,272)
Adjustment of minority interest (1,382)
Adjustment of Company's share of the excess of
proceeds over book value of subsidiaries' shares
purchased by Telecom Denmark (737)
------- -----------
Net cash used in investing activities (12,690) (1,587)
------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,220 7,690
Borrowings under long-term debt 8,531
Borrowings under short-term bank loans 354
Increase in loan payable to Telecom Denmark 511
Proceeds of loan payable to subsidiary of
Hungarian Teleconstruct Corp. 258
Proceeds from sale of stock by subsidiaries to
outside investors 1,947
------- -------
Net cash provided by financing activities 10,616 9,895
------- -------
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 128 1
------- -------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 1,015 8,735
Cash and cash equivalents at beginning
of period 6,966 3,404
------- -------
Cash and cash equivalents at end of period $ 7,981 $ 12,139
=========== ===========
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES FOR THE SIX
MONTHS ENDED JUNE 30, 1995 AND 1994:
In June 1994, the Company issued a $300,000 note payable and stock warrants
valued at $100,000 in settlement of a claim.
In the second quarter of 1994, a minority stockholder of a subsidiary
contributed real estate with an estimated fair value of $372,000 in exchange
for additional shares of stock.
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
<S>
Foreign
Additional Currency
Common Stock Paid-in Translation Accumulated
Shares Amount Capital Adjustment Deficit
-------- ------- ----------- ---------- ------------
SIX MONTHS ENDED JUNE 30, 1995:
<C> <C> <C> <C> <C>
Balance, January 1, 1995 2,705 $2,705 $18,728 $ - $ (6,168)
Private placement costs (31)
Exercise of warrants 45 45 187
Exercise of options 251 251 1,064
Recognition of compensation
expense related to stock options 3,268
Adjustment of Company's share
of the excess of proceeds over
book value of subsidiaries'
shares purchased by
Telecom Denmark (737)
Foreign currency translation adjustment 166
Net loss for the period (7,373)
-------- ------- -------- ------- ----------
Balance, June 30, 1995 3,001 $3,001 $22,479 $166 $(13,541)
======== ====== ======== ======= ==========
SIX MONTHS ENDED JUNE 30, 1994:
Balance, January 1, 1994 1,288 $1,288 $ 5,603 $(76) $(1,570)
Issuance of shares for cash 635 635 7,690
Issuance of warrants for claim
settlement 100
Foreign currency translation adjustment (3)
Net loss for the period (1,437)
------- ------ ------- ------ --------
Balance, June 30, 1994 1,923 $1,923 $13,393 $(79) $(3,007)
======= ====== ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Accounting Policies
(a) Business
Hungarian Telephone and Cable Corp. (the
"Company") was organized on March 23, 1992 to
provide working capital, technical expertise and
management services to community sponsored
telecommunications companies in Hungary. The
Company was in the development stage through
March 31, 1995.
In February 1994, two subsidiaries were awarded
concessions to provide local public telephone service in
their respective districts. These were the Sarvar region,
operated by Raba-Com RT ("Raba-Com") which is 66% owned by
the Company and the Salgetaran region, operated by
Kelet-Negrad Com RT ("Kelet-Negrad Com") which is 70%
owned by the Company. In addition, the Company has
interests in the following subsidiaries: HTCC Consulting
RT, (100% owned), which is an intermediate holding and
service company, incorporated in Hungary, and which holds
part of the group's interests in the two concession
companies for the purpose of satisfying the local
ownership provisions of the concession agreements;
Borszony-Com RT ("Borszony-Com") an inactive company which
is 84% owned and Pilistav Kft. ("Pilistav"), which is 83%
owned and which is also currently inactive, and in which
the Company increased its interests in the first quarter
of 1995, from 25% to the current level following
acquisition of Hungarian Teleconstruct Corp.'s holdings
for an amount equal to that company's cost. In the second
quarter of 1995, the Company wrote down the value of
Pilistav's assets to 50% of book value.
Hungarian Teleconstruct Corp. ("HTC") had the same
officers and the same four out of five directors as the
Company through May 31, 1995. In connection with the
agreement with Citizens Utilities Company ("Citizens")
described in Note 12, the Company's then President, Chief
Executive Officer and Chief Financial Officer resigned.
Since that date, two officers own 1.4% of the outstanding
common stock of both HTC and the Company, and would own
approximately 13% of both companies, if they exercise
their options to purchase common stock which vest over a
five year period ending in 1999. The exercise prices of
the options are below current market prices.
(b) Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its
majority-owned subsidiaries. All material
intercompany balances and transactions have been
eliminated.
In preparing financial statements in conformity with
generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ
from those estimates.
(c) Fiscal Year
The Company's reporting period is the fiscal year ending
December 31.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(d) Foreign Currency Translation
In previous periods, the Company has used the U.S. dollar
as the functional currency for its majority-owned
Hungarian subsidiaries. At June 30, 1995, all assets and
liabilities have been translated at the exchange rate in
effect at the balance sheet date, recognizing that the
majority of the Company's assets are in Hungary and their
values are affected by the continuing devaluation of the
Hungarian forint. Revenue and expense accounts were
translated by using the average exchange rate during the
period. The exchange rate differences resulted in
$1,692,654 of goodwill on consolidation which has been
written off against a December 31, 1994 allowance for
foreign currency translation. The minority interest has
also been affected by this adjustment.
The Company also uses the Hungarian forint as the
functional currency for measuring the accounts of Elso in
which it has a 30% interest. Gains or losses resulting
from translation were included as a separate component of
stockholders' equity until December 31, 1994. At that
date, the cumulative foreign currency translation
adjustment of $113,000 was transferred to foreign currency
loss and recognized in the consolidated statement of loss
for the year ended December 31, 1994 since the Company
expects to sell its 30% interest in Elso to MATAV RT
("MATAV"), the majority stockholder of Elso, for
approximately the carrying value at December 31, 1994.
(e) Cash Equivalents
For purposes of the consolidated statements of cash flows,
the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents.
(f) Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated
useful lives of the assets as follows:
Estimated
useful life
-----------
Buildings 50 years
Furniture, fixtures
and equipment 3-7 years
Motor vehicles 5 years
(g) Intangible Assets
Intangible assets represent one-time concession fees paid.
The intangible assets are being amortized over a period of
eight years, the exclusivity period of the 25-year
concession period.
(h) Deferred Compensation Expense
Deferred compensation expense, representing the excess of
the market price at the effective date of certain employment
contracts over the option price of 248,997 shares of the
Company's common stock, is being amortized over a five
year vesting period.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(i) Investment in Affiliates
The Company's less than 50% equity interests are accounted
for using the equity method, under which the Company
records as income its share of the earnings, net of the
amortization of goodwill, and dividends are credited
against the investment account when declared.
(j) Advance Subscriber Payments
Advancesubscriber payments represent advance
connection fees received from telephone subscribers.
Since the advance fees received within the Kelet-Negrad
Com concession area would have to be repaid with
interest if the telephone network is not operational by
a certain date, interest has been accrued.
(k) Income Taxes
The Company follows the liability method of accounting
for income taxes. The Company's community sponsored
telecom subsidiaries will be 100% exempt from Hungarian
income tax for a period of five years beginning from
January 1, 1994 and 60% exempt for the subsequent five
years as long as(1)capitalization stays above 50,000,000
HUF, (2) foreign ownership exceeds 30% of the
capitalization and (3) more than 50% of the
revenue earned arises from telecommunication
services.
(l) Net Loss Per Share
The net loss per share is computed using the weighted
average number of common shares outstanding during each
period.
2. Interim Periods
The accompanying consolidated financial statements for the three
months ended June 30, 1995 and 1994, and the six months ended
June 30, 1995 and 1994 are unaudited but, 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.
3. Incorporation by Reference
Reference is made to the Company's annual report on Form 10-KSB for
the fiscal year ended December 31, 1994 and to the notes to the
consolidated financial statements included therein, which are
incorporated herein by reference.
4. Concentration of Cash and Cash Equivalents and Restricted Cash
(a) Concentration
At June 30, 1995, cash of $1,686,688, denominated in U.S.
dollars, was on deposit with a major money center bank and
a U.S. Treasury money market fund in the United States. In
addition, $7,637,867 (denominated partly in U.S. dollars
and partly in Hungarian forints) was on deposit with
Hungarian government-owned banks and a foreign bank in
Hungary.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(b) Restriction
At June 30, 1995, restricted cash includes:
(i) $1,032,828 denominated in Hungarian forints of
which $397,583 is classified as a noncurrent
asset. The restricted cash includes (1) advance
connection fees paid by subscribers with the
restriction to be removed upon the completion of
the connections, (2) concession contract
fulfillment guarantees with restrictions to be
removed upon the successful assumption of the
operations of two local telephone exchanges by
the concession companies and other restrictions
to be removed upon the concession companies
fulfilling the requirements prescribed for 1997
in the concession agreements
(ii) $311,002 certificate of deposit collateralizing a
$300,000 irrevocable and unconditional letter
of credit issued by a bank as a guarantee of
payment of the $300,000 note payable on December
29, 1995 (see Note 14(d))
5. Investments in Affiliates
The Company's investments in affiliates consist principally of a 30%
interest in Elso Hazai Tavkozlesi RT ("Elso") and a 49% interest
in Central Europe Consult ("CEC"). The majority stockholder in
CEC is HTC. The investments are accounted for on the equity
method. The net share of the losses of the affiliates has been
included in the consolidated statements of loss.
(a) Elso has a concession to operate a local telephone
exchange network in a suburb of Budapest, Hungary, which
is at present serving a maximum of 1,000 lines. The excess
of the carrying value of the Company's investment over its
equity in the fair value of the underlying net assets at
the acquisition date of Elso, August 6, 1992, was written
off.
At December 31, 1994, the Company wrote down the carrying
value of its investment in Elso by $700,000 to an
estimated fair market value of $271,000 which represented
the approximate sales price to MATAV. The $271,000 also
approximated the equity in the fair value of the
underlying net assets of Elso at December 31, 1994.
(b) The Company's 75.2% interest in Pilistav was reduced to
25% in September 1994 when Hungarian Teleconstruct Corp.
invested $930,000 to increase its interest to 68%. The
investment in Pilistav at December 31, 1994 was carried at
$300,000 which approximated the equity in the fair value
of the underlying net assets of Pilistav. In March 1995,
the Company acquired Hungarian Teleconstruct Corp.'s
interest in Pilistav. The accounts of Pilistav have been
reconsolidated in the accompanying financial statements at
June 30, 1995.
(c) The Company's investment in CEC, an Austrian corporation
formed in late 1994, is carried at $63,263, its equity in
the fair value of the underlying net assets of CEC.
(d) The Company's equity in net loss of affiliates of $76,648
and $7,000 for the six months ended June 30, 1995 and
1994, respectively, has been included in other expenses
in the accompanying statements of loss.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
6. Construction in Progress
Construction-in-progress represents costs incurred in connection
with the building of the local telephone exchanges.
7. Award of Concessions
(a) On February 28, 1994, the tender bids for concessions to
provide local public telephone service by two of the
Company's community sponsored subsidiaries, Kelet-Negrad
Com, in the primary district of Salgotarjan, and Raba-Com,
in the primary district of Sarvar, were accepted by the
Ministry of Transport, Telecommunications and Water
Management (the "Ministry"). The concessions are for a
period of 25 years until June 2019 with an eight-year
exclusivity period. The one-time concession fees of
approximately $2,100,000 (215,000,000 HUF) for Salgotarjan
and approximately $2,700,000 (275,000,000 HUF) were paid
in 1994. In addition, yearly concession fees of .1% and
1.5% of gross income earned in the districts of
Salgotarjan and Sarvar, respectively, will be payable.
By April 25, 1996, concession companies with Hungarian ownership
in excess of 25% are required to be formed.
The Company, as the majority shareholder of the two successful
bidders, has accepted the responsibility as a joint and
several guarantor to meet all commitments and obligations
of the concession companies in accordance with the
concession agreements, which were signed on March 9, 1994,
including payment of penalties in the amount of
500,000,000 HUF ($4,500,000) per concession in the event
of breach of either agreement or failure to provide
telephone service by dates specified in the concession
agreements. As of December 31, 1994, Raba-Com did not
fulfill the requirements for new telephone lines to be
installed in the area; however, it did meet such
requirements at June 30, 1995. The Company believes it is
unlikely that Kelet-Negrad Com will fulfill its
requirements for new telephone lines in its area for 1995.
In Management's opinion, based on its continued
negotiations with the Ministry, the likelihood of any
penalty being assessed by the Ministry is remote.
In accordance with the concession agreements, the operating
assets for approximately 15,300 telephone lines owned and
utilized by MATAV, the Hungarian telephone company, to
provide local telephone service in the concession areas,
have been acquired in 1995 and approximately 215 employees
have been hired. Raba-Com acquired the operating assets on
January 1, 1995 for a payment of approximately $665,000.
Kelet-Negrad Com acquired the operating assets on February
28, 1995 for approximately $5,300,000, of which $1,060,000
was paid on February 28 and the balance is payable in 12
quarterly payments of approximately $353,000 beginning
June 1995 with interest payable at 30% per annum. The
Company has pledged its interest in Kelet-Negrad Com as
guarantee of the installment payments.
The two concession companies are in the process of
constructing the local telephone exchanges which are
estimated to cost approximately $90 million, which
includes the following: concession fees ($4.8 million),
investment in switch and transmission equipment ($11
million), investment in the line network ($44 million),
investment in ground buildings, existing lines and other
work ($28 million), and management fees ($2.2 million).
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The concession companies plan to finance these requirements by
contributing $30 million in equity and procuring subordinated
debt of $10 million and senior debt of $50 million.
The activities of the concession companies are regulated by
the Ministry and the terms of the concession agreements.
The Ministry regulates the construction, operation and
sales of local telephone exchanges. The Ministry has also
been given the authority to regulate the industry,
including fixing local, long distance and international
call rates, sharing of revenues between the local
exchanges and MATAV, the Hungarian telephone company,
approving equipment that can be used, and requiring the
local exchanges to meet specified standards as to growth
and services.
(b) In March 1995, Kelet-Negrad Com and Raba-Com entered into
contracts with an unrelated corporation which provide for
the construction of the local telephone exchanges in the
two primary districts on a turnkey basis. The minimum
contract price for the two districts is approximately
$36,000,000 of which the contractor will finance
approximately $5,000,000, representing 85% of the contract
price of the equipment. The financing will be for an
eight-year period with semiannual installments beginning
July 1, 1995, including interest at DEM-LIBOR plus 1%. The
contractor will hold a security interest in all financed
property until the payment of the last installment. At
June 30, 1995, approximately $2,700,000 was owed to the
contractor under the financing arrangement. The balance
sheet at June 30, 1995 includes $5,272,639 of advance
payments to the contractor. These advances will be applied
against future costs to be incurred in the future.
(c) In March 1994, the Company's subsidiaries, Kelet-Negrad
Com and Raba-Com, and Teleconstruct IpitJsi RT
("Teleconstruct"), a wholly-owned subsidiary of HTC,
issued letters of intent to engage Teleconstruct as the
sole builder to implement advanced digitally operated
telephone systems for the regions of Raba and eastern
Negrad.
8. Asset Write-Downs
Asset write-downs for the three months and six months ended June 30,
1995 amounted to $594,082; write-downs for the three and six
months ended June 30, 1994 amounted to $68,383 and $285,311,
respectively. The 1994 write-downs represented planning and
designing costs incurred by Pilistav and Borszony-Com, the two
subsidiaries which were not awarded concessions to provide local
public telephone service in their respective areas. The 1995
write-downs represented 50% of Pilistav's assets under
construction.
Pilistav has filed a lawsuit against the Ministry and MATAV since it
believes that it was the high bidder for the Szentendre
concession area and that if the Ministry would have followed its
own tender rules for awarding the concession area, Szentendre
would have been awarded to Pilistav. Since the ultimate outcome
of this litigation could not be reasonably determined,
approximately $500,000 of planning and design costs incurred by
Pilistav during 1994 were charged to operations and included in
asset write-downs for the year ended December 31, 1994. In
addition, it remains uncertain whether the Company will be
successful in selling the lines that Pilistav has laid and if
so, at what price. Accordingly, 50% of the net book value of the
relevant assets has been written off at June 30, 1995.
Management believes that the remaining book value of Pilistav's
assets at June 30, 1995 is fully realizable.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
9. Payables to Related Parties
Payables to related parties at June 30, 1995 primarily consist of
(a) advances of $472,550 from HTC and its wholly-owned
subsidiary, Teleconstruct, for the purpose of increasing the
Company's investments in Raba-Com and Kelet-Negrad Com and (b)
$49,000 of interest expense on these advances.
During the second quarter of 1994, the Company also borrowed from a
subsidiary of HTC approximately $258,000 for the purpose of
increasing its investment in Kelet-Negrad Com, which was repaid
later in 1994 with 22% interest.
10. Loan Payable to Telecom Denmark
On November 16, 1994, the Company reduced its interest in
Kelet-Negrad Com and Raba-Com by selling 4.8% interests in the
two subsidiaries to Telecom Denmark. The new stockholder agreed
to lend the two subsidiaries approximately $6,300,000 at LIBOR
plus 2% on a subordinated basis, repayable over a period of six
years commencing in 1996. The loan payable under this agreement
amounted to $511,334 at June 30, 1995.
11. Long-term Debt
In addition to the debt payable to MATAV as described in Note 7(a),
long-term debt at June 30, 1995 includes the debt payable to The
Investment Fund for Central and Eastern Europe. Approximate annual
maturities of this debt are as follows:
Year Ending
June 30 Amount
----------- ----------
1996 $ 544,000
1997 1,607,000
1998 1,607,000
1999 1,607,000
2000 1,130,000
Thereafter 1,075,000
----------
$7,570,000
----------
12. Agreement with Citizens Utilities Company
On May 31, 1995, the Company and certain wholly-owned subsidiaries
of Citizens Utilities Company ("Citizens") entered into the
following agreements (the "Citizens Agreements"): the Master
Agreement between the Company and CU Capital Corp. ("CUCC") (the
"Master Agreement"); the Loan Agreement between the Company and
CUCC (the "Loan Agreement") and the Promissory Note related
thereto issued by the Company to CUCC (the "Note"); the Warrant
to Purchase Shares of Common Stock of Hungarian Telephone and
Cable Corp. between the Company and CUCC (the "Warrant"); the
Stock Pledge Agreement between the Company and CUCC (the "Stock
Pledge Agreement"); the Stock Option Agreement between the
Company and CUCC (the "Stock Option Agreement"); the
Registration Agreement between the Company and CUCC (the
"Registration Agreement"); and the Management Services Agreement
between the Company and Citizens International Management
Services Company, a Delaware corporation ("CIMS") and a
wholly-owned subsidiary of Citizens (the "Management Services
Agreement").
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
CUCC simultaneously entered into voting agreements with three
affiliates of the Company (the "Voting Agreements") and
consummated the purchase of 300,000 shares of Common Stock
from Peter E. Klenner, a Director and then President, Chief
Executive Officer and Chief FinancialOfficer of the Company.
The Citizens Agreements listed above were entered into between
CUCC or CIMS, on the one hand, and the Company or certain
affiliates of the Company, on the other hand, as the result of
certain agreements entered into as of May 12, 1995, between
Citizens, on the one hand, and the Company or Peter E.
Klenner, on the other hand.
Detailed below is a brief description of the Citizens Agreements.
The summaries do not purport to be complete and are subject to
and qualified in their entirety by reference to each such
agreement, copies of which are attached as appendices to the
definitive proxy filed on August 8, 1995 with the Securities and
Exchange Commission and are incorporated herein by reference.
The Master Agreement is the umbrella agreement for the Citizens
Agreements. Its provisions include representations, warranties
and covenants consistent with the nature of the transactions
contemplated by the Citizens Agreements, including procedures
and obligations with respect to a meeting of the stockholders of
the Company for the purpose of approving the Stock Option
Agreement and the Stock Options granted pursuant thereto as
described below. As set forth in the Master Agreement, the
Company's Board of Directors has approved, and, subject to
certain conditions set forth therein, recommends that the
Company's stockholders approve, the Stock Option Agreement and
the Stock Options.
The Master Agreement also provides that, if the Company's
stockholders do not approve the Stock Option Agreement and the
Stock Options, or if a meeting therefor has not been held by
December 31, 1995, then CUCC would have the right to (a) require
the Company to purchase for $4,200,000 plus certain expenses
from CUCC the 300,000 shares of the Company's Common Stock that
CUCC purchased on May 31, 1995 pursuant to the Klenner Agreement
(the "Put Right") and (b) purchase from the Company the stock of
HTCC Consulting RT at the Company's cost therefor, which is
approximately $4,500,000 (the "Consulting Purchase Option").
The Master Agreement also provides that if the Company issues, in
connection with any public or private offering, shares of Common
Stock or other stock of the Company or any securities
convertible into, or exchangeable or exercisable for, shares of
Common Stock or other stock of the Company (the "Offered
Securities") and such issuance occurs prior to the expiration of
the exercise period of the Two-Year Stock Options as defined in
the Stock Option Agreement (the "Two-Year Stock Options") then
the Company must grant CUCC the option (on the same terms and
conditions and an expiration date concurrent with the expiration
date of the Two-Year Stock Options) to purchase such number of
shares of the Offered Securities sufficient to maintain CUCC's
then existing percentage ownership interest of Common Stock on a
fully diluted basis. If such issuance of Offered Securities
occurs after the expiration of the exercise period of the
Two-Year Stock Options, then the Company must grant CUCC the
right to purchase at the applicable offering price such number
of shares of the Offered Securities as is necessary to maintain
CUCC's then existing percentage ownership interest of Common
Stock on a fully diluted basis.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The intended effect of such provisions is to enable CUCC to maintain
its ability, upon exercise in full of the Warrant and the Stock
Options, to acquire ownership of up to approximately 51% of
Common Stock outstanding on a fully diluted basis.
The Master Agreement further provides that CUCC is entitled to have
one representative on the Company's Board of Directors at this
time, and to have one such representative (or his successor(s))
nominated by such Board for election at all the Company's
stockholders' meetings for so long as CUCC owns at least 300,000
shares of the Company's Common Stock. Accordingly, CUCC
designated and on May 11, 1995 the Company's Board of Directors
elected Donald K. Roberton to such Board, subject to the
satisfaction of certain conditions which were satisfied on May
31, 1995, at which time Mr. Roberton took office as a Director.
Mr. Roberton is a nominee for reelection as a Director at the
Annual Meeting to be held on September 12, 1995. The Master
Agreement also provides that the Company's Board of Directors
will continue to be comprised of at least six directors, whose
terms will not be classified or staggered.
The Loan Agreement provides for advances by CUCC of up to $4,300,000
to fund certain obligations pertaining to HTCC Consulting RT
("Consulting") and its affiliated concession companies in
Hungary, and a possible additional advance of up to $910,000 to
fund the repayment of certain loans to the Company from HTC.
Approximately $1,887,000 was advanced by CUCC on July 25, 1995
to fund Consulting's remaining subscription obligations to
Kelet-Negrad Com. The additional advance of up to $910,000 is
contingent upon the satisfaction of certain conditions,
including approval by the Company's stockholders of the Stock
Options described below. The remainder of the $4,300,000 advance
may be required to be advanced by CUCC shortly in order to
enable HTCC to meet certain subordinated loan obligations that
may be owing to Kelet-Negrad Com and Raba-Com.
The Loan Agreement provides for customary events of default and
remedies, and cross-defaults under the Master Agreement.
Advances made under the Loan Agreement will bear interest at a
variable rate equal to prime (as published in the Wall Street
Journal) plus 2% per annum, payable quarterly in cash or, at the
Company's election, in shares of the Company's Common Stock
valued at the lower of $13.00 per share or a market average
price per share during such quarter. The loan is due and payable
in full (a) two years after the first advance if the Company's
stockholders approve the Stock Options, as described below or
(b) six months after the earlier of either the date of the
Company's stockholders' meeting at which the Stock Options are
not approved as described below, or December 31, 1995, if no
such meeting has been held by said date.
The Warrant entitles CUCC to purchase up to 299,219 shares of the
Company's Common Stock at $13.00 per share at any time through
May 31, 1997, subject to (a) adjustments pursuant to customary
anti-dilution protections and (b) the exercise price per share
under the Warrants being reduced to $10.00 per share if the
Company's stockholders do not approve the Stock Options
described below or such Company's stockholders' meeting has not
occurred on or before December 31, 1995. Assuming no adjustments
occur, the aggregate proceeds that the Company would receive if
the Warrant were exercised in full would be $3,889,847. The
Company presently expects that if the Warrant is exercised, the
proceeds would be used by the Company for general corporate
purposes.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The Stock Pledge Agreement provides for the Company's pledge of the
stock of Consulting to secure the Company's obligations under
(a) the Loan Agreement and Note thereunder described above and
(b) the Put Right that is included in the Master Agreement
described above.
The Stock Option Agreement provides for the grant by the Company to
CUCC of the Stock Options, which, if fully exercised, would
result in CUCC owning an aggregate amount (including shares now
held or subject to purchase, pursuant to the Warrant, by CUCC
but not including any shares issued to pay interest on the
advances made pursuant to the Loan Agreement described above or
fees due under the Management Services Agreement described
below) of approximately 51% of the Company's then outstanding
Common Stock on a fully diluted basis. The Stock Options have
varying exercise periods of two, three, four and five years,
respectively, in each case commencing on the date that the
Company's stockholders approve the Stock Options as described
below.
(a) The Two-Year Stock Options permit CUCC to purchase 101,550
shares of Common Stock at $13.00 per share, subject to
adjustment, at any time prior to the second anniversary of
the date that the Stock Options are approved by the
Company's stockholders.
(b) The Three-Year Stock Options permit CUCC to purchase
920,916 shares of Common Stock at $15.00 per share,
subject to adjustment, at any time prior to the third
anniversary of the date that the Stock Options are
approved by the Company's stockholders.
(c) The Four-Year Stock Options permit CUCC to purchase
920,916 shares of Common Stock at $16.50 per share,
subject to adjustment, at any time prior to the fourth
anniversary of the date that the Stock Options are
approved by the Company's stockholders.
(d) The Five-Year Stock Options permit CUCC to purchase
920,917 shares of Common Stock at $18.00 per share,
subject to adjustment, at any time prior to the fifth
anniversary of the date that the Stock Options are
approved by the Company's stockholders.
The number of shares and price per share for each of the Options are
subject to adjustment pursuant to customary anti-dilution
protections that assure CUCC's ability to purchase and hold
approximately 51% (inclusive of the 300,000 shares now held by
CUCC) of the Common Stock outstanding if and when CUCC has
exercised the Warrant and all the Stock Options. The Stock
Options may not be exercised unless and until the Stock Options
have been approved by a vote of the majority of the outstanding
shares of the Company's Common Stock present in person or
represented by proxy and voted upon at a meeting of the
Company's stockholders at which such approval is sought, all as
required by the Master Agreement described above. If no
adjustments occur, the aggregate proceeds that the Company would
receive if CUCC exercised all of the Stock Options in full would
be $46,905,510. The Company presently expects that if any or all
of the Stock Options were exercised, the proceeds would be used
by the Company for general corporate purposes.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The Registration Agreement provides that the Company will pay
certain expenses of and provide upon CUCC's request up to four
(4) demand registrations (which may be shelf registrations) and
unlimited incidental or piggyback registrations for the sale of
shares of Common Stock now or hereafter owned by CUCC for up to
the next twenty (20) years, subject to the terms and conditions
provided therein.
The Management Services Agreement provides for CIMS to provide
certain corporate, financial, technical, construction, marketing
and operational services to the Company and its subsidiaries for
a term commencing July 1, 1995 and continuing until December 31,
2007, unless terminated earlier pursuant thereto. The management
fee to be paid by the Company to CIMS for such services will be
the greater of 5% of Adjusted Gross Revenues (as such term is
defined in such agreement) or $100,000 per month through 1995,
$150,000 per month during 1996 and up to $200,000 per month
commencing with January 1997 or such subsequent month as shall
follow the month during which there shall have occurred a 20% or
greater improvement in the collective net operating income of
Kelet-Negrad Com and Raba-Com over the combined net operating
income of such companies as projected in their business plans.
Such monthly fee payments may be paid in cash or, at the
Company's election, shares of Common Stock having a value, based
on a three-month market average, equal to such fee. Expenses
incurred by CIMS in providing the management services, including
certain allocable overhead items, will be reimbursed by the
Company.
CUCCentered into certain Voting Agreements with certain directors,
officers and stockholders of the Company on May 31, 1995. The
Voting Agreements are with (i) Robert Genova, the Company's
Chairman of the Board, President, Chief Executive Officer and a
Director (currently the beneficial owner of 18,000 shares of
Common Stock), (ii) Frank R. Cohen, the Company's Secretary,
Treasurer and Chief Financial Officer and a Director (currently
the beneficial owner of 25,000 shares of Common Stock), and
(iii) Peter E. Klenner, a Director of the Company and, until May
31, 1995, its President, Chief Executive Officer and Chief
Financial Officer (currently the beneficial owner of 84,300
shares of Common Stock).
Pursuant to the Voting Agreements, each such person agreed, as a
stockholder of the Company, to support and vote their shares of
Common Stock for (a) the approval of the Stock Option Agreement
and the Stock Options, and (b) CUCC's designee(s) to serve on
the Company's Board of Directors during a term of up to December
31, 1996. Each of the Voting Agreements also contains certain
restrictions on sales of or other encumbrances on such person's
shares.
The Voting Agreement with Mr. Genova also provides that Mr. Genova
will sell to CUCC the shares of Common Stock beneficially owned
by Mr. Genova if the Company's stockholders fail to approve the
Stock Option Agreement and the Stock Options unless such failure
is a result of the Company consummating a transaction not
involving CUCC with a third party at a price per share of Common
Stock in excess of $13.00, in which case CUCC would receive
one-half of the amount Mr. Genova receives for his shares in
such transaction that is in excess of $13.00 per share.
The Stock Option Agreement, the Stock Options and the issuance of
common stock upon any exercise thereof are subject to approval
by the Company's stockholders at the annual meeting of
stockholders, which is to be held on September 12, 1995.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
13. Common Stock
In April 1992, the Company adopted a Stock Option Plan (the
"Plan"). An aggregate of 250,000 shares of common stock is
authorized for issuance under the Plan. The Plan provides that
incentive and nonqualified options may be granted to officers
and directors and consultants to the Company. Options granted
under the Plan are exercisable for a period of up to ten years
from the date of grant. Options generally terminate upon the
optionee's termination of employment or consulting arrangement
with the Company. On February 7, 1995, the Company granted to
officers and directors 165,000 nonqualified stock options
exercisable at $12.25 per share. As of June 30, 1995, 250,000
stock options have been granted.
The following table is a summary of all stock options as of June 30,
1995:
Outstanding Option price
options per share
March 23, 1992 - -
Granted 80,000 $ 7.00
--------------------------------------------------------
December 31, 1992 80,000 $ 7.00
Granted 19,000 $10.00
Granted 5,000 $10.25
--------------------------------------------------------
December 31, 1993 104,000 $ 7.00 - $10.25
Granted 479,991 $ 4.00
Granted 10,000 $10.00
--------------------------------------------------------
Terminated (3,000) $10.00
December 31, 1994 590,991 $ 4.00 - $10.25
Granted 165,000 $12.25
Exercised (230,994) $ 4.00
Exercised (20,000) $ 7.00
Terminated (16,000) $10.00
---------------------------------------------------------
June 30, 1995 488,997 $ 4.00 - $12.25
At June 30, 1995, 60,000 stock options were exercisable at $7.00 per
share, 5,000 at $10.25, 10,000 at $10.00 per share and
165,000 at $12.25 per share.
During the six months ended June 30, 1995, the Company issued 45,478
shares of its common stock upon the exercise of placement agent
warrants to purchase such shares at prices ranging from $3.60 to
$10.15 per share. In addition, an officer exercised options to
purchase 230,994 shares of common stock at $4.00 per share and
20,000 shares at $7.00 per share. These transactions resulted in
net increases in common stock and additional paid-in capital of
$296 and $1,250,453, respectively.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
14. Commitments and Contingencies
(a) Employment Agreement
In February 1994, the Company entered into employment
contracts with Robert Genova, Peter E. Klenner and Frank
R. Cohen effective upon the granting of concessions to the
Company from the Ministry of Transport, Telecommunications
and Water Management of the Republic of Hungary and the
financing of such concessions. The employment contracts
provided for annual salaries for Messrs. Klenner, Genova
and Cohen of $144,000, $120,000 and $72,000, respectively,
and for non-qualified stock options exercisable at $4.00
per share to purchase 125,000, 125,000 and 35,000 shares
of Common Stock, respectively. Prior to such employment
contracts going into effect, the Board rescinded such
employment contracts and replaced them with new five-year
employment contracts to be effective as of May 1, 1994.
The new employment contracts, dated May 4, 1994, provided
for Messrs. Klenner, Genova and Cohen to receive annual
salaries of $168,000, $126,000 and $84,000, respectively,
and for non-qualified stock options exercisable at $14.00
per share to purchase 230,994, 197,247 and 51,750 shares
of Common Stock, respectively. Such options become
exercisable at the rate of 20% per year beginning
September 1, 1995 and each September 1st thereafter
through 1999. The exercise price for these options was
raised closer to market in order to avoid a significant
book loss to the Company. On May 4, 1994, the quoted
NASDAQ closing price of the Company Common Stock was
$18.00 per share; however, $14 was the amount obtained by
the Company in a private placement in May 1994. On August
16, 1994, when the Company's Common Stock was being quoted
on NASDAQ at $92, the Board reset the exercise price of
the stock options granted pursuant to such employment
contracts to management to $10.00 per share in order to
assure intended incentives to management. New five-year
employment contracts with Messrs. Klenner, Genova and
Cohen were entered into on September 1, 1994 on the same
terms as the May 4, 1994 employment contracts with the
exception of a new five-year term beginning on September
1, 1995 and the exercise price for the stock options being
reset from $14.00 to $10.00. On November 29, 1994, the
Board reset the exercise price of the stock options
granted pursuant to the September 1, 1994 employment
contracts from $10.00 back to the original exercise price
of $4.00 per share as a bonus to Messrs. Klenner, Genova
and Cohen for their services in 1994. The last sale price
on November 29, 1994 reported by NASDAQ was $12f. The
Board decided to lower the exercise price in lieu of
granting additional stock options or awarding cash
bonuses. New five-year employment contracts were executed
on January 17, 1995 on the same terms as the September 1,
1994 employment contracts with the exception of a new
five-year term beginning on January 17, 1995 and the
exercise price for the stock options being reset from
$10.00 to $4.00. The employment contracts with Messrs.
Klenner, Genova and Cohen provide that if the employee
resigns from the Company due to certain changes in
management or in the event of the termination of that
employee's employment by the Company for any reason other
than "cause" as defined in such agreement, the employee
will be entitled to the immediate vesting in all unvested
options and a two-year continuation of salary.
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Notes to Consolidated Financial Statements
(Unaudited)
On May 31, 1995, the employment contract with Mr. Klenner was
terminated when Mr. Klenner resigned as President, Chief
Executive Officer and Chief Financial Officer of the
Company, and the employment contracts with Messrs. Genova
and Cohen were amended to increase their salaries to
$168,000 and $120,000, respectively, to provide
compensation for the assumption of additional duties by
Mr. Genova as President and Chief Executive Officer and
the assumption of additional duties by Mr. Cohen as Chief
Financial Officer. Pursuant to his employment agreement
and as acknowledged in a Certain Termination and Release
Agreement between the Company and Mr. Klenner, Mr. Klenner
was entitled to the immediate vesting of 230,994 options
at $4.00 per share (which he promptly exercised); however,
pursuant to the Klenner Termination Agreement, Mr. Klenner
will not receive any continuation of salary under his
former employment contract.
Stock compensation expense for the six months ended June 30,
1995 (including the write-off of the entire amount related to the
President's options) amounted to $3,268,352.
During the six months ended June 30, 1995, the Company also paid
legal fees of $115,000 to an officer.
(b) Management Agreements
On June 16, 1994, the Company entered into an agreement with
Telecom Denmark ("TD") which provided, among other things,
for TD to (1) acquire 20% interests in Kelet-Negrad Com
and Raba-Com for approximately $6,600,000 by purchasing
the shares directly from the two companies, (2) acquire
25,000 shares of the Company's common stock for
approximately $400,000, and (3) manage the two concession
districts. The management agreements require approximate
aggregate minimum annual fees as follows:
Year
1 $1,551,000
2 1,551,000
3 324,000
4 324,000
5 324,000
---------
$4,074,000
==========
In addition to the fees, the agreements also require the
concession companies to pay for travel and certain other
expenses.
(c) Leases
The Company leases office facilities in New York City which
require minimum annual rentals of $21,375 through August
31, 1996. The Company shares the facilities with HTC. The
Company also rents office facilities in Budapest, Hungary
from HTC on a month-to-month basis at a rental of
approximately $3,500 per month.
<PAGE>
(d) Claim Settlement
In connection with the settlement of a claim relating to the
termination of a management agreement with an unrelated
corporation to operate certain concessions, the Company
issued to the corporation (1) a promissory note for
$300,000 payable December 29, 1995, guaranteed by an
irrevocable and unconditional letter of credit and (2)
25,000 five-year assignable warrants with an estimated
market value of $100,000, entitling the holder to purchase
25,000 shares of the Company's common stock at $20 per
share. The corporation will also have a "put option" to
require the Company to purchase the warrants from the
proceeds of any public offering of the Company's
securities at an aggregate price of $300,000. In case the
Company fails to perform any of its obligations under the
settlement agreement, the corporation will be entitled to
exercise any and all claims and actions which the
corporation was able to exercise under its management
agreement and its termination. The $400,000 settlement was
charged to operations during the three months ended June
30, 1994.
15. Subsequent Events
On July 31, 1995, the Company borrowed approximately $1,887,000 from
Citizens which it used to increase its ownership in Kelet-Negrad
Com to 70%.
As announced on August 3, 1995, the Company entered into an
Agreement in Principle as of July 31, 1995, to purchase from
Alcatel Austria AG, an Austrian corporation; U.S. Telecom East,
Inc., a Delaware corporation; and Central Euro TeleKom, Inc., a
Delaware corporation, their collective rights to an 85% equity
interest in Hungarotel RT ("Hungarotel") and a 45% equity
interest in Papatel RT ("Papatel"), both Hungarian corporations.
In exchange, at closing the Company will issue up to 555,555
shares of Common Stock. After three years, the Company would be
required to issue up to 158,730 additional shares of Common
Stock if the Common Stock has not maintained an average value of
$18.00 during a twenty-day trading period immediately prior to
the third anniversary of closing. In such event, the Common
Stock will be assumed to have a value per share equal to such
average, but in no event less than $14.00 per share.
Hungarotel holds the concession rights to provide telecommunications
services in the Bekescsaba and Oroshaza area of Hungary, which
together have a total population of approximately 412,000 and
approximately 162,000 households. Papatel holds the concession
rights to provide telecommunications services in the Papa area
of Hungary, which has a total population of approximately 65,000
and approximately 23,000 households.
The purchase is subject to several conditions, including: the
execution of a definitive stock purchase agreement; the approval
of the Ministry; the Ministry agreeing to reductions in certain
concession fees applicable to the Hungarotel and Papatel
concessions; the purchase (or the execution of an agreement to
purchase) by the Company of MATAV RT's (the former Hungarian
state-owned telephone monopoly) 25.01% ownership interest in
Papatel; and the Company's stockholders' approval.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Operations
The Company was organized on March 23, 1992 to acquire majority
interests in and to provide working capital, technical expertise and
management services to community sponsored telecommunication
companies.
The Company was in the development stage through March 31, 1995 and
has been unprofitable to date.
For the three months ended June 30, 1995, the Company incurred a net
loss of $6,155,000 after net interest expense of $397,000 as compared
to a net loss of $889,000 after net interest and dividend income of
$48,000 for the three months ended June 30, 1994.
For the six months ended June 30, 1995, the Company incurred a net
loss of $7,373,000 after net interest expense of $506,000 as
compared to a net loss of $1,438,000 after net interest and dividend
income of $89,000 for the six months ended June 30, 1994.
The net losses for 1995 differed from the 1994 losses primarily
because of the following:
a) On May 31, 1995, 250,994 stock options were exercised by
the President in connection with the termination of his
employment. Stock compensation expense for the six months
ended June 30, 1995 (including the write-off of the entire
amount related to the President's options) amounted to
$3,268,352; stock compensation expense for the six months
ended June 30, 1994 amounted to $90,000.
b) The three months ended June 30, 1995 was the first quarter
since the Company emerged from the development stage.
Therefore, results of operations for this period are not
comparable to results of operations for prior periods.
In 1994, Bell Canada International ("BCI") performed services in
connection with the concession applications. After these services were
performed, the Company terminated its agreement with BCI because the
financial lenders with whom the Company was discussing loans insisted
that the manager of the project have an equity interest in the project
and BCI refused to make an investment in the project on the grounds
that it had a policy against investing in Eastern European situations.
In settlement of BCI's claim, the Company agreed to issue a promissory
note for $300,000 payable on December 31, 1995, guaranteed by a bank.
In addition, the Company agreed to grant 25,000 five-year assignable
warrants entitling the holder to purchase 25,000 shares of the
Company's common stock at $20 per share, together with the right to
have these warrants included in any Registration Statement filed by
the Company with the U.S. Securities and Exchange Commission for the
sale of its common stock during the life of the warrants. BCI was also
granted a "put option" to require the Company to purchase the warrants
at an aggregate price of $300,000 out of the proceeds of any public
offering of securities by the Company during the term of the warrants.
<PAGE>
The consolidated statement of loss for the three months ended June
30, 1994 included a $400,000 charge to operations, representing
the $300,000 note payable and $100,000 estimated market value of the
warrants.
MATAV has been operating a network of approximately 2,500 telephones
in the Sarvar district and approximately 12,800 telephones in the
Salgotarjan district. As of January 1, 1995, Raba Com purchased the
2,500 telephone lines and associated buildings and equipment located
in its district from MATAV for approximately $665,000 and hired the 55
employees who operated the network. Since January 1, 1995, Raba Com
has been operating this network, receiving the revenues and paying
operating expenses.
As of March 1, 1995, Kelet-Negrad Com purchased the 12,800 telephone
lines and associated buildings and equipment located in its district
from MATAV for $5.3 million and hired the 160 employees who operated
the network. Kelet-Negrad Com paid MATAV with a three year promissory
note. The note was guaranteed by Telecom Denmark as to 28% and by the
Company as to 72%. The Company pledged its holdings of 50.2% of the
outstanding shares of Kelet-Negrad Com as security for its share of
the guarantee. Since March 1, 1995, Kelet-Negrad Com has been
operating the network, receiving the revenues and paying the operating
expenses.
The Company commenced construction of new lines in both the Raba Com
and Kelet-Negrad Com districts in March 1995 and should complete
construction of some of the lines and receive revenues in 1995 both in
the form of subscriber fees and from the use of the lines.
Liquidity and Capital Resources
During the six months ended June 30, 1995, the Company issued 45,478
shares of its common stock upon the exercise of placement agent
warrants to purchase such shares at prices ranging from $3.60 to
$10.15 per share. In addition, an officer exercised options to
purchase 230,994 shares of common stock at $4.00 per share and 20,000
shares at $7.00 per share. These transactions resulted in net
increases in common stock and additional paid-in capital of $296 and
$1,250,453, respectively.
Agreement with Citizens Utilities Company
On May 31, 1995, the Company and certain wholly-owned subsidiaries of
Citizens Utilities Company ("Citizens") entered into the following
agreements (the "Citizens Agreements"): the Master Agreement between
the Company and CU CapitalCorp. ("CUCC") (the "Master Agreement"); the
Loan Agreement between the Company and CUCC (the "Loan Agreement") and
the Promissory Note related thereto issued by the Company to CUCC (the
"Note"); the Warrant to Purchase Shares of Common Stock of Hungarian
Telephone and Cable Corp. between the Company and CUCC (the
"Warrant"); the Stock Pledge Agreement between the Company and CUCC
(the "Stock Pledge Agreement"); the Stock Option Agreement between the
Company and CUCC (the "Stock Option Agreement"); the Registration
Agreement between the Company and CUCC (the "Registration Agreement");
and the Management Services Agreement between the Company and Citizens
International Management Services Company, a Delaware corporation
("CIMS") and a wholly-owned subsidiary of Citizens (the "Management
Services Agreement"). CUCC simultaneously entered into voting
agreements with three affiliates of the Company (the "Voting
Agreements") and consummated the purchase of 300,000 shares of Common
Stock from Peter E. Klenner, a Director and then President, Chief
Executive Officer and Chief Financial Officer of the Company.
<PAGE>
The Citizens Agreements listed above were entered into between CUCC or
CIMS, on the one hand, and the Company or certain affiliates of the
Company, on the other hand, as the result of certain agreements
entered into as of May 12, 1995, between Citizens, on the one hand,
and the Company or Peter E. Klenner, on the other hand.
Detailed below is a brief description of the Citizens Agreements. The
summaries do not purport to be complete and are subject to and
qualified in their entirety by reference to each such agreement,
copies of which are attached as appendices to the definitive proxy
filed on August 8, 1995 with the Securities and Exchange Commission
and are incorporated herein by reference.
The Master Agreement is the umbrella agreement for the Citizens
Agreements. Its provisions include representations, warranties and
covenants consistent with the nature of the transactions contemplated
by the Citizens Agreements, including procedures and obligations with
respect to a meeting of the stockholders of the Company for the
purpose of approving the Stock Option Agreement and the Stock Options
granted pursuant thereto as described below. As set forth in the
Master Agreement, the Company's Board of Directors has approved, and,
subject to certain conditions set forth therein, recommends that the
Company's stockholders approve, the Stock Option Agreement and the
Stock Options.
The Master Agreement also provides that, if the Company's stockholders
do not approve the Stock Option Agreement and the Stock Options, or if
a meeting therefor has not been held by December 31, 1995, then CUCC
would have the right to (a) require the Company to purchase for
$4,200,000 plus certain expenses from CUCC the 300,000 shares of the
Company's Common Stock that CUCC purchased on May 31, 1995 pursuant to
the Klenner Agreement (the "Put Right") and (b) purchase from the
Company the stock of HTCC Consulting RT at the Company's cost
therefor, which is approximately $4,500,000 (the "Consulting Purchase
Option").
The Master Agreement also provides that if the Company issues, in
connection with any public or private offering, shares of Common Stock
or other stock of the Company or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock or other stock
of the Company (the "Offered Securities") and such issuance occurs
prior to the expiration of the exercise period of the Two-Year Stock
Options as defined in the Stock Option Agreement (the "Two-Year Stock
Options") then the Company must grant CUCC the option (on the same
terms and conditions and an expiration date concurrent with the
expiration date of the Two-Year Stock Options) to purchase such number
of shares of the Offered Securities sufficient to maintain CUCC's then
existing percentage ownership interest of Common Stock on a fully
diluted basis. If such issuance of Offered Securities occurs after the
expiration of the exercise period of the Two-Year Stock Options, then
the Company must grant CUCC the right to purchase at the applicable
offering price such number of shares of the Offered Securities as is
necessary to maintain CUCC's then existing percentage ownership
interest of Common Stock on a fully diluted basis. The intended effect
of such provisions is to enable CUCC to maintain its ability, upon
exercise in full of the Warrant and the Stock Options, to acquire
ownership of up to approximately 51% of Common Stock outstanding on a
fully diluted basis.
<PAGE>
The Master Agreement further provides that CUCC is entitled to have
one representative on the Company's Board of Directors at this time,
and to have one such representative (or his successor(s)) nominated by
such Board for election at all the Company's stockholders' meetings
for so long as CUCC owns at least 300,000 shares of the Company's
Common Stock. Accordingly, CUCC designated and on May 11, 1995 the
Company's Board of Directors elected Donald K. Roberton to such Board,
subject to the satisfaction of certain conditions which were satisfied
on May 31, 1995, at which time Mr. Roberton took office as a Director.
Mr. Roberton is a nominee for reelection as a Director at the Annual
Meeting to be held on September 12, 1995. The Master Agreement also
provides that the Company's Board of Directors will continue to be
comprised of at least six directors, whose terms will not be
classified or staggered.
The Loan Agreement provides for advances by CUCC of up to $4,300,000
to fund certain obligations pertaining to HTCC Consulting RT
("Consulting") and its affiliated concession companies in Hungary, and
a possible additional advance of up to $910,000 to fund the repayment
of certain loans to the Company from HTC. Approximately $1,887,000 was
advanced by CUCC on July 25, 1995 to fund Consulting's remaining
subscription obligations to Kelet-Negrad Com. The additional advance
of up to $910,000 is contingent upon the satisfaction of certain
conditions, including approval by the Company's stockholders of the
Stock Options described below. The remainder of the $4,300,000 advance
may be required to be advanced by CUCC shortly in order to enable HTCC
to meet certain subordinated loan obligations that may be owing to
Kelet-Negrad Com and Raba-Com.
The Loan Agreement provides for customary events of default and
remedies, and cross-defaults under the Master Agreement. Advances made
under the Loan Agreement will bear interest at a variable rate equal
to prime (as published in the Wall Street Journal) plus 2% per annum,
payable quarterly in cash or, at the Company's election, in shares of
the Company's Common Stock valued at the lower of $13.00 per share or
a market average price per share during such quarter. The loan is due
and payable in full (a) two years after the first advance if the
Company's stockholders approve the Stock Options, as described below
or (b) six months after the earlier of either the date of the
Company's stockholders' meeting at which the Stock Options are not
approved as described below, or December 31, 1995, if no such meeting
has been held by said date.
The Warrant entitles CUCC to purchase up to 299,219 shares of the
Company's Common Stock at $13.00 per share at any time through May 31,
1997, subject to (a) adjustments pursuant to customary anti-dilution
protections and (b) the exercise price per share under the Warrants
being reduced to $10.00 per share if the Company's stockholders do not
approve the Stock Options described below or such Company's
stockholders' meeting has not occurred on or before December 31, 1995.
Assuming no adjustments occur, the aggregate proceeds that the Company
would receive if the Warrant were exercised in full would be
$3,889,847. The Company presently expects that if the Warrant is
exercised, the proceeds would be used by the Company for general
corporate purposes.
The Stock Pledge Agreement provides for the Company's pledge of the
stock of Consulting to secure the Company's obligations under (a) the
Loan Agreement and Note thereunder described above and (b) the Put
Right that is included in the Master Agreement described above.
<PAGE>
The Stock Option Agreement provides for the grant by the Company to
CUCC of the Stock Options, which, if fully exercised, would result in
CUCC owning an aggregate amount (including shares now held or subject
to purchase, pursuant to the Warrant, by CUCC but not including any
shares issued to pay interest on the advances made pursuant to the
Loan Agreement described above or fees due under the Management
Services Agreement described below) of approximately 51% of the
Company's then outstanding Common Stock on a fully diluted basis. The
Stock Options have varying exercise periods of two, three, four and
five years, respectively, in each case commencing on the date that the
Company's stockholders approve the Stock Options as described below.
(a) The Two-Year Stock Options permit CUCC to purchase
101,550 shares of Common Stock at $13.00 per share,
subject to adjustment, at any time prior to the
second anniversary of the date that the Stock
Options are approved by the Company's stockholders.
(b) The Three-Year Stock Options permit CUCC to purchase
920,916 shares of Common Stock at $15.00 per share,
subject to adjustment, at any time prior to the
third anniversary of the date that the Stock Options
are approved by the Company's stockholders.
(c) The Four-Year Stock Options permit CUCC to purchase
920,916 shares of Common Stock at $16.50 per share,
subject to adjustment, at any time prior to the
fourth anniversary of the date that the Stock
Options are approved by the Company's stockholders.
(d) The Five-Year Stock Options permit CUCC to purchase
920,917 shares of Common Stock at $18.00 per share,
subject to adjustment, at any time prior to the
fifth anniversary of the date that the Stock Options
are approved by the Company's stockholders.
The number of shares and price per share for each of the Options are
subject to adjustment pursuant to customary anti-dilution protections
that assure CUCC's ability to purchase and hold approximately 51%
(inclusive of the 300,000 shares now held by CUCC) of the Common Stock
outstanding if and when CUCC has exercised the Warrant and all the
Stock Options. The Stock Options may not be exercised unless and until
the Stock Options have been approved by a vote of the majority of the
outstanding shares of the Company's Common Stock present in person or
represented by proxy and voted upon at a meeting of the Company's
stockholders at which such approval is sought, all as required by the
Master Agreement described above. If no adjustments occur, the
aggregate proceeds that the Company would receive if CUCC exercised
all of the Stock Options in full would be $46,905,510. The Company
presently expects that if any or all of the Stock Options were
exercised, the proceeds would be used by the Company for general
corporate purposes.
The Registration Agreement provides that the Company will pay certain
expenses of and provide upon CUCC's request up to four (4) demand
registrations (which may be shelf registrations) and unlimited
incidental or piggyback registrations for the sale of shares of Common
Stock now or hereafter owned by CUCC for up to the next twenty (20)
years, subject to the terms and conditions provided therein.
<PAGE>
The Management Services Agreement provides for CIMS to provide certain
corporate, financial, technical, construction, marketing and
operational services to the Company and its subsidiaries for a term
commencing July 1, 1995 and continuing until December 31, 2007, unless
terminated earlier pursuant thereto. The management fee to be paid by
the Company to CIMS for such services will be the greater of 5% of
Adjusted Gross Revenues (as such term is defined in such agreement) or
$100,000 per month through 1995, $150,000 per month during 1996 and up
to $200,000 per month commencing with January 1997 or such subsequent
month as shall follow the month during which there shall have occurred
a 20% or greater improvement in the collective net operating income of
Kelet-Negrad Com and Raba-Com over the combined net operating income
of such companies as projected in their business plans. Such monthly
fee payments may be paid in cash or, at the Company's election, shares
of Common Stock having a value, based on a three-month market average,
equal to such fee. Expenses incurred by CIMS in providing the
management services, including certain allocable overhead items, will
be reimbursed by the Company.
CUCC entered into certain Voting Agreements with certain directors,
officers and stockholders of the Company on May 31, 1995. The Voting
Agreements are with (i) Robert Genova, the Company's Chairman of the
Board, President, Chief Executive Officer and a Director (currently
the beneficial owner of 18,000 shares of Common Stock), (ii) Frank R.
Cohen, the Company's Secretary, Treasurer and Chief Financial Officer
and a Director (currently the beneficial owner of 25,000 shares of
Common Stock), and (iii) Peter E. Klenner, a Director of the Company
and, until May 31, 1995, its President, Chief Executive Officer and
Chief Financial Officer (currently the beneficial owner of 84,300
shares of Common Stock).
Pursuant to the Voting Agreements, each such person agreed, as a
stockholder of the Company, to support and vote their shares of Common
Stock for (a) the approval of the Stock Option Agreement and the Stock
Options, and (b) CUCC's designee(s) to serve on the Company's Board of
Directors during a term of up to December 31, 1996. Each of the Voting
Agreements also contains certain restrictions on sales of or other
encumbrances on such person's shares.
The Voting Agreement with Mr. Genova also provides that Mr. Genova
will sell to CUCC the shares of Common Stock beneficially owned by Mr.
Genova if the Company's stockholders fail to approve the Stock Option
Agreement and the Stock Options unless such failure is a result of the
Company consummating a transaction not involving CUCC with a third
party at a price per share of Common Stock in excess of $13.00, in
which case CUCC would receive one-half of the amount Mr. Genova
receives for his shares in such transaction that is in excess of
$13.00 per share.
Capital Expenditure Program
Based upon Business Plans approved by the concession companies in
March 1995, the financial requirements to build out the telephone
exchange in the concession primary districts will be approximately $90
million.
The $90 million includes the following: concession fees ($4.8
million), investment in switch and transmission equipment ($11
million) investment in the line network ($44 million), investment in
ground buildings, existing lines and other work ($28 million), and
management fees ($2.2 million).
<PAGE>
The concession companies plan to finance these requirements by
contributing $30 million in equity and procuring subordinated debt
of $10 million and senior debt of $50 million.
The shareholders of the concession companies have already contributed
$24 million in equity and procured $23 million in subordinated and
senior debt loans consisting of a $9 million equipment loan from
Siemens, $10 million in subordinated loans, and a $4 million loan from
MATAV in connection with the purchase of approximately 15,300
operating telephone lines from MATAV.
Subsequent Events
As announced on August 3, 1995, the Company entered into an Agreement
in Principle as of July 31, 1995, to purchase from Alcatel Austria AG,
an Austrian corporation; U.S. Telecom East, Inc., a Delaware
corporation; and Central Euro TeleKom, Inc., a Delaware corporation,
their collective rights to an 85% equity interest in Hungarotel RT
("Hungarotel") and a 45% equity interest in Papatel RT ("Papatel"),
both Hungarian corporations. In exchange, at closing the Company will
issue up to 555,555 shares of Common Stock. After three years, the
Company would be required to issue up to 158,730 additional shares of
Common Stock if the Common Stock has not maintained an average value
of $18.00 during a twenty-day trading period immediately prior to the
third anniversary of closing. In such event, the Common Stock will be
assumed to have a value per share equal to such average, but in no
event less than $14.00 per share.
Hungarotel holds the concession rights to provide telecommunications
services in the Bekescsaba and Oroshaza area of Hungary, which
together have a total population of approximately 412,000 and
approximately 162,000 households. Papatel holds the concession rights
to provide telecommunications services in the Papa area of Hungary,
which has a total population of approximately 65,000 and approximately
23,000 households.
The purchase is subject to several conditions, including: the
execution of a definitive stock purchase agreement; the approval of
the Ministry; the Ministry agreeing to reductions in certain
concession fees applicable to the Hungarotel and Papatel concessions;
the purchase (or the execution of an agreement to purchase) by the
Company of MATAV RT's (the former Hungarian state-owned telephone
monopoly) 25.01% ownership interest in Papatel; and the Company's
stockholders' approval.
Inflation and Seasonality
Although the rate of inflation declined in 1994 and 1995, it is still
high, compared to the United States. The rate of inflation was 18% for
1994 as compared to 20% for 1993 and 22% for 1992. Since the Siemens
turnkey contract is payable in German deutsch marks, the costs of the
project increase to the extent that the Hungarian forint is devalued
in relation to the German currency.
The Company's business is not seasonal.
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults 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 *(numbers below are references to Regulation S-B)
(3) (a) Certificate of Incorporation filed March 23, 1992
(b) By-laws
(4) (a) Form of Common Stock Certificate
(b) Form of Underwriters' Warrants
(c) Placement Agreement between Registrant and J.W. Barclay &
Co., Inc. and form of Placement Agent Warrants issued in
connection with private placement financing
(d) Placement Agreement between Registrant and Commonwealth
Associates and Placement Agent Warrant Agreement and Warrant
Certificates issued in connection with the private
placement**
(5) (a) Opinion of Cohen & Cohen, as to legality of shares being
offered
(b) Opinions from Ruttner & Partners as to Elso
(10) (a) Purchase Agreement between Registrant and Klenner Securities,
Ltd. dated August 6, 1992 covering 30% of outstanding shares
of Elso including promissory note
(b) Consulting Agreement between Registrant and Klenner
Securities, Ltd.
(c) Retainer Agreement between Registrant and Cohen & Cohen
(d) 1992 Incentive Stock Option Plan
(e) Form of Consultant Agreement between Registrant and Texas
Capital
(f) Concession Agreement between Registrant and Ministry of
Telecommunications (Hungary) and English translation
of same (g) Subscription Agreement between private placement
investors dated August 4, 1992 containing registration rights
(h) Proposed purchase agreement of Elso shares between Registrant
and MATAV
<PAGE>
(i) Agreement between Registrant and members of Pilistav group consisting of
minutes of meeting, Amendment I to Articles of Association, and Quotation
for Refurbishing and Syndicate Agreement
(j) Memorandum of Understanding with Muszertechnika Holding Ltd.
(k) English translation of Elso Articles of Association
(l) Sharing Agreement with Hungarian Teleconstruct Corp. relating to 90 West
Street office space**
(m) Employment agreement between Registrant and Robert Genova as amended***
(n) Employment agreement between Registrant and Peter E. Klenner as amended***
(o) Employment agreement between Registrant and Frank R. Cohen as amended***
(p) Form of Concession Agreement**
(q) Concession Agreement for Raba-Com***
(r) Concession Agreement for Kelet-Negrad Com***
(s) Employment agreement between Registrant and Ulf Robert Sandberg**
(t) Joint Venture and Management Agreements with Telecom Denmark as to
Raba-Com***
(u) Joint Venture and Management Agreements with Telecom Denmark as to
Kelet-Negrad Com***
(v) Settlement Agreement between Bell Canada International, Inc. and
Registrant***
(w) Equipment supply contracts between Siemens Telefongyar Kft and Raba Com
and Kelet-Negrad Com***
(x) Raba-Com agreement to acquire telephone lines from MATAV****
(y) Kelet-Negrad agreement to acquire telephone lines from MATAV****
(z) Turnkey construction contracts between Siemens and Raba-Com and
Kelet-Negrad Com****
(aa) Agreements between Registrant and Citizens Utilities including Management
Agreement, Stock Option Agreement, Convertible Loan Agreement,
Warrant Agreement and the separate Klenner Agreement*****
(bb) Employment agreement between Registrant and Robert Genova as amended******
(cc) Employment agreement between Registrant and Frank R. Cohen as amended******
(dd) Master Agreement, dated May 31, 1995, between the Registrant and CUCC
(ee) Loan Agreement (which includes the form of the Note as Exhibit I thereto),
dated May 31, 1995, between the Registrant and CUCC (ff) Warrant,
dated May 31, 1995, granted by the Registrant to CUCC
(gg) Stock Pledge Agreement, dated May 31, 1995, between the Registrant and CUCC
(hh) Stock Option Agreement, dated May 31, 1995, between the Registrant and CUCC
(ii) Registration Agreement, dated May 31, 1995, between the Registrant and CUCC
(jj) Management Services Agreement, dated May 31, 1995, between the Registrant
and CIMS
(kk) Voting Agreement, dated May 31, 1995, between CUCC and Robert Genova
(ll) Voting Agreement, dated May 31, 1995, between CUCC and Frank R. Cohen
(mm) Voting Agreement, dated May 31, 1995, between CUCC and Peter E. Klenner
<PAGE>
(nn) Agreement In Principle, dated as of July 31, 1995 between the Registrant,
Alcatel Austria AG, U.S. Telecom, Inc. and Central Euro TeleKom, Inc.
99 (a) Press Release issued by the Registrant on May 15, 1995
(b) Press Release issued by the Registrant on August 3, 1995
* All Exhibits are Incorporated by reference to Registrant's Registration
Statement on Form SB-2 dated October 20, 1992 (Registration No.
33-53582-NY, as amended) unless indicated by ** or *** or **** or
**** or ***** or ******
** Filed with Form 10-KSB for year ended December 31, 1993.
*** Filed with Registrant's Registration Statement on Form SB-2 dated
November 3, 1994 (Registration No. 33-80676, as amended).
**** Filed with Form 10-KSB for year ended December 31, 1994.
***** Filed with current report on Form 8-K for May 31, 1995.
****** Filed with Form 10-QSB for three months ended June 30, 1995.
<PAGE>
B. The following reports on Form 8-K have been filed during the three
months ended June 30, 1995:
Date Filed Description
---------- -----------
May 31, 1995 Definitive Agreements with Citizens Utilities Company
June 16, 1995 Change in auditors from BDO Seidman to KPMG Peat Marwick
The Following report on Form 8-K has been filed subsequent to June 30, 1995:
Date Filed Description
---------- -----------
July 16, 1995 Amendment to change in auditors
August 3, 1995 Agreement in Principle with Alcatel Austria AG, U.S.
Telecom, Inc. and Central Euro Telekom, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on the day of August 1995.
HUNGARIAN TELEPHONE AND CABLE CORP.
By
-------------------------------------
Frank R. Cohen
Treasurer and Chief Financial Officer
