HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended June 30, 1998
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 5,277,395 Shares
(Class) (Outstanding at August 12, 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 9
and Results of Operations
Part II. Other Information 18
Signatures 20
- 1 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands, except share data)
<TABLE>
Assets June 30, 1998 December 31, 1997
<S> <C> <C>
(unaudited)
Current assets:
Cash $ 3,549 $ 4,031
Restricted cash 510 536
Accounts receivable, net 7,532 9,437
VAT receivable, net 42 2,641
Inventories 1,274 1,231
Prepayments and other current assets 1,163 2,146
----- -----
Total current assets 14,070 20,022
Net property, plant and equipment 135,848 138,885
Goodwill, less accumulated amortization 10,104 11,299
Other intangibles, less accumulated amortization 5,605 6,168
Other assets 8,708 10,111
----- ------
Total assets $ 174,335 $ 186,485
======= =======
Liabilities and Stockholders' Deficiency
Current liabilities:
Current installments of long-term debt $ 17,811 $ 7,489
Accounts payable 1,583 7,996
Advance subscriber payments 237 351
Due to related parties 10,478 7,932
Accruals 3,807 4,364
Other current liabilities 1,340 689
----- ---
Total current liabilities 35,256 28,821
Long-term debt, excluding current installments 195,307 194,537
Deferred revenue 1,483 1,488
Due to related parties 3,079 3,476
----- -----
Total liabilities 235,125 228,322
======= =======
Stockholders' deficiency:
Common stock, $.001 par value. Authorized
25,000,000 shares; issued 5,277,395 shares
in 1998 and 5,235,370 shares in 1997 5 5
Additional paid-in capital 70,833 70,772
Accumulated deficit (139,852) (117,197)
Accumulated other comprehensive income 8,224 4,964
Deferred compensation - (381)
----- -----
Total stockholders' deficiency (60,790) (41,837)
------- -------
Total liabilities and stockholders' deficiency $ 174,335 $ 186,485
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations
For the Three and Six Month Periods Ended June 30, 1998 and 1997
(In thousands, except share and per share data)
(unaudited)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
TELEPHONE SERVICES REVENUES, NET $ 9,718 $ 9,297 $ 19,090 $ 17,221
Operating expenses:
Operating and maintenance expenses 4,975 6,087 10,567 11,327
Depreciation and amortization 2,948 1,653 5,688 3,412
Management fees 996 1,329 2,500 2,736
----- ----- ----- -----
Total Operating Expenses 8,919 9,069 18,755 17,475
----- ----- ------ ------
INCOME (LOSS) FROM OPERATIONS 799 228 335 (254)
Other income (expenses):
Foreign exchange losses (83) (49) (350) (312)
Interest expense (11,688) (8,530) (22,797) (15,103)
Interest income 111 155 219 451
Other, net (94) 13 (62) 87
----- ----- ----- -----
NET LOSS $ (10,955) $ (8,183) $ (22,655) $ (15,131)
======= ====== ======= =======
NET LOSS PER COMMON SHARE - BASIC $ (2.07) $ (1.95) $ (4.29) $ (3.61)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,285,637 4,189,626 5,279,286 4,187,483
========= ========= ========= =========
</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' Deficiency
(In thousands, except share data)
(unaudited)
<TABLE>
Accumulated
Additional Other Total
Common Paid-in Accumulated Comprehensive Deferred Stockholders'
Shares Stock Capital Deficit Income Compensation Deficiency
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net loss (22,655) (22,655)
Foreign currency translation adjustment 3,260 3,260
------ --- --- ------- ----- --- -----
Balances at June 30, 1998 5,277,395 $ 5 70,833 (139,852) 8,224 - $ (60,790)
========= === ====== ======== ===== ===== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Month Periods Ended June 30, 1998 and 1997
(In thousands)
(unaudited)
<TABLE>
1998 1997
<S> <C> <C>
Net cash provided by operating activities $ 2,606 5,191
Cash flows from investing activities: ----- -----
Construction of telecommunication networks (11,998) (42,301)
Decrease in construction deposits 527
Acquisition of interest in subsidiary (20)
Proceeds from sale of assets - 299
----- -----
Net cash used in investing activities (11,491) (42,002)
Cash flows from financing activities: ------- -------
Borrowings under long-term debt 12,053 41,906
Repayment of long-term debt (3,577) (15,741)
Proceeds from exercise of options 224 50
----- -----
Net cash provided by financing activities 8,700 26,215
----- ------
Effect of foreign exchange rate changes on cash (297) (1,353)
----- ------
Net decrease in cash and cash equivalents (482) (11,949)
Cash and cash equivalents at beginning of period 4,031 15,876
----- ------
Cash and cash equivalents at end of period $ 3,549 3,927
===== =====
</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) 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 7,492,384 and 5,897,254 for the periods
ending June 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>
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.
(2) Cash and Restricted Cash
(a) Cash
At June 30, 1998, cash of $3,549,000 comprised the following:
$3,161,000 consisting of $175,000 denominated in U.S. dollars and
the equivalent of $2,986,000 denominated in Hungarian Forints on
deposit with banks in Hungary, and; $388,000 on deposit in the
United States.
(b) Restricted Cash
At June 30, 1998, approximately $456,000 of cash denominated in
Hungarian Forints was restricted under concession contract
fulfillment guarantees with restrictions to be removed principally
upon the successful attainment of certain operational requirements
as prescribed in the concession agreements. The Company expects to
satisfy the operational requirements within one year and therefore
the restricted cash is shown as a current asset.
At June 30, 1998, approximately $22,000 of cash denominated in
U.S. Dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $32,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
Current and long-term amounts due to related parties totalling
$13,557,000 at June 30, 1998 is comprised of the following: $34,000 due
to Hungarian Teleconstruct Corp. ("Teleconstruct") for rent and other
services, plus interest, $9,674,000 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 (see
Note 4 below); and $3,849,000 representing payments due to certain former
officers under separate termination, consulting and non-competition
agreements.
The Company paid approximately $604,000 during the six months ended June
30, 1998 and 1997 to three former officers under these agreements.
- 7 -
<PAGE>
(4) Issues with Citizens
The Company and Citizens presently have disagreements with respect to the
Management Services Agreement and shares of Common Stock subject to
Citizens' preemptive rights. As of June 30, 1998, the Company has accrued
as a current liability, but not paid, $9.7 million pursuant to the
Management Services Agreement with Citizens. The Company currently
intends to withhold any payments to Citizens with respect to the
Management Services Agreement until such time as these issues are
resolved. The Company and Citizens also have a disagreement regarding
certain issues with respect to 2.1 million shares of Common Stock subject
to Citizens' preemptive rights to date. The Company is currently in
discussions with Citizens in an attempt to resolve these issues.
(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 changes in the amounts of
items such as foreign currency translation adjustments are to be
displayed prominently in the financial statements. The Company's total
comprehensive loss is as follows:
June 30, June 30,
1998 1997
Net loss (22,655) (15,131)
Foreign currency translation
adjustment 3,260 3,370
Total comprehensive loss (19,395) (11,761)
(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 June 30, 1998 and 1997, the Company had
borrowed a total of $166 million and $143 million, respectively, under
the Postabank facility.
- 8 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Hungarian Telephone and Cable Corp. ("HTCC" 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 $3.7 million during the quarter ended June 30, 1998, up from EBITDA
of $1.9 million for the quarter ended June 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.
- 9 -
<PAGE>
Company's network construction and expansion program has added approximately
118,000 access lines through June 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 June 30, 1998 and
Three Months Ended June 30, 1997
Net Revenues
<TABLE>
Quarter end
(dollars in millions) 1998 1997 % change
<S> <C> <C> <C>
Measured service revenues 7.9 6.3 25
Subscription revenues 2.7 1.6 69
Net interconnect charges (2.5) (2.5) -
---- ----
Net measured service and subscription revenues 8.1 5.4 50
Connection fees 0.4 3.5 (89)
Other operating revenues, net 1.2 0.4 200
---- ----
Telephone Service Revenues, Net 9.7 9.3 4
==== ====
</TABLE>
The Company recorded a 4% increase in telephone service revenues to
$9.7 million for the three months ended June 30, 1998 from $9.3 million for the
three months ended June 30, 1997.
Net measured service and subscription revenues increased 50% to $8.1
million for the three months ended June 30, 1998 from $5.4 million for the three
months ended June 30, 1997. Measured service revenues increased 25% to $7.9
million during the three months ended June 30, 1998 from $6.3 million during the
three months ended June 30, 1997. Subscription revenues increased 69% to $2.7
million during the three months ended June 30, 1998 from $1.6 million during the
three months ended June 30, 1997. These increases in measured service and
subscription revenues are the result of a 47% increase in average access lines
in service from approximately 120,00 lines for the three months ended June 30,
1997 to approximately 176,200 lines during the three months ended June 30, 1998.
These revenues have been offset by net interconnect charges which
totalled $2.5 million during the three month periods ended June 30, 1998 and
1997. As a percentage of call and subscription revenues, net interconnect
charges have declined from 32% for the three months ended June 30, 1997 to 24%
for the three months ended June 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 June 30, 1998 totalled
$0.4 million as compared to $3.5 million for the three months ended June 30,
1997. This decrease reflects the reduction in the number of new access lines
connected from approximately 15,000 lines during the three months ended June 30,
1997 to approximately 3,200 lines during the three months ended June 30, 1998.
Connection fees were expected to decline substantially during the quarter as the
majority of waitlisted customers have been provided with access lines.
- 10 -
<PAGE>
Other operating revenues increased to $1.2 million during the three
months ended June 30, 1998 from $0.4 million during the three months ended June
30, 1997 due to revenues generated from Lucent PBX sales and related maintenance
services, revenues generated from the provision of direct lines, as well as the
receipt of a government subsidy to maintain low subscription fees.
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 18% to $5.0 million for
the three months ended June 30, 1998 as compared to $6.1 million for the three
months ended June 30, 1997. On a per line basis, operating and maintenance
expenses decreased to approximately $28 per average access line for the three
months ended June 30, 1998 from $51 for the three months ended June 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.
Depreciation and Amortization
Depreciation and amortization charges increased $1.2 million to $2.9
million for the three months ended June 30, 1998 from $1.7 million for the three
months ended June 30, 1997. This increase was due to the increase in
depreciation of plant and lines in operation.
Management Fees
Management fees pursuant to management service agreements decreased
$0.3 million to $1.0 million for the three months ended June 30, 1998 from $1.3
million for the three months ended June 30, 1997.
Income from Operations
Income from operations increased to $0.8 million for the three months
ended June 30, 1998 from $0.2 million for the three months ended June 30, 1997.
Higher revenues and lower operating and maintenance expenses during the three
months ended June 30, 1998 as compared to the three months ended June 30, 1997
were offset by increased depreciation and amortization charges during the
quarter.
Foreign Exchange Losses
Foreign exchange losses increased from approximately $50,000 for the
three months ended June 30, 1997 to approximately $80,000 for the three months
ended June 30, 1998. Such foreign exchange losses resulted from the devaluation
of the Hungarian Forint against the U.S. Dollar and the German Mark.
- 11 -
<PAGE>
Interest Expense
Interest expense increased to $11.7 million for the three months ended
June 30, 1998 from $8.5 million for the three months ended June 30, 1997. This
increase was attributable to higher average debt levels during the three months
ended June 30, 1998 as compared to the three months ended June 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 decreased to $0.1 million for the three months ended
June 30, 1998 from $0.2 million for the three months ended June 30, 1997 due to
lower average cash balances outstanding during the three months ended June 30,
1998.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $11.0 million during the three months ended June 30, 1998 as compared to
a net loss of $8.2 million during the three months ended June 30, 1997.
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997
<TABLE>
Net Revenues
Year-to-date ended
(dollars in millions) 6/30/98 6/30/97 % change
<S> <C> <C> <C>
Measured service revenues 15.7 12.3 28
Subscription revenues 5.4 3.1 74
Net interconnect charges (4.8) (5.0) (4)
---- ----
Net measured service and subscription revenues 16.3 10.4 57
Connection fees 0.9 6.0 (85)
Other operating revenues 1.9 0.8 138
---- ----
Telephone Service Revenues, Net 19.1 17.2 11
==== ====
</TABLE>
The Company recorded an 11% increase in net telephone service revenues
of $19.1 million for the six months ended June 30, 1998 as compared to revenues
of $17.2 million for the six months ended June 30, 1997.
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<PAGE>
Net measured service and subscription revenues increased 57% to $16.3
million for the six months ended June 30, 1998 from $10.4 million for the six
months ended June 30, 1997. Measured service revenues increased 28% to $15.7
million while subscription revenues increased 74% to $5.4 million for the six
months ended June 30, 1998. These increases in net measured service and
subscription fee revenues are the result of a 57% increase in average access
lines in service from approximately 111,800 lines for the six months ended June
30, 1997 to approximately 175,200 lines for the six months ended June 30, 1998.
These revenues have been offset by net interconnect charges which
totalled $4.8 million for the six months ended June 30, 1998 as compared to $5.0
million for the six months ended June 30, 1997. As a percentage of call and
subscription revenues, net interconnect charges have declined from 32% for the
six months ended June 30, 1997 to 23% for the six months ended June 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 six months ended June 30, 1998 totalled $0.9
million as compared to $6.0 million for the six months ended June 30, 1997. The
Company's ongoing network construction efforts resulted in the connection of
approximately 34,000 subscribers during the six months ended June 30, 1997 as
compared to the connection of approximately 3,500 subscribers in the six months
ended June 30, 1998. Connection fees were expected to decline substantially
during the period as the majority of waitlisted customers have been provided
with access lines.
Other operating revenues increased to $1.9 million for the six months
ended June 30, 1998 compared to $0.8 million for the six months ended June 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 six months ended June 30,
1998 decreased to $10.6 million as compared to $11.3 million for the six months
ended June 30, 1997. On a per line basis, operating and maintenance expenses
decreased to approximately $60 per average access line for the six months ended
June 30, 1998 from $101 for the six months ended June 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.
- 13 -
<PAGE>
Depreciation and Amortization
Depreciation and amortization charges increased to $5.7 million for the
six months ended June 30, 1998 from $3.4 million for the six months ended June
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 six months ended June 30, 1998 from $2.7 million for the
six months ended June 30, 1997.
Income from Operations
Income from operations increased to over $0.3 million for the six
months ended June 30, 1998 compared to a loss from operations of $0.3 million
for the six months ended June 30, 1997. The operating loss decreased 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 remained constant at $0.3 million for the six
months ended June 30, 1998 and June 30, 1997. Such foreign exchange losses
resulted from the devaluation of the Hungarian Forint against the U.S. Dollar
and the German Mark.
Interest Expense
Interest expense increased to $22.8 million for the six months ended
June 30, 1998 from $15.1 million for the six months ended June 30, 1997. This
increase was attributable to higher average debt levels during the six months
ended June 30, 1998 as compared to the six months ended June 30, 1997 as the
Company incurred additional indebtedness in order to continue the construction
of its telecommunications networks.
Interest Income
Interest income decreased to $0.2 million for the six months ended June
30, 1998 from $0.5 million for the six months ended June 30, 1997 primarily due
to lower average cash balances outstanding during the period.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $22.7 million, or $4.29 per share, for the six months ended June 30,
1998 as compared to a net loss of $15.1 million, or $3.61 per share for the six
months ended June 30, 1997.
- 14 -
<PAGE>
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 $2.6 million during
the six months ended June 30, 1998 compared to $5.2 million during the six
months ended June 30, 1997. For the six months ended June 30, 1998, the Company
used $11.5 million for investing activities, which was primarily used to fund
the construction of the Company's telecommunications networks, compared to $42.0
million used for investing activities in the six months ended June 30, 1997.
Financing activities provided net cash of $8.7 million and $26.2 million for the
six months ended June 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, including those related to the
Management Services Agreement with Citizens. 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.
The Company and Citizens presently have a disagreement regarding
certain issues with respect to the Management Services Agreement with Citizens.
As of June 30, 1998, the Company has accrued as a current liability, but not
paid, $9.7 million pursuant to the Management Services Agreement. The Company
currently intends to withhold any payments to Citizens until such time as these
issues are resolved. The Company and Citizens also have a disagreement regarding
certain issues with respect to 2.1 million shares of Common Stock subject to
Citizens' preemptive rights to date. The Company is currently in discussions
with Citizens in an attempt to resolve these issues.
The Company believes it will be able to meet its obligations as they
become due during 1998, provided it is not required to settle the accrued
liability to Citizens in cash, however, there can be no assurance that this will
be the case. Additionally, funding for the Company's future capital requirements
to repay existing debt obligations after 1998 may require the sale of equity
and/or debt of the Company or one or more of the Operating Companies. There can
be no assurance that such financing will be available to the Company when
needed, on commercially reasonable terms, or at all. 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.
- 15 -
<PAGE>
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 Citizens, and has
provided certain preemptive rights to Citizens. 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 Citizens, acquire a
controlling interest in the Company. As long as these warrants and options
remain unexercised, and dependent upon the outcome of the Company's
disagreements with Citizens, the Company's ability to obtain additional equity
capital may be adversely affected.
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.
- 16 -
<PAGE>
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.
- 17 -
<PAGE>
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Legal Proceedings
The Company is currently reviewing the work product in connection with certain
construction services performed by a Hungarian contractor in 1996 and 1997
during the development of the Company's network build-out in two of its
operating areas. Following the completion of such review, the Company may seek
certain remedies against such contractor. In addition, the Company and such
contractor have a disagreement over certain issues with respect to the pricing
of the connection of certain telephone access lines which are to be connected to
the Company's networks in 1998. The Company is currently in discussions with
such contractor in an attempt to resolve these issues.
Item 2. Change in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Registrant was held on
June 10, 1998.
(b) Not Applicable.
(c) First Matter Voted on at the Annual Meeting of Stockholders of the
Registrant: Election of Directors.
Votes Cast For Votes Withheld
Ole Bertram 4,719,168 58,573
Daryl A. Ferguson 4,718,068 59,673
David A. Finley 4,718,168 59,573
James G. Morrison 4,698,818 78,923
John B. Ryan 4,719,168 58,573
Finn Schkolnik 4,719,168 58,573
James H. Season 4,216,260 561,481
William E. Starkey 4,718,168 59,573
Leonard Tow 4,653,154 124,587
- 18 -
<PAGE>
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Second Matter Voted on at the Annual Meeting of Stockholders
of the Registrant: Proposal to amend the Company's 1992 Incentive Stock
Option Plan, as amended, to increase the number of shares of the
Registrant's common stock available thereunder from 750,000 to
1,000,000.
For Against Abstain
4,543,745 209,696 24,300
Third Matter Voted on at the Annual Meeting of Stockholders of
the Registrant: Ratification of the appointment of KPMG Peat Marwick
LLP as auditors of the Registrant for the fiscal year ending December
31, 1998.
For Against Abstain
4,744,616 8,800 24,325
(d) Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
- 19 -
<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)
August 13, 1998 By: /s/Francis J. Busacca, Jr.
--------------------------
Francis J. Busacca, Jr.
Chief Financial Officer, Acting President
and Chief Executive Officer; Duly
Authorized Officer
August 13, 1998 By: /s/William McGann
--------------------------
William McGann
Chief Accounting Officer
- 20 -
<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 June 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> JUN-30-1998
<CASH> 4,059
<SECURITIES> 0
<RECEIVABLES> 8,221
<ALLOWANCES> (689)
<INVENTORY> 0
<CURRENT-ASSETS> 14,070
<PP&E> 149,568
<DEPRECIATION> (13,720)
<TOTAL-ASSETS> 174,335
<CURRENT-LIABILITIES> 35,256
<BONDS> 195,307
0
0
<COMMON> 5
<OTHER-SE> (60,795)
<TOTAL-LIABILITY-AND-EQUITY> 174,335
<SALES> 9,718
<TOTAL-REVENUES> 9,718
<CGS> 0
<TOTAL-COSTS> 8,919
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 11,688
<INCOME-PRETAX> (10,955)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,955)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,955)
<EPS-PRIMARY> (2.07)
<EPS-DILUTED> 0
</TABLE>
