Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(D)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
September 30, 1996 1-1200
HUNGARIAN TELECONSTRUCT CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3696015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
227 Route 206, Unit 11, Flanders, NJ 07836
(Address of principal executive offices)
(201) 927-6560
The 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
requirement for the past 90 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 1,518,290 Shares
(Class) (Outstanding at September 30, 1996)
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of
September 30, 1996 (unaudited)
and December 31, 1995 (audited) 2
Consolidated statements of loss
(unaudited) for the three
months ended September 30, 1996
and 1995 and the nine months
ended September 30, 1996 and 1995 3
Consolidated statements of stockholders'
equity (unaudited) for the nine months
ended September 30, 1996 and 1995 4
Consolidated statements of cash flows
(unaudited) for the nine months ended
September 30, 1996 and 1995 5
Notes to consolidated financial statements
(unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II. Other Information 19
Signature 21
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 December 31, 1995
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 172,726 $ 376,986
VAT refund receivable 69,050 221,216
Receivables from related parties 32,784 566,746
Notes receivable from affiliate 407,000
Other 49,853 40,375
Total current assets 731,413 1,205,323
Property and equipment, less accumulated
depreciation of $96,077 and $77,773,
respectively 258,866 611,316
Construction in progress, net of $700,000
allowance for reduction to market value
in 1996 3,460,059 3,119,721
Investment in and advances to affiliate 151,748 872,667
Other 343 51,308
$ 4,602,429 $5,860,335
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ $ 16,502
Accounts payable and accrued expenses 215,124 566,778
Payables to related parties 323,974
Deposits payable to related parties 594,320
Total current liabilities 1,133,418 583,280
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value - shares
authorized 10,000,000 (1996) and
3,000,000 (1995); issued and
outstanding 1,518,290 at both dates 1,518 1,518
Additional paid-in capital 14,645,998 14,645,998
Accumulated deficit (11,178,505) (9,370,461)
Total stockholders' equity 3,469,011 5,277,055
$ 4,602,429 $5,860,335
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
REVENUES
Construction $ $ 155,023 $ $ 244,745
Other 15,578 31,098 104,393
Total 170,601 31,098 349,138
EXPENSES(INCOME)
Cost of construction
revenue 165,653 249,400
Compensation and
related costs 51,516 439,717 350,918 1,331,815
Consulting and
professional fees 29,152 16,844 140,552 62,765
Foreign currency
(gain)loss 6,220 (28,324) 110,297 20,994
Interest and dividend
income (19,658) (95,599) (61,318) (308,785)
Depreciation and
amortization 9,017 19,422 21,700 45,610
Write-down of
construction in
progress to market
value 700,000 700,000
Other 64,812 137,862 214,993 443,124
Total 841,059 655,575 1,477,142 1,844,923
Loss before
minority interest
and equity in net
loss of unconsolidated
affiliate (841,059) (484,974) (1,446,044) (1,495,785)
Minority interest in
net losses 63,263 76,238
Equity in net loss
of unconsolidated
affiliate (180,000) (362,000)
Net loss $ (1,021,059) $ (421,711) $(1,808,044) $(1,419,547)
Net loss per share $ (.67) $ (.28) $ (1.19) $ (.93)
Weighted average number
of common shares
outstanding 1,518,290 1,518,290 1,518,290 1,518,290
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
NINE MONTHS ENDED
SEPTEMBER 30, 1996:
Balance, January 1, 1996 1,518,290 $1,518 $14,645,998 $ (9,370,461)
Net loss for the period (1,808,044)
Balance, September 30, 1996 1,518,290 $1,518 $14,645,998 $(11,178,505)
NINE MONTHS ENDED
SEPTEMBER 30, 1995:
Balance, January 1, 1995 1,518,290 $1,518 $ 9,260,331 $(2,891,084)
Amortization of unearned
portion of options
granted as compensation 897,000
Net loss for the period (1,419,547)
Balance, September 30, 1995 1,518,290 $1,518 $10,157,331 $(4,310,631)
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,808,044) $(1,419,547)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization 21,700 45,610
Write-down of construction in
progress to market value 700,000
Amortization of imputed interest
income (39,000) (165,000)
Amortization of options granted
as compensation 897,000
Loss on disposal of property and
equipment 1,829
Foreign currency loss 110,297 20,994
Loss on sale of Pilistav Kft 23,530
Minority interest in net losses (76,238)
Equity in net loss of unconsolidated
affiliate 362,000
Changes in operating assets and
liabilities:
Decrease in accounts receivable 32,075
(Increase)decrease in VAT refund
receivable 152,166 (12,390)
Decrease in receivables from
related parties 533,962 751,913
Decrease in other assets 41,487 67,976
Increase(decrease) in accounts
payable and accrued expenses (351,654) 54,116
Increase in payables to related
parties 323,974
Increase in deposits payable
to related parties 594,320
Net cash provided by operating
activities 643,037 220,039
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment
and construction in progress (1,026,417) (904,734)
Proceeds from sale of building to
Hungarian Telephone and Cable Corp. 315,000
Proceeds from sale of Pilistav Kft 918,875
Increase in investment in and advances
to affiliate and notes receivable (9,081) (865,197)
Net cash used in investing activities (720,498) (851,056)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in bank overdraft (16,502)
EFFECT OF FOREIGN EXCHANGE RATE
CHANGES ON CASH (110,297) (20,994)
DECREASE IN CASH AND CASH EQUIVALENTS (204,260) (652,011)
Cash and cash equivalents at beginning
of period 376,986 2,107,892
Cash and cash equivalents at end
of period $ 172,726 $1,455,881
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts
of Hungarian Teleconstruct Corp. (the "Company") and its
majority-owned subsidiaries, except for Pilistav Kft
("Pilistav") in which the Company had a 68% interest at
January 1, 1995, but control was temporary (see Note 8(b)).
All material intercompany balances and transactions have been
eliminated.
(b) Use of Estimates
In preparing financial statements in conformity with
generally accepted accounting principles, management
is required to make estimates and assumptions that affect
the 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.
(c) Fiscal Year
The Company's reporting period is the fiscal year ending
December 31.
(d) Foreign Currency Translation
The Company uses the U.S. dollar as the functional currency
for its majority-owned Hungarian subsidiaries. Accordingly,
monetary assets and liabilities of the subsidiaries were
translated by using the exchange rate in effect at the
balance sheet date while nonmonetary assets and liabilities
were translated at historical rates. Income and expense
accounts were translated at the average rates in effect
during the period. Translation adjustments and transaction
gains or losses were reflected in the consolidated statements
of loss.
(e) Cash Equivalents
For purposes of the consolidated statements of cash flows,
the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents. The carrying amounts reported in the
accompanying balance sheets approximate fair value.
(f) Fair Value of Financial Instruments
Due to the nature of the VAT refund receivable, receivables
from related parties, notes receivable from affiliate,
payables to related parties and advances to affiliate,
it is not practicable to approximate their fair market values.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(g) Investment in Affiliate
The Company's 9.7% equity interest in Hungarian
Broadcasting Corp. ("HBC") is accounted for using
the equity method because the Company has the ability
to exercise significant influence over HBC. Under this
method, the Company records as a loss its share of the
losses incurred by HBC and dividends, if any, are credited
against the investment account when declared.
(h) Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation
is computed by the straight-line method over the estimated
useful lives of the assets as follows:
Years
Office condominiums 40
Furniture, fixtures and equipment 3 - 5
Motor vehicles 4 - 5
(i) Net Loss Per Share
The net loss per share is computed using the weighted
average number of common shares outstanding during each
period.
2. Organization, Business and Discontinued Operations
(a) Business
The Company was organized on November 9, 1992 and was in the
development stage through December 31, 1993. The Company had
two operating business segments: (1) building of condominium
apartments and building renovation and (2) design and civil
engineering, and laying of underground fiber optic telephone
and cable lines. The latter segment was discontinued in 1994.
Through its wholly-owned Hungarian subsidiary, Teleconstruct
Epitesi RT. ("Teleconstruct") the Company is currently
constructing for sale two luxury 14-unit condominiums in
Budapest.
In October 1996, the Company announced that it was planning
to enter the Internet provider business and has established
a strategic alliance with MCI and Netscape Communications to
establish a full range of Internet services in Hungary. It
plans to initiate services during the first quarter of 1997.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
During 1993, the Company also organized the following Hungarian
subsidiaries, all of which are limited liability companies:
%
Name Ownership Business
Tele-Media Kft 100 Advertising and promoting
use of additional telephone
options. In process of being
liquidated.
TC Telecom Kft 100 Liquidated in 1995
Termolang Kft 90 Sold in September 1995
(building renovation)
Tele-Plusz Kft 60 Sold in April 1995 (laying
of underground fiber optic
telephone and cable lines
and design and civil
engineering)
During 1994, the Company organized Central Europe Consult
("CEC"), an Austrian corporation, in which it has a 51%
interest, with Hungarian Telephone and Cable Corp. ("HTCC"),
a U.S. public company which had two of the same officers and
directors as the Company, owning a 49% interest. CEC is in the
process of being liquidated.
(b) Sale of Building Renovation Business
Effective September 30, 1995, the Company's 90% interest
in Termolang Kft was sold for its original investment to
the 10% interest holder for a gain of approximately $11,000.
All construction revenues reflected in the consolidated
statements of loss were earned by Termolang Kft.
(c) Discontinued Operations
By selling Tele-Plusz Kft ("Tele-Plusz") and discontinuing
the operations of TC Telecom Kft ("TC Telecom"), the Company
discontinued one of its two business segments.
On April 27, 1995, the Company entered into an agreement to
sell its 60% interest in Tele-Plusz to an affiliate of the
40% interest holder for approximately $40,000 payable on
May 11, 1995. The agreement also provided for the
repayment of the loan to Teleconstruct in 18 equal monthly
installments beginning June 1, 1995. As a result of the
sale, Tele-Plusz's assets and liabilities as of December 31,
1994 and its operations for the year then ended were
deconsolidated from the Company's financial statements.
Based on the financial condition of Tele-Plusz and because
the payment of the sales price and repayment of the loan
were conditional on Tele-Plusz being awarded a subcontract
for the building of the Kelet-Nograd telephone exchange,
Teleconstruct's loan receivable of $354,325 from Tele-Plusz
was written off at December 31, 1994 and none of the sales
price on the sale of the 60% interest was recognized in the
financial statements. Any proceeds realized in the future
from the loan or the sale of the interest will be recognized
upon receipt.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The Company will not be responsible for the payment of any
obligations related to Tele-Plusz. Accordingly, the
Company's share of accumulated deficit in excess of its
investment in Tele-Plusz was reflected as a gain on
abandonment of discontinued operations at December 31, 1994.
During 1994, TC Telecom discontinued its operations and was
liquidated during 1995. Substantially all of its revenues
were earned from subsidiaries of HTCC.
3. Interim Periods
The accompanying consolidated financial statements for the
three months ended September 30, 1996 and 1995 and the nine
months ended September 30, 1996 and 1995 are unaudited but,
in the opinion of management, include all adjustments, consisting
mainly of normal recurring accruals necessary for fair
presentation. Results for the interim periods are not
necessarily indicative of the results for a full year.
4. Incorporation by Reference
Reference is made to the Company's annual report on Form 10-KSB
for the fiscal year ended December 31, 1995 and to the notes to
the consolidated financial statements included therein, which are
incorporated herein by reference.
5. Concentration of Cash and Cash Equivalents
At September 30, 1996, cash includes $89,701 denominated in U.S.
dollars on deposit with a major money center bank in the United
States and $83,025 (denominated partly in U.S. dollars and partly
in Hungarian forints) on deposit with Hungarian government-owned
banks and a foreign bank in Hungary.
6. Receivables from and Payables to Related Parties
At September 30, 1996, receivables from and payables to related
parties include the following:
Receivables Payables
HTCC $32,784
Officer/stockholder and affiliate $323,974
The amount due from HTCC primarily represents accrued interest
on advances.
The amount due to the officer/stockholder and affiliate primarily
represents non-interest bearing advances.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
7. Construction in Progress
Construction-in-progress of $3,460,059 at September 30, 1996
includes the cost of land ($885,000) and construction costs
incurred in connection with the building for sale of two
luxury 14-unit condominiums which are estimated to cost
approximately an additional $300,000 to complete. In order
to reduce the total cost of construction in progress for both
buildings to market value, a write-down of $700,000 was charged
to operations during the three months ended September 30, 1996.
See Note 14 for disclosure of the sale of one of the buildings to
a related party in October 1996.
8. Investment in and Advances to Affiliate and Notes Receivable
from Affiliate
(a) Hungarian Broadcasting Corp.
At September 30, 1996, the investment in and advances to
HBC includes the following:
Investment at equity $ 41,000
Loans and advances 110,748
$151,748
On November 28, 1994, the Company entered into a loan
agreement with HBC, which provided for the Company to lend
HBC $800,000 at 6% interest per annum, originally repayable
on the earlier of December 31, 1995 or the completion of an
Initial Public Offering ("IPO") by HBC. The IPO was
consummated in December 1995 by selling 1,150,000 shares
of common stock at a price of $5 per share, with the Company
recognizing a gain of approximately $203,000 resulting
from the increase in the Company's proportionate share in
HBC's equity. The gain was accounted for as an equity
transaction, increasing additional paid-in capital.
The loan agreement provided for the following additional
consideration to the Company: (1) issuance of 100,000
shares of HBC's common stock, which shares shall be deemed
fully paid and nonassessable; (2) an option which was
exercised in April 1995, to purchase an additional 150,000
shares of HBC's common stock at $3 per share; and (3) three
years right of first refusal to act as general contractor for
all broadcast facilities to be built by companies controlled
by HBC. On January 2, 1996, HBC repaid $424,000 of the amount
owed to the Company with the balance being due June 30, 1997.
Notes receivable of $407,000 at September 30, 1996 includes
accrued interest and is shown net of $39,000 original issue
discount.
The Company's 9.7% interest in HBC (250,000 shares of common
stock) at September 30, 1996 has an original cost of $615,000
and includes the 100,000 shares received in connection with
the loan made to HBC and valued at $165,000 representing the
original issue discount on the $800,000 loan. The original
issue discount is being amortized over the term of the loan
with $39,000 amortized during the nine months ended
September 30, 1996 and included in interest income.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The 250,000 shares are restricted securities under Rule 144
promulgated under the Securities Act of 1933, as amended.
In addition, the Company has entered into an agreement with
HBC's underwriters not to sell or otherwise dispose of the
HBC shares before December 23, 1997 without the written
consent of the underwriters. The Company has the right to
include the HBC shares in any registration statement filed
by HBC to the extent that the managing underwriter of the
public offering advises HBC that such inclusion would not
interfere with the orderly sale of the securities to be
offered to the public.
At September 30, 1996, two officers of the Company own
approximately 16% of the outstanding common stock of HBC
and sit on the Board of HBC, constituting a majority of
the Board. The Company's 9.7% interest in HBC is carried
at equity because the Company has the ability to exercise
significant influence over HBC. The quoted market price
per share of HBC's common stock on the NASDAQ Small Cap
Market at September 30, 1996 was $7 11/32.
(b) Pilistav
During 1993, the Company acquired a 7% interest in Pilistav,
a community-sponsored telecommunication company which was
unsuccessful in its bids for concession rights to provide
local public telephone service in its area. HTCC had
previously acquired a 75.2% interest in Pilistav.
The Company's interest in Pilistav was increased to 68% in
September 1994 when it invested $930,000 directly into
Pilistav. In March 1995, the Company agreed to sell its
interest in Pilistav to HTCC for approximately $930,000.
Although the Company had a 68% interest in Pilistav at
December 31, 1994, the investment was carried at cost since
the Company's control was considered temporary. The sale to
HTCC was consummated and full payment was received by
March 31, 1995.
9. Private Placement
In March 1993, the Company sold by private placement $1,150,000
principal amount of unsecured promissory notes with interest at
6% and 230,000 shares of common stock for an aggregate purchase
price of $1,150,000.
The private placement investors have the right to include their
shares in any registration statement filed by the Company
after the IPO to the extent that the managing underwriter of the
public offering advises the Company that such inclusion would not
interfere with the orderly sale of the securities to be publicly
offered.
The Company, in connection with the private placement, granted
placement agent warrants to purchase an aggregate of 5,700 shares
of common stock at an exercise price of 165% of the IPO price per
share. The holders of placement agent warrants have been granted
certain rights to require the Company, at the Company's expense,
to register under the Securities Act such private placement
warrants and the underlying shares of common stock. In
addition, the holders of placement agent warrants have "piggy
back" registration rights.
<PAGE
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
10. Capital Stock
(a) In connection with a public offering in July 1993, the
Company granted warrants entitling the underwriters to
purchase up to 62,000 shares of common stock during the
four-year period commencing July 29, 1993 at an exercise
price equal to 165% of the IPO price.
(b) In connection with a private placement in April 1994, the
Company granted placement agent warrants to purchase 25,000
shares at $10.75 per share.
(c) On May 14, 1996, the Company's stockholders approved an
amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common stock
from 3,000,000 to 10,000,000.
(d) See Note 14 for disclosure of the sale of common stock and
convertible debentures in October 1996.
11. Stock Option Plan
On May 14, 1996, the Company's stockholders approved an increase
in the number of stock options available under the Stock Option
Plan (the "Plan") to 350,000. The Plan provides that incentive
and nonqualified options may be granted to officers and directors
and consultants to the Company. The Plan may be administered by
either the Board of Directors or a committee of three directors
appointed by the Board (the "Committee").
Options granted under the Plan are exercisable for a period of up
to ten years from the date of grant. Options terminate upon the
optionee's termination of employment or consulting arrangement
with the Company, except that, under certain circumstances, an
optionee may exercise an option within the three-month period
after such termination of employment. An optionee may not
transfer any options except that an option may be exercised
by the personal representative of a deceased optionee within
the three-month period following the optionee's death.
Incentive options granted to any employee who owns more than 10%
of the Company's outstanding common stock immediately before the
grant must have an exercise price of not less than 110% of the
fair market value of all underlying stock on the date of the grant
and the exercise term may not exceed five years. The aggregate
fair market value of common stock (determined at the date of
grant) for which any employee may exercise incentive options in
the first calendar year may not exceed $100,000. In addition,
the Company will not grant a nonqualified option with an exercise
price less than 85% of the fair market value of the underlying
common stock on the date of the grant.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
Effective July 29, 1993, the Company granted to three directors
15,000 incentive stock options exercisable at $8 per share, the
IPO price; 5,000 of these options were terminated in 1994. In
February 1994, three employees in Hungary were granted 20,000
incentive stock options exercisable at $10 per share, provided
they remain in the employ of the Company until December 31, 1994.
In May 1994, 460,000 options exercisable at $1 per share were
granted to three officers in connection with their employment
agreements (see Note 12(a)). In June 1994, the officers and
directors of the Company were granted 65,000 incentive stock
options exercisable at $8 per share, market value on the date of
grant. On March 7, 1996, the exercise price of the 75,000
options granted under the Plan was reduced from $8 to $3.375,
which was the market price at that date.
The following table is a summary of all stock options as of
September 30, 1996:
Outstanding Option price
options per share
January 1, 1993 - -
Granted 15,000 $8.00
Balance at December 31, 1993 15,000 $8.00
Granted 545,000 $1.00 - $10.00
Terminated (5,000) $8.00
Balance at December 31, 1994
and 1995 555,000 $1.00 - $10.00
Change of exercise price
from $8.00 to $3.375 (75,000) $8.00
75,000 $3.375
Balance at September 30, 1996 555,000 $1.00 - $10.00
As of September 30, 1996, all stock options were exercisable.
On October 30, 1996, officers and directors were granted
190,000 incentive stock options exercisable at $3 per share,
market value on the date of grant. On the same date, the
Company granted 50,000 five-year options to purchase shares
of common stock exercisable at $3.375 per share to a
consulting firm which was engaged to prepare a business plan
for the Company's entry into the Internet provider business
and to arrange for a turnkey construction agreement.
As disclosed in Note 14, the Company's President and Chief
Executive Officer resigned in October 1996. The termination
agreement provides that the stock options which were granted
to him under his employment agreement and pursuant to the
Company's Incentive Stock Option Plan of 1992 will not
terminate.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
12. Commitments and Contingencies
(a) Employment Agreements
Effective May 1, 1994, the Company entered into three-year
employment agreements with the three officers and terminated
the existing consulting and retainer agreement with them.
The agreements were extended by two additional years on
October 23, 1995. The agreements provided for aggregate
annual compensation of $336,000 for the Chairman of the
Board, President and Secretary/Treasurer of the Company,
and the granting of options to the three officers to
purchase 460,000 shares of common stock of the Company at
the exercise price of $1 per share with vesting over a
five-year period (20% per year).
Compensation expense, the difference between the quoted
market price at the date of grant and the option price, of
$5,980,000 in connection with the granting of the 460,000
stock options was being amortized over the five-year
vesting period which began May 1, 1994. For the nine months
ended September 30, 1995, $897,000 of compensation expense
was recorded in connection with the above stock options.
On October 23, 1995, the Board of Directors voted to replace
the original vesting period with immediate vesting and,
accordingly, the remaining balance of $4,285,667 of deferred
compensation at that date was charged to operations during
the quarter ended December 31, 1995.
In addition to the above compensation, the Company also paid
legal fees of $37,000 and $15,000 to the Secretary/Treasurer
for the nine months ended September 30, 1996 and 1995,
respectively.
As disclosed in Note 14, the Company's President and Chief
Executive Officer resigned in October 1996.
(b) Leases
In August 1993, HTCC entered into a three-year lease in New
York City, for office space at a minimum annual rental of
$21,375, plus electricity, and which provided for rent
escalation based on certain cost increases. The Company
entered into a sharing agreement as of August 1993 with
HTCC pursuant to which it agreed to share the costs for
rent and electricity equally with HTCC. Both companies
vacated the premises effective April 1, 1996. The Company
moved its offices to premises occupied by its Chairman of
the Board in Flanders, NJ. The Company and HTCC shared the
new premises from April 1 to September 30, 1996 and HTCC
paid the entire rent for that period. The Company will
occupy the entire premises commencing October 1, 1996 at
an annual rental of $25,000 under a lease which expires on
March 31, 1998. The Company is also required to pay its
proportionate share of any increases over base year amounts
for certain expenses.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
13. Related Party Transactions
(a) Revenues
For the nine months ended September 30, 1996 and 1995,
revenues earned from subsidiaries of HTCC amounted to
approximately $10,500 and $98,000, respectively. These
amounts include rental income of approximately $3,500 per
month from the rental of an office condominium in Budapest,
Hungary on a month-to-month basis until the building was
sold to HTCC during the second quarter of 1996.
(b) Sale of Condominium Units
In January 1996, an entity wholly owned by the Company's
President acquired three condominium apartment units and
three garage spaces being built by the Company for $394,320.
The purchase price was approximately 61% of the current
offering price to the public and approximately 86% of the
currently expected cost. The purchase price was satisfied
by offsetting amounts due to the President for an amount
paid by him in January 1996, on behalf of the Company.
HTCC is in the process of purchasing one of the condominium
apartment units being built by the Company for $207,180,
which approximates the offering price to the public. HTCC
has paid deposits amounting to $200,000.
During the second quarter of 1996, HTCC purchased from
Teleconstruct the ownership of the premises used as offices
by HTCC and its subsidiary, HTCC Consulting Rt, in Budapest,
for $315,000, which approximated the Company's cost.
See Note 14 for disclosure of the sale of one condominium
building in October 1996.
14. Subsequent Events
(a) Sale of Condominium Building and Resignation of President
On October 30, 1996, the Board of Directors approved the
sale of one of the condominium buildings under construction
to a company controlled by the Company's President and Chief
Executive Officer. The purchaser agreed to pay the Company
$1,281,512 for the building and repay therefrom $346,473
previously loaned by the purchaser to the Company. The
balance of $935,039 is payable to the Company; $250,000
is due on receipt of move-in permits and a note payable for
$685,039 is due on June 30, 1997.
The Company's President also agreed to resign as an officer,
director and employee and agreed to a cancellation of his
employment agreement (which provided for $168,000 salary per
annum until February 1999) upon payment of $372,000, which
amount is to be deducted from the aforementioned $685,039
note payable to the Company, leaving a balance due on the
note of $313,039. It was further agreed that the stock
options which were granted to the President under his
employment agreement and pursuant to the Company's
Incentive Stock Option Plan of 1992 will not terminate.
<PAGE>
Accounts payable and accrued expenses at September 30, 1996
include $42,000 for the President's salary from July 1 to
September 30, 1996. The balance due to him under the
termination agreement will be charged to operations during
the fourth quarter of 1996.
(b) Sale of Common Stock and Convertible Debentures
In a private placement during October 1996, the Company sold
22 units at the price of $50,000 per unit. Each unit
consisted of 25,000 shares of common stock and 25,000
five-year common stock purchase warrants exercisable at
$2 per share of common stock after a one year holding
period.
During October 1996, the Company also received $610,000
from the offshore placement of 10% convertible debentures.
The proceeds from the two private placements (net of
underwriting commissions) amounted to approximately
$1,550,000.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
The Company was organized on November 9, 1992. Through its
wholly-owned Hungarian subsidiary, Teleconstruct Epitesi RT.
("Teleconstruct") the Company is constructing for sale two luxury
14-unit condominiums in Budapest. In October 1996, the Company
announced that it was planning to enter the Internet provider
business and has established a strategic alliance with MCI and
Netscape Communications to establish a full range of Internet
services in Hungary. It plans to initiate services during the
first quarter of 1997.
The Company was in the development stage through December 31, 1993
and has been unprofitable to date.
For the nine months ended September 30, 1996, the Company incurred
a net loss of $1,808,044 after interest and dividend income of
$61,318. In order to reduce the total cost of construction in
progress of two condominium buildings to market value, a write-down
of $700,000 was charged to operations during the three months
ended September 30, 1996. The net loss for the nine months ended
September 30, 1995 amounted to $1,419,547 after interest and
dividend income of $308,785. The decrease in revenues from 1995
related primarily to a decrease in construction revenue since all
construction revenue was earned by the Company's 90% owned
subsidiary, Termolang Kft, which was sold effective
September 30, 1995.
The equity in net loss of unconsolidated affiliate of $362,000 for
the nine months ended September 30, 1996 represents the Company's
share of HBC's estimated loss. The Company's 9.7% interest in HBC
is carried at equity because the Company has the ability to exercise
significant influence over HBC.
Liquidity and Capital Resources
In March 1993, the Company received $964,000 in net proceeds from
a private placement of Common Stock. The Company provided $588,250
to establish Teleconstruct and $31,770 to establish Termolang and
it retained the remaining proceeds for operating funds.
In August 1993, the Company received $6,565,395 in net proceeds
from a public offering for the sale of 977,500 shares of its Common
Stock at $8 per share.
In January 1994, the Company purchased for approximately $885,000 a
60,000 sq. foot parcel of undeveloped land in Hungary and is building
two structures, each one consisting of 14 units on this land. The
Company intended to sell the 28 units as apartments with underground
parking facilities, upon completion.
The Company's estimated cost to complete the buildings amounts to
approximately $300,000. In October 1996, the Board of Directors
approved the sale of one of the buildings to a company controlled by
the Company's President and Chief Executive Officer. The purchaser
agreed to pay the Company $1,281,512 for the building and repay
therefrom $346,473 previously loaned by the purchaser to the
Company. The balance of $935,039 is payable to the Company;
$250,000 is due on receipt of move-in permits and a note payable
for $685,039 is due on June 30, 1997.
<PAGE>
The Company's President also agreed to resign as an officer,
director and employee and agreed to a cancellation of his employment
agreement (which provided for $168,000 salary per annum until February
1999) upon payment of $372,000, which amount is to be deducted from
the aforementioned $685,039 note payable to the Company, leaving a
balance due on the note of $313,039. It was further agreed that
the stock options which were granted to the President under his
employment agreement and pursuant to the Company's Incentive Stock
Option Plan of 1992 will not terminate.
In April 1994, the Company received $1,767,004 in net proceeds
from a private placement of 180,790 shares of its Common Stock.
The Company used these proceeds in connection with its construction
activities.
In a private placement during October 1996, the Company sold 22
units at the price of $50,000 per unit. Each unit consisted of
25,000 shares of common stock and 25,000 five year common stock
purchase warrants exercisable at $2 per share of common stock after
a one year holding period.
During October 1996, the Company also received $610,000 from the
offshore placement of 10% convertible debentures.
The proceeds from the two private placements (net of underwriting
commissions) amounted to approximately $1,550,000.
The Company has incurred substantial losses in each fiscal year
since inception; it requires an estimated $300,000 to complete the
two condominium buildings it is currently constructing, and will
need approximately $275,000 for an operations center for its
Internet operations. However, the Company believes that it will
generate sufficient working capital for it to remain a going concern.
Inflation and Seasonality
The rate of inflation in Hungary was 28% in 1995 as compared to 18%
for 1994 and 23% for 1993. Prices have been rising rapidly in recent
years mainly because of reduction or removal of subsidies and price
controls, not because of expansionist monetary policies. Since the
Company uses the U.S. dollar as the functional currency for its
Hungarian subsidiaries, the Hungarian inflation does not have a
material effect on financial condition and results of operations.
The Company's construction operations have been seasonal in that
construction operations take place from March through November
rather than from December through February when the winter
weather deters construction.
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits* (numbers below reference Regulations S-B)
(3)(a) Certificate of Incorporation filed November 9, 1992
(b) Amendment to Certificate of Incorporation filed
April 23, 1993
(c) Amendment to Certificate of Incorporation filed May 21,
1996****
(d) By-laws
(4)(a) Form of Common Stock Certificate
(b) Form of Underwriters' Warrants to be sold to
Underwriters
(c) Placement Agreement between Registrant and J.W.
Barclay & Co., Inc. and form of Placement Agent
Warrants issued in connection with private
placement financing
(d) Placement Agreement between Registrant and Nichols
Safina Lerner & Co. Inc. and Placement Agent
Warrants issued in connection with private
placement financing
(10)(a) Consulting agreement between Registrant and
Klenner Securities, Ltd.
(b) Consulting agreement between Registrant and
Robert Genova
(c) Consulting agreement between Registrant and
Laszlo Modransky
(d) 1993 Incentive Stock Option Plan
(e) Sharing agreement for space and facilities
between Registrant and Hungarian Telephone &
Cable Corp.
(f) Articles of Association (in English) of
Teleconnect Building Corp.
(g) Articles of Association (in English) of Termolang
Engineering and Construction Ltd.
(h) Letter of intent between Teleconnect Building
Corp. and Pilistav Kft
(i) Employment Agreement between Registrant and
Robert Genova**
(j) Employment Agreement between Registrant and
Peter E. Klenner**
<PAGE>
(k) Employment Agreement between Registrant and
Frank R. Cohen**
(l) Letter of Intent Agreement between Registrant
and Raba-Com RT***
(m) Letter of Intent Agreement between Registrant
and Kelet-Nograd Com RT***
(n) Letter of Intent Agreement between Registrant
and 3 Pilistav villages for installation of
cable in those areas
* All Exhibits are incorporated by reference to Registrant's
Registration Statement on Form SB-2 dated May 12, 1993
(Registration No. 33-62672-NY, as amended)
** Filed with Form 8-K as of February 17, 1994 and as of
May 27, 1994 (modifications)
*** Filed with report on Form 10-K for year ended December 31,
1993
**** Filed with report on Form 10-QSB for the quarter ended
June 30, 1996
B. No reports on Form 8-K have been filed during the last
quarter covered by this report on Form 10-QSB
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as
amended, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on the
18th day of November 1996.
HUNGARIAN TELECONSTRUCT CORP.
By
Frank R. Cohen
Treasurer
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