UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission file number 1-11484
------------------
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3652685
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
100 First Stamford Place, Stamford, CT 06902 (Address of
principal executive offices)
(203) 348-9069
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest possible date:
Common Stock, $.001 par value 5,395,864 Shares
(Class) (Outstanding at November 11, 1998)
<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' Deficiency 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Part II. Other Information 23
Signatures 24
- 1 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
<S> <C> <C>
Assets September 30, 1998 December 31, 1997
------ ------------------ -----------------
(unaudited)
Current assets:
Cash $ 10,665 $ 4,031
Restricted cash 286 536
Accounts receivable, net 6,820 9,437
VAT receivable, net - 2,641
Inventories 1,119 1,231
Prepayments and other current assets 306 2,146
------------ ------------
Total current assets 19,196 20,022
Net property, plant and equipment 134,540 138,885
Goodwill, less accumulated amortization 9,975 11,299
Other intangibles, less accumulated amortization 5,528 6,168
Other assets 8,722 10,111
------------ ------------
Total assets $ 177,961 $ 186,485
============ ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Current installments of long-term debt $ 24,350 $ 7,489
Accounts payable 3,428 7,996
Advance subscriber payments 88 351
Due to related parties 828 7,932
Accruals 3,357 4,364
Other current liabilities 875 689
------------ ------------
Total current liabilities 32,926 28,821
Long-term debt, excluding current installments 200,548 194,537
Deferred revenue 1,438 1,488
Due to related parties 22,376 3,476
------------ ------------
Total liabilities 257,288 228,322
------------ ------------
Stockholders' deficiency:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued 5,395,864 shares
in 1998 and 5,235,370 shares in 1997 5 5
Additional paid-in capital 71,346 70,772
Accumulated deficit (158,925) (117,197)
Accumulated other comprehensive income 8,247 4,964
Deferred compensation - (381)
------------ ------------
Total stockholders' deficiency (79,327) (41,837)
------------ ------------
Total liabilities and stockholders' deficiency $ 177,961 $ 186,485
============ ============
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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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 Nine Month Periods Ended September 30, 1998 and 1997
(In thousands, except share and per share data)
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
TELEPHONE SERVICES REVENUES, NET $ 9,412 $ 9,669 $ 28,502 $ 26,890
Operating expenses:
Operating and maintenance expenses 4,179 6,103 14,746 17,430
Cost of termination of management
services agreement 11,131 - 11,131 -
Depreciation and amortization 2,916 1,893 8,604 5,305
Management fees - 1,383 2,500 4,119
------- ------- ------- -------
Total Operating Expenses 18,226 9,379 36,981 26,854
------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS (8,814) 290 (8,479) 36
Other income (expenses):
Foreign exchange gains (losses) 58 (125) (292) (437)
Interest expense (11,294) (9,234) (34,091) (24,337)
Interest income 154 113 373 564
Other, net 823 (94) 761 (7)
------- -------- ------- --------
NET LOSS $ (19,073) $ (9,050) $ (41,728) $ (24,181)
======== ======= ======== =======
NET LOSS PER COMMON SHARE - BASIC $ (3.61) $ (1.96) $ (7.90) $ (5.58)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,284,504 4,617,961 5,281,045 4,332,553
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 3 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Deficiency
(In thousands, except share data)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Additional Other Total
Common Paid-in Accumulated Comprehensive Deferred Stockholders'
Shares Stock Capital Deficit Income Compensation Deficiency
- --------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 5,235,370 $ 5 70,772 (117,197) 4,964 (381) $ (41,837)
Earned compensation 125 125
Cancellation of shares (25,000) (256) 256 -
Exercise of options and warrants 56,400 224 224
Shares issued as compensation 10,625 93 93
Shares issued to Citizens 100,000 513 513
Shares issued as contingent consideration
relating to former acquisitions 18,469 -
Net loss (41,728) (41,728)
Foreign currency translation adjustment 3,283 3,283
- ----------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1998 5,395,864 $ 5 71,346 (158,925) 8,247 - $ (79,327)
- ----------------------------------------------------------------------------------------------------------------------
</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
Consolidated Condensed Statements of Cash Flows
For the Nine Month Periods Ended September 30, 1998 and 1997
(In thousands)
(unaudited)
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Net cash provided by operating activities $ 8,449 5,573
---------- -----------
Cash flows from investing activities:
Construction of telecommunication networks (13,657) (57,186)
Decrease in construction deposits 465
Acquisition of interest in subsidiary (20)
Proceeds from sale of assets 231 -
---------- -----------
Net cash used in investing activities (12,981) (57,186)
---------- -----------
Cash flows from financing activities:
Borrowings under long-term debt 14,879 58,403
Repayment of long-term debt (3,577) (15,301)
Proceeds from exercise of options 224 97
---------- -----------
Net cash provided by financing activities 11,526 43,199
---------- -----------
Effect of foreign exchange rate changes on cash (360) (1,898)
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,634 (10,312)
Cash and cash equivalents at beginning of period 4,031 15,876
---------- -----------
Cash and cash equivalents at end of period $ 10,665 5,564
========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 5 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying condensed consolidated financial statements have
been prepared without audit and, in the opinion of management,
include all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation. Results for the interim periods
are not necessarily indicative of the results for a full year.
(b) Net Loss Per Share
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
on December 31, 1997. SFAS 128 establishes standards for computing
and presenting earnings per share ("EPS") and supersedes APB
Opinion No. 15, "Earnings Per Share". SFAS 128 requires dual
presentation of basic and diluted EPS for net income on the face
of the statement of operations and a separate reconciliation of
both EPS amounts. Basic EPS is computed by dividing income or loss
by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock at the beginning of the
period presented. Basic loss per share for 1997 has been restated
to give effect to SFAS 128 and was not different from net loss per
share measured under APB No. 15. Potentially dilutive common stock
equivalents totalling 7,474,915 and 7,248,462 for the periods
ending September 30, 1998 and 1997, respectively, have not been
included in the computation of diluted net loss per common share
because they were antidilutive for the periods presented.
(c) New Accounting Pronouncements
SFAS No. 131 ("SFAS 131"), "Disclosure about Segments of an
Enterprise and Related Information," was issued in June 1997.
SFAS 131 establishes standards for the way public companies
report information about operating segments in annual financial
statements and requires that those companies report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
party disclosures about products and services, geographic areas
and major customers. The Company will adopt SFAS 131 for its
annual reporting in 1998.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
In June 1998, Statement of Financial Account Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS 133 established accounting and
reporting standards for derivative instruments and for hedging
activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133
cannot be applied retroactively to financial statements of prior
periods. At the current time the Company does not utilize
derivative instruments and accordingly it is anticipated that the
adoption of SFAS 133 will not have a material impact on the
Company's consolidated financial position and results of
operations.
(2) Cash and Restricted Cash
(a) Cash
At September 30, 1998, cash of $10,665,000 comprised the
following: $10,480,000 consisting of $320,000 denominated in U.S.
dollars and the equivalent of $10,160,000 denominated in Hungarian
Forints on deposit with banks in Hungary, and; $185,000 on deposit
in the United States.
(b) Restricted Cash
At September 30, 1998, approximately $228,000 of cash denominated
in Hungarian Forints was restricted under concession contract
fulfillment guarantees with restrictions to be removed principally
upon the successful attainment of certain operational requirements
as prescribed in the concession agreements. The Company expects to
satisfy the operational requirements within one year and therefore
the restricted cash is shown as a current asset.
At September 30, 1998, approximately $22,000 of cash denominated
in U.S. Dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $36,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
Current and long-term amounts due to related parties totalling
$23,204,000 at September 30, 1998 is comprised of the following: $34,000
due to Hungarian Teleconstruct Corp.
- 7 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
("Teleconstruct") for rent and other services, plus interest, a
$8,374,000 promissory note due to a subsidiary of Citizens Utilities
Company (see Note 4 below), $11,131,000 representing payments due to
Citizens under a termination and consulting agreement (see Note 4
below); and $3,665,000 representing payments due to certain former
officers under separate termination, consulting and non-competition
agreements.
The Company paid approximately $906,000 during the nine months ended
September 30, 1998 and 1997 to three former officers under these
agreements.
(4) Issues with Citizens
On September 30, 1998, the Company entered into certain agreements with
certain wholly-owned subsidiaries of Citizens Utilities Company (Citizens
Utilities Company and its subsidiaries are hereinafter referred to as
"Citizens") pursuant to which the Company settled its disagreements with
Citizens regarding certain issues with respect to (i) 2.1 million shares
of the Company's common stock subject to Citizens' accrued preemptive
rights and (ii) the Company's management services agreement with Citizens
dated as of May 31, 1995, as amended (the "Management Services
Agreement").
Such agreements provided for, among other things, (i) the termination of
the Master Agreement dated as of May 31, 1995 between the Company and
Citizens; (ii) the issuance by the Company to Citizens of 100,000 shares
of the Company's common stock and a promissory note in the principal
amount of $8,374,498 (the "Note") in settlement of $9.6 million accrued
fees and expenses due and payable to Citizens under the Management
Services Agreement; (iii) the termination of the Management Services
Agreement; (iv) payments by the Company to Citizens in the aggregate
amount of $21,000,000 payable in 28 quarterly installments of each year
from 2004 through and including 2010 in part as consideration for
Citizens' agreement to terminate the Management Services Agreement and in
part as consideration for certain consulting services to be provided by
Citizens to the Company from 2004 through and including 2010; (v) the
grant by the Company to Citizens of certain preemptive rights in
connection with any public or private issuances by the Company of shares
of its common stock to purchase within 30 days for cash such number of
shares of the Company's common stock sufficient to maintain Citizens'
then existing percentage ownership interest of the Company's common stock
on a fully diluted basis; and (vi) the right of one Citizens designee to
the Company's Board of Directors to be renominated for reelection to the
Company's Board of Directors for so long as Citizens owns at least
300,000 shares of the Company's common stock.
-8-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The principal on the promissory note is payable in full on September 15,
2004 and bears interest at a varying rate per annum which is 2-1/2% per
annum above the one-year LIBOR rate with monthly adjustments in such
varying rate. Accrued interest shall be payable annually.
The agreements include an Amended, Restated and Consolidated Stock Option
Agreement (the "Restated Stock Option Agreement") pursuant to which the
Company granted Citizens an option to purchase 2,110,896 shares of the
Company's common stock at a price of $13.00 per share with an expiration
date of July 1, 1999 in settlement of Citizens' accrued preemptive
rights. The Restated Stock Option agreement also acknowledged Citizens
existing options to date to purchase an aggregate of 4,511,322 shares of
the Company's common stock at exercise prices ranging from $12.75 to
$18.00 per share with an expiration date of September 12, 2000. In the
aggregate, Citizens presently owns approximately 18.6% of the Company's
outstanding common stock and 59.2% of the Company's common stock on a
fully diluted basis.
(5) Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS 130 requires that comprehensive income or
loss and changes in its components such as foreign currency translation
adjustments are to be displayed prominently in the financial statements.
The Company's total comprehensive loss is as follows:
September 30, September 30,
1998 1997
Net loss (41,728) (24,181)
Foreign currency translation
adjustment 3,283 4,893
--------- --------
Total comprehensive loss (38,445) (19,288)
========= ========
-9-
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(6) Credit Facility
On October 15, 1996, the Company and its subsidiaries entered into a $170
million 10-year Multi-Currency Credit Facility with Postabank es
Takarekpenztar ("Postabank"), a Hungarian commercial bank (the "Postabank
Credit Facility"). Proceeds from the loan may be drawn entirely in
Hungarian Forints and up to 20% of the principal may be drawn in U.S.
Dollars through March 31, 1999.
Since October 1996, the Company has utilized the funding provided by the
Postabank Credit Facility to continue construction of its
telecommunications networks, provide working capital, and repay other
existing debt obligations. As of September 30, 1998 and 1997, the Company
had borrowed a total of $169 million and $150 million, respectively,
under the Postabank facility.
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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, monthly line rental fees,
connection fees, public pay telephone services and ancillary services (including
charges for additional services purchased at the customer's discretion).
The Company has embarked on a significant network development program
which has met its substantial demand backlog, increased the number of basic
telephone access lines in service and modernized existing facilities. The
development and installation of the network in each of the Company's operating
areas required significant capital expenditures. These expenditures, together
with associated operating expenses, will continue to result in the use of
outstanding credit facilities until a customer base large enough to provide
sufficient revenues and operating cash flow is established.
As a result of the development program to date, the Company achieved
EBITDA1 of $5.2 million during the quarter ended September 30, 1998 adjusted for
the cost of termination of the management services agreement, up from EBITDA of
$2.2 million for the quarter ended September 30, 1997. The ability of the
Company to generate sufficient revenues to satisfy cash requirements and become
profitable will depend upon a number of factors, including the Company's ability
to attract customers, revenues per customer and construction costs. These
factors are expected to be primarily influenced by the success of the Company's
operating and marketing strategies as well as market acceptance of
telecommunications services in the Company's operating areas. In addition, the
Company's profitability may be affected by changes in the Company's regulatory
environment and other factors that are beyond the Company's control.
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
- --------
1 EBITDA is defined as net revenue less operating and maintenance expenses and
management fees. The Company has included information concerning EBITDA because
it understands that it is used by certain investors as one measure of the
Company's ability to service or incur indebtedness. EBITDA is not a measure of
financial performance under generally accepted accounting principles and is not
necessarily comparable to similarly titled measures used by other companies.
EBITDA should not be construed as an alternative to operating income (as
determined in accordance with generally accepted accounting principles) 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>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
the Company's network construction and expansion program has added approximately
120,000 access lines through September 30, 1998 to the approximately 60,000
access lines acquired directly from Magyar Tavkozlesi Rt. ("MATAV"), the former
State-controlled monopoly telephone company.
Comparison of Three Months Ended September 30, 1998 and
Three Months Ended September 30, 1997
<TABLE>
Quarter end
<S> <C> <C> <C>
Net Revenues
(dollars in millions) 1998 1997 % change
Measured service revenues 8.1 6.5 25
Subscription revenues 2.6 1.9 37
Net interconnect charges (2.4) (2.6) (8)
----- -----
Net measured service and subscription revenues 8.3 5.8 43
Connection fees 0.5 3.5 (86)
Other operating revenues, net 0.6 0.4 50
----- -----
Telephone Service Revenues, Net 9.4 9.7 (3)
===== =====
</TABLE>
The Company recorded a 3% decrease in telephone service revenues to
$9.4 million for the three months ended September 30, 1998 from $9.7 million for
the three months ended September 30, 1997.
Net measured service and subscription revenues increased 43% to $8.3
million for the three months ended September 30, 1998 from $5.8 million for the
three months ended September 30, 1997. Measured service revenues increased 25%
to $8.1 million during the three months ended September 30, 1998 from $6.5
million during the three months ended September 30, 1997. Subscription revenues
increased 37% to $2.6 million during the three months ended September 30, 1998
from $1.9 million during the three months ended September 30, 1997. These
increases in measured service and subscription revenues are the result of a 32%
increase in average access lines in service from approximately 136,000 lines for
the three months ended September 30, 1997 to approximately 179,000 lines during
the three months ended September 30, 1998.
These revenues have been offset by net interconnect charges which
totalled $2.4 and $2.6 million during the three month periods ended September
30, 1998 and 1997, respectively. As a percentage of call and subscription
revenues, net interconnect charges have declined from 31% for the three months
ended September 30, 1997 to 22% for the three months ended September 30, 1998,
due to a higher proportion of local traffic as additional access lines are
placed in service plus a negotiated reduction in interconnect fees effective
January 1, 1998.
Connection fees for the three month period ended September 30, 1998
totalled $0.5 million as compared to $3.5 million for the three months ended
September 30, 1997. This decrease reflects the reduction in the number of new
access lines connected from approximately
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
19,000 lines during the three months ended September 30, 1997 to approximately
2,500 lines during the three months ended September 30, 1998. Connection fees
were expected to decline substantially during the quarter as the majority of
waitlisted customers have been provided with access lines.
Other operating revenues increased to $0.6 million during the three
months ended September 30, 1998 from $0.4 million during the three months ended
September 30, 1997 due to revenues generated from Lucent PBX sales and related
maintenance services and revenues generated from the provision of direct lines.
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 32% to $4.2 million for
the three months ended September 30, 1998 as compared to $6.1 million for the
three months ended September 30, 1997. On a per line basis, operating and
maintenance expenses decreased to approximately $23 per average access line for
the three months ended September 30, 1998 from $45 for the three months ended
September 30, 1997 as the Company achieved productivity improvements, including
stopping the use of labor intensive manual switchboards through the use of
modern switching technology, as well as increased focus on reducing operating
expenses.
Cost of termination of management services agreement
For the three months ended September 30, 1998, the Company recorded a
charge totalling $11.1 million representing the present value of payments due to
Citizens International Management Services Company under a termination and
consulting agreement (see "Liquidity and Capital Resources" below).
Depreciation and Amortization
Depreciation and amortization charges increased $1.0 million to $2.9
million for the three months ended September 30, 1998 from $1.9 million for the
three months ended September 30, 1997. This increase was due to the increase in
depreciation of plant and lines in operation.
Management Fees
Management fees were zero for the quarter due to the termination of the
management services agreement between the Company and Citizens International
Management Services Company (see "Liquidity and Capital Resources" below).
Loss from Operations
Loss from operations amounted to $8.8 million for the three months
ended September 30, 1998 as compared to income from operations of $0.3 million
for the three months ended September 30, 1997. Adjusted for the cost of
terminating the management services agreement,
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
income from operations for the quarter amounted to $2.3 million. Higher revenues
and lower operating and maintenance expenses during the three months ended
September 30, 1998 as compared to the three months ended September 30, 1997 were
offset by increased depreciation and amortization charges during the quarter.
Foreign Exchange Gains
Foreign exchange gains amounted to approximately $58,000 for the three
months ended September 30, 1998 as compared to foreign exchange losses of
approximately $125,000 for the three months ended September 30, 1997. Such
foreign exchange gains and losses resulted from the devaluation of the Hungarian
Forint against the U.S. Dollar and the German Mark, as well as the strengthening
of the German Mark against the U.S. Dollar during the period.
Interest Expense
Interest expense increased to $11.3 million for the three months ended
September 30, 1998 from $9.2 million for the three months ended September 30,
1997. This increase was attributable to higher average debt levels during the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997 as the Company incurred indebtedness in order to continue the
construction of its telecommunications networks and repay other loan
obligations.
Interest Income
Interest income increased to $0.2 million for the three months ended
September 30, 1998 from $0.1 million for the three months ended September 30,
1997 due to higher average cash balances outstanding during the three months
ended September 30, 1998.
Other, net
Other, income amounted to $0.8 million for the three months ended
September 30, 1998 as compared to other, expense of $0.1 million for the three
months ended September 30, 1997. The increase during the three months ended
September 30, 1998 is due to an approximate $0.8 million gain recognized related
to the termination of the former management services agreement between the
Company and Citizens International Management Services Company (see "Liquidity
and Capital Resources" below).
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $19.1 million during the three months ended September 30, 1998 as
compared to a net loss of $9.1 million during the three months ended September
30, 1997.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Comparison of Nine Months Ended September 30, 1998 to
Nine Months Ended September 30, 1997
<TABLE>
<S> <C> <C> <C>
Net Revenues
Year-to-date ended
(dollars in millions) 9/30/98 9/30/97 % change
Measured service revenues 23.8 18.8 27
Subscription revenues 8.0 5.0 60
Net interconnect charges (7.3) (7.6) (4)
------ ------
Net measured service and subscription revenues 24.5 16.2 51
Connection fees 1.4 9.4 (85)
Other operating revenues 2.6 1.3 100
----- ------
Telephone Service Revenues, Net 28.5 26.9 6
==== ====
</TABLE>
The Company recorded a 6% increase in net telephone service revenues of
$28.5 million for the nine months ended September 30, 1998 as compared to
revenues of $26.9 million for the nine months ended September 30, 1997.
Net measured service and subscription revenues increased 51% to $24.5
million for the nine months ended September 30, 1998 from $16.2 million for the
nine months ended September 30, 1997. Measured service revenues increased 27% to
$23.8 million while subscription revenues increased 60% to $8.0 million for the
nine months ended September 30, 1998. These increases in net measured service
and subscription fee revenues are the result of a 47% increase in average access
lines in service from approximately 120,000 lines for the nine months ended
September 30, 1997 to approximately 176,500 lines for the nine months ended
September 30, 1998.
These revenues have been offset by net interconnect charges which
totalled $7.3 million for the nine months ended September 30, 1998 as compared
to $7.6 million for the nine months ended September 30, 1997. As a percentage of
call and subscription revenues, net interconnect charges have declined from 32%
for the nine months ended September 30, 1997 to 23% for the nine months ended
September 30, 1998, due to a higher proportion of local traffic as additional
access lines are placed in service plus a negotiated reduction in interconnect
fees effective January 1, 1998.
Connection fees for the nine months ended September 30, 1998 totalled
$1.4 million as compared to $9.4 million for the nine months ended September 30,
1997. The Company's ongoing network construction efforts resulted in the
connection of approximately 53,000 subscribers during the nine months ended
September 30, 1997 as compared to the connection of approximately 6,000
subscribers in the nine months ended September 30, 1998. Connection fees were
expected to decline substantially during the period as the majority of
waitlisted customers have been provided with access lines.
- 15 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Other operating revenues increased to $2.6 million for the nine months
ended September 30, 1998 compared to $1.3 million for the nine months ended
September 30, 1997. This increase was due to additional revenues generated from
the provision of direct lines, Lucent PBX sales and related maintenance
services, as well as the receipt of a government subsidy to maintain low
subscription fees.
Operating and Maintenance Expenses
Operating and maintenance expenses for the nine months ended September
30, 1998 decreased to $14.7 million as compared to $17.4 million for the nine
months ended September 30, 1997. On a per line basis, operating and maintenance
expenses decreased to approximately $84 per average access line for the nine
months ended September 30, 1998 from $145 for the nine months ended September
30, 1997 as the Company achieved productivity improvements, including stopping
the use of labor intensive manual switchboards through the use of modern
switching technology, as well as increased focus on reducing operating expenses.
Cost of termination of management services agreement
For the nine months ended September 30, 1998, the Company recorded a
charge totalling $11.1 million representing the present value of payments due to
Citizens International Management Services Company under a termination and
consulting agreement (see "Liquidity and Capital Resources" below).
Depreciation and Amortization
Depreciation and amortization charges increased to $8.6 million for the
nine months ended September 30, 1998 from $5.3 million for the nine months ended
September 30, 1997. This increase was due to the increase in property, plant and
equipment in service as the construction program progresses.
Management Fees
Management fees pursuant to management service agreements decreased to
$2.5 million for the nine months ended September 30, 1998 from $4.1 million for
the nine months ended September 30, 1997. Effective July 1, 1998, the Company
will no longer be obligated to pay management fees due to the termination of the
agreements (see "Liquidity and Capital Resources" below).
Loss from Operations
Loss from operations amounted to $8.5 million for the nine months ended
September 30, 1998 as compared to income from operations of $36,000 for the nine
months ended September 30, 1997. Adjusted for the termination charge, income
- 16 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
from operations amounted to $2.7 million for the nine months ended September 30,
1998. The adjusted income from operations increased principally due to the
additional revenue generated by the network development program and increased
focus on reducing operating expenses.
Foreign Exchange Loss
Foreign exchange losses decreased to $0.3 million for the nine months
ended September 30, 1998 from $0.4 million for the nine months ended September
30, 1997. Such foreign exchange losses resulted from the devaluation of the
Hungarian Forint against the U.S. Dollar and the German Mark and currency
fluctuations between the U.S. Dollar and the German Mark.
Interest Expense
Interest expense increased to $34.1 million for the nine months ended
September 30, 1998 from $24.3 million for the nine months ended September 30,
1997. This increase was attributable to higher average debt levels during the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997 as the Company incurred additional indebtedness in order to
continue the construction of its telecommunications networks.
Interest Income
Interest income decreased to $0.4 million for the nine months ended
September 30, 1998 from $0.6 million for the nine months ended September 30,
1997 primarily due to lower average cash balances outstanding during the period.
Other, net
Other, income amounted to $0.8 million for the nine months ended
September 30, 1998 as compared to other, expense of $7,000 for the nine months
ended September 30, 1997. The increase during the three months ended September
30, 1998 is due to an approximate $0.8 million gain recognized related to the
termination of the former management services agreement between the Company and
Citizens International Management Services Company (see "Liquidity and Capital
Resources" below).
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $41.8 million, or $7.90 per share, for the nine months ended September
30, 1998 as compared to a net loss of $24.2 million, or $5.58 per share for the
nine months ended September 30, 1997.
- 17 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its capital requirements primarily
through a combination of debt, equity and vendor financing. The ongoing
development and installation of the network in each of the Company's operating
areas required 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.
Cash flow provided by operating activities totalled $8.5 million during
the nine months ended September 30, 1998 compared to $5.6 million during the
nine months ended September 30, 1997. For the nine months ended September 30,
1998, the Company used $13.0 million for investing activities, which was
primarily used to fund the construction of the Company's telecommunications
networks, compared to $57.2 million used for investing activities in the nine
months ended September 30, 1997. Financing activities provided net cash of $11.5
million and $43.2 million for the nine months ended September 30, 1998 and 1997,
respectively.
To date, the Company's activities have involved the acquisition of the
concessions and telecommunications networks from MATAV and the subsequent
design, development and construction of the modern telecommunications
infrastructure that the Company now has in service. The Company has suffered
from recurring losses from operations and has a working capital deficiency and a
net capital deficiency. The Company is dependent on its ability to generate cash
from operations, raise capital in the form of debt or equity, or refinance or
otherwise resolve its existing obligations. 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
additional customers and revenues per customer. 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 the Company's services.
On September 30, 1998, the Company and Citizens International
Management Services Company, a wholly-owned subsidiary of Citizens Utilities
Company ("CIMS") agreed to terminate the Management Services Agreement (the
"Management Services Agreement") between the Company and CIMS pursuant to which
CIMS provided certain management services to the Company. As of June 30, 1998,
the Company had accrued as a current liability, but not paid, $9.7 million
pursuant to the Management Services Agreement. As consideration for the
termination of the Management Services Agreement, the Company issued (i) 100,000
shares of its common stock in final settlement and payment of $1.2 million of
accrued fees and expenses payable to CIMS under the Management Services
Agreement and (ii) a promissory note in the principal amount of $8.4 million
(the "Note") evidencing the Company's obligation to pay such amount of accrued
fees and expenses due and payable to CIMS under the Management Services
Agreement. The principal on the Note is payable in full on September 15, 2004
and bears interest at a varying rate per annum which is 2-1/2% per annum above
the one-year LIBOR rate with monthly adjustments in such varying rate. Accrued
interest shall be payable annually. In
- 18 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
part as further consideration for the termination of the Management Services
Agreement and in part as consideration for certain consulting services to be
provided by CIMS to the Company from 2004 to 2010, the Company agreed to pay
CIMS an aggregate amount of $21,000,000 payable in 28 quarterly installments of
$750,000 in each year from 2004 through and including 2010.
The Company believes it will be able to meet its obligations as they
become due during the remainder of 1998 and into the first quarter of 1999.
Funding for the Company's future capital requirements to repay existing debt
obligations in 1999 may require the sale of equity and/or debt of HTCC or one or
more of its subsidiaries. There can be no assurance that such financing will be
available to the Company when needed, on commercially reasonable terms, or at
all. The Company is, however, reviewing its options with respect to refinancing
its existing credit and/or vendor facilities. The Company is also reviewing
various other financing alternatives with its financial advisors.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated condensed financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
The Company has granted various warrants and options to purchase the
Company's Common Stock, including those previously granted to CU CapitalCorp., a
wholly-owned subsidiary of Citizens Utilities Company ("CUCC"), and has provided
certain preemptive rights to CUCC. For the term of these warrants and options,
the holders will have the opportunity to exercise and dilute the interests of
other security holders or, in the case of CUCC acquire a controlling interest in
the Company. As long as these warrants and options remain unexercised, the
Company's ability to obtain additional equity capital may be affected.
YEAR 2000
Computer programs worldwide use a two-digit code for calendar dates.
For instance, many computers on January 1, 2000 will assume that 01-01-00 is the
first day of the year 1900 rather than 2000. Massive system failures may occur
globally due to this year 2000 (Y2K) "bug", which acts much like a computer
virus, if not properly addressed. The Company developed a Y2K compliance Program
(the "Program") in early 1998 to mitigate the impact of the Y2K issue for its
internal systems and the systems that it relies on directly and indirectly from
third parties.
Under the Program, the Company has formed a Y2K oversight committee
(the "Committee") which is responsible for researching, planning, executing,
implementing and completing the Program for the Company. The Company has full
authority to establish methodologies and to obtain additional resources as
necessary. The Committee consists of senior and mid-level management from
various disciplines within the Company, as well as representatives from the
switch manufacturers and other major hardware and software providers.
- 19 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
The systems evaluated in the Program include the Company's
telecommunication network (the "Network"), as well as internal information
technology ("IT") business systems, which include certain operational, financial
and administrative functions. The Program is composed of five primary phases:
(I) inventory; (II) assessment; (III) remediation; (IV) testing; and (V)
contingency planning and certification. Phase I has been completed and consisted
of developing a comprehensive working list which documents all software and
microprocessor reliant materials used by the Company to ensure that phase II
covers the entire population of potential Y2K issues. Phase II consists of
determining which equipment or software is not Y2K compliant and should be
completed by the end of November 1998. Phase III will consist of replacing those
hardware and software components identified as non-compliant and should be
completed by the middle of the second quarter 1999. Phase IV will consist of
testing of existing and new hardware and software components and has begun in
parallel with phase II and III. Phase V consists of developing a written plan
for alternative methods of completing critical processes should failure occur at
the turn of the century. These plans are scheduled to be in place prior to the
close of the third quarter 1999.
The Company relies upon its network construction vendors to provide
compliant hardware and software. The Committee believes that compliance of the
telephone switching systems presents the most significant Y2K exposure for the
Company. In cooperation with representatives from the switch manufacturers who
are active members of the Committee, the Committee has developed a tentative
plan for Y2K compliance of the switching systems. Initial meetings with major
vendors have indicated that full compliance should be reached by the end of the
second quarter of 1999 at which time compliance certificates will be issued by
the vendors. There are several plans being developed with the vendors to ensure
that these systems are upgraded and tested prior to this deadline.
The Company relies upon MATAV's telecommunication network for all
long-distance interconnections. Should MATAV's telephone switching systems be
non-Y2K compliant, the systems could fail resulting in lost revenue for the
Company. The Company is working directly with MATAV to ensure that no such
failure occurs. A member of the Committee employed by one of the Company's
telecommunications switching vendors also sits on MATAV's Y2K committee and is
actively involved in the issue. The Company believes that no costs will be
incurred related to this matter.
The Company's recently implemented Billing and Customer Care system
("BACC") is Y2K compliant according to its vendor, representatives of which
participate on the Committee. During phase IV of the program and following the
upgrades of the Company's switching systems, the BACC system will be fully
tested in cooperation with the vendor to ensure Y2K compliance has been reached.
The vendor will issue a compliance certificate following successful completion
of these tests.
Various other IT systems have been identified to be replaced or
upgraded in association with the Company's efforts to become Y2K compliant. The
Company believes that all such systems will have completed all phases of the
Program by the end of the second quarter of 1999.
- 20 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
The Company currently estimates that the total costs of remediation
will range from $700,000 to $1 million, which includes the replacement /upgrade
of certain equipment. When phase II is completed, this cost estimate may
increase. Management cannot provide assurance that the result of the Program or
that the remediation costs will not be materially different from estimates.
Accordingly, contingency plans are currently being developed to address
high-risk systems. The contingency plans are expected to be in place by the
third quarter of 1999.
The Company is dependent on network switch manufacturers to provide
compliant hardware and software in a timely manner. With IT systems, the Company
is dependent on the development of software by external experts, and the
availability of critical resources with the requisite skill sets. At worst case,
failure by the Company or by certain of its vendors to remediate Y2K compliance
issues could result in disruption of the Company's operations, possibly
impacting the Network and the Company's ability to bill and collect revenues.
However, management believes that this worst case scenario is unlikely, and that
its efforts to mitigate Y2K issues will be successful.
INFLATION AND FOREIGN CURRENCY
For the year ended December 31, 1997, inflation in Hungary was
approximately 18.6% on an annualized basis. It is the stated policy goal of the
Hungarian government to keep inflation from exceeding approximately 15% in 1998.
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. The Company's
resulting foreign currency exposure is difficult to hedge due to the significant
costs involved and the lack of a market for such hedging. In addition, certain
of the Company's balance sheet accounts are expressed in foreign currencies
other than the Hungarian Forint, the Company's functional currency. Accordingly,
when such accounts are converted into Hungarian Forints, the Company is subject
to foreign exchange gains and losses which are reflected as a component of net
income or loss. When the Company and its subsidiaries' Forint-denominated
accounts are translated into U.S. Dollars for financial reporting purposes, the
Company is subject to translation adjustments, the effect of which 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 Consumer Price Index
("CPI") 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 CPI 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.
- 21 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
SFAS No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise
and Related Information," was issued in June 1997. SFAS 131 establishes
standards for the way public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related party
disclosures about products and services, geographic areas and major customers.
The Company will adopt SFAS 131 for its annual reporting in 1998.
In June 1998, Statement of Financial Account Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 cannot be applied retroactively to
financial statements of prior periods. At the current time the Company does not
utilize derivative instruments and accordingly it is anticipated that the
adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial position and results of operations.
- 22 -
<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 Number
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 30, 1998 under
Item 5 "Other Events" summarizing certain agreements entered into
with certain subsidiaries of Citizens Utilities Company (Citizens
Utilities Company and its subsidiaries are hereinafter referred to as
"Citizens") pursuant to which the Company and Citizens settled its
disagreements with Citizens regarding certain issues with respect to
(i) 2.1 million shares of the Company's common stock subject to
Citizens' accrued preemptive rights and (ii) the Company's management
services agreement with Citizens.
- 23 -
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
(Registrant)
November 11, 1998 By: /s/Francis J. Busacca, Jr.
-----------------------------------
Francis J. Busacca, Jr.
Chief Financial Officer, Acting
President and Chief
Executive Officer; Duly
Authorized Officer
November 11, 1998 By: /s/William McGann
-----------------------------------
William McGann
Chief Accounting Officer,
Controller and Treasurer
- 24 -
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Hungarian
Telephone and Cable Corp.'s Consolidated Financial Statements for the quarterly
period ended September 30, 1998.
</LEGEND>
<CIK> 0000889949
<NAME> HUNGARIAN TELEPHONE AND CABLE CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,951
<SECURITIES> 0
<RECEIVABLES> 7,574
<ALLOWANCES> (754)
<INVENTORY> 0
<CURRENT-ASSETS> 19,196
<PP&E> 150,851
<DEPRECIATION> (16,311)
<TOTAL-ASSETS> 177,961
<CURRENT-LIABILITIES> 32,926
<BONDS> 200,548
0
0
<COMMON> 5
<OTHER-SE> (79,332)
<TOTAL-LIABILITY-AND-EQUITY> 177,961
<SALES> 9,412
<TOTAL-REVENUES> 9,412
<CGS> 0
<TOTAL-COSTS> 18,226
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,294
<INCOME-PRETAX> (19,073)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,073)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,073)
<EPS-PRIMARY> (3.61)
<EPS-DILUTED> 0
</TABLE>
