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 March 31, 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 3,125,174 Shares
(Class) (Outstanding at March 31, 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 March 31, 1997 (unaudited)
and December 31, 1996 (audited) 2
Consolidated statements of loss (unaudited) for the three
months ended March 31, 1997 and 1996 3
Consolidated statements of stockholders' equity (unaudited)
for the three months ended March 31, 1997 and 1996 4
Consolidated statements of cash flows (unaudited) for the
three months ended March 31, 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 16
PART II. Other Information 18
Signature 20
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 December 31, 1996
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash $ 461,422 $ 495,703
Accounts receivable 165,290 -
VAT refund receivable 43,483 74,412
Receivables from related parties 480,168 480,784
Prepaid and other current assets 94,562 101,564
Total current assets 1,244,925 1,152,463
Property and equipment, less accumulated
depreciation of $59,158 and $38,750,
respectively 277,665 65,586
Office condominium unit held for sale 209,000 209,000
Construction in progress, net of $1,000,000
allowance for reduction to market value 3,615,951 3,527,090
Advances on acquisitions - 1,585,000
Investment in and advances to affiliate 222,689 218,344
Goodwill 1,829,948 -
Other 36,390 -
$ 7,436,568 $ 6,757,483
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to affiliate $ 350,000 $ -
Payable to owner of acquired business 249,147 400,000
Accounts payable and accrued expenses 700,084 259,996
Compensation payable to officers 46,000 96,000
Deposits 594,320 594,320
Total current liabilities 1,939,551 1,350,316
10% CONVERTIBLE DEBENTURES 385,000 485,000
PAYABLE TO FORMER OFFICER 983,367 895,719
Total Liabilities 3,307,918 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 2,981,174 and 2,476,269,
respectively 2,981 2,476
Additional paid-in capital 17,610,259 17,189,447
Accumulated deficit (13,844,590) (13,165,475)
Total stockholders' equity 3,768,650 4,026,448
$ 7,436,568 $ 6,757,483
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
Three Months Ended
March 31,
1997 1996
REVENUES
Internet $ 286,252 $ -
Other - 31,098
Total 286,252 31,098
EXPENSES(INCOME)
Compensation and related costs 220,001 182,221
Consulting and professional fees 84,275 31,000
Foreign currency loss 74,424 85,030
Depreciation and amortization of
property and equipment 20,408 6,368
Amortization of goodwill 86,000 -
Interest and dividend income (19,000) (20,986)
Interest expense 183,197 -
Financing costs 59,924 -
Other 256,138 103,983
Total 965,367 387,616
Loss before equity in net loss of
unconsolidated affiliate (679,115) (356,518)
Equity in net loss of unconsolidated
affiliate - (82,000)
Net loss $ (679,115) $ (438,518)
Net loss per share $ (.24) $ (.29)
Weighted average number of common
shares outstanding 2,815,255 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
THREE MONTHS ENDED MARCH 31, 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 acquisition (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 648,905 649 505,668 -
Incremental interest from
revaluation of convertible
debentures - - 150,000 -
Net loss for the period - - - (679,115)
Balance, March 31, 1997 3,125,174 $2,981 $17,610,259 $(13,844,590)
THREE MONTHS ENDED MARCH 31, 1996:
Balance, January 1, 1996 1,518,290 $1,518 $14,645,998 $(9,370,461)
Net loss for the period - - - (438,518)
Balance, March 31, 1996 1,518,290 $1,518 $14,645,99 $(9,808,979)
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (679,115) $(438,518)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization of
property and equipment 20,408 6,368
Amortization of goodwill 86,000 -
Amortization of imputed interest income (13,000) (13,000)
Options granted/extended as compensation 125,000 -
Incremental interest on revaluation of
convertible debentures 150,000 -
Interest on debentures paid in shares of
capital stock 11,317 -
Loss on disposal of property and equipment - 1,829
Foreign currency loss 74,424 85,030
Equity in net loss of unconsolidated affiliate - 82,000
Changes in operating assets and liabilities:
Increase in accounts receivable (165,290) -
(Increase)decrease in VAT refund receivable 30,929 (43,926)
Decrease in receivables from related parties 616 537,179
(Increase)decrease in prepaid and other assets (29,388) 49,219
Increase(decrease) in accounts payable and
accrued expenses 440,088 (207,883)
Decrease in compensation payable to officers (50,000) -
Increase in payables to related parties - 104,486
Increase in deposits payable - 491,354
Increase in payable to former officer 87,648 -
Net cash provided by operating activities 89,637 654,138
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment
and construction in progress (321,348) (381,925)
Decrease in advances on acquisitions 1,585,000 -
Acquisition of goodwill (1,915,948) -
Payment to owner of acquired business (150,853) -
(Increase)decrease in investment in and advances
to affiliate 8,655 (1,964)
Net cash used in investing activities (794,494) (383,889)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt 395,000 -
Proceeds from note payable to affiliate 350,000 -
Decrease in bank overdraft - (16,502)
Net cash provided by(used in)
financing activities 745,000 (16,502)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (74,424) (85,030)
INCREASE(DECREASE) IN CASH (34,281) 168,717
Cash at beginning of period 495,703 376,986
Cash at end of period $ 461,422 $ 545,703
SUPPLEMENTAL NONCASH INVESTING AND FINANCNG ACTIVITIES:
Issuance of common stock upon conversion of
debentures and accrued interest $ 506,317 $ -
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 March 31, 1997 and has been classified
as such in the accompanying balance sheets.
(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 March 31, 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 $1,715,948 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 March 31, 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.
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 March 31, 1997, cash of $332,815 denominated in U.S. dollars, was on
deposit with a major money center bank in the United States.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
6. Receivables from and Note Payable to Related Parties
At March 31, 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 March 31, 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 $70,000.
(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).
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
8. Investment in and Advances to Affiliate
Investment in and advances to HBC at March 31, 1997 includes the
following:
Investment $125,000
Loans and advances, including
accrued interest, less original
issue discount of $13,000 545,689
670,689
Less: Repayment to be received
June 30, 1997, included
in receivable from related
parties (Note 6) 448,000
$222,689
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 March 31, 1997 includes accrued
interest and is shown net of $13,000 original issue discount.
The Company's interest in HBC (250,000 shares of common stock) at March
31, 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 is being amortized over the term of the loan with
$13,000 amortized during the three months ended March 31, 1997 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 March 31, 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 March 31, 1996, since the Company
had the ability to exercise significant influence over HBC. At March 31,
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 March 31, 1997 was $5.75.
9. Private Placements
(a) In November and December 1996, the Company sold $792,500 of 10%
convertible debentures due September 30, 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 quarter
ended March 31, 1997, the Company sold an additional $395,000 of 10%
convertible debentures due January 31, 1999 and March 31, 1999,
receiving $335,076 after deducting financing costs of $59,924.
Subsequent sales of $360,000 of 10% convertible debentures were made
during April 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 were converted into 263,979 shares of common
stock and during the quarter ended March 31, 1997, an additional
$495,000 of debentures were converted into 648,905 shares of common
stock. During April 1997, another $30,000 of debentures were converted
into 55,845 shares of common stock.
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 $150,000 to the
consolidated statement of loss for the three months ended March 31,
1997. In addition, the financing costs of $59,924 incurred in
connection with the sale of the 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.
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(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.
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.
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
<PAGE>
HUNGARIAN TELECONSTRUCT CORP.
Notes to Consolidated Financial Statements
(Unaudited)
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
March 31, 1997:
Outstanding Option Price
Options Per Share
Outstanding at
January 1, 1997 775,000 $1.00 to $3.375
Granted 175,000 $2.00
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
March 31, 1997 780,000 $1.00 to $3.375
As of March 31, 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 will be
paid a consulting fee of $7,000 per month for a two year period.
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 March 31, 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>
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 three months ended March 31, 1997 amounted
to $286,252.
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 three months ended March 31, 1997, the Company incurred a net loss of
$679,115; the net loss for the three months ended March 31, 1996 amounted to
$438,518. The acquisition of the Internet business resulted in goodwill of
$1,715,948, which is being amortized over five years; amortization for the three
months ended March 31, 1997 amounted to $86,000.
The equity in net loss of unconsolidated affiliate of $82,000 for the three
months ended March 31, 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 $59,924 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 $183,197 in 1997 includes $150,000 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 September 30, 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 quarter ended March 31, 1997, the Company
sold an additional $395,000 of 10% convertible debentures due January 31, 1999
and March 31, 1999, receiving $335,076 after deducting financing costs of
$59,924. Subsequent sales of $360,000 of 10% convertible debentures were
made during April 1997.
At December 31, 1996, $307,500 of debentures were converted into 263,979 shares
of common stock and during the quarter ended March 31, 1997, an additional
$495,000 of debentures were converted into 648,905 shares of common stock.
During April 1997, another $30,000 of debentures were converted into 55,845
shares of common stock.
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) 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***
(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***
<PAGE>
(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
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 16th day of June, 1997
HUNGARIAN TELECONSTRUCT CORP.
by: Frank R. Cohen
Chairman of the Board
[ARTICLE] 5
[CIK] 0000905428
[NAME] HUNGARIAN TELECONSTRUCT CORP.
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] MAR-31-1997
[CASH] 461,422
[SECURITIES] 0
[RECEIVABLES] 688,941
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 1,244,925
[PP&E] 336,823
[DEPRECIATION] 59,158
[TOTAL-ASSETS] 7,426,568
[CURRENT-LIABILITIES] 1,939,551
[BONDS] 1,368,367
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2,981
[OTHER-SE] 3,765,669
[TOTAL-LIABILITY-AND-EQUITY] 7,436,568
[SALES] 0
[TOTAL-REVENUES] 286,252
[CGS] 0
[TOTAL-COSTS] 984,367
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 183,197
[INCOME-PRETAX] (438,518)
[INCOME-TAX] 0
[INCOME-CONTINUING] (438,518)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (438,518)
[EPS-PRIMARY] (.24)
[EPS-DILUTED] (.24)
</TABLE>
