Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _____________
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
incorporation or organization) Identification No.
100 First Stamford Place, Stamford, CT 06902
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 348-9069
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 21, 1997, 4,189,626 shares of the Registrant's Common Stock
were outstanding, of which 4,099,306 were held by non-affiliates of the
Registrant. The aggregate market value of the Registrant's Common Stock held by
non-affiliates, computed by reference to the closing price of the Common Stock
on the American Stock Exchange as of March 21, 1997, was $39,455,820. (The
exclusion of shares owned by any person from such amount shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.)
Documents Incorporated by Reference
Part III - Portions of the Registrant's proxy statement for the Annual Meeting
of Stockholders for the fiscal year ended December 31, 1996.
<PAGE>
PART I
In this Part I of Form 10-K, all references to "$" or "U.S. Dollars"
are to United States Dollars and all references to "HUF" or "Forints" are to
Hungarian Forints. Certain amounts stated in Forints herein also have been
stated in U.S. Dollars solely for the informational purposes of the reader, and
should not be construed as a representation that such Forint amounts actually
represent such U.S. Dollar amounts or could be, or could have been, converted
into U.S. Dollars at the rate indicated or at any other rate. Unless otherwise
stated or the context otherwise requires, such amounts have been stated at
December 31, 1996 exchange rates.
Item 1. Business
Company Overview
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") is a rapidly growing
provider of basic telephone services in five defined regions within the Republic
of Hungary (each, an "Operating Area" and together, the "Operating Areas")
pursuant to 25-year telecommunications concessions granted by the Hungarian
government. HTCC, through its four majority-owned operating subsidiaries (each,
an Operating Company and together, the "Operating Companies"), owns and operates
virtually all existing public telephone exchanges and local loop
telecommunications network facilities in its Operating Areas and is the
exclusive provider through November 1, 2002 of non-cellular local voice
telephone services in such areas. The Company has embarked on a significant
network modernization and construction program designed to meet its substantial
demand backlog, increase the number of basic telephone access lines in service
and modernize existing facilities. When fully complete, the Company's networks
are expected to have the capacity to provide basic telephone services to
virtually all of the estimated 279,000 homes and 39,900 business and other
institutional subscribers (including government institutions) within its
Operating Areas.
The Company acquired its concession rights from the Hungarian Ministry
of Transportation, Telecommunications and Water Management (the "Ministry") for
$11.5 million and purchased the existing telecommunications infrastructure in
the Operating Areas, including approximately 60,000 access lines, from Magyar
Tavkozlesi Rt. ("MATAV"), the formerly State-controlled monopoly telephone
company, for $23.2 million. Since the acquisition of the existing networks from
MATAV by Kelet-Nograd Com Rt. ("KNC") and Raba Com. Rt. ("Raba-Com") in the
first quarter of 1995, the Company has incurred capital expenditures through
December 31, 1996 of approximately $58.6 million to expand and upgrade its
network facilities in the Operating Areas operated by KNC and Raba-Com,
resulting in the addition of approximately 18,900 new access lines in service
(including pay phones) and the replacement of 3,572 manual exchange lines. The
Company completed the network construction program in Raba-Com in the fourth
quarter of 1996 and is expected to fully complete the network construction
program in KNC by the end of the second quarter in 1997 which has resulted in
the construction of significant new switching and backbone network capacity and
will result in the connection to the network of all of the subscribers who were
on KNC's and Raba-Com's original waiting lists. The next phase of KNC's and
Raba-Com's network expansion programs will consist of connecting their waiting
lists, as well as additional new subscribers, to the networks which should
involve lower incremental costs since the networks' backbones are already in
place.
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<PAGE>
Since the acquisition of the existing network from MATAV by Papa es
Tersege Telefon Koncesszios Rt. ("Papatel") on January 1, 1996, the Company has
incurred capital expenditures through December 31, 1996 of approximately $16.2
million to expand and upgrade its network facilities in the Operating Area
operated by Papatel, resulting in the addition of approximately 7,300 new access
lines in service (including pay phones) and the replacement of 521 manual lines.
The Company completed the network construction program in Papatel in the fourth
quarter of 1996 which resulted in the construction of significant new switching
and backbone network capacity and the connection to the network of substantially
all of the subscribers who were on Papatel's original waiting list. The next
phase of Papatel's network expansion program will consist of connecting its
existing waiting list, as well as additional new subscribers, to the network
which should involve lower incremental costs since its network backbone is
already in place.
Since the acquisition of the existing networks from MATAV by Hungarotel
Tavkozlesi Rt. ("Hungarotel") on January 1, 1996, the Company entered into
turnkey construction contracts to upgrade the telecommunications facilities in
the Operating Areas operated by Hungarotel. These contracts provide for the
construction of significant new switching and backbone network capacity in
addition to the installation of 64,000 new access lines (including the
replacement of 6,000 manual exchange lines). One of the construction contracts
includes $45.0 million in contractor financing that has been arranged through a
Hungarian commercial bank. The Company spent approximately $16.0 million through
December 31, 1996 to begin construction of the planned network modernization
program in the Hungarotel Operating Area resulting in the addition of 7,200
access lines in service (including pay phones) and the replacement of 6,458
manual lines. The Company expects to complete the construction program in the
Hungarotel Operating Area by the end of 1997, at an additional cost of $50.5
million. Following the completion of the construction program in the Hungarotel
Operating Area, Hungarotel will have connected its original waiting list and all
recent additions to its current waiting list to its network and added enough
capacity to connect even more subscribers to its network. The next phase of
Hungarotel's network expansion will consist of adding new subscribers to the
network which should involve lower incremental costs since its network backbone
is already in place.
The Company, through its turnkey construction contracts with Siemens
Telefongyar Kft. ("Siemens"), Ericsson Technika ("Ericsson") and Fazis
Telecommunication System Design and Construction Corporation ("Fazis"), has the
necessary construction contracts in place to complete the initial phase of its
planned network expansion and modernization program in all of its Operating
Areas and, through its $170 million 10-year credit facility with Postabank es
Takarekpenztar (the "Postabank Credit Facility"), a Hungarian commercial bank
("Postabank"), has the necessary capital to fund such contracts.
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<PAGE>
As of December 31, 1996, the Company's telecommunications networks had
approximately 93,400 access lines in service (including pay phones). Following
the completion of its initial network expansion and construction program in all
of its Operating Areas, the Company expects to have 160,000 access lines in
place by the end of 1997 and the necessary wired switching capacity to service
190,000 households, businesses and other institutions and the backbone network
capacity to service 326,000 households, businesses and other institutions. The
following table sets forth certain information as of December 31, 1996 with
respect to each of the Operating Companies.
Raba-Com KNC Papatel Hungarotel Total
<TABLE>
<S> <C> <C> <C> <C> <C>
Population.................... 69,500 154,700 68,300 420,500 713,000
Residences.................... 29,000 61,300 23,700 165,000 279,000
Businesses and other(1)....... 2,900 9,800 1,200 26,000 39,900
Access lines in operation:
Residential.............. 12,200 15,900 9,800 37,700 75,600
Business and other(2).... 1,800 4,600 1,300 10,100 17,800
-------- ------- ------- -------- -------
Total.............. 14,000 20,500 11,100 47,800 93,400
Pay phones.................... 80 486 106 817 1,489
Waiting list(3):
Prepaid.................. 2,600 7,700 300 33,200 43,800
Non-prepaid.............. -- 3,100 1,700 13,900 18,700
-------- ------- ------- ------ --------
Total.............. 2,600 10,800 2,000 47,100 62,500
Penetration rate(4)........... 42.1 25.9 41.3 22.8 27.1
</TABLE>
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(1) Represents Company estimates of business and other institutional subscribers
or potential subscribers (including government institutions).
(2) Represents Company estimates of subscribers which are businesses and other
institutional subscribers (including government institutions) and pay
phones.
(3) The prepaid waiting list includes those individuals, businesses and other
potential subscribers (including government institutions) who have paid the
required advance connection fee for telephone service. The non-prepaid
waiting list includes individuals, businesses and other potential
subscribers (including government institutions) who have applied for
telephone service but have not yet paid the requisite connection fee.
(4) Penetration rate is defined as the number of residential access lines
per residences.
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<PAGE>
History
Overview of Hungarian Telecommunications Industry
The Company believes that Hungary is an attractive market for
telecommunications services, especially since the Hungarian telecommunications
market was significantly underdeveloped by MATAV, which did not make the
investments in the Hungarian telecommunications infrastructure necessary to
achieve a comparable level of teledensity to that of Western Europe. As of
December 31, 1995, Hungary had a basic telephone penetration rate of
approximately 21 telephone access lines per 100 inhabitants compared to an
European Union average of approximately 48 access lines per 100 inhabitants and
a United States average of approximately 60 access lines per 100 inhabitants. Of
such access lines in Hungary, approximately 40% were located in Budapest (in
which approximately 20% of Hungary's population resides). In the Company's
Operating Areas, access line penetration was approximately nine access lines per
100 inhabitants as of December 31, 1995 and, due to the Company's ongoing
network expansion and modernization program, has increased to approximately 13
access lines per 100 inhabitants as of December 31, 1996. By comparison, basic
telephone penetration rates in other Eastern European countries such as the
Czech Republic, Poland, Slovakia and Bulgaria, as of December 31, 1995, were 23,
15, 21 and 28 access lines per 100 inhabitants, respectively.
In addition, since 1989 Hungary has been the most successful country in
Central Europe in attracting foreign investment, due to its early start in, and
ongoing commitment to, economic reform. From 1990 through 1996, cumulative
foreign investment in Hungary exceeded HUF 1.338 billion ($8.1 billion) and,
during such period, Hungary attracted some 25-28% of the total foreign
investment in Central and Eastern Europe. Foreign ventures, including the
Hungarian affiliates of General Motors, General Electric, Suzuki, Ford, Audi,
Elf-Sanofi and others, now account for some 40% of the country's exports to the
West.
Historically, the exclusive provider of telecommunications services in
Hungary was MATAV, once a part of the Hungarian Post Office. Beginning in 1992,
the Hungarian government began the process of privatizing Hungary's
telecommunications industry by selling an initial 30% stake in MATAV (raised to
67% in 1995) to a consortium comprised of Deutsche Telekom, the German public
telephone operator (a "PTO"), and Ameritech, a U.S. regional bell operating
company. In addition, the Ministry divided the country into 54 primary
telecommunications service areas in order to take some of such primary
telecommunications service areas out of MATAV's national network with respect to
the provision of local basic telephone service while allowing MATAV to continue
its monopoly in the provision of domestic and international long distance
services. In 1993, the Ministry solicited bids for concessions to build, own and
operate telecommunications service areas which had been chosen to exit the MATAV
system. As of December 31, 1996, 23 of the 25 concessions for which the Ministry
solicited bids had been awarded. Winning bidders (each a Local Telephone
Operator, "LTO", and together the "LTOs") included: the Company (presently 5
areas); UTI, a consortium formed by Alcatel Austria AG and US Telecom East, Inc.
(4 areas); affiliates of Compagnie Generale des Eaux (4 areas) and the Swiss and
Dutch PTTs (1 area); a bidding group including United International Holdings (1
area); and a consortium comprised of Bezeq, the Israeli PTO, and MATAV (3
areas). MATAV retained the rights to service 5 such areas. In addition to the
fees paid to the government which aggregated approximately $80.0 million (at
historical rates), each of the LTOs negotiated a separate asset purchase
agreement with MATAV for each concession area's existing basic telephone plant
and equipment, which led to the transfer of approximately 256,000 access lines
from a total of 1.2 million access lines in the MATAV system.
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<PAGE>
In addition to the liberalization of basic telephone services, the
Ministry also selected two consortia to provide nationwide cellular telephone
services. A consortium comprised of MATAV and U.S. West ("Westel") was granted
two licenses to provide both analog (NMT-450) and digital (GSM-900) services
while Pannon GSM Tavkozlesi, a consortium formed by various Scandinavian PTOs
(including Tele Danmark A/S) and the Dutch PTT ("Pannon"), was granted a license
to provide only digital cellular services. The Company believes that there are
currently 500,000 to 700,000 cellular subscribers in Hungary.
The Ministry continues to pursue industry liberalization efforts. In
2002, or at such earlier time that Hungary adopts a more aggressive
privatization schedule, MATAV's right to provide exclusive domestic and
international long distance voice transmission is expected to end as are the
exclusive rights of MATAV and the LTOs, including the Operating Companies, to
provide non-cellular local voice telephone services. In addition, other services
such as sub-exchange lines, paging and private lines have been opened to
competition.
HTCC and its Operating Companies
In 1994, the Ministry awarded KNC and Raba-Com concession rights to
construct local telephone exchanges and provide non-cellular local voice
telephone services for a period of 25 years, with exclusivity for the first
eight years. The Company subsequently acquired two other Operating Companies,
Hungarotel and Papatel, that had been awarded substantially identical concession
rights by the Ministry. MATAV continues to be the sole provider of domestic and
international long distance non-cellular voice telephone services through 2002.
HTCC conducts its operations through the Operating Companies. Set forth
below is an organizational chart of the Company and its principal stockholders
and affiliates as of March 15, 1997. Share ownership percentages of HTCC are
based on shares of the Common Stock owned as of March 21, 1997, without giving
effect to outstanding options or warrants; share ownership percentages in
parenthesis are presented on a fully-diluted basis. Additionally, ownership
percentages for the Operating Companies do not give effect to future Hungarian
equity ownership requirements. See "- Regulation - Hungarian Equity Ownership
Requirements."
Citizens Public HTCC Tele
19.2% 78.0% Management Danmark
(58.1)% (40.6)% 2.2% 0.6%
(1.0%) (0.3%)
HTCC
Papatel Raba-Com KNC Hungarotel
79.2% 65.9% 70.0% 99.0%
Other Other Other Other
Stockholders: Stockholders: Stockholders: Stockholders:
IFC 20.0% Tele Danmark 20.0% Tele Danmark 20.0% Private
Municipalities 0.8% Danish Fund 4.8% Danish Fund 4.8% Hungarian
Municipalities 9.3% Municipalities 5.0% Investor 1.0%
Antenna Hungaria 0.2%
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<PAGE>
HTCC was organized under the laws of the State of Delaware on March 23,
1992. The Common Stock is traded on the American Stock Exchange under the symbol
"HTC." The Company's United States office is located at 100 First Stamford
Place, Stamford, Connecticut 06902; telephone (203) 348-9069. The Company's
principal office in Hungary is located at Kiralyhago u.2, H-1126, Budapest;
telephone (361) 457-6300.
Relationships with Certain Stockholders
The Company benefits from the extensive telecommunications experience
and capabilities of certain of its stockholders in managing and constructing its
telecommunications networks. Set forth below is a discussion of certain
arrangements with such stockholders.
Citizens Utilities Company
Citizens Utilities Company (together with its affiliates, "Citizens")
is a New York Stock Exchange listed, diversified growth company providing
telecommunications, natural gas distribution, electric distribution, water and
wastewater treatment services to approximately 1.64 million customers in 22
states in the United States. Citizens is the seventh largest independent
telecommunications company in the United States and holds a significant
investment interest in Centennial Cellular Corp., a cellular telephone company
serving markets with a population of approximately 10.2 million. Citizens also
owns Electric Lightwave, Inc., a competitive access provider operating in five
western states in the United States. Through a joint venture with Century
Communications Corp., Citizens provides cable television services to 49,500
subscribers in southern California. At December 31, 1996, Citizens had $4.5
billion in assets and $1.9 billion in equity. For the twelve months ended
December 31, 1996, Citizens had net income of $178.7 million on total revenues
of $1.3 billion, of which 60% were derived from the provision of
telecommunications services.
In May 1995, Citizens purchased 300,000 shares of Common Stock from a
former executive of the Company and has since acquired an additional 502,908
shares pursuant to certain agreements entered into with HTCC (as amended and
restated in certain cases to date, the "Citizens Agreements") bringing its
ownership of the outstanding Common Stock as of March 21, 1997, to 19.2%. In
addition, as a result of the Citizens Agreements, Citizens has received options
and a warrant, with per share exercise prices ranging from $12.75 to $18.00
(together, the "Citizens Options"). Assuming the exercise of all of the
outstanding options and warrants to purchase Common Stock as of March 21, 1997
(including the Citizens Options), Citizens would own 58.1% of the Common Stock
on a fully-diluted basis.
Concurrently with its initial investment in HTCC, Citizens entered into
an agreement with HTCC pursuant to which Citizens provides HTCC and the
Operating Companies with certain administrative, financial, technical,
construction, marketing and operational services (the "Management Services
Agreement") for a fee. Management of the Company believes that its relationship
with Citizens will continue to benefit the Company substantially as it proceeds
with the development and implementation of its capital expenditure and financing
plans. For a more detailed description of some of the Citizens Agreements, see
"Certain Relationships and Related Party Transactions." See also "Security
Ownership of Certain Beneficial Owners and Management" and Note 13 of Notes to
Consolidated Financial Statements.
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<PAGE>
Tele Danmark A/S and The Investment Fund for Central and Eastern Europe
Tele Danmark A/S (together with its affiliates, "Tele Danmark") is the
Danish public telephone operator ("PTO"). Through various wholly-owned
subsidiaries, Tele Danmark provides a variety of telecommunications services to
customers in Denmark, including regional, mobile, maritime and other telephone
services. In addition, Tele Danmark provides teledata, electronic mail, telex,
distribution of radio and television programs to local cable distributors,
leased lines, pay phones and more. In Hungary, Tele Danmark also has an 23.2%
interest in Pannon (defined above), one of the two Hungarian digital cellular
operators. At December 31, 1996, Tele Danmark had total assets of Danish Kroner
47.1 billion (approximately $7.9 billion) and shareholders' equity of Danish
Kroner 27.9 billion (approximately $4.7 billion). During 1996, Tele Danmark had
net income of Danish Kroner 3.1 billion (approximately $522.6 million) on total
revenues of Danish Kroner 26.2 billion (approximately $4.4 billion).
The Investment Fund for Central and Eastern Europe (the "Danish Fund")
is an investment fund sponsored and funded by the Danish government. The Danish
Fund co-invests with certain Danish companies providing investment capital for
projects located in Central and Eastern Europe.
In addition to its investment in HTCC, Tele Danmark also owns 20.0% of
the outstanding capital stock of each of KNC and Raba-Com and has entered into
joint venture and shareholders' agreements with HTCC with respect to such
ownership interests. The Danish Fund owns 4.8% of the outstanding capital stock
of each of KNC and Raba-Com and is a party to such joint venture and
shareholders' agreements. In the past, both Tele Danmark and the Danish Fund
have provided KNC and Raba-Com with certain financial support. See Note 12 of
Notes to Consolidated Financial Statements.
International Finance Corporation
The International Finance Corporation (the "IFC") is the private-sector
financing organization of the World Bank, a global cooperative which provides
financial and other aid to developing countries. The IFC owns 20.0% of the
capital stock of Papatel.
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<PAGE>
Strategy
The Company's primary objective is to continue the development of its
telecommunications networks in a cost-effective manner utilizing advanced
technology. The Company has implemented the following operating strategies in
order to further its business objectives:
Managed Penetration. The Company manages the expansion and construction of
its telecommunications networks and subscriber growth with the objective
of increasing revenues and producing substantial operating cash flow as
soon as practicable. Within the Operating Areas, the Company initially
directs its construction and marketing efforts at households and businesses
and other institutions on the Company's waiting list and to the homes and
businesses surrounding such potential customers, and then at concentrated
population and business districts in order to connect the greatest number
of customers at the least expenditure and in the shortest period of time.
As of December 31, 1996, there were approximately 62,500 potential
customers wait-listed for service. Of these, 43,800 potential customers had
paid significant deposits of up to HUF 30,000 ($182) (plus value added tax,
"VAT") in the case of residential subscribers, and up to HUF 90,000 ($546)
(plus VAT) in the case of business and other potential subscribers
(including government institutions). After meeting this demand, the Company
plans to direct its construction and marketing efforts to the remaining
areas, based on demand, population and growth potential.
Technologically Advanced, Flexible Networks. In modernizing and completing
its telecommunications networks, the Company emphasizes the use of
advanced, flexible network technology. To this end, in certain portions of
the Operating Areas, the Company is building networks using a combination
of fiber optic cable and twisted pair copper wire to deliver telephone
service to subscribers. In other portions of the Operating Areas, the
Company is implementing a cost-effective wireless local loop solution. This
solution uses a combination of 1.8 to 1.9 GHz DECT technology and 900 MHz
analog radio technology in the local loop, which allows for rapid
deployment and accelerated subscriber additions at a lower capital cost per
customer connected compared to traditional wireline customer connections.
Each of the Operating Companies has been allocated the necessary radio
frequency spectrum pursuant to licenses issued by the Ministry to deploy
such wireless technology. The Company's wired and wireless
telecommunications networks have been designed to handle enhanced vertical
services such as CLASS and ISDN.
Additional Services. The Company currently only provides two types of basic
services: (i) residential telephone--general telephone services that allow
customers to place and receive telephone calls locally, nationally and
internationally; and (ii) business telecommunications--the same general
telephone services that are provided to the residential telephone market
plus Private Brand Exchange ("PBX"), direct, leased line and other enhanced
services. The Company is employing a flexible network build-out in order to
provide numerous other services including detailed billing and vertical and
enhanced services, up to and including ISDN. Finally, the Company expects
to be able to use the basic network infrastructure to support other
telecommunications services such as wired and wireless cable television, if
it determines that a market sufficient to support such services exists in
the Operating Areas, has the available capital and acquires the necessary
licenses.
Economies of Scale and Geographic Clusters. The Company expects to achieve
certain economies of scale with respect to network management,
administration, customer service, billing, accounts receivable, payroll
processing, purchasing and network maintenance. For example, the Company is
in the process of implementing its own centralized operating and accounting
system. In addition, some of the Company's Operating Areas are contiguous,
which is expected to facilitate the realization of certain economies of
scale.
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<PAGE>
Strategic Acquisitions and Alliances. The Company intends to selectively
explore opportunities, which may include the acquisition of other
concessions or the creation of strategic joint ventures, in order to expand
its telecommunications services and the geographic areas in Hungary in
which it provides such services. In this regard, the Company has engaged in
discussions with certain existing and potential telecommunications
providers in the Hungarian market regarding such possible acquisitions or
alliances, although, to date, none of these discussions has resulted in any
definitive plans. The Company is also exploring other potential
opportunities in other parts of Central and Eastern Europe including Poland
and the Czech Republic but, to date, the Company has no definitive plans
for expansion into such areas.
Operations
Services
The Company provides non-cellular local voice telephone service in the
Operating Areas which allows subscribers to have facsimile, and modem
transmission capabilities and makes available to its subscribers, through
interconnection with MATAV, domestic and international long distance services.
In addition to these standard services, the Company offers or intends to offer
its subscribers data transmission, telex and other value-added services,
including voice mail, call waiting, call forwarding, three-way calling, caller
ID and virtual private network ("VPN") services.
The Company's revenues are derived from the provision of local and
domestic and international long distance telephone services which consist of (i)
charges for measured telephone service, which vary depending on the day, the
time of day, distance and duration of the call, (ii) connection and subscription
fees, and (iii) other operating revenues consisting principally of charges and
fees from leased lines, public phones, detailed billing and other customer
services, including revenues from the sale and lease of telephone equipment.
Measured Service. Charges for local and domestic and international long
distance measured service vary with the number of pulses generated by a call.
The number of pulses generated for a particular call depends upon the day, the
time of day, the distance covered and the duration of the call. Currently, the
Company charges HUF 9.0 ($.05) per pulse. For all local calls within an
Operating Area, the Company retains all of the revenues associated with the
call. For domestic long distance calls outside of an Operating Area (including
those between Operating Areas, including adjacent Operating Areas) and all
international long distance calls, the Company has a revenue sharing arrangement
with MATAV the terms of which are governed by a decree of the Ministry. Mobile
telephone calls to customers in the Operating Areas and calls from customers in
the Operating Areas to mobile phones are included in long-distance service
revenues shared with MATAV. Such revenue sharing arrangement is intended to
result in each Operating Company receiving 67% of the total measured service
revenue (including all the revenues attributable to local, domestic long
distance and international long distance calls) and subscription fees within an
Operating Area, with MATAV receiving the remaining 33%. This arrangement is
mandated by the Ministry and is predicated upon the Ministry's estimate of
traffic patterns upon the completion of the build-out of the Operating Company's
network. The current effect of this arrangement, while the Company continues to
upgrade and expand its telecommunications networks, is such that the Operating
Companies receive approximately 63% of total measured service revenue and
subscription fees in the Operating Areas. The Company and the other LTOs are
currently in negotiations with the Ministry and MATAV regarding new revenue
sharing arrangements which outcome is expected to be determined by the end of
the third quarter of 1997 and which the Company believes will result in more
favorable terms for the LTOs.
Subscription and Connection Fees. The Company collects a monthly
subscription fee from its customers. Such fees vary depending on such factors as
whether the services are provided to a residential or business or other customer
(including government institutions), and whether the customer is linked to a
digital, analog or manual exchange.
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<PAGE>
Connection fees are earned when a customer is added to the network. The
Company may collect the full connection fee provided the customer is connected
within 30 days; otherwise, the Company may collect only one-third of the
connection fee and must connect the subscriber within one year. The connection
fee is not recognized as income until the customer receives a telephone and the
connection is made. Currently, connection fees are HUF 30,000 ($182) (plus VAT)
for residential customers and HUF 90,000 ($546) (plus VAT) for business and
other institutional subscribers (including government institutions), which are
the maximum allowable fees, pursuant to a decree of the Ministry. Similar to
measured service, connection fee caps are adjusted annually by the Ministry
based on the Hungarian PPI. Customers requesting additional access lines are
charged an additional connection fee per line.
Other Operating Revenue. The Company supplies private line service
(point-to-point and point-to-multi-point) primarily to businesses. As of
December 31, 1996, approximately 1,700 leased lines were in service. In
addition, as of December 31, 1996, the Company had 1,500 public pay phones in
the Operating Areas in accordance with the terms of the Concession Contracts (as
defined under "- Network Design, Construction and Performance - Milestones." The
Company expects to generate additional revenues from the provision of
value-added services, including voice mail, call waiting, call forwarding,
three-way calling, caller ID and VPN services as well as through the sale and
leasing of telephone equipment. The Company recently entered into an agreement
with Octel Communications Europe, an international voice-mail vendor which
provides the potential of having a voice-mail box behind every line plus virtual
mail boxes for transient subscribers, waiting subscribers and subscribers who
only want or can afford a message service. The Company anticipates that the
voice-mail systems will belong to the Company at the end of a three-year
revenue-sharing arrangement. The Company believes this is a significant
potential for raising the average per-line revenues, since fewer calls will go
unanswered and additional calls will be generated to retrieve messages.
Pricing
Maximum pricing levels are set by the Ministry and historically rate
increases have tracked inflation, as measured by the Hungarian Provider Price
Index ("PPI"). In addition to the one-time connection fee (described above), the
Company charges a monthly subscription fee to digital and single-party exchange
customers of HUF 940 ($5.70) for residential customers and HUF 1,120 ($6.80) for
business and other institutional subscribers (including government
institutions). For manual exchange customers, such fees are HUF 80 ($0.49) and
HUF 150 ($0.91). The Company's customers are on a one-month billing cycle. A
maximum of twice annually, the Ministry sets the maximum tariffs that LTOs
(including MATAV) may charge for local calls and subscription fees based on
changes in the Hungarian PPI. The Company may choose to increase its rates up to
the permitted amount; however, price increases in the past generally have
conformed to the price increases promulgated by MATAV. Measured service rate
increases are effected by the Ministry by either increasing charges per pulse or
reducing the time interval between pulses, depending on the time of day and
other factors. In addition, once the Company's modernized network is fully in
place, the Company will be able to charge additional fees for services such as
data transmission, voice mail, call waiting and call transfer in all of its
Operating Areas. The fees charged for these services are not subject to
regulation by the Ministry.
The Company has begun allowing its subscribers to pay connection fees
on an installment basis and encourages customers to lease their telephones. The
connection fee is paid in three equal installments, with one-third payable upon
application, one-third payable upon installation and one-third payable within 90
days after installation. The Company believes that the installment plan will
result in an increase in the number of subscribers in the Operating Areas.
The Company currently purchases telephone sets in bulk from a variety
of manufactures at an average price of HUF 2,300 ($13.95). Customers can choose
to buy the phone and pay HUF 3,800 ($23.06) or lease the phone and pay a monthly
fee of between HUF 100 ($0.61) and 160 ($0.97). Although there is no Ministry or
other governmental regulation relating to lease rates, the Company adjusts such
rates annually according to the Hungarian PPI. Each phone set has an expected
life of 10 years. Approximately 45%, or 42,000, of the company's subscribers as
of December 31, 1996 leased their phones from the Company.
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Marketing Strategy
As the exclusive provider of basic telephone services in the Operating
Areas, the Company's marketing objective is to create demand for non-cellular
local voice telephone services and attract subscribers by targeting the needs of
various market segments and providing service and reliability based on modern
technology. To this end, the Company plans to satisfy existing demand and
generate additional demand through effective distribution and customer service,
as well as advertising. The Company has targeted its market segments as follows:
(i) residential customers; (ii) small businesses and professionals; (iii) medium
and large businesses; and (iv) government institutions. The Company's primary
marketing efforts have been aimed at homes surrounding wait-listed subscribers
and on the business and professional sectors which are characterized by low
price sensitivity, high usage and substantial demand for value added services
such as data transmission.
The Company has focused its marketing efforts on informing customers of
available or anticipated phone service. The Company intends to make effective
use of advertising to educate Hungarian consumers as to the benefits of
telephone service and stimulate demand for the Company's services. To date, the
Company's advertising campaign primarily has been comprised of print, billboard
and other cost-effective media which has emphasized the Company's separate
identity from MATAV.
The Company's existing workforce conducts door-to-door sales, primarily
focusing on residential customers in areas where the Company's networks are
being constructed or are scheduled for construction. These sales efforts are
designed to increase customer awareness and understanding of the services
offered by the Company. Employees receive a commission for each potential
customer added to the prepaid waiting list as a result of their efforts.
Most of the Company's subscriber base consists of residential
customers. As of December 31, 1996, 81% of subscribers were residential
customers and 19% were businesses and other institutional subscribers (including
government institutions).
Customer Service
The Company believes that providing a high level of customer service is
important to achieving its objective of attracting additional customers.
Accordingly, the Company's primary efforts with regard to customer service are
targeted at reducing the waiting list such that new subscribers will be able to
receive a phone within a short time of placing an order for service. This
compares to the situation during 1996 where the average wait for phone service
for a new addition to the waiting list was approximately 12 months and certain
subscribers had been waiting for a telephone line for in excess of 20 years.
Following the full replacement of the manual exchanges which are in use by
approximately 6,000 of the Company's 93,000 subscribers as of December 31, 1996,
the Company will be able to offer all of its customers the capability to use
telephone service 24 hours a day 365 days a year. Currently, the systems which
are served by manual exchanges are operated under contract by the Hungarian Post
Office and are only operated from 8:00 A.M. to 4:00 P.M. Monday through Friday
(except holidays), except in certain larger communities where 24 hour service is
available. The Company also intends to operate a full time customer service
center which will be staffed by operators capable of providing call completion
assistance, directory assistance and assistance in handling billing and other
service inquiries. Furthermore, the Company is in the process of implementing a
state of the art billing system which will allow the Company to provide detailed
bills to its existing and future customers, some for the first time. The Company
anticipates that the 24 hour customer service center and detailed billing
capability will be operational in all of the Operating Areas by the end of 1997.
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The Operating Companies
The following is a brief description of each of the Operating
Companies:
Hungarotel
The Company owns a 99.0% interest in Hungarotel while a private
Hungarian investor owns the remaining 1.0%. The Hungarotel Operating Area
encompasses the southern portion of Bekes County, which borders Romania. The
Hungarotel Operating Area is comprised of 75 municipalities and has a population
of approximately 420,500 with an estimated 165,000 residences and 26,000
business and other potential subscribers (including government institutions).
Bekes is the most intensively cultivated agrarian region in Hungary and produces
a substantial portion of Hungary's total wheat production. Industry, generally
related to food processing, glass and textile production, is also a strong
employer in the region. Foreign investors in the Operating Area include Owens
Illinois of the United States and a number of European manufacturers. The region
is also a center for natural gas exploration and production.
In order to acquire its concession rights in the Hungarotel Operating
Area, the Company paid a fee in the amount of HUF 814.5 million ($5.8 million,
at December 31, 1995 exchange rates). In addition, Hungarotel spent HUF 2.1
billion ($15.4 million, at December 31, 1995 exchange rates) in order to acquire
MATAV's existing 40,600 subscribers and telecommunications network. Upon
consummation of the MATAV asset purchase on December 31, 1995, Hungarotel's
waiting list numbered 34,000. From January 1, 1996 through December 31, 1996,
Hungarotel has spent approximately $16.0 million and has added 7,200 access
lines (including pay phones) to its network. During the second quarter of 1996,
Hungarotel entered into construction contracts with Ericsson and Fazis to
complete the build-out of its telecommunications network. As of December 31,
1996, there were 47,100 subscribers on Hungarotel's waiting list, of which
33,200 had paid advance connection fees and 13,900 had not. The Company
estimates that to complete the network build-out of the Hungarotel Operating
Area will require an additional $50.5 million through the end of 1997. The
network presently being constructed in the Hungarotel Operating Area utilizes a
combination of conventional build and wireless local loop technology.
KNC
The Company holds a 70.0% interest in KNC, and its strategic and
financial partners in KNC are Tele Danmark with a 20% interest and the Danish
Fund with a 4.8% interest. KNC Operating Area municipalities own 5.0% and
Antenna Hungaria owns the remaining 0.2%. The KNC Operating Area is comprised of
74 municipalities in the eastern portion of Nograd County, which borders
Slovakia. The KNC Operating Area has a population of approximately 154,700, with
an estimated 61,300 residences and 9,800 business and other potential
subscribers (including government institutions). The principal economic
activities in the KNC Operating Area include light manufacturing, tourism, some
coal mining and agriculture. Foreign investors in the region include the
Austrian dairy producer, Avonmore, and the Japanese company, Paramount Glass.
The Operating Area's proximity to Budapest, 1-1/2 hours by car, and its many
cultural attractions makes it a desirable weekend and tourist destination.
In order to acquire its concession rights in the KNC Operating Area,
the Company paid a fee in the amount of HUF 215.0 million ($2.1 million, at
November 15, 1994 exchange rates). In addition, KNC spent HUF 548.5 million
($4.6 million, at March 1, 1995 exchange rates) in order to acquire MATAV's
existing 13,100 subscribers and telecommunications network. Upon consummation of
the MATAV asset purchase on February 28, 1995, KNC's waiting list numbered
11,200. From March 1, 1995 through December 31, 1996, KNC has spent
approximately $28.7 million and has added 7,400 access lines (including pay
phones) to its network. As of December 31, 1996, there were 10,800 subscribers
on KNC's waiting list, of which 7,700 had paid advance connection fees and 3,100
had not. The Company estimates, that to complete the network build-out of the
KNC Operating Area will require an additional $8.8 million by the end of the
second quarter of 1997, which should add 9,000 subscribers to the network. In
addition, KNC has entered into a construction contract which provides for the
connection of an additional 16,000 subscribers by December 31, 2001 which will
require an additional $8.7 million after 1997. The network presently being
constructed in the KNC Operating Area utilizes a combination of conventional
build and wireless local loop technology.
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Papatel
The Company holds a 79.2% interest in Papatel. The IFC owns a 20.0%
interest and Papa, the principal city in the Papatel Operating Area, owns the
remainder. The Operating Area is composed of 48 municipalities located in the
northern portion of Veszprem County and is contiguous with the Raba-Com
Operating Area. The population of the Papatel Operating Area is approximately
68,300 with an estimated 23,700 residences and 1,200 business and other
potential subscribers (including government institutions). The region is
relatively underdeveloped economically with the principal economic activities
centering around light industry, appliance manufacturing, agriculture and forest
products. Significant foreign investors in the Operating Area include ATAG, the
Dutch appliance maker, and Electricite de France.
In order to acquire its concession rights in the Papatel Operating
Area, the Company paid a fee in the amount of HUF 123.8 million ($0.9 million,
at December 31, 1995 exchange rates). In addition, Papatel spent HUF 347.0
million ($2.5 million, at December 31, 1995 exchange rates) in order to acquire
MATAV's existing 3,800 subscribers and telecommunications network. Upon
consummation of the MATAV asset purchase on December 31, 1995, Papatel's waiting
list numbered 7,500. From January 1, 1996 through December 31, 1996, Papatel
spent approximately $16.2 million to complete its network build-out, which
utilizes a combination of conventional build and wireless loop technology. The
completion of the network has resulted in the addition of 7,300 access lines
(including pay phones) including substantially all of Papatel's original waiting
list. As of December 31, 1996, there were 2,000 subscribers on Papatel's waiting
list, of which 300 had paid advance connection fees and 1,700 had not. During
the next phase of the development of the Papatel network, Papatel will connect
its waiting list, as well as new subscribers, to its network, and further
develop the network to add capacity to service additional customers.
Raba-Com
The Company holds a 65.9% interest in Raba-Com. Its strategic and
financial partners in Raba-Com include Tele Danmark with a 20.0% interest and
the Danish Fund with a 4.8% interest. Municipalities in the Raba-Com Operating
Area own the remaining 9.3%. The Raba-Com Operating Area is comprised of 59
municipalities in Vas County, which borders Austria and Slovenia. The Raba-Com
Operating Area has a population of approximately 69,500, with an estimated
29,000 residences and 2,900 business and other institutional subscribers
(including government institutions). The principal economic activities in the
Raba-Com Operating Area include heavy manufacturing, agriculture and tourism.
Significant employers include: Lenda (the Hungarian central natural gas
distributor): Phillips (a Dutch-owned electronics manufacturer); EcoPlant (an
Austrian-owned plastics producer); and Saga (a British-owned poultry processor).
In order to acquire its concession rights in the Raba-Com Operating
Area, the Company paid a fee in the amount of HUF 275.0 million ($2.7 million,
at November 15, 1994 exchange rates). In addition, Raba-Com spent HUF 75.1
million ($0.7 million, at January 1, 1995 exchange rates) in order to acquire
MATAV's existing 2,500 subscribers and telecommunications network. Upon
consummation of the MATAV asset purchase on January 1, 1995, Raba-Com's waiting
list numbered 2,200. From January 1, 1995 through December 31, 1996, Raba-Com
spent approximately $29.9 million to complete its network build-out which
utilizes a conventional build. The completion of the network has resulted in the
addition of 11,500 access lines (including pay phones) including all of
Raba-Com's original waiting list. As of December 31, 1996, there were 2,600
subscribers on Raba-Com's waiting list, all of whom had paid advance connection
fees. During the next phase of the development of the Raba-Com network, Raba-Com
will connect its waiting list, as well as new subscribers, to its network, and
further develop the network to add capacity to service additional customers.
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Network Design, Construction and Performance
The Company is constructing a versatile network which is designed to
incorporate the more modern network infrastructure purchased from MATAV and
which will be able to provide all the technologically advanced services
currently available in the United States and Western Europe. The Company's
networks are designed to attain, at minimum, the North American standard, or
"P01", grade of service. The P01 standard means that one call out of 100 will be
blocked in the busiest hour of the busiest season. The Company believes that its
ability to meet the telecommunications requirements of its customers through a
combination of conventional fiber optic and wireless local loop technology
affords it significant flexibility with respect to network development and
network capital expenditures. In addition to its network expansion requirements,
the Company will also replace certain existing facilities purchased from MATAV
which utilize manually operated local battery and common battery cord type
switchboards while retaining certain analog crossbar switching systems. The
Company intends to upgrade such analog crossbar switching systems through the
installation of complementary digital equipment which will allow such analog
systems to mimic many of the features available in modern digital switching
systems with a minimum of investment. The Company plans to replace such analog
crossbar switching systems with modern switching systems once its network
build-out is relatively complete and the useful life of such analog switches is
near an end.
Conventional Network Design.
In developing its network design, the Company has retained, or will
retain, certain features of the existing network while implementing service
quality and redundancy objectives on par with Western European and North
American digital network standards. Certain of the networks constructed or
presently being constructed are based on digital hosts and remotes with fiber
optic rings and copper feeder and distribution. Such a distribution system is
the conventional system used in the United States and Western Europe.
Telecommunications services will be transmitted to the home through twisted pair
copper wire telephone cable. The diagram below shows the general design of the
Company's conventional network.
The Company's conventional networks have been designed to employ an
open architecture, generally using Synchronous Digital Hierarchy ("SDH")
technology for system resilience. The Company's networks are designed to provide
voice and high speed data services such as ISDN and others may be provided
across the network. The Company believes that the flexible design of the
conventional networks it is constructing will allow it to readily implement new
technologies and provide enhanced or new services. The Company's switches in its
conventional networks will allow it to connect to networks operated by other
LTOs or by MATAV in order to route calls between its subscribers and these
networks and to route data (or similar transmissions) to any other network.
Wireless Network Design
In certain portions of the Operating Areas, the Company is deploying or
expects to deploy an optical fiber and wireless network based upon the Digital
Enhanced Cordless Telecommunications ("DECT") system which utilizes radio
technology links to an optical fiber-based or digital microwave fixed network
for use within a limited area. The principal advantage in deploying a wireless
network lies in the significant reduction in capital expenditure requirements as
compared to a conventional network build-out. In addition, use of DECT
technology generally reduces the time and expense of securing rights of way. In
a conventional network build, significant investment must be made in order to
offer service to a large proportion of potential customers whether or not they
become actual customers. By contrast, the use of the DECT system in a network
build-out provides for capital investment proportional to the number of
customers actually connected because the radio links and other required
equipment are installed only for those households choosing to take the service
and are installed only at the time service is requested.
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<PAGE>
In those areas in which the Company is utilizing or plans to utilize a
wireless network design, the Company will deploy fiber optic cable to the node
in the same fashion as in a conventional network build-out. At each newly
constructed node, the Company will construct a radio base station ("RBS"),
rather than switching to twisted pair copper wire distribution to the home. Each
RBS will have the capacity to provide service to between 200 and 600 customers.
As customers are brought onto the network, the Company will install a
transceiver unit at the subscriber's premises. Such transceiver's operating
software is digitally encrypted so that it will operate only with the RBS to
which it is attuned. A conventional telephone jack is then installed in the
subscriber's household near an electrical outlet which is used to power the
transceiver unit. The subscriber then uses a conventional phone to make outgoing
and receive incoming calls. The Company also utilizes a 900 MHz analog radio
solution in certain portions of the Operating Areas. Such systems differ from a
DECT-based solution only in that the transceiver is an analog rather than a
digital unit and operates on a different frequency.
The DECT-based wireless local loop system provides at least the same
grade of service as a conventional telephone network. In addition, a DECT-based
network is able to provide the same services (e.g., ISDN capability, voicemail,
call forwarding, call barring, etc.) as will be available with the Company's
conventional network.
The diagram below shows the general design of the Company's network
utilizing the DECT-based wireless local loop system.
[DIAGRAM]
Networks in the Operating Areas
The Company believes that the networks in the Operating Areas have been
designed to maximize the use of existing network infrastructure and to minimize
the overall cost of new network construction. The following discusses the
development of the telecommunications network in each of the Operating Areas.
Hungarotel. The construction of the Hungarotel network began in the
third quarter of 1996. Within the Hungarotel network, the Company has begun
utilizing a combination of conventional build and wireless local loop
technology. The network will utilize radio technology links to an optical
fiber-based or digital microwave fixed network for use within a limited area.
The Company believes that using wireless local loop technology in the Hungarotel
network will result in lower capital expenditures and a shorter construction
period than a conventional build.
As of December 31, 1996, Hungarotel had 30 kilometers of fiber optic
cable and 47,800 access lines in service of which 19,700 access lines were
serviced by two digital host exchanges which support four remote digital
exchanges, 23,800 access lines which were serviced by three analog host
exchanges which support 19 remote analog exchanges and 4,300 access lines which
were serviced by two manual exchanges (i.e., an operator must place all calls as
the telephones connected to the manual exchanges have no keyboard or rotary
dial). There are approximately 817 pay phones within Hungarotel.
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<PAGE>
The remaining build-out plan for the Hungarotel network calls for the
addition of 570 kilometers of fiber optic cable, several remote digital
exchanges and digital and analog wireless local loop technology. While all of
the existing manual exchanges will be replaced by the new digital exchanges, the
Company will retain the existing analog exchanges in order to maximize certain
tax and other benefits. The analog exchanges have received software upgrades to
ensure that they can provide the same level of service, including detailed
billing, call waiting, etc., as the digital exchanges.
Papatel. The construction of the Papatel network reconvened in the
second quarter of 1996, after the termination of construction in 1995 under
Papatel's prior owners, and was completed in the fourth quarter 1996. Similar to
Hungarotel, the Company is utilizing a combination of conventional build and
wireless local loop technology within Papatel.
As of December 31, 1996, Papatel had 209 kilometers of fiber optic
cable, and 11,100 access lines in place which were serviced by one digital host
exchange which supports 16 remote digital exchanges. There are approximately 160
pay phones within Papatel.
KNC. The construction of the KNC network began in the summer of 1995
and is expected to be completed in the second quarter of 1997. Within KNC, the
Company, similar to Hungarotel and Papatel, is utilizing a combination of
conventional build and wireless local loop technology. The conventional network
design is based on digital host and remotes with fiber optic rings and copper
feeder and distribution.
As of December 31, 1996, KNC had 183 kilometers of fiber optic cable
and 20,500 access lines in place of which 10,600 access lines were serviced by
one digital host exchange which supports 22 remote digital exchanges, 9,300
access lines were serviced by eight analog exchanges, and 600 access lines which
were serviced by one manual exchange. There are approximately 486 pay phones
within KNC.
The remaining build-out plan for the KNC network calls for the addition
of 100 kilometers of fiber optic cable, several remote digital exchanges and
digital and analog wireless local loop technology. All of the existing manual
exchanges will be replaced by the new digital host exchange, however the analog
exchanges will remain. The analog exchanges have received a software upgrade
such that they will be capable of providing the same level of service, including
detailed billing and call waiting as the digital host exchange.
Raba-Com. The construction of the Raba-Com network began in the summer
of 1995 and was completed in the fourth quarter of 1996. The Company is
utilizing a conventional build.
As of December 31, 1996, Raba-Com had 169 kilometers of fiber optic
cable and 14,000 access lines in place which were serviced by one digital host
exchange which supports 19 remote digital exchanges. There are approximately 80
pay phones within Raba-Com.
Network Construction Costs
Construction of the Company's telecommunications networks is capital
intensive, requiring substantial investment for "network costs" including
construction (trenching and laying underground ducts), telephony plant and
network electronics, subscriber electronics, switching offices, land and
buildings, computers and capitalization of pre-operating costs and labor.
Construction costs for each of the Operating Companies will vary depending upon
housing density, geographical terrain and the types of underground conditions
encountered. In an effort to minimize the costs of network construction, the
Operating Companies have entered into turnkey contracts with Siemens, Ericsson
and/or Fazis, as described below. See "- Network Design, Construction and
Performance - Networks in the Operating Areas," and Note 8 of Notes to
Consolidated Financial Statements. While construction pursuant to the turnkey
contracts will be remunerated on a fixed price basis, these contracts contain
various incentive and escalation features which may result in the requirement
for greater or lesser capital expenditures in order to complete the Company's
network build-out. See also "- Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."
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<PAGE>
To fund its construction costs, the Company entered into several
agreements with Citizens during 1995 and 1996 pursuant to which Citizens
assisted in providing $79.2 million of financial support to the Company. On
March 29, 1996, the Company entered into a $75.0 million Secured Term Loan
Credit Facility (the "CNA Credit Facility") with Citicorp North America, Inc.
("CNA"). The Company used the funds from the CNA Credit Facility to, among other
things, repay all the funds advanced or guaranteed by Citizens. The Company then
engaged Citicorp Securities, Inc. ("CSI") to serve as lead underwriters for the
placement of debt securities of the Company. The Company terminated the
negotiations of such debt securities placement when it entered into the $170
million Postabank Credit Facility which enabled the Company to repay the CNA
Credit Facility and fund the remaining construction costs for the initial phase
of its network expansion program in all of its Operating Areas. See "-
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources," "- Certain Relationships and
Related Party Transactions." and Notes 6 and 13 of Notes to Consolidated
Financial Statements.
Hungarotel. Hungarotel has entered into turnkey construction contracts
with Fazis and Ericsson. The contracts between Fazis and Hungarotel are for an
aggregate of $51.4 million through December 1997, of which $9.1 million had been
paid as of December 31, 1996. The contract between Ericsson and Hungarotel is
for $15.1 million through May 1997, of which $6.9 million had been paid as of
December 31, 1996.
Papatel. The Papatel build-out of the network was completed by Fazis
and Ericsson through turnkey construction contracts. The contract between Fazis
and Papatel was for $13.2 million through December 1996, all of which had been
paid as of December 31, 1996. The contract between Papatel and Ericsson was for
$3.0 million through December 1996, all of which had been paid as of December
31, 1996.
KNC. KNC has entered into turnkey construction contracts with Siemens
and Fazis. The contractual arrangements between Siemens and KNC are for $41.3
million through December 1996, of which $22.8 million had been paid as of
December 31, 1996. Siemens credited $1.7 million to the contract balance. The
contract between Fazis and KNC is for $1.8 million payable through the first
quarter of 1997 of which $1.1 million had been paid as of December 31, 1996. KNC
also paid $3.1 million to a Hungarian engineering firm.
Raba-Com. The build-out of the Raba-Com network was completed by
Siemens through a turnkey construction contract for $27.3 million, all of which
had been paid as of December 31, 1996. Raba-Com also paid a Hungarian
engineering firm $2.6 million.
Pursuant to the requirements of the network construction contracts, the
Company expects to have approximately 160,000 access lines in service (including
the replacement of 4,879 manual exchange lines) by the end of 1997. The Company
believes that, in order to install these access lines, it will have built out
the wired switching capacity to service 190,000 households, businesses and other
institutions and the backbone network capacity to service 326,000 households,
businesses and other institutions. The access lines required to be installed
pursuant to the construction contracts were intended to meet demand estimates as
in effect at the time of negotiation of such contracts. The Company currently
expects demand to exceed the access lines provided for in the construction
contracts. To add additional access lines will require additional capital
expenditures which will be partially offset by the payment of connection fees by
potential subscribers. Since the switching capacity and the backbone networks
will be substantially in place in all of its Operating Areas by the end of 1997,
the Company expects that the incremental costs to connect additional subscribers
will be substantially lower than the capital expenditures to date.
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Milestones
The Operating Companies' rights to provide non-cellular local voice
telephone services in the Operating Areas are governed by concession contracts
with the Ministry (the "Concession Contracts"). All of the Operating Companies
entered into Concession Contracts with the Ministry in 1994. Each Concession
Contract prescribes certain build obligations ("milestones") that require each
Operating Company to install a specified number of access lines within
prescribed time periods. Hungarotel and Papatel entered into amended Concession
Contracts with the Ministry in June 1996 as a result of the Ministry's approval
of the Company's acquisition of Hungarotel and Papatel. Since the Company has
exhibited substantial progress to date in the construction of its networks in
the Operating Areas and the Company has communicated the reasons for certain
delays in its construction to the Ministry, the Company does not believe that
any material fines will be forthcoming for 1996. For 1997, the Company expects
to be in full compliance with the milestones in each of its Operating Areas. See
"- Regulation - Concession Contracts - Fines." Once fully completed, the
Company's networks are expected to have the capacity to provide basic telephone
services to virtually all of the estimated 279,000 homes and 39,900 business and
other potential subscribers (including government institutions) in the Operating
Areas.
Network Administration
The Company maintains a network administration center in each Operating
Area which is capable of monitoring switching centers and all critical network
operational parameters in each Operating Area. As digital features are
introduced into their respective networks, network technicians will have the
ability to monitor the networks and evaluate and respond to any technical
difficulties in real time. The Company will also be able to analyze the
performance data generated by these systems in order to make the operating
adjustments or capital expenditures necessary to enhance individual network
operations.
Regulation
In November 1992, the Hungarian Parliament enacted the Hungarian
Telecom Act which took effect in 1993. The Hungarian Telecom Act provided for,
among other things, the establishment of the conditions under which individuals
and companies (including MATAV, foreign persons and foreign owned companies)
could bid for concessions to build, own and operate local telecommunications
networks in designated service areas. The Hungarian Telecom Act also gave the
Ministry the authority to regulate the industry, including the setting of local,
domestic long distance and international long distance rates, the sharing of
revenues between the LTOs and MATAV, the accrediting of equipment vendors and
the setting of standards in respect of network development and services offered.
In order to meet these obligations, the Hungarian Telecom Act created a
professional supervisory body, the Telecommunications Chief Inspectorate (the
"Inspectorate") which is supervised by the Ministry. Its tasks include
supervising the progress of the LTOs with respect to build-out scheduling,
equipment purchases and the quality of network construction.
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Concession Contracts
Pursuant to the Hungarian Telecom Act and in accordance with the
Concession Act of 1991, in connection with the award of a concession, each of
the LTOs entered into a Concession Contract with the Ministry governing the
rights and obligations of the LTO with respect to each concession. Topics
addressed by individual concession contracts include the royalties to be paid to
the Ministry, guidelines concerning LTO capital structure, build-out milestones,
employment guidelines and the level of required contributions to meet social and
educational requirements. For example, the Concession Contracts stipulate that
an LTO may not change its capital structure by more than 10% without the express
written consent of the Ministry and that former MATAV employees generally must
be retained for the first five to eight years of operation. The Company may,
however, enter into termination agreements with its employees. To date, the
Company has reduced its workforce in its Operating Companies by approximately 84
employees since the assumption of employees from MATAV through normal attrition
and early retirement agreements.
Corporate Governance. The amended Concession Contracts for Hungarotel
and Papatel provide that two out of every five members of their Boards of
Directors and one-half of the members of their Supervisory Boards be Hungarian
citizens.
Exclusivity. The Concession Contracts provide that each Operating
Company has the exclusive right to provide non-cellular local voice telephone
services for eight years. Commencing in 2002, the Ministry will have the right
to grant additional concessions for non-cellular local voice telephone services.
Milestones/Network Construction. Each of the Concession Contracts
incorporates build-out milestones requiring a 15.5% per year increases in
installed access lines. In addition, as of January 1, 1997, in the case of KNC
and Raba-Com, and by January 1, 1998, in the case of Hungarotel and Papatel,
each Operating Company must be able to meet 90% of its wait-listed demand within
six months and 98% of such demand within one year. The failure to meet such
build-out milestones may result in the imposition of fines or in the shortening
of the eight year exclusivity period provided by the Concession Contracts. The
Company believes that it will comply with these construction requirements. See
"- Fines."
Presently, only three vendors have been accredited to provide
telecommunications switching equipment to LTOs, namely, Siemens, Ericsson and a
Hungarian subsidiary of Northern Telecom. Although only these three vendors have
been accredited, the Operating Companies have not encountered any equipment
supply shortfalls.
Royalties. Each of the LTOs is required by the terms of its individual
concession contract to pay annual royalties to the Ministry equal to a
percentage of net revenue from basic telephone services. Net revenue for this
purpose are generally defined as gross revenue from basic telephone services
less interconnect fees paid to MATAV. The royalty percentage may also differ by
region. For example, the Operating Companies must pay royalties in the following
percentage amounts: KNC (Salgotarjan) 0.1%; Raba-Com (Sarvar) 1.5%; Hungarotel
(Bekescsaba) 2.3%; Hungarotel (Oroshaza) 0.3%; and Papatel (Papa) 2.3%. These
amounts are paid annually, in arrears.
Social and Educational Contributions. In addition to the royalties
described above, Concession Contracts may also call for social and educational
contributions based on revenues of the Operating Company, excluding VAT. The
Concession Contracts for KNC and Raba-Com require them to contribute 1.5% and
1.0% of such revenues, respectively, to support social and educational projects
in their Operating Areas. The Concession Contracts for Hungarotel require it to
pay an amount equal to 10 times the local occupational excise tax, which amount
could, if levied under current restrictions, amount to as much as approximately
1.0% of net revenues. As this tax is currently not levied, it is not possible to
predict the effect, if any, such provision will have on the Company.
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<PAGE>
Renewal. Each Concession Contract provides for a 25-year term with the
right to submit a proposal, within 18 months prior to the expiration of the
Concession Contract to apply for an additional 12-1/2 years which the Ministry
may grant if it approves the Operating Company's proposal, subject to
consultation with local authorities and professional and consumer protection
bodies. Such extension would involve the payment of an additional concession fee
to be set by the Ministry prior to the submission of the proposal. In the event
the proposal is rejected or is not timely filed, the concession would be
auctioned by the Ministry, although the existing Operating Company would have
priority in the event the Operating Company's proposal provides for the same
terms and conditions as that of another bidder.
Fines. The failure to meet required construction milestones may result
in the levying of fines by the Ministry. Such fines are computed based on a
contractual formula and may be substantial. Hungarotel and Papatel did not
comply with their respective build-out requirements until June 1996, at which
time each entered into an amended Concession Contract with the Ministry which
included revised milestone requirements. For 1996, Raba-Com and Papatel were in
compliance with their build-out requirements but KNC and Hungarotel were not. As
a result of the Company's substantial progress to date with respect to network
construction in all of its Operating Areas, communicating the reasons for any
construction delays to the Ministry and in light of the Ministry entering into
amended Concession Contracts with Hungarotel and Papatel, the Company believes
that it is unlikely that any material fines will be imposed for 1996. For 1997,
the Company expects to be in full compliance with its build-out requirements in
all of its Operating Areas. However, in the event that fines are imposed by the
Ministry, such fines would be assessed based on a maximum of HUF 500.0 million
(approximately $3.0 million) in the case of KNC and Raba-Com, reduced in
proportion to the amount of required construction that has been completed in
their Operating Areas.
Termination upon Lack of Performance. If an LTO is unable to comply
with its Concession Contracts, the Ministry has the right to abrogate the
Concession Contract. In such an instance, the Ministry has authority to
determine alternative provisions for such service, which may include the sale of
the LTO's telecommunications assets to another provider. In such case, the LTO
would be obligated to sell its assets under the terms of a contract to the
provider to whom the concession is transferred. The Company believes that it has
demonstrated substantial performance to date under its Concession Contracts and
that its relations with the Ministry are good and, therefore, the chance of any
termination of any Concession Contract are remote.
Dispute Resolution. Any disputes arising with respect to the interpre-
tation of a Concession Contract will be adjudicated by a Hungarian court.
Hungarian Equity Ownership Requirements.
The Ministry has stipulated in the Concession Contracts for Hungarotel
and Papatel, as amended in June 1996, that each of the Operating Companies must
meet certain Hungarian ownership requirements so that by the end of the seventh
year of their Concession Contracts Hungarian ownership must consist of 25% plus
one share of the relevant Operating Company. For the first three months after
assuming operations of an Operating Area from MATAV, no Hungarian ownership was
required. For the seven-year period following the date or amendment of a
Concession Contract, as the case may be, Hungarian ownership must be at least
10%, except that during such period, such ownership may be reduced to as low as
1% for a period of up to two years. During such seven-year period, while the
Hungarian ownership block is required to be at least 10%, such block must have
voting power of at least 25% plus one share, thus providing Hungarian owners the
right to block certain transactions which, under Hungarian corporate law,
require a supermajority (75%) of stockholders voting on the matter, such as
mergers and consolidations, increases in share capital and winding-up.
-21-
<PAGE>
For these purposes, Hungarian ownership of shares means shares owned by
Hungarian citizens. Shares owned by a corporation are considered Hungarian owned
only in proportion to the Hungarian ownership of such corporation. The LTOs can
also fulfill the 25% plus one share Hungarian ownership requirement by listing
such shares on the Budapest Stock Exchange.
The equity ownership requirements and exceptions described above are
contained in the June 1996 amended Concession Contracts for Hungarotel and
Papatel. KNC and Raba-Com may not presently be in compliance with the equity
ownership requirements expressly set forth in their Concession Contracts which
call for a shorter compliance period. However, the Ministry has stated, pursuant
to a letter dated September 18, 1996, that it intends that all of the Operating
Companies be treated equally with respect to such ownership requirements which
requirements KNC and Raba-Com are currently in compliance.
Each of the Operating Companies, other than Papatel, is currently in
compliance with the 1% ownership requirement. Papatel's Concession Contract
permits an initial Hungarian ownership level of its current 0.8%. If the
Hungarian ownership does not meet the required levels, the LTO is required to
give notice to the Ministry, which may then require the LTO to rectify the
situation within three months, or a shorter period if the Ministry considers
that there has been a delay in the required notification. Failure to do so, or
failure to comply with the greater than 25% Hungarian ownership requirement at
the end of the seven-year period will be considered a serious breach of a
Concession Contract, giving the Ministry the right, among other things, to
terminate the Concession Contract. There can be no assurance that the Company
will be able to increase the Hungarian ownership in the Operating Companies in a
manner sufficient to comply with such requirements in the future.
The Hungarian ownership requirements effectively give minority
Hungarian stockholders in the Operating Companies the ability to block certain
corporate transactions requiring the approval of 75% of stockholders voting on
the matter, including mergers and consolidations, increases in share capital and
winding-up. In addition, compliance with the Hungarian ownership requirements is
presently expected to result in a reduction in the Company's ownership in the
Operating Companies, and, consequently, the Company's share of income, if any,
or loss of the Operating Companies will be reduced proportionately.
-22-
<PAGE>
Rate-Setting
Rates for telephone service in Hungary, including connection fees,
local, domestic and international long distance rates, are set by Ministry
decree. Annual increases are permitted according to a formula tied to increases
in the Hungarian PPI. The increase in the Hungarian PPI represents the maximum
amount by which such rates may be increased; however, actual rate increases may
be less. For the year ended December 31, 1996, the increase in the Hungarian PPI
was approximately 21.8%; however, in the fourth quarter of 1995 the Ministry set
the maximum tariff increase for 1996 at 24.0% effective January 1, 1996, after
taking into account a pre-approved interim increase of approximately 3.5%
effective July 1, 1995. In the fourth quarter of 1996, the Ministry set the
maximum tariff increase for 1997 at 23.3%.
Revenue Sharing
The Ministry is responsible for determining the sharing arrangement for
long distance revenues. Such arrangement is intended to result in the LTO
receiving 67% of total measured service revenue for local, domestic long
distance and international long distance calls and subscription fees, with MATAV
receiving 33%. The current effect of this arrangement, owing in part to the
networks being in the construction phase, is such that the Operating Companies
receive approximately 63% of total measured service revenue and subscription
fees. The Company and the other LTOs are currently in negotiations with the
Ministry and MATAV regarding new revenue sharing arrangements which outcome is
expected to be determined by the end of the third quarter of 1997 and the
Company believes will result in more favorable terms for the LTOs. See
"- Operations - Services - Measured Services."
Wireless Networks
The use of radio frequencies for wireless communications technology is
licensed and regulated by the Ministry and the Inspectorate, which have the
authority to grant such licenses after a formal review process, including
licenses for use of the DECT system frequency band of 1880 MHz to 1900 MHz. In
Hungary, the service provider having the concession, after acquiring the
necessary permits and licenses, will have the authority to: (i) establish
subscriber radio lines with fixed service or with DECT mobility; (ii) establish
a radio telecommunication system to be accessed by a building or group of
buildings, with fixed service or with DECT mobility; and (iii) provide PBX
service with fixed service or with DECT mobility.
The Operating Companies' radio frequency licenses do not provide for
expiration; however, such licenses may be terminated if the frequencies granted
are not utilized by the Operating Companies within one year of the granting of
the license, or by March 1997. The Company's construction program provided for
the implementation of some of the DECT-based portions of the networks by March
15, 1997 so such licenses cannot be terminated.
Hungarian Taxation
Corporate Income Tax. The operations of the Company's Hungarian
subsidiaries, including the Operating Companies, are subject to Hungarian
corporate income tax. Generally, Hungarian corporations are subject to tax at an
annual rate of 18.0% of all undistributed profits and a further 23.0% of
distributed profits (20.0% for 1997). Companies which fulfilled certain criteria
became entitled to a 100.0% reduction in income taxes for the five year period
ending December 31, 1998 and a 60.0% reduction in income taxes for the
subsequent five year period ending December 31, 2003, provided certain criteria
continue to be met. See Note 1(i) of Notes to Consolidated Financial Statements.
The Operating Companies are currently eligible for such tax treatment. However,
the corporate income tax is reviewed, and subject to change, annually. Any tax
increase or change in the tax exempt status of the Operating Companies could
have a material adverse effect on the Company.
Value Added Tax ("VAT"). The Hungarian VAT system is virtually
identical to the one used in most European countries. VAT is a consumption tax
which is fully borne by the final consumer of a product or service. The current
rates of VAT in Hungary vary between 0.0% and 25.0%, depending on the type of
product or service.
-23-
<PAGE>
Social Insurance Contributions. The level of contributions for social
insurance in Hungary is one of the highest in Europe. Employers are required to
pay the state 42.5% (39.0% for 1997) of an employee's gross salary as a social
security contribution and 4.5% of an employee's gross salary as the employer's
contribution to the unemployment fund. The Company's share of pension,
unemployment, social security and health insurance payments are reflected in
operating and maintenance expenses.
Competition
The Concession Contracts provide for an eight-year period of
exclusivity in the provision of non-cellular local voice telephone services,
which ends in 2002, while the initial 25-year terms of the Concession Contracts
are scheduled to expire in 2019. Other telecommunications service providers
presently are permitted to apply for licenses to provide non-exclusive services
(e.g., data transmission) throughout Hungary, including the Operating Areas. In
addition, beginning in 2002, other competitors may choose to enter the
non-cellular local voice telephone services market, but the terms and conditions
upon which such market entry will be effected are today unclear, although the
Company is aware of discussions among certain existing and potential
telecommunications providers regarding the possible formation of joint ventures
or other alliances with respect to such entry. The Company does not enjoy
exclusivity rights in respect of the provision of other services such as data
transmission or value-added services such as voicemail and call waiting. In the
event a competitor builds a telecommunications infrastructure with the capacity
to provide non-exclusive services prior to 2002 and non-cellular local voice
telephone services beginning in 2002 in an Operating Area (as is presently
permitted), such competitor could, assuming it obtains the proper
authorizations, directly compete with the Company in the Operating Area with
respect to such services.
The Company also faces competition from the three Hungarian cellular
providers - Westel 900 GSM Mobil Tavkozlesi ("Westel 900"), Westel Radiotelefon
Kft. ("Westel") and Pannon - who are able to provide consumers with mobile
telephones rather than fixed telephones (including the telephones which the
Company will install as a result of its decision to use wireless local loop
technology in certain parts of its Operating Areas). Westel 900 and Westel, both
joint ventures between US West and MATAV have the national licenses to provide
both digital and analog cellular services, while Pannon, a consortium comprised
of the Scandinavian PTOs (including Tele Danmark) and the Dutch PTT, may only
provide digital cellular services. Of the cellular operators, only Westel 900
and Westel presently offer cellular telephone services in all of the Company's
Operating Areas. Pannon offers cellular telephone services in all of the
Company's Operating Areas other than a small portion of the Hungarotel Operating
Area. The airtime and monthly fees charged by the cellular operators are much
greater than the fees for comparable services charged by the Company.
In 2002, the exclusivity period for non-cellular local voice services
by the Operating Companies will end as will MATAV's exclusivity with respect to
the provision of domestic and international long distance services. Prior to
such time, the Company may consider adopting plans to compete in the domestic
and international long distance sector, which may include joint ventures with
other Hungarian or international entities.
Employees
The Company had a total of approximately 713 employees, including 24
expatriates, at December 31, 1996. The Company hired approximately 700 persons
in connection with the assets acquired from MATAV for its five Operating Areas.
The Company completed the collective bargaining agreements with its former MATAV
employees on non-salary issues in the first quarter of 1997 and expects to enter
into collective bargaining agreements with such employees on salary issues by
the end of the second quarter of 1997. The Company considers its relations with
its employees to be satisfactory.
-24-
<PAGE>
Item 2. Properties
The Company leases 1,157 square feet of office space at 100 First
Stamford Place, Stamford, CT at a monthly rental of $1,977. The lease expires
March 31, 1998. The Company owns 4,500 square feet of office space in Budapest
at Kiralyhago u.2. The Company believes that its leased and owned office space
is adequate for its present and anticipated needs for the next two years.
In addition, each Operating Company owns or leases the following office
or customer service space in its respective Operating Area: KNC owns or leases
52,000 square feet of total space; Raba-Com owns or leases 14,500 square feet of
total space; Hungarotel owns or leases 74,150 square feet of total space; and
Papatel owns 18,900 square feet of total space. The aggregate monthly rent for
the leased space is $6,900.
Item 3. Legal Proceedings
Hungarotel is a defendant in a lawsuit brought in Hungary that alleges
breach of contract. The plaintiff is seeking payment of outstanding invoices and
alleged damages totaling approximately HUF 270.0 million (approximately $1.6
million). The next hearing is expected to be scheduled for the third quarter
1997. The Company believes it has meritorious defenses to this claim and does
not believe there will be any material adverse effect from the outcome of this
lawsuit.
Raba-Com is a defendant in a lawsuit seeking a refund of the connection
fee paid by a residential customer due to a delay in providing telephone
service. The Company believes it has meritorious defenses to the claim and
expects to prevail. Should, however, the trial result in an unfavorable outcome,
the Company could be subject to additional claims for refunds of connection fees
received.
The Company and its subsidiaries are involved in various other legal
actions arising in the ordinary course of business. The Company is contesting
these legal actions in addition to the suit noted above; however, the outcome of
individual matters is not predictable with assurance. Although the ultimate
resolution of these actions (including the action discussed above) is not
presently determinable, the Company believes that any liability resulting from
the current pending legal actions involving the Company, in excess of amounts
provided therefor, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1996.
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<PAGE>
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
Market Information
The Company's Common Stock is traded on the American Stock Exchange
(the "Amex") under the symbol "HTCC." Trading of the Common Stock on the Amex
commenced on December 20, 1995. From December 8, 1994 through December 19, 1995,
the Common Stock was quoted on the Nasdaq National Market and from December 28,
1992 through December 7, 1994 the Common Stock was quoted on the Nasdaq
Small-Cap Market.
The following table sets forth the high and low sale prices for the
Common Stock as reported by the Amex (during the period from December 20, 1995
through December 31, 1996), or the high and low sale prices for the Common Stock
as reported by the Nasdaq National Market (during the period from January 1,
1995 through December 19, 1995).
High Low
Quarter Ended:
1995
March 31, 1995 . . . . . . . . . . . $14 $ 9-3/4
June 30, 1995. . . . . . . . . . . . 15 10-1/8
September 30, 1995 . . . . . . . . . 19 12-1/4
December 31, 1995. . . . . . . . . . 16-3/4 9-1/4
1996
March 31, 1996 . . . . . . . . . . . $16-1/4 $10-5/8
June 30, 1996. . . . . . . . . . . . . 16 11-3/4
September 30, 1996 . . . . . . . . . 13-7/8 9-3/8
December 31, 1996. . . . . . . . . . 13 8-1/2
On March 21, 1997, the closing sale price for the Common Stock on the
Amex was $9-5/8.
Shareholders
As of March 21, 1997, the Company had 4,189,626 shares of Common Stock
outstanding held by 121 shareholders of record. The Company believes that it has
approximately 1,930 beneficial owners who hold their shares in street names.
The Company will furnish, without charge, on the written request of any
stockholder, a copy of the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, including financial statements filed therewith.
Stockholders wishing a copy may send their request to the Company at 100 First
Stamford Place, Suite 204, Stamford, CT 06902.
Dividend Policy
It is the present policy of the Company to retain earnings, if any, to
finance the development and growth of its businesses. Accordingly, the Board of
Directors does not anticipate that cash dividends will be paid until earnings of
the Company warrant such dividends, and there can be no assurance that the
Company can achieve such earnings or any earnings.
At present, HTCC's only source of revenues is payments, including
repayment of any intercompany loans, payments under its management service
agreements and dividends, if any, from the Operating Companies. The Operating
Companies' ability to pay dividends or make other capital distributions to the
Company is governed by Hungarian law, and is significantly restricted by certain
obligations of the Operating Company.
-26-
<PAGE>
Item 6. Selected Financial Data
HUNGARIAN TELEPHONE AND CABLE CORP.
AND SUBSIDIARIES
Selected Financial and Operating Data
(Dollars in Thousands, Except Per Share Amounts)
For the Year
1996 1995 1994 1993
-------- --------- -------- ---------
Operating revenues ................... $ 20,910 $ 4,070 $ -- $ --
Operating loss ....................... $(20,553) $(17,829) $(5,272) $ (1,400)
---------
Net loss ............................. $(54,769) $(20,024) $(4,597) $ (1,400)
---------
Net loss per common share ............ $ (13.14) $ (6.30) $ (2.13) $ (.80)
At Year-End
Total assets ......................... $156,615 $110,387 $27,577 $ 6,894
Long-term debt, excluding current
installments and minority interests .. $148,472 $ 23,467 $ 2,299 $ --
Total stockholders' (deficit) equity . $(23,790) $ 15,739 $12,563 $ 3,958
-27-
<PAGE>
Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
Introduction
The Company was organized on March 23, 1992 and was a development stage
enterprise through March 31, 1995. The Company is now engaged primarily in
the provision of telecommunications services through its majority-owned
subsidiaries, Raba-Com, KNC, Papatel and Hungarotel. The Company has
embarked on a significant network development program designed to meet its
substantial demand backlog, increase the number of basic telephone access
lines in service and modernize existing facilities. Since acquiring the
operations comprising Raba-Com and KNC, the Company's network upgrade and
expansion program has resulted in the modernization of facilities acquired
from MATAV and the addition of approximately 18,900 access lines through
December 31, 1996 to the 15,500 access lines purchased from MATAV in the
first quarter of 1995. During 1996, the Company continued its network
modernization and construction efforts in Raba-Com and KNC, while commencing
such efforts in Papatel and Hungarotel which had a combined total of 58,900
access lines at December 31, 1996. The Company installed approximately
29,600 access lines in all of its concession areas during 1996 and had over
93,400 access lines in operation at year end 1996.
Through 1994 to 1996, the Company devoted a substantial portion of its
efforts to obtaining concession rights, negotiating acquisitions, raising
debt and equity financing, assembling its current management team and
commencing operations. As a result, the Company recognized no revenue until
1995 and incurred aggregate net losses of approximately $81.0 million
through December 31, 1996.
Since the quarter ended March 31, 1995, the Company has provided
telecommunications services in the Raba-Com and KNC Operating Areas. As of
January 1, 1996, the Company commenced providing telecommunications services
in the Papatel and Hungarotel Operating Areas. The 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 until a customer base large enough to provide sufficient
revenues and operating cash flow is established. The ability of the Company
to generate sufficient revenues to satisfy cash requirements and become
profitable will depend upon a number of factors, including the Company's
ability to attract customers, revenues per customer and construction costs.
These factors are expected to be primarily influenced by the success of the
Company's operating and marketing strategies as well as market acceptance of
telecommunications services in the Company's Operating Areas. In addition,
the Company's profitability may be affected by changes in the Company's
regulatory environment and other factors that are beyond the Company's
control.
The success of the Company's strategy is dependent upon its ability to
increase revenues through the addition of new subscribers while limiting
churn. Since March 31, 1995, the Company's network construction and
expansion program has added approximately 33,400 access lines through
December 31, 1996 to the 60,000 access lines acquired directly from MATAV.
During this same period, churn has been negligible, primarily due to the
Company's exclusivity rights and the demand for services evidenced by the
waitlisted subscribers base.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Net Revenues
The company recorded net telephone service revenues of $20.9 million
for the year ended December 31, 1996 as compared to revenues of $4.1 million
for the year ended December 31, 1995, an increase of $16.8 million.
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<PAGE>
Measured service revenues increased $16.7 million from $3.8 million for
the year ended December 31, 1995 to $20.5 million for the year ended
December 31, 1996. These revenues have been offset by net interconnect
charges which totalled $8.9 million for the year ended December 31, 1996 as
compared to $1.7 million for the year ended December 31, 1995, an increase
of $7.2 million. This increase in net measured service revenues is the
result of an increase in average access lines in service from 13,841 lines
for the year ended December 31, 1995 to 75,864 lines for the year ended
December 31, 1996. The principal reason for this significant increase in
lines was the addition of 44,400 lines in the Hungarotel and Papatel areas
which were acquired from MATAV on December 31, 1995. Measured service
revenues were also higher due to an increase in the call tariff rates for
the year ended December 31, 1996 as compared to the year ended December 31,
1995.
The Company recognized $7.9 million of revenues from connection and
monthly subscription fees during the year ended December 31, 1996, as
compared to $1.6 million for the year ended December 31, 1995. The principal
reasons for this increase relate to 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 29,645 subscribers in the year ended
December 31, 1996 as compared to the connection of 3,834 subscribers in the
year ended 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 $1.4 million in the year ended
December 31, 1996 as compared to $303 thousand for the year ended December
31, 1995. 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 year ended December 31, 1996
increased $7.1 million, or 48%, to $22.0 million as compared to $14.9
million for the year ended December 31, 1995. The $14.9 million of operating
expenses incurred in the year ended December 31, 1995 included non-cash
charges totalling $6.4 million relating to deferred stock compensation.
Included in operating and maintenance expenses for the year ended December
31, 1996 was deferred stock compensation of $383 thousand. Operating and
maintenance expenses adjusted to remove the effect of the deferred stock
compensation totalled $21.6 million and $8.5 million for the years ended
December 31, 1996 and 1995, respectively, an increase of $13.1 million, or
154%. 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 $285 per average access line
for the year ended December 31, 1996 from $620 for the year ended December
31, 1995 as the Company achieved productivity improvements, including the
decreased use of labor intensive manual switchboards and the increased use
of modern switching technology.
Depreciation and Amortization
Depreciation and amortization charges increased $2.1 million to $4.3
million for the year ended December 31, 1996 from $2.2 million for the year
ended December 31, 1995. This increase was due to the increase in plant and
lines in operation, including an additional 62,023 average lines in service
during the year ended December 31, 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.
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<PAGE>
Management Fees
Management fees pursuant to management service agreements increased
$2.7 million to $6.9 million for the year ended December 31, 1996 from $4.2
million for the year ended December 31, 1995. The increase is primarily due
to a full year of monthly management fees due to Citizens which commenced
July 1, 1995, this was offset by the expiration in the third quarter of 1996
of the management services agreement between the Company and Tele Danmark.
See Note 13 of Notes to Consolidated Financial Statements.
Asset Write-downs
Asset write-downs increased from $0.6 million for the year ended
December 31, 1995 to $2.0 million for the year ended December 31, 1996. This
was due to the decommissioning and write-off of redundant assets as a result
of the network construction in 1996.
Cost of Termination of Former Officers and Directors
For the year ended December 31, 1996, the Company recorded a charge of
$6.3 million representing the present value of payments due and options
granted to former officers and directors under separate termination and
release agreements, consulting agreements and noncompetition agreements. See
Note 12(a) of Notes to Consolidated Financial Statements.
Loss from Operations
Loss from operations increased $2.8 million to $20.6 million for the
year ended December 31, 1996 from $17.8 million for the year ended December
31, 1995. The operating loss for the year ended December 31, 1996 was
principally due to the costs of termination of certain former officers and
directors as noted above and to the additional expenses incurred by the
Company to expand management, project oversight, engineering design and
systems needed to achieve rapid line growth and revenue increases, and
provide for the introduction and control of new services.
Foreign Exchange Losses
Foreign exchange losses increased $2.2 million from $4.1 million for
the year ended December 31, 1995 to $6.3 million for the year ended December
31, 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 year ended December 31, 1996, the
Hungarian Forint devalued against the U.S. Dollar and the German Mark by
18.4% and 9.0%, respectively, as compared to 26.0% and 36.3% during the year
ended December 31, 1995. The increase in foreign exchange loss was primarily
attributable to the repayment in 1996 of U.S. Dollar and German Mark
denominated intercompany loans resulting in a realized foreign exchange loss
in the operating subsidiaries. The loss was offset by a reduced devaluation
of the Hungarian Forint during 1996 as well as the repayment of the German
Mark denominated vendor credit facility. It is the policy of the National
Bank of Hungary to continue to devalue the Hungarian Forint in order to
ensure its relative competitiveness. 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 the
substantial portion of the liabilities within the operating companies are
now denominated in the Hungarian Forint, the Company expects to incur
reduced foreign currency losses in the future.
Interest Expense
Interest expense increased $21.5 million to $23.2 million for the year
ended December 31, 1996 from $1.7 million for the year ended December 31,
1995. This increase was attributable to higher average debt levels in the
year ended December 31, 1996 as compared to the year ended December 31, 1995
as the Company incurred indebtedness in order to continue the construction
of its telecommunications networks.
Included in interest expense is $4.9 million, the value of
consideration provided to Citizens for assistance in fulfilling the
Company's obligations under the Citicorp Credit Facility (as defined
herein). See Notes 5 and 13 of Notes to Consolidated Financial Statements.
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Interest Income
Interest income increased $0.5 million to $1.5 million for the year
ended December 31, 1996 from $1.0 million for the year ended December 31,
1995 primarily due to higher available cash reserves for short term
investment.
Abandonment of Financing
During 1996 the Company cancelled a planned bond offering in favor of a
Hungarian Bank Credit Facility. The costs of abandonment of financing were
$3.0 million and included $2.0 million in settlement of fees and costs of
the underwriter and $1.0 million for professional fees and various out of
pocket expenses.
Other, net
Other, net increased from net charges of $0.3 million for the year
ended December 31, 1995 to net income of $1.1 million for the year ended
December 31, 1996 principally due to non-operating income and ancillary
services.
Loss Before Extraordinary Items
As a result of the factors discussed above, for the year ended December
31, 1996, the Company recorded a loss before extraordinary items of $47.5
million compared to a loss of $20.0 million for the year ended December 31,
1995.
Extraordinary Item
For the year ended December 31, 1996, the Company recorded an
extraordinary item of $7.3 million comprised at a non-cash charge of $8.2
million related to the write-off of the remaining unamortized deferred
financing costs pertaining to the Citizens Loan Agreements, offset in part
by extraordinary income of $0.9 million relating to a gain on early
retirement of a vendor credit facility. See Notes 5 and 13 of Notes to
Consolidated Financial Statements.
Net Loss
As a result of the factors discussed above the Company recorded a net
loss of $54.8 million for the year ended December 31, 1996 as compared to a
net loss of $20.0 million for the year ended December 31, 1995.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Net Revenue
Measured service revenue increased from zero for the year ended
December 31, 1994 to $3.8 million for the year ended December 31, 1995,
which was partially offset by net interconnect charges of $1.7 million.
Measured service revenue increased as the Company commenced providing
services in the Raba-Com Operating Area in January 1995 and in the KNC
Operating Area in March 1995. At the time of the acquisitions of these
Operating Areas, Raba-Com and KNC had 2,500 and 13,100 subscribers,
respectively.
The Company recognized approximately $1.6 million in subscription and
connection revenues for the year ended December 31, 1995 compared to no such
revenue in 1994. The increase was due to the Company's acquisition from
MATAV of the Raba-Com Operating Area on January 1, 1995 and the KNC
Operating Area on March 1, 1995.
Other revenue increased from zero for the year ended December 31, 1994
to $0.3 million for the year ended December 31, 1995. Other telephone
services revenues were primarily derived from the provision of direct lines
and telephone sales and leasing.
As a result, the Company recorded net revenue of $4.1 million in 1995,
whereas the Company generated no revenue in 1994 as it was still a
development stage enterprise.
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Operating and Maintenance Expenses
Operating and maintenance expenses increased $12.0 million from $2.9
million in 1994 to $14.9 million in 1995. The largest portion of this
increase, aggregating $6.4 million, was non-cash compensation expense
incurred as a result of a reduction in exercise price and acceleration of
vesting of stock options previously granted to certain former officers and
directors of the Company. The remainder of the increase was primarily
attributable to an increase in salary and wages expense as the Company
increased its supervisory staff pursuant to its plan to accelerate the
build-out of its networks and to an increase in legal fees as a result of
work on the acquisitions of Papatel and Hungarotel. On a per line basis,
operating and maintenance expenses averaged $620 (exclusive of non-cash
compensation) for the year ended December 31, 1995.
Depreciation and Amortization
Depreciation and amortization charges increased $1.8 million from $0.4
million in 1994 to $2.2 million in 1995. The increase was entirely
attributable to commencement of the Company's operations in the Raba-Com and
KNC Operating Areas.
Management Fees
Management fees increased $3.4 million from $0.8 million in 1994 to
$4.2 million in 1995. Such fees represent contractual amounts paid to Tele
Danmark and Citizens in respect of assistance provided by both Tele Danmark
and Citizens pursuant to various agreements, including the Management
Services Agreement. Of this amount, Tele Danmark received $1.8 million for
services provided with respect to Raba-Com and KNC while Citizens received
$2.4 million, including reimbursable costs, for providing the Company with
significant financial services and other assistance.
Asset Writedowns
Asset writedowns decreased from $1.2 million for the year ended
December 31, 1994 to $0.6 million for the year ended December 31, 1995, due
to the writedown in the carrying value of the Company's nonoperating
subsidiaries and investments in 1994 and a further writedown to recognize
realizable value in 1995.
Loss from Operations
Loss from operations increased $12.6 million from $5.2 million in 1994
to $17.8 million in 1995. The principal reasons for the increase in loss
from operations included the increases in non-cash compensation expense and
depreciation and amortization charges described above.
Foreign Exchange Losses
Foreign exchange losses increased $3.7 million from $0.4 million in
1994 to $4.1 million in 1995. Such foreign exchange losses resulted from the
devaluation of the Hungarian Forint against those currencies in which the
Company has incurred debt and other obligations as it acquired existing
access lines and commenced the construction of its telecommunication
networks. During 1995, the Hungarian Forint devalued 26.0% against the U.S.
Dollar.
Interest Expense
Interest expense increased $1.5 million from $0.2 million in 1994 to
$1.7 million in 1995. The increase in interest expense is attributable to
higher average debt levels in 1995 as compared to 1994 as the Company
incurred indebtedness in order to acquire existing access lines and to
commence the construction of its telecommunication network and provide for
working capital and other requirements.
Interest Income
Interest income increased $0.4 million to $1.0 million for the year
ended December 31, 1995 from $0.6 million for the year ended December 31,
1994 primarily due to higher average cash balances in 1995.
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Other Income (Expense), Net
Other income (expense), net, decreased by $0.5 million from $0.2
million for the year ended December 31, 1994 to ($0.3) million for the year
ended December 31, 1995 and consisted primarily of nonoperating and
ancillary expenses.
Net Loss
As a result of the factors discussed above, net loss increased $15.4
million to $20.0 million for the year ended December 31, 1995 from $4.6
million for the year ended December 31, 1994.
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.
In 1995 the Company entered into a financing agreement with Citizens
pursuant to which Citizens guaranteed a $33.2 million loan from Chemical
Bank in November 1995. During February and March 1996, the Company borrowed
$18.2 million under a second financing agreement with Citizens.
On March 29, 1996, the Company entered into a $75.0 million Secured
Term Loan Credit Facility (the "Citicorp Credit Facility") and, together
with HTCC Consulting, a related Pledge and Security Agreement with Citicorp
North America, Inc. ("Citicorp"). 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 Citicorp Credit Facility.
On October 15, 1996, the company and its subsidiaries entered into a
$170 million 10-year Multi-Currency Credit Facility with Postabank. 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 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 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, are payable in 32 equal quarterly installments beginning
on March 31, 1999. Amounts outstanding in U.S. Dollars are 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.
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In October 1996, pursuant to the Postabank Credit Facility, the Company
borrowed the equivalent of $82.3 million in Hungarian Forints. Approximately
$75.2 million of this amount was used to repay Citicorp all funds advanced
pursuant to the Citicorp Credit Facility, as amended, and $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 management fees and reimbursable
costs owed to Citizens 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 of December 31, 1996 the Company had borrowed a total of
$116 million under the Postabank Credit Facility.
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.
In 1996, the Company's subsidiary Hungarotel entered into a $47.5
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 $45.0 million of the contract amount.
The financing agreement requires repayment in 20 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 has
received approximately $0.7 million of 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 in operating activities increased to $35.8 million for
the year ended December 31, 1996 compared to $0.5 million for the year ended
December 31, 1995. For the year ended December 31, 1996, the Company used
$56.4 million in investing activities, which was used to fund the
construction of the Company's telecommunications networks, compared to $53.2
million in investing activities for the year ended December 31, 1995.
Financing activities provided net cash of $89.2 million and $64.3 million
for the years ended December 31, 1996 and 1995, respectively.
The Company anticipates that the capital expenditures necessary to
complete the modernization and construction of its networks will require
approximately $59.3 million through the end of 1997 and an additional $8.7
million after 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 and working capital
needs, funding for the Company's future capital requirements to finance
possible acquisitions or other start-up businesses may include the sale of
equity or debt of HTCC or one or more of the operating companies. There can
be no assurance that such financing will be available to the Company when
needed, on commercially reasonable terms, or at all.
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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 year ended December 31, 1996, inflation in Hungary was
approximately 23.6% on an annualized basis. It is the stated policy goal of
the Hungarian government to keep inflation from exceeding approximately 20%
for the 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.
Item 8. Financial Statements And Supplementary Data
Reference is made to the Consolidated Financial Statements of the
Company, beginning with the index thereto on page F-1.
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Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure
Effective July 1, 1995, the Board of Directors of the Company selected
KPMG Peat Marwick LLP as its new independent auditor. BDO Seidman, LLP had
served as the Company's independent auditor until that time. The Company made
the change because KPMG Peat Marwick LLP has an auditing staff in the Republic
of Hungary, while BDO Seidman, LLP does not. The Company believes that such a
local auditing presence in Hungary will serve the Company better during its
anticipated growth period. The Board of Directors approved the decision to
change public accountants based on the reasons stated above. The Board of
Directors did not dismiss BDO Seidman, LLP, nor did BDO Seidman, LLP resign or
decline to serve if reappointed. None of BDO Seidman, LLP's reports on the
financial statements for any year contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principle. There were no disagreements with BDO Seidman, LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure in connection with the audits of the Company at any
time.
PART III
Item 10. Directors And Executive Officers Of The Registrant
There is incorporated in this Item 10 by reference the information
appearing under the captions "Election of Directors - Nominees for Director," "-
Executive Officers Who Are Not Directors" and "- Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive proxy statement for
the 1997 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
Item 11. Executive Compensation
There is incorporated in this Item 11 by reference the information
appearing under the caption "Election of Directors" in the Company's definitive
proxy statement for the 1997 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
There is incorporated in this Item 12 by reference the information
appearing under the captions "Introduction - Stock Ownership of Certain
Beneficial Owners," "- Stock Ownership of Management," and "-Potential Change in
Control," and "Election of Directors - Nominees for Director" in the Company's
definitive proxy statement for the 1997 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
Item 13. Certain Relationships And Related Party Transactions
There is incorporated in this Item 13 by reference the information
appearing under the caption "Election of Directors - Certain Relationships and
Related Party Transactions," and "- Indebtedness of Management" in the Company's
definitive proxy statement for the 1997 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements
Reference is made to the index on page F-1 for a list of all
financial statements filed as part of this Form 10-K.
(a)(2) List of Financial Statement Schedules
Reference is made to the index on page F-1 for a list of all
financial statement schedules filed as part of this Form 10-K.
(a)(3) List of Exhibits
Reference to
Prior Filing
Exhibit or Exhibit Number
Number Description Attached Hereto
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession None
3(i) Certificate of Incorporation of the Registrant,
filed March 23, 1992 (1)
3(ii) By-laws of the Registrant (1)
4 Instruments defining the rights of security holders,
including indentures None
9 Voting trust agreement None
10 Material contracts:
10.1 Employment Agreement between the Registrant and Frank R. Cohen (1)
10.2 1992 Incentive Stock Option Plan of the Registrant (2)
10.3 Decision by the Ministry of Transportation, Telecommunications
and Water Management of the Republic of Hungary to the
application for the establishment of a telecommunications
network and service provision and the English translation
of the same (1)
10.4 Subscription Agreement between the Registrant and private
placement investors containing registration rights (1)
10.5 Sharing Agreement with Hungarian Teleconstruct Corp.
relating to 90 West Street Office space (3)
10.6 Form of Concession Agreement (4)
10.7 Concession Agreement for Raba-Com Rt. (5)
10.8 Concession Agreement for Kelet-Nograd Com Rt. (5)
10.9 Joint Venture and Management Agreements with Telecom Denmark A/S
as to Raba-Com Rt. (6)
10.10 Joint Venture and Management Agreements with Telecom Denmark A/S
as to Kelet-Nograd Com Rt. (6)
10.11 Settlement Agreement between Bell Canada International, Inc. and
the Registrant (6)
10.12 Equipment supply contracts between Siemens Telefungyar Kft. and
Raba-Com and Kelet-Nograd Com Rt. (6)
10.13 Summary of the terms of Raba-Com Rt. agreement to acquire
telephone lines from Matav (7)
10.14 Summary of the terms of Kelet-Nograd Com Rt. agreement to acquire
telephone lines from Matav (7)
10.15 Turnkey construction contracts between Siemens and Raba-Com Rt.
and Kelet-Nograd Com Rt. (7)
10.16 Master Agreement, dated May 31, 1995, between the Registrant and
CU CapitalCorp. (8)
10.17 Warrant, dated May 31, 1995, granted by the Registrant to
CU CapitalCorp. (8)
10.18 Stock Option Agreement, dated May 31, 1995, between the Registrant
and CU CapitalCorp. (8)
10.19 Registration Agreement, dated May 31, 1995, between the Registrant
and CU CapitalCorp. (8)
10.20 Management Services Agreement, dated May 31, 1995, between the
Registrant and Citizens International Management Services Company (8)
10.21 Stock Purchase Agreement, dated as of August 31, 1995, between the
Registrant, Alcatel Austria AG, US Telecom East, Inc., and Central
Euro Telekom, Inc. (9)
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Reference to
Prior Filing
Exhibit or Exhibit Number
Number Description Attached Hereto
10.22 Agreement to Amend and Restate, dated September 28, 1995, between
the Registrant and CU CapitalCorp. (10)
10.23 Second Stock Option Agreement, dated September 28, 1995, between
the Registrant and CU CapitalCorp. (10)
10.24 First Amendment to Management Services Agreement, dated September
28, 1995, between the Registrant and Citizens International
Management Services Company (10)
10.25 Second Agreement to Amend and Restate, dated October 30, 1995,
between the Registrant and CU CapitalCorp. (11)
10.26 Amended and Restated Loan Agreement, dated October 30, 1995,
between the Registrant and CU CapitalCorp. (which includes the
form of the Amended and Restated Promissory Note as Exhibit I
thereto) (11)
10.27 Second Amended and Restated Pledge Agreement, dated October 30,
1995, between the Registrant and CU CapitalCorp. (11)
10.28 Employment Agreement dated November 29, 1994 between the
Registrant and Robert Genova (12)
10.29 Employment Agreement dated November 29, 1994 between the
Registrant and Frank R. Cohen (12)
10.30 Concession Agreement dated May 10, 1994 between the Ministry of
Transportation, Telecommunications and Water Management of the
Republic of Hungary and Raba-Com Rt. (13)
10.31 Concession Agreement dated May 10, 1994 between the Ministry of
Transportation, Telecommunications and Water Management of the
Republic of Hungary and Kelet-Nograd Com Rt. (13)
10.32 Loan Agreement between the Registrant and Chemical Bank dated
November 28, 1995, as amended (14)
10.33 Guaranty of CU CapitalCorp. dated as of December 1, 1995 in favor
of Chemical Bank with respect to the Loan Agreement dated November
28, 1995, as amended (14)
10.34 Basic Contract for Takeover of Public Telephone Service in the
Bekescsaba and Oroshaza Primary Region dated December 30, 1995
between Hungarotel and Matav (14)
10.35 Transfer Agreement for the Transfer of Assets relating to the
Local Public Telephone Service in the Bekescsaba and Oroshaza
Primary Regions dated December 30, 1995 between Hungarotel and
Matav (14)
10.36 Agreement on the Continuous Employment of Matav Employees
providing Public Telephone Service in the Bekescsaba and
Oroshaza Primary Regions dated December 30, 1995 between
Hungarotel and Matav (14)
10.37 Agreement on the Taking Over of Public Telecommunication Services
in Bekescsaba and Oroshaza Primary Region dated December 30,
1995 between Hungarotel and Matav (14)
10.38 Agreement on the Regulation of Rights and Obligations from
Pending Contracts concerning the Public Telephone Service in
the Bekescsaba and Oroshaza Primary Regions dated December 30,
1995 between Hungarotel and Matav (14)
10.39 Network Agreement dated December 30, 1995 between Hungarotel and
Matav (14)
10.40 Agreement to Enter Into a Security Agreement between the
Registrant and Matav dated December 30, 1995 (14)
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Reference to
Prior Filing
Exhibit or Exhibit Number
Number Description Attached Hereto
10.41 Guaranty of the Registrant dated December 30, 1995 in favor
of Matav with respect to Hungarotel (14)
10.42 Declaration of Matav with respect to Hungarotel (14)
10.43 Basic Contract for Taking Over of Public Telephone Services in
the Papa Primary Region dated December 30, 1995 between Papatel
and Matav (14)
10.44 Transfer Agreement for the Transfer of Assets relating to the
Local Public Telephone Services in the Papa Primary Region dated
December 30, 1995 between Papatel and Matav (14)
10.45 Agreement on the Continuous Employment of Matav Employees
providing Public Telephone Services in the Papa Primary Region
dated December 30, 1995 between Papatel and Matav (14)
10.46 Agreement on the Taking Over of Public Telecommunication Services
in the Papa Primary Region dated December 30, 1995 between
Papatel and Matav (14)
10.47 Agreement on the Regulation of Rights and Obligations from
Pending Contracts concerning the Public Telephone Services
in the Papa Primary Region dated December 30, 1995 between
Papatel and Matav (14)
10.48 Network Agreement dated December 30, 1995 between Papatel and
Matav (14)
10.49 Security Agreement between the Registrant, Matav, ABN AMRO Bank
Rt. and Papatel, in favor of Matav (14)
10.50 Guaranty of the Registrant dated December 30, 1995 in favor of
Matav with respect to Papatel (14)
10.51 Third Agreement to Amend and Restate, dated February 26, 1996,
between the Registrant and CUCC (15)
10.52 Second Loan Agreement, dated February 26, 1996, between the
Registrant and CUCC (including form of the Second Promissory
Note as Exhibit I thereto) (15)
10.53 First Amendment to the Second Amended and Restated Pledge
Agreement, dated February 26, 1996, between the Registrant
and CUCC (15)
10.54 First Amendment to the Amended and Restated Loan Agreement,
dated February 26, 1996, between the Registrant and CUCC (15)
10.55 Second Amendment to the Management Services Agreement, dated
February 26, 1996, between the Registrant and CIMS (15)
10.56 Employment Agreement dated September 12, 1995 between the
Registrant and Robert Genova (18)
10.57 Employment Agreement dated September 12, 1995 between the
Registrant and Frank R. Cohen (18)
10.58 Employment Agreement dated December 14, 1995 between the
Registrant and James G. Morrison (18)
10.59 Employment Agreement dated December 14, 1995 between the
Registrant and Andrew E. Nicholson (18)
10.60 Secured Term Loan Credit Facility between the Registrant and
Citicorp North America, Inc. et al. Dated as of March 29, 1996 (19)
10.61 Pledge and Security Agreement dated as of March 29, 1996 between
the Registrant, HTCC Consulting Rt., and Citicorp North America,
Inc. et al dated as of March 29, 1996 (19)
10.62 Termination and Release Agreement dated as of July 26, 1996
between the Registrant and Robert Genova (20)
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Reference to
Prior Filing
Exhibit or Exhibit Number
Number Description Attached Hereto
10.63 Consulting Agreement dated as of July 26, 1996 between the
Registrant and Robert Genova (20)
10.64 Noncompetition Agreement dated as of July 26, 1996 between the
Registrant and Robert Genova (20)
10.65 Irrevocable Proxy dated July 26, 1996 executed by Robert Genova
appointing Hungarian Telephone and Cable Corp. as his proxy (20)
10.66 Termination and Release Agreement dated as of July 26, 1996
between the Registrant and Frank R. Cohen (20)
10.67 Consulting Agreement dated as of July 26, 1996 between the
Registrant and Frank R. Cohen (20)
10.68 Noncompetition Agreement dated as of July 26, 1996 between
the Registrant and Frank R. Cohen (20)
10.69 Irrevocable Proxy dated July 26, 1996 executed by Frank R. Cohen
appointing Hungarian Telephone and Cable Corp. as his proxy (20)
10.70 Termination and Release Agreement dated as of July 26, 1996
between the Registrant and Donald K. Roberton (20)
10.71 Consulting Agreement dated as of July 26, 1996 between the
Registrant and Donald K. Roberton (20)
10.72 Noncompetition Agreement dated as of July 26, 1996 between
the Registrant and Donald K. Roberton (20)
10.73 Irrevocable Proxy dated July 26, 1996 executed by Donald K.
Roberton appointing Hungarian Telephone and Cable Corp. as his
proxy (20)
10.74 English translation of Construction Contract between Papa es
Tersege Telefon Koncesszios Rt. and Fazis Telecommunications
System Design and Construction Corporation dated May 10, 1996 (21)
10.75 English translation of Construction Contract between Hungarotel
Tavkozlesi Rt. and Ericsson Kft. dated May 17, 1996. (as amended) (24)
10.76 English translation of Construction Contract between Papa es Tersege
Telefon Koncesszios Rt. and Ericsson Kft. dated May 31, 1996 (21)
10.77 English translation of Construction Contract between Hungarotel
Tavkozlesi Rt. and Fazis Telecommunications System Design and
Construction Corporation dated June 28, 1996 (21)
10.78 English translation of Amended and Restated Concession Contract
between Papa es Tersege Telefon Koncesszios Rt. and the Hungarian
Ministry for Transportation, Telecommunications and Water
Management dated as of June 3, 1996 (21)
10.79 English translation of Amended and Restated Concession Contract
between Hungarotel Tavkozlesi Rt. and the Hungarian Ministry for
Transportation, Telecommunications and Water Management dated as
of June 3, 1996 (Oroshaza) (21)
10.80 English translation of Amended and Restated Concession Contract
between Hungarotel Tavkozlesi Rt. and the Hungarian Ministry for
Transportation, Telecommunications and Water Management dated as
of June 3, 1996 (Bekescsaba) (21)
10.81 Amended and Restated Employment Agreement dated as of October 17,
1996 between the Registrant and James G. Morrison (22)
10.82 Amended and Restated Employment Agreement dated as of October 17,
1996 between the Registrant and Andrew E. Nicholson (22)
-40-
<PAGE>
Reference to
Prior Filing
Exhibit or Exhibit Number
Number Description Attached Hereto
10.83 Amended and Restated Employment Agreement dated as of
October 17, 1996 between the Registrant and Daniel R. Vaughn (22)
10.84 Multi-Currency Credit Facility among Postabank Rt., as Lender,
the Registrant, as Guarantor, HTCC Consulting Rt., Hungarotel
Tavkozlesi Rt., Kelet-Nograd Com Rt. and Papa es Tersege Telefon
Koncesszios Rt. and Raba Com Rt., as Borrowers entered into as
of October 15, 1996 (23)
10.85 Form of Loan Agreement entered into as of October 15, 1996 among
Postabank Rt., as Lender, the Registrant, as Guarantor, and each
Subsidiary, as Borrower (23)
10.86 Form of Mortgage and Pledge Agreement Securing Bank Loan
entered into as of October 15, 1996 between Postabank Rt. and
each Subsidiary (23)
10.87 Form of Security Agreement entered into as of October 15, 1996
among Postabank Rt., as the secured party, ABN AMRO Rt., as the
Escrow Agent, and the Registrant and HTCC Consulting Rt., as the
pledgors (23)
10.88 First Amendment to Warrant between the Registrant and CU
CapitalCorp. dated as of October 18,1996 (23)
10.89 First Amendment to Stock Option Agreement between the Registrant
and CU CapitalCorp. dated as of October 18, 1996 (23)
10.90 Third Stock Option between the Registrant and CU CapitalCorp
dated as of October 18, 1996 (23)
10.91 Non-Employee Director Stock Option Plan dated as of February 6,
1997 10.91
10.92 Amended and Restated Employment Agreement Between the Registrant
and Richard P. Halka dated as of January 9, 1997 10.92
10.93 Stock Option Agreement Between the Registrant and James G.
Morrison dated as of March 13, 1997 10.93
10.94 Stock Option Agreement Between the Registrant and Andrew E.
Nicholson dated as of March 13, 1997 10.94
10.95 Stock Option Agreement Between the Registrant and Daniel R.
Vaughn dated as of March 13, 1997 10.95
11 Statement re computation of per share earnings Not required
12 Statement re computation of ratios Not required
13 Annual report to security holders Not required
16 Letter re change in certifying accountant (16)
18 Letter re change in accounting principles None
21 Subsidiaries of the Registrant (21)
22 Published report regarding matters submitted to vote of security
holders Not required
23 Consents of experts and counsel Not required
23.1 Consent of KPMG Peat Marwick LLP, certified public accountants 23.1
23.2 Consent of BDO Seidman, LLP, certified public accountants 23.2
24 Power of Attorney Not required
27.1 Financial Data Schedule 27.1
28 Information from reports furnished to state insurance
regulatory authorities Not required
99.1 Press Release issued by the Registrant on May 15, 1995 (8)
99.2 Press Release issued by the Registrant on August 3, 1995 (9)
99.3 Press Release issued by the Registrant on September 5, 1995 (17)
99.4 Press Release dated July 29, 1996 (20)
99.5 Press Release dated October 16, 1996 (23)
- ------------
-41-
<PAGE>
(1) Incorporated herein by reference to the Registrant's Registration Statement
on Form SB-2 dated October 20, 1992, as amended (Registration No. 33-53582-NY as
amended).
(2) Incorporated herein by reference to the Registrant's definitive proxy
statement on Schedule 14A for the Annual Meeting of Stockholders held on
September 14, 1994.
(3) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for May 4, 1994.
(4) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for February 17, 1994.
(5) Incorporated herein by reference to the Registrant's Form 10-KSB for the
year ended December 31, 1993.
(6) Incorporated herein by reference to the Registrant's Registration Statement
on Form SB-2 dated October 27, 1994, as amended (Registration No. 33-80676).
(7) Incorporated herein by reference to the Registrant's Form 10-KSB for the
year ended December 31, 1994.
(8) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for May 31, 1995.
(9) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for August 31, 1995.
(10) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for September 28, 1995.
(11) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for October 30, 1995.
(12) Incorporated herein by reference to the Registrant's Form 10-QSB for the
quarter ended June 30, 1995.
(13) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for February 28, 1994.
(14) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for December 30, 1995.
(15) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for February 26, 1996.
(16) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for June 16, 1995.
(17) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for October 30, 1995.
(18) Incorporated herein by reference to the Registrant's Form 10-K for the year
ended December 31, 1995.
(19) Incorporated herein by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 1996.
(20) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for July 26, 1996.
(21) Incorporated herein by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 1996.
(22) Incorporated herein by reference to the Registrant's Form S-8 filed on
October 18, 1996.
(23) Incorporated herein by reference to the Registrant's Current Report on Form
8-K for October 15, 1996.
(24) Incorporated herein by reference to the Registrant's Form 10-Q for the
quarter ended September 30, 1996.
(b) Reports on Form 8-K
On October 24, 1996, the Registrant filed a Current Report on Form 8-K
for the event on October 15, 1996. On such date, the Registrant and its
subsidiaries entered into a $170 million 10-year Multi-Currency Credit Facility
with Postabank Rt., a Hungarian commercial bank. In connection with such credit
facility, the Registrant also entered into certain agreements with CU Capital
Corp., a Delaware corporation ("CUCC") and a wholly-owned subsidiary of Citizens
Utilities Company pursuant to which the Registrant, in consideration of certain
financial support provided by CUCC, (i) extended to September 12, 2000 the
exercise period of a Warrant and certain stock options held by CUCC, (ii)
granted CUCC the option to purchase an additional 875,850 shares of Common Stock
at an exercise price of $12.75 and (iii) paid CUCC $750,000.
-42-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 1997.
HUNGARIAN TELEPHONE AND CABLE CORP.
(Registrant)
By /s/Richard P. Halka
Richard P. Halka
(Controller/Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange of 1934, this
Report has been signed below by the following persons and on behalf of the
Registrant and in the capacities indicated as of March 27, 1997.
Signature/Name Title
/s/ James G. Morrison President and Chief Executive Officer
James G. Morrison Director (Principal Executive Officer)
/s/ Richard P. Halka Controller (Principal Accounting Officer)
Richard P. Halka
/s/ Andrew E. Nicholson Senior Vice President - Finance
Andrew E. Nicholson (Principal Financial Officer)
/s/ David A. Finley Director
David A. Finley
/s/ Warren B. French, Jr. Director
Warren B. French, Jr.
/s/ John B. Ryan Director
John B. Ryan
/s/ James H. Season Director
James H. Season
/s/ Ronald E. Spears Director
Ronald E. Spears
/s/William E. Starkey Director
William E. Starkey
-43-
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Index to Consolidated Financial Statements
The following information is included on the pages indicated:
Consolidated Financial Statements: Page
Independent Auditors' Reports................F-2 to F-3
Consolidated Balance Sheets..................F-4
Consolidated Statements of Operations........F-5
Consolidated Statements of Stockholders'
(Deficit) Equity...........................F-6
Consolidated Statements of Cash Flows........F-7
Notes to Consolidated Financial Statements...F-8 to F-27
Financial Statement Schedules:
All financial statement schedules are omitted as the required
information is not applicable or the information is presented in the
consolidated financial statements or related notes.
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Hungarian Telephone and Cable Corp.:
We have audited the accompanying consolidated balance sheets of Hungarian
Telephone and Cable Corp. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' (deficit)
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hungarian Telephone
and Cable Corp. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
March 21, 1997
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Hungarian Telephone and Cable Corp.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Hungarian Telephone and Cable Corp. and
subsidiaries for the year ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Hungarian Telephone and Cable Corp. and subsidiaries for the year ended December
31, 1994, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
March 27, 1997
F-3
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1996 1995
------ ----- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,876 16,192
Restricted cash 6,092 1,757
Accounts receivable, net of allowance
of $123 in 1996, and $0 in 1995 4,575 1,399
VAT receivable, net 5,377 4,432
Prepayments and other current assets 2,028 1,729
--------- ---------
Total current assets 33,948 25,509
Net property, plant and equipment 82,012 54,222
Goodwill and intangibles, net of accumulated
amortization of $1,178 in 1996 and $485
in 1995 17,374 19,768
Other assets 11,497 6,570
Construction deposits 11,784 4,318
--------- ---------
Total assets $ 156,615 110,387
======== ========
Liabilities and Stockholders'
(Deficit) Equity
Current liabilities:
Current instalments of long-term debt $ 120 9,699
Short term loans 33,982
Accounts payable 17,777 8,835
Advance subscriber payments 3,202
Due to related parties 2,934 3,075
Accruals 1,748 5,564
Other current liabilities 1,952 2,253
--------- ---------
Total current liabilities 27,733 63,408
Long-term debt, excluding current instalments 148,472 23,467
Advance subscriber payments, long-term 2,136
Due to related parties 4,200
---------
Total liabilities 180,405 89,011
--------- ---------
Commitments and contingencies
Minority interest 5,637
-------- --------
Stockholders' (deficit) equity:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued 4,179,626
shares in 1996 and 4,015,039 shares
in 1995 4 4
Additional paid-in capital 59,327 45,358
Accumulated deficit (80,961) (26,192)
Foreign currency translation adjustment (1,494) (2,381)
Deferred compensation (666) (1,050)
---------- ----------
Total stockholders' (deficit) equity (23,790) 15,739
---------- ---------
Total liabilities and stockholders
(deficit) equity $ 156,615 110,387
========= =========
</TABLE>
See accompanying notes to consolidated financial statements. The Company ceased
to be a development stage company on April 1, 1995.
F-4
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
TELEPHONE SERVICES REVENUES, NET $ 20,910 4,070
----------- ---------- ---------
Operating expenses:
Operating and maintenance expenses 22,011 14,948 2,863
Depreciation and amortization 4,270 2,211 413
Management fees 6,917 4,178 753
Asset write-downs 2,005 562 1,243
Termination of former officers and
directors 6,260
------- ------ ------
Total Operating Expenses 41,463 21,899 5,272
----------- ---------- ----------
LOSS FROM OPERATIONS (20,553) (17,829) (5,272)
Other income (expenses):
Foreign exchange losses (6,278) (4,090) (373)
Interest expense (23,240) (1,672) (211)
Interest income 1,488 981 585
Cost of abandoned financing (2,985)
Other, net 1,123 (252) 180
------- ------- -------
LOSS BEFORE MINORITY INTEREST (50,445) (22,862) (5,091)
MINORITY INTEREST 2,994 2,838 494
----------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (47,451) (20,024) (4,597)
EXTRAORDINARY ITEM, NET (7,318)
------ ------ ------
NET LOSS $ (54,769) (20,024) (4,597)
=========== ========== ==========
LOSS PER SHARE OF COMMON STOCK
BEFORE EXTRAORDINARY ITEM $ (11.38) (6.30) (2.13)
EXTRAORDINARY ITEM $ (1.76)
------ ------ ------
NET LOSS $ (13.14) (6.30) (2.13)
=========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,169,532 3,177,801 2,159,508
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements. The Company ceased
to be a development stage company on April 1, 1995.
F-5
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit) Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share data)
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-in Accumulated Translation Deferred Stockholders
Shares Stock Capital Deficit Adjustment Compensation Equity
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994 1,288,000 $ 1 5,603 (1,571) (75) 0 $ 3,958
Common stock issuances,
643,991 shares for cash 643,991 1 7,821 7,822
307,692 shares for cash 307,692 3,000 3,000
Options granted as compensation 2,196 (2,196) 0
Earned compensation 324 324
Issuance of warrants in connection
with claim settlement 100 100
Transfer of carrying value of shares of
stock subject to mandatory redemption
upon expiration of redemption period 465,000 1 1,143 1,144
Company's share of the excess of
proceeds over book value of subsidiaries
shares purchased by Telecom Denmark 737 737
Foreign currency translation adjustment (37) (37)
Net loss (4,597) 112 (4,485)
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 2,704,683 $ 3 20,600 (6,168) 0 (1,872) $ 12,563
Exercise of warrants 55,025 284 284
Private placement costs (37) (37)
Common stock issuances 252,908 3,476 3,476
Options issued as consideration
for financial support 3,481 3,481
Exercise of options 328,494 2,012 2,012
Compensation related to stock options 4,493 1,872 6,365
Common stock granted to employees 102,500 1,050 (1,050) 0
Common stock issued for acquisitions 571,429 1 9,999 10,000
Foreign currency translation adjustment (2,381) (2,381)
Net loss (20,024) (20,024)
- ----------------------------------------------------------------------------------------------------------------------
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 options and warrants 8,016 81 81
Cancellation of shares (101,429) (1,775) (1,775)
Options granted in connection
with termination agreement 1,125 1,125
Options issued and extended as
consideration for financial support 11,218 11,218
Shares issued as compensation 8,000 101 101
Earned compensation 384 384
Foreign currency translation adjustment 887 887
Net loss (54,769) (54,769)
- ----------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 4,179,626 $ 4 59,327 (80,961) (1,494) (666) $(23,790)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements. The Company ceased
to be a development stage company on April 1, 1995.
F-6
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net cash used in operating activities $ (35,841) (466) (4,188)
--------- -------- --------
Cash flows from investing activities:
Acquisition and construction of
telecommunications networks (49,086) (41,921) (8,655)
Increase in construction deposits (7,466) (4,313)
Acquisition of concession rights (7,119) (4,186)
Cash received from sale of
subsidiaries stock 1,464
Acquisition of interests in
subsidiaries (330) (1,293)
Proceeds from sale of assets 336
Proceeds from issuance of stock by
subsidiaries to outside investors 6,370
Redemption of U.S. Treasury bills 1,497
Sale (acquisition) of interests in
affiliates 130 (434)
--------- -------- -------
Net cash used in investing activities (56,416) (53,182) (5,408)
--------- -------- -------
Cash flows from financing activities:
Borrowings under long-term debt 132,307 31,694 2,442
Proceeds from short-term loans 108,729 31,956
Proceeds from exercise of options
and warrants 81 2,296 10,822
Repayment of long-term debt (9,026) (1,582)
Repayment short-term loans (142,607)
Deferred offering costs paid (37)
Repayment of notes payable (300)
--------- -------- -------
Net cash provided by financing activities 89,184 64,327 13,264
--------- -------- -------
Effect of foreign exchange rate changes on cash 2,757 (1,453) (106)
--------- -------- -------
Net increase (decrease) in cash and cash
equivalents (316) 9,226 3,562
Cash and cash equivalents at beginning of year 16,192 6,966 3,404
--------- -------- -------
Cash and cash equivalents at end of year $ 15,876 16,192 6,966
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements. The Company ceased
to be a development stage company on April 1, 1995.
F-7
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
(a) Description of Business
Hungarian Telephone and Cable Corp. was organized on March 23,
1992 to own and manage telecommunications companies in Hungary.
Four subsidiaries of the Company are presently engaged in the
ownership, construction and operation of public switched telephone
service. Hungarian Telephone and Cable Corp. and subsidiaries
("the Company")was in the development stage through March 31,1995.
The Company, through two of its subsidiaries, commenced operations
in two concession regions in 1995 and through two other
subsidiaries, commenced operations in three additional concession
areas effective January 1, 1996. Accordingly, the Company devoted
substantially all of its efforts through 1994 and a considerable
portion of its efforts in 1995 to obtaining concession rights,
negotiating acquisitions, raising capital in the form of debt and
equity, attracting and creating its current management team and
preparing to commence operations. As a result, the Company
recognized no revenues until 1995.
In 1996, significant activities were devoted to negotiating and
managing construction contracts in its concession areas.
Considerable efforts were also spent raising capital in the form
of long-term debt in order to finance construction and working
capital. As a result, the Company has incurred losses through the
end of 1996.
(b) Principles of Consolidation and the Use of Estimates
The consolidated financial statements include the financial
statements of the Company and its majority owned subsidiaries;
Kelet-Nograd Com Rt., (KNC), Raba-Com Rt., (Raba-Com), Hungarotel
Tavkozlesi Rt. (Hungarotel), Papa es Tersege Telefon Koncesszios
Rt. (Papatel), HTCC Consulting Rt. (HTCC Consulting), Pilistav Rt.
(Pilistav), Borzsony Com and Telebud (CI) Ltd. All material
intercompany balances and transactions have been eliminated.
Investments in affiliates representing less than 50% ownership,
and in which the Company exercises significant influence, are
accounted for using the equity method.
The consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles (GAAP). In
preparing financial statements in conformity with GAAP, management
is required to make estimates and assumptions that affect reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(c) Foreign Currency Translation
The statutory accounts of the Company's consolidated subsidiaries
and affiliates are maintained in accordance with local accounting
regulations and are stated in local currencies. Local statements
are adjusted to U.S. GAAP and then translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No.
52, "Accounting for Foreign Currency Translation" ("SFAS 52").
During the period in which the Company was a development stage
enterprise, the Company used the U.S. dollar as the functional
currency for its majority-owned Hungarian subsidiaries.
Accordingly, monetary assets and liabilities of the Hungarian
subsidiaries were translated at year-end exchange rates while
non-monetary assets and liabilities were translated at historical
rates. Income and expense accounts were translated at the average
rates in effect during the year. Translation adjustments and
transaction gains or losses were reflected in the consolidated
statement of operations.
F-8
<PAGE>
Since commencement of revenue generating activities, the Company
has used the Hungarian Forint ("HUF") as the functional currency
for its majority owned Hungarian subsidiaries. The Company also
used the HUF as the functional currency for measuring the accounts
of Elso Hazai Tavkozlesi Rt. ("Elso") in which it had a 30%
interest until April 19, 1996. Accordingly, foreign currency
assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Results of operations are
generally translated using the average exchange rates prevailing
throughout the year. The effects of exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S.
dollars are accumulated as part of the foreign currency
translation adjustment in stockholders' equity. Foreign exchange
fluctuations related to intercompany balances are included in
equity if such balances are intended to be long-term in nature. At
the time the Company settles such balances, the resulting gain or
loss is reflected in the consolidated statement of operations.
Gains and losses from foreign currency transactions are included
in net loss in the period in which they occur.
(d) Cash Equivalents
For the 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.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful
lives of the respective assets.
(f) Intangible Assets
Intangible assets are comprised of concession fees paid and the
excess of cost over net assets acquired. The concession fees are
being amortized over the 25-year concession period using the
straight-line method. Excess of cost over net assets acquired is
also amortized over 25 years using the straight-line method.
(g) Revenue Recognition
Telephone service revenues are recognized when earned and are
primarily derived from usage of the Company's local exchange
networks and facilities or under revenue sharing agreements with
the former state controlled monopoly telephone company, Magyar
Tavkozlesi Rt. ("MATAV"), the international and national long
distance interconnect service provider.
Advance subscriber payments represent advance connection fees
received from telephone subscribers and are recognized as income
when the subscriber is connected to the telephone network. Advance
fees received are required to be repaid with interest if the
subscriber is not connected to the local telephone network.
(h) Stock Based Compensation
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
F-9
<PAGE>
Deferred compensation related to stock options represents the
excess of the market price of the Company's Common Stock over the
exercise price of Common Stock options granted at the date of
grant and is amortized over the vesting period of the related
options. Deferred compensation related to stock grants represents
the value of Common Stock granted to employees and is being
amortized over the vesting period of the related award.
(i) Income Taxes
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities, if any, are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company's Hungarian operating subsidiaries are 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
(approximately $303,000 at December 31, 1996 exchange rates), (2)
foreign ownership exceeds 30% of the registered capital, and (3)
more than 50% of the revenue earned arises from telecommunication
services.
(j) Loss Per Share of Common Stock
Loss per share is computed by dividing net loss by the weighted
average number of common and common equivalent shares outstanding
during the year. Common equivalent shares include shares issuable
upon the assumed exercise of stock options using the treasury
stock method when dilutive. Computations of common equivalent
shares are based upon average prices during each period. Fully
diluted loss per share is not presented since the effect is
anti-dilutive.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" on January 1, 1996. This Statement requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
undiscounted future cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less anticipated selling costs. Adoption of
this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(l) Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform to
the 1996 presentation.
F-10
<PAGE>
(2) Acquisitions
On January 1, 1995, subject to Concession Agreements (see note 8(a)), the
Company acquired certain operating plant and equipment from MATAV related
to the concession area to which Raba-Com has the rights. The purchase
price for the Raba-Com concession area assets was approximately HUF
75,131,000 (approximately $665,000 at January 1, 1995 exchange rates).
On February 28, 1995, subject to the Concession Agreements, the Company
acquired certain operating plant and equipment from MATAV related to the
concession area to which KNC has the rights. The purchase price for the
KNC Concession Area assets was HUF 548,450,000 (approximately $4.6
million at February 28, 1995 exchange rates).
On August 31, 1995, the Company acquired 45.12% of the outstanding Common
Stock and voting rights to an additional 6% of the outstanding Common
Stock of Papatel and 65% of the outstanding Common Stock and the right to
acquire a further 20% of Hungarotel from Alcatel Austria AG, US Telecom
East, Inc. and Central Euro TeleKom, Inc. ("CET") for 571,429 shares of
its Common Stock (subject to reduction based upon certain post-closing
purchase price adjustments). The value of the Common Stock issued in the
exchange was $10,000,000, however, pending resolution of the potential
post-closing adjustments, the Common Stock was not delivered. In
September 1995, the Company entered into agreements with MATAV to acquire
25.01% of the outstanding Common Stock of Papatel for $925,000, and
Microsystem Telecom Rt. and V.P. Consulting Kft. to acquire 9.19% of the
Common Stock and dividend rights to another 6% of the Common Stock of
Papatel for a purchase price of $300,000. These acquisitions resulted in
a total purchase price of $11,225,000 for 79.24% of Papatel and 65% of
Hungarotel.
On March 13, 1996, the Company acquired the remaining 35% of Hungarotel
for $330,000 in cash. As a result, the Company has adjusted the minority
interest and intangible assets acquired.
On May 21, 1996, the Company and 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 of approximately $1.8 million was reflected as a reduction
of goodwill and a reduction of Common Stock and additional paid-in
capital. Additionally, in May 1996, Papatel entered into a settlement
agreement with a contractor for pre-acquisition claims for approximately
$0.7 million more than the amount recorded at acquisition. The Company
has recorded this excess as an increase in goodwill.
Contingent consideration in the form of Common Stock is payable in the
event that the average trading price for the Company's Common Stock
during the twenty (20) trading days preceding August 31, 1998 is less
than $17.50 per share. The maximum number of additional shares issuable
is 27,703.
The acquisition of the Common Stock of Hungarotel and Papatel has been
accounted for using the purchase method of accounting, and, accordingly,
the purchase price has been allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date of acquisition
subject to adjustment as described above.
F-11
<PAGE>
The net purchase price for the acquisitions, as adjusted, was allocated
as follows:
<TABLE>
<S> <C>
(in thousands)
Property, plant and equipment $ 5,046
Other assets 2,766
Intangible assets 7,260
Liabilities (3,807)
Minority interests (754)
----
Purchase price $ 10,511
========
</TABLE>
On December 31, 1995, the Company acquired certain operating plant and
equipment from MATAV related to the concession areas to which Hungarotel
and Papatel have the rights. The purchase price for the Hungarotel and
Papatel concession area assets was HUF 2.5 billion (approximately $17.9
million at December 31, 1995 exchange rates). At the date of acquisition,
pending final allocation, the total purchase price was reflected as
property, plant and equipment.
During the fourth quarter of 1996, the Company finalized the network
design and construction schedule for the Hungarotel operating area and
completed its assessment of the fair value of assets acquired from MATAV
on December 31, 1995. The final allocation of the purchase price resulted
in a decrease in property, plant and equipment and an increase in
goodwill associated with the purchase of HUF 642.7 million (approximately
$3.9 million at December 31, 1996 exchange rates).
(3) Cash and Cash Equivalents and Restricted Cash
(a) Concentration
At December 31, 1996 cash of $128,000 denominated in U.S. dollars
was on deposit with two major money center banks in the United
States. In addition, $15,748,000 ($685,000 denominated in U.S.
dollars, the equivalent of $15,048,000 denominated in Hungarian
Forints and the equivalent of $15,000 denominated in Deutsche
Marks) was on deposit with banks in Hungary.
(b) Restriction
At December 31, 1996, approximately $1,486,000 of cash denominated
in Hungarian Forints was restricted under concession contract
fulfilment guarantees with restrictions to be removed upon the
successful attainment of certain operational requirements as
prescribed in the concession agreements. The Company intends to
satisfy the operational requirements within one year and therefore
the amount is shown as a current asset.
In addition, at December 31, 1996, approximately $4,606,000 of
cash denominated in U.S. dollars was deposited in escrow accounts
under terms of construction contracts. Such amounts are to be used
to pay for construction costs and as of March 21, 1997, most of
these funds have been applied to contractor invoices included in
accounts payable at December 31, 1996.
F-12
<PAGE>
(4) Property, Plant and Equipment
The components of property, plant and equipment at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
Estimated
1996 1995 Useful Lives
(in thousands)
<S> <C> <C> <C>
Land and Buildings $ 4,835 2,046 25 to 50 years
Telecommunications equipment 63,990 8,673 7 to 10 years
Other equipment 2,390 1,561 5 years
Construction in progress 14,467 43,073
------ ------
85,682 55,353
Less: accumulated depreciation (3,670) (1,131)
------ ------
$ 82,012 54,222
========= ======
</TABLE>
During the fourth quarter of 1996, the Company wrote off network assets
with a net book value of approximately $1.3 million which were taken out
of service as a result of changes to the network design and configuration
in certain operating areas.
Capitalized interest included in the cost of construction of certain
long-term assets amounted to approximately $2,076,000 in 1996 and
$503,000 in 1995. No interest was capitalized in 1994.
F-13
<PAGE>
(5) Short-Term Loans
There were no short-term loans outstanding at December 31, 1996. Short-
term loans at December 31, 1995 consist of the following:
December 31,
1995
(in thousands)
Bank loan - Chemical $ 30,674
Bank loan - ABN-AMRO 1,603
Loan payable to TDI:
DM 1,727,000 1,225
U.S. dollar loan 480
----------
Short-term loans $ 33,982
==========
In 1995, the Company entered into a financing agreement (the "First
Citizens Loan Agreement") (see note 13) in which an affiliate of Citizens
Utilities Company (Citizens Utilities Company and its affiliates are
hereinafter referred to as "Citizens") provided a guaranty to Chemical
Bank that permitted the Company to borrow up to $33.2 million at the
bank's prime rate of interest + 2% through July 25, 1997. At December 31,
1995, the Company had borrowed $30.7 million under the financing. During
February and March of 1996, the Company borrowed from Citizens an
additional $18.2 million under a second financial agreement with Citizens
(the "Second Citizens Loan Agreement" together with the First Citizens
Loan Agreement, the "Citizens Loan Agreements") (see note 13).
At December 31, 1995, the Company had a short-term loan payable to
ABN-AMRO for DM 2,250,000 (approximately $1,603,000 at December 31, 1995
exchange rates) which bore interest at DM LIBOR + .625%. This loan was
repaid in March 1996.
At December 31, 1995, the Company had short-term loans payable to
TeleDanmark A/S which bore interest at DM and U.S. dollar LIBOR + 3%. The
loans were repaid in January 1996.
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. ("Citicorp"). This facility permitted the Company to borrow
funds through December 31, 1996 at interest rates ranging from 3.5% to
6.5% above LIBOR or Citicorp's announced based rate, at the Company's
option. In April, 1996, the Company used the Credit Facility to repay all
the funds advanced or guaranteed by Citizens and Chemical Bank and to
meet contractual commitments pursuant to construction contracts and
operating expenses and recorded an extraordinary loss on the early
extinguishment of the debt of approximately $8.2 million representing a
non-cash charge relating to the write off of the remaining unamortized
deferred financing costs included in other assets pertaining to the
Citizens Loan Agreements.
In October 1996, utilizing funds provided by the Postabank Credit
Facility (see note 6), the Company paid Citicorp all funds owed pursuant
to the Credit Facility, as amended, plus $2.0 million in fees and costs
representing settlement in connection with the cancellation of the
Company's proposed bond offering for which Citicorp was to act as
underwriter (see note 6).
F-14
<PAGE>
(6) Long-term Debt
<TABLE>
<S> <C> <C>
Long-term debt at December 31, 1996 and 1995 consists of the following:
1996 1995
(in thousands)
Loan payable, maximum HUF equivalent of $170 million USD, interest
at the National Bank of Hungary weighted average Treasury Bill + 2.5%
(26% at December 31, 1996), payable in 32 quarterly instalments
beginning March 31, 1999 with final payment due December 21, 2006.
HUF 19,136,275,000 outstanding at December 31, 1996. $ 116,104
Construction loan, maximum HUF equivalent of $45 million, interest at the
National Bank of Hungary average Treasury Bill + 2.5% (26% at
December 31, 1996) payable in 20 quarterly instalments
beginning March 31, 1998 with final payment due December 31, 2002;
HUF 1,565,450,000 outstanding at December 31, 1996. 9,498
Payable to MATAV, interest at the National Bank of Hungary 90 day
Treasury Bill rate + 2% (24% and 32% at December 31, 1996 and 1995,
respectively, payable quarterly, with final payment due September 30,
1998; HUF 1,492,357,000 and HUF 2,491,511,000 outstanding at
December 31, 1996 and 1995, respectively. 9,054 17,864
Loan payable, imputed interest at LIBOR + 2.5% p.a., payable semiannually
through December 31, 2001; $2,388,000 and DM 7,774,000
outstanding at December 31, 1996. 7,387
Loanpayable, imputed interest at LIBOR + 2% p.a., payable in semiannual
instalments, with final payment due December 31, 1999; $1,499,000 and
DM 5,429,000 outstanding at December 31, 1996 and $1,813,000 and
DM 6,405,000 outstanding at December 31, 1995. 4,986 6,296
Payable to MATAV, interest at the National Bank of Hungary 90 day
Treasury Bill rate + 2% (24% and 32% at December 31, 1996 and 1995,
respectively) payable quarterly, with final payment due January 10,
1998; HUF 198,212,000 and HUF 345,758,000 outstanding
at December 31, 1996 and 1995, respectively. 1,203 2,479
Loan payable, without interest due in equal annual instalments
over three years 360
First mortgage loan payable, interest at DM-LIBOR + 1% with semi-annual
instalments of DM 666,000 (approximately $466,000 at December 31,
1995 exchange rates) plus interest, with final payment due December
31, 2002; secured by property, plant and equipment; DM 9,350,000
outstanding at December 31, in 1995. 6,527
------- -------
Total long-term debt $ 148,592 33,166
Less current instalments 120 9,699
------- ------
Long-term debt, excluding current instalments $ 148,472 23,467
======= ======
</TABLE>
F-15
<PAGE>
The aggregate maturities of long-term debt based on U.S. dollar
equivalents at December 31, 1996 exchange rates for each of the five
years subsequent to December 31, 1996 are as follows: 1997, $120,000;
1998, $2,020,000; 1999, $18,617,000; 2000, $18,497,000; and 2001,
$24,454,000. The carrying value of long-term debt approximates its fair
value at December 31, 1996.
On October 15, 1996, the Company and its subsidiaries entered into a $170
million 10-year Multi-Currency Credit Facility with Postabank es
Takarekpenztar ("Postabank"), a Hungarian commercial bank (the "Postabank
Credit Facility"). Proceeds from the loan may be drawn entirely in
Hungarian Forints or up to 20% of the principal may be drawn in U.S.
dollars through March 31, 1999. Concurrently upon entering into the loan
agreement with Postabank, the Company terminated its planned bond
offering and recorded a charge of $2,985,000 representing all related
costs.
Under the terms of the Postabank Credit Facility, drawdowns in Hungarian
Forints 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 bear interest at 2.5% above LIBOR. Interest
payments 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 instalments 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 each
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 $75.2 million of this amount was used to repay Citicorp all
funds advanced pursuant to the Credit Facility, as amended, and $2.0
million was paid to Citicorp for fees representing settlement in
connection with the cancellation of the Company's proposed bond offering.
The remaining $5.1 million was used to pay management fees and
reimbursable costs owed to Citizens pursuant to the Management Services
Agreement (see note 13). 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 instalments over a two year period, and which
will be amortized over the life of the loan facility. At December 31,
1996, the remaining unamortized deferred financing costs have been
included in other assets. Additionally, certain costs were incurred as a
result of Citizens' financial support (see note 13).
The remainder of the proceeds will be used to complete construction of
the Company's telecommunications networks, provide additional working
capital, and refinance or repay other existing debt. Current instalments
due under existing agreements for certain long-term obligations have been
classified as long-term since the Company has the ability and intent to
refinance these obligations on a long-term basis. In January 1997, the
Company repaid amounts payable to MATAV under long-term agreements with
proceeds of the Postabank Credit Facility.
In 1996, Hungarotel entered into a $47.5 million construction contract
for the construction of a telephone network in one of its concession
areas. Financing up to $45 million will be provided by the contractor.
The financing agreement requires repayment in 20 quarterly instalments
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 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 was awarded subsidies from the Ministry aggregating
HUF 118,720,000 (approximately $850,000 at December 31, 1995 exchange
rates). The required conditions were satisfied in 1996 and the funds were
received one-half in the form of a grant and one-half in the form of a
non-interest bearing loan repayable over a three year period.
F-16
<PAGE>
(7) Income Taxes
The statutory U.S. Federal tax rate for the years ended December 31,
1996, 1995 and 1994 was 35%. The effective tax rate was zero for the
years ended December 31, 1996 and 1995 due to the Company incurring net
operating losses for which no tax benefit was recorded.
For U.S. Federal income tax purposes, the Company has unused net
operating loss carryforwards at December 31, 1996 of approximately
$20,824,000 which expire in 2007, $142,000; 2008, $422,000; 2009,
$950,000; 2010, $6,507,000; and 2011, $12,803,000. The availability of
the net operating loss carryforwards to offset income in future years may
be restricted as a result of an ownership change which may occur as a
result of future sales of Company Stock and other events.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31
1996 1995
($ thousand)
<S> <C> <C>
Net operating loss carryforwards $ 7,288 2,106
Write down of assets 418 418
Stock compensation 1,358 2,239
Termination benefits 2,087
Other 903 197
------- -------
Total gross deferred tax assets 12,054 4,960
Less valuation allowance (12,054) (4,960)
------- ------
Net deferred tax assets $ 0 0
========= ========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning in making these assessments. During 1996 and 1995, the valuation
allowance increased by $7,094,000 and $3,789,000, respectively.
(8) Commitments and Contingencies
(a) Concession Agreements
Certain subsidiaries of the Company have been awarded concession
rights by the Hungarian Ministry of Transportation,
Telecommunications and Water Management ("the Ministry") to own
and operate local public telephone networks in five regions of
Hungary. Each of the concession agreements are for a term of 25
years and provide for an eight-year exclusivity period.
Agreements providing concession rights in two regions to
Hungarotel and one region to Papatel which were entered into prior
to their acquisition by the Company and were renegotiated by the
Company. The renegotiated concession agreements provided for an
initial payment to the Ministry of HUF 938,250,000 (approximately
$6.7 at December 31, 1995 exchange rates) which was paid in
November 1995, and for annual concession fees based upon 2.3% and
0.3% of revenues of the regions operated by Hungarotel and 2.3%
for the regions operated by Papatel.
In 1994, the Ministry awarded concession rights to own and operate
local public telephone networks to KNC and Raba-Com under
agreements which provided for initial payments of approximately
$2.1 million and $2.7 million and annual concession fees based
upon 0.1% and 1.5% for regions operated by KNC and Raba-Com,
respectively.
F-17
<PAGE>
The concession agreements provide for, among other things, the
subsidiaries to provide telephone service to specific numbers of
customers by specified dates or be subject to possible monetary
penalties of up to HUF 500,000,000 (approximately $3 million at
December 31, 1996 exchange rates) and possibly reduction in the
period of exclusivity. As of December 31, 1996, KNC and Hungarotel
did not fulfill these service requirements in their concession
areas. The Company has communicated the reasons for the service
delays experienced by KNC and Hungarotel to the Ministry and
believes it has demonstrated accelerating progress towards meeting
minimum service requirements. Based on its discussions, the
Company believes the possibility of penalties being imposed by the
Ministry is remote and has not provided for any potential
liability.
The activities of the subsidiaries which own concession rights are
regulated by the Ministry and by the terms of their respective
concession agreements. The Ministry regulates the construction,
operation and sale of local telephone exchanges and has been given
the authority to regulate the industry. This authority includes
approving local, long distance and international rates, the
sharing of revenues between concession companies and MATAV, the
equipment that can be used in the public switched telephone
network and requiring local companies to meet specified standards
as to growth and services.
(b) Construction Commitments
KNC entered into contracts which provide for the construction of a
local telephone network in its service area. The contracts,
including subsequent renegotiations, total approximately $46.2
million. Construction is expected to be substantially completed in
the second quarter of 1997.
Raba-Com entered into contracts totaling $29.9 million which
provided for the construction of a local telephone network in its
service area. By December 31, 1996, construction of the network in
Raba-Com was substantially complete.
Papatel entered into contracts totaling $16.2 million which
provided for the construction of a local telephone network in its
service area. By December 31, 1996, construction of the network in
Papatel was substantially complete.
Hungarotel entered into contracts totaling $66.5 million which
provide for construction of telephone networks in its service
areas. Construction is expected to be substantially completed in
the second quarter of 1997.
(c) Settlement of Claim
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 a
promissory note for $300,000 which was repaid in 1996 and 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 also has
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. The $400,000
settlement was charged to operations for the year ended December
31, 1994, and is included in "Other, net" in the accompanying
Statement of Operations.
(d) Leases
The Company leases office facilities in Stamford, Connecticut,
which require minimum annual rentals of approximately $24,000.
During a portion of 1996 and all of 1995 and 1994, the Company
also leased offices in Budapest, Hungary from Hungarian
Teleconstruct Corp. ("Teleconstruct"), a company whose officers
and directors consist of certain former officers and directors of
the Company (see note 12(b)). Rent expense for the years ended
December 31, 1996, 1995 and 1994, including rental amounts paid to
Teleconstruct, was $94,500, $30,100 and $78,000, respectively.
F-18
<PAGE>
(e) Legal Proceedings
Hungarotel is a defendant in a lawsuit brought in Hungary that
alleges breach of contract. The plaintiff is seeking payment of
outstanding invoices and alleged damages totaling approximately
HUF 270.0 million (approximately $1.6 million at December 31, 1996
exchange rates). The Company believes it has meritorious defenses
to the claim and does not believe there will be any material
adverse effect from the outcome of this proceeding.
Raba-Com is a defendant in a lawsuit seeking refund of the
connection fee paid by a residential customer due to delay in
providing telephone service. Management believes there are
meritorious defenses to the claim and expects to prevail. Should,
however, the trial result in an unfavorable outcome, the Company
could be subject to additional claims for refunds of connection
fees received.
The Company and its subsidiaries are involved in various other
claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition
of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations
or liquidity.
(9) Common Stock
In August 1992, the Company sold 465,000 shares of Common Stock in a
private placement at $3.00 per share, receiving $1,142,907 in net
proceeds after direct costs of $252,093. In connection with the private
placement, the Company issued warrants to the placement agent to purchase
46,500 shares of Common Stock at an exercise price of $3.60 per share.
In connection with a public offering in December 1992, the Company
granted warrants entitling the underwriters to purchase up to 33,500
shares of Common Stock during the four-year period commencing on December
26, 1992 at an exercise price of $10.15.
In May and December 1994, the Company sold 643,991 and 307,692 shares of
Common Stock to foreign investors outside of the United States in private
placements at $14.00 and $9.75 per share, receiving net proceeds of
approximately $7,690,000 and $3,000,000, respectively.
In connection with the May 1994 private placement, the Company granted
the placement agent warrants to purchase an aggregate of 61,950 shares of
Common Stock at an exercise price of $21.00 per share over a period of
five years ending May 4, 1999. In August 1994, the exercise price of the
warrants was repriced at $14.00 per share. The holders of the placement
agent warrants have been granted certain rights to require the Company,
at the Company's expense, to register the warrants and the underlying
shares under the Securities Act of 1933.
During the year ended December 31, 1995, the Company issued 54,955 shares
of 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, a former officer exercised options to purchase 230,994 shares
of Common Stock at $4.00 per share, 20,000 shares at $7.00 per share and
77,500 shares at $12.25 per share. These transactions resulted in net
increases in Common Stock and additional paid-in capital of $300 and
$2,296,000, respectively.
During 1996, options to purchase 5,000 shares of Common Stock at $10 per
share and warrants to purchase 3,016 shares of Common Stock at $10.15
were exercised. Proceeds from the exercise of these options and warrants
amounted to approximately $81,000.
The Company has reserved 5,627,775 shares for issuance under stock option
plans and agreements and warrants.
F-19
<PAGE>
(10) Stock Based Compensation
Stock Option Plans
The Company adopted a stock option plan (the "Plan") in April 1992 which
provided for the issuance of an aggregate of 90,000 stock options which
was increased to 250,000 at the 1994 Annual Meeting of Stockholders. On
May 9, 1996, the stockholders of the Company approved an increase in the
number of shares available under the plan from 250,000 to 750,000. Under
the Plan, incentive and non-qualified options may be granted to officers,
directors and consultants to the Company. The plan is administered by the
Board of Directors, which may designate a committee to fulfill its
responsibilities. Options granted under the Plan are exercisable for up
to 10 years from the date of grant. As of December 31, 1996, 465,000
options provided for by the Plan had been issued, of which 102,500 were
exercised and 347,500 remained outstanding.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options issued under the Plan. Accordingly, no
compensation cost has been recognized in the financial statements. Had
the Company determined compensation cost for options issued under the
Plan based on the fair value at the grant date according to SFAS No. 123,
the Company's net pro forma income and Earnings Per Share would have been
as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Net income As reported ($54,769) ($20,024)
Pro forma (54,982) (20,237)
Earnings Per Share As reported ($13.14) ($6.30)
Pro forma (13.19) (6.37)
</TABLE>
For purposes of the pro forma calculation under SFAS 123, the fair value
of each option grant has been estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions: (1) a
risk free rate of 5.4% in 1996 and 7.39% in 1995, (2) an expected life of
6 years for 1996 and 5 years for 1995, and (3) volatility of
approximately 53% for both 1996 and 1995.
Pro forma net loss reflects only options granted during 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock
under SFAS 123 is not reflected in the pro forma net loss amounts because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
The following is a summary of stock options, including those issued under
the Plan referred to above, issued to officers, directors, and
consultants, exercised and cancelled for the three years ended December
31, 1996:
F-20
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Outstanding Option Price
Options Per Share
--------------------------------------------------------------------------
<S> <C> <C>
December 31, 1993 94,000 $7.00-$10.25
Granted 499,991 $4.00-$14.00
--------------------------------------------------------------------------
December 31, 1994 593,991 $7.00-$14.00
Granted 170,000 $12.25-$14.00
Exercised (328,494) $4.00-$12.25
Cancelled (29,000) $10.00-$10.25
--------------------------------------------------------------------------
December 31, 1995 406,497 $4.00-$14.00
Granted 200,000 $14.00
Exercised (5,000) $10.00
Cancelled (5,000) $14.00
--------------------------------------------------------------------------
December 31, 1996 596,497 $4.00-$14.00
--------------------------------------------------------------------------
</TABLE>
The following table summarizes information about shares subject to
outstanding options as of December 31, 1996 which were issued to current
or former employees or directors pursuant to the Plan or employment
agreements.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted-
Number Range of Weighted-Average Remaining Number Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
<C> <C> <C> <C> <C> <C>
248,997 4.00 4.00 7.6 248,997 4.00
60,000 7.00 7.00 1.0 60,000 7.00
5,000 10.00 10.00 5.9 5,000 10.00
82,500 12.25 12.25 3.1 82,500 12.25
200,000 14.00 14.00 4.6 200,000 14.00
------- -------
596,497 4.00 - 14.00 8.85 5.3 596,497 8.85
======= =======
</TABLE>
Stock Grants
In October 1996, the Board of Directors of the Company amended and
restated employment agreements with three executive officers. As part of
these agreements, in March 1997, based on performance in 1996, options to
purchase 70,000 shares of Stock at an exercise price of $8.75 were
granted which become effective April 1, 1997.
In October 1996, the Company issued 8,000 shares to three executives as
compensation. An amount of $101,000, representing the fair market value
of the stock on the date of grant, has been recorded as an increase in
Common Stock and additional paid-in-capital.
In December 1995, the Company entered into employment agreement with
three executives which provided for, among other things, the granting of
a total of 102,500 shares of Common Stock. The Common Stock grants vest
over a four year period from the effective date of each agreement. As a
result of these employment agreements, in 1995 the Company recorded an
increase in additional paid-in-capital of $1,050,000, and a corresponding
increase in deferred compensation.
F-21
<PAGE>
(11) Reconciliation of Net Income to Net Cash Used in Operating Activities
The reconciliation of net loss to net cash used in operating activities
for the years ended December 31, 1996, 1995 and 1994 follows:
1996 1995 1994
(in thousands)
Net loss $ (54,769) (20,024) (4,597)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
property, plant and equipment 3,477 1,043 413
Amortization of intangibles 793 1,168 -
Asset write-downs 2,005 562 1,243
Equity in net loss of affiliates 248 71
Non-cash compensation 485 6,365 324
Unrealized foreign currency loss 1,084 602 373
Extraordinary items 7,318
Termination benefits 6,260
Claim settlement -- 400
Gain on sale of subsidiaries' stock -- (580)
Minority interest (2,994) (2,838) (494)
Unpaid interest 6,279 40 -
Changes in operating assets and liabilities
net of effects of acquisitions:
Increase in accounts receivable (3,663) (1,399) -
Decrease (increase) in restricted cash (4,974) 2,065 (3,822)
Increase in VAT receivable (1,757) (3,305) (1,127)
Decrease (increase) in other assets (5,976) 825 35
Increase in accounts payable 10,955 12,311 1,613
Increase (decrease) advance payments 1,066 (312) 1,067
Decrease (increase) in due to related
parties (1,430) 2,183 893
------ ----- ---
Net cash used in operating activities $ (35,841) (466) (4,188)
========= ==== ======
Cash paid during the year for:
Interest $ 16,961 1,672 211
========= ===== ===
Summary of non-cash transactions (figures in dollars): During 1996 the
Company:
Issued 250,000 shares of Common Stock valued at $3,219,000
and also issued 875,850 options and modified the terms of
other options to purchase Common Stock valued at
$11,219,000 in consideration for certain financial support
from Citizens.
Retired 101,429 shares of Common Stock valued at
$1,775,000, not yet delivered as a purchase price
adjustment related to acquisitions.
Issued 8,000 shares as compensation to three executive
officers valued at $101,000.
During 1995 the Company:
Issued 571,429 shares of Common Stock valued at
$10,000,000 subject to adjustment, for acquisitions.
Issued 250,000 shares of Common Stock valued at $3,436,000
and 626,155 options to purchase Common Stock valued at
$3,481,000 in consideration for certain financial support
from Citizens.
Issued 2,908 shares of Common Stock as payment of
approximately $40,000 of interest to Citizens.
Issued 102,500 restricted shares to certain officers
pursuant to their employment agreements.
During 1994:
The Company issued a $300,000 note payable and warrants to
purchase Common Stock valued at $100,000 in settlement of a
claim.
F-22
<PAGE>
A minority stockholder of a subsidiary contributed real
estate with an estimated fair value of $372,000 in exchange
for additional shares of stock.
(12) Related Parties
Transactions entered into with certain related parties are as follows:
(a) Transactions with 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 Chairman and Chief Executive Officer, former Vice
Chairman and former Chief Financial Officer, Treasurer, Secretary
and Director. Pursuant to these agreements, the Company agreed to
make payments for severance, consulting fees and non-compete
agreements amounting to $7.25 million, in equal monthly
instalments over a 72 month period commencing August 31, 1996 and
also issued options to purchase 200,000 shares of Common Stock at
an exercise price of $14.00 per share. These commitments are
supported by letters of credit.
The Company has recorded a charge of approximately $6.3 million
and made payments aggregating approximately $503,000 in 1996
related to these agreements.
On September 12, 1995 the Board of Directors of the Company had
extended the employment contracts of the Chairman, President and
Chief Executive Officer and its former Chief Financial Officer,
Treasurer, Secretary and Director for one year and made all of the
options contained in such employment agreements immediately
vesting instead of over the term of such employment contracts.
Stock compensation expense for the year ended December 31, 1995
(including a charge for the entire amount related to the
accelerated vesting of options of the Company's prior president,
chief executive and chief financial officer) amounted to
$6,365,000.
In 1996, 1995 and 1994, the Company paid legal fees to the former
Chief Financial Officer, Treasurer, Secretary and Director of
approximately $146,000, $158,000 and $80,000, respectively.
Included in other assets at December 31,1996 is $250,000 plus
accrued interest due from the former Vice Chairman for funds
advanced on a personal mortgage which was repaid in February 1997.
(b) Transactions with Teleconstruct
In addition to transactions related to Pilistav (see note 15) in
1996, the Company purchased the premises used as offices by the
Company and a residental apartment in Budapest, Hungary from
Teleconstruct in two separate transactions for an aggregate
purchase price of $643,000.
(c) Agreements with TeleDanmark A/S
On June 16, 1994, the Company entered into joint venture and
shareholder agreements with TeleDanmark A/S ("TDI") pursuant to
which, among other things, TDI: (1) acquired 20% interests in
RabaCom and KNC by purchasing shares directly from such companies
(TDI paid approximately $6,600,000 for such shares), (2) purchased
25,000 shares of the Company's Common Stock for approximately
$400,000 and (3) entered into an agreement to manage the
operations of RabaCom and KNC areas through 1999. The management
agreements entered into among the parties required aggregate
minimum annual payments of fees in addition to reimbursement of
certain expenses. Amounts paid to TDI in 1996, 1995 and 1994 under
the management agreements amounted to approximately $976,000,
$1,778,000 and $1,443,000, respectively. The management agreements
with TDI were terminated in August 1996.
F-23
<PAGE>
(d) Transactions with Citizens Utilities Company
Transactions with Citizens including those under the Management
Service Agreements are discussed in Footnote 13.
Amounts payable to related parties as of December 31, 1996 and 1995, were
as follows:
<TABLE>
1996 1995
<S> <C> <C>
Payable to former officers and directors $ 4,839,000 $
Due to Citizens 1,491,000 2,566,000
Due to TDI 770,000 480,000
Due to Teleconstruct 34,000 29,000
------ ------
$ 7,134,000 $ 3,075,000
============= ============
</TABLE>
(13) Agreements with Citizens
During 1995, the Company and certain subsidiaries of Citizens entered
into a Master Agreement, a Loan Agreement and related Promissory Note, a
Warrant to Purchase Shares of Common Stock to Citizens (the Warrant), a
Stock Pledge Agreement, a Stock Option Agreement and second Stock Option
Agreement, a Registration Agreement and a Management Services Agreement
(the "Citizens Agreements"). Simultaneously, Citizens entered into voting
agreements with three affiliates of the Company and consummated the
purchase of 300,000 shares of Common Stock of the Company from the then
President, Chief Executive Officer and Chief Financial Officer and
Director of the Company. Certain of these agreements were subsequently
amended in connection with Citizens providing additional financial
support to the Company and expanding its management services
responsibilities as a result of the Company's acquisition of additional
concession companies.
The Citizens Agreements, as amended, resulted in and provide for the
following:
The nomination by Citizens of one representative to the Company's
board of directors (out of a minimum of six directors) for as long
as Citizens owns at least 300,000 shares of Common Stock of the
Company.
Citizen's receipt of options and a warrant to purchase an
aggregate of 3,392,591 (as adjusted for items described below)
additional shares of Common Stock of the Company at exercise
prices ranging from $13 to $18 per share under the Stock Option
Agreement and Warrant, as amended (the "Citizens Options and
Warrant"). The Citizens Options and Warrant were originally due to
expire at various dates from May 31, 1997 to September 12, 2000.
Expiration dates of the warrant and certain options were extended
as discussed below. All of the options are subject to
anti-dilution provisions which result in adjustments to the number
and price per share of the options.
Financial support under the Citizens Loan Agreements, as amended,
to the Company by Citizens through advances or the arrangement of
advances through Chemical Bank of approximately $31 million and
guarantees by Citibank of $16 million totaling $47 million as of
December 31, 1995. Chemical Bank provided such advances based upon
a guarantee provided by Citizens on the Company's behalf.
Consideration for Citizens commitment to provide the financial
support in excess of the approximately $5.2 million provided in
the First Citizens Loan Agreement included the grant to Citizens
of an additional five year option to purchase 626,155 shares of
Common Stock and its subsequent repricing, and the issuance of
250,000 shares of Common Stock to Citizens. The cost of this
consideration to the Company, representing the fair value of the
newly granted options and the subsequent repricing, and the fair
value of the Common Stock amounted to $6,917,000. The fair value
of the options granted and repriced were determined using the
Black Scholes option pricing model.
F-24
<PAGE>
The First Citizens Loan Agreement provided for certain events of
default and remedies. Advances under the Loan Agreement bore
interest at a variable rate equal to the prime rate plus 2%,
payable quarterly in cash. To the extent the interest rate payable
by the Company to Chemical was less than the applicable interest
rate under the First Citizens Loan Agreement, the Company was
required to pay to Citizens the difference, as partial
consideration for Citizens making its guaranty. The Company's
option to repay advances and interest in Common Stock under the
terms of the First Citizens Loan Agreement was waived in
connection with Citizen's commitment in February 1996 to provide
additional financial support to the Company as described below.
The maturity date of the loan was July 25, 1997; however, the
First Citizens Loan Agreement provided that in the event the
Company issues or sells for cash, pursuant to any public or
private offering, any shares of its capital stock (or any other
securities or any obligations convertible into or exchangeable for
Common Stock) or receives a bank loan or any bridge financing
related to such offering, then the Company must repay the
outstanding principal and accrued but unpaid interest from such
net offering proceeds or related financing, subject to the prior
repayment of any such advances made through third party lenders.
On February 26, 1996, the Company and Citizens entered into, among
other agreements, the Second Citizens Loan Agreement pursuant to
which Citizens agreed to lend the Company up to an additional $46
million (the "Additional Citizens Financial Support"), including
(i) an advance of up to $16 million to enable the Company to
satisfy its obligations to Citibank, if Citibank's payment
obligations to MATAV arose pursuant to its payment guaranty to
secure Hungarotel's asset purchase and (ii) advances of up to $30
million, composed of up to $20 million for certain limited
purposes and up to $10 million reserved for anticipated
obligations under construction contracts to be approved by
Citizens.
Citizens commitment to provide the loan advances of up to $16
million in connection with the Hungarotel asset purchase expired
on the earlier of June 28, 1996 or the termination of Citibank's
payment guaranty. Citizens commitment to provide the loan advances
in connection with the remaining $30 million of Additional
Citizens Financial Support expired on June 28, 1996, with respect
to the $20 million reserved for other limited purposes.
Consideration for Citizen's commitment to provide the Additional
Citizens Financial Support included the issuance of an additional
250,000 shares of Common Stock. The cost of this consideration to
the Company representing the fair value of the Common Stock
amounted to $3,219,000.
Total consideration to Citizens related to these transactions
amounted to $10,136,000 and was capitalized as deferred financing
fees. As discussed in note 5, all amounts outstanding in
connection with the Citizens Loan Agreements and additional
Citizens' financial support were repaid in April 1996 and any
remaining unamortized deferred financing costs pertaining to such
agreements were expensed and reflected as an extraordinary loss.
Certain corporate, financial, technical, construction, marketing
and operational services are to be provided by Citizens to the
Company under the terms of the Management Services Agreement. Such
services commenced on July 1, 1995 and will continue through
December 31, 2007. All services rendered by Citizens are subject
to the oversight, supervision and approval of the Company. The
management fee payable to Citizens is the greater of 5% of
Adjusted Gross Revenues, as defined, or a fixed amount ranging
from $100,000 to $395,800 per month from July 1995 through
December 31, 1996, and $416,600 per month for each month
commencing January 1997 for the remainder of the term, subject to
adjustment for inflation. The monthly management fees during 1995
and 1996 were payable in cash or, with Citizen's consent, in
shares of Common Stock of the Company equal in value to the fee,
F-25
<PAGE>
based upon a three-month market price average. Management fees
payable to Citizens during 1996 amounted to $3,639,600 plus
reimbursable costs of $1,862,232, while in 1995 such fees amounted
to $900,000 plus reimbursable costs of $1,490,511. Cash payments
made to Citizens in 1996 for management services totaled
$5,865,000.
The right for Citizens to receive an option to purchase
additional shares of Common Stock, if the Company issues, in
connection with any public or private offering, shares of Common
Stock, 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 prior to September 12, 1997, on the
same terms and applicable to the original two-year option granted
under the Citizens Options and Warrant, to purchase the number or
amount of shares sufficient to maintain Citizens' then existing
percentage ownership on a fully diluted basis. If the issuance
occurs after September 12, 1997, then the Company must grant
Citizens the right to purchase at the applicable offering price
the number of shares as is necessary to maintain Citizens' then
existing percentage ownership on a fully diluted basis.
In connection with the Postabank Credit Facility (see note 6), on
October 18, 1996, the Company entered into certain agreements with
Citizens in consideration for, among other things, Citizens'
support in fulfilling all terms under the Citicorp Credit
Facility, as amended, and in obtaining the Postabank Credit
Facility. Under such agreements, the Company agreed to (i) extend
to September 12, 2000 the exercise periods of a warrant and
certain stock options to purchase approximately 2,516,741 shares
of Common Stock (as adjusted), (ii) grant 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) pay Citizens $750,000 in cash. The cost of this
consideration to the Company representing the increase in fair
value of the options previously granted, the fair value of the
newly granted options and the cash payment amounted to $11.97
million. The fair value of the options was determined using the
Black Scholes option pricing model. The Company has reflected the
portion of the cost related to the financial support in fulfilling
the terms of the Citicorp Credit Facility, $5.7 million, as a
current period charge. The remaining $6.27 million has been
capitalized in other assets with other direct costs incurred in
obtaining the Postabank Credit Facility and will be amortized over
the term of the related debt.
Additionally, the Citizens Agreements provided for the pledge of certain
assets of the Company as security, including its ownership interests in
its subsidiaries. The Company is also obligated to bear the cost of
registering shares it has issued to Citizens, including shares issuable
under the Citizens Options and Warrant. As a result of the above
transactions, on December 31, 1996 Citizens held 19.2% of the Company's
outstanding Common Stock and 4,894,596 options and warrants to purchase
Common Stock. Citizens ownership of the Company's outstanding shares on a
fully diluted basis is approximately 58.1% at December 31, 1996.
(14) Employee Benefit Plan
Effective December 1996, the Company established a 401(k) salary deferral
plan (the "401(k) Plan") on behalf of its U.S. employees. The 401(k) Plan
is a qualified defined contribution plan and allows participating
employees to defer up to 15% of their compensation, subject to certain
limitations. Under the 401(k) Plan, the Company has the discretion to
match contributions made by the employee. No matching contributions were
made by the Company in 1996.
F-26
<PAGE>
(15) Investment in Pilistav
The Company initially acquired an 82% ownership interest in Pilistav in
1992. During 1993, as a result of a recapitalization and additional
investment in Pilistav, the Company's interest was reduced to 75.25%.
During 1994, Teleconstruct invested $930,000 in Pilistav increasing its
investment to 68%. At December 31, 1994, the Company accounted for
Pilistav using the equity method and the investment in Pilistav was
carried at $300,000, which appoximated the equity in fair value of the
underlying net assets. In March 1995, the Company acquired
Teleconstruct's ownership interest in Pilistav for $919,000 raising its
ownership interest to 94%. The Company reconsolidated the accounts of
Pilistav from April 1, 1995.
Pilistav had applied for but did not receive a concession to own and
operate a local telephone network in Hungary and as such had no
operations. During 1994, as a result of Pilistav not receiving a
concession to provide telephone service, approximately $500,000 of
planning and design costs were charged to operations. In the second
quarter of 1995, subsequent to the Company acquiring Teleconstruct's
interest in Pilistav, an additional writedown of $562,000 was recorded to
reduce the net assets of Pilistav to the estimated fair value of
approximately $75,000. In March 1996, the Company sold the assets of
Pilistav to MATAV for approximately $220,000.
(16) Investment in Affiliate
At December 31, 1996, the Company's investment in affiliate consisted
principally of a 49% interest in Central Europe Consult ("CEC"). The
majority stockholder in CEC is Teleconstruct.
In April, 1996, the Company sold its 30% interest in Elso. Elso has a
concession to operate a local telephone exchange network in a suburb of
Budapest, Hungary, and is serving approximately 1,000 lines. At December
31, 1994, the Company wrote down the carrying value of its investment in
Elso by $700,000 to its net realizable value of $271,000. At December 31,
1995 and 1994, the investment in Elso was carried at $82,000 and
$271,000, respectively, which approximated the equity in the fair value
of the underlying net assets of Elso at those dates. In 1996, the Company
sold its investment in Elso for $130,000 in cash, recognizing a gain of
$48,000.
The Company's share of losses of affiliates of $0, $248,000 and $71,000
for 1996, 1995 and 1994, respectively, has been included in other
expenses in the consolidated statements of operations.
(17) Gain on Sale of Subsidiaries' Stock
On November 16, 1994, the Company reduced its interest in KNC and Raba-
Com by selling 4.8% interest in the two subsidiaries to the Danish
Investment Fund for Central and Eastern Europe (the "Danish Fund") for
$1,464,155, representing 150% of par value, for a gain of $580,173 which
is included in "Other, net" in the accompanying consolidated statement of
operations.
F-27
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP.
Index to Exhibits
Exhibit
No. Description
10.91 Non-Employee Director Stock Option Plan dated as of February 6, 1997
10.92 Amended and Restated Employment Agreement Between the Registrant and
Richard P. Halka dated as of January 9, 1997
10.93 Stock Option Agreement Between the Registrant and James G. Morrison
dated as of March 13, 1997
10.94 Stock Option Agreement Between the Registrant and Andrew E. Nicholson
dated as of March 13, 1997
10.95 Stock Option Agreement Between the Registrant and Daniel R. Vaughn dated
as of March 13, 1997
23.1 Consent of KPMG Peat Marwick LLP, certified public accountants
23.2 Consent of BDO Seidman, LLP, certified public accountants
27.1 Financial Data Schedule
Exhibit 10.91
HUNGARIAN TELEPHONE AND CABLE CORP.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. This Non-Employee Director Stock Option Plan (the "Plan") is
intended to promote the interests of Hungarian Telephone and Cable Corp. (the
"Company") by providing an inducement to attract and retain the services of
qualified persons who are neither employees nor officers of the Company to serve
as members of the Board of Directors and by demonstrating the Company's
appreciation for their service on the Company's Board of Directors.
2. Options to be Granted. Under the Plan, Options ("Options") are granted that
give an optionee ("Optionee") the right for a specified time period to purchase
a specified number of shares of Common Stock, par value $.001 per share, of the
Company (the "Common Stock"). The Option price is determined in each instance in
accordance with the terms of this Plan.
3. Available Shares. The total number of shares of Common Stock for which
Options may be granted shall not exceed 250,000 shares (the "Option Shares"),
subject to adjustment in accordance with Section 13 hereof. Shares subject to
the Plan are authorized but unissued shares or shares that were once issued and
subsequently reacquired by the Company. If any Options granted under this Plan
are surrendered before exercise or lapse without exercise, in whole or in part,
the shares reserved therefor shall revert to the Option pool and again become
available for grant under the Plan.
4. Administration. The Plan shall be administered by the Compensation - Stock
Option Committee or its successor of the Board of Directors of the Company (the
"Committee"). The Committee shall, subject to the provisions of the Plan, have
the power to construe and interpret the Plan, to resolve all issues thereunder,
and to adopt and amend such rules and regulations for the administration of the
Plan as it may deem desirable.
5. Option Agreement. Each Option granted under the provisions of this Plan shall
be evidenced by an Option Agreement, in such form as may be approved by the
Committee, which Option Agreement shall be duly executed and delivered on behalf
of the Company and by the Optionee to whom such Option is granted. The Option
Agreement shall contain such terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Committee.
6. Eligibility and Limitations. Options may be granted pursuant to the Plan only
to members of the Board of Directors of the Company who are not officers or
employees of the Company or any of its subsidiaries or any of its affiliates
(10% or greater shareholders of the Company or any of its subsidiaries)
("Non-Employee Directors").
7. Exercise Price. The exercise price for the purchase of stock covered by an
Option granted pursuant to the Plan shall be 100% of the fair market of such
shares on the day the Option is granted. The exercise price will be subject to
adjustment in accordance with the provisions of Section 13 hereof. For purposes
of the Plan, the "fair market value" of a share of Common Stock means the
average of the high and low quoted sales price on the date in question (or, if
there is no reported sale on such date, on the last preceding date on which any
reported sale occurred) of a share on the American Stock Exchange, or, if the
shares are not listed or admitted to trading on such Exchange, on the principal
United States securities exchange registered under the Securities Act of 1934,
as amended, on which the shares are listed or admitted to trading, or if the
shares are not listed or admitted to trading on any such exchange, the mean
between the closing high bid and low asked quotations with respect to a share on
such date on the National Association of Securities Dealers, Inc. Automated
Quotations System, or any similar system then in use, or if no such quotations
are available, the fair market value on such date of a share as the Committee
shall determine.
-1-
<PAGE>
8. Grant of Option Awards.
(a) Initial Grant of Options. Each Non-Employee Director of the Company
who is serving in such capacity on (i) the date of the adoption of this Plan by
the Board of Directors of the Company and (ii) the date of the 1997 Annual
Meeting of Stockholders of the Company, is hereby granted without further action
by the Board of Directors or the Committee, an Option to purchase 5,000 shares
of Common Stock on the date of the 1997 Annual Meeting of Stockholders of the
Company, which Options shall vest in the Optionee on the date of such grant.
(b) Automatic Annual Grant of Options. As of the date each year that
any Non-Employee Director is elected or re-elected to serve as a director by the
stockholders of the Company at the Annual Meeting of Stockholders of the Company
(beginning with the 1997 Annual Meeting of Stockholders), each Non-Employee
Director shall be automatically granted without further action by the Board of
Directors or the Committee an Option to purchase 5,000 shares of Common Stock.
Each Non-Employee Director who is appointed (or elected) to the Board of
Directors after any Annual Meeting of Stockholders of the Company but prior to
the next following Annual Meeting of Stockholders of the Company shall be
automatically granted, on the date of the first such appointment (or election)
and without further action by the Board of Directors or the Committee, an Option
to purchase a pro-rata share of 5,000 shares of Common Stock as determined by
the Committee based on the ratio of the number of days actually served from the
date of appointment (or election) to the date of the next Annual Meeting of
Stockholders rounded to the nearest whole share. If on any date for the grant of
Options pursuant to the Plan the aggregate number of shares then remaining
available for Options under the Plan is less than the number of Option Shares
which the Plan provides shall be granted on such date, Options shall be granted
on the following basis: first, ratably (to the nearest whole share) to any
persons entitled to receive on such date a grant pursuant to the first sentence
of this Section 8(b), up to a maximum grant of 1,000 Option Shares per Optionee;
and second, ratably (to the nearest whole share) to any person entitled to
receive on such date a grant pursuant to the second sentence of this Section
8(b), up to a maximum grant of 1,000 Option Shares per Optionee.
9. Period of Options. The Options granted hereunder shall expire on a date which
is ten years after the date of grant of the Options. The Plan shall terminate
when all Options granted hereunder have expired or terminated.
10. Exercise of Options. Subject to the terms and conditions of the Plan and the
Option Agreement, each Option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to the
Company by mail or in person addressed to Hungarian Telephone and Cable Corp.,
100 First Stamford Place, Stamford, CT 06902, stating the number of shares with
respect to which the Option is being exercised, accompanied by payment in full
of the exercise price for such shares. Upon notification from the Company, the
Transfer Agent shall, on behalf of the Company, prepare a certificate or
certificates representing the shares acquired pursuant to exercise of the
Option, shall register the Optionee as the owner of such shares on the books of
the Company and shall cause the fully executed certificate(s) representing such
shares to be delivered to the Optionee as soon as practicable after payment of
the Option price in full. The Optionee shall not have any rights of a
stockholder with respect to the shares covered by the Option, except through the
due exercise of the Option.
11. Vesting of Shares and Non-Transferability of Option
(a) Vesting. Each automatic annual grant of any Option granted under
the Plan pursuant to Section 8(b) shall vest in the Optionee, and thus become
exercisable, at the earlier of (x) the date of the next Annual Meeting of the
Stockholders of the Company, or (y) one year from the date of such annual grant.
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If either of the following events shall occur, all Options theretofore
granted and not fully exercisable shall become exercisable in full upon the
happening of such event and shall remain so exercisable for a period of 60 days
following such date, after which they shall revert to being exercisable in
accordance with their terms (provided that no Option which has previously been
exercised or has expired or otherwise terminated shall become exercisable):
(i) a tender offer or exchange offer for shares of Common
Stock (other than such an offer by the Company) is commenced, or
(ii) the stockholders of the Company approve an agreement
providing either for a transaction in which the Company will cease to
be an independent publicly-owned company or for a sale or disposition
of all or substantially all the assets of the Company.
(b) Legend on Certificates. The certificates representing shares issued
upon exercise of an Option shall carry such appropriate legends, and such
written instructions shall be given to the Company's Transfer Agent, as may be
deemed necessary or advisable by counsel to the Company in order to comply with
the requirements of the Securities Act of 1933 or any federal, state or local
securities laws.
(c) Non-Transferability. Any Option granted pursuant to the Plan shall
not be assignable or transferable other than by will or the laws of descent and
distribution, and shall be exercisable during the Optionee's lifetime only by
the Optionee.
12. Termination of Options.
(a) In the event an Optionee ceases to be a member of the Board of
Directors of the Company for any reason other than death or disability, any
Options not then exercisable shall immediately terminate and become void. Any
Options which are exercisable, but which have not been exercised, at the time
the Optionee so ceases to be a member of the Board of Directors may be exercised
by the Optionee within a period of three months following the date the Optionee
so ceases to be a member of the Board of Directors, but in no event later than
the expiration date of the Option.
(b) In the event of the death of an Optionee while a member of the
Board of Directors of the Company or during the three-month period referred to
in Section 12(a) hereof, any Options, whether or not exercisable at the time of
death, may be exercised (by the Optionee's personal representative, heir or
legatee) during the period ending one year after the date of such death, but in
no event later than the expiration date of the Option. Following the death of
any person to whom an Option was granted under the Plan, the Committee may, as
an alternative means of settlement of such Option, elect to pay to the person to
whom such Option is transferred by will or by the laws of descent and
distribution the amount by which the fair market value per share on the date of
exercise of such Option shall exceed the exercise price of such Option,
multiplied by the number of shares to which such Option is properly exercised.
Any such settlement of an Option shall be considered an exercise of such Option
for all purposes of the Plan.
13. Adjustments Upon Changes in Capitalization and Other Matters. In the event
that the outstanding shares of Common Stock are changed into or exchanged for a
different number or kind of shares of other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation,
recapitalization or reclassification, or in the event of a stock split,
combination of shares or dividends payable in capital stock, automatic
adjustment shall be made in the number and kind of shares as to which
outstanding Options or portions thereof then unexercised shall be exercisable
and in the available shares set forth in Section 3 hereof, to the end that the
proportionate interest of the Optionee shall be maintained as before the
occurrence of such event. Such adjustment in outstanding Options shall be made
without charge in the total price applicable to the unexercised portion of such
Options and with a corresponding adjustment in the exercise price per share.
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If an Option hereunder shall be assumed, or a new Option substituted therefor,
as a result of sale of the Company, whether by a corporate merger, consolidation
or sale of property or stock, then membership on the Board of Directors of such
assuming or substituting corporation, or a parent corporation thereof, shall be
considered for purposes of the Plan to be membership on the Board of Directors
of the Company.
14. Delivery and Registration of Stock. The Company's obligations to deliver
shares of Common Stock upon exercise of an Option shall, if the Committee so
requests, be conditioned upon the receipt of a representation as to the
investment intention of the Optionee to whom such shares are to be delivered, in
such form as the Committee shall determine to be necessary or advisable to
comply with the provision of the Securities Act of 1933, as amended, or any
other Federal, state or local securities laws. It may be provided that any
representation requirements shall become inoperative upon a registration of the
shares or other action eliminating the necessity of such representation under
such Securities Act or other securities laws. The Company shall not be required
to deliver any shares under the Plan prior to (i) the admission of such shares
to listing on a stock exchange on which shares may then be listed, and (ii) the
completion of such registration or other qualification of such shares under any
state or Federal law, rule or regulation, as the Committee shall determine to be
necessary or advisable.
15. Withholding Tax. Where an Optionee or other person is entitled to receive
shares pursuant to the exercise of an Option pursuant to the Plan, the Company
shall have the right in its sole discretion to require the Optionee or such
other person to pay the Company the amount of any taxes which the Company is
required to withhold with respect to such shares.
16. Effectiveness. Anything in the Plan to the contrary notwithstanding, the
effectiveness of the Plan and of the grant of all Options hereunder is in all
respects subject to, and the Plan and Options granted under it shall be of no
force and effect unless and until, and no Option granted hereunder shall in any
way vest or become exercisable in any respect unless and until, the approval of
the Plan by the Company's Board of Directors.
17. Compliance with Section 16. This Plan is intended to comply with Rule 16
promulgated under the Exchange Act ("Rule 16b-3") to the fullest extent
possible. Any provision of the Plan which is inconsistent with said Rule shall,
to the extent of such inconsistency, be inoperative and shall not affect the
validity of the remaining provisions of the Plan.
18. Termination and Amendment of Plan. The Board may at any time terminate the
Plan or make such modification or amendment thereof as it deems advisable.
Termination or any modification or amendment of the Plan shall not, without the
consent of an Optionee, affect his or her rights under an Option previously
granted.
[Adopted as of February 6, 1997]
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Exhibit 10.92
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (this "Agreement") is
made and entered into as of this 9th day of January, 1997, by and between
Hungarian Telephone and Cable Corp., a corporation organized under the laws of
the State of Delaware, United States of America (the "Company") and Richard P.
Halka ("Executive").
RECITALS:
A. The Company and Executive are parties to that certain Employment
Agreement, dated December 19, 1995 ("1995 Agreement").
B. On July 26, 1996, Executive's position with the Company was changed
from that of Assistant Controller to that of Controller, thereby significantly
increasing Executive's duties and responsibilities.
C. The parties desire to amend and restate the 1995 Agreement to set
forth the terms and conditions under which Executive shall continue to serve in
the above-stated capacity of Controller of the Company.
NOW, THEREFORE, in consideration of the respective covenants and
agreements of the parties set forth herein, it is agreed as follows:
1. Employment and Duties. The Company agrees to employ Executive and
Executive accepts the employment, subject to the terms and conditions herein, to
serve as Controller of the Company. Executive shall report and be responsible
solely to the President and Chief Executive Officer of the Company. Executive's
duties and responsibilities shall include the duties and responsibilities as set
forth in the Company's bylaws from time to time in effect and such other duties
and responsibilities as the President and Chief Executive Officer may from time
to time reasonably assign Executive, in all cases consistent with Executive's
position. Executive shall perform faithfully the executive duties assigned to
him to the best of his ability.
2. Place of Employment. Executive shall be employed at the Company's
offices located at Kiralyhago u.2, Budapest, Hungary.
3. Term. The term of employment under this Agreement shall continue
through December 31, 1999, unless earlier terminated in accordance with the
terms of this Agreement (the "Employment Period").
4. Effective Date. The effective date of this Agreement is July 26,
1996, the date on which Executive was elected Controller by the Board of
Directors of the Company (the "Board").
5. Annual Salary. Executive will receive an annual base salary of One
Hundred Forty Thousand Dollars ($140,000), payable in equal monthly installments
on the last day of each month. The Company shall be entitled to deduct or
withhold all taxes and charges which the Company may be required by law to
deduct or withhold therefrom. The Compensation and Stock Option Committee of the
Board (the "Compensation Committee") shall annually review Executive's base
salary in light of the performance of Executive and, if it finds Executive's
performance to be satisfactory, the Compensation Committee shall increase such
base salary by an amount it determines to be appropriate, but in no event shall
such increase be less than the annual change in the United States Consumer Price
Index for the most recently reported twelve (12) month period.
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6. Share Award. In consideration of the Executive's (i) past services
to the Company and (ii) delivery of the aggregate par value therefor, the
Company hereby sells and assigns Executive five thousand (5,000) shares (the
"Shares") of the Company's common stock, par value $.001, ("Common Stock"),
which will be registered with the United States Securities and Exchange
Commission (the "Commission") on Form S-8. Executive's rights to the Shares will
vest and certificates evidencing ownership of the Shares will be released
according to the following schedule, provided that if Executive has not
maintained continuous service with the Company from the date hereof until the
related vesting date (other than in circumstances set forth in Paragraphs 17(b)
and (c)) all as yet unvested Shares shall be forfeited and cancelled, so no
certificate(s) therefor shall be released to the Executive:
Release Date Shares released
October 10, 1997 5,000
Prior to the scheduled release date of any installment of Shares, such
unreleased Shares may not be sold, assigned, transferred, pledged, or otherwise
encumbered by Executive. Executive hereby grants the Company an option to
purchase such number of Shares released to Executive as shall be sufficient to
allow Executive to pay taxes due on the released Shares, provided such purchase
by the Company does not violate the Company's certificate of incorporation, its
bylaws or the Delaware General Corporation Law.
7. Annual Stock Options. Executive shall be entitled to receive an
award of options to purchase a target of fifteen thousand (15,000) shares of
Common Stock annually (the "Options") starting in 1997.
For the years 1997 through 1999, Executive will be entitled to
participate in the Company's 1992 Incentive Stock Option Plan, as amended (the
"ISO Plan"). Under the ISO Plan, Executive shall be entitled to receive an award
of options to purchase a target of fifteen thousand (15,000) shares of Common
Stock annually on terms to be established by the Compensation Committee. The
Compensation Committee shall establish such terms, including exercise price, by
March 31st of the year following the year in which such Options are
attributable. In any given year, Executive may receive an award that is less
than, equal to, or greater than the target award, depending upon the Company's
performance measured against annual financial targets agreed to by and between
Executive and the Compensation Committee.
8. Annual Housing Allowance. Executive will receive an annual housing
allowance (the "Housing Allowance") of Thirty-Six Thousand Dollars ($36,000),
payable in equal monthly installments. The Compensation Committee shall review
the amount of the Housing Allowance on an annual basis, and may increase the
amount based on cost of living increases, if applicable.
9. Insurance. The Company will provide Executive, his spouse and his
minor dependents with health insurance coverage under a fully comprehensive
international scheme.
10. Automobile. The Company will provide Executive with an automobile
to be leased or purchased and maintained by the Company.
11. Annual Leave. Executive will be entitled to thirty (30) days annual
paid vacation and a home leave allowance of Five Thousand Dollars ($5,000).
12. Hungarian Taxes. The Company will reimburse Executive for all
Hungarian taxes, work permits, or other governmental assessments that relate to
his employment by the Company.
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13. Covenant Not to Compete. Executive hereby agrees that during the
term of this Agreement, he will not, either through any kind of ownership (other
than ownership of securities of a publicly held corporation of which Executive
owns less than five percent (5%) of any class of outstanding securities), or as
a director, officer, principal, agent, employee, employer, advisor, consultant,
co-partner, or in any individual or representative capacity whatever, either for
his own benefit or for the benefit of any other person, firm, or corporation,
without the prior written consent of a duly authorized officer of the Company,
compete with the Company by engaging in any act, including, but not limited to,
any of the following: (a) canvass, solicit, accept, or perform any type of work
performed by the Company for any "customer" (as hereinafter defined) of the
Company; (b) develop, design, market any services that may be sold by the
Company during the term of this Agreement; (c) request or advise any firm to
withdraw, curtail, or cancel its business with the Company; (d) give or attempt
to give any person, partnership, or corporation the right to solicit or canvass
any customer for the performance of services provided by the Company; and (e)
induce or attempt to influence any employee of the Company or any employee of
any customer to terminate his employment with the view toward competing with the
Company or any customer. As used herein, the term "customer" includes any of the
Company customers at any time during the term of this Agreement.
14. Confidential Information.
(a) Nondisclosure. Executive expressly covenants and agrees
that he will not during the term of this Agreement or at any time after
the termination hereof, irrespective of the time, manner, or cause of
termination, reveal, divulge, disclose, or communicate to any person,
firm, or corporation, other than authorized officers, directors, and
employees of the Company, in any manner whatsoever, any "confidential
information" (as hereinafter defined) of the Company that would be
inconsistent with the position held by Executive or the duties being
performed by Executive at the direction of the Company.
(b) Return of Confidential Information and Other Property. Upon
termination of this Agreement, Executive will surrender to the Company
all confidential information including, without limitation, all lists,
charts, schedules, reports, financial statements, books and records,
and all copies thereof, of the Company and all other property belonging
to the Company whatsoever. As used herein, "confidential information"
means information disclosed to or known by Executive as a consequence
of or through his employment for the Company, not generally known in
the business in which the Company is or may become engaged, about the
Company, its business, products and processes.
15. Breach of Covenant Not to Compete and Confidentiality Provision.
Executive agrees that a substantial violation on his part of any covenant
contained in Paragraphs 13 and 14 above will cause such damage to the Company as
will be irreparable and for that reason, Executive further agrees that the
Company shall be entitled as a matter of right, to an injunction out of any
court of competent jurisdiction, restraining any further violation of said
covenants by Executive, his employer, employees, partners, or agents. Such right
to injunction shall be cumulative and in addition to whatever other remedies the
Company may have, including, specifically, recovery of liquidated and additional
damages. Executive expressly acknowledges and agrees that the respective
covenants and agreements shall be construed in such a manner as to be
enforceable under applicable laws if a more limited scope of time is determined
by a court or competent jurisdiction to be required.
16. Indemnification. The Company agrees that if Executive is made a
party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that he is or was a director, officer or employee of the
Company, Executive shall be indemnified and held harmless by the Company to the
fullest extent legally permitted or authorized by the Company's certificate of
incorporation or bylaws or resolutions of the Board or, if greater, by the laws
of the State of Delaware, against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by Executive in connection therewith. The Company agrees to
continue and maintain a directors' and officers' liability insurance policy
covering Executive to the extent the Company provides such coverage for any of
its other executive officers.
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17. Termination.
(a) Reasons for Termination. The employment of Executive with
the Company shall terminate automatically upon Executive's death and
may be terminated by written notice (i) by the Company, upon
Executive's disability which renders him unable to perform his usual
and customary duties for a period of 180 consecutive days; (ii) by the
Company, with or without "cause" (as hereinafter defined); (iii) by
Executive, if he suffers a demotion or a lower status with the Company
other than for cause; or (iv) by Executive, in the event of a "change
in control" (as hereinafter defined), whether or not Executive suffers
a demotion or a lower status with the Company. For purposes of this
Agreement, "cause" shall mean (i) a failure by Executive to
substantially perform Executive's reasonable and legal duties and as
defined by goals established by the Board and agreed to by Executive,
other than a failure resulting from Executive's complete or partial
incapacity due to physical or mental illness or impairment, (ii)a
willful act by Executive that constitutes gross misconduct and that is
injurious to the Company, (iii) a willful breach by Executive of a
material provision of this Agreement, or (iv) a material and willful
violation of a federal or state law or regulation applicable to
the business of the Company. No act, or failure to act, by Executive
shall be considered "willful" unless committed without good faith and
without a reasonable belief that the act or omission was in the
Company's best interest. For purposes of this Agreement, a "change
of control" shall be deemed to have occurred if (1) any "person" (as
such term is used in Sections 13(d) and 14(d)of the U.S. Securities and
Exchange Act (the "Exchange Act")), other than Citizens Utilities
Company or its affiliates (together, "Citizens"), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing
thirty-five percent (35%) or more of the combined voting power (with
respect to the election of directors) of the Company's then outstanding
securities; (2) at any time after the execution of this Agreement, a
majority of the Board shall be replaced, over a two-year period, from
the directors who constituted the Board at the beginning of such
period, and such replacement shall not have been approved by either
two-thirds (2/3) of the Board as constituted at the beginning of such
period or Citizens; (3) the consummation of a merger or consolidation
of the Company with or into any other corporation (other than
Citizens), other than a merger or consolidation which would result in
the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more
than sixty-five percent (65%) of the combined voting power (with
respect to the election of directors) of the securities of the Company
or of such surviving entity outstanding immediately after such merger
or consolidation; or (4) the consummation of a plan of complete
liquidation of the Company or of an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
business or assets.
(b) Termination Benefits. If Executive's employment is
terminated prior to the expiration of the term of this Agreement, for
any reason noted above (other than for "cause"), Executive will be
entitled to receive the following benefits as severance (the "Severance
Benefits"):
(i) a lump sum payment equal to nine (9) months'
salary and nine (9) months' Housing Allowance at
Executive's then-current annual salary and Housing
Allowance levels;
(ii) payment of any salary, expenses, allowances and
benefits accrued by Executive up to the date of the
termination;
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(iii) the immediate vesting and release of any
unvested unreleased portion of the shares of Common
Stock granted hereunder, without restriction; and
(iv) a pro-rata share of stock options, if any, that
are awardable under any incentive stock option plan
(in addition to the ISO Plan) established by the
Company.
(c) Benefits in the Event of Executive's Death. Except as set
forth below, if Executive's employment terminates automatically in the
event of Executive's death, Executive's estate will be entitled to
receive the Severance Benefits. The Company may, at its option,
maintain a life insurance policy for Executive in an amount deemed to
be appropriate by the Board and designating Executive's estate as the
beneficiary. If the Company elects to maintain such life insurance and
the policy amount equals or exceeds the value of the Severance Benefits
(as determined by the Board), Executive's estate shall only be entitled
to receive the proceeds of the insurance policy. If the policy amount
is less than the value of the Severance Benefits, the Company shall pay
to Executive's estate an amount equal to the difference between the
value of the Severance Benefits and the amount to which the estate
would be entitled under the insurance policy. The Company shall
determine the value of the Severance Benefits as soon as practicable
after Executive's death but in no event later than thirty (30) days
thereafter.
(d) Date of Termination; Provision of Severance Benefits. The
date of termination of Executive's employment by the Company under this
Paragraph 17 shall be one (1) month after receipt by Executive of
written notice of termination, provided, however, that if the
termination is for cause the date of termination shall be the date
specified in the notice of termination or if no date is specified then
the date on which such notice is received by the Executive. The date of
termination by Executive under this Paragraph 17 shall be one (1) month
after receipt by the Company of written notice of termination. All
benefits to which Executive is entitled under subparagraph (b) hereof
shall be provided on the date of termination. In the case of automatic
termination in the event of Executive's death, the benefits shall be
provided no later than thirty (30) days from the date of Executive's
death.
18. Miscellaneous.
(a) Rights Under Plans and Programs. Notwithstanding anything
in this Agreement to the contrary no provision of this Agreement is
intended, nor shall it be construed, to reduce or in any way restrict
any benefit to which Executive may be entitled under any agreement,
plan, arrangement, or program providing benefits for Executive.
(b) Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter of
this Agreement and supersedes all prior written and oral and all
contemporaneous oral agreements and understandings with respect to the
subject matter of this Agreement.
(c) Notices. Any notice or request to be given hereunder by
any party to the other shall be in writing and shall be deemed to have
been duly given on the next business day after the same is sent, if
delivered personally or sent by telecopy or overnight delivery, or five
calendar days after the same is sent, if sent by registered or
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certified mail, return receipt requested, postage prepaid, as set forth
below, or to such other persons or addresses as may be designated in
writing in accordance with the terms hereof by the party to receive
such notice.
If to the Company, to:
Hungarian Telephone and Cable Corp.
100 First Stamford Place, Suite 204
Stamford, CT 06902
Facsimile No.: 203/348-9128
Attn: General Counsel
with a required copy to:
Fleischman and Walsh, L.L.P.
1400 Sixteenth Street, N.W.
Washington, D.C. 20036
Facsimile No.: 202/745-0916
Attn: Jeffry L. Hardin
If to Executive, to:
the address or facsimile number
for Executive as set forth
in the Company's records
with a required copy to:
Covington and Burling
1201 Pennsylvania Ave., N.W.
Washington, D.C. 20044
Facsimile No.: 202/622-6291
Attn: Paul Berman, Esq.
(d) Governing Law; Forum; Consent to Jurisdiction. This
Agreement shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to the principles
of conflict of laws thereof. Each of the parties to this Agreement
hereby irrevocably and unconditionally (i) consents to submit to the
exclusive jurisdiction of the courts of the State of New York for any
proceeding arising in connection with this Agreement (and each such
party agrees not to commence any such proceeding, except in such
courts), (ii) to the extent such party is not a resident of the State
of New York, agrees to appoint an agent in the State of New York as
such party's agent for acceptance of legal process in any such
proceeding against such party with the same legal force and validity as
if served upon such party personally within the State of New York, and
to notify promptly each other party hereto of the name and address of
such agent, (iii) waives any objection to the laying of venue of any
such proceeding in the courts of the State of New York, and (iv)
waives, and agrees not to plead or to make, any claim that any such
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proceeding brought in any court of the State of New York has been
brought in an improper or otherwise inconvenient forum.
(e) Counterparts. This Agreement may be executed in one or
more counterparts, and each of such counterparts shall for all purposes
be deemed to be an original, but all such counterparts together shall
constitute but one instrument.
(f) Executive's Successors. This Agreement and all rights of
Executive hereunder shall inure to the benefit of, and be enforceable
by, Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
(g) Assignment. Neither this Agreement, nor the rights and
obligations hereunder, may be assigned by either party without the
prior written consent of the other party.
(h) Parties in Interest. Nothing in this Agreement, expressed
or implied, is intended to confer on any person other than the parties
hereto or their respective successors or assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
(i) Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
(j) Extension; Waiver. Either party to this Agreement may (a)
extend the time for the performance of any of the obligations or other
acts of the other party to this Agreement or (b) waive compliance by
the other party with any of the agreements or conditions contained
herein or any breach thereof. Any agreement on the part of a party to
any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
(k) Severability. The provisions of this Agreement are
severable and, if any provision of this Agreement is determined to be
invalid or unenforceable by any court of competent jurisdiction, such
provision (in any other jurisdiction) and the other provisions hereof
(in any jurisdiction) shall not be rendered otherwise invalid or
unenforceable and such provision shall be deemed to be modified to the
extent necessary to render it legal, valid and enforceable, and if no
such modification shall render it legal, valid and enforceable, then
this Agreement shall be construed as if not containing the provision
held to be invalid, and the rights and obligations of the parties shall
be construed and enforced accordingly.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
HUNGARIAN TELEPHONE AND CABLE CORP.
By: /s/ James G. Morrison
James G. Morrison
President and Chief Executive Officer
RICHARD P. HALKA
/s/ Richard P. Halka
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Exhibit 10.93
HUNGARIAN TELEPHONE AND CABLE CORP.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Agreement, made and entered into as of March 13, 1997 by and
between Hungarian Telephone and Cable Corp., a corporation organized and
existing under the laws of Delaware (hereinafter, together with the
subsidiaries, called the "Company"), and James G. Morrison (hereinafter called
the "Optionee").
WHEREAS, Optionee is the Company's President and Chief Executive
Officer pursuant to an Amended and Restated Employment Agreement dated as of
October 17, 1996 ("Employment Agreement");
WHEREAS, the Employment Agreement contemplates a grant of an option for
services performed in 1996 by the Optionee and the Company desires to grant such
option;
WHEREAS, the Compensation-Stock Option Committee (the "Committee") of
the Board of Directors of the Company by resolutions adopted as of December 9,
1996, and the Board of Directors of the Company by resolutions adopted at a
meeting on December 9, 1996, authorized the granting of options to Optionee
pursuant to the terms of the Company's 1992 Incentive Stock Option Plan, as
amended (the "Plan").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, it is understood and agreed:
1. Option to Purchase. The Company hereby grants to Optionee the
irrevocable right and option to purchase from the Company 30,000 shares of the
Company's Common Stock, $.001 par value per share (the "Common Stock"), upon the
terms and conditions hereinafter set forth (the "Option"). The Option is
intended to be a Non-Qualified Stock Option as defined in the Plan
2. Purchase Price. The purchase price payable to the Company for the
shares to be acquired pursuant to the exercise of the Option shall be $8.75 per
share, as determined by the Employment Agreement subject, however, to adjustment
as provided in Section 10 of the Plan).
3. Manner of Exercise of Option.
(a) Optionee can exercise the Option to purchase on a cumulative basis
all or any part of the number of shares subject to the Option, and such right
shall be a continuing one during the term of the Option period until the number
of shares subject to the Option stated in paragraph 1 have been purchased;
(b) If the Option shall be exercised by the legal representative of
Optionee or by a person who acquired the Option by bequest or inheritance or by
reason of the death of Optionee, within one year following Optionee's death,
written notice of such exercise shall be accompanied by a certified copy of
letters testamentary or equivalent proof of the right of such legal
representative or other person to exercise the Option.
4. Subject to Plan. The Option and its exercise are subject to the
Plan, but the terms of the Plan shall not be considered an enlargement of any
benefits under this Agreement. In addition, the Option is subject to any rules
promulgated pursuant to the Plan by the Committee or the Board of Directors of
the Company.
5. Basic Term of Option. The term of the Option shall be for a
period of 5 years from April 1, 1997 through March 31, 2002, subject to earlier
termination as provided herein and in the Plan.
-1-
<PAGE>
6. Restrictions on Exercise. This Option may be exercised only with
respect to full shares and no fractional share of Common Stock shall be issued.
7. Notice of Exercise of Option. This Option shall be exercised in
whole or in part by written notice to the Company addressed to the General
Counsel, or such person as the Committee may designate, at the principal United
States office of the Company, such notice to be delivered either personally or
by registered or certified mail, specifying the number of shares to be purchased
and specifying a business day not more than fifteen (15) days from the date such
notice is given for the payment of the purchase price against delivery of the
shares being purchased (the "Exercise Date"). Such notice shall state the number
of shares Optionee (or such other person as may be exercising the right to
purchase hereunder) elects to purchase under this Option at such time of
exercise (not exceeding the maximum number of shares subject to purchase
hereunder, less the number of shares previously acquired pursuant to this
Option). Payment for shares purchased pursuant to the exercise of the Option, or
any installment thereof, must be made in cash in United States dollars.
8. Purchase for Investment. Except as hereafter provided, Optionee
shall, upon any exercise of the Option, execute and deliver to the Company a
written statement, in form satisfactory to the Company, in which Optionee
represents and warrants that Optionee is purchasing or acquiring the shares of
Common Stock acquired under the Option for Optionee's own account, for
investment only and not with a view to the resale or distribution thereof, and
agrees that any subsequent offer for sale or sale or distribution of any such
shares of Common Stock shall be made only pursuant to either (a) a Registration
Statement on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act"), which Registration Statement has become effective and is
current with regard to the shares of Common Stock being offered or sold, or (b)
a specific exemption from the registration requirements of the Securities Act,
but in claiming such exemption the holder shall, if so requested by the Company,
prior to any offer for sale or sale of such shares of Common Stock, obtain a
prior favorable written opinion, in form and substance satisfactory to the
Company, from counsel for or approved by the Company, as to the applicability of
such exemption thereto. The foregoing requirements shall not apply to (i)
issuances by the Company, upon exercise of the Option, so long as the shares of
Common Stock being issued are registered under the Securities Act and a
prospectus in respect thereof is current or (ii) reofferings of shares of Common
Stock by affiliates of the Company as defined in Rule 405 or any successor rule
or regulation promulgated under the Securities Act if the shares of Common Stock
being reoffered are registered under the Securities Act and a prospectus in
respect thereof is current.
9. Rights as a Stockholder. After receipt of the notice of exercise and
the purchase price as provided in paragraph 7, the Company shall cause to be
issued and delivered such certificates in such denominations as Optionee may
direct, representing the number of fully paid, nonassessable shares of Common
Stock so purchased, registered in the name of Optionee, but Optionee shall have
no right as a stockholder with respect to any shares covered by this Option
until the issuance of such stock certificates, and no adjustment shall be made
for dividends or other rights for which the record date is prior to the time
such stock certificates are issued except as may be otherwise provided for in
the Plan. The Company agrees to promptly seek all consents of regulatory bodies
and other governmental agencies as may be necessary to issue the Common Stock so
purchased by Optionee. All stock so purchased shall be issued by the later of:
(i) 20 days after the payment of the purchase price; or (ii) five business days
after the receipt of any and all regulatory and governmental consents referred
to in the preceding sentence of this paragraph 9.
10. Transfer of Option. This Option cannot be transferred by Optionee,
whether by operation of law or otherwise, other than by will or the laws of
descent and distribution or by a qualified domestic relations order, and can be
exercised during Optionee's lifetime only by Optionee.
-2-
<PAGE>
11. Termination of Employment Except Upon Death. In the event that
Optionee shall cease to be employed by the Company or any of its subsidiaries
(whether as an employee, officer or consultant) for any reason other than his
death, Optionee shall have the right (subject to the restrictions set forth in
Section 7(f) of the Plan) to exercise the Option as to any shares still subject
to the Option at any time within three months after such termination of
employment (twelve months if termination was due to Disability or Retirement),
to the extent that, on the day preceding the date of termination of employment,
the Option had not previously been exercised in full. If however, during the
five-year term of the Option, the Employee ceases to be employed by the Company
as an employee or officer subsequent to the termination of his Employment
Agreement and the Option had not previously been exercised in full, the Company
agrees to retain the Optionee as a non-paid Consultant through March 31, 2002
unless the Company and Employee have otherwise agreed on a paid consulting
position to cover such period.
12. Death of Optionee. If Optionee shall die while in the employ of the
Company and shall not have fully exercised the Option, an Option may be
exercised in full (subject to the restrictions set forth in Section 7(f) of the
Plan), to the extent it had not previously been exercised, at any time within
twelve (12) months after the Optionee's death, by the executors or
administrators of his estate or by any person or persons who shall have acquired
the Option directly from the Optionee by bequest or inheritance.
If the Optionee shall die within three (3) months after his employment
(whether as an employee, consultant or officer) with the Company terminated and
shall not have fully exercised the Option, an Option may be exercised (subject
to the limitations on exercisability set forth in Subsection 7(f) of the Plan)
to the extent that, at the date of termination of employment, the Optionee's
right to exercise such Option had accrued pursuant to the terms of the
applicable option agreement and had not previously been exercised, at any time
within twelve months after the Optionee's death, by the executors or
administrators of the Optionee's estate or by any person or persons who shall
have acquired the Option directly from the Optionee by bequest or inheritance.
13. Right to Terminate Employment. Neither this Agreement nor the
Option shall impose any obligations on the Company or any subsidiary corporation
thereof to continue the employment of any Optionee or impose any obligation on
the part of the Optionee to remain in the employ of the Company. All such
employment matters shall be governed by the Employment Agreement.
14. Approvals. Notwithstanding anything in this Agreement to the
contrary, this Agreement and the Option shall become null and void if any
governmental body having jurisdiction over the issuance of the Option or the
shares of Common Stock subject thereto shall not approve the issuance of the
Option or the issuance of the shares of Common Stock subject thereto.
15. Notices. Any notice to be given by the Optionee hereunder shall be
sent to the Company at its principal United States office, and any notice from
the Company to the Optionee shall be sent to the Optionee at the Company's
Budapest, Hungary office; all such notices shall be in writing and shall be
delivered in person or by registered or certified mail. Either party may change
the address to which notices are to be sent by notice in writing given to the
other in accordance with the terms hereof.
IN WITNESS WHEREOF, this Agreement is made as of the date first shown
herein above.
HUNGARIAN TELEPHONE AND
CABLE CORP.
By: /s/ Ronald E. Spears
Ronald E. Spears
Compensation-Stock
Option Committee
JAMES G. MORRISON
/s/ James G. Morrison
-3-
Exhibit 10.94
HUNGARIAN TELEPHONE AND CABLE CORP.
NON-QUALIFIED STOCK OPTION AGREEMENT
This Agreement, made and entered into as of March 13, 1997 by and
between Hungarian Telephone and Cable Corp., a corporation organized and
existing under the laws of Delaware (hereinafter, together with the
subsidiaries, called the "Company"), and Andrew E. Nicholson (hereinafter called
the "Optionee").
WHEREAS, Optionee is the Company's Senior Vice President-Finance
pursuant to an Amended and Restated Employment Agreement dated as of October 17,
1996 ("Employment Agreement");
WHEREAS, the Employment Agreement contemplates a grant of an option for
services performed in 1996 by the Optionee and the Company desires to grant such
option;
WHEREAS, the Compensation-Stock Option Committee (the "Committee") of
the Board of Directors of the Company by resolutions adopted as of December 9,
1996, and the Board of Directors of the Company by resolutions adopted at a
meeting on December 9, 1996, authorized the granting of options to Optionee
pursuant to the terms of the Company's 1992 Incentive Stock Option Plan, as
amended (the "Plan").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, it is understood and agreed:
1. Option to Purchase. The Company hereby grants to Optionee the
irrevocable right and option to purchase from the Company 20,000 shares of the
Company's Common Stock, $.001 par value per share (the "Common Stock"), upon the
terms and conditions hereinafter set forth (the "Option"). The Option is
intended to be a Non-Qualified Stock Option as defined in the Plan
2. Purchase Price. The purchase price payable to the Company for the
shares to be acquired pursuant to the exercise of the Option shall be $8.75 per
share, as determined by the Employment Agreement(subject, however, to adjustment
as provided in Section 10 of the Plan).
3. Manner of Exercise of Option.
(a) Optionee can exercise the Option to purchase on a cumulative basis
all or any part of the number of shares subject to the Option, and such right
shall be a continuing one during the term of the Option period until the number
of shares subject to the Option stated in paragraph 1 have been purchased;
(b) If the Option shall be exercised by the legal representative of
Optionee or by a person who acquired the Option by bequest or inheritance or by
reason of the death of Optionee, within one year following Optionee's death,
written notice of such exercise shall be accompanied by a certified copy of
letters testamentary or equivalent proof of the right of such legal
representative or other person to exercise the Option.
4. Subject to Plan. The Option and its exercise are subject to the
Plan, but the terms of the Plan shall not be considered an enlargement of any
benefits under this Agreement. In addition, the Option is subject to any
rules promulgated pursuant to the Plan by the Committee or the Board of
Directors of the Company.
-1-
<PAGE>
5. Basic Term of Option. The term of the Option shall be for a
period of 5 years from April 1, 1997 through March 31, 2002, subject to earlier
termination as provided herein and in the Plan. 6. Restrictions on Exercise.
This Option may be exercised only with respect to full shares and no fractional
share of Common Stock shall be issued.
7. Notice of Exercise of Option. This Option shall be exercised in
whole or in part by written notice to the Company addressed to the General
Counsel, or such person as the Committee may designate, at the principal United
States office of the Company, such notice to be delivered either personally or
by registered or certified mail, specifying the number of shares to be purchased
and specifying a business day not more than fifteen (15) days from the date such
notice is given for the payment of the purchase price against delivery of the
shares being purchased (the "Exercise Date"). Such notice shall state the number
of shares Optionee (or such other person as may be exercising the right to
purchase hereunder) elects to purchase under this Option at such time of
exercise (not exceeding the maximum number of shares subject to purchase
hereunder, less the number of shares previously acquired pursuant to this
Option). Payment for shares purchased pursuant to the exercise of the Option, or
any installment thereof, must be made in cash in United States dollars.
8. Purchase for Investment. Except as hereafter provided, Optionee
shall, upon any exercise of the Option, execute and deliver to the Company a
written statement, in form satisfactory to the Company, in which Optionee
represents and warrants that Optionee is purchasing or acquiring the shares of
Common Stock acquired under the Option for Optionee's own account, for
investment only and not with a view to the resale or distribution thereof, and
agrees that any subsequent offer for sale or sale or distribution of any such
shares of Common Stock shall be made only pursuant to either (a) a Registration
Statement on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act"), which Registration Statement has become effective and is
current with regard to the shares of Common Stock being offered or sold, or (b)
a specific exemption from the registration requirements of the Securities Act,
but in claiming such exemption the holder shall, if so requested by the Company,
prior to any offer for sale or sale of such shares of Common Stock, obtain a
prior favorable written opinion, in form and substance satisfactory to the
Company, from counsel for or approved by the Company, as to the applicability of
such exemption thereto. The foregoing requirements shall not apply to (i)
issuances by the Company, upon exercise of the Option, so long as the shares of
Common Stock being issued are registered under the Securities Act and a
prospectus in respect thereof is current or (ii) reofferings of shares of Common
Stock by affiliates of the Company as defined in Rule 405 or any successor rule
or regulation promulgated under the Securities Act if the shares of Common Stock
being reoffered are registered under the Securities Act and a prospectus in
respect thereof is current.
9. Rights as a Stockholder. After receipt of the notice of exercise and
the purchase price as provided in paragraph 7, the Company shall cause to be
issued and delivered such certificates in such denominations as Optionee may
direct, representing the number of fully paid, nonassessable shares of Common
Stock so purchased, registered in the name of Optionee, but Optionee shall have
no right as a stockholder with respect to any shares covered by this Option
until the issuance of such stock certificates, and no adjustment shall be made
for dividends or other rights for which the record date is prior to the time
such stock certificates are issued except as may be otherwise provided for in
the Plan. The Company agrees to promptly seek all consents of regulatory bodies
and other governmental agencies as may be necessary to issue the Common Stock so
purchased by Optionee. All stock so purchased shall be issued by the later of:
(i) 20 days after the payment of the purchase price; or (ii) five business days
after the receipt of any and all regulatory and governmental consents referred
to in the preceding sentence of this paragraph 9.
10. Transfer of Option. This Option cannot be transferred by Optionee,
whether by operation of law or otherwise, other than by will or the laws of
descent and distribution or by a qualified domestic relations order, and can be
exercised during Optionee's lifetime only by Optionee.
-2-
<PAGE>
11. Termination of Employment Except Upon Death. In the event that
Optionee shall cease to be employed by the Company or any of its subsidiaries
(whether as an employee, officer or consultant) for any reason other than his
death, Optionee shall have the right (subject to the restrictions set forth in
Section 7(f) of the Plan) to exercise the Option as to any shares still subject
to the Option at any time within three months after such termination of
employment (twelve months if termination was due to Disability or Retirement),
to the extent that, on the day preceding the date of termination of employment,
the Option had not previously been exercised in full. If however, during the
five-year term of the Option, the Employee ceases to be employed by the Company
as an employee or officer subsequent to the termination of his Employment
Agreement and the Option had not previously been exercised in full, the Company
agrees to retain the Optionee as a non-paid Consultant through March 31, 2002
unless the Company and Employee have otherwise agreed on a paid consulting
position to cover such period.
12. Death of Optionee. If Optionee shall die while in the employ of the
Company and shall not have fully exercised the Option, an Option may be
exercised in full (subject to the restrictions set forth in Section 7(f) of the
Plan), to the extent it had not previously been exercised, at any time within
twelve (12) months after the Optionee's death, by the executors or
administrators of his estate or by any person or persons who shall have acquired
the Option directly from the Optionee by bequest or inheritance.
If the Optionee shall die within three (3) months after his employment
(whether as an employee, consultant or officer) with the Company terminated and
shall not have fully exercised the Option, an Option may be exercised (subject
to the limitations on exercisability set forth in Subsection 7(f) of the Plan)
to the extent that, at the date of termination of employment, the Optionee's
right to exercise such Option had accrued pursuant to the terms of the
applicable option agreement and had not previously been exercised, at any time
within twelve months after the Optionee's death, by the executors or
administrators of the Optionee's estate or by any person or persons who shall
have acquired the Option directly from the Optionee by bequest or inheritance.
13. Right to Terminate Employment. Neither this Agreement nor the
Option shall impose any obligations on the Company or any subsidiary corporation
thereof to continue the employment of any Optionee or impose any obligation on
the part of the Optionee to remain in the employ of the Company. All such
employment matters shall be governed by the Employment Agreement.
14. Approvals. Notwithstanding anything in this Agreement to the
contrary, this Agreement and the Option shall become null and void if any
governmental body having jurisdiction over the issuance of the Option or the
shares of Common Stock subject thereto shall not approve the issuance of the
Option or the issuance of the shares of Common Stock subject thereto.
15. Notices. Any notice to be given by the Optionee hereunder shall be
sent to the Company at its principal United States office, and any notice from
the Company to the Optionee shall be sent to the Optionee at the Company's
Budapest, Hungary office; all such notices shall be in writing and shall be
delivered in person or by registered or certified mail. Either party may change
the address to which notices are to be sent by notice in writing given to the
other in accordance with the terms hereof.
IN WITNESS WHEREOF, this Agreement is made as of the date first shown
herein above.
HUNGARIAN TELEPHONE AND
CABLE CORP.
By: /s/ James G. Morrison
James G. Morrison
President and Chief Executive
Officer
Andrew E. Nicholson
/s/ Andrew E. Nicholson
-3-
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors of Stockholders
Hungarian Telephone and Cable Corp.:
We consent to incorporation by reference in the registration statement on Form
S-8 of Hungarian Telephone and Cable Corp. of our report dated March 21, 1997,
relating to the consolidated balance sheets of Hungarian Telephone and Cable
Corp. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the years then ended, which appears in the December 31, 1996
annual report on Form 10-K of Hungarian Telephone and Cable Corp.
KPMG Peat Marwick LLP
New York, New York
March 21, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Hungarian Telephone and Cable Corp.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Hungarian Telephone and Cable Corp. of our report dated
March 27, 1995, relating to the consolidated financial statements of Hungarian
Telephone and Cable Corp. and subsidiaries, appearing in its Annual Report on
Form 10-K for the year ended December 31, 1996.
BDO Seidman, LLP
New York, New York
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HUNGARIAN
TELEPHONE AND CABLE CORP.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000889949
<NAME> HUNGARIAN TELEPHONE AND CABLE CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 21,968
<SECURITIES> 0
<RECEIVABLES> 4,698
<ALLOWANCES> (123)
<INVENTORY> 0
<CURRENT-ASSETS> 33,948
<PP&E> 85,682
<DEPRECIATION> 3,670
<TOTAL-ASSETS> 156,615
<CURRENT-LIABILITIES> 27,733
<BONDS> 148,472
0
0
<COMMON> 4
<OTHER-SE> (23,794)
<TOTAL-LIABILITY-AND-EQUITY> 156,615
<SALES> 20,910
<TOTAL-REVENUES> 20,910
<CGS> 0
<TOTAL-COSTS> 41,463
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,240
<INCOME-PRETAX> (47,451)
<INCOME-TAX> 0
<INCOME-CONTINUING> (47,451)
<DISCONTINUED> 0
<EXTRAORDINARY> (7,318)
<CHANGES> 0
<NET-INCOME> (54,769)
<EPS-PRIMARY> (13.14)
<EPS-DILUTED> 0
</TABLE>
