HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended September 30, 1997
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
100 First Stamford Place, Stamford, CT 06902 (Address of
principal executive offices)
(203) 348-9069
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest possible date:
Common Stock, $.001 par value 5,168,784 Shares
(Class) (Outstanding at November 7, 1997)
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information: Page No.
Consolidated Condensed Balance Sheets 2
Consolidated Condensed Statements of Operations 3
Consolidated Condensed Statements of Stockholders' Deficit 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Part II. Other Information 18
Signatures 19
- 1 -
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets September 30, 1997 December 31, 1996
------ ------------------ -----------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents $ 5,564 $ 15,876
Restricted cash 1,149 6,092
Accounts receivable, net 6,998 4,575
VAT receivable, net 2,862 5,377
Prepayments and other current assets 1,981 2,028
------------ ------------
Total current assets 18,554 33,948
Property, plant and equipment, net 119,947 82,012
Goodwill and intangibles, less accumulated amortization 18,282 17,374
Other assets 10,285 11,497
Construction deposits 2,691 11,784
------------ ------------
Total assets $ 169,759 $ 156,615
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt $ 5,313 $ 120
Accounts payable 4,125 17,777
Accruals 2,301 1,748
Due to related parties 6,286 2,934
Advance subscriber payments 1,306 3,202
Other current liabilities 640 1,952
------------ ------------
Total current liabilities 19,971 27,733
Long-term debt, excluding current installments 176,413 148,472
Due to related parties 3,665 4,200
------------ ------------
Total liabilities 200,049 180,405
------------ ------------
Stockholders' deficit:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued 5,168,784 shares
in 1997 and 4,179,626 shares in 1996 5 4
Additional paid-in capital 70,234 59,327
Accumulated deficit (103,492) (80,961)
Foreign currency translation adjustment 3,399 (1,494)
Deferred compensation (436) (666)
------------- ------------
Total stockholders' deficit (30,290) (23,790)
------------- ------------
Total liabilities and stockholders' deficit $ 169,759 $ 156,615
============ ============
<FN>
See accompanying notes to consolidated condensed financial statements.
</FN>
</TABLE>
- 2 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
For the Three and Nine Month Periods Ended September 30, 1997 and 1996
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
TELEPHONE SERVICES REVENUES, NET $ 9,669 $ 5,034 $ 26,890 $ 14,727
Operating expenses:
Operating and maintenance expenses 6,103 4,594 17,430 16,068
Depreciation and amortization 1,893 1,109 5,305 3,026
Management fees 1,383 1,476 4,119 4,829
Cost of termination of former officers
and directors 6,260 6,260
------- ------- ------- -------
Total Operating Expenses 9,379 13,439 26,854 30,183
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS 290 (8,405) 36 (15,456)
Other income (expenses):
Foreign exchange losses (125) (506) (437) (2,096)
Interest expense (7,584) (4,265) (22,687) (11,146)
Interest income 113 50 564 942
Other, net (94) (554) (7) (95)
-------- ------- -------- -------
LOSS BEFORE MINORITY INTEREST (7,400) (13,680) (22,531) (27,851)
MINORITY INTEREST 575 1,541
------- ------- ------- -------
LOSS BEFORE EXTRAORDINARY ITEMS (7,400) (13,105) (22,531) (26,310)
EXTRAORDINARY ITEM (8,186)
NET LOSS $ (7,400) $ (13,105) $ (22,531) $ (34,496)
======== ======= ======== =======
LOSS PER SHARE OF COMMON STOCK
BEFORE EXTRAORDINARY ITEM $ (1.60) $ (3.14) $ (5.20) $ (6.31)
EXTRAORDINARY ITEM (1.96)
NET LOSS $ (1.60) $ (3.14) $ (5.20) $ (8.27)
------- ------ ------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,617,961 4,167,006 4,332,553 4,166,610
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 3 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Deficit
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-in Accumulated Translation Deferred Stockholders'
Shares Stock Capital Deficit Adjustment Compensation Deficit
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 4,179,626 $ 4 59,327 (80,961) (1,494) (666) $ (23,790)
Earned compensation 230 230
Exercise of options 10,000 97 97
Shares issued as compensation 5,000 52 52
Options issued to officers 70 70
Shares issued to TD 969,158 1 10,688 10,689
Foreign currency translation adjustment 4,893 4,893
Net loss (22,531) (22,531)
Balances at September 30, 1997 5,163,784 $ 5 70,234 (103,492) 3,399 (436) $ (30,290)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 4 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Month Periods Ended September 30, 1997 and 1996
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ 5,573 (21,457)
---------- -----------
Cash flows from investing activities:
Construction of telecommunication networks (57,186) (32,060)
Acquisition of interests in subsidiaries (330)
Proceeds from sale of interest in affiliate 130
---------- -----------
Net cash used in investing activities (57,186) (32,260)
---------- -----------
Cash flows from financing activities:
Borrowings under long-term debt 58,403 8,772
Repayment of long-term debt (15,301) (1,890)
Proceeds from short-term loans 94,303
Repayment of short-term loans (53,458)
Proceeds from exercise of options 97 31
---------- -----------
Net cash provided by financing activities 43,199 47,758
---------- -----------
Effect of foreign exchange rate changes on cash (1,898) 816
----------- -----------
Net decrease in cash and cash equivalents (10,312) (5,143)
Cash and cash equivalents at beginning of period 15,876 16,192
---------- -----------
Cash and cash equivalents at end of period $ 5,564 11,049
========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 5 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared without audit and, in the opinion of management, include all
adjustments consisting mainly of normal recurring accruals necessary for
fair presentation. Results for the interim periods are not necessarily
indicative of the results for a full year.
(2) Cash and Cash Equivalents and Restricted Cash
(a) Cash and Cash Equivalents
At September 30, 1997, cash of $5,564,000 comprised the following:
$5,521,000 on deposit with banks in Hungary consisting of $222,000
denominated in U.S. dollars, the equivalent of $15,000 denominated
in German Deutsche Marks and the equivalent of $5,284,000
denominated in Hungarian Forints, and; $43,000 on deposit in the
United States.
(b) Restricted Cash
At September 30, 1997, approximately $502,000 of cash denominated
in Hungarian Forints was restricted under concession contract
fulfillment guarantees with restrictions to be removed principally
upon the successful attainment of certain operational requirements
as prescribed in the concession agreements. The Company expects to
satisfy the operational requirements within one year and therefore
the restricted cash is shown as a current asset.
At September 30, 1997, approximately $605,000 of cash denominated
in U.S. Dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $42,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
Current and long-term amounts due to related parties totalling $9,951,000
at September 30, 1997 is comprised of the following: $34,000 due to
Hungarian Teleconstruct Corp. ("Teleconstruct") for rent and other
services, plus interest; $5,550,000 due to a subsidiary of Citizens
Utilities Company (Citizens Utilities Company and its subsidiaries are
hereinafter referred to as "Citizens") for reimbursable management costs
and management fees accrued under the Management Services Agreement; and
$4,367,000 representing payments due to certain former officers under
separate termination, consulting and non-competition agreements.
- 6 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The Company paid approximately $906,000 during the nine months ended
September 30, 1997 to three former officers under these agreements.
(4) Credit Facility
On October 15, 1996, the Company and its subsidiaries entered into a $170
million 10-year Multi-Currency Credit Facility with Postabank es
Takarekpenztar ("Postabank"), a Hungarian commercial bank (the "Postabank
Credit Facility"). Proceeds from the loan may be drawn entirely in
Hungarian Forints and up to 20% of the principal may be drawn in U.S.
Dollars through March 31, 1999.
Since October 1996, the Company has utilized the funding provided by the
Postabank Credit Facility to continue construction of its
telecommunications networks, provide working capital, and repay other
existing debt obligations. As of September 30, 1997, the Company had
borrowed approximately $150 million under the Postabank facility.
(5) Transactions with TD
On July 1, 1997, the Company entered into an agreement with Tele Danmark
A/S ("TD") pursuant to which TD agreed to exchange its 20% interest in
each of two of the Company's operating subsidiaries for 420,908 shares
of the Company's common stock. The value of shares on the date of issue
totalled $3.63 million. Under the agreement, TD was granted the
preemptive right to maintain its equity ownership percentage of total
shares outstanding in addition to giving TD the right, if TD acquired
the 4.8% stake in each of two of the Company's operating subsidiaries
owned by the Danish Fund for Central and Eastern Europe ("Danish Fund"),
to sell such shares to the Company on similar terms.
On September 30, 1997, TD agreed to exchange the 4.8% interest in each of
two operating subsidiaries purchased from the Danish Fund for 101,018
shares of the Company's common stock. The value of shares on the date of
issue amounted to $1.3 million.
The total value of shares issued relating to these two transactions has
been recorded as an increase to goodwill.
On September 30, 1997, the Company and TD entered into an agreement
whereby TD agreed to exchange loans and accrued interest totalling $5.53
million in two operating subsidiaries for 447,232 shares of the Company's
common stock.
- 7 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The difference between the carrying value of the loans and related
accrued interest and the shares issued in the exchange was not material.
As a result of these transactions, TD has increased its share ownership
in the Company to 19.2% of shares presently outstanding.
(6) Subsequent Event
On October 2, 1997, the Company concluded an agreement with Lucent
Technologies to become the exclusive distributor of Lucent Technologies
PBX and Key System products in Hungary. As part of the agreement, the
Company purchased fixed assets valued at $470,000 and agreed to purchase
commitments amounting to $6 million for each of the next three years. The
distributorship agreement provides for the imposition of penalties should
these purchase commitments not be met.
- 8 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Hungarian Telephone and Cable Corp. ("HTCC" and, together with its
consolidated subsidiaries, the "Company") is engaged primarily in the provision
of telecommunications services through its majority-owned operating
subsidiaries, Kelet-Nograd Com Rt. ("KNC"), Raba Com Rt. ("Raba-Com"), Papa es
Tersege Telefon Koncesszios Rt. ("Papatel") and Hungarotel Tavkozlesi Rt.
("Hungarotel"). The Company earns substantially all of its telecommunications
revenue from measured service fees, monthly subscription fees, connection fees,
public pay telephone services and ancillary services (including charges for
additional services purchased at the customer's discretion).
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. 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 the use of
outstanding credit facilities until a customer base large enough to provide
sufficient revenues and operating cash flow is established.
As a result of the Company's development program to date, it achieved
EBITDA1 of $2.2 million during the quarter ended September 30, 1997, up from
EBITDA of $1.9 million and $1.3 million for the quarters ended June 30, 1997 and
March 31, 1997, respectively. Cash flows from operations totalled $5.6 million
for the nine months ended September 30, 1997. 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.
- --------
1 EBITDA is defined as net revenue less operating and maintenance expenses and
management fees. The Company has included information concerning EBITDA (which
is not a measure of financial performance under generally accepted accounting
principles) because it understands that it is used by certain investors as one
measure the Company's ability to service or incur indebtedness. EBITDA should
not be construed as an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an indicator of the
Company's performance or to cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) as a measure of
liquidity.
-9-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
The success of the Company's strategy is dependent upon its ability to
increase revenues through the addition of new subscribers. Since commencing the
provision of telecommunications services in the first quarter of 1995, the
Company's network construction and expansion program has added approximately
100,000 access lines through October, 1997 to the 60,000 access lines acquired
directly from Magyar Tavkozlesi Rt. ("MATAV"), the former state-controlled
monopoly telephone company. During this same period, churn has been negligible,
primarily due to the Company's exclusivity rights and the demand for services
evidenced by the wait-listed subscriber base.
Comparison of Three Months Ended September 30, 1997 to
Three Months Ended September 30, 1996
<TABLE>
<CAPTION>
Net Revenues
Three Months Ended
September 30,
(dollars in millions) 1997 1996 % increase
---- ---- ----------
<S> <C> <C> <C>
Subscription revenues 1.9 1.0 90
Net interconnect charges (2.6) (2.4) 8
----- -----
Net measured service and subscription revenues 5.8 3.7 57
Connection fees 3.5 0.9 289
Other operating revenues 0.4 0.4 0
----- -----
Telephone Service Revenues, Net $ 9.7 $ 5.0 94
==== ====
</TABLE>
The Company recorded a 94% increase in net telephone service revenues
to $9.7 million for the three months ended September 30, 1997 from $5.0 million
for the three months ended September 30, 1996.
Net measured service and subscription revenues increased 57% to $5.8
million for the three months ended September 30, 1997 from $3.7 million for the
three months ended September 30, 1996. Measured service revenues increased 28%
to $6.5 million while subscription revenues increased 90% to $1.9 million for
the three months ended September 30, 1997. These increases in call and
subscription fee revenues are the result of an 79% increase in average access
lines in service from approximately 76,000 lines for the three months ended
September 30, 1996 to approximately 136,000 lines for the three months ended
September 30, 1997. The growth in access lines is not fully reflected in
increased measured service revenues as newer customers require a period of
maturity before producing revenues similar to established telephone customers.
These revenues have been offset by net interconnect charges which
totalled $2.6 million for the three months ended September 30, 1997 as compared
to $2.4 million for the three months ended September 30, 1996. As a percentage
of call and subscription revenues, net interconnect charges have declined from
39% for the three months ended September 30, 1996 to 31% for the three months
ended September 30, 1997, due to a higher proportion of local traffic as
additional access lines are placed in service.
-10-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Connection fees for the three month period ended September 30, 1997
totalled $3.5 million as compared to $0.9 million for the three months ended
September 30, 1996. This increase reflects the Company's ongoing network
construction which resulted in the connection of 19,000 subscribers in the three
months ended September 30, 1997 as compared to the connection of 5,800
subscribers in the three months ended September 30, 1996. After the substantial
backlog of wait listed customers are provided with access lines, connection fees
will decline.
Other operating revenues remained constant at $0.4 million in the three
months ended September 30, 1997 compared to the three months ended September 30,
1996. Other operating revenues are generated from the provision of direct lines,
telephone leasing and telephone sales.
Operating and Maintenance Expenses
Operating and maintenance expenses for the three months ended September
30, 1997 increased to $6.1 million compared to $4.6 million for the three months
ended September 30, 1996. On a per line basis, operating and maintenance
expenses decreased to approximately $45 per average access line for the three
months ended September 30, 1997 from $60 for the three months ended September
30, 1996 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 to $1.9 million for the
three months ended September 30, 1997 from $1.1 million for the three months
ended September 30, 1996. This increase was due to the increase in property,
plant and equipment in service as the construction program progresses.
Management Fees
Management fees pursuant to management service agreements decreased to
$1.4 million for the three months ended September 30, 1997 from $1.5 million for
the three months ended September 30, 1996. This decrease was due primarily to
the termination of the TD management agreements in August 1996.
Cost of Termination of Former Officers and Directors
For the three months ended September 30, 1996, the Company recorded a
charge totalling $6.3 million representing the present value of payments due and
options granted to former officers and directors under separate termination
agreements.
-11-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Income from Operations
Income from operations increased to $0.3 million for the three months
ended September 30, 1997 from a loss from operations of $8.4 million for the
three months ended September 30, 1996. Adjusted for the cost of termination of
former officers and directors, the loss from operations totalled $2.1 million
for the three months ended September 30, 1996. The Company generated operating
profit in the third quarter of 1997 principally due to the additional revenue
generated by the network development program.
Foreign Exchange Loss
Foreign exchange losses decreased to $0.1 million for the three months
ended September 30, 1997 from $0.5 million for the three months ended September
30, 1996. Such foreign exchange losses resulted from the devaluation of the
Hungarian Forint against the U.S. Dollar and the German Mark. The decrease in
the foreign exchange loss is due to a reduction in debt and other obligations
denominated in U.S. Dollars and German Marks.
Interest Expense
Interest expense increased to $7.6 million for the three months ended
September 30, 1997 from $4.3 million for the three months ended September 30,
1996. This increase was attributable to higher average debt levels during the
three months ended September 30, 1997 as compared to the three months ended
September 30, 1996 as the Company incurred additional indebtedness in order to
continue the construction of its telecommunications networks.
Interest Income
Interest income remained constant at $0.1 million for the three months
ended September 30, 1997 and September 30, 1996.
Other, net
Other, net expense decreased to $0.1 million for the three months ended
September 30, 1997 from $0.6 million for the three months ended September 30,
1996 principally due to an increase in non-operating income and ancillary
services.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $7.4 million, or $1.60 per share, for the three months ended September
30, 1997 as compared to a net loss of $13.1 million, or $3.14 per share, for the
three months ended September 30, 1996.
-12-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Comparison of Nine Months Ended September 30, 1997 to
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Net Revenues
Nine Months Ended
September 30,
(dollars in millions) 1997 1996 % increase
---- ---- ----------
<S> <C> <C> <C>
Measured service revenues $ 18.8 $ 15.0 25
Subscription revenues 5.0 2.6 92
Net interconnect charges (7.6) (6.5) 17
----- -----
Net measured service and subscription revenues 16.2 11.1 46
Connection fees 9.4 2.5 276
Other operating revenues 1.3 1.1 18
----- -----
Telephone Service Revenues, Net $ 26.9 $ 14.7 83
===== =====
</TABLE>
The Company recorded an 83% increase in net telephone service revenues
of $26.9 million for the nine months ended September 30, 1997 as compared to
revenues of $14.7 million for the nine months ended September 30, 1996.
Net measured service revenues increased 46% to $16.2 million for the
nine months ended September 30, 1997 from $11.1 million for the nine months
ended September 30, 1996. Measured service revenues increased 25% to $18.8
million while subscription revenues increased 92% to $5.0 million for the nine
months ended September 30, 1997. These increases in net measured service and
subscription fee revenues are the result of a 67% increase in average access
lines in service from approximately 72,000 lines for the nine months ended
September 30, 1996 to approximately 120,000 lines for the nine months ended
September 30, 1997. The growth in access lines is not fully reflected in
increased measured service revenues as newer customers require a period of
maturity before producing revenues similar to established telephone customers.
These revenues have been offset by net interconnect charges which
totalled $7.6 million for the nine months ended September 30, 1997 as compared
to $6.5 million for the nine months ended September 30, 1996. As a percentage of
call and subscription revenues, net interconnect charges have declined from 37%
for the nine months ended September 30, 1996 to 32% for the nine months ended
September 30, 1997, due to a higher proportion of local traffic as additional
access lines are placed in service.
Connection fees for the nine months ended September 30, 1997 totalled
$9.4 million as compared to $2.5 million for the nine months ended September 30,
1996. The Company's ongoing network construction efforts resulted in the
connection of 53,000 subscribers during the nine months ended September 30, 1997
as compared to the connection of 15,000 subscribers in the nine months ended
September 30, 1996. After the substantial backlog of wait listed customers are
provided with access lines, connection fees will decline.
-13-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Other operating revenues increased to $1.3 million in the nine months
ended September 30, 1997 compared to $1.1 million for the nine months ended
September 30, 1996. This increase was due to additional revenues generated from
the provision of direct lines, telephone leasing and telephone sales.
Operating and Maintenance Expenses
Operating and maintenance expenses for the nine months ended September
30, 1997 increased to $17.4 million as compared to $16.1 million for the nine
months ended September 30, 1996. On a per line basis, operating and maintenance
expenses decreased to approximately $145 per average access line for the nine
months ended September 30, 1997 from $223 for the nine months ended September
30, 1996 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 to $5.3 million for the
nine months ended September 30, 1997 from $3.0 million for the nine months ended
September 30, 1996. This increase was due to the increase in property, plant and
equipment in service as the construction program progresses.
Management Fees
Management fees pursuant to management service agreements decreased to
$4.1 million for the nine months ended September 30, 1997 from $4.8 million for
the nine months ended September 30, 1996. This decrease was due primarily to the
termination of the TD management agreements in August 1996.
Cost of Termination of Former Officers and Directors
For the nine months ended September 30, 1996, the Company recorded a
charge totalling $6.3 million representing the present value of payments due and
options granted to former officers and directors under separate termination
agreements.
Loss from Operations
Income from operations increased to $36,000 for the nine months ended
September 30, 1997 compared to a loss from operations of $15.5 million for the
nine months ended September 30, 1996. Adjusted for the cost of termination of
former officers and directors, the loss from operations totalled $9.2 million
for the nine months ended September 30, 1996. The operating loss decreased
principally due to the additional revenue generated by the network development
program.
-14-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Foreign Exchange Loss
Foreign exchange losses decreased to $0.4 million for the nine months
ended September 30, 1997 from $2.1 million for the nine months ended September
30, 1996. Such foreign exchange losses resulted from the devaluation of the
Hungarian Forint against the U.S. Dollar and the German Mark. The decrease in
the foreign exchange loss is due to a reduction in debt and other obligations
denominated in U.S. Dollars and German Marks.
Interest Expense
Interest expense increased to $22.7 million for the nine months ended
September 30, 1997 from $11.1 million for the nine months ended September 30,
1996. This increase was attributable to higher average debt levels during the
nine months ended September 30, 1997 as compared to the nine months ended
September 30, 1996 as the Company incurred additional indebtedness in order to
continue the construction of its telecommunications networks.
Interest Income
Interest income decreased to $0.6 million for the nine months ended
September 30, 1997 from $0.9 million for the nine months ended September 30,
1996 primarily due to lower average cash balances outstanding during the period.
Other, net
Other, net expense decreased to $7,000 for the nine months ended
September 30, 1997 from $0.1 million for the nine months ended September 30,
1997 principally due to a increase in non-operating income and ancillary
services.
Extraordinary Item
For the nine months ended September 30, 1996, the Company recorded an
extraordinary item for a non-cash charge of $8.2 million related to the
write-off of the remaining unamortized deferred financing costs pertaining to a
Loan Agreement with Citizens, on repayment of the relevant loan.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $22.5 million, or $5.20 per share, for the nine months ended September
30, 1997 as compared to a net loss of $34.5 million, or $8.27 per share for the
nine months ended September 30, 1996.
-15-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 the use of
outstanding credit facilities until a customer base large enough to provide
sufficient revenues and operating cash flow is established.
The Company expects that proceeds from the $170 million Credit Facility
with Postabank, 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, or to reduce outstanding borrowings, may include the sale
of equity or debt of HTCC or one or more of the operating companies.
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.
The Company's development program has resulted in cash flow provided
from operating activities of $5.6 million for the nine months ended September
30, 1997 as compared to cash flow used in operating activities of $21.5 million
for the nine months ended September 30, 1996. For the nine months ended
September 30, 1997, the Company used $57.2 million for investing activities
compared to $32.3 million used for investing activities in the nine months ended
September 30, 1996. These amounts were primarily used to fund the construction
of the Company's telecommunications networks. Financing activities provided net
cash of $43.2 million and $47.8 million for the nine months ended September 30,
1997 and 1996, respectively.
During the third quarter of 1997, the Company entered into agreements
with TD whereby TD agreed in two separate transactions to exchange interests
totalling 24.8% in each of two operating subsidiaries for 521,926 shares of the
Company's common stock. The value of shares on the dates of issue totalled
approximately $4.9 million. On September 30, 1997, TD agreed to exchange loans
and accrued interest totalling $5.53 million in two operating subsidiaries for
447,232 shares of the Company's common stock. As a result of these transactions,
TD has increased its share ownership in the Company to 19.2% of shares presently
outstanding.
On October 2, 1997, the Company concluded an agreement with Lucent
Technologies to become the exclusive distributor of Lucent Technologies PBX and
Key System products in Hungary. As part of the agreement, the Company purchased
fixed assets valued at $470,000 and agreed to purchase commitments amounting to
$6 million for each of the next three years. The distributorship agreement
provides for the imposition of penalties should these purchase commitments not
be met.
-16-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
INFLATION AND FOREIGN CURRENCY
For the year ended December 31, 1996, inflation in Hungary was
approximately 24% on an annualized basis. It is the stated policy goal of the
Hungarian government to keep inflation from exceeding 20% for the year 1997. The
latest government estimates indicate an annualized inflation rate for 1997 of
approximately 18%.
In 1996, the Hungarian Forint devalued against the U.S. Dollar by
approximately 18%. For the first three quarters of 1997, the Hungarian Forint
has devalued approximately 21% against the U.S. Dollar. The Hungarian government
is continuing its policy of a crawling peg devaluation.
The Company's Hungarian operations generate revenues in Hungarian
Forints and incur operating and other expenses predominately in Hungarian
Forints, while capital expenditures and certain other costs are incurred in U.S.
Dollars and German Deutsche Marks. The Company's foreign currency exposure is
difficult to hedge due to the significant costs involved and the lack of a
market for such hedging. However, since December 31, 1996, practically all of
the Company's borrowings have been denominated in Hungarian Forints. Interest on
such borrowings is at a higher nominal rate than that applied to U.S. Dollar or
German Mark borrowings, due to a comparatively high rate of domestic inflation
and a resultant reduction in the U.S. Dollar and German Mark value of the
Hungarian Forint. This devaluation of the Hungarian Forint leads to a reduction
in the U.S. Dollar equivalent of the Company's Hungarian Forint denominated
borrowings. Such reduction in U.S. Dollar equivalent borrowings is not
recognized in the statement of operations but is reflected as a component of the
foreign currency translation adjustment included in the stockholders' deficit
section of the balance sheet.
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 is reflected as a component of stockholders' deficit.
-17-
<PAGE>
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Legal Proceedings
None
Item 2. Change in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. The Company filed a report on Form 8-K dated July 1, 1997 under Item
5 "Other Events" summarizing the terms of a Stock Purchase Agreement
dated as of July 1, 1997 between the Company and Tele Danmark A/S
("TD") pursuant to which TD transferred its 20% interest in each of two
of the Company's Hungarian subsidiaries to the Company in exchange for
420,908 shares of the Company's common stock.
2. The Company filed a report on Form 8-K dated September 30, 1997
under Item 5 "Other Events" summarizing the terms of two agreements
between the Company and TD, both dated as of September 30, 1997.
Pursuant to the first agreement, a Stock Purchase Agreement, TD
transferred its 4.8% interest in each of two of the Company's Hungarian
subsidiaries to the Company in exchange for 101,018 shares of the
Company's common stock. In the second agreement, an Exchange Agreement,
TD agreed to transfer its interests in its loans to two of the
Company's Hungarian subsidiaries, totalling $5.53 million in the
aggregate, to the Company in exchange for 447,232 shares of the
Company's common stock.
-18-
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
(Registrant)
November 10, 1997 By /s/ James G. Morrison
-----------------------
James G. Morrison
President and Chief
Executive Officer
November 10, 1997 By /s/ Richard P. Halka
----------------------
Richard P. Halka
Controller and Treasurer
-19-
<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 quarterly
period ended September 30, 1997.
</LEGEND>
<CIK> 0000889949
<NAME> Hungarian Telephone and Cable Corp.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,713
<SECURITIES> 0
<RECEIVABLES> 7,248
<ALLOWANCES> (250)
<INVENTORY> 0
<CURRENT-ASSETS> 18,554
<PP&E> 126,923
<DEPRECIATION> 6,976
<TOTAL-ASSETS> 169,759
<CURRENT-LIABILITIES> 19,971
<BONDS> 176,413
0
0
<COMMON> 5
<OTHER-SE> (30,290)
<TOTAL-LIABILITY-AND-EQUITY> 169,759
<SALES> 9,669
<TOTAL-REVENUES> 9,669
<CGS> 0
<TOTAL-COSTS> 9,379
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,584
<INCOME-PRETAX> (7,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,400)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> 0
</TABLE>
