HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended March 31, 2000
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000 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)
32 Center Street, Darien, CT 06820
(Address of principal executive offices)
(203) 656-3882
(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 12,015,179 Shares
(Class) (Outstanding at May 10, 2000)
<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 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 13
Part II. Other Information 21
Signatures 22
- 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 March 31, 2000 December 31, 1999
------ -------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 20,281 $ 17,197
Restricted cash 116 111
Accounts receivable, net 5,989 6,940
Inventories 1,053 885
Prepayments and other current assets 645 1,082
------------ ------------
Total current assets 28,084 26,215
Property, plant and equipment, net 106,291 115,526
Goodwill, less accumulated amortization 7,121 7,859
Other intangibles, less accumulated amortization 4,179 4,526
Other assets 390 557
------------ ------------
Total assets $ 146,065 $ 154,683
============ ============
Liabilities and Stockholders' Deficiency
----------------------------------------
Current liabilities:
Short-term loans $ 3,828 $ 5,048
Accounts payable 875 3,994
Accruals 10,605 5,561
Other current liabilities 1,696 1,349
Due to related parties 1,052 996
------------ ------------
Total current liabilities 18,056 16,948
Long-term debt, excluding current installments 116,194 122,917
Long-term notes payable, $25,000,000 aggregate face
amount; interest - LIBOR plus 4%, due March 31, 2007
(less unamortized discount based on imputed interest
rate of 5% - $8,023,000 in 2000; $8,256,000 in 1999) 16,977 16,744
Due to related parties 1,477 1,728
Deferred credits and other liabilities 2,573 3,292
------------ ------------
Total liabilities 155,277 161,629
------------ ------------
Commitments and Contingencies
Stockholders' deficiency:
Preferred stock, $.01 par value; $70.00 liquidation value.
Authorized 200,000 shares; issued and outstanding
30,000 shares in 2000 and 1999 - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
12,009,479 shares in 2000 and 11,981,579 in 1999 12 11
Additional paid-in capital 144,269 144,052
Accumulated deficit (168,161) (164,705)
Accumulated other comprehensive income 14,668 13,696
------------ ------------
Total stockholders' deficiency (9,212) (6,946)
------------ ------------
Total liabilities and stockholders' deficiency $ 146,065 $ 154,683
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated condensed financial
statements.
- 2 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations and Comprehensive Loss
For the Three Month Periods Ended March
31, 2000 and 1999 (In thousands,
except share and per share data)
(unaudited)
<TABLE>
<S> <C> <C>
2000 1999
---- ----
Telephone service revenues, net $ 10,831 $ 11,205
Operating expenses:
Operating and maintenance expenses 4,318 4,396
Depreciation and amortization 2,501 2,853
---------- -----------
Total operating expenses 6,819 7,249
---------- -----------
Income from operations 4,012 3,956
Other income (expenses):
Foreign exchange losses (1,978) (333)
Interest expense (5,927) (11,860)
Interest income 460 243
Other, net 3 (20)
---------- ------------
Net loss $ (3,430) $ (8,014)
Preferred stock dividends (26) -
----------- -----------
Net loss attributable to common stockholders (3,456) (8,014)
Comprehensive income adjustments 972 6,860
---------- -----------
Total comprehensive loss $ (2,484) $ (1,154)
=========== ============
Net loss per common share - basic and diluted $ (0.29) $ (1.49)
======= ======
Weighted average number of common shares
Outstanding - basic and diluted 11,989,428 5,395,864
========== ===========
</TABLE>
See accompanying notes to the unaudited 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>
Accumulated
Other Total
Common Preferred Additional Accumulated Comprehensive Stockholders'
Shares Stock Stock Paid-in Capital deficit Income Deficiency
- --------------------------- ----------- ---------- ----------- ------------------ --------------- ---------------- ----------------
Balances at December 31,
1999 11,981,579 $ 11 - 144,052 (164,705) 13,696 $ (6,946)
Exercise of options 27,900 1 - 217 - - 218
Cumulative preferred
stock dividends in arrears - - - - (26) - (26)
Net loss - - - - (3,430) - (3,430)
Foreign currency
translation adjustment - - - - - 972 972
- --------------------------- ----------- ---------- ----------- ------------------ --------------- ---------------- ----------------
Balances at March 31, 2000 12,009,479 $ 12 - 144,269 (168,161) 14,668 $ (9,212)
- --------------------------- ----------- ---------- ----------- ------------------ --------------- ---------------- ----------------
</TABLE>
See accompanying notes to the unaudited 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 Three Month Periods Ended March 31, 2000 and 1999
(In thousands)
(unaudited)
<TABLE>
<S> <C> <C>
2000 1999
---- ----
Net cash provided by operating activities $ 4,901 3,828
---------- -----------
Cash flows from investing activities:
Construction of telecommunication networks (976) (877)
(Increase) decrease in construction deposits (1) 20
Proceeds from sale of assets 31 15
---------- -----------
Net cash used in investing activities (946) (842)
---------- -----------
Cash flows from financing activities:
Borrowings under debt agreements - 16,391
Repayment of long-term debt (30) (90)
Payments in connection with settlement and
refinancing of long-term debt - (15,000)
Proceeds from exercise of options 218 -
---------- -----------
Net cash provided by financing activities 188 1,301
---------- -----------
Effect of foreign exchange rate changes on cash (1,059) (954)
----------- -----------
Net increase in cash and cash equivalents 3,084 3,333
Cash and cash equivalents at beginning of period 17,197 8,489
---------- -----------
Cash and cash equivalents at end of period $ 20,281 11,822
========== ===========
</TABLE>
See accompanying notes to the unaudited 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. and its Subsidiaries ("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 the Company 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") collectively (the
"Operating Companies"), 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 Subsidiaries
for the year ended December 31, 1999, including the notes thereto,
set forth in the Company's Form 10-K.
- 6 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(b) Net Loss Per Share
Basic earnings 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 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 March 31, 2000 and 1999.
The Company had potentially dilutive common stock equivalents of
8,246,659 and 7,599,905 for the periods ended March 31, 2000 and
1999, respectively, which were not included in the computation of
diluted net loss per common share because they were antidilutive
for the periods presented.
(2) Cash, Cash Equivalents and Restricted Cash
(a) Cash
At March 31, 2000, cash of $5,804,000 comprised the following:
$1,373,000 on deposit in the United States and $4,431,000
consisting of $353,000 denominated in U.S. dollars and the
equivalent of $4,078,000 denominated in Hungarian forints on
deposit with banks in Hungary.
(b) Cash Equivalents
Cash equivalents amounted to approximately $14,477,000 at March
31, 2000 and consisted of Hungarian government securities,
denominated in Hungarian forints, purchased under agreements to
resell which mature within three months.
(c) Restricted Cash
At March 31, 2000, 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.
- 7 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(3) Related Parties
Current and long-term amounts due to related parties totalling $2,529,000
at March 31, 2000 is comprised of the following: $94,000 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 and $2,435,000
representing payments due to certain former officers under separate
termination, consulting and non-competition agreements. The Company paid
approximately $302,000 during each of the three months ended March 31,
2000 and 1999 to three former officers under these agreements.
The Company has short-term loans (see Note 4) and long-term notes with
Postabank es Takarekpenztar ("Postabank"), a Hungarian commercial bank.
Postabank's share ownership in the Company is 20.2% of the shares
outstanding at March 31, 2000.
(4) Short-term Loans
Short-term loans at March 31, 2000 consist of the following:
<TABLE>
<S> <C>
2000
(in thousands)
Bridge loan:
Euro - EUR 25,000,000 $ 23,924
Hungarian Forint - HUF 25,940,624,000 96,098
--------
Total short-term loans 120,022
Less amounts refinanced subsequent to March 31, 2000 116,194
-------
Short-term loans, excluding portion classified as long-term debt $ 3,828
========
</TABLE>
On May 12, 1999, the Company borrowed from Postabank $138 million ($120
million at March 31, 2000 exchange rates) under a one-year dual currency
bridge loan agreement in Hungarian forints and Euros. The bridge loan was
repayable on May 12, 2000 and bore interest at an initial rate of 2.25%
(the "Margin") plus the Budapest Interbank Offering Rate or Euro LIBOR
Rate (11.68% and 3.69%, respectively at March 31, 2000) which Margin
increased incrementally to 4.25%, in quarterly increments of 1% during
the loan
- 8 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
term. At March 31, 2000, the Margin was 4.25%. On April 11, 2000, the
Company signed a 130 million Euro senior secured debt facility agreement
with a European banking syndicate, the proceeds of which were used to
repay the existing bridge loan on April 20, 2000. As a result of this
refinancing, the Company has classified $116 million of its short-term
loans at March 31, 2000, as long-term debt. See Note 6 for further
explanation of this subsequent event.
(5) Segment Disclosures
The Company operates in a single industry segment, communications
services. The Company's operations involve developing and constructing a
modern telecommunications infrastructure in order to provide a full range
of the Company's products and services in its five concession areas in
Hungary. While the Company's chief operating decision maker monitors the
revenue streams of the various products and services, operations are
managed and financial performance is evaluated based on the delivery of
multiple services to customers over an integrated network. Substantially
all of the Company's assets are located in Hungary and all of its
revenues are generated in Hungary.
Products and Services
The Company groups its products and services into the following
categories:
Telephone Services - local dial tone and switched products and services
that provide incoming and outgoing calls over the public switched
network. This category includes reciprocal compensation revenues and
expenses (i.e. interconnect).
Network Services - point-to-point dedicated services that provide a
private transmission channel for the Company's customers' exclusive use
between two or more locations, both in local and long distance
applications.
Other Service and Product Revenues - PBX hardware sales and service
revenues, as well as miscellaneous other telephony service revenues.
- 9 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The revenues generated by these products and services for the periods
ended March 31 were as follows:
($ in thousands) 2000 1999
---- ----
Telephone services $10,086 $10,492
Network services 551 524
Other service and product
revenues 194 189
------- -------
$10,831 $11,205
======= =======
Included in telephone services are connection fee revenues amounting to
$159,000 and $331,000 for the periods ended March 31, 2000 and 1999,
respectively.
Major Customers
For the periods ended March 31, 2000 and 1999, none of the Company's
customers accounted for more than 10% of the Company's total revenue.
(6) Subsequent Events
On April 11, 2000, the Company entered into an EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement" or "Facility") with
a European banking syndicate. The Company drew down EUR 129 million of
the Facility on April 20, 2000 ($121 million at April 20, 2000 exchange
rates), the funds of which were used, along with another $7.3 million of
other Company funds, at April 20, 2000 exchange rates, to pay off the
entire outstanding balance EUR 134 million (approximately $128 million at
March 31, 2000 exchange rates) of the Postabank Bridge Loan which
resulted in the termination of the Postabank Bridge Loan which was due to
mature on May 12, 2000, as well as fees associated with the Debt
Agreement. The borrowers under the Debt Agreement are the Operating
Companies who were the borrowers under the Postabank Bridge Loan. The
Debt Agreement has two facilities. Facility A is a floating rate term
- 10 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
loan in the amount of EUR 125 million (the "Term Facility") which
principal is repayable semi-annually on each June 30 and December 31
beginning on June 30, 2001 and ending on December 31, 2007. The amounts
of the principal repayments on the Term Facility are to be escalating
percentages of the amounts drawn down (EUR 125 million). The Company has
borrowed the full EUR 125 million, of which EUR 84,135,000 was funded in
euro and the equivalent of EUR 40,865,000 was funded in Hungarian
forints. The amounts borrowed in Hungarian forints are repayable in
Hungarian forints. The Term Facility loans denominated in euros accrue
interest at the rate of the Applicable Margin (defined below) plus the
EURIBOR rate for the applicable interest period. The EURIBOR rate is the
percentage rate per annum determined by the Banking Federation of the
European Union for the applicable interest period. The Term Facility
loans denominated in Hungarian forints accrue interest at the rate of
the Applicable Margin (defined below) plus the BUBOR rate for the
applicable interest period. The BUBOR rate is the percentage rate per
annum determined according to the rules established by the Hungarian
Forex Association and published by the National Bank of Hungary for the
applicable interest period. The applicable interest period for Term
Facility Loans denominated in euros is six months. The applicable
interest period for Term Facility Loans denominated in Hungarian forints
is three months. Interest is payable at the end of each interest period.
The Applicable Margin is initially 1.75%. The Applicable Margin may be
adjusted downward incrementally to a minimum of 1.15% subject to the
financial performance of the Company as measured by the ratio of the
Company's senior debt to its earnings before interest, taxes,
depreciation and amortization.
Facility B is a floating rate revolving loan in the amount of EUR 5
million (the "Revolving Facility") which can only be drawn down in euros.
The Revolving Facility will be reduced to EUR 2.5 million on December 31,
2005. The Revolving Facility is available until December 31, 2007. The
Company borrowed EUR 4 million of the Revolving Facility to pay off the
balance of the Postabank Bridge Loan and fees associated with the
transaction on April 20, 2000. The principal amount borrowed under the
Revolving Facility is due at the end of each interest period at which
point the Company can, subject to certain conditions, roll over the
amount of principal borrowed. The applicable interest period for the
Revolving Facility is, at the Company's option, one, three, or six
months. The Company chose 6 months at the present time. Interest is
payable at the end of each interest period calculated similar to the Term
Facility loan denominated in euros.
- 11 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
As a part of the Debt Agreement, the Company is required to hedge at
least 50% of the euro borrowings until a minimum of 50% of the Term
Facility has been cancelled, prepaid or repaid. Dependent on its cash
flow, commencing in 2001, the Company will be required to prepay the
equivalent of $25 million on the Term Facility until such time as $25
million has been prepaid. The amount of the prepayment in any year shall
be at least 50% of the Company's excess cash flow, if any, for the
previous financial year as defined in the Debt Agreement. The prepayment
amount is due within 15 days of the publication of each annual Form 10-K
filing.
The Company is obligated to pay a commitment fee equal to the lower of
0.75% or 50% of the Applicable Margin on any available unused commitment.
Since the Company only borrowed EUR 4 million of the Revolving Facility,
the Company will pay a commitment fee of EUR 7,500 for the unused EUR 1
million commitment. The Company paid an arrangement fee in the amount of
EUR 2,665,000 (approximately $2,508,000 at April 20, 2000 exchange rates)
and an agency fee in the amount of $60,000. HTCC and one of its
subsidiaries, HTCC Consulting Rt., are guarantors for the HTCC operating
companies under the Debt 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 Debt Agreement. The Company and Citibank Rt. (as security
agent) have entered into a series of agreements to secure all of the
Company's obligations under the Debt Agreement. The Debt Agreement
contains customary representation and warranties. The Company is subject
to some restrictive covenants including restrictions regarding the
ability of the Company to pay dividends, borrow funds, merge and dispose
of its assets. The Debt Agreement contains the customary events of
default, which would trigger early repayment of the balance on the Debt
Agreement including those related to a change of control. If prior to the
later of the December 31, 2001 or the Trigger Date (as defined below),
Tele Danmark sells any of the shares of Common Stock that it currently
owns or Tele Danmark and the Danish Fund, together, no longer own at
least 30.1% of the outstanding Common Stock, then an event of default
shall have occurred. Tele Danmark and the Danish Fund currently together
own 32.1% of the outstanding Common Stock. The Trigger Date is defined as
the date on which for the prior two fiscal quarters the Company's debt to
EBITDA ratio is less than 3.5 to 1. Following the Trigger Date, Tele
Danmark can only transfer its shares with the prior written consent of
banks holding at least 66.7% of the Company's outstanding debt under the
Debt Facility.
- 12 -
<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).
On April 11, 2000, the Company entered into a EUR 130 million
syndicated senior secured debt facility, which proceeds were used to repay the
Company's existing bridge loan. See "Liquidity and Capital Resources" section
below.
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.
The Company's Hungarian subsidiaries functional currency is the
Hungarian forint. The average Hungarian forint/U.S. dollar exchange rate for the
three months ended March 31, 2000 was 261.48, as compared to an average
Hungarian forint/U.S. dollar exchange rate for the three months ended March 31,
1999 of 226.29. This 16% devaluation of the Hungarian forint against the U.S.
dollar reflects the strengthening of the U.S. dollar against the Hungarian
forint during the period. When comparing the three months ended March 31, 2000
to the three months ended March 31, 1999, it should be noted that all U.S.
dollar reported amounts have been affected by this 16% devaluation in the
Hungarian subsidiaries' functional currency.
As a result of the Company's development program, the Company achieved
EBITDA1 of $6.5 million during the quarter ended March 31, 2000, down from
EBITDA of $6.8 million for the quarter ended March 31, 1999. Now that the
Company's network is substantially built-out, 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 on-going 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.
- --------
1 EBITDA is defined as net revenue less operating and maintenance expenses. 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.
- 13 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 141,000 access lines through March 31, 2000 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 March 31, 2000 and Three Months Ended March 31,
1999
Net Revenues
<TABLE>
<S> <C> <C>
Quarter ended
(dollars in millions) 2000 1999 % change
Measured service revenues 8.0 8.7 (8)
Subscription revenues 3.2 2.8 14
Net interconnect charges (1.6) (1.6) -
Net measured service and subscription revenues 9.6 9.9 (3)
Connection fees 0.2 0.3 (33)
Other operating revenues, net 1.0 1.0 -
Telephone Service Revenues, Net 10.8 11.2 (4)
</TABLE>
The Company recorded a 4% decrease in telephone service revenues to
$10.8 million for the three months ended March 31, 2000 from $11.2 million for
the three months ended March 31, 1999.
Net measured service and subscription revenues decreased 3% to $9.6
million for the three months ended March 31, 2000 from $9.9 million for the
three months ended March 31, 1999. Measured service revenues decreased 8% to
$8.0 million during the three months ended March 31, 2000 from $8.7 million
during the three months ended March 31, 1999. Subscription revenues increased
14% to $3.2 million during the three months ended March 31, 2000 from $2.8
million during the three months ended March 31, 1999. Measured service revenues
increased in functional currency terms by approximately 7% as a result of an 8%
increase in average access lines in service from approximately 185,900 for the
three months ended March 31, 1999 to approximately 200,900 during the three
months ended March 31, 2000, offset by an approximate 16% devaluation of the
functional currency during the period. Subscription revenues increased in
functional currency terms by approximately 33% as a result of tariff
re-balancing by the Hungarian telecommunications regulatory authorities
effective February 1, 2000, as well as the increase in average access lines
in service previously discussed, offset by the approximate 16% devaluation
of the functional currency during the period. Under tariff re-balancing,
a more cost-driven payment structure is envisaged with the actual monthly
subscription fees increasing to cover network infrastructure expenses over
time. In Hungary, over the past several years, as in many other countries,
cheaper local call charges have been subsidized by overly expensive
international and domestic long-distance calls. The overall effect on a gross
revenue basis for the telecoms industry, as a whole, is expected to be neutral.
However, the Company is expecting to see a slightly positive net revenue effect
on its telephone service revenues.
- 14 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
These revenues have been reduced by net interconnect charges which
totalled $1.6 million during the three month periods ended March 31, 2000 and
1999. As a percentage of call and subscription revenues, net interconnect
charges have remained consistent at 14% for each of the three month periods
ended March 31, 2000 and 1999.
Connection fees for the three month period ended March 31, 2000
totalled $0.2 million as compared to $0.3 million for the three months ended
March 31, 1999. This decrease reflects a reduction in the number of new access
lines connected and the devaluation of the Hungarian forint.
Other operating revenues remained consistent at $1.0 million for the
three months ended March 31, 2000 and March 31, 1999.
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 2% to $4.3 million for the
three months ended March 31, 2000 as compared to $4.4 million for the three
months ended March 31, 1999. On a per line basis, operating and maintenance
expenses decreased to approximately $22 per average access line for the three
months ended March 31, 2000 from $24 for the three months ended March 31, 1999
as the Company achieved productivity improvements. The Company does not expect a
significant decrease in operating and maintenance expenses in 2000 in U.S.
dollar terms. However, on a per line basis, operating and maintenance costs are
expected to decline as additional access lines are added during 2000.
Depreciation and Amortization
Depreciation and amortization charges decreased $0.4 million to $2.5
million for the three months ended March 31, 2000 from $2.9 million for the
three months ended March 31, 1999. Depreciation and amortization charges
increased in functional currency terms by approximately 1% due to additional
capital expenditures during the period. However, due to the devaluation of the
Hungarian forint during the period, depreciation and amortization charges for
the three months ended March 31, 2000 have decreased in U.S. dollar terms
compared to the three months ended March 31, 1999.
Income from Operations
Income from operations remained consistent at $4.0 million for the
three months ended March 31, 2000 and March 31, 1999.
- 15 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Foreign Exchange Losses
Foreign exchange losses increased $1.7 million to $2.0 for the three
months ended March 31, 2000 from $0.3 million for the three months ended March
31, 1999. 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,
all of the Company's debt was denominated in Hungarian forints. See the
"Inflation and Foreign Currency" and "Market Risk Exposure" sections below.
Interest Expense
Interest expense decreased to $5.9 million for the three months ended
March 31, 2000 from $11.9 million for the three months ended March 31, 1999.
This decrease was attributable to lower average debt levels during the three
months ended March 31, 2000 as compared to the three months ended March 31,
1999. The Company restructured its debt obligations in May 1999 and interest
expense was expected to decrease as compared to the three months ended March 31,
1999. See "Liquidity and Capital Resources" section below.
Interest Income
Interest income increased to $0.5 million for the three months ended
March 31, 2000 from $0.2 million for the three months ended March 31, 1999 due
to higher average cash and cash equivalent balances outstanding during the three
months ended March 31, 2000.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $3.5 million, or $0.29 per share, during the three months ended March
31, 2000 as compared to a net loss of $8.0 million, or $1.49 per share, during
the three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its capital requirements primarily
through a combination of debt, equity and vendor financing. The on-going
development and installation of the network in each of the Company's Operating
Areas required significant capital expenditures ($182 million at historical
exchange rates through March 31, 2000). The Company's networks now have the
capacity to provide basic telephone services to virtually all of the potential
subscribers within its Operating Areas.
Net cash provided by operating activities totalled $4.9 million during
the three months ended March 31, 2000 compared to $3.8 million during the three
months ended March 31, 1999. For the three months ended March 31, 2000 and 1999,
the Company used $0.9 million and $0.8 million, respectively, in investing
activities, which was primarily used to fund additions to the Company's
telecommunications networks. Financing activities provided net cash of $0.2
million and $1.3 million for the three months ended March 31, 2000 and 1999,
respectively.
- 16 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
On April 11, 2000, the Company entered into an EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement" or "Facility") with a
European banking syndicate. The Company drew down EUR 129 million of the
Facility on April 20, 2000 ($121 million at April 20, 2000 exchange rates), the
funds of which were used, along with another $7.3 million of other Company
funds, at April 20, 2000 exchange rates, to pay off the entire outstanding
balance EUR 134 million (approximately $128 million at March 31, 2000 exchange
rates) of the Bridge Loan with Postabank which resulted in the termination of
the Postabank Bridge Loan which was due to mature on May 12, 2000, as well as
fees associated with the Debt Agreement. The borrowers under the Debt Agreement
are the Operating Companies who were the borrowers under the Postabank Bridge
Loan. The Debt Agreement has two facilities. Facility A is a floating rate term
loan in the amount of EUR 125 million (the "Term Facility") which principal is
repayable semi-annually on each June 30 and December 31 beginning on June 30,
2001 and ending on December 31, 2007. The amounts of the principal repayments on
the Term Facility are to be escalating percentages of the amounts drawn down
(EUR 125 million). The Company has borrowed the full EUR 125 million, of which
EUR 84,135,000 was funded in euro and the equivalent of EUR 40,865,000 was
funded in Hungarian forints. The amounts borrowed in Hungarian forints are
repayable in Hungarian forints. The Term Facility loans denominated in euros
accrue interest at the rate of the Applicable Margin (defined below) plus the
EURIBOR rate for the applicable interest period. The EURIBOR rate is the
percentage rate per annum determined by the Banking Federation of the European
Union for the applicable interest period. The Term Facility loans denominated in
Hungarian forints accrue interest at the rate of the Applicable Margin (defined
below) plus the BUBOR rate for the applicable interest period. The BUBOR rate is
the percentage rate per annum determined according to the rules established by
the Hungarian Forex Association and published by the National Bank of Hungary
for the applicable interest period. The applicable interest period for Term
Facility Loans denominated in euros is six months. The applicable interest
period for Term Facility Loans denominated in Hungarian forints is three months.
Interest is payable at the end of each interest period. The Applicable Margin is
initially 1.75%. The Applicable Margin may be adjusted downward incrementally to
a minimum of 1.15% subject to the financial performance of the Company as
measured by the ratio of the Company's senior debt to its earnings before
interest, taxes, depreciation and amortization.
Facility B is a floating rate revolving loan in the amount of EUR 5
million (the "Revolving Facility") which can only be drawn down in euros. The
Revolving Facility will be reduced to EUR 2.5 million on December 31, 2005. The
Revolving Facility is available until December 31, 2007. The Company borrowed
EUR 4 million of the Revolving Facility to pay off the balance of the Postabank
Bridge Loan and fees associated with the transaction on April 20, 2000. The
principal amount borrowed under the Revolving Facility is due at the end of each
interest period at which point the Company can, subject to certain conditions,
roll over the amount of principal borrowed. The applicable interest period for
the Revolving Facility is, at the Company's option, one, three, or six months.
The Company chose 6 months at the present time. Interest is payable at the end
of each interest period calculated similar to the Term Facility loan denominated
in euros.
- 17 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
As a part of the Debt Agreement, the Company is required to hedge at
least 50% of the euro borrowings until a minimum of 50% of the Term Facility has
been cancelled, prepaid or repaid. Dependent on its cash flow, commencing in
2001, the Company will be required to prepay the equivalent of $25 million on
the Term Facility until such time as $25 million has been prepaid. The amount of
the prepayment in any year shall be at least 50% of the Company's excess cash
flow, if any, for the previous financial year as defined in the Debt Agreement.
The prepayment amount is due within 15 days of the publication of each annual
Form 10-K filing.
The Company is obligated to pay a commitment fee equal to the lower of
0.75% or 50% of the Applicable Margin on any available unused commitment. Since
the Company only borrowed EUR 4 million of the Revolving Facility, the Company
will pay a commitment fee of EUR 7,500 for the unused EUR 1 million commitment.
The Company paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2,508,000 at April 20, 2000 exchange rates) and an agency fee in
the amount of $60,000. HTCC and one of its subsidiaries, HTCC Consulting Rt.,
are guarantors for the HTCC operating companies under the Debt 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 Debt Agreement. The Company and Citibank Rt. (as
security agent) have entered into a series of agreements to secure all of the
Company's obligations under the Debt Agreement. The Debt Agreement contains
customary representation and warranties. The Company is subject to some
restrictive covenants including restrictions regarding the ability of the
Company to pay dividends, borrow funds, merge and dispose of its assets. The
Debt Agreement contains the customary events of default, which would trigger
early repayment of the balance on the Debt Agreement including those related to
a change of control. If prior to the later of the December 31, 2001 or the
Trigger Date (as defined below), Tele Danmark sells any of the shares of Common
Stock that it currently owns or Tele Danmark and the Danish Fund, together, no
longer own at least 30.1% of the outstanding Common Stock, then an event of
default shall have occurred. Tele Danmark and the Danish Fund currently together
own 32.1% of the outstanding Common Stock. The Trigger Date is defined as the
date on which for the prior two fiscal quarters the Company's debt to EBITDA
ratio is less than 3.5 to 1. Following the Trigger Date, Tele Danmark can only
transfer its shares with the prior written consent of banks holding at least
66.7% of the Company's outstanding debt under the Debt Facility.
INFLATION AND FOREIGN CURRENCY
Due to the continued strengthening of the U.S. dollar on international
currency markets, the Hungarian forint/U.S. dollar exchange rate increased to
269.94 as of March 31, 2000, compared to a December 31, 1999 exchange rate of
252.52, an effective year to date devaluation of 6.9%.
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. 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.
- 18 -
<PAGE>
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.
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 "crawling peg" policy and the
telecommunications pricing law. The "crawling peg" policy of the National Bank
of Hungary maintains a scheduled daily devaluation of the Hungarian forint which
has been pegged 100% to the euro since January 1, 2000. The Hungarian forint is
allowed to trade within 2.25% of the mid-point of this trading band. For the
quarter ended March 31, 2000, the Hungarian government devaluation policy was
0.4% per month. As of April 1, 2000, the Hungarian government announced the
monthly planned devaluation rate was decreased to 0.3% per month for the
Hungarian forint, which totals approximately 3.9% for 2000. It should be noted
however, that due to the continued strengthening of the U.S. dollar on
international currency markets, the Hungarian forint/U.S. dollar exchange rate
increased to 288.38 as of May 5, 2000, an effective year to date devaluation of
14%. The telecommunications pricing law has historically provided for price
increases tied to the Consumer Price Index (CPI). 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 $383,000 based upon the Company's debt
level from April 20, 2000. If a 1% change in the LIBOR 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 from April 20,
2000.
- 19 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 $829,000 based upon the Company's debt
level from April 20, 2000. 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.
Prospective Accounting Pronouncements
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. The Statement, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company has not
purchased derivative instruments or entered into hedging activities during the
three years ended December 31, 1999. The Company has entered into hedging
transactions under the terms of the Company's EUR 130 million Senior Secured
Debt Facility, which was entered into on April 11, 2000. The Company is
currently evaluating the effect, if any, the pronouncement will have on its
consolidated financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is contained under the heading
"Market Risk Exposure" under Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
- 20 -
<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 March 31, 2000, the total arrearage on the
Preferred Shares was $94,000.
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.
- 21 -
<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.
May 10, 2000 By: /s/Ole Bertram
Ole Bertram
Chief Executive Officer and President
May 10, 2000 By: /s/William McGann
William McGann
Chief Accounting Officer,
Controller and Treasurer
- 22 -
<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 March 31, 2000 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-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 20,281
<SECURITIES> 0
<RECEIVABLES> 7020
<ALLOWANCES> (1031)
<INVENTORY> 0
<CURRENT-ASSETS> 28,084
<PP&E> 134,007
<DEPRECIATION> (27,716)
<TOTAL-ASSETS> 146,065
<CURRENT-LIABILITIES> 18,056
<BONDS> 133,171
0
0
<COMMON> 12
<OTHER-SE> (9,224)
<TOTAL-LIABILITY-AND-EQUITY> 146,065
<SALES> 10,831
<TOTAL-REVENUES> 10,831
<CGS> 0
<TOTAL-COSTS> 6,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,927
<INCOME-PRETAX> (3,430)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,430)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,430)
<EPS-BASIC> (0.29)
<EPS-DILUTED> 0
</TABLE>
