HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended September 30, 1999
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
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 11,981,579 Shares
(Class) (Outstanding at November 11, 1999)
<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
and Comprehensive Income (Loss) 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
and Results of Operations 14
Part II. Other Information 29
Signatures 30
- 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, 1999 December 31, 1998
------ ------------------ -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 19,527 $ 8,489
Restricted cash 116 64
Accounts receivable, net 7,721 6,703
Inventories 1,001 1,111
Prepayments and other current assets 1,774 187
------------ ------------
Total current assets 30,139 16,554
Net property, plant and equipment 118,058 136,489
Goodwill, less accumulated amortization 8,435 10,000
Other intangibles, less accumulated amortization 4,797 5,592
Other assets 791 8,432
------------ ------------
Total assets $ 162,220 $ 177,067
============ ============
Liabilities and Stockholders' Deficiency
----------------------------------------
Current liabilities:
Current installments of long-term debt $ - $ 31,804
Short-term loans 134,206 -
Accounts payable 1,233 2,061
Accruals 10,673 3,552
Other current liabilities 1,462 932
Due to related parties 941 1,011
------------ ------------
Total current liabilities 148,515 39,360
Long-term debt, excluding current installments - 202,881
Long-term note payable, $25,000,000 face amount;
interest - LIBOR plus 4%, due March 31, 2007
(less unamortized discount based on imputed
interest rate of 5% - $8,486,000 in 1999; $0 in 1998) 16,514 -
Due to related parties 1,971 22,372
Deferred credits and other liabilities 644 1,491
------------ ------------
Total liabilities 167,644 266,104
------------ ------------
Stockholders' deficiency:
Preferred stock, $.001 par value; $70.00 liquidation value.
Authorized 200,000 shares; issued and outstanding
30,000 shares in 1999 and no shares in 1998 - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
11,981,579 in 1999 and 5,395,864 in 1998 11 5
Additional paid-in capital 143,998 71,467
Accumulated deficit (162,623) (167,809)
Accumulated other comprehensive income 13,190 7,300
------------ ------------
Total stockholders' deficiency (5,424) (89,037)
------------ ------------
Total liabilities and stockholders' deficiency $ 162,220 $ 177,067
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 2 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations and Comprehensive Income (Loss)
For the Three and Nine Month Periods Ended September 30, 1999 and 1998
(In thousands, except share and per share data)
(unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
Telephone services revenues, net $ 11,169 $ 9,412 $ 33,164 $ 28,502
Operating expenses:
Operating and maintenance expenses 4,282 4,179 12,942 14,746
Cost of termination of management
Services agreement - 11,131 - 11,131
Depreciation and amortization 3,091 2,916 8,933 8,604
Management fees - - - 2,500
------- ------- ------- -------
Total Operating Expenses 7,373 18,226 21,875 36,981
------- ------- ------- -------
Income (loss) from operations 3,796 (8,814) 11,289 (8,479)
Other income (expenses):
Foreign exchange gains (losses) (827) 58 (1,964) (292)
Interest expense (6,252) (11,294) (26,036) (34,091)
Interest income 604 154 1,216 373
Other, net (57) 823 (223) 761
-------- ------- -------- -------
Loss before extraordinary items (2,736) (19,073) (15,718) (41,728)
Extraordinary items, net - - 20,945 -
------- ------- -------- ------------
Net income (loss) $ (2,736) $ (19,073) $ 5,227 $ (41,728)
Preferred stock dividends (27) - (41) -
-------- ------- ----------- ------------
Net income (loss) available for common stockholders (2,763) (19,073) 5,186 (41,728)
Comprehensive income adjustments (9) 23 5,890 3,283
-------- ------- -------- --------
Total comprehensive income (loss) $ (2,772) $ (19,050) $ 11,076 $ (38,445)
======== ======== ====== ========
Earnings (loss) per common share - basic and diluted:
Before extraordinary items $ (0.23) $ (3.61) $ (1.78) $ (7.90)
Extraordinary items $ - $ - $ 2.37 $ -
--------- --------- --------- ---------
Net earnings (loss) $ (0.23) $ (3.61) $ 0.59 $ (7.90)
========= ========= ========= =========
Weighted average number of common shares
Outstanding - basic and diluted 11,981,579 5,284,504 8,821,401 5,281,045
========== ========= ========= =========
</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
Other Total
Common Preferred Additional Accumulated Comprehensive Stockholders'
Shares Stock Stock Paid-in Capital deficit Income Deficiency
- -------------------------- ----------- ----------- ----------- ------------------ --------------- ---------------- ----------------
Balances at December 31,
1998 5,395,864 $ 5 - 71,467 (167,809) 7,300 $ (89,037)
Shares issued to Tele
Danmark A/S 1,571,429 2 - 10,998 - - 11,000
Shares issued to
Postabank 2,428,572 2 - 33,998 - - 34,000
Shares issued to Citizens 1,300,000 1 - 11,199 - - 11,200
Shares issued to Danish
Fund 1,285,714 1 - 8,999 - - 9,000
Stock issuance costs - - (1,488) - - (1,488)
Warrants issued in
connection with
long-term notes - - 8,825 - - 8,825
Cumulative preferred
stock dividends in
arrears - - - (41) - (41)
Net income - - - 5,227 - 5,227
Foreign currency
translation adjustment - - - - 5,890 5,890
- -------------------------- ----------- ----------- ----------- ------------------ --------------- ---------------- ----------------
Balances at June 30, 1999
11,981,579 $ 11 - 143,998 (162,623) 13,190 $ (5,424)
- -------------------------- ----------- ----------- ----------- ------------------ --------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
- 4 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Month Periods Ended September 30, 1998 and 1999
(In thousands)
(unaudited)
<TABLE>
<S> <C> <C>
1999 1998
---- ----
Net cash provided by operating activities $ 14,522 8,449
---------- -----------
Cash flows from investing activities:
Construction of telecommunication networks (4,093) (13,657)
(Increase) decrease in construction deposits (3) 465
Acquisition of interest in subsidiary - (20)
Proceeds from sale of assets 45 231
---------- -----------
Net cash used in investing activities (4,051) (12,981)
---------- ------------
Cash flows from financing activities:
Borrowings under long-term debt agreements 41,391 14,879
Repayments and settlement of long-term debt (217,697) (3,577)
Borrowings under short-term debt agreements 124,753 -
Proceeds from issuance of common stock, net 52,511 -
Proceeds from exercise of options - 224
---------- -----------
Net cash provided by financing activities 958 11,526
---------- -----------
Effect of foreign exchange rate changes on cash (391) (360)
----------- ------------
Net increase in cash and cash equivalents 11,038 6,634
Cash and cash equivalents at beginning of period 8,489 4,031
---------- -----------
Cash and cash equivalents at end of period $ 19,527 10,665
========== ===========
</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 of
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant
and, together with its consolidated subsidiaries, the "Company")
have been prepared without audit and, in the opinion of
management, include all adjustments consisting mainly 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.
The accompanying condensed consolidated financial statements
include the financial statements of HTCC and its majority
owned subsidiaries; Kelet-Nograd Com Rt., ("KNC"), Raba-Com Rt.,
("Raba-Com"), Hungarotel Tavkozlesi Rt. ("Hungarotel"), Papa es
Tersege Telefon Koncesszios Rt. ("Papatel"), HTCC Consulting Rt.
("HTCC Consulting") and Pilistav Rt. ("Pilistav"). All material
intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial
statements are prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP). In preparing financial
statements in conformity with U.S. GAAP, management is required to
make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
The unaudited condensed consolidated financial statements should
be read in conjunction with the audited consolidated financial
statements of Hungarian Telephone and Cable Corp. and its
subsidiaries for the year ended December 31, 1998, including the
notes thereto, set forth in the Company's Form 10-K.
The Company has suffered recurring losses, has a net capital
deficiency, and has current liabilities in excess of current
assets. As discussed in Notes 4, 5 and 6, the Company has
refinanced and restructured its debt and equity in May 1999. As a
part of the Company's debt refinancing, the Company has entered
into a one-year $138 million ($134 million at current exchange
rates) dual currency bridge loan with Postabank es Takarekpenztar
- 6 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
("Postabank"), a Hungarian commercial bank. The Company is
currently evaluating various alternatives to refinance the bridge
loan provided by Postabank as the loan is repayable on May 10,
2000. While the availability of long-term financing
sources cannot be predicted with certainty, the Company believes
that it will be able to resolve this issue prior to May 10, 2000.
However, there can be no assurance that the Company will be able
to obtain long-term financing on commercially acceptable terms, or
at all.
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.
(b) Net Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed by dividing
income or loss attributable to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock.
Net earnings (loss) and weighted average shares outstanding used
for computing diluted loss per common share were the same as that
used for computing basic loss per common share for each of the
periods ended September 30, 1999 and 1998.
The Company had potentially dilutive common stock equivalents of
8,242,059 and 7,474,915 for the periods ended September 30, 1999
and 1998, respectively, which were not included in the computation
of diluted net loss per common share because they were
antidilutive for the periods presented. The basis for determining
whether common stock equivalents were potentially dilutive was
loss before extraordinary items.
(2) Cash, Cash Equivalents and Restricted Cash
(a) Cash
At September 30, 1999, cash of $3,470,000 included the following:
$2,544,000 consisting of $413,000 denominated in U.S. dollars and
the equivalent of $2,131,000 denominated in Hungarian Forints on
deposit with banks in Hungary, and; $926,000 on deposit in the
United States.
- 7 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(b) Cash Equivalents
Cash equivalents amounted to approximately $16,057,000 at
September 30, 1999 and consisted of Hungarian government
securities, denominated in Hungarian Forints, purchased under
agreements to resell which mature within three months.
(c) Restricted Cash
At September 30, 1999, approximately $22,000 of cash denominated
in U.S. Dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $94,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
Current and long-term amounts due to related parties totalling $2,912,000
at September 30, 1999 is comprised of the following: $41,000 due to a
subsidiary of Citizens Utilities Company (Citizens Utilities Company and
its subsidiaries are hereinafter referred to as "Citizens") representing
cumulative preferred stock dividends in arrears (see Note 5) and
$2,871,000 representing payments due to certain former officers under
separate termination, consulting and non-competition agreements. The
Company paid approximately $906,000 during each of the nine months ended
September 30, 1999 and 1998 to three former officers under these
agreements.
The Company has short-term loans and long-term notes with Postabank (see
Note 4). Postabank's share ownership in the Company is 20.3% of the
shares outstanding at September 30, 1999.
(4) Short-term Loans and Credit Facilities
During 1996 and 1997, the Company entered into several construction
contracts with a Hungarian contractor which totalled $59.0 million in the
aggregate, $47.5 million of which was financed by a contractor financing
facility. The contractor financed the financing facility through a
facility provided by Postabank. As of December 31, 1998, the balance owed
under the contractor financing facility was $36.6 million. On March 30,
1999, Postabank assumed HUF 7 billion plus accrued interest of HUF 348
million (approximately $30.9 million at historical exchange rates) of the
Company's liability under the contractor financing facility from the
contractor, due to the contractor's financial difficulties, and sold
this debt back to the Company for HUF 3 billion (approximately $12.6
million at historical exchange rates). The purchase of the debt was
- 8 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
financed by Postabank. On the same day, the Company purchased HUF 4
billion (approximately $16.8 million at historical exchange rates) of
loans the contractor had with Postabank for HUF 900 million
(approximately $3.8 million at historical exchange rates) and
subsequently offset the booked value of the loans purchased of HUF 900
million (approximately $3.8 million at historical exchange rates)
against the outstanding amounts owed to the contractor. The purchase
of these loans was also financed by Postabank. As a result of the above
transactions, the Company recorded an extraordinary gain of HUF 4.3
billion (approximately $18.1 million at historical exchange rates)
during the second quarter of 1999 which reflected the
extinguishment of all amounts due under the contractor financing
facility.
On October 15, 1996, the Company and its subsidiaries entered into a $170
million 10-year Multi-Currency Credit Facility with Postabank (the
"Original Postabank Credit Facility"). The Company utilized the funding
provided by the Original Postabank Credit Facility to continue
construction of its telecommunications networks, provide working capital,
and repay other debt obligations. The Company did not have sufficient
funds to meet the required repayment obligations under the Original
Postabank Credit Facility as of March 31, 1999. On May 12, 1999, the
Company entered into various agreements as part of a revision of its
capital structure with the following parties: Postabank; Tele Danmark A/S
("Tele Danmark"); and the Danish Investment Fund for Central and Eastern
Europe (the "Danish Fund") (see Note 6). As a result of such agreements,
the Company extinguished all of its obligations to Postabank under the
Company's Original Postabank Credit Facility in the amount of
approximately $193 million and the $16.4 million borrowed in settlement
of the amount due under the contractor financing facility described
above. On May 12, 1999, the Company borrowed from Postabank $138 million
($134 million at current exchange rates) under a one-year dual currency
bridge loan agreement in Hungarian Forints and Euros and $25 million
pursuant to certain unsecured notes payable (the "Notes"). The loan is
repayable on May 10, 2000 and bears interest at an initial rate of 2.25%
(the "Margin") plus the Budapest Bank Offering Rate or Euro LIBOR Rate
(currently approximately 15% and 2.2%, respectively) which Margin
increases incrementally to 4.25%, in quarterly increments of 1% over the
next year. HTCC and one of its subsidiaries, HTCC Consulting Rt. are
guarantors for the HTCC subsidiaries under the Bridge Loan Agreement. The
Company has pledged all of its intangible and tangible assets, including
HTCC's ownership interests in its subsidiaries, and its real property to
secure all of the obligations under the Bridge Loan Agreement. The
Company entered into a series of agreements to secure such obligations
under the Bridge Loan Agreement. The Notes accrue interest, which is
payable semi-annually, at 4% plus the LIBOR rate for the applicable six
month interest period. The Notes which mature in 2007 are transferable
subject to applicable security laws.
- 9 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
As a result of the extinguishment of the Original Postabank Credit
Facility, the Company recorded an extraordinary loss of HUF 1.5 billion
(approximately $6.2 million at historical exchange rates) during the
second quarter of 1999 which represented the write-off of the remaining
unamortized deferred financing costs, included in other assets and
deferred credits at December 31, 1998, pertaining to the Original
Postabank Credit Facility.
(5) Transactions with Citizens
On May 12, 1999, the Company and Citizens entered into a Stock Purchase
Agreement (the "Citizens Stock Purchase Agreement') pursuant to which the
Company issued to Citizens 1,300,000 shares of the Company's common stock
and 30,000 shares of the Company's Series A Preferred Stock, par value
$0.001 (the "Preferred Shares"). In consideration for such shares,
Citizens (i) transferred to the Company for cancellation the $8,374,000
promissory note issued by the Company to Citizens which was to mature in
2004, (ii) forgave half of the accrued interest due on the promissory
note through May 15, 1999 and (iii) agreed to renounce and forego any
rights whatsoever to any payment of the $21 million which was payable by
the Company to Citizens in quarterly installments of $750,000 each from
2004 through and including 2010. Citizens, as the holder of the Preferred
Shares, is entitled to receive cumulative cash dividends at an annual
rate of 5%, compounded annually on the liquidation value of $70 per
share. The Company may redeem the Preferred Shares at any time. Citizens
can convert each of the Preferred Shares into shares of the Company's
common stock on a one for ten basis. The Citizens Stock Purchase
Agreement provides that if the average closing price of the Company's
common stock for the twenty (20) trading days ending March 31, 2000 is
less than $7.00 per share, then HTCC shall issue such number of HTCC
Preferred Shares (with a value of $70 per share) equal in value to (i)
1,600,000 times (ii) $7.00 less the average closing price of HTCC common
stock for such twenty (20) trading day period. The Citizens Stock
Purchase Agreement also requires Citizens not to transfer any shares of
HTCC common stock which it may hold prior to May 15, 2000 without the
prior written consent of the Company and Postabank. Citizens also waived
any and all preemptive and anti-dilution rights in connection with the
transactions described in Note 4 above. As a result of the Stock Purchase
Agreement with Citizens, the Company recorded extraordinary income of
$9.0 million during the second quarter of 1999 which represented the gain
on the extinguishment of the liabilities the Company had with Citizens.
- 10 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(6) Capital Transactions
On May 12, 1999, the Company and Postabank entered into a Securities
Purchase Agreement (the "Securities Purchase Agreement") pursuant to
which Postabank purchased 2,428,572 shares of the Company's common stock
for an aggregate purchase price of $34 million. The Securities Purchase
Agreement provides for one person designated by Postabank to be nominated
for election to the Company's Board of Directors. Postabank cannot
transfer its shares until the earlier of (x) the repayment in full of all
the obligations under the Bridge Loan Agreement or (y) May 10, 2000, and
then Postabank can only transfer such shares incrementally through 2003
subject to the Company's right of first refusal. The Company's right of
first refusal expires in January 2003 and is assignable by the Company to
any beneficial holder of more than 10% of the Company's outstanding
common stock. The Company applied the proceeds from the stock issuance to
the repayment of the Original Postabank Credit Facility. Pursuant to the
Securities Purchase Agreement, the Company issued notes to Postabank in
an aggregate amount of $25 million (see Note 4) with detachable warrants
(the "Warrants"). The Warrants which were issued pursuant to a series of
Warrant Agreements between the Company and Postabank enable Postabank to
purchase 2,500,000 shares of the Company's common stock at an exercise
price of $10 per share. The exercise period commences on January 1, 2004
and terminates on March 31, 2007. The fair value of the warrants amounted
to $8.8 million and has been charged directly to additional paid-in
capital. The fair value of the warrants was determined using the Black
Scholes Warrant Option valuation model. The unamortized discount on the
notes at September 30, 1999 was $8.5 million. The Company has the right
to terminate the Warrants in full or proportionately prior to January 1,
2004 provided that the Company repays a proportionate amount of the Notes
and up to 7-1/2% of the aggregate principal amount of the Notes
concurrently with the termination of the Warrants.
On May 12, 1999, the Company and Tele Danmark entered into a Stock
Purchase Agreement (the "TD Stock Purchase Agreement") pursuant to which
the Company issued 1,571,429 shares of the Company's common stock in
exchange for $11 million. The Company applied the proceeds from the TD
Stock Purchase Agreement to the repayment of the Original Postabank
Credit Facility. Tele Danmark agreed not to transfer the shares to any
party prior to May 11, 2000 without the prior written consent of the
Company.
- 11 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
On May 12, 1999, the Company and the Danish Fund entered into a Stock
Purchase Agreement (the "Fund Stock Purchase Agreement") pursuant to
which the Company issued 1,285,714 shares of the Company's common stock
in exchange for $9 million. The Company applied the proceeds from the
Fund Stock Purchase Agreement to the repayment of the Original Postabank
Credit Facility. The Danish Fund agreed not to transfer the shares to any
party except for Tele Danmark prior to May 11, 2000 without the prior
written consent of the Company.
(7) Segment Disclosures
The Company operates in a single industry segment, communications
services. The Company's operations involve developing and constructing a
modern telecommunications infrastructure in order to provide a full range
of the Company's products and services in its five concession areas in
Hungary. While the Company's chief operating decision maker monitors the
revenue streams of the various products and services, operations are
managed and financial performance is evaluated based on the delivery of
multiple services to customers over an integrated network. Substantially
all of the Company's assets are located in Hungary and all of its
revenues are generated in Hungary.
Products and Services
The Company groups its products and services into the following
categories:
Telephone Services - local dial tone and switched products and services
that provide incoming and outgoing calls over the public switched
network. This category includes reciprocal compensation revenues and
expenses (i.e. interconnect).
Network Services - point-to-point dedicated services that provide a
private transmission channel for the Company's customers' exclusive use
between two or more locations, both in local and long distance
applications.
Other Service and Product Revenues - PBX hardware sales and service
revenues, as well as miscellaneous other telephony service revenues.
- 12 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The revenues generated by these products and services for the periods
ended September 30 were as follows:
($ in thousands) 1999 1998
Telephone services $30,968 $26,630
Network services 1,517 946
Other service and product
Revenues 679 926
------- -------
$33,164 $28,502
======= =======
Included in telephone services are connection fee revenues amounting to
$1,088,000 and $1,413,000 for the periods ended September 30, 1999 and
1998, respectively.
Major Customers
For the periods ended September 30, 1999 and 1998, none of the Company's
customers accounted for more than 10% of the Company's total revenue.
(8) Deferred Credits and Other Liabilities
During the period, one of the Company's subsidiaries entered into an
agreement with the Hungarian Ministry of Transportation,
Telecommunications and Water Management (the "Ministry") for the
relinquishment of the subsidiary's right to use a broadcasting frequency
previously granted by the Ministry. The frequency is used to provide
telephone services to certain customers. For relinquishing the right to
use the frequency, the Ministry will reimburse the subsidiary for the
costs associated with the relinquishment of the frequency right and pay a
total of 308 MHUF ($1,278,000 at current exchange rates) as the cost of
replacing the parts of the network using the frequency with fixed network
equipment.
As of September 30, 1999, the amount due under the agreement is 144 MHUF
($598,000 at current exchange rates) which is included in deferred
credits and other liabilities. Once the new fixed network equipment is
placed into service, the compensation received from the Ministry will be
recognized over the new fixed network equipment's depreciable life as a
reduction in depreciation expense over the future depreciable periods.
- 13 -
<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
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained herein which express "belief,"
"anticipation," "expectation," or "intention" or any other projection, insofar
as they may apply prospectively and are not historical facts, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the
Company's ability to attract additional customers, revenues per customer and
construction costs, as well as changes in the Company's regulatory environment
and other factors that are beyond the Company's control." For additional
factors the Company's Form 10-K for the year ended December 31, 1998 should be
read.
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).
During 1996 and 1997, the Company embarked on a significant network
development program which 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.
As a result of the Company's development program, the Company achieved
EBITDA1 of $6.9 million during the quarter ended September 30, 1999, up from
EBITDA of $5.2 million for the quarter ended September 30, 1998, adjusted for
the cost of termination of the management services agreement. 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, revenues per customer and construction costs.
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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 U.S. generally accepted accounting principles) or
to cash flows from operating activities (as determined in accordance with U.S.
generally accepted accounting principles) as a measure of liquidity.
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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. In the
second quarter of 1999, the Company refinanced and restructured its debt and
equity. See "Liquidity and Capital Resources" below.
The success of the Company's strategy is dependent upon its ability to
increase revenues through the increased usage and the addition of new
subscribers. Since commencing the provision of telecommunications services in
the first quarter of 1995, the Company's network construction and expansion
program has added approximately 132,000 access lines through September 30, 1999
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, 1999 and Three Months Ended
September 30, 1998
<TABLE>
<S> <C> <C> <C>
Net Revenues
Quarter end
(dollars in millions) 1999 1998 % change
Measured service revenues 8.9 8.1 10
Subscription revenues 2.7 2.6 4
Net interconnect charges (1.9) (2.4) (21)
----- -----
Net measured service and subscription revenues 9.7 8.3 17
Connection fees 0.4 0.5 (20)
Other operating revenues, net 1.1 0.6 83
---- -----
Telephone Service Revenues, Net 11.2 9.4 19
==== =====
</TABLE>
The Company recorded a 19% increase in telephone service revenues to
$11.2 million for the three months ended September 30, 1999 from $9.4 million
for the three months ended September 30, 1998.
Net measured service and subscription revenues increased 17% to $9.7
million for the three months ended September 30, 1999 from $8.3 million for the
three months ended September 30, 1998. Measured service revenues increased 10%
to $8.9 million during the three months ended September 30, 1999 from $8.1
million during the three months ended September 30, 1998. Subscription revenues
were $2.7 million and $2.6 million during the three months ended September 30,
1999 and 1998, respectively. These increases in measured service and
subscription revenues are the result of a 6% increase in average access lines in
service from approximately 179,000 lines for the three months ended September
30, 1998 to approximately 190,500 lines during the three months ended September
30, 1999. Also, contributing to the increases in measured service and
subscription revenues is an average 11% increase in tariff rates, effective
January 1, 1999 in the operating subsidiaries' functional currency, the
Hungarian Forint, offset by an approximate 9% devaluation of the functional
currency against the U.S. Dollar during the period.
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
These revenues have been reduced by net interconnect charges which
totalled $1.9 million during the three months ended September 30, 1999 compared
to $2.4 million during the three months ended September 30, 1998. As a
percentage of call and subscription revenues, net interconnect charges have
declined from 22% for the three months ended September 30, 1998 to 16% for the
three months ended September 30, 1999, 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, 1999.
Connection fees for the three months ended September 30, 1999 totalled
$0.4 million as compared to $0.5 million for the three months ended September
30, 1998. This decrease reflects a reduction in the number of new access lines
connected and the devaluation of the Hungarian Forint. Connection fees were
expected to decline during the period as penetration rates have increased.
Other operating revenues increased to $1.1 million during the three
months ended September 30, 1999 from $0.6 million during the three months ended
September 30, 1998. This increase was due to additional revenues generated from
the provision of direct lines and other miscellaneous telephony service
revenues.
Operating and Maintenance Expenses
Operating and maintenance expenses were $4.3 million for the three
months ended September 30, 1999 as compared to $4.2 million for the three months
ended September 30, 1998. On a per line basis, operating and maintenance
expenses remained consistent at approximately $23 per average access line for
each three month period.
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. No such transaction has occurred during 1999.
Depreciation and Amortization
Depreciation and amortization charges increased $0.2 million to $3.1
million for the three months ended September 30, 1999 from $2.9 million for the
three months ended September 30, 1998. Depreciation and amortization expense
increased in functional currency terms by approximately 16% due to additional
capital expenditures. However, due to the devaluation of the Hungarian Forint
during the period, depreciation and amortization expense for the three months
ended September 30, 1999 has remained relatively consistent in U.S.
Dollar terms with 1998 amounts.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Income (Loss) from Operations
Income from operations was $3.8 million for the three months ended
September 30, 1999 compared to loss from operations of $8.8 million for the
three months ended September 30, 1998. Adjusted for the cost of terminating the
management services agreement in 1998, income from operations for the three
months ended September 30, 1998 amounted to $2.3 million. Contributing to the
improvement were higher revenues during the three months ended September 30,
1999 as compared to the three months ended September 30, 1998, offset by slight
increases in operating and maintenance expenses and depreciation and
amortization charges during the period.
Foreign Exchange (Losses) Gains
For the three months ended September 30, 1999, the Company had foreign
exchange losses of $0.8 million, as compared to foreign exchange gains of
approximately $58,000 for the three months ended September 30, 1998. Such
foreign exchange losses primarily resulted from the devaluation of the Hungarian
Forint against the U.S. Dollar during the period. This increase in foreign
exchange losses during the period is due to the Company's restructuring of its
debt obligations in May 1999. Prior to its restructuring, the Company had debt
denominated in Hungarian Forints. The Company now has debt obligations
denominated in U.S. Dollars and Euros, as well as Hungarian Forints. See
"Liquidity and Capital Resources" section below for information regarding the
Company's debt restructuring during the period. See also "Inflation and
Foreign Currency" and "Market Risk Exposure" below.
Interest Expense
Interest expense decreased to $6.3 million for the three months ended
September 30, 1999 from $11.3 million for the three months ended September 30,
1998. This decrease was attributable to lower average debt levels during the
three months ended September 30, 1999 as compared to the three months ended
September 30, 1998. This reduction in average debt levels outstanding during the
period is due to the Company's restructuring of its debt obligations in May
1999. See "Liquidity and Capital Resources" below for information regarding
the Company's debt restructuring during the period. The decrease also reflects
lower interest rates paid on borrowings in U.S. Dollars and Euros, compared
to Hungarian Forints.
Interest Income
Interest income increased to $0.6 million for the three months ended
September 30, 1999 from $0.2 million for the three months ended September 30,
1998 due to higher average cash balances outstanding during the three months
ended September 30, 1999.
Other, net
Other, expense amounted to $57,000 for the three months ended September
30, 1999 as compared to other, income of $0.8 million for the three months ended
September 30, 1998. The decrease during the three months ended September 30,
1999 as compared to the three months ended September 30, 1998 is primarily due
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 during 1998. The Company does not have
any continuing management services agreements.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $2.7 million, or $0.23 per share, during the three months ended
September 30, 1999 as compared to a net loss of $19.1 million, or $3.61 per
share, during the three months ended September 30, 1998.
Comparison of Nine Months Ended September 30, 1999 to Nine Months Ended
September 30, 1998
<TABLE>
<S> <C> <C> <C>
Net Revenues
Year-to-date ended
(dollars in millions) 9/30/99 9/30/98 % change
Measured service revenues 26.2 23.8 10
Subscription revenues 8.2 8.0 3
Net interconnect charges (5.3) (7.3) (27)
----- ------
Net measured service and subscription revenues 29.1 24.5 19
Connection fees 1.1 1.4 (21)
Other operating revenues 3.0 2.6 15
----- ------
Telephone Service Revenues, Net 33.2 28.5 16
===== ======
</TABLE>
The Company recorded a 16% increase in net telephone service revenues
of $33.2 million for the nine months ended September 30, 1999 as compared to
revenues of $28.5 million for the nine months ended September 30, 1998.
Net measured service and subscription revenues increased 19% to $29.1
million for the nine months ended September 30, 1999 from $24.5 million for the
nine months ended September 30, 1998. Measured service revenues increased 10% to
$26.2 million while subscription revenues increased 3% to $8.2 million for the
nine months ended September 30, 1999. These increases in net measured service
and subscription fee revenues are the result of a 6% increase in average access
lines in service from approximately 176,500 lines for the nine months ended
September 30, 1998 to approximately 188,200 lines for the nine months ended
September 30, 1999. Also contributing to the increases in measured service and
subscription revenues is an average 11% increase in tariff rates, effective
January 1, 1999 in the operating subsidiaries' functional currency, the
Hungarian Forint, offset by an approximate 10% devaluation of the functional
currency against the U.S. Dollar during the period.
These revenues have been offset by net interconnect charges which
totalled $5.3 million for the nine months ended September 30, 1999 as compared
to $7.3 million for the nine months ended September 30, 1998. As a percentage of
call and subscription revenues, net interconnect charges have declined from 23%
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
for the nine months ended September 30, 1998 to 15% for the nine months ended
September 30, 1999, 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, 1999.
Connection fees for the nine months ended September 30, 1999 totalled
$1.1 million as compared to $1.4 million for the nine months ended September 30,
1998. This decrease reflects a reduction in the number of new access lines
connected and the devaluation of the Hungarian Forint. Connection fees were
expected to decline during the period as penetration rates have increased.
Other operating revenues increased to $3.0 million for the nine months
ended September 30, 1999 compared to $2.6 million for the nine months ended
September 30, 1998. This increase was due to additional revenues generated from
the provision of direct lines and other miscellaneous telephony service
revenues.
Operating and Maintenance Expenses
Operating and maintenance expenses for the nine months ended September
30, 1999 decreased to $12.9 million as compared to $14.7 million for the nine
months ended September 30, 1998. On a per line basis, operating and maintenance
expenses decreased to approximately $69 per average access line for the nine
months ended September 30, 1999 from $84 for the nine months ended September 30,
1998 as the Company achieved productivity improvements and increased its focus
on reducing operating expenses, particularly through reductions in the number of
expatriates working for the Company.
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. No such transaction has occurred during 1999.
Depreciation and Amortization
Depreciation and amortization charges increased to $8.9 million for the
nine months ended September 30, 1999 from $8.6 million for the nine months ended
September 30, 1998. Depreciation and amortization expense increased in
functional currency terms by approximately 14% due to additional capital
expenditures, however, due to the devaluation of the Hungarian Forint during the
period, depreciation and amortization expense for the nine months ended
September 30, 1999 has remained relatively consistent in U.S. Dollar terms with
1998 amounts.
Management Fees
There was no management fee expense for the nine months ended September
30, 1999 as compared to $2.5 million for the nine months ended September 30,
1998. This decrease is due to the termination of the management services
agreement between the Company and Citizens International Management Services
Company during 1998. The Company does not have any continuing management
services agreements.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Income (Loss) from Operations
Income from operations increased to $11.3 million for the nine months
ended September 30, 1999 compared to a loss from operations of $8.5 million for
the nine months ended September 30, 1998. Adjusted for the termination charge in
1998, income from operations amounted to $2.7 million for the nine months ended
September 30, 1998. Contributing to such improvements were higher revenues,
lower operating and maintenance expenses and the elimination of the management
fees described above during the nine months ended September 30, 1999 as compared
to the nine months ended September 30, 1998, offset by increased depreciation
and amortization charges during the period.
Foreign Exchange Loss
Foreign exchange losses increased $1.7 million to $2.0 million for the
nine months ended September 30, 1999 from $0.3 million for the nine months ended
September 30, 1998. Such foreign exchange losses resulted primarily from the
devaluation of the Hungarian Forint against the U.S. Dollar during the period.
This increase in foreign exchange losses during the period is due to the
Company's restructuring of its debt obligations in May 1999. Prior to its
restructuring, the Company had debt denominated in Hungarian Forints. The
Company now has debt obligations denominated in U.S. Dollars and Euros, as well
as Hungarian Forints. See "Liquidity and Capital Resources" below for
information regarding the Company's debt restructuring during the period. See
also "Inflation and Foreign Currency" and "Market Risk Exposure" below.
Interest Expense
Interest expense decreased to $26.0 million for the nine months ended
September 30, 1999 from $34.1 million for the nine months ended September 30,
1998. This decrease was attributable to lower average debt levels during the
nine months ended September 30, 1999 as compared to the nine months ended
September 30, 1998. This reduction in average debt levels outstanding during the
period is due to the Company's restructuring of its debt obligations in May
1999. See "Liquidity and Capital Resources" below for information regarding
the Company's debt restructuring during the period. The decrease also reflects
lower interest rates paid on borrowings in U.S. Dollars and Euros, compared
to Hungarian Forints.
Interest Income
Interest income increased to $1.2 million for the nine months ended
September 30, 1999 from $0.4 million for the nine months ended September 30,
1998 primarily due to higher average cash balances outstanding during the
period.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Other, net
Other, expense amounted to $0.2 million for the nine months ended
September 30, 1999 as compared to other, income of $0.8 million for the nine
months ended September 30, 1998. The decrease during the nine months ended
September 30, 1999 as compared to the nine months ended September 30, 1998 is
primarily 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 during 1998. The Company does
not have any continuing management services agreements.
Loss Before Extraordinary Items
As a result of the factors discussed above, the Company recorded a loss
before extraordinary items of $15.7 million, or $1.78 per share, during the nine
months ended September 30, 1999 as compared to a loss of $41.8 million, or $7.90
per share, during the nine months ended September 30, 1998.
Extraordinary Item
For the nine months ended September 30, 1999, the Company recorded an
extraordinary item of $20.9 million comprised of extraordinary income of $27.1
million which consists of a $9.0 million gain on extinguishment of the
liabilities the Company had with Citizens and a $18.1 million gain on
extinguishment of all amounts due under a contractor financing facility, offset
in part by a non-cash charge of $6.2 million related to the write-off of the
remaining unamortized deferred financing costs and credits pertaining to the
Original Postabank Credit Facility.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded net
income of $5.2 million, or $0.59 per share for the nine months ended September
30, 1999 as compared to a net loss of $41.8 million, or $7.90 per share for the
nine months ended September 30, 1998.
Liquidity and Capital Resources
The Company has historically funded its capital requirements primarily
through a combination of debt, equity and vendor financing. The development of
the network in each of the Company's operating areas required significant
capital expenditures. The Company's networks now have the capacity, with some
additional capital expenditures, to provide basic telephone services to
virtually all of the potential subscribers within its operating areas.
Net cash provided by operating activities totalled $14.5 million during
the nine months ended September 30, 1999 compared to $8.5 million during the
nine months ended September 30, 1998. For the nine months ended September 30,
1999 and 1998, the Company used $4.1 million and $13.0 million, respectively, in
investing activities, which was primarily used to fund the construction of the
Company's telecommunications networks. Financing activities provided net cash of
$1.0 million and $11.5 million for the nine months ended September 30, 1999 and
1998, respectively.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
On May 12, 1999, the Company entered into various agreements as part of
a revision of its capital structure with the following parties: Postabank es
Takarekpenztar Rt. ("Postabank"); Tele Danmark A/S ("Tele Danmark"); the Danish
Investment Fund for Central and Eastern Europe (the "Danish Fund"); CU
CapitalCorp and Citizens International Management Services Company, each of
which is a wholly-owned subsidiary of Citizens Utilities Company (Citizens
Utilities Company and its subsidiaries are hereinafter referred to as
"Citizens"). As a result of such agreements, the Company extinguished all of its
obligations (i) to Postabank under the Company's October 1996 Credit Facility to
Postabank (the "Original Postabank Credit Facility") in the amount of
approximately $193 million and the amounts borrowed to settle a portion due
under a contractor financing facility in the amount of approximately $16
million; (ii) to one of its contractors under a contractor financing facility in
the amount of approximately $35 million; and (iii) to Citizens under a $8.4
million promissory note which was payable in 2004 and an obligation to pay
Citizens $21 million in 28 quarterly installments of $750,000 each from 2004
through and including 2010. The effect of these transactions has been a
significant reduction in the financial obligations of the Company. The Company
has borrowed from Postabank $138 million ($134 million at current exchange
rates) under a one-year dual currency bridge loan agreement in Hungarian Forints
and Euros and $25 million pursuant to certain unsecured notes which mature in
2007. Some of the various agreements which were entered into as of May 12, 1999
are described herein. (The descriptions and summaries herein do not purport to
be complete, and are subject to, and qualified in their entirety by, reference
to each such agreement, copies of which have been previously filed).
The Company and Postabank entered into a Dual Currency Bridge Loan
Agreement (the "Bridge Loan Agreement") pursuant to which HTCC's subsidiaries
borrowed the equivalent of $111 million in Hungarian Forints and $27 million in
Euros which funds were applied to the repayment of the Original Postabank Credit
Facility. The loan is repayable on May 10, 2000 and bears interest at an initial
rate of 2.25% (the "Margin") plus the Budapest Bank Offering Rate or Euro LIBOR
Rate (currently approximately 15% and 2.5%, respectively) which Margin increases
incrementally to 4.25%, in quarterly increments of 1% over the next year. HTCC
and one of its subsidiaries, HTCC Consulting Rt. are guarantors for the HTCC
subsidiaries under the Bridge Loan Agreement. The Company has pledged all of its
intangible and tangible assets, including HTCC's ownership interests in its
subsidiaries, and its real property to secure all of the obligations under the
Bridge Loan Agreement. The Company entered into a series of agreements to secure
such obligations under the Bridge Loan Agreement.
The Company and Postabank also entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") pursuant to which Postabank
purchased 2,428,572 shares of the Company's common stock for an aggregate
purchase price of $34 million. The Securities Purchase Agreement provides for
one person designated by Postabank to be nominated for election to the Company's
Board of Directors. Postabank cannot transfer its shares until the earlier of
(x) the repayment in full of all the obligations under the Bridge Loan Agreement
or (y) May 10, 2000, and then Postabank can only transfer such shares
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
incrementally through 2003 subject to the Company's right of first refusal. The
Company's right of first refusal expires in January 2003 and is assignable by
the Company to any beneficial holder of more than 10% of the Company's
outstanding common stock. The Company applied the proceeds from the stock
issuance to the repayment of the Original Postabank Credit Facility. Pursuant to
the Securities Purchase Agreement, the Company issued notes to Postabank in an
aggregate amount of $25 million (the "Notes") with detachable warrants (the
"Warrants"). The Notes accrue interest, which is payable semi-annually, at 4%
plus the LIBOR rate for the applicable six month interest period. The Notes
which mature in 2007 are transferable subject to applicable security laws. The
Warrants which were issued pursuant to a series of Warrant Agreements between
the Company and Postabank enable Postabank to purchase 2,500,000 shares of the
Company's common stock at an exercise price of $10 per share. The exercise
period commences on January 1, 2004 and terminates on March 31, 2007. The
Company has the right to terminate the Warrants in full or proportionately prior
to January 1, 2004 provided that the Company repays a proportionate amount of
the Notes and up to 7-1/2% of the aggregate principal amount of the Notes
concurrently with the termination of the Warrants.
The Company and Tele Danmark entered into a Stock Purchase Agreement
(the "TD Stock Purchase Agreement") pursuant to which the Company issued
1,571,429 shares of the Company's common stock in exchange for $11 million. The
Company applied the proceeds from the TD Stock Purchase Agreement to the
repayment of the Original Postabank Credit Facility. Tele Danmark agreed not to
transfer the shares to any party prior to May 11, 2000 without the prior written
consent of the Company.
The Company and the Danish Fund entered into a Stock Purchase Agreement
(the "Fund Stock Purchase Agreement") pursuant to which the Company issued
1,285,714 shares of the Company's common stock in exchange for $9 million. The
Company applied the proceeds from the Fund Stock Purchase Agreement to the
repayment of the Original Postabank Credit Facility. The Danish Fund agreed not
to transfer the shares to any party except for Tele Danmark prior to May 11,
2000 without the prior written consent of the Company.
The Company and Citizens entered into a Stock Purchase Agreement (the
"Citizens Stock Purchase Agreement') pursuant to which the Company issued to
Citizens 1,300,000 shares of the Company's common stock and 30,000 shares of the
Company's Series A Preferred Stock, par value $0.001 (the "Preferred Shares").
In consideration for such shares, Citizens (i) transferred to the Company for
cancellation a $8.4 million promissory note issued by the Company to Citizens
which was to mature in 2004, (ii) forego half of the accrued interest due on the
promissory note through May 15, 1999 and (iii) agreed to renounce and forego any
rights whatsoever to any payment of the $21 million which was payable by the
Company to Citizens in quarterly installments of $750,000 from 2004 through and
including 2010. Citizens, as the holder of the Preferred Shares, is entitled to
receive cumulative cash dividends at an annual rate of 5%, compounded annually
on the liquidation value of $70 per share. The Company may redeem the Preferred
Shares at any time. Citizens can convert each of the Preferred Shares into
shares of the Company's common stock on a one for ten basis. The Citizens Stock
Purchase Agreement provides that if the average closing price of the Company's
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
common stock for the twenty (20) trading days ending March 31, 2000 is less than
$7.00 per share, then HTCC shall issue such number of HTCC Preferred Shares
(with a value of $70 per share) equal in value to (i) 1,600,000 times (ii) $7.00
less the average closing price of HTCC common stock for such twenty (20) trading
day period. The Citizens Stock Purchase Agreement also requires Citizens not to
transfer any shares of HTCC common stock which it may hold prior to May 15, 2000
without the prior written consent of the Company and Postabank. Citizens also
waived any and all preemptive and anti-dilution rights in connection with the
transactions described above. As a result of the Stock Purchase Agreement with
Citizens, the Company recorded extraordinary income of $9.0 million during the
second quarter of 1999 which represented the gain on the extinguishment of the
liabilities the Company had with Citizens.
During 1996 and 1997, the Company entered into several construction
contracts with a Hungarian contractor which totalled $59.0 million in the
aggregate, $47.5 million of which was financed by a contractor financing
facility. The contractor financed the financing facility through a facility
provided by Postabank. As of December 31, 1998, the balance owed under the
contractor financing facility was $36.6 million. On March 30, 1999, Postabank
assumed HUF 7 billion plus accrued interest of HUF 348 million (approximately
$30.9 million at historical exchange rates) of the Company's liability under
the contractor financing facility from the contractor, due to the contractor's
financial difficulties, and sold this debt back to the Company for HUF 3 billion
(approximately $12.6 million at historical exchange rates). The purchase of the
debt was financed by Postabank. On the same day, the Company purchased HUF 4
billion (approximately $16.8 million at historical exchange rates) of loans the
contractor had with Postabank for HUF 900 million (approximately $3.8 million
at historical exchange rates) and subsequently offset the booked value of the
loans purchased of HUF 900 million (approximately $3.8 million at historical
exchange rates) against the outstanding amounts owed to the contractor. The
purchase of these loans was also financed by Postabank. As a result of the
above transactions, the Company recorded an extraordinary gain of HUF 4.3
billion (approximately $18.1 million at historical exchange rates) during the
second quarter of 1999 which reflects the extinguishment of all amounts
due under the contractor financing facility.
As a result of the agreements above, the Company currently has
11,981,579 shares of common stock outstanding. The following parties hold the
following percentages of such shares: Postabank 20.3%; Tele Danmark 21.4%; the
Danish Fund 10.7%; Citizens 19.2%; and others 28.4%. On a fully-diluted basis,
the Company has 20,223,638 shares outstanding. The following parties hold the
following percentages of such shares: Postabank 24.4%; Tele Danmark 12.7%; the
Danish Fund 6.4%; Citizens 35.2%; and others 21.3%.
The Company has suffered recurring losses, has a net capital
deficiency, and has current liabilities in excess of current assets. As
discussed above, the Company refinanced and restructured its debt and equity
during the second quarter of 1999. As a part of the Company's debt refinancing,
the Company has entered into a one-year $138 million ($134 million at current
exchange rates) dual currency bridge loan with Postabank. The Company is
currently evaluating various alternatives to refinance the bridge loan provided
by Postabank as the loan is repayable on May 10, 2000. While the availability of
long-term financing sources cannot be predicted with certainty, the Company
believes that it will be able to resolve this issue during the next twelve
months. However, there can be no assurance that the Company will be able to
obtain long-term financing with commercially acceptable terms, or at all.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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.
Inflation and Foreign Currency
Due to the strengthening of the U.S. Dollar on international currency
markets during the period, the Hungarian Forint/U.S. Dollar exchange rate
increased to 241.33 as of September 30, 1999, an effective year to date
devaluation of 11.5%.
The Company's Hungarian operations generate revenues in Hungarian
Forints and incur operating and other expenses, including capital expenditures,
predominately in Hungarian Forints but also 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' deficiency.
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
obligations in currencies other than the Hungarian Forint.
Year 2000
In 1998 the Company initiated a project designed to identify and
mitigate Year 2000 computer deficiencies. The Company formed a Year 2K project
team (the "Project Team") with the mandate to identify problems, set
methodologies for resolution, and budget expenses all in order to minimize the
impact of any Y2K problems from the Company's computer systems.
The Project Team consists of employees from senior and mid-level
management from various business units within the Company. The Project Team also
includes several of the Company's computer technicians and representatives from
the systems' vendors. The Project Team has 10 permanent members from the Company
and 3 permanent members from the switching and billing system vendors. Other
vendors are consulted on an "as needed" basis. The Company also formed an
oversight committee comprised of senior management to oversee the Y2K issue.
- 25 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
The Project Team is examining the Company's telecommunications
networks, IT business systems, and miscellaneous support systems. These systems
include computers that support telephone services, bill production, customer
accounting, plant records, payroll, and a variety of systems such as air
conditioners and building entry systems. The project has five primary phases:
(I) inventory, (II) assessment, (III) remediation, (IV) testing and (V)
contingency planning and certification. Phase I is complete and consisted of the
development of 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 consisted of
evaluating the inventory list developed during Phase I and determining which
systems need replacement, modification or retirement during 1999. Phase II is
complete. Phase III consisted of replacing those hardware and software
components identified as non-compliant. Phase III is complete. Phase IV
consisted of testing of existing and new hardware and software components and
was completed by October. Test documents were used to verify vendor certificates
and certify systems not covered by vendor contracts. Phase V consists of
developing a written plan for alternative methods of completing critical
processes should failure occur at the turn of the century. Contingency plans are
being developed currently for all systems. Contingency plans will be documented
using test results from the systems testing which has occurred. Written
contingency plans were to be provided to the employees by September, however,
due to some delays with vendor deliveries, testing was not completed until
October. As a result, written contingency plans were not distributed to
employees in September as originally planned. It is planned that contingency
plans will be distributed to employees during the first week of December.
The Company relies upon its network construction vendors to provide
compliant hardware and software. The Project Team believes that compliance of
the telephone switching systems and the automatic message accounting interface
with the billing system present the most significant Y2K exposure for the
Company. In cooperation with representatives from the switch manufacturers who
are active members of the Project Team, the Project Team has developed a plan
for Y2K Compliance of the switching systems. Both of the Company's switch
manufacturers have provided the Company with switch upgrades and compliance
certificates at this time. Testing of the switching/billing system Automatic
Message Accounting ("AMA") interface was completed in the end of October. The
new AMA interface processes are now being used in the Company's billing
processes.
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 reduce the risk of
failure. A member of the Project Team 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 received a Y2K compliance letter
from MATAV during the third quarter. MATAV was expected to provide the Company
with certification for the 2 Megabyte ("2MB") backbone of the Company's internal
wide area network by September. However, due to circumstances outside of the
Company's control, the 2MB certification was not received in September. It is
anticipated that the Company will receive the certification by the middle of
November.
- 26 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
During phase IV of the program, the Company's recently implemented
Billing and Customer Care system was fully tested in cooperation with the
vendor and Y2K compliance has been certified. The vendor has issued a compliance
certificate.
Various other IT systems have been identified to be replaced or
upgraded in association with the Company's efforts to become Y2K compliant. All
such systems have completed all phases of the project at this time. The Company
maintains approximately 2 million lines of computer code developed internally
which has been tested and modified during the third quarter. These programs,
while providing convenience features for many departments within the company,
are not critical to the Company's business processes.
The Company originally estimated the total costs of remediation, which
includes the replacement and/or upgrade of certain equipment would be
approximately $785,000. However, due to recent agreements with its switch
vendors, the Company was able to obtain Y2K switching upgrades for no cost. As a
result, the original estimate of $785,000, has been reduced to approximately
$125,000 as to the total costs of remediation. At this time, the Company has
expensed approximately $95,000 for remediation of the Y2K problem, which is
included in the Company's Consolidated Condensed Statement of Operations.
Management cannot provide assurance that the result of the project 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 were expected to be in place by the end of the third
quarter of 1999, however due to some delays with vendor deliveries, testing was
not completed until the end of October. As a result, contingency plans will be
focused on during November and in place by the first week of December.
The Company is dependent on network switch manufacturers to provide
compliant hardware and software in a timely manner. Within IT, the Company is
dependent on the development of software by external experts, and the
availability of critical resources with the requisite skill sets. The failure to
correct a material Y2K problem could cause an interruption or failure of certain
of the Company's normal business functions or operations, which could have a
material adverse effect on the Company's results of operations, liquidity or
financial condition; however, management considers such a likelihood remote. Due
to the uncertainty inherent in other Y2K issues that are ultimately beyond the
Company's control, including, for example, the final Y2K readiness of our
suppliers, customers and interconnecting carriers, the Company is unable to
determine at this time the likelihood of a material impact on our results of
operations, liquidity or financial condition due to such Y2K issues. However,
the Company is taking appropriate prudent measures to mitigate that risk.
- 27 -
<PAGE>
Market Risk Exposure
The Company is exposed to various types of risk in the normal course of
its business, including the impact of foreign currency exchange rate
fluctuations and interest rate changes. Company operations, including all
revenues and approximately 75% of operational costs are Hungarian Forint based
and are therefore subject to exchange rate variability between the Hungarian
Forint and U.S. Dollar. This variability is mitigated by several factors,
including the Hungarian National Bank policy to peg the Hungarian Forint to a
currency basket and the telecommunications pricing law. The "crawling peg"
policy of the National Bank of Hungary maintains a scheduled daily devaluation
of the Hungarian Forint through a currency basket consisting of 70% Euros and
30% U.S. Dollars. The Hungarian Forint is allowed to trade within 2.25% of the
mid-point of this trading band. The Hungarian government devaluation policy for
1999 has been 0.6% per month for January through June, 0.5% per month for July
through September and is 0.4% per month for October through December, totaling
approximately 6.5% for the year. It should be noted however, that due to the
strengthening of the U.S. Dollar on international currency markets during the
period, the Hungarian Forint/U.S. Dollar exchange rate increased to 242.27 as of
November 1, 1999, an effective year to date devaluation of 11.9%. The
telecommunications pricing law allows prices to increase by the Consumer Price
Index (CPI) adjusted for an efficiency factor of up to 2%. Thus, to the extent
that adjusted CPI follows devaluation, revenues are somewhat insulated from
exchange rate risk.
The debt obligations of the Company are Hungarian Forint, Euro and U.S.
Dollar denominated. The interest rate on the Hungarian Forint debt obligations
is based on the Budapest Bank Offer Rate (BUBOR). The interest rates on the Euro
and U.S. Dollar denominated obligations are based on LIBOR. Over the medium to
long term, the BUBOR rate is expected to follow inflation and devaluation trends
and the Company does not currently believe it has any material interest rate
risk on any of its Hungarian Forint denominated debt obligations. If a 1% change
in the BUBOR interest rate were to occur, the Company's interest expense would
increase or decrease by approximately $1.1 million based upon the Company's debt
level. If a 1% change in the LIBOR interest rate were to occur, the Company's
interest expense would increase or decrease by approximately $500,000.
The Company is also exposed to exchange rate risk in so far as the
Company has debt obligations in other than the functional currency of its
majority owned Hungarian subsidiaries. Given the Company's debt obligations,
which include Euro and U.S. Dollar denominated debt, if a 1% change in Hungarian
Forint/Euro exchange rates were to occur, the Company's exchange rate risk would
increase or decrease by approximately $264,000. If a 1% change in Hungarian
Forint/U.S. Dollar exchange rates were to occur, the Company's exchange rate
risk would increase or decrease by approximately $250,000.
- 28 -
<PAGE>
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Legal Proceedings
None.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
(a) None.
(b) On May 12, 1999, the Company issued 30,000 shares of Preferred
Stock Series A with a liquidation value of $70 per share to a
subsidiary of Citizens Utilities Company. Any holder of such Preferred
Shares is entitled to receive cumulative cash dividends payable in
arrears at the annual rate of 5%, compounded annually, on the
liquidation value. As of September 30, 1999, the total arrearage on the
Preferred Shares was $41,000.
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
- 29 -
<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.
November 11, 1999 By: /s/Ole Bertram
Ole Bertram
Chief Executive Officer and President
November 11, 1999 By: /s/William McGann
William McGann
Chief Accounting Officer,
Controller and Treasurer
-30 -
<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Description
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Hungarian Telephone and Cable Corp.'s Consolidated Financial Statements
for the quarter ending September 30, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000889949
<NAME> HUNGARIAN TELEPHONE AND CABLE CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,643
<SECURITIES> 0
<RECEIVABLES> 8,862
<ALLOWANCES> (1,141)
<INVENTORY> 1,001
<CURRENT-ASSETS> 30,139
<PP&E> 143,396
<DEPRECIATION> (25,338)
<TOTAL-ASSETS> 162,220
<CURRENT-LIABILITIES> 148,515
<BONDS> 16,514
0
0
<COMMON> 11
<OTHER-SE> (5,435)
<TOTAL-LIABILITY-AND-EQUITY> 162,220
<SALES> 11,169
<TOTAL-REVENUES> 11,169
<CGS> 0
<TOTAL-COSTS> 7,373
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,252)
<INCOME-PRETAX> (2,736)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,736)
<EPS-BASIC> (0.23)
<EPS-DILUTED> 0
</TABLE>
