HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended June 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 June 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 4,610,534 Shares
(Class) (Outstanding at August 8, 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
and Results of Operations 9
Part II. Other Information 17
Signature 19
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<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 June 30, 1997 December 31, 1996
------ ------------- -----------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents $ 3,927 $ 15,876
Restricted cash 2,132 6,092
Accounts receivable, net 5,461 4,575
VAT receivable, net 2,603 5,377
Prepayments and other current assets 2,277 2,028
----- -----
Total current assets 16,400 33,948
Net property, plant and equipment, net 102,437 82,012
Goodwill and intangibles, less accumulated amortization 14,136 17,374
Other assets 10,645 11,497
Construction deposits 8,242 11,784
----- ------
Total assets $ 151,860 $ 156,615
========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt $ 2,470 $ 120
Accounts payable 5,427 17,777
Accruals 2,530 1,748
Due to related parties 5,067 2,934
Advance subscriber payments 1,808 3,202
Other current liabilities 555 1,952
--- -----
Total current liabilities $ 17,857 27,733
Long-term debt, excluding current installments 165,379 148,472
Due to related parties 3,849 4,200
----- -----
Total liabilities 187,085 180,405
======= =======
Stockholders' deficit:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued 4,189,626 shares
in 1997 and 4,179,626 shares in 1996 4 4
Additional paid-in capital 59,499 59,327
Accumulated deficit (96,092) (80,961)
Foreign currency translation adjustment 1,876 (1,494)
Deferred compensation (512) (666)
---- ----
Total stockholders' deficit (35,225) (23,790)
------- -------
Total liabilities and stockholders' deficit $ 151,860 $ 156,615
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
For the Three and Six Month Periods Ended June 30, 1997 and 1996
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
TELEPHONE SERVICES REVENUES, NET $ 9,297 $ 4,534 $ 17,221 $ 9,693
Operating expenses:
Operating and maintenance expenses 6,087 6,510 11,327 11,474
Depreciation and amortization 1,653 924 3,412 1,917
Management fees 1,329 2,011 2,736 3,353
----- ----- ----- -----
Total Operating Expenses 9,069 9,445 17,475 16,744
----- ----- ------ ------
INCOME (LOSS) FROM OPERATIONS 228 (4,911) (254) (7,051)
Other income (expenses):
Foreign exchange losses (49) (178) (312) (1,590)
Interest expense (8,530) (3,944) (15,103) (6,881)
Interest income 155 700 451 892
Other, net 13 247 87 459
-- --- -- ---
LOSS BEFORE MINORITY INTEREST (8,183) (8,086) (15,131) (14,171)
MINORITY INTEREST 649 967
--- --- ---
LOSS BEFORE EXTRAORDINARY ITEMS (8,183) (7,437) (15,131) (13,204)
====== ====== ======= =======
EXTRAORDINARY ITEM (8,186) (8,186)
NET LOSS $ (8,183) $ (15,623) $ (15,131) $ (21,390)
LOSS PER SHARE OF COMMON STOCK
BEFORE EXTRAORDINARY ITEM $ (1.95) $ (1.76) $ (3.61) $ (3.18)
EXTRAORDINARY ITEM (1.94) (1.97)
----- ----- ----- -----
NET LOSS $ (1.95) $ (3.70) $ (3.61) $ (5.15)
--------- --------- --------- ---------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,189,626 4,215,106 4,187,483 4,148,039
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<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 154 154
Exercise of options 5,000 50 50
Shares issued as compensation 5,000 52 52
Options issued to officers 70 70
Foreign currency translation adjustment 3,370 3,370
Net loss (15,131) (15,131)
- -----------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1997 4,189,626 $ 4 59,499 (96,092) 1,876 (512) $ (35,225)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Month Periods Ended June 30, 1997 and 1996
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ 5,191 (12,659)
---------- -------
Cash flows from investing activities:
Construction of telecommunication networks (42,301) (13,679)
Acquisition of interests in subsidiaries (330)
Proceeds from sale of assets 299
--- ---
Net cash used in investing activities (42,002) (14,009)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt 41,906 1,499
Repayment of long-term debt (15,741)
Proceeds from short-term debt 78,773
Repayment of short-term debt (50,752)
Proceeds from exercise of options 50
--- ---
Net cash provided by financing activities 26,215 29,520
------ ------
Effect of foreign exchange rate changes on cash (1,353) 283
------ ---
Net decrease in cash and cash equivalents (11,949) 3,135
Cash and cash equivalents at beginning of period 15,876 16,192
------ ------
Cash and cash equivalents at end of period $ 3,927 19,327
========== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<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 June 30, 1997, cash was comprised of the following: the
equivalent of 3,867,000 on deposit with banks in Hungary
consisting of $223,000 denominated in U.S. dollars, the
equivalent of $15,000 denominated in German Deutsche Marks
and the equivalent of $3,629,000 denominated in Hungarian
Forints, and; $60,000 on deposit in the United States.
(b) Restricted Cash
At June 30, 1997, approximately $1,284,000 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 June 30, 1997, approximately $825,000 of cash denominated in
U.S. Dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $23,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
Current and long-term amounts due to related parties totalling $8,916,000
at June 30, 1997 is comprised of the following: $34,000 due to Hungarian
Teleconstruct Corp. ("Teleconstruct") for rent and other services, plus
interest; $152,000 due to Tele Danmark A/S ("TDI") for management fees
accrued under the management agreement; $4,201,000 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 $4,529,000
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
representing payments due to certain former officers under separate
termination, consulting and non-competition agreements. The Company paid
approximately $604,000 during the six months ended June 30, 1997 to three
former officers under these agreements.
Included in long-term debt at June 30, 1997 is approximately $5,534,000
borrowed from TDI by subsidiaries under subordinated loan 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 June 30, 1997, the Company had borrowed
approximately $143 million under the Postabank Credit Facility at
historical exchange rates.
(5) Construction Commitments
Kelet-Nograd Com Rt. ("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 $46.1
million. Construction is expected to be completed in the second half of
1997.
Hungarotel Tavkozlesi Rt. ("Hungarotel") entered into contracts
totalling $67 million which provide for construction of a telephone
network in its service areas. Construction is expected to be
substantially completed in the fourth quarter of 1997.
The balance sheet at June 30, 1997 includes approximately $8.2 million of
advanced payments on construction contracts to be applied against future
contract invoices.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(6) Subsequent Events
On July 1, 1997, the Company entered into an agreement with TDI pursuant
to which TDI agreed to exchange its 20 percent interest in each of two of
the Company's operating subsidiaries for 420,908 shares of the Company's
common stock. The 420,908 shares constitute approximately 9.1 percent of
the total outstanding shares of the Company and increases TDI's interest
in the Company to 9.7 percent of the total outstanding shares. Under the
agreement, TDI was granted the preemptive right, upon the issuance of
common stock by the Company, to maintain its then current equity
ownership percentage interest in the outstanding shares of common stock
of the Company. In addition, the Company is obligated to purchase, and
TDI is obligated to sell, the 4.8% ownership interests in each of the
Company's two operating subsidiaries presently owned by the Danish
Investment Fund for Central and Eastern Europe if TDI acquires such
ownership interests by June 30, 1998. The terms of such exchange would be
on terms similar to this initial exchange.
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<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" or the "Registrant" 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, connection fees, monthly line rental 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 substantial cash
requirements 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
positive cash flow from operations of $5.2 million and EBITDA1 of $1.9 million
during the quarter ended June 30, 1997, up from EBITDA of $1.3 million for the
quarter ended March 31, 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.
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
67,000 access lines through June 30, 1997 to
________________________________
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 of 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
Cmpany's performance or to cash flows from operating activities (as determined
in accordance with generally accepted acocunting prinicples) as a measure of
liquidity.
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<PAGE>
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 June 30, 1997 and Three Months Ended June 30,
1996
Net Revenues
The Company recorded net telephone service revenues of $9.3 million for
the three months ended June 30, 1997 as compared to revenues of $4.5 million for
the three months ended June 30, 1996, an increase of $4.8 million, or 107%.
Measured service revenues increased $1.4 million, or 29%, to $6.3
million for the three months ended June 30, 1997 from $4.9 million for the three
months ended June 30, 1996. These revenues have been offset by net interconnect
charges which totalled $2.5 million for the three months ended June 30, 1997 as
compared to $2.1 million for the three months ended June 30, 1996, an increase
of $0.4 million. This increase in net measured service revenues is the result of
an increase in average access lines in service from approximately 72,000 lines
for the three months ended June 30, 1996 to approximately 120,000 lines for the
three months ended June 30, 1997.
The Company recognized $5.0 million of revenues from connection and
monthly subscription fees during the three months ended June 30, 1997, as
compared to $1.5 million for the three months ended June 30, 1996. The principal
reasons for this increase relate to the Company's ongoing network construction
which resulted in the connection of 15,000 subscribers in the three months ended
June 30, 1997 as compared to the connection of 2,600 subscribers in the three
months ended June 30, 1996. Subscription fees increased due to the higher
average number of lines installed and an increase in monthly subscription rates
for the three months ended June 30, 1997 as compared to the three months ended
June 30, 1996.
Other operating revenues increased to $0.5 million in the three months
ended June 30, 1997 as compared to $0.2 million for the three months ended June
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 three months ended June 30,
1997 decreased $0.4 million, or 6%, to $6.1 million as compared to $6.5 million
for the three months ended June 30, 1996. On a per line basis, operating and
maintenance expenses decreased to approximately $51 per average access line for
the three months ended June 30, 1997 from $90 for the three months ended June
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.
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<PAGE>
Depreciation and Amortization
Depreciation and amortization charges increased $0.8 million to $1.7
million for the three months ended June 30, 1997 from $0.9 million for the three
months ended June 30, 1996. This increase was due to the increase in
depreciation of plant and lines in operation. As the Company proceeds with its
capital expenditure programs and adds additional access lines in each of the
operating areas, depreciation and amortization expenses are expected to
increase.
Management Fees
Management fees pursuant to management service agreements decreased
$0.7 million to $1.3 million for the three months ended June 30, 1997 from $2.0
million for the three months ended June 30, 1996. This decrease was due to the
termination of certain management agreements with Tele Danmark A/S in August
1996.
Income from Operations
Income from operations increased to $0.2 million for the three months
ended June 30, 1997 from a loss from operations of $4.9 million for the three
months ended June 30, 1996. The Company generated operating profit in the second
quarter of 1997 principally due to the additional revenue generated by the
network development program.
Foreign Exchange Losses
Foreign exchange losses decreased from $0.2 million for the three
months ended June 30, 1996 to $0.05 million for the three months ended June 30,
1997. 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 the debt and other
obligations which are denominated in U.S. Dollars and German Marks.
Interest Expense
Interest expense increased $4.6 million to $8.5 million for the three
months ended June 30, 1997 from $3.9 million for the three months ended June 30,
1996. This increase was attributable to higher average debt levels during the
three months ended June 30, 1997 as compared to the three months ended June 30,
1996 as the Company incurred indebtedness in order to continue the construction
of its telecommunications networks. Furthermore, a greater portion of the debt
was denominated in Hungarian Forints which bears a higher nominal interest rate
than U.S. Dollar or German Mark denominated debt. This higher nominal interest
rate is offset by the reduction in the U.S. Dollar equivalent value of Hungarian
Forint indebtedness.
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<PAGE>
Such reduction is not recognized in the statement of operations but is a
component of the foreign currency translation adjustment included in the
balance sheet.
Interest Income
Interest income decreased $0.5 million to $0.2 million for the three
months ended June 30, 1997 from $0.7 million for the three months ended June 30,
1996 primarily due to lower average cash balances outstanding during the period.
Other, net
Other, net income decreased from $0.2 million for the three months
ended June 30, 1996 to $13,000 for the three months ended June 30, 1997
principally due to a decrease in non-operating income and ancillary services.
Extraordinary Item
For the three months ended June 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
the repayment of a loan agreement with a subsidiary of Citizens Utilities
Company (Citizens Utilities Company and its affiliates are hereinafter referred
to as "Citizens").
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $8.2 million for the three months ended June 30, 1997 as compared to a
net loss of $15.6 million for the three months ended June 30, 1996.
Comparison of Six Months Ended June 30, 1997 and Six Months Ended June 30, 1996
Net Revenues
The Company recorded net telephone service revenues of $17.2 million
for the six months ended June 30, 1997 as compared to revenues of $9.7 million
for the six months ended June 30, 1996, an increase of $7.5 million, or 77%.
Measured service revenues increased $2.3 million, or 23%, to $12.3
million for the six months ended June 30, 1997 from $10.0 million for the six
months ended June 30, 1996. These revenues have been offset by net interconnect
charges which totalled $5.0 million for the six months ended June 30, 1997 as
compared to $4.2 million for the six months ended June 30, 1996, an increase of
$0.8 million. This increase in net measured service revenues is the result of
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<PAGE>
an increase in average access lines in service from approximately 70,000 lines
for the six months ended June 30, 1996 to approximately 112,000 lines for the
six months ended June 30, 1997.
The Company recognized $9.1 million of revenues from connection and
monthly subscription fees during the six months ended June 30, 1997, as compared
to $3.2 million for the six months ended June 30, 1996. The principal reasons
for this increase relate to the Company's ongoing network construction which
resulted in the connection of approximately 34,000 subscribers during the six
months ended June 30, 1997 as compared to the connection of approximately 10,000
subscribers during the six months ended June 30, 1996. Subscription fees
increased due to the higher number of average lines installed and an increase in
monthly subscription rates for the six months ended June 30, 1997 as compared to
the six months ended June 30, 1996.
Other operating revenues increased to $0.9 million in the six months
ended June 30, 1997 as compared to $0.7 million for the six months ended June
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 six months ended June 30,
1997 decreased $0.2 million, or 2%, to $11.3 million as compared to $11.5
million for the six months ended June 30, 1996. On a per line basis, operating
and maintenance expenses decreased to approximately $101 per average access line
for the six months ended June 30, 1997 from $164 for the six months ended June
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 $1.5 million to $3.4
million for the six months ended June 30, 1997 from $1.9 million for the six
months ended June 30, 1996. This increase was due to the increase in
depreciation of plant and lines in operation. As the Company proceeds with its
capital expenditure programs and adds additional access lines in each of the
operating areas, depreciation and amortization expenses are expected to
increase.
Management Fees
Management fees pursuant to management service agreements decreased
$0.7 million to $2.7 million for the six months ended June 30, 1997 from $3.4
million for the six months ended June 30, 1996. This decrease was due to the
termination of certain management agreements with Tele Danmark A/S in August
1996.
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<PAGE>
Loss from Operations
Loss from operations decreased $6.8 million to $0.3 million for the six
months ended June 30, 1997 from $7.1 million for the six months ended June 30,
1996. The operating loss decreased principally due to the additional revenue
generated by the network development program.
Foreign Exchange Losses
Foreign exchange losses decreased $1.3 million from $1.6 million for
the six months ended June 30, 1996 to $0.3 million for the six months ended June
30, 1997. 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 the debt and other
obligations which are denominated in U.S. Dollars and German Marks.
Interest Expense
Interest expense increased $8.2 million to $15.1 million for the six
months ended June 30, 1997 from $6.9 million for the six months ended June 30,
1996. This increase was attributable to higher average debt levels during the
six months ended June 30, 1997 as compared to the six months ended June 30, 1996
as the Company incurred indebtedness in order to continue the construction of
its telecommunications networks. Furthermore, a greater portion of the debt was
denominated in Hungarian Forints which bears a higher nominal interest rate than
U.S. Dollar or German Mark denominated debt. This higher nominal interest rate
is offset by the reduction in the U.S. Dollar equivalent value of Hungarian
Forint indebtedness. Such reduction is not recognized in the statement of
operations but is a component of the foreign currency translation adjustment
included in the balance sheet.
Interest Income
Interest income decreased $0.4 million to $0.5 million for the six
months ended June 30, 1997 from $0.9 million for the six months ended June 30,
1996 primarily due to lower average cash balances outstanding during the period.
Other, net
Other, net income decreased from $0.5 million for the six months ended
June 30, 1996 to $0.1 million for the six months ended June 30, 1997 principally
due to a decrease in non-operating income and ancillary services.
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<PAGE>
Extraordinary Item
For the six months ended June 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
the repayment of the loan agreement with Citizens.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $15.1 million for the six months ended June 30, 1997 as compared to a
net loss of $21.4 million for the six months ended June 30, 1996.
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 substantial cash
requirements at least 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 $5.2 million for the six months ended June 30, 1997
as compared to cash flow used in operating activities of $12.7 million for the
six months ended June 30, 1996. For the six months ended June 30, 1997, the
Company used $42.0 million for investing activities, which was used to fund the
construction of the Company's telecommunications networks, compared to $14.0
million used for investing activities in the six months ended June 30, 1996.
Financing activities provided net cash of $26.2 million and $29.5 million for
the six months ended June 30, 1997 and 1996, respectively.
- 15 -
<PAGE>
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% in the
current year.
The Company's Hungarian operations generate revenues in Hungarian
Forints and incur operating and other expenses predominately in Hungarian
Forints, while other costs, primarily capital expenditures, 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 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. This
reduction 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.
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.
- 16 -
<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
(a) The Annual Meeting of Stockholders of the Registrant was held on
May 16, 1997.
(b) Not Applicable.
(c) First Matter Voted on at the Annual Meeting of Stockholders of the
Registrant: Election of Directors
Votes Cast For Votes Withheld
-------------- --------------
David A. Finley 3,039,637 73,110
*Warren B. French, Jr. 3,038,277 74,470
James G. Morrison 3,039,637 73,110
John B. Ryan 3,038,637 74,110
James H. Season 3,038,137 74,610
Ronald E. Spears 3,037,157 75,590
*Mr. French resigned from the Registrant's Board of Directors of June
16, 1997. As of August 8, 1997, the Registrant has not yet elected
another director to fill the vacancy.
- 17 -
<PAGE>
Second Matter Voted on at the Annual Meeting of Stockholders of the
Registrant: Ratification of the appointment of KPMG Peat Marwick LLP as
auditors of the Registrant for the fiscal year ending December 31,
1997.
For Against Abstain
--- ------- -------
3,073,297 23,250 16,200
(d) Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 18 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
(Registrant)
August 8, 1997 By /s/ James G. Morrison
------------------------
James G. Morrison
President and Chief
Executive Officer
August 8, 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 June 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> APR-1-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,059
<SECURITIES> 0
<RECEIVABLES> 5,573
<ALLOWANCES> (112)
<INVENTORY> 0
<CURRENT-ASSETS> 16,400
<PP&E> 108,052
<DEPRECIATION> 5,615
<TOTAL-ASSETS> 151,860
<CURRENT-LIABILITIES> 17,857
<BONDS> 165,379
0
0
<COMMON> 4
<OTHER-SE> (35,229)
<TOTAL-LIABILITY-AND-EQUITY> 151,860
<SALES> 9,297
<TOTAL-REVENUES> 9,297
<CGS> 0
<TOTAL-COSTS> 9,069
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,530
<INCOME-PRETAX> (8,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,183)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> 0
</TABLE>
