U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-1200
HUNGARIAN TELECONSTRUCT CORP.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3696015
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
445 Park Avenue, 15th Floor, New York, NY 10022
(Address of principal executive offices)
(212) 758-9870
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Common Stock, $.001 par value 3,321,753 Shares
(Class) (Outstanding at June 30, 1997)
Transitional Small business Disclosures Format (Check one): Yes No X
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of June 30, 1997 (unaudited)
and December 31, 1996 (audited) 2
Consolidated statements of loss (unaudited) for the three
months ended June 30, 1997 and 1996 and the six months
ended June 30, 1997 and 1996 3
Consolidated statements of stockholders' equity (unaudited)
for the six months ended June 30, 1997 and 1996 4
Consolidated statements of cash flows (unaudited) for the
six months ended June 30, 1997 and 1996 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
June 30, 1997 December 31, 1996
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 378,781 $ 495,703
Accounts receivable 219,133 -
VAT refund receivable 55,016 74,412
Receivables from related parties 480,168 480,784
Prepaid and other current assets 132,275 101,564
Total current assets 1,265,373 1,152,463
Property and equipment, less accumulated
depreciation of $93,018 and $38,750,
respectively 337,963 65,586
Office condominium unit held for sale - 209,000
Construction in progress, net of $1,000,000
allowance for reduction to market value 3,677,468 3,527,090
Advances on acquisitions - 1,585,000
Investment in and advances to affiliate 228,260 218,344
Goodwill 1,721,137 -
Other 34,319 -
$ 7,264,520 $6,757,483
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to affiliate $ 350,000 $ -
Payable to owners of acquired business 268,508 400,000
Accounts payable and accrued expenses 655,724 259,996
Compensation payable to officers 46,000 96,000
Deposits payable 594,320 594,320
Total current liabilities 1,914,552 1,350,316
10% CONVERTIBLE DEBENTURES 680,000 485,000
PAYABLE TO FORMER OFFICER 1,020,778 895,719
Total liabilities 3,615,330 2,731,035
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT OPTIONS;
$.001 PAR VALUE, SHARES ISSUED AND
OUTSTANDING 144,000 360,000 -
STOCKHOLDERS' EQUITY
Common stock, $.001 par value - shares
authorized 10,000,000 (1997) and
3,000,000 (1996); issued and
outstanding 3,177,753 and 2,476,269,
respectively 3,178 2,476
Additional paid-in capital 17,863,180 17,189,447
Accumulated deficit (14,577,168) (13,165,475)
Total stockholders' equity 3,289,190 4,026,448
$ 7,264,520 $ 6,757,483
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
REVENUES
Internet $ 321,828 $ - $ 608,080 $ -
Other - - - 31,098
Total 321,828 - 608,080 31,098
EXPENSES(INCOME)
Compensation and related costs 97,804 117,181 317,805 299,402
Consulting and professional fees 86,286 80,400 170,561 111,400
Foreign currency loss 1,337 19,047 75,761 104,077
Depreciation and amortization of
property and equipment 33,860 6,315 54,268 12,683
Amortization of goodwill 105,000 - 191,000 -
Interest and dividend income (21,211) (20,674) (40,211) (41,660)
Interest expense 195,320 - 378,517 -
Financing costs 73,779 - 133,703 -
Loss on sale of office
condominium unit 75,000 - 75,000 -
Other 407,231 46,198 663,369 150,181
Total 1,054,406 248,467 2,019,773 636,083
Loss before equity in net loss
of unconsolidated affiliate (732,578) (248,467) (1,411,693) (604,985)
Equity in net loss of
unconsolidated affiliate - (100,000) - (182,000)
Net loss $ (732,578) $ (348,467)$(1,411,693) $ (786,985)
Net loss per share $ (.23) $ (.23)$ (.47) $ (.52)
Weighted average number of
common shares outstanding 3,197,570 1,518,290 3,007,469 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
SIX MONTHS ENDED JUNE 30, 1997:
Balance, January 1, 1997 2,476,269 $2,476 $17,189,447 $(13,165,475)
Issuance of put options on
common stock issued in
connection with acquisitions (144,000) (144) (359,856) -
Compensation relating to the
extension of the period of
exercisability of former
officers' options - - 125,000 -
Issuance of shares on conversion
of debentures 845,484 846 604,589 -
Incremental interest from
revaluation of convertible
debentures - - 304,000 -
Net loss for the period - - - (1,411,693)
Balance, June 30, 1997 3,177,753 $3,178 $17,863,180 $(14,577,168)
SIX MONTHS ENDED JUNE 30, 1996:
Balance, January 1, 1996 1,518,290 $1,518 $14,645,998 $ (9,370,461)
Net loss for the period - - - (786,985)
Balance, June 30, 1996 1,518,290 $1,518 $14,645,998 $(10,157,446)
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,411,693) $(786,985)
Adjustments to reconcile net loss to
net cash provided by(used in) operating
activities:
Depreciation and amortization of property
and equipment 54,268 12,683
Amortization of goodwill 191,000 -
Amortization of imputed interest income (26,000) (26,000)
Options granted/extended as compensation 125,000 -
Incremental interest on revaluation of
convertible debentures 304,000 -
Interest on debentures paid in shares of
capital stock 20,435 -
Loss on sale of office condominium unit 75,000 -
Loss on disposal of property and equipment - 1,829
Foreign currency loss 75,761 104,077
Equity in net loss of unconsolidated affiliate - 182,000
Changes in operating assets and liabilities:
Increase in accounts receivable (219,133) -
Decrease in VAT refund receivable 19,396 143,758
Decrease in receivables from related parties 616 533,962
(Increase)decrease in prepaid and other assets (65,030) 20,104
Increase(decrease) in accounts payable and
accrued expenses 395,728 (420,259)
Decrease in compensation payable to officers (50,000) -
Increase in payables to related parties - 13,319
Increase in deposits payable - 594,320
Increase in payable to former officer 125,059 -
Net cash provided by(used in) operating activitie (385,593) 372,808
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment
and construction in progress (477,023) (751,736)
Decrease in advances on acquisitions 1,585,000 -
Acquisition of goodwill (1,912,137) -
Payment to owners of acquired business (131,492) -
Proceeds from sale of building to HTCC - 315,000
Proceeds from sale of office condominium unit 134,000 -
(Increase)decrease in investment in and advances
to affiliate 16,084 (5,214)
Net cash used in investing activities (785,568) (441,950)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt 780,000 -
Proceeds from note payable to affiliate 350,000 -
Decrease in bank overdraft - (16,502)
Net cash provided by(used in) financing
activities 1,130,000 (16,502)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (75,761) (104,077)
DECREASE IN CASH AND CASH EQUIVALENTS (116,922) (189,721)
Cash and cash equivalents at beginning of period 495,703 376,986
Cash and cash equivalents at end of period $ 378,781 $187,265
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock upon conversion of
debentures and accrued interest $ 605,435 $ -
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. 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) Revenue Recognition
Sales of constructed condominium apartments are recognized when
collection of sales price is assured and occupancy permits have been
issued.
(e) Foreign Currency Translation
The Company uses the U.S. dollar as the functional currency for
its 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.
(f) 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.
(g) Fair Value of Financial Instruments
Due to the nature of the VAT refund receivable, receivables from
related parties, payables to related parties and former officer and
advances to affiliate, it is not practicable to approximate their fair
market values. The carrying value of the convertible debentures
approximates their fair market value.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(h) Investment in Affiliate
The Company's 9.7% equity interest in Hungarian Broadcasting
Corp. ("HBC") through September 30, 1996 was accounted for using the
equity method since the Company had the ability to exercise significant
influence over HBC. Under this method, the Company recorded as a loss
its share of the losses and dividends (if any) were credited against the
investment account when declared. Beginning October 1, 1996, the
Company discontinued its use of the equity method of accounting for its
investment in HBC, since the Company no longer had the ability to
exercise significant influence over HBC (See Note 8).
(i) Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the assets of 3 - 5 years.
During 1996, the Company sold one of its office condominium units
to Hungarian Telephone and Cable Corp. ("HTCC") at a net profit of
approximately $9,000. Its other office condominium unit was being held
for sale at December 31, 1996 and was sold during the second quarter of
1997, resulting in a loss of $75,000.
(j) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123, which was
effective in 1996 for transactions entered into after 1994, established
a fair value method of accounting for stock-based compensation, through
either recognition or disclosure. The Company adopted the disclosure
option for employee stock-based compensation provisions of SFAS No. 123
in 1996. However, since the pro forma net income and earnings per share
amounts assuming the fair value method was adopted January 1, 1995 did
not differ materially from the comparable amounts reported on the
consolidated statements of loss, no such pro forma amounts have been
disclosed. The adoption of SFAS No. 123 did not impact the Company's
results of operations, financial position or cash flows.
(k) Net Loss Per Share
The net loss per share is computed using the weighted average
number of common shares outstanding during each period.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
2. Organization and Business
The Company is a Delaware corporation which was organized on November 9,
1992. It was a development stage company through December 31, 1993.
Its wholly-owned Hungarian subsidiary, Teleconstruct Epitesi Rt.
("Teleconstruct"), was organized on March 19, 1993 with the intention to
contract with community-sponsored telecom companies in Hungary to
construct and maintain local telephone exchanges in their areas. 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. Effective September 30, 1995,
the Company's 90% interest in Termolang Kft., which was in the building
renovation business, was sold for its original investment to the 10%
interest holder for a gain of approximately $11,000. Teleconstruct is
currently building for sale two luxury 14-unit condominium buildings in
Budapest.
During 1994, the Company organized Central Europe Consult ("CEC"), an
Austrian corporation, in which it has a 51% interest, with HTCC owning
the remaining 49%. CEC is in the process of being liquidated.
On January 2, 1997, the Company acquired three Hungarian Internet
service companies ("Internet providers") for a purchase price of
approximately $1,785,000, consisting of 144,000 shares of common stock
of the Company and $1,225,000 in cash. Except for $400,000 which was
paid in January 1997 and $200,000 which is payable after June 15, 1997,
the purchase price was paid in December 1996. The 144,000 shares and
related amounts have been excluded from stockholders' equity in the June
30, 1997 financial statements since they are subject to put options
during the period July 1 to October 31, 1997, obligating the Company to
purchase each share for $2.50 if the former owners exercise their
options.
These acquisitions which have been accounted for using the purchase
method of accounting, resulted in goodwill of $1,915,948 with an
estimated useful life of five years.
The Company's consolidated statement of loss includes the results of
the acquired companies' operations since January 2, 1997.
3. Interim Periods
The accompanying consolidated financial statements for the three
months ended June 30, 1997 and 1996 and the six months ended June 30,
1997 and 1996 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.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
4. Incorporation by Reference
Reference is made to the Company's annual report on Form 10-KSB for
the fiscal year ended December 31, 1996 and to the notes to the
consolidated financial statements included therein, which are
incorporated herein by reference.
5. Cash Concentration
At June 30, 1997, cash includes $82,011 denominated in U.S. dollars
on deposit with a major money center bank in the United States and
$252,211 invested in a U.S. Treasury money market fund. In addition,
$44,559 was on deposit in Hungarian banks.
6. Receivables from and Note Payable to Related Parties
At June 30, 1997, receivables from and payables to related parties
include the following:
Note
Receivables Payable
HBC (Note 8) $448,000 $350,000
HTCC 32,168 -
$480,168 $350,000
The receivable from HBC represents the second and final installment
of principal and interest on an $800,000 loan made by the Company, due
June 30, 1997.
The amount due from HTCC primarily represents accrued interest on
advances and a receivable on the sale of certain equipment.
In February 1997, the Company borrowed $350,000 from HBC. The loan,
which is evidenced by a promissory note with interest at 6% per annum,
is payable on the earlier of (1) June 30, 1997, (2) the closing of any
offering by the Company of its securities, or (3) sale of any assets by
the Company. The loan is secured by the balance of the aforementioned
loan owed by HBC to the Company and the proceeds of a debt owed by a
company controlled by the Company's former President (see Note 12(a)).
7. Construction in Progress
(a) Construction-in-progress of two luxury 14-unit condominium
buildings to be held for sale includes the cost of land ($885,000) and
construction costs incurred through June 30, 1997, net of a provision of
$1,000,000 made in 1996 for a write-down to estimated net realizable
value. The Company believes that the provision was required based on
the current real estate market conditions in Budapest. The estimated
additional cost to complete the construction is $100,000.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(b) Deposits have been received for the full sales price for four
condominium apartments and upon the issuance of move-in permits, the
sale of the apartments will be recognized. The deposits were received
from the Company's former President ($394,320) and HTCC ($200,000). The
$394,320 represents approximately 80% of the expected cost of the
apartments. The deposits were received for apartments sold in the
building, prior to the sale (see Note 12).
8. Investment in and Advances to Affiliate
Investment in and advances to HBC at June 30, 1997 includes the
following:
Investment $125,000
Loans and advances, including
accrued interest 551,260
676,260
Less: Repayment due June 30, 1997,
included in receivable from
related parties (Note 6) 448,000
$228,260
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, because HBC
was a development stage company.
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 $448,000
at June 30, 1997 includes accrued interest.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The Company's interest in HBC (250,000 shares of common stock) at
June 30, 1997 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 was amortized over the original term of the
loan with $26,000 amortized during the six months ended June 30, 1997
and included in interest income.
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 June 30, 1996, two officers of the Company owned approximately
16% of the outstanding common stock of HBC and sat on the Board of HBC,
constituting a majority of the Board, but at December 31, 1996, only one
of the Company's officers sat on the Board of HBC and that officer owned
less than 1% of the outstanding common stock of HBC. The Company's 9.7%
interest in HBC was carried at equity at June 30, 1996, since the
Company had the ability to exercise significant influence over HBC. At
June 30, 1997, none of the Company's officers were on the Board of HBC.
The quoted market price per share of HBC's common stock on the NASDAQ
Small Cap Market at June 30, 1997 was $4.50.
9. Private Placements
(a) In November and December 1996, the Company sold $792,500 of 10%
convertible debentures due in September 1998 to foreign investors
outside the United States in private placements, receiving aggregate
net proceeds of approximately $693,500 after deducting placement agent
fees and offering expenses of approximately $99,000. During the six
months ended June 30, 1997, the Company sold an additional $780,000 of
10% convertible debentures due from January 1999 through April 1999,
receiving $646,297 after deducting financing costs of $133,703.
Subsequent sales of $70,000 of 10% convertible debentures were made
during July 1997.
Commencing 45 days after issuance, the original principal amount
of the debentures is convertible into the Company's shares of common
stock at a conversion price of 50% of the market price, as defined, of
the Company's common stock. The unconverted debentures are due on the
maturity dates noted above except in the case of the occurrence of one
or more "events of default" as described in the debenture, in which
case the debentures may be immediately due and payable. At December 31,
1996, $307,500 of debentures and accrued interest were converted into
263,979 shares of common stock and during the six months ended June 30,
1997, an additional $585,000 of debentures and accrued interest were
converted into 845,484 shares of common stock. During July 1997,
another $80,000 of debentures and accrued interest were converted into
165,160 shares of common stock.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The incremental yield on the debentures relating to the
convertibility of the debentures into common stock at a 50% discount to
the common stock's market price resulted in interest charges of $304,000
to the consolidated statement of loss for the six months ended June 30,
1997. In addition, the financing costs of $133,703 incurred in
connection with the sale of the debentures were charged to 1997
operations, since a substantial portion of the debentures is expected to
be converted to common stock within a short period.
(b) In October 1996, the Company sold a private placement consisting
of 550,000 shares of common stock and 550,000 common stock purchase
warrants exercisable at $2 per share at any time from October 1, 1997
until September 30, 2001 for net proceeds of $972,450 after deducting
placement agent fees and offering expenses of $127,550. The warrants
and the underlying shares of common stock have been registered under the
Securities Act of 1933. The exercise price was reduced to $1.25 per
share on June 26, 1997.
10. Stock Option Plan and Warrants
Stock Options
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 any 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.
For options granted to employees at exercise prices equal to the fair
market value of the underlying common stock at the date of grant, no
compensation cost is recognized.
<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. 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. On March 19, 1997, the
exercise price of the options granted under the Company's 1993 Stock
Option Plan held by the three directors on that date was reduced to
$1.25 in order to bring the exercise price more in line with the recent
trading range of the Company's common stock.
In February 1997, the former President of the Company was retained as
a consultant to the Company to oversee the Company's real estate
interests and Internet business. He agreed to render consulting
services for a two-year period for a fee of 100,000 five-year options
exercisable at $2.00 per share. The compensation relating to these
options is being charged to operations over a two-year period.
SFAS No. 123 requires the Company to provide, beginning with 1995
grants, pro forma information regarding net income and net income per
common share as if compensation costs for the Company's stock option
plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. Such pro forma information has not been
presented because management has determined that the compensation costs
associated with options granted in 1997 and 1996 are not material to net
loss or net loss per common share.
The following table is a summary of all stock options as of June 30, 1997:
Outstanding Option Price
Options Per Share
Outstanding at
January 1, 1997 775,000 $1.00 to $3.375
Granted 175,000 $2.00
Granted 40,000 $1.50
Change of exercise price (135,000) $3.00
from $3.00 to $1.25 135,000 $1.25
Cancelled (170,000) $1.00 to $3.375
Outstanding at
June 30, 1997 820,000 $1.00 to $3.375
As of June 30, 1997, stock options for 680,000 shares were
exercisable.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
11. Commitments and Contingencies
(a) Employment Agreements
Effective May 1, 1994, the Company entered into three-year
employment agreements with three officers and terminated the existing
consulting and retainer agreement with them. The agreements were
extended by two additional years on October 23, 1995 and another two
years on December 23, 1996. The amended 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. On
October 23, 1995, the Board of Directors voted to replace the original
vesting period with immediate vesting and, accordingly, the entire
unearned compensation of $5,182,667 as of January 1, 1995 was charged to
operations for the year ended December 31, 1995.
On October 20, 1996, the Company entered into a termination
agreement with its President which provides, among other things, for (1)
his resignation as an officer, director and employee and (2) for the
cancellation of his employment agreement upon payment of $372,000, which
amount is to be deducted from the amount owed by a company controlled by
him in connection with the purchase of one of the Company's condominium
buildings. The President retained his rights as a stock optionee with
respect to his 285,000 options granted under his employment agreement
and pursuant to the Company's Incentive Stock Option Plan of 1992.
Unless he exercises his options within five years of the date the
options were granted, the options will expire. Compensation expense of
$972,000 was charged to 1996 operations as a result of cancelling the
President's employment agreement and extending the termination date of
his options (See Note 12(a)).
On December 23, 1996, the Board of Directors extended the
employment contracts of the Chairman of the Board and Treasurer to
December 31, 2001 and increased their annual compensation to $144,000
and $120,000, respectively.
In February 1997, the Company's Chairman of the Board resigned as
an officer, director and employee, and agreed to a cancellation of his
employment agreement upon payment of $50,000, which represented the
approximate amount owed to him with respect to 1996 salary. In
addition, 125,000 stock options which were granted to him under his
employment agreement will not terminate as a result of the resignation,
but will continue to be governed by the original terms of the options.
Compensation of $100,000 has been charged to the 1997 operations
relating to the extension of the period of exercisability of the
options.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
During February 1997, the Company appointed a new President, who
was to be paid a consulting fee of $7,000 per month for a two year
period. Effective July 1, 1997, the Board of Directors increased the
President's consulting fee to $10,000 per month and increased the salary
of the Chairman of the Board to $150,000 per year.
(b) Litigation
The Company has commenced a lawsuit against a prior general
contractor and several subcontractors for failing to complete some
construction work and for performing certain work in a negligent manner.
Both the costs of the litigation and any proceeds derived from the
litigation are to be shared equally with the owner of the sold building
referred to in Note 12(a).
12. Related Party Transactions
(a) Transactions with Former 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
building to be sold contains the four units for which deposits for the
full sales price have been received by the Company (see Note 7(b)). The
purchaser agreed to purchase the building, subject to receiving move-in
permits, for $1,281,512 and the Company must repay therefrom $346,473
previously loaned by the purchaser to the Company. The balance of
$935,039 is payable to the Company as follows: $250,000 upon receipt of
move-in permits and a note payable for $685,039 is due on June 30, 1997.
The sale will be consummated upon the receipt of the move-in permits.
As of June 30, 1997, move-in permits have not been obtained.
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, but will continue to be governed by the
original terms of the options. The aforementioned $372,000 relating to
the cancellation of the President's employment agreement and $600,000
relating to the extension of the period of exercisability of the
President's options were charged to compensation and related costs
during the fourth quarter of 1996.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
13. Subsequent Events
Effective July 9, 1997, the Company changed its name to Euroweb
International Corp. and increased the authorized number of shares of
capital stock from 10,000,000 shares of common stock to 15,000,000
shares of common stock and 5,000,000 shares of preferred stock. In
addition, one of the three Internet subsidiaries changed its name to
Euroweb Kft. (a Limited Liability Company) and the accounts of the three
subsidiaries were consolidated into this company. Euroweb Kft. then
changed its name and corporate structure to Euroweb Rt. (a Stock
Corporation) in order to make possible a public offering of its shares
in Hungary. The Company has no present plans or intent to sell any of
the Euroweb Rt. shares in Hungary and has no current negotiations for
such sale with any investment bankers.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations
The Company was organized on November 9, 1992. The Company was in the
development stage through December 31, 1993 and has been unprofitable to
date. Through its wholly-owned Hungarian subsidiary, Teleconstruct
Epitesi Rt. ("Teleconstruct") the Company is constructing for sale two
luxury 14-unit condominiums in Budapest.
In January 1997, the Company acquired three operating Internet service
provider businesses and has been in the process of consolidating the
three businesses under one roof and operating the three businesses as a
single unit. Revenues from the Internet business for the six months
ended June 30, 1997 amounted to $608,080.
In February 1997, the Company's Chairman of the Board resigned as an
officer, director and employee, and agreed to a cancellation of his
employment agreement upon payment of $50,000, which represented the
approximate amount owed to him with respect to 1996 salary. In
addition, 125,000 stock options which were granted to him under his
employment agreement will not terminate as a result of the resignation,
but will continue to be governed by the original terms of the options.
Compensation of $100,000 has been charged to the 1997 operations
relating to the period of exercisability of the options.
In February 1997, the former President of the Company was retained as a
consultant to the Company to oversee the Company's real estate interests
and Internet business. He agreed to render consulting services for a
two-year period for a fee of 100,000 five-year options exercisable at
$2.00 per share. The compensation relating to these options is being
charged to operations over a two-year period.
For the six months ended June 30, 1997, the Company incurred a net loss
of $1,411,693; the net loss for the six months ended June 30, 1996
amounted to $786,985. The acquisition of the Internet business resulted
in goodwill of $1,912,077, which is being amortized over five years;
amortization for the six months ended June 30, 1997 amounted to
$191,000.
The equity in net loss of unconsolidated affiliate of $182,000 for the
six months ended June 30, 1996 represented the Company's share of HBC's
estimated loss. The Company's 9.7% interest in HBC was carried at
equity because the Company had the ability to exercise significant
influence over HBC. Effective October 1, 1996, the Company discontinued
its use of the equity method of accounting for its investment in HBC,
since the Company no longer had the ability to exercise significant
influence over HBC.
Financing costs of $133,703 incurred in connection with the sale of
convertible debentures were charged to 1997 operations since a
substantial portion of the debentures are expected to be converted to
common stock within a short period.
Interest expense of $378,517 in 1997 includes $304,000 of incremental
interest on the convertible debentures relating to the convertibility of
the debentures at a 50% discount to the Common Stock's market price.
The balance of the interest was primarily incurred on various
borrowings.
<PAGE>
Liquidity and Capital Resources
In November and December 1996, the Company sold $792,500 of 10%
convertible debentures due in September 1998 to foreign investors
outside the United States in private placements, receiving aggregate net
proceeds of approximately $693,500 after deducting placement agent fees
and offering expenses of approximately $99,000. During the six months
ended June 30, 1997, the Company sold an additional $780,000 of 10%
convertible debentures due from January 1999 through April 1999,
receiving $646,297 after deducting financing costs of $133,703.
Subsequent sales of $70,000 of 10% convertible debentures were made
during July 1997.
At December 31, 1996, $307,500 of debentures and accrued interest were
converted into 263,979 shares of common stock and during the six months
ended June 30, 1997, an additional $585,000 of debentures and accrued
interest were converted into 845,484 shares of common stock. During
July 1997, another $80,000 of debentures and accrued interest were
converted into 165,160 shares of common stock.
Effective July 9, 1997, the Company changed its name to Euroweb
International Corp. and increased the authorized number of shares of
capital stock from 10,000,000 shares of common stock to 15,000,000
shares of common stock and 5,000,000 shares of preferred stock. In
addition, one of the three Internet subsidiaries changed its name to
Euroweb Kft. (a Limited Liability Company) and the accounts of the three
Internet subsidiaries were consolidated into this company. Euroweb Kft.
then changed its name and corporate structure to Euroweb Rt. (a Stock
Corporation) in order to make possible a public offering of its shares
in Hungary. The Company has no present plans or intent to sell any of
the Euroweb Rt. shares in Hungary and has no current negotiations for
such sale with any investment bankers.
The Company believes that its revenues from operations, together with
the funds already raised and to be raised in 1997, will meet the
Company's cash requirements to the end of 1998.
Inflation and Seasonality
The rate of inflation in Hungary was 23% in 1996 as compared with 28%
for 1995 and 18% for 1994. 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.
Internet operations are not seasonal or dependent on weather conditions.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Except for historical information provided in the Management's
Discussion and Analysis, statements made throughout this document are
forward-looking and contain information about financial results,
economic conditions, trends and known uncertainties. The Company
cautions the reader that actual results could differ materially from
those expected by the Company, depending on the outcome of certain
factors (some of which are described with the forward-looking
statements) including: 1) heightened competition, particularly price
competition, reducing margins; and 2) slower growth than expected in the
market for Internet services in Hungary.
<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 July 9, 1997****
(c) 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) Form of 10% Convertible Debenture used in connection with
offshore private placement financing pursuant to Regulation S***
(e) Form of Common Stock Purchase Warrant in connection with
private placement financing under Section 506 of Regulation D***
(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 and Cable Corp.
(f) Articles of Association (in English) of Teleconstruct
Building Corp.
(g) Articles of Association (in English) of Termolang
Engineering and Construction Ltd.
(h) Letter of intent between Teleconstruct Building Corp. and Pilistav
(i) Employment agreement between Registrant and Robert Genova**
and termination agreement dated February 5, 1997***
<PAGE>
(j) Employment agreement between Registrant and Peter E.
Klenner** and termination agreement dated October 30, 1996, and
agreement for sale of condominium unit to M&A***
(k) Employment agreement between Registrant and Frank R. Cohen**
and modification of employment agreement***
(l) Letter of Intent agreement between Registrant and Raba-Com Rt.
(m) Letter of Intent agreement between Registrant and Kelet-Nograd Rt.
(n) Letter of Intent agreement between Registrant and 3 Pilistav
villages for installation of cable in those areas
(o) Lease agreement between Registant's subsidiary EUnet Kft.
and Varosmajor Passage, Kft. for office space***
(p) Acquisition agreement between Registrant and KFKI Computer
Systems Corp. dated December 13,1996***
(q) Acquisition agreement between Registrant and Enet Hungary***
(r) Acquisition agreement between Registrant and MS Telecom Rt.***
(s) Employment Agreement between Registrant and Imre Kovats***
(t) Employment Agreement between Registrant and Csaba Toro***
(u) Promissory Note from Registrant to HBC***
* 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
*** Filed with Form 10-KSB for year ended December 31, 1996
**** Filed herewith.
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 day of August 1997
HUNGARIAN TELECONSTRUCT CORP.
By
Frank R. Cohen
Chairman of the Board
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