HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Financial Statements
For the quarterly period ended September 30, 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 September 30, 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 November 14, 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 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 13
Quantitative and Qualitative Disclosure About Market Risk 25
Part II. Other Information 26
Signatures 27
- 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> <C>
Assets September 30, 2000 December 31, 1999
------ ------------------ -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 14,364 $ 17,197
Restricted cash 113 111
Accounts receivable, net 5,593 6,940
Inventories 802 885
Prepayments and other current assets 2,349 1,082
------------ ------------
Total current assets 23,221 26,215
Net property, plant and equipment 94,128 115,526
Goodwill, less accumulated amortization 6,029 7,859
Other intangibles, less accumulated amortization 3,665 4,526
Other assets 4,948 557
------------ ------------
Total assets $ 131,991 $ 154,683
============ ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Current installments of long-term debt $ 3,242 $ -
Short-term loans 3,520 5,048
Accounts payable 838 3,994
Accruals 5,037 5,561
Other current liabilities 2,595 1,349
Due to related parties 1,167 996
------------ ------------
Total current liabilities 16,399 16,948
Long-term debt, excluding current installments 105,844 122,917
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% - $7,547,000 in 2000; $8,256,000 in 1999) 17,453 16,744
Due to related parties 952 1,728
Deferred credits and other liabilities 1,863 3,292
------------ ------------
Total liabilities 142,511 161,629
------------ ------------
Commitments and contingencies Stockholders' deficiency: Preferred stock, $.001
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
12,015,179 in 2000 and 11,981,579 in 1999 12 11
Additional paid-in capital 144,261 144,052
Accumulated deficit (171,069) (164,705)
Accumulated other comprehensive income 16,276 13,696
------------ ------------
Total stockholders' deficiency (10,520) (6,946)
------------- ------------
Total liabilities and stockholders' deficiency $ 131,991 $ 154,683
============ ============
</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, 2000 and 1999
(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,
------------------------ -------------------------------
2000 1999 2000 1999
------- ---------- ------- ----------
Telephone services revenues, net $ 10,404 $ 11,169 $ 31,891 $ 33,164
Operating expenses:
Operating and maintenance expenses 3,707 4,282 11,827 12,942
Depreciation and amortization 2,329 3,091 7,218 8,933
------- ---------- ------- ---------
Total Operating Expenses 6,036 7,373 19,045 21,875
------- ---------- ------- ---------
Income from operations 4,368 3,796 12,846 11,289
Other income (expenses):
Foreign exchange losses, net (3,167) (827) (5,670) (1,964)
Interest expense (4,297) (6,252) (14,713) (26,036)
Interest income 429 604 1,212 1,216
Other, net (6) (57) 41 (223)
-------- ----------- ------- ---------
Loss before extraordinary items (2,673) (2,736) (6,284) (15,718)
Extraordinary items, net - - - 20,945
------- ---------- --------- ----------
Net income (loss) $ (2,673) $ (2,736) $ (6,284) $ 5,227
Preferred stock dividends (27) (27) (80) (41)
-------- ----------- ----------- ----------
Net income (loss) available for common stockholders (2,700) (2,763) (6,364) 5,186
Comprehensive income (loss) adjustments 1,504 (9) 2,580 5,890
------- ----------- -------- --------
Total comprehensive income (loss) $ (1,196) $ (2,772) $ (3,784) $ 11,076
======== =========== ======= ======
Earnings (loss) per common share - basic and diluted:
Before extraordinary items $ (0.22) $ (0.23) $ (0.53) $ (1.78)
Extraordinary items $ - $ - $ - $ 2.37
--------- ------------- --------- -----------
Net earnings (loss) $ (0.22) $ (0.23) $ (0.53) $ 0.59
========= ============== ========== ===========
Weighted average number of common shares
Outstanding - basic and diluted 12,015,179 11,981,579 12,006,252 8,821,401
========== ============ ========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Deficiency
(In thousands, except share data)
(unaudited)
<TABLE>
<S> <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 33,600 1 - 263 - - 264
Modification of option
terms - - (54) - - (54)
Cumulative preferred
stock dividends in - - - (80) - (80)
arrears
Net loss - - - (6,284) - (6,284)
Foreign currency
translation adjustment - - - - 2,580 2,580
-------------------------- ----------- ----------- ----------- ------------------ --------------- ---------------- ----------------
Balances at
September 30, 2000 12,015,179 $ 12 - 144,261 (171,069) 16,276 $ (10,520)
-------------------------- ----------- ----------- ----------- ------------------ --------------- ---------------- ----------------
</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, 2000 and 1999
(In thousands)
(unaudited)
<TABLE>
<S> <C> <C>
2000 1999
---- ----
Net cash provided by operating activities $ 5,016 14,522
------------- ---------------
Cash flows from investing activities:
Construction of telecommunication networks (4,509) (4,093)
Increase in construction deposits (1,897) (3)
Proceeds from sale of assets 279 45
------------- ----------------
Net cash used in investing activities (6,127) (4,051)
------------ ----------------
Cash flows from financing activities:
Borrowings under long-term debt agreements 117,170 41,391
Repayments and settlement of long-term debt (117,534) (217,697)
Borrowings under short-term debt agreements 3,754 124,753
Deferred financing costs paid under long-term
debt agreements (3,104) -
Proceeds from issuance of common stock, net - 52,511
Proceeds from exercise of options 264 -
------------- ----------------
Net cash provided by financing activities 550 958
------------- ----------------
Effect of foreign exchange rate changes on cash (2,272) (391)
------------- -----------------
Net (decrease) increase in cash and cash equivalents (2,833) 11,038
Cash and cash equivalents at beginning of period 17,197 8,489
------------- ----------------
Cash and cash equivalents at end of period $ 14,364 19,527
============= ================
</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 conformity with U.S. generally accepted
accounting principles (U.S. GAAP). In preparing such financial
statements, 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 revenues 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, 1999, including the
notes thereto, set forth in the Company's annual report on Form
10-K, filed with the U.S. Securities and Exchange Commission
("SEC").
(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.
- 6 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
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, 2000 and 1999.
The Company had potentially dilutive common stock equivalents of
3,759,637 and 8,242,059 for the periods ended September 30, 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. The basis for determining
whether common stock equivalents were potentially dilutive was
loss before extraordinary items.
(c) Foreign Exchange Financial Instruments
Foreign exchange financial instrument contracts are utilized by
the Company to manage certain foreign exchange rate risks. Company
policy prohibits holding or issuing derivative financial
instruments for trading purposes.
The Company accounts for foreign exchange financial instruments
under Statement of Financial Accounting Standards No. 52 ("SFAS
52"), "Foreign Currency Translation". To qualify for hedge
accounting under SFAS 52, the contracts must meet defined
correlation and effectiveness criteria, be designated as hedges
and result in cash flows and financial statement effects which
substantially offset those of the position being hedged.
Under SFAS 52 hedge accounting, these contracts are valued at
current spot rates on a monthly basis. The change in value is
recognized currently in income through foreign exchange gains
(losses) and is intended to offset the transaction losses or gains
on the foreign currency denominated liabilities which the
contracts are intended to hedge. The foreign exchange loss for
the nine month period ended September 30, 2000 of $5,670,000 is
stated net of a gain of $876,000 relating to the Company's forward
hedging contracts. Any forward points on these contracts are
amortized over the life of the contract through interest
expense. The Company has not yet determined whether its foreign
exchange financial instrument contracts will qualify for hedge
accounting under Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities", as amended, upon adoption on January 1, 2001.
(2) Cash, Restricted Cash and Short-Term Investments
(a) Cash
At September 30, 2000, cash of $2,945,000 comprised the following:
$288,000 on deposit in the United States and $2,657,000 consisting
of $105,000 denominated in U.S. dollars and the equivalent of
$2,552,000 denominated in Hungarian forints on deposit with banks
in Hungary.
- 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 $11,419,000 at
September 30, 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 September 30, 2000, approximately $7,000 of cash denominated in
U.S. dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $106,000 of
cash denominated in Hungarian forints was restricted pursuant to
certain arrangements with other parties.
(3) Related Parties
Current and long-term amounts due to related parties totalling $2,119,000
at September 30, 2000 is comprised of the following: $148,000 due to a
subsidiary of Citizens Communications Company (Citizens Communications
Company and its subsidiaries are hereinafter referred to as "Citizens")
representing cumulative preferred stock dividends in arrears and
$1,971,000 representing payments due to certain former officers under
separate termination, consulting and non-competition agreements. The
Company paid approximately $906,000 during the nine months ended
September 30, 2000 and 1999 to three former officers under these
agreements.
The Company has long-term notes payable with Postabank es Takarekpenztar
("Postabank"), a Hungarian commercial bank. Postabank's share ownership
in the Company is 20.2% of the shares outstanding at September 30, 2000.
(4) Short-term Loans and Debt Facilities
On May 12, 1999, the Company borrowed $138 million from Postabank 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 which Margin increased incrementally to
4.25%, in quarterly increments of 1% during the loan term.
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 $7.3 million of other
Company funds (at April 20, 2000 exchange rates) to pay off the entire
outstanding EUR 134 million (approximately $126 million at April 20, 2000
- 8 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
exchange rates) principal and interest due on the Postabank Bridge Loan
which was due to mature on May 12, 2000, and to pay 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. The Company
has borrowed the full EUR 125 million, of which EUR 84,135,000 was funded
in euros and the equivalent of EUR 40,865,000 was funded in Hungarian
forints. The amounts borrowed in euros are repayable in euros and 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, which is included in short-term loans at September
30, 2000, 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 has chosen six 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.
- 9 -
<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 devise and
implement a hedging strategy in order to mitigate and minimize its key
interest rate and foreign exchange rate market risks. Following its
hedging strategy, on April 20, 2000, the Company entered into six month
forward contracts to purchase EUR 43,750,000 (approximately $38,496,000
at September 30, 2000 exchange rates) at a rate of 268.48 on October 20,
2000. On maturity of these forward contracts, the Company will enter into
spot contracts to sell EUR 43,750,000 for Hungarian forint on a net
settled basis.
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 filing of
each annual Form 10-K with the SEC.
The Company paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2,508,000 at April 20, 2000 exchange rates), which is
included in other assets along with other direct costs incurred in
obtaining the Debt Agreement, and is being amortized over the term of the
related debt. In addition, an agency fee in the amount of $60,000 has
also been paid. The Company is obligated to pay an annual commitment fee
equal to the lower of 0.75% or 50% of the Applicable Margin on any
available unused commitment. HTCC and one of its subsidiaries, HTCC
Consulting Rt., are guarantors for the 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 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 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 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 Agreement.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(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.
- 11 -
<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:
<TABLE>
<S> <C> <C>
3 months ended 9 months ended
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
($ in thousands)
Telephone services $ 9,603 $10,395 $29,559 $30,968
Network services 603 552 1,772 1,517
Other service and product
Revenues 198 222 560 679
--------- -------- -------- --------
$10,404 $11,169 $31,891 $33,164
======= ======= ======= =======
</TABLE>
Included in telephone services are connection fee revenues amounting to
$513,000 and $1,088,000 for the nine month periods ended September 30,
2000 and 1999, respectively.
Major Customers
For the periods ended September 30, 2000 and 1999, none of the Company's
customers accounted for more than 10% of the Company's total revenue.
- 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
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, 1999 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") (KNC, Raba-Com, Papatel and Hungarotel are each an "Operating
Company" and together, the "Operating Companies"). 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 an EUR 130 million
syndicated senior secured debt facility, the proceeds of which were used to
repay the Company's existing bridge loan. See "Liquidity and Capital Resources"
section below.
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 September 30, 2000 was 286.30, as compared to an average
Hungarian forint/U.S. dollar exchange rate for the three months ended September
30, 1999 of 240.16. The average Hungarian forint/U.S. dollar exchange rate for
the nine months ended September 30, 2000 was 275.34, as compared to an average
Hungarian forint/U.S. dollar exchange rate for the nine months ended September
30, 1999 of 234.06. This 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 and nine months ended
September 30, 2000 to the three and nine months ended September 30, 1999, it
should be noted that all U.S. dollar reported amounts have been affected by this
19% and 18% devaluation in the Hungarian subsidiaries' functional currency,
respectively.
- 13 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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. Since that
time, the Company has continued to expand its network and connect new customers.
The Company achieved EBITDA1 of $6.7 million during the quarter ended
September 30, 2000, down from EBITDA of $6.9 million for the quarter ended
September 30, 1999. The ability of the Company to generate sufficient revenues
to satisfy its 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.
Since commencing the provision of telecommunications services in the
first quarter of 1995, the Company's network construction and expansion program
has added approximately 143,000 access lines through September 30, 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 September 30, 2000 and Three Months Ended
September 30, 1999
Net Revenues
Quarter end
(dollars in millions) 2000 1999 % change
Measured service revenues 7.7 8.9 (13)
Subscription revenues 3.3 2.7 22
Net interconnect charges (1.7) (1.9) (11)
----- -----
Net measured service and subscription revenues 9.3 9.7 (4)
Connection fees 0.3 0.4 (25)
Other operating revenues, net 0.8 1.1 (27)
----- -----
Telephone Service Revenues, Net 10.4 11.2 (7)
===== =====
--------
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 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.
- 14 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
The Company recorded a 7% decrease in telephone service revenues to
$10.4 million for the three months ended September 30, 2000 from $11.2 million
for the three months ended September 30, 1999.
Net measured service and subscription revenues decreased to $9.3
million for the three months ended September 30, 2000 from $9.7 million for the
three months ended September 30, 1999. Measured service revenues decreased 13%
to $7.7 million during the three months ended September 30, 2000 from $8.9
million during the three months ended September 30, 1999. Subscription revenues
increased 22% to $3.3 million during the three months ended September 30, 2000
from $2.7 million during the three months ended September 30, 1999. Measured
service revenues increased in functional currency terms by approximately 2% as a
result of an increase in average access lines in service from approximately
190,500 for the three months ended September 30, 1999 to approximately 202,200
during the three months ended September 30, 2000, offset by an approximate 19%
devaluation of the functional currency during the period. Subscription revenues
increased in functional currency terms by approximately 45% as a result of
tariff re-balancing effective February 1, 2000, as well as the increase in
average access lines in service, offset by the approximate 19% devaluation of
the functional currency during the period. Under tariff re-balancing, a more
cost-driven payment structure is envisaged with 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 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.
These revenues have been reduced by net interconnect charges which
totalled $1.7 million during the three months ended September 30, 2000 compared
to $1.9 million during the three months ended September 30, 1999. As a
percentage of call and subscription revenues, net interconnect charges have
declined from 16.4% for the three months ended September 30, 1999 to 15.5% for
the three months ended September 30, 2000.
Connection fees for the three month period ended September 30, 2000
totalled $0.3 million as compared to $0.4 million for the three months ended
September 30, 1999. This decrease reflects a reduction in the number of new
access lines connected and the devaluation of the Hungarian forint.
Other operating revenues which include revenues generated from the
provision of direct lines and other miscellaneous telephony service revenues,
totalled $0.8 million for the three months ended September 30, 2000, as compared
to $1.1 million for the three months ended September 30, 1999.
- 15 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 14% to $3.7 million for
the three months ended September 30, 2000 as compared to $4.3 million for the
three months ended September 30, 1999. In functional currency terms, operating
and maintenance expenses increased 8% for the three months ended September 30,
2000, as compared to the three months ended September 30, 1999. This increase is
due to inflationary increases in costs at the Company's Hungarian subsidiaries,
offset by savings related to reductions in the number of expatriates working for
the Company. On a per line basis, operating and maintenance expenses decreased
to approximately $18 per average access line for the three months ended
September 30, 2000 from $22 for the three months ended September 30, 1999. 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 $0.8 million, or 25%,
to $2.3 million for the three months ended September 30, 2000 from $3.1 million
for the three months ended September 30, 1999. This decrease is due to
depreciation and amortization charges decreasing in functional currency terms by
approximately 10% and the 19% devaluation of the Hungarian forint during the
period. The 10% decrease in depreciation and amortization charges in functional
currency terms is due to additional depreciation being recorded at one of the
Company's subsidiaries beginning during the second quarter of 1999 on certain
network equipment which was replaced by December 31, 1999. The amount of the
additional depreciation in the third quarter of 1999 amounted to approximately
$0.3 million at historical exchange rates.
Income from Operations
Income from operations increased to $4.4 million for the three months
ended September 30, 2000 from $3.8 million for the three months ended September
30, 1999. Contributing to such improvements were lower operating and maintenance
expenses and lower depreciation and amortization charges during the period.
Foreign Exchange Losses
Foreign exchange losses increased $2.4 million, net of a gain of $0.6
million related to the Company's forward hedging contracts, to $3.2 million for
the three months ended September 30, 2000 from $0.8 million for the three months
ended September 30, 1999. Such foreign exchange losses resulted primarily from
the devaluation of the Hungarian forint against the U.S. dollar and euro during
the period. See the "Inflation and Foreign Currency" and "Market Risk Exposure"
sections below.
Interest Expense
Interest expense decreased to $4.3 million for the three months ended
September 30, 2000 from $6.3 million for the three months ended September 30,
1999. During April 2000, the Company refinanced the debt obligations it had
restructured in May 1999. As a result of this refinancing in April 2000, the
Company's borrowings went from being mostly Hungarian forint denominated to
mostly euro denominated. This decrease reflects the lower interest rates paid on
borrowings in U.S. dollars and euros, compared to Hungarian forints. As a result
of the refinancing in April 2000, the Company's weighted average interest rate
on its debt obligations went from 13.98% for the three months ended September
30, 1999, to 7.95% for the three months ended September 30, 2000, a 43%
decrease. Included in interest expense for the three months ended September 30,
2000 is approximately $0.8 million of amortization of the forward points on the
Company's forward foreign currency contracts. See "Liquidity and Capital
Resources" section below.
- 16 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Interest Income
Interest income decreased to $0.4 million for the three months ended
September 30, 2000 from $0.6 million for the three months ended September 30,
1999 due to higher average cash balances outstanding during the three months
ended September 30, 2000 being offset by lower interest rates on Hungarian
forint deposits during the period.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss available for common stockholders of $2.7 million, or $0.22 per share,
during the three months ended September 30, 2000 as compared to a loss of $2.8
million, or $0.23 per share, during the three months ended September 30, 1999.
Comparison of Nine Months Ended September 30, 2000 to Nine Months Ended
September 30, 1999
Net Revenues
Year-to-date ended
(dollars in millions) 9/30/00 9/30/99 % change
Measured service revenues 23.4 26.2 (11)
Subscription revenues 10.0 8.2 22
Net interconnect charges (5.0) (5.3) (6)
----- ------
Net measured service and subscription revenues 28.4 29.1 (2)
Connection fees 0.8 1.1 (27)
Other operating revenues 2.7 3.0 (10)
----- -----
Telephone Service Revenues, Net 31.9 33.2 (4)
==== ====
The Company recorded a 4% decrease in net telephone service revenues of
$31.9 million for the nine months ended September 30, 2000 as compared to
revenues of $33.2 million for the nine months ended September 30, 1999.
Net measured service and subscription revenues decreased 2% to $28.4
million for the nine months ended September 30, 2000 from $29.1 million for the
nine months ended September 30, 1999. Measured service revenues decreased 11% to
$23.4 million while subscription revenues increased 22% to $10.0 million for the
nine months ended September 30, 2000. Measured service revenues increased in
functional currency terms by approximately 4% as a result of an increase in
average access lines in service from approximately 188,200 for the nine months
ended September 30, 1999 to approximately 201,500 during the nine months ended
- 17 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
September 30, 2000, offset by an approximate 18% devaluation of the functional
currency during the period. Subscription revenues increased in functional
currency terms by approximately 41% as a result of tariff re-balancing effective
February 1, 2000, as well as the increase in average access lines in service,
offset by the approximate 18% 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, cheap local call charges have been subsidized by
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.
These revenues have been offset by net interconnect charges which
totalled $5.0 million for the nine months ended September 30, 2000 as compared
to $5.3 million for the nine months ended September 30, 1999. As a percentage of
call and subscription revenues, net interconnect charges have declined from
15.4% for the nine months ended September 30, 1999 to 15.0% for the nine months
ended September 30, 2000.
Connection fees for the nine month period ended September 30, 2000
totalled $0.8 million as compared to $1.1 million for the nine months ended
September 30, 1999. This decrease reflects a reduction in the number of new
access lines connected and the devaluation of the Hungarian forint.
Other operating revenues which include revenues generated from the
provision of direct lines and other miscellaneous telephony service revenues,
totalled $2.7 million for the nine months ended September 30, 2000 as compared
to $3.0 million for the nine months ended September 30, 1999.
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 9% to $11.8 million for
the nine months ended September 30, 2000 as compared to $12.9 million for the
nine months ended September 30, 1999. In functional currency terms, operating
and maintenance expenses increased 11% for the nine months ended September 30,
2000, as compared to the nine months ended September 30, 1999. This increase is
due to inflationary increases in costs at the Company's Hungarian subsidiaries,
offset by savings related to reductions in the number of ex-patriates working
for the Company. On a per line basis, operating and maintenance expenses
decreased to approximately $59 per average access line for the nine months ended
September 30, 2000 from $69 for the nine months ended September 30, 1999. On a
per line basis, operating and maintenance costs are expected to decline as
additional access lines are added during 2000.
- 18 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Depreciation and Amortization
Depreciation and amortization charges decreased $1.7 million, or 19%,
to $7.2 million for the nine months ended September 30, 2000 from $8.9 million
for the nine months ended September 30, 1999. This decrease is due to
depreciation and amortization charges decreasing in functional currency terms by
approximately 6% and the 18% devaluation of the Hungarian forint during the
period. The 6% decrease in depreciation and amortization charges in functional
currency terms is due to additional depreciation being recorded at one of the
Company's subsidiaries beginning during the second quarter of 1999 on certain
network equipment which was replaced by December 31, 1999. The amount of the
additional depreciation during the first nine months of 1999 amounted to
approximately $0.5 million at historical exchange rates through September 30,
1999.
Income from Operations
Income from operations increased to $12.8 million for the nine months
ended September 30, 2000 from $11.3 million for the nine months ended September
30, 1999. Contributing to such improvements were lower operating and maintenance
expenses and lower depreciation and amortization charges during the period.
Foreign Exchange Loss
Foreign exchange losses increased $3.7 million, net of a gain of $0.9
million related to the Company's forward hedging contracts, to $5.7 million for
the nine months ended September 30, 2000 from $2.0 million for the nine months
ended September 30, 1999. Such foreign exchange losses resulted primarily from
the devaluation of the Hungarian forint against the U.S. dollar and euro during
the period. This increase in foreign exchange losses during the period is also
due to the Company's refinancing of its debt obligations in April 2000. Prior to
its refinancing, approximately 20% of the Company's debt was denominated in
currencies other than the Hungarian forint, whereas subsequent to its
refinancing, the Company's debt is approximately 69% denominated in currencies
other than the Hungarian forint. See the "Inflation and Foreign Currency" and
"Market Risk Exposure" sections below.
Interest Expense
Interest expense decreased 43% to $14.7 million for the nine months
ended September 30, 2000 from $26.0 million for the nine months ended September
30, 1999. This $11.3 million decrease was partially attributable to lower
average debt levels during the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999. This reduction in average debt
levels outstanding during the period was due to the Company's restructuring of
its debt obligations in May 1999 and the subsequent refinancing of those
obligations in April 2000. As a result of the refinancing in April 2000, the
Company's borrowings went from being mostly Hungarian forint denominated to
mostly euro denominated. The decrease also reflects the lower interest rates
paid on borrowings in U.S. dollars and euros, compared to Hungarian forints. As
a result of the restructuring in May 1999 and the refinancing in April 2000, the
Company's weighted average interest rate on its debt obligations went from
16.72% for the nine months ended September 30, 1999, to 11.51% for the nine
months ended September 30, 2000, a 31% decrease. Included in interest expense
for the nine months ended September 30, 2000 is approximately $1.4 million of
amortization of the forward points on the Company's forward foreign currency
contracts. See "Liquidity and Capital Resources" section below.
- 19 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Interest Income
Interest income remained consistent at $1.2 million for each of the
nine month periods ended September 30, 2000 and 1999.
Loss Before Extraordinary Items
As a result of the factors discussed above, the Company recorded a loss
before extraordinary items of $6.3 million, or $0.53 per share, for the nine
months ended September 30, 2000 as compared to a loss of $15.7 million, or $1.78
per share, for the nine months ended September 30, 1999.
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
termination of a credit facility with Postabank.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded a net
loss available for common stockholders of $6.4 million, or $0.53 per share, for
the nine months ended September 30, 2000 as compared to net income available for
common stockholders of $5.2 million, or $0.59 per share, for the nine months
ended September 30, 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 ($185.5 million at historical
exchange rates through September 30, 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 $5.0 million during
the nine months ended September 30, 2000 compared to $14.5 million during the
nine months ended September 30, 1999. For the period ended September 30, 1999,
cash was provided by operations because $16.1 million of interest due was
deferred and added to amounts due under the Postabank Bridge Loan. For the nine
months ended September 30, 2000 and 1999, the Company used $6.1 million and $4.1
million, respectively, in investing activities, which was primarily used to fund
additions to the Company's telecommunications networks. Financing activities
provided net cash of $0.6 million and $1.0 million for the nine months ended
September 30, 2000 and 1999, respectively.
- 20 -
<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 $7.3 million of other Company funds (at
April 20, 2000 exchange rates) to pay off the entire outstanding EUR 134 million
(approximately $126 million at April 20, 2000 exchange rates) principal and
interest due on the Postabank Bridge Loan which was due to mature on May 12,
2000, and to pay 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. The Company has borrowed the
full EUR 125 million, of which EUR 84,135,000 was funded in euros and the
equivalent of EUR 40,865,000 was funded in Hungarian forints. The amounts
borrowed in euros are repayable in euros and 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 has chosen six months at the present time. Interest is payable at
the end of each interest period calculated similarly to the Term Facility loan
denominated in euros.
- 21 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
As a part of the Debt Agreement, the Company is required to devise and
implement a hedging strategy in order to mitigate and minimize its key interest
rate and foreign exchange rate market risks. 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 paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2,508,000 at April 20, 2000 exchange rates), which has been
capitalized with other direct costs incurred in obtaining the Debt Agreement and
is being amortized over the term of the related debt. In addition, an agency fee
in the amount of $60,000 has also been paid. 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. HTCC and one of its subsidiaries, HTCC
Consulting Rt., are guarantors for the 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 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 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 Agreement.
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
299.72 as of September 30, 2000, compared to a December 31, 1999 exchange rate
of 252.52, an effective year to date devaluation of 18.7%.
- 22 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 denominated 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.
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 84% of operational costs are Hungarian forint based
and are therefore subject to exchange rate variability between the Hungarian
forint and the U.S. Dollar. This variability is mitigated by several factors,
including the Hungarian National Bank policy to peg the Hungarian forint 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 307.62 as of November 8, 2000, an effective year to date
devaluation of 22%. 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
- 23 -
<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
in the BUBOR interest rate were to occur, the Company's interest expense would
increase or decrease by approximately $350,000 annually based upon the Company's
current 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 $1.0
million annually based upon the Company's current debt level.
The Company is also exposed to exchange rate risk insofar 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 $776,000 annually based upon the Company's
current debt level. 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 annually.
The Company utilizes foreign currency forward contracts to reduce
certain exposure to exchange rate risks associated with the Company's long-term
debt obligations. The forward contracts establish the exchange rates at which
the Company will sell the contracted amount of Hungarian forints for euros at a
future date. The Company utilizes forward contracts which are six months in
duration and at maturity will either receive or pay the difference between the
contracted forward rate and the exchange rate at the settlement date. The
contracted amount of foreign currency forwards at September 30, 2000 is EUR
43,750,000 (approximately $38,496,000 at September 30, 2000 exchange rates). The
Company has recently reviewed its hedging strategy and has changed it such that
it will hedge future interest and principal payments payable in euros due within
the next six months.
The counterparties to the Company's foreign currency forward contracts
are substantial and creditworthy multinational commercial banks or other
financial institutions which are recognized market makers. Neither the risks of
counterparty nonperformance nor the economic consequences of counterparty
nonperformance associated with these contracts are considered by the Company to
be material.
Prospective Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities",
was issued. SFAS 133, as amended by SFAS 137 and SFAS 138, requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair value. The Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company is
continuing to evaluate the effect, if any, the adoption of SFAS 133 will have on
its consolidated financial position and results of operations.
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<PAGE>
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosure 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."
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<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, 2000, the total arrearage on the
Preferred Shares was $148,000.
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.
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<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 14, 2000 By: /s/Ole Bertram
-------------------------------------
Ole Bertram
Chief Executive Officer and President
November 14, 2000 By: /s/William McGann
-------------------------------------
William McGann
Chief Accounting Officer,
Controller and Treasurer
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<PAGE>
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Description
27.1 Financial Data Schedule
