HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended March 31, 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 March 31, 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 4,189,626 Shares
(Class) (Outstanding at May 13, 1997)
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Table of Contents
Part I. 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 14
Signature 15
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets March 31, 1997 December 31, 1996
------ -------------- -----------------
<S> <C> <C>
(unaudited)
Current assets:
Cash and cash equivalents $ 8,766 $ 15,876
Restricted cash 2,206 6,092
Accounts receivable, net 5,418 4,575
VAT receivable, net 5,404 5,377
Prepayments and other current assets 2,265 2,028
------------ ------------
Total current assets 24,059 33,948
Net property, plant and equipment 96,194 82,012
Goodwill and intangibles, less accumulated amortization 15,438 17,374
Other assets 11,203 11,497
Construction deposits 8,058 11,784
------------ ------------
Total assets $ 154,952 $ 156,615
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Current installments of long-term debt $ 6,333 $ 120
Accounts payable 13,702 17,777
Accruals 3,782 1,748
Due to related parties 3,644 2,934
Advance subscriber payments 2,215 3,202
Other current liabilities 1,085 1,952
------------ ------------
Total current liabilities 30,761 27,733
Long-term debt, excluding current installments 148,983 148,472
Due to related parties 4,027 4,200
------------ ------------
Total liabilities 183,771 180,405
------------ ------------
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 59,429 59,327
Accumulated deficit (87,909) (80,961)
Foreign currency translation adjustment 246 (1,494)
Deferred compensation (589) (666)
------------ ------------
Total stockholders' deficit (28,819) (23,790)
------------ ------------
Total liabilities and stockholders' deficit $ 154,952 $ 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 Month Periods Ended March 31, 1997 and 1996
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
TELEPHONE SERVICES REVENUES, NET $ 7,924 $ 5,159
Operating expenses:
Operating and maintenance expenses 5,240 4,964
Depreciation and amortization 1,759 993
Management fees 1,407 1,342
---------- -----------
Total Operating Expenses 8,406 7,299
---------- -----------
LOSS FROM OPERATIONS (482) (2,140)
Other income (expenses):
Foreign exchange losses (263) (1,412)
Interest expense (6,573) (2,937)
Interest income 296 192
Other, net 74 211
---------- -----------
LOSS BEFORE MINORITY INTEREST (6,948) (6,086)
MINORITY INTEREST 318
NET LOSS $ (6,948) $ (5,768)
========== ===========
LOSS PER SHARE OF COMMON STOCK $ (1.66) $ (1.41)
======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,185,317 4,080,079
========== ===========
</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 77 77
Exercise of options 5,000 50 50
Shares issued as compensation 5,000 52 52
Foreign currency translation adjustment 1,740 1,740
Net loss (6,948) (6,948)
- ------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 4,189,626 $ 4 59,429 (87,909) 246 (589) $ (28,819)
- ------------------------------------------------------------------------------------------------------------------------
</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 Three Month Periods Ended March 31, 1997 and 1996
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net cash provided by (used in) operating activities $ 805 (7,659)
---------- -----------
Cash flows from investing activities:
Construction of telecommunication networks (20,796) (5,031)
Acquisition of interests in subsidiaries (330)
Proceeds from sale of assets 170
----------
Net cash used in investing activities (20,626) (5,361)
---------- -----------
Cash flows from financing activities:
Borrowings under long-term debt 23,596 108
Repayment of long-term debt (9,959)
Repayment of short-term debt (4,865)
Proceeds from exercise of options 50
Proceeds from borrowings from related parties 16,430
---------- -----------
Net cash provided by financing activities 13,687 11,673
---------- -----------
Effect of foreign exchange rate changes on cash (976) (1,129)
----------- -----------
Net decrease in cash and cash equivalents (7,110) (2,476)
Cash and cash equivalents at beginning of period 15,876 16,192
---------- -----------
Cash and cash equivalents at end of period $ 8,766 13,716
========== ===========
</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 March 31, 1997, cash of $8,766,000 comprised the following:
$8,720,000 consisting of $332,000 denominated in U.S. dollars, the
equivalent of $15,000 denominated in German Deutsche Marks and the
equivalent of $8,373,000 denominated in Hungarian Forints on
deposit with banks in Hungary, and; $46,000 on deposit in the
United States.
(b) Restricted Cash
At March 31, 1997, approximately $1,365,000 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 March 31, 1997, approximately $822,000 of cash denominated in
U.S. Dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $19,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
Current and long term amounts due to related parties totalling $7,671,000
at March 31, 1997 is comprised of the following: $34,000 due to Hungarian
Teleconstruct Corp. ("Teleconstruct") for rent and other services, plus
interest, $100,000 due to Tele Danmark A/S ("TDI) for management fees
accrued under the management agreement; $2,851,000 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 $4,686,000
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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 $302,000 in the first quarter to three
former officers under these agreements.
During the first quarter, the Company received payment of $250,000 plus
accrued interest due from a former director of the Company for funds
advanced on a personal mortgage.
Included in long-term debt at March 31, 1997 is approximately $5.7
million 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. At March 31, 1997, the Company had borrowed a
total of $139 million under the Postabank facility.
(5) Current Installments of Long-term Debt
Included in current installments of long-term debt at March 31, 1997 is
approximately $5.8 million owed to the Danish Fund which was paid
subsequent to March 31, 1997. Although this amount was previously
classified as long-term, current installments due under existing
agreements for certain long-term obligations were classified as long-term
since the Company had the ability and intent to refinance these
obligations on a long-term basis. The funds used to repay the loan amount
were provided by the Postabank Credit Facility (see note 4) prior to
March 31, 1997 and included as part of long-term debt.
(6) 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
$46.2 million. Construction is expected to be completed in the second
quarter of 1997.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
Raba Com Rt. ("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.
Papa es Tersege Telefon Koncesszios Rt. ("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 Tavkozlesi Rt.("Hungarotel") entered into contracts totaling
$66.5 million which provide for construction of a telephone network in
its service areas. Construction is expected to be substantially completed
in the second quarter of 1997.
The balance sheet at March 31, 1997 includes approximately $8.1 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
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 connection fees, monthly line rental fees, measured service fees,
public pay telephone services and ancilliary 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
for the first time a quarterly positive cash flow from operations of $0.8
million and EBITDA1 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. For a more detailed discussion of these and other factors affecting the
Company's business operations and financial condition, see Exhibit 99.6 hereto.
- -----------------------
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.
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<PAGE>
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
52,200 access lines through March 31, 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 March 31, 1997
and Three Months Ended March 31, 1996
Net Revenues
The Company recorded net telephone service revenues of $7.9 million for
the three months ended March 31, 1997 as compared to revenues of $5.2 million
for the three months ended March 31, 1996, an increase of $2.7 million.
Measured service revenues increased $1.0 million from $5.0 million for
the three months ended March 31, 1996 to $6.0 million for the three months ended
March 31, 1997. These revenues have been offset by net interconnect charges
which totalled $2.5 million for the three months ended March 31, 1997 as
compared to $2.1 million for the three months ended March 31, 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 67,400 lines for the three
months ended March 31, 1996 to 103,400 lines for the three months ended March
31, 1997. Measured service revenues were also higher due to an increase in the
call tariff rates for the three months ended March 31, 1997 as compared to the
three months ended March 31, 1996.
The Company recognized $4.1 million of revenues from connection and
monthly subscription fees during the three months ended March 31, 1997, as
compared to $1.7 million for the three months ended March 31, 1996. The
principal reasons for this increase relate to the Company's ongoing network
construction which resulted in the connection of 18,800 subscribers in the three
months ended March 31, 1997 as compared to the connection of 7,000 subscribers
in the three months ended March 31, 1996. Subscription fees also increased due
to an increase in monthly subscription rates for the three months ended March
31, 1997 as compared to the three months ended March 31, 1996.
Other operating revenues decreased to $0.4 million in the three months
ended March 31, 1997 as compared to $0.5 million for the three months ended
March 31, 1996. This decrease was due to the inclusion of non-recurring revenue
for the three months ended March 31, 1996 which was not fully offset by
additional revenues from the provision of direct lines, telephone leasing and
telephone sales.
Operating and Maintenance Expenses
Operating and maintenance expenses for the three months ended March 31,
1997 increased $0.2 million, or 4%, to $5.2 million as compared to $5.0 million
for the three months ended March 31, 1996. On a per line basis, however,
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<PAGE>
operating and maintenance expenses decreased to approximately $50 per average
access line for the three months ended March 31, 1997 from $73 for the three
months ended March 31, 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 $0.8 million to $1.8
million for the three months ended March 31, 1997 from $1.0 million for the
three months ended March 31, 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 increased
$0.1 million to $1.4 million for the three months ended March 31, 1997 from $1.3
million for the three months ended March 31, 1996.
Loss from Operations
Loss from operations decreased $1.6 million to $0.5 million for the
three months ended March 31, 1997 from $2.1 million for the three months ended
March 31, 1996. The operating loss decreased principally due to the additional
revenue generated by the network development program.
Foreign Exchange Losses
Foreign exchange losses decreased $1.1 million from $1.4 million for
the three months ended March 31, 1996 to $0.3 million for the three months ended
March 31, 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 $3.7 million to $6.6 million for the three
months ended March 31, 1997 from $2.9 million for the three months ended March
31, 1996. This increase was attributable to higher average debt levels in the
three months ended March 31, 1997 as compared to the three months ended March
31, 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 or exchange gain is not
recognized in the statement of operations but is a component of the foreign
currency translation adjustment included in the balance sheet.
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<PAGE>
Interest Income
Interest income increased $0.1 million to $0.3 million for the three
months ended March 31, 1997 from $0.2 million for the three months ended March
31, 1996 primarily due to a greater portion of the available cash reserves being
invested in higher yielding Hungarian Forints as compared to U.S. Dollars.
Other, net
Other, net income (expense) decreased from $0.2 million for the three
months ended March 31, 1996 to $0.1 million for the three months ended March 31,
1997 principally due to a decrease in non-operating income and ancillary
services.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $6.9 million for the three months ended March 31, 1997 as compared to a
net loss of $5.8 million for the three months ended March 31, 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 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.
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<PAGE>
The Company's development program has resulted in cash flow provided
from operating activities of $0.8 million for the three months ended March 31,
1997, an increase of $8.5 million from the cash used in operating activities of
$7.7 million for the three months ended March 31, 1996. For the three months
ended March 31, 1997, the Company used $20.6 million for investing activities,
which was used to fund the construction of the Company's telecommunications
networks, compared to $5.4 million used for investing activities in the three
months ended March 31, 1996. Financing activities provided net cash of $13.7
million and $11.7 million for the three months ended March 31, 1997 and 1996,
respectively.
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,
predominately in Hungarian Forints but as well 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 exchange gain 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.
- 13 -
<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
Exhibit 99.6 Cautionary Statements Regarding "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
(b) Reports on Form 8-K
None
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<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)
May 14, 1997 By /s/ James G. Morrison
-----------------------------------
James G. Morrison
President and Chief
Executive Officer
May 14, 1997 By /s/ Richard P. Halka
-----------------------------------
Richard P. Halka
Controller
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<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Description
99.6 Cautionary Statements Regarding "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
Exhibit 99.6
CAUTIONARY STATEMENTS REGARDING "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
From time to time, Hungarian Telephone and Cable Corp. ("HTCC" or the
"Registrant" and, together with its consolidated subsidiaries, the "Company")
issues statements in public filings or press releases, or makes oral statements
through an authorized officer of the Company, that may be considered forward
looking. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, filed herewith as an exhibit are a
number of cautionary statements identifying certain factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company.
The Company, through its four 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") each, an "Operating Company" and together, the "Operating
Companies") is engaged principally in the provision of non-cellular local voice
telephone services in five defined regions within the Republic of Hungary, and,
therefore, is subject to certain unique business, legal, economic, political,
cultural, and other factors that may affect the Company's results of operations
and financial condition.
Forward-Looking Statements; Cautionary Statement. When used anywhere in
future filings by the Company with the Securities and Exchange Commission, in
the Company's press releases and in oral statements made with the approval of an
authorized executive officer of the Company, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "project,"
"outlook," or similar expressions (including confirmations by an authorized
executive officer of the Company of any such expressions made by a third party
with respect to the Company) are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risk factors are described below. The Company
specifically declines any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
The Company wishes to caution readers that the following important
factors, among other things, in some cases have affected, and in the future
could affect, the Company's actual results and could cause the Company's actual
consolidated results for the Company's current quarter and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company.
<PAGE>
Hungarian Economic, Political and Legal Considerations
As substantially all of the Company's operations are located in the
Republic of Hungary, the Company's operations, financial condition and the
market prices of its common stock will be affected by political, economic and
legal developments in or affecting Hungary. The Company is currently subject to
various governmental requirements and restrictions, including, without
limitation, requirements relating to minimum Hungarian equity ownership of its
Hungarian subsidiaries (the "Operating Companies"). See "- Government
Regulation; Terms of Concession Contracts-Hungarian Equity Ownership
Requirements."
In 1989, Hungary became a multiparty constitutional republic and began
the process of implementing a plan to transform its economy from one that was
centrally planned to one that is market oriented. This process (which includes a
major privatization program) is expected to continue, and will not be fully
realized for some years to come. To support and implement the new economic
system, Hungary has substantially revised its laws and regulations, and
continues to do so. There can be no assurance regarding the degree to which such
changes will continue to be realized or implemented or as to the development of
additional laws that may affect the Company and its operations, including,
without limitation, laws relating to non-Hungarian ownership of
telecommunications assets, appropriation, seizure and the convertibility of the
Forint. See "- Foreign Currency and Exchange Risks and Regulation." In addition,
Hungary's laws, including laws governing telecommunications, will require
substantial revision as part of Hungary's transition to a market economy and to
meet EU standards, as may be in force from time to time. There can be no
assurance regarding the effect of such changes on the Company or its licenses,
including the exclusivity provisions thereof. Furthermore, enforcement and
administration of these laws and regulations are often inconsistent and without
precedent and many have not yet been the subject of judicial interpretation.
Although Hungary is developing institutions and a legal and regulatory
system characteristic of parliamentary democracies, these institutions and
systems lack institutional history and regularly observed procedural safeguards.
Corporate, contract, property, bankruptcy, competition, securities and other
laws and regulations have been, and continue to be, substantially revised.
Existing laws and regulations may be applied inconsistently in some
circumstances and it may not be possible to obtain swift and equitable
enforcement of the law. As a result, and for a variety of other reasons, shifts
in government policy and regulation are possible. There can be no assurance,
therefore, that the political framework in Hungary will continue to foster the
development of private enterprise, or to be favorable to non-Hungarian
investment and ownership.
- 2 -
<PAGE>
Due to these factors, significant uncertainties exist with respect to
the future governance of, and economic policies in, Hungary. The process of
converting to a free market economy has affected, and will continue to affect,
consumer prices, gross domestic product and interest rates in Hungary, all of
which will affect Hungarian businesses, including the Operating Companies. There
can be no assurance that the significant social, political and economic changes
which Hungary has experienced recently, and which are expected to continue, will
not have a material adverse effect on the Company and its investors, including
the Company's ability to successfully operate its telecommunications networks in
Hungary.
Inflation, Local Currency Devaluation and Economic Growth
The Hungarian economy has been characterized by high rates of inflation
and devaluation of the Hungarian Forint against the U.S. Dollar and various
European currencies. In 1994, 1995 and 1996, the annual reported inflation rate
in Hungary (measured by the national consumer price index) was approximately
18.8%, 28.2% and 23.6%, respectively. The Hungarian Forint has devalued against
the U.S. Dollar in 1992, 1993 and 1994 by 11.0%, 19.9% and 9.9%, respectively.
In March 1995, an immediate 9.0% devaluation of the Hungarian Forint was
announced together with a new policy of daily or "crawling peg" devaluation
against a target basket of major currencies. This resulting in an overall 1995
devaluation rate of 29.9% against the U.S. Dollar. During 1996, the monthly
devaluation rate was established pursuant to governmental decree at 1.2% for the
entire year resulting in an overall 1996 devaluation rate of 18.4% against the
U.S. Dollar. For 1997, the Hungarian government announced through a decree that
it will continue to implement the 1.2% monthly devaluation rate. The Hungarian
GNP per capita increased only 1.5% in 1995 and 1.0% in 1996, in part, as a
result of the rate of inflation noted above. The exchange rate for the Hungarian
Forint, as set by the National Bank of Hungary, declined from approximately
100.70 Forints per U.S. Dollar at December 31, 1993 to approximately 179.52
Forints per U.S. Dollar at March 31, 1997.
Foreign Currency and Exchange Risks and Regulation
HTCC's principal source of revenues is expected to be payments from the
Operating Companies. In addition, borrowings and other principal obligations of
the Operating Companies are Hungarian Forint denominated obligations but pegged
to a fixed U.S. Dollar or Deutsche Mark amount. All of the Operating Companies'
anticipated revenues (as well as the majority of their operating expenses, other
than payments under certain construction and management contracts) are in
Hungarian Forints.
As a result of the above, the Company will be subject to significant
foreign exchange risk. There are currently no meaningful ways to hedge Hungarian
currency risk. Therefore, the Company's ability to limit its exposure to
currency fluctuations is significantly restricted. During the years ended
December 31, 1994, 1995 and 1996, and for the three months ended March 31, 1997,
the Company incurred losses from foreign currency transactions, of approximately
$373,000, $4.1 million, $6.2 million, and $263,000 respectively.
- 3 -
<PAGE>
Although the Forint has recently become exchangeable outside Hungary,
there is not yet a substantial freely convertible exchange market in place for
the Forint outside of Hungary. In addition, Hungarian law permits the
repatriation of foreign currency only to the extent of capital investment and
earnings, as determined under applicable Hungarian law. The repayment of any
intercompany debt and payments under management service agreements by the
Operating Companies to HTCC are not subject to foreign currency regulation
provided that certain Hungarian legal requirements have been met. HTCC's
management services agreements with its subsidiaries and its intercompany debt
meet such requirements. However, there can be no assurance as to the future
exchangeability or convertibility of Forints.
Government Regulation; Terms of Concession Contracts
General
The Company's current and proposed operations in Hungary are subject to
Hungarian laws and regulations relating to the establishment and operation of
telecommunications systems, including the Hungarian Telecommunications Act of
1992 (the "Hungarian Telecom Act") and subsequent decrees and regulations.
Beginning in 1992, the Hungarian government began the process of
privatizing Hungary's telecommunications industry by selling an initial 30%
stake in Magyar Tavkozlesi Rt. ("MATAV"), the formerly State-controlled monopoly
telephone company, to a consortium comprised of Deutsche Telekom, the German
public telephone operator (a "PTO"), and Ameritech, a U.S. regional bell
operating company. The equity stake sold to this consortium was increased to 67%
in 1995. In addition, the Hungarian Ministry of Transportation,
Telecommunications and Water Management (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 networks in the 25 service areas which
had been chosen to exit the MATAV system. As of March 31, 1997, 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. Both MATAV and each LTO have exclusivity in their
respective areas for an agreed period in respect of non-cellular local voice
telephone services. Other potential providers may apply for a license to carry
out non-exclusive telecommunications services (e.g., data transmission)
throughout Hungary, including the Operating Areas.
- 4 -
<PAGE>
The Ministry sets the maximum rates and fees that the LTOs, including
the Operating Companies, may charge subscribers. In addition, the Ministry
establishes the revenue sharing arrangement between the Operating Companies and
MATAV (in its capacity as the operator of Hungary's national telephone network,
through which domestic long distance and international long distance service is
provided).
Concession Contracts
The Operating Companies' rights to provide non-cellular local voice
telephone services in the Operating Areas are governed by concession contracts
entered into with the Ministry (the "Concession Contracts"). The Concession
Contracts are for terms of 25 years, which may be extended by the Ministry
without conducting a new auction, under certain conditions, for an additional 12
1/2 years. The Concession Contracts require the Operating Companies, among other
things, to: (i) pay certain royalty fees and make certain social and educational
contributions; (ii) refrain from changing the share ownership of the Operating
Companies by more than 10% without the prior written consent of the Ministry;
(iii) satisfy specified percentages of subscriber demand for telephone service
within specified time frames; (iv) provide certain services and monetary and
other support to the Operating Areas; and (v) meet certain minimum requirements
for installing new access lines in their respective Operating Areas. HTCC, as
the majority shareholder of each Operating Company, has guaranteed the Operating
Companies' obligations under the Concession Contracts.
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 $2.8 million at the March 31, 1997 exchange rate) 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. There can be no assurance,
however, that each of the Operating Companies will be able to meet such
requirements in the future or, if any of the Operating Companies does not meet
such requirements, that it will be able to obtain a waiver on terms acceptable
to the Company. To the extent not waived by the Ministry, a breach of any of the
Concession Contracts, including a breach of the Hungarian equity ownership
requirements discussed below, could have a material adverse effect on the
Company, including possible termination of such Concession Contract, which would
result in the Operating Company forfeiting its concession rights and ceasing its
operations.
- 5 -
<PAGE>
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
stockholders the right to block certain transactions which, under Hungarian
corporate law, require a supermajority (75%) vote of stockholders voting on the
matter, such as mergers and consolidations, increases in share capital and
winding-up.
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, with
which KNC and Raba-Com are currently in compliance. Therefore, the Company does
not believe that any lack of current compliance is material.
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.
- 6 -
<PAGE>
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 revenues and
income, if any, of the Operating Companies will be reduced proportionately. See
also "- Operating Companies Not Wholly Owned."
Hungarian Taxation
The payment of dividends by the Operating Companies and the payment of
Hungarian income taxes by the Operating Companies currently are subject to
partial "tax holidays" through December 31, 2003. Hungary's income tax law,
however, is subject to change and, therefore, there can be no assurance that
such holidays will remain in effect for the Operating Companies through such
period.
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. 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.
Limited Exclusivity Rights; Competition
Pursuant to the Concession Contracts, the Operating Companies have been
granted the exclusive rights to provide non-cellular local voice telephone
services within their respective Operating Areas through November 1, 2002. 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. 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 voice mail 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.
- 7 -
<PAGE>
In addition, Hungary has applied for membership in the EU and in
December 1991 signed an Association Agreement as a first step toward such
membership. There can be no assurance that Hungary will not amend existing laws
and regulations or enact new laws and regulations substantially reducing or
eliminating such exclusivity rights pursuant to conditions to membership in the
EU or otherwise or that the Company will be able to compete successfully against
other telecommunications providers for local non-voice telephone services or,
after the termination of the exclusivity period, for non-cellular local voice
telephone services.
While the Operating Companies are the exclusive providers of
non-cellular local voice telephone services within their respective Operating
Areas, they face competition from the various mobile telephone service providers
in Hungary, particularly due to the ability of cellular providers to deliver
immediate telephone service to their customers. Although the Company believes
the current rates for its services are generally less expensive than those of
mobile telephone service providers, there can be no assurance that the Company
will be able to compete successfully against such mobile telephone service
providers.
Holding Company Structure and Dependence on Cash Flow from Subsidiaries;
Restrictions on Dividends
HTCC is a holding company, with no business operations or source of
income of its own. The Company's cash flows is dependent on the earnings of the
Operating Companies, and the distribution of those earnings in the form of debt
service repayments, management fees, loans, dividends and other distributions.
Since the Operating Companies are majority-owned, but not wholly-owned, by HTCC,
HTCC will only be entitled to receive its pro rata share of the earnings of such
subsidiaries. To the extent the Operating Companies must issue additional equity
to meet Hungarian equity ownership requirements, HTCC's ownership will be
decreased. In addition, certain of the Operating Companies may be subject to
restrictions on distributions, in certain circumstances, imposed by their
creditors. See "- Government Regulation; Terms of Concession Contracts-Hungarian
Equity Ownership Requirements."
- 8 -
<PAGE>
Limited Operating History; Operating Losses; Leverage
HTCC was organized in March 1992 and, through March 31, 1995, was a
development stage company without significant operating revenues. Prospective
investors, therefore, have limited historical financial information about the
Company upon which to base an evaluation of its performance.
The Company has experienced cumulative net losses from inception
through March 31, 1997 of $87.9 million ($54.8 million of which was generated in
the year ended December 31, 1996). The Company expects that it will incur losses
at least until it substantially completes construction of its telecommunications
networks and connects additional subscribers. In addition, the Company's ability
to generate net income will be dependent on its ability to retain skilled
managerial, financial, technical, marketing and other personnel, to manage its
growth and construction costs, control operating expenses and to provide
satisfactory service levels. If the Company's future revenues are insufficient
to cover future costs and expenses, the Company may require additional sources
of financing to fund its working capital and capital expenditure requirements.
There can be no assurance that additional financing will be available on terms
and conditions acceptable to the Company or in a timely manner or at all, or
that additional capital contributions will be provided by its stockholders.
As of March 31, 1997, the Company's total consolidated indebtedness was
$183.8 million. The Company's high degree of leverage will require that a
significant portion of the Company's cash flow be used for debt service and may
impair the Company's ability to (i) refinance its existing indebtedness or
obtain additional financing to fund its future working capital requirements,
(ii) obtain additional financing to make capital expenditures and acquisitions,
(iii) withstand adverse economic conditions or take advantage of significant
business opportunities that may arise, (iv) invest in new or developing
technologies, or (v) respond to changes affecting the implementation of its
financing, construction or operating plans.
Restrictions Under Debt Instruments
The Company's operating and financial performance is, or may become,
subject to covenants contained in certain agreements related to the Company's
indebtedness, including the $170 million 10-year credit facility with Postabank
es Takarekpenztar. Among other things, these agreements (i) limit the Company's
flexibility, including the ability to utilize the proceeds of such indebtedness
other than for certain specified purposes, incur liens and dispose of certain
assets. These restrictions could limit the Company's ability to respond to
adverse changes in economic, regulatory or industry conditions.
- 9 -
<PAGE>
Such debt and other obligations are, in some cases, secured by the
assets of HTCC and the Operating Companies, including HTCC's interests in the
Operating Companies. Should the Company default on any payment or should any
other default occur, such as a breach of any of the covenants or restrictions
contained in the Concession Contracts resulting in a termination of a Concession
Contract, the Company's creditors would be entitled to invoke their remedies as
secured or unsecured creditors, as the case may be.
Development of Market and Market Acceptance
The Company's revenues are derived primarily from measured service and
connection and monthly subscription fees from residential and business and other
institutional subscribers (including government institutions) within each of its
Operating Areas and, pursuant to revenue sharing agreements with MATAV, from
domestic and international long distance service. As of March 31, 1997, the
Company's Operating Areas had a combined population of approximately 689,000
inhabitants (an estimated 278,000 households) with 112,200 installed access
lines (including pay phones) and a waiting list for additional access lines of
46,700. While telecommunications facilities in all of the Operating Areas are
not yet fully developed, with an average penetration rate of approximately 16
access lines per 100 inhabitants, compared to a European Union average of nearly
48 access lines per 100 inhabitants, it is not known to what extent potential
subscribers will accept or use basic telephony services given the limited
history of the provision of basic telephony services. Also, certain ancillary
value-added telecommunications services which the Company offers or intends to
offer, such as call waiting, voice mail, three-way calling, call forwarding and
caller ID, may be perceived as luxury items and may not be affordable given
existing Hungarian reported disposable income levels. Furthermore, the one-time
connection fees of up to HUF 30,000 ($167 at the March 31, 1997 exchange rate)
(plus VAT) for residential subscribers, and up to HUF 90,000 ($501 at the March
31, 1997 exchange rate) (plus VAT) for business and other institutional
subscribers (including government institutions), may not be sustainable. There
can be no assurance as to the ultimate level of demand for, or market acceptance
of, any of the Company's services.
Relationship with Citizens; Transactions with Affiliates; Conflicts of Interest
A subsidiary of Citizens Utilities Company (Citizens Utilities Company
and its subsidiaries are hereinafter referred to as "Citizens") is the Company's
principal stockholder, beneficially owning approximately 19.2% of HTCC's Common
Stock presently issued and outstanding, and has options and a warrant pursuant
to which Citizens owns approximately 58.1% of HTCC's Common Stock on a
fully-diluted basis. Such options and warrant are presently exercisable at
prices presently ranging from $13.00 to $18.00 per share, subject to adjustment
under certain circumstances. In addition, Citizens has certain preemptive and
anti-dilution rights which are designed to ensure that Citizens is able to
maintain its right to acquire control in the event of, among other things, a
change in the capitalization or number of outstanding shares of HTCC. As a
result, Citizens could, subject to applicable law, exercise effective control
over the management and affairs of the Company following an exercise of a
substantial number of its options and warrant, and election of its designees to
a majority of HTCC's board seats.
- 10 -
<PAGE>
Pursuant to a management services agreement, which expires in 2007,
between HTCC and Citizens, Citizens provides, upon request, certain
administrative, financial, technical, construction, marketing and operational
services to HTCC and its affiliates for which Citizens receives a management fee
and reimbursement of certain expenses (including certain salaries and expenses
of employees of Citizens engaged in providing services to the Company and
allocable overhead expenses). In addition, Citizens has provided financial
support to the Company from time to time, although it currently has no
obligation to do so. If the Company's relationship with Citizens were materially
weakened or terminated, the Company may be adversely affected. There can be no
assurance that disagreements with Citizens with respect to operational,
financial, economic or other matters relating to the Company and its
subsidiaries will not arise in the future and, if they do arise, that the
existence of any such disagreement will not have or lead to a material adverse
effect on the Company or its subsidiaries.
Rapid Technological Change
The telecommunications industry is subject to rapid and significant
changes in technology. While the Company believes that, in the short term, these
changes will neither materially affect the continued use of fiber optic,
coaxial, copper cabling or radio technologies nor materially hinder the
Company's ability to acquire necessary technologies, the effect of technological
changes on the business of the Company and the Operating Companies cannot be
predicted. In addition, the cost of implementation of emerging technologies
could be significant and the Company's ability to fund such implementation may
be dependent on its ability to obtain additional financing
Operating Companies Not Wholly Owned
Although the Company has a sufficient interest in the Operating
Companies to be able to exercise control, the holders of various minority
interests in the Operating Companies are protected by certain provisions of
Hungarian corporate law which, among other things, require a supermajority (75%)
vote of stockholders voting on the matter to approve certain actions, such as
mergers and consolidations, increases in share capital and winding-up.
Accordingly, the Company may not exercise complete control over such companies
and may be required to deal with such companies on terms no less favorable to
such companies than could be obtained from unaffiliated third parties. Pursuant
to joint venture and shareholders' agreements among the Company and Tele Danmark
A/S ("Tele Danmark") and the Danish Investment Fund for Central and Eastern
Europe (the "Danish Fund") as well as the organizational documents of KNC and
Raba-Com, Tele Danmark and the Danish Fund have veto power over certain
transactions involving such Operating Companies, such as increasing or
decreasing share capital, sale or disposition of assets over certain amounts and
other significant actions. In addition, dividends or other distributions paid or
made by such companies must be paid or made on a pro rata basis to all
stockholders. See "-Government Regulation; Terms of Concession
Contracts-Hungarian Equity Ownership Requirements."
- 11 -
<PAGE>
Low Trading Volume for Common Stock
Although the Common Stock is listed on the Amex, there has been, and
the Company expects that there will continue to be, only limited shares of
Common Stock outstanding and limited trading volume for the Common Stock.
Accordingly, the market price of the Common Stock may not be reflective of its
actual value.
- 12 -
<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 March 31, 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> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,972
<SECURITIES> 0
<RECEIVABLES> 5,539
<ALLOWANCES> (121)
<INVENTORY> 0
<CURRENT-ASSETS> 24,059
<PP&E> 100,778
<DEPRECIATION> 4,584
<TOTAL-ASSETS> 154,952
<CURRENT-LIABILITIES> 30,761
<BONDS> 148,983
0
0
<COMMON> 4
<OTHER-SE> (28,823)
<TOTAL-LIABILITY-AND-EQUITY> 154,952
<SALES> 7,924
<TOTAL-REVENUES> 7,924
<CGS> 0
<TOTAL-COSTS> 8,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,573
<INCOME-PRETAX> (6,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,948)
<EPS-PRIMARY> (1.66)
<EPS-DILUTED> 0
</TABLE>
