Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to ________
Commission File Number 1-11484
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact Name of Registrant as specified in its charter)
Delaware 13-3652685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
32 Center Street, Darien, CT 06820
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 656-3882
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 28, 2001, 12,103,180 shares of the Registrant's Common
Stock were outstanding, of which 12,095,467 were held by non-affiliates of the
Registrant. The aggregate market value of the Registrant's Common Stock held by
non-affiliates, computed by reference to the closing price of the Common Stock
on the American Stock Exchange as of March 27, 2001, was $89,506,456. The
exclusion of shares owned by any person from such amount shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.
Documents Incorporated by Reference
Part III - Portions of the Registrant's proxy statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 2000.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained herein which express "belief,"
"anticipation," "expectation," or "intention" or any other projection, insofar
as they may apply prospectively and are not historical facts, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the factors
set forth in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures
about Market Risk."
PART I
In this Form 10-K, all references to "$" or "U.S. dollars" are to
United States dollars, all references to "EUR" or "euros" are to the euro which
is the currency of the European Monetary Union, and all references to "HUF" or
"forints" are to Hungarian forints. Certain amounts stated in euros and forints
herein also have been stated in U.S. dollars solely for the informational
purposes of the reader, and should not be construed as a representation that
such euro or forint amounts actually represent such U.S. dollar amounts or could
be, or could have been, converted into U.S. dollars at the rate indicated or at
any other rate. Unless otherwise stated or the context otherwise requires, such
amounts have been stated at December 31, 2000 exchange rates. The forint/U.S.
dollar middle exchange rate as of December 31, 2000 was approximately 284.73
forints per U.S. dollar.
Item 1. Business
Company Overview
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") provides basic
telephone services in five defined regions within the Republic of Hungary (each,
an "Operating Area" and together, the "Operating Areas") pursuant to 25-year
telecommunications concessions granted by the Hungarian government. HTCC,
through its four majority-owned Hungarian operating subsidiaries (each, an
Operating Company and together, the "Operating Companies"), owns and operates
virtually all existing public telephone exchanges and local loop
telecommunications network facilities in its Operating Areas and is the
exclusive provider through November 1, 2002 of non-cellular local voice
telephone services in such areas.
The Company acquired its concession rights from the Hungarian Ministry
of Transportation, Telecommunications and Water Management (the "TTW Ministry")
for $11.5 million (at historical exchange rates) and purchased the existing
telecommunications infrastructure in the Operating Areas, including
approximately 61,400 access lines, from Magyar Tavkozlesi Rt. ("Matav"), the
formerly State-controlled monopoly telephone company, for $23.2 million (at
historical exchange rates). Kelet-Nograd Com Rt. ("KNC") and Raba Com. Rt.
("Raba-Com"), two of the Operating Companies, acquired the existing
telecommunications assets in their respective Operating Areas in the first
quarter of 1995, while Papa es Tersege Telefon Koncesszios Rt. ("Papatel") and
Hungarotel Tavkozlesi Rt. ("Hungarotel"), the other two Operating Companies,
acquired the existing telecommunications assets in their respective Operating
Areas on January 1, 1996. Since the acquisition of such existing networks, the
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Operating Companies have incurred capital expenditures through December 31, 2000
of $190 million (at historical exchange rates) to expand and upgrade their
network facilities which has resulted in the completion of a modern
telecommunications network in each of the Operating Areas. As of December 31,
2000, the Company's telecommunications networks had approximately 206,900 access
lines in service, an addition of approximately 145,500 access lines to the
61,400 access lines acquired from Matav. The Company's networks now have the
capacity, with some normal additional capital expenditures, to provide basic
telephone services to virtually all of the estimated 283,300 homes and 38,400
business and other institutional subscribers (including government institutions)
within its Operating Areas.
The Company completed its network modernization and construction
program in each of its Operating Areas primarily through turnkey construction
contracts with Siemens, Ericsson and Fazis Telecommunication System Design and
Construction Corporation. The build-out was primarily financed through a $170
million credit facility with Postabank es Takarekpenztar, a Hungarian commercial
bank ("Postabank"), which was subsequently refinanced and a $47.5 million
contractor financing facility. See "- Revision of Capital Structure," Item 3
"Legal Proceedings," Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," and
Notes 4, 5 and 8(d) of Notes to Consolidated Financial Statements.
The following table sets forth certain information as of December 31,
2000 with respect to each of the Operating Companies.
Raba-Com KNC Papatel Hungarotel Total
-------- --- ------- ---------- -------
Population........................ 63,900 149,000 63,200 391,700 667,800
Residences........................ 25,900 66,400 24,100 166,900 283,300
Businesses and other(1)........... 3,300 8,300 3,800 23,000 38,400
Access lines in operation:
Residential.................. 20,000 41,200 17,800 100,300 179,300
Business and other(2)........ 2,700 6,500 2,400 16,000 27,600
-------- -------- -------- --------- --------
Total.................. 22,700 47,700 20,200 116,300 206,900
Pay phones........................ 167 480 202 1,073 1,922
Population Penetration rate(3).... 35.5 32.0 32.0 29.7 31.0
Residential Penetration rate (4).. 77.2 62.0 73.9 60.1 63.3
--------
(1) Represents Company estimates of business and other institutional subscribers
or potential subscribers (including government institutions).
(2) Represents Company estimates of subscribers which are businesses and other
institutional subscribers (including government institutions), leased lines
and pay phones. Includes ISDN equivalent lines.
(3) Population Penetration rate is defined as the number of access lines per 100
inhabitants.
(4) Residential Penetration rate is defined as the number of residential
access lines per 100 residences.
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The following table sets forth the number of access lines served by each
of the Operating Companies at takeover from Matav and at the end of 1995, 1996,
1997, 1998, 1999 and 2000.
Takeover 1995 1996 1997 1998 1999 2000
-------- ---- ---- ---- ---- ---- ----
Raba-Com 2,500(1) 5,100 14,000 20,600 21,400 22,300 22,700
KNC 13,000(1) 14,200 20,500 35,500 40,000 46,300 47,700
Papatel 3,800(2) 3,800 11,100 17,000 18,300 19,600 20,200
Hungarotel 42,100(2) 42,100 47,800 102,000 105,300 112,300 116,300
----------- --------- -------- -------- -------- -------- -------
Total 61,400 65,200 93,400 175,100 185,000 200,500 206,900
(1) 1st Quarter 1995
(2) Year-End 1995
The Republic of Hungary
Hungary is located in Central Europe bordering on Austria, Slovenia,
Croatia, Yugoslavia, Romania, Ukraine and Slovakia. Six West European capitals
are within a one-hour flight. Its total area is approximately 93,030 square
kilometers. It has 10 million inhabitants, approximately 1.8 million of whom
reside in Hungary's capital, Budapest.
For nearly 40 years, Hungary was under central state control with a
one-party government and a centrally planned economy. Democracy was restored and
the foundations of a market economy were built between 1988 and 1990. Free
elections were held in 1990. Today, Hungary has a parliamentary democracy with a
single-chamber National Assembly. As a result of a large scale privatization
effort, private enterprise has become the basis of the Hungarian economy.
Today, Hungary is considered the most developed country in Central
Europe. Since 1989, foreign direct investment has been approximately $19.9
billion. Foreign direct investment was approximately $1.95 billion in 2000. On a
per capita basis, Hungary has been one of the largest Central European
recipients of foreign direct investment since the transition to a market
economy. Hungary has received (on a per capita basis) nearly twice the level of
foreign direct investment of Poland and about the same as that of the Czech
Republic.
Since 1995, the Hungarian government has embarked on an economic
stabilization effort aimed at putting the economy on a sustainable path of
low-inflationary growth. Hungary has experienced the following annual GDP growth
rates since the initiation of that effort: 1.7% in 1995; 1.3% in 1996; 3.5% in
1997; 5% in 1998; 4.9% in 1999; and 5.3% in 2000. The unemployment rate has
gradually decreased from 11.1% in 1995 to 6.4% in 2000. The Hungarian inflation
rate has been steadily decreasing as well as evidenced by the following
declining annual inflation rates: 28.2% in 1995; 23.6% in 1996; 18.2% in 1997;
14.5% in 1998; 10.0% in 1999; and 9.8% in 2000.
Hungary's application for membership in the European Union ("EU") was
accepted in 1998. Hungary is now in the process of negotiating the terms of its
accession into the EU. Hungary is not expected to become a member of the EU
until 2003 at the earliest. Hungary joined the North Atlantic Treaty
Organization in 1999. Hungary is also a member of the World Trade Organization.
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Overview of Hungarian Telecommunications Industry
Early State of Hungarian Telecommunications Industry
In 1989, the Hungarian state-owned Post, Telegraph and Telephone ("PTT")
was divided into three separate companies: the Hungarian Broadcasting Company
("Antenna Hungaria"), the Hungarian Post Office ("Magyar Posta") and Matav. The
Hungarian PTT was historically the exclusive provider of telecommunications
services in Hungary. The Hungarian telecommunications market was significantly
underdeveloped without the necessary investment in the telecommunications
infrastructure necessary to achieve a comparable level of teledensity to that of
Western Europe. As of December 31, 1995, Hungary had a basic telephone
penetration rate of approximately 21 telephone access lines per 100 inhabitants
compared to a European Union average of approximately 48 access lines per 100
inhabitants and a United States average of approximately 60 access lines per 100
inhabitants. Of such access lines in Hungary, approximately 40% were located in
Budapest (in which approximately 18% of Hungary's population resides). In the
Company's Operating Areas, access line penetration was approximately nine access
lines per 100 inhabitants as of December 31, 1995. By comparison, basic
telephone penetration rates in other Eastern European countries such as the
Czech Republic, Poland, Slovakia and Bulgaria, as of December 31, 1995, were 23,
15, 21 and 28 access lines per 100 inhabitants, respectively.
Privatization of Matav and Local Telephone Service
Beginning in 1992, the Hungarian government began the process of
privatizing Hungary's telecommunications industry by selling an initial 30%
stake in Matav (raised to 67% in 1995) to MagyarCom, a company then wholly owned
by Deutsche Telekom AG, the German public telephone operator ("Deutsche
Telekom"), and Ameritech, the United States based telecommunications company.
(In 2000 Deutsche Telekom purchased the entire ownership interest of SBC
Communications (Ameritech's successor) in MagyarCom). In 1997 Matav completed
its initial public offering pursuant to which MagyarCom's stake in Matav was
reduced to approximately 60% and the Hungarian State's stake was reduced to
approximately 6%. The Hungarian State also retained certain shareholder rights
by retaining one "Golden Share." In 1999 the Hungarian State sold its remaining
6% ownership interest in Matav but retained its "Golden Share." As of December
31, 2000, MagyarCom owned 59.5% of Matav while 40.5% was publicly traded.
In 1992 the TTW Ministry divided the country into 54 primary
telecommunications service areas in order to take some of such primary
telecommunications service areas out of Matav's national network with respect to
the provision of local basic telephone service while allowing Matav to continue
its monopoly in the provision of domestic and international long distance
services. In 1993, the TTW Ministry solicited bids for concessions to build, own
and operate telecommunications networks in the 25 service areas which had been
chosen to exit the Matav system. As of December 31, 2000, 23 of the 25
concessions for which the TTW Ministry solicited bids had been awarded. Holders
of those concessions today (each a Local Telephone Operator, "LTO", and together
the "LTOs") include: the Company (presently 5 areas); Vivendi Telecom Hungary
("Vivendi") owned by affiliates of Vivendi SA of France and General Electric
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Capital Corp. (9 areas); an affiliate of United Pan-Europe Communications NV
("UPC") (1 area); a consortium comprised of Bezeq (the Israeli PTO), Poalim
Investment (an Israeli investment and holding company) and Matav (3 areas)
(Matav has recently announced an agreement to buy out the ownership interests of
Bezeq and Poalim, which transaction is subject to regulatory review); and Matav
(5 areas). Matav also retained the rights to service 2 areas for which there
were no successful bidders. Each of the LTOs (including Matav) received 25 year
licenses to provide local basic telephone service with exclusivity rights in
their respective concessions through 2002 (2001 in the case of Matav except for
5 areas in which Matav has exclusivity rights through 2002). In addition to the
fees paid to the government which aggregated approximately $80.0 million (at
historical exchange rates), each of the non-Matav LTOs negotiated a separate
asset purchase agreement with Matav for each concession area's existing basic
telephone plant and equipment, which led to the transfer of approximately
260,000 access lines from a total of 1.2 million access lines in the Matav
system. Matav's concession areas presently cover approximately 75% of Hungary's
population and approximately 70% of its geographic area.
Cellular Service
In addition to the liberalization of basic telephone services, the TTW
Ministry also initially selected two consortia to provide nationwide cellular
telephone services. A consortium comprised of Matav and MediaOne Group Inc.,
formerly part of U.S. West, was granted two licenses to provide both analog
(NMT-450) ("Westel 450") and digital (GSM-900) ("Westel 900") services while
Pannon GSM Tavkozlesi ("Pannon") was granted a license to provide only digital
cellular services. Pannon's current shareholders include: Telenor AS (the
Norwegian telecommunications company) (25.8%); Tele Danmark A/S (the Danish
telecommunications company) (6.6%); Sonera Corporation (the Finish
telecommunications company) (23%); and KPN NV (the Dutch telecommunications
company, "KPN") (44.6%). MediaOne subsequently sold its holdings in Westel 450
and Westel 900 to Deutsche Telekom. Matav is in the process of exercising an
option it holds to purchase the interests in Westel 450 and Westel 900 that
Deutsche Telekom acquired from MediaOne.
In June 1999, a consortium comprised of Vodafone Group Plc. (50.1%),
RWE Telliance (19.9%), Antenna Hungaria (20%) and Magyar Posta (10%) (together,
"Vodafone") was the winning bidder for a digital 1800-megahertz (or DCS
frequency) mobile phone license. It began operations in late 1999.
Domestic and International Long Distance Services
At the end of 2001 with the further liberalization of the Hungarian
telecommunications market, Matav's right to provide exclusive domestic and
international long distance voice transmission is due to expire. In 1998, to
further stimulate future competition in this market, the TTW Ministry awarded
Pan-Tel Rt., a newly formed Hungarian company ("Pan-Tel"), the licenses to
provide such services as data transmission, voice mail and other services which
are not subject to exclusive concessions. Pan-Tel built its own country-wide
telecommunications network. The current shareholders of Pan-Tel include MAV Rt.
(the Hungarian railway company) (10.1%), PT Investment Holding Company (14.7%)
and KPN (75.2%).
The Hungarian Telecommunications Industry Today
During 2000 the Hungarian government moved the telecommunications
portfolio from the Ministry of Transportation, Telecommunications and Water
Management to the Prime Minister's Office. The Prime Minister's Office is headed
by the Chancellor (who is effectively the Deputy Prime Minister) and the
Chancellor now has ministerial responsibility for telecommunications. An
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Information Technology Commissioner was appointed to assist the Chancellor. The
Hungarian government is currently working on new legislation for 2002 to further
liberalize the telecommunications market in accordance with European Union
standards. The regulation of telephony, cable television and the Internet would
be affected. However, the Company does not expect that the exclusivity period of
its concession rights will be affected.
Since the privatization of the Hungarian telecommunications market, the
LTOs and Matav have spent approximately $1 billion (at historical exchange
rates) to build modern state-of-the-art telecommunications networks throughout
Hungary. As a result of such investment, Matav had approximately 3.0 million
access lines connected to its telecommunications networks and the other LTOs
(including the Company) had over 800,000 access lines connected to their
telecommunications networks as of December 31, 2000.
In the mobile telecommunications marketplace, Westel 450 and Westel 900
had 76,000 and 1,600,000 subscribers, respectively, as of December 31, 2000.
Pannon had approximately 1,250,000 subscribers as of December 31, 2000. Vodafone
had approximately 188,0000 subscribers as of December 31, 2000. As of December
31, 2000, the overall penetration rate for cellular service in Hungary was 31%.
Due to the completion of the Company's network modernization and
construction program, access line penetration in the Company's Operating Areas
has increased to 31 access lines per 100 inhabitants as of December 31, 2000.
Given that the overall investment in the Hungarian telecommunications market
over the last several years has produced a significant increase in the overall
penetration rate in Hungary to approximately 38% as of December 31, 2000 and the
expansion of the mobile telecommunications market, the Company expects to
benefit from a continued increase in the use of its telecommunications services
by its customer base as the overall Hungarian telecommunications market
continues to expand. See also "- Competition."
HTCC and its Operating Companies
In 1994, the TTW Ministry awarded KNC and Raba-Com concession rights to
construct local telephone exchanges and provide non-cellular local voice
telephone services for a period of 25 years, with exclusivity for the first
eight years. The Company subsequently acquired two other Operating Companies,
Hungarotel and Papatel, that had been awarded substantially identical concession
rights by the TTW Ministry. Matav continues to be the sole provider of domestic
and international long distance non-cellular voice telephone services through
2001.
HTCC conducts its operations through the Operating Companies. Set forth
below is a chart of HTCC and its principal subsidiaries and stockholders as of
March 28, 2001. Share ownership percentages of HTCC are based on shares of
HTCC's common stock (the "Common Stock") owned as of March 28, 2001, without
giving effect to outstanding options or warrants. The ownership percentages for
the Operating Companies could be affected by certain Hungarian equity ownership
requirements. See "- Regulation - Hungarian Equity Ownership Requirements."
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[CHART]
HTCC was organized under the laws of the State of Delaware on March 23,
1992. The Common Stock is traded on the American Stock Exchange under the symbol
"HTC." The Company's United States office is located at 32 Center Street,
Darien, Connecticut 06820; telephone (203) 656-3882. The Company's principal
office in Hungary is located at Terez krt. 46, H-1066, Budapest; telephone (361)
474-7700.
Certain Stockholders
The Company has benefited from the extensive telecommunications
experience and capabilities of certain of its stockholders. Set forth below is a
brief description of such stockholders.
Citizens Communications Company
Citizens Communications Company (together with its subsidiaries,
"Citizens") is a New York Stock Exchange listed company which serves 1.4 million
access lines in 17 states and is acquiring an additional 1.7 million access
lines. Citizens also owns 85% of Electric Lightwave, Inc. (NASDAQ: ELIX), a
facilities-based, integrated communications provider that offers a broad range
of telecommunications-intensive businesses throughout the United States. At
December 31, 2000, Citizens had $7.0 billion of total assets and $1.7 billion in
shareholders' equity. For the year ended December 31, 2000, Citizens had $1.8
billion of revenue and $121.8 million in operating income.
In May 1995, Citizens purchased 300,000 shares of HTCC's common stock
from a former executive of the Company and has since acquired an additional
1,902,908 shares of Common Stock and 30,000 shares of the Company's Series A
Preferred Stock convertible into 300,000 shares of Common Stock, pursuant to
certain agreements entered into with HTCC (as amended and restated in certain
cases to date, the "Citizens Agreements"). Citizens also purchased 103,000
shares of Common Stock on the open market bringing its ownership of the
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outstanding Common Stock as of March 28, 2001 to 19.1%. The Citizens Agreements
provide Citizens with certain preemptive rights to purchase, upon the issuance
of Common Stock in certain circumstances to third parties, shares of Common
Stock in order to maintain its percentage ownership interest on a fully diluted
basis. For a more detailed description of some of the Citizens Agreements, see
Notes 9 and 12 of Notes to Consolidated Financial Statements, Item 12 "Security
Ownership of Certain Beneficial Owners and Management," and "- Revision of
Capital Structure."
Tele Danmark A/S
Tele Danmark A/S (together with its affiliates, "Tele Danmark") is the
preeminent provider of telecommunications services in Denmark. Tele Danmark
provides a full range of telecommunications services in Denmark, including
landline and cellular telephone services, data communications, Internet, leased
lines, directory and operator services and cable television. Domestic operations
include 3,735,000 telephone subscriber lines, 1,648,000 cellular users, 801,000
cable television customers and 618,000 Internet dial-up customers.
At December 31, 1999, Tele Danmark had total assets of Danish Kroner
75.1 billion (approximately $9.0 billion at current exchange rates) and
shareholders' equity of Danish Kroner 32.6 billion (approximately $3.9 billion
at current exchange rates). During 2000, Tele Danmark had net income of Danish
Kroner 3.591 billion (approximately $428 million at current exchange rates) on
net revenues of Danish Kroner 44.552 billion (approximately $5.3 billion at
current exchange rates.)
Tele Danmark's activities abroad have been an important growth areas
over the last several years. Tele Danmark operates in 12 European countries.
International operations accounted for 48% of Tele Danmark's net revenues in
2000. Tele Danmark has investments in the Nordic region, continental Western
Europe as well as Central and Eastern Europe--among them Belgacom (Belgium), Ben
(the Netherlands), Sunrise (Switzerland), Talkline (Germany), Polkomtel
(Poland), Contactel (the Czech Republic) and UMC (Ukraine). In Hungary, Tele
Danmark also holds a 6.6% stake in Pannon, one of the three digital cellular
phone providers in Hungary.
As a result of certain agreements between the Company and Tele Danmark
(the "Tele Danmark Agreements"), the Company has issued 2,579,588 shares of
Common Stock to Tele Danmark. As of March 28, 2001, Tele Danmark owned 21.3% of
the Company's outstanding Common Stock. The Tele Danmark Agreements provide Tele
Danmark with certain preemptive rights to purchase, upon the issuance of Common
Stock in certain circumstances to third parties, shares of Common Stock in order
to maintain its percentage ownership interest of the outstanding Common Stock.
See Notes 9 and 12 of Notes to Consolidated Financial Statements, Item 12
"Security Ownership of Certain Beneficial Owners and Management," and "-
Revision of Capital Structure."
Tele Danmark's stock trades on the Copenhagen Stock Exchange and the
New York Stock Exchange. SBC Communications of San Antonio, Texas owns 42% of
the shares, with the remaining shares held by individual and institutional
shareowners all over the world.
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Postabank Rt.
Postabank was established in 1988 and provides a wide range of
commercial and retail banking services to its private and corporate customers in
Hungary. As of December 31, 2000, its total assets were HUF 331 billion ($1.2
billion). Today it is the sixth largest Hungarian retail bank in terms of total
assets with a 4.7% market share of the deposits and a 1.5% market share of the
loan market. The Hungarian government owns a controlling interest in Postabank.
In October 1996, the Company entered into a $170 million 10-Year
Multi-Currency Credit Facility with Postabank (the "Original Postabank Credit
Facility"). In May 1999, as part of a revision of its capital structure, the
Company issued 2,428,572 shares of Common Stock, warrants to purchase 2,500,000
shares of Common Stock and notes in the aggregate amount of $25 million to
Postabank. The Company also entered into a $138 million Dual-Currency Bridge
Loan Agreement with Postabank (the "Postabank Bridge Loan Agreement"). As a
result of such issuances and other agreements, the Company paid off the balance
on the Original Postabank Credit Facility and terminated such agreement. In
April 2000 the Company paid off the outstanding balance on the Postabank Bridge
Loan Agreement with the proceeds of a syndicated loan agreement. See "- Revision
of Capital Structure," Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," and Notes 4, 5 and 9 of Notes to Consolidated Financial Statements.
As of March 28, 2001, Postabank owned 20.1% of the outstanding Common
Stock and 30.9% of the Common Stock on a fully diluted basis. For a more
detailed description of some of the Postabank Agreements, see Notes 4, 5 and 9
of Notes to Consolidated Financial Statements, Item 13 "Certain Relationships
and Related Transactions," Item 12 "Security Ownership of Certain Beneficial
Owners and Management," and "- Revision of Capital Structure."
The Danish Investment Fund for Central and Eastern Europe
The Investment Fund for Central and Eastern Europe (the "Danish Fund")
is a Danish government initiated and financed investment fund founded in 1989 by
the Danish Parliament. The purpose is to promote Danish direct investments in
Central and Eastern Europe and to enhance the possibilities for closer
cooperation between Danish and Central and Eastern European companies. The
Danish Fund engages in projects via equity capital and/or loans in joint
ventures with a participation of one or more Danish companies. The Danish Fund
has experience in Hungary (currently four projects) and in particular the
Hungarian telecommunications sector, as it was involved in Pannon from 1994 to
1996 and in two of the Operating Companies from 1994 to 1997. As of March 28,
2001, the Danish Fund owned 10.6% of the outstanding Common Stock. See Item 12
"Security Ownership of Certain Beneficial Owners and Management."
Revision of Capital Structure
In May 1999 the Company entered into various agreements as part of a
revision of its capital structure with the following parties: Postabank; Tele
Danmark; the Danish Fund; and CU CapitalCorp and Citizens International
Management Services Company, two wholly-owned subsidiaries of Citizens
Communications Company. As a result of such agreements, the Company extinguished
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all of its obligations (i) to Postabank under the Original Postabank Credit
Facility in the amount of approximately $193 million and the amounts borrowed to
settle a portion due under a contractor financing facility in the amount of
approximately $16 million; (ii) to one of its contractors under a contractor
financing facility in the amount of approximately $35 million; and (iii) to
Citizens under a $8.4 million promissory note which was payable in 2004 and an
obligation to pay Citizens $21 million in 28 quarterly installments of $750,000
each from 2004 through and including 2010. The Company borrowed $138 million
from Postabank under a one-year Dual-Currency Bridge Loan Agreement in Hungarian
forints and euros and $25 million pursuant to certain unsecured notes which
mature in 2007. Some of the various agreements which were entered into as of May
10, 1999 are described herein. (The descriptions and summaries herein do not
purport to be complete, and are subject to, and qualified in their entirety by,
reference to each such agreement, copies of which are filed as exhibits hereto.
See Item 14 below).
The Company and Postabank entered into a Dual-Currency Bridge Loan
Agreement (the "Postabank Bridge Loan") pursuant to which HTCC's subsidiaries
borrowed the equivalent of $111 million in Hungarian forints (at historical
exchange rates) and $27 million in euros (at historical exchange rates) which
funds were applied to the repayment of the Original Postabank Credit Facility.
On April 11, 2000, the Company entered into a EUR 130 million senior secured
syndicated bank credit facility which funds were used to pay off the Postabank
Bridge Loan.
The Company and Postabank also entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") pursuant to which Postabank
purchased 2,428,572 shares of Common Stock for an aggregate purchase price of
$34 million. The Securities Purchase Agreement provides for one person
designated by Postabank to be nominated for election to the Company's Board of
Directors. Postabank could not transfer its shares until the earlier of (x) the
repayment in full of all the obligations under the Postabank Bridge Loan
Agreement or (y) May 10, 2000, and now Postabank can only transfer such shares
incrementally through 2003 subject to the Company's right of first refusal. The
Company's right of first refusal expires in January 2003 and is assignable by
the Company to any beneficial holder of more than 10% of the Company's
outstanding common stock. The Company applied the proceeds from the stock
issuance to the repayment of the Original Postabank Credit Facility. Pursuant to
the Securities Purchase Agreement, the Company issued notes to Postabank in an
aggregate amount of $25 million (the "Notes") with detachable warrants (the
"Warrants"). The Notes, as amended, accrue interest, which is payable
semi-annually, at 3.5% plus the LIBOR rate for the applicable six month interest
period. The Notes, which mature in 2007, are transferable. The Warrants which
were issued pursuant to a series of Warrant Agreements between the Company and
Postabank enable Postabank to purchase 2,500,000 shares of the Company's common
stock at an exercise price of $10 per share. The exercise period commences on
January 1, 2004 and terminates on March 31, 2007. The Company has the right to
terminate the Warrants in whole or in part prior to January 1, 2004 provided
that the Company (i) repays a proportionate amount of the outstanding principal
on the Notes to the holders of such Notes and (ii) pays an additional 7.5% of
the aggregate principal amount of the Notes repaid concurrently with the
termination of the Warrants to the holders of the Warrants.
The Company and Tele Danmark entered into a Stock Purchase Agreement
(the "TD Stock Purchase Agreement") pursuant to which the Company issued
1,571,429 shares of the Company's common stock in exchange for $11 million. The
Company applied the proceeds from the TD Stock Purchase Agreement to the
repayment of the Original Postabank Credit Facility.
-11-
The Company and the Danish Fund entered into a Stock Purchase Agreement
(the "Danish Fund Stock Purchase Agreement") pursuant to which the Company
issued 1,285,714 shares of the Company's common stock in exchange for $9
million. The Company applied the proceeds from the Danish Fund Stock Purchase
Agreement to the repayment of the Original Postabank Credit Facility.
The Company and Citizens entered into a Stock Purchase Agreement (the
"Citizens Stock Purchase Agreement') pursuant to which the Company issued to
Citizens 1,300,000 shares of the Company's common stock and 30,000 shares of the
Company's Series A Preferred Stock, par value $0.001 (the "Preferred Shares").
In consideration for such shares, Citizens (i) transferred to the Company for
cancellation a $8.4 million promissory note issued by the Company to Citizens
which was to mature in 2004, and (ii) agreed to renounce and forego any rights
whatsoever to any payment of the $21 million which was payable by the Company to
Citizens in quarterly installments of $750,000 from 2004 through and including
2010. Citizens, as the holder of the Preferred Shares, is entitled to receive
cumulative cash dividends at an annual rate of 5%, compounded annually on the
liquidation value of $70 per share. The Company may redeem the Preferred Shares
at any time. Citizens can convert each of the Preferred Shares into shares of
the Company's common stock on a one for ten basis. Citizens also waived any and
all preemptive and anti-dilution rights in connection with the transactions
described above.
The April 2000 Syndicated Credit Facility
On April 11, 2000, the Company entered into a EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement") with a European banking
syndicate which was arranged by Citibank N.A. ("Citibank") and Westdeutsche
Landesbank Girozentrale ("WestLB"). The Company drew down EUR 129 million ($121
million at April 20, 2000 exchange rates), which funds were used, along with
another $7.3 million of other Company funds, to pay off the entire outstanding
balance of EUR 134 million (approximately $126 million at April 20, 2000
exchange rates) on the Postabank Bridge Loan, and fees relating to the Debt
Agreement. The borrowers under the Debt Agreement are the Operating Companies
who were the borrowers under the Postabank Bridge Loan Agreement. The Debt
Agreement and some of the related agreements are described below. (The
descriptions and summaries herein do not purport to be complete, and are subject
to, and qualified in their entirety by, reference to each such agreement, copies
of some of which are filed as exhibits hereto. See Item 14 below.)
The Debt Agreement has two facilities. Facility A is a floating rate
term loan in the amount of EUR 125 million (the "Term Facility") which principal
is repayable in installments semi-annually on each June 30 and December 31
beginning on June 30, 2001 and ending on December 31, 2007. The amounts of the
principal repayments on the Term Facility are to be escalating percentages of
the amount of the facility which was drawn down (EUR 125 million). The Company
borrowed the full EUR 125 million, of which EUR 84.1 million was funded, and is
repayable, in euros and the equivalent of EUR 40.9 million was funded, and is
repayable in, Hungarian forints. The Term Facility loans denominated in euros
accrues interest at the rate of the Applicable Margin (defined below) plus the
EURIBOR rate for the applicable interest period. The EURIBOR rate is the
percentage rate per annum determined by the Banking Federation of the European
Union for the applicable interest period. The portion of the Term Facility loan
denominated in Hungarian forints accrues interest at the rate of the Applicable
Margin (defined below) plus the BUBOR rate for the applicable interest period.
The BUBOR rate is the percentage rate per annum determined according to the
rules established by the Hungarian Forex Association and published by the
National Bank of Hungary for the applicable interest period. The applicable
interest period for the portion of the Term Facility loans denominated in euros
is, at the Company's option, one, three or six months. The Company chose six
months. The applicable interest period for the portion of the Term Facility
loans denominated in Hungarian forints is, at the Company's option, in one or
-12-
three months. The Company chose three months. Interest is payable at the end of
each interest period. The Applicable Margin is initially, subject to adjustment,
1.75%. The Applicable Margin may be adjusted downward incrementally to a minimum
of 1.15% subject to the financial performance of the Company as measured by the
ratio of the Company's debt to its earnings before interest, taxes, depreciation
and amortization.
Facility B is a floating rate revolving loan in the amount of EUR 5
million (the "Revolving Facility") which can only be drawn down in euros. The
Revolving Facility will be reduced to EUR 2.5 million on December 31, 2005. The
Revolving Facility is available until December 31, 2007. The Company borrowed
EUR 4 million of the Revolving Facility to pay off the balance of the Postabank
Bridge Loan and fees associated with the transaction on April 20, 2000. The
principal amount borrowed under the Revolving Facility is due at the end of each
interest period at which point the Company can, subject to certain conditions,
roll over the amount of principal borrowed. The applicable interest period for
the Revolving Facility is, at the Company's option, one, three, or six months.
The Company has chosen six months at the present time. Interest is payable at
the end of each interest period calculated similar to that for the Term Facility
loan denominated in euros.
Dependent on its cash flow, the Company is required to prepay up to the
equivalent of $25 million on the Term Facility. The amount of the prepayment in
any year shall be at least 50% of the Company's excess cash flow, if any, for
the previous financial year as defined in the Debt Agreement. The prepayment
amount is due within 15 days of the filing of each annual report on Form 10-K
with the Securities and Exchange Commission. There was no "excess cash flow", as
defined in the Debt Agreement, for 2000 and, therefore, there will be no
prepayment in 2001.
The Company paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2.5 million at April 20, 2000 exchange rates), which is included
in other assets along with other direct costs incurred in obtaining the Debt
Agreement, and is being amortized over the term of the related debt. The Company
also paid an agency fee in the amount of $60,000. The Company is obligated to
pay an annual commitment fee equal to the lower of 0.75% or 50% of the
Applicable Margin on any available unused commitment on the Revolving Facility.
HTCC and one of its subsidiaries, HTCC Consulting Rt., are guarantors
for the HTCC subsidiaries under the Debt Agreement. The Company pledged all of
its intangible and tangible assets, including HTCC's ownership interests in its
subsidiaries, and its real property to secure all of the obligations under the
Debt Agreement. The Company and Citibank Rt. (as security agent) entered into a
series of agreements to secure all of the Company's obligations under the Debt
Agreement. The Debt Agreement contains customary representation and warranties.
The Company is subject to some restrictive covenants including restrictions
regarding the ability of the Company to pay dividends, borrow funds, merge with
another company and dispose of its assets. The Debt Agreement contains customary
events of default, which would trigger early repayment of the Debt Agreement
including those related to a change of control. If prior to the later of
December 31, 2001 or the Trigger Date (as defined below), Tele Danmark sells any
of the shares of Common Stock that it currently owns or Tele Danmark and the
Danish Fund no longer own, in the aggregate, at least 30.1% of the outstanding
Common Stock, the Company would be in default under the Debt Agreement. Tele
Danmark and the Danish Fund currently own 31.9% of the outstanding Common Stock.
The Trigger Date is defined as the date on which for the prior two fiscal
quarters the Company's debt to EBITDA ratio is less than 3.5 to 1. Following the
Trigger Date, Tele Danmark can only transfer its shares with the prior written
consent of banks holding at least 66.7% of the Company's outstanding debt under
the Debt Agreement.
-13-
Strategy
The Company's primary focus is to continue to increase call revenues
and reduce operating costs while continuing to add residential and business
customers to its networks. To accomplish these goals, the Company is continuing
its efforts to expand its product and service offerings to its entire customer
base, improve its customer service, increase its operational efficiencies and
increase its marketing efforts. The Company has implemented the following
operational strategies in order to further its business objectives.
Revenue Growth
The Company intends to continue to increase its call revenues by
increasing the usage of its product and service offerings by both its
residential and business customers. Since the availability of modern
telecommunications services is a relatively new phenomena in Hungary, the key
factor in increasing the usage is educating both customer segments on the
availability and benefits of the Company's products and services. For the
residential customers, the Company is focusing its efforts on educating the
residential customer on the availability of such products and services as voice
mail, caller ID and call waiting, which are all new to the Company's residential
customer base. The Company is also highlighting the benefits of the Internet and
encouraging its use by offering special discounted rates for Internet usage. One
of the tools that the Company is deploying to increase customer awareness of
these services is video and personal demonstrations in the customer service
centers which are located in each of the Operating Areas. The Company is also
focusing its marketing and educating efforts at its business customers, which
represent 40% of the Company's total revenues. The Company has placed emphasis
on increasing the installation and usage levels of the Company's business
customers by focusing on the marketing and sales of deregulated services
including managed lease lines, PBX sales and services, ISDN, Internet and
Digifon Services (e.g. call forwarding, call waiting, call barring). The Company
has assigned an account manager to each business customer who is responsible for
meeting with each business customer to find out such customer's
telecommunications needs. The account manager can then demonstrate each of the
Company's products and services and, working together with that customer,
develop a telecommunications strategy using the Company's products and services
which can best enhance that customer's business.
The Company plans to continue its revenue growth by increasing the
penetration levels in the residential sector. To that end, the Company is
continuing its mass marketing efforts to the residences who have not yet had
service. The Company is also marketing the benefits of additional lines to its
existing residential and business customer.
New Products and Services
The Company continues to offer the latest telecommunications products and
services as they become available in the telecommunications marketplace. In
2000, the Company introduced Internet Protocol-based voice services to its
customers. This enables the Company to offer long distance and international
calling services at discounted rates without violating Matav's domestic long
distance and international calling monopoly. The Company is planning to become
an Internet Service Provider in all of its Operating Areas in 2001.
-14-
Marketing
As the exclusive provider of basic telephone services in the Operating
Areas, the Company's primary marketing objective is to increase the usage of its
telephone services by its existing residential and business customers. In
addition, the Company intends to attract new subscribers by targeting the needs
of various market segments, while maintaining superior customer service and
reliability based on current "state of the art" telecommunications technology.
The Company's targeted market segments are: (i) residential customers; (ii)
small businesses and professionals; (iii) medium and large businesses; and (iv)
government institutions.
For its residential customers and potential customers, the Company's
marketing efforts include advertising on radio and television, door-to-door
marketing surveys, newspaper advertising, participation in local trade shows,
direct mail, community meetings and billboard advertising. The Company is also
offering discounts for Internet users. To increase the residential penetration
rate, the Company has implemented short marketing campaigns targeting those
residences without phone service. To induce the potential customers the Company
has offered special limited time only rates on the connection fee. Since many
Hungarians still prefer face-to-face personal marketing, the Company has
leveraged the benefits of having a customer service center in each Operating
Area to give personal demonstrations.
For its larger business customers, the Company has trained account
managers to service these customers and potential customers by educating them on
the availability of "turn-key" business communications solutions and several
"value added services" including the premium rate services, voice mail and all
of the Digifon services (e.g. call forwarding, call waiting, call barring). The
Company believes that this effort will result in a greater understanding by its
business customers and potential business customers of the potential revenue
gains that can be achieved with advanced telecommunications technology.
Customer Service
The Company believes that providing a high level of customer service is
important to achieving its objective of attracting additional customers and
increasing the usage of existing services by its current customer base. Prior to
completion of the construction program, some customers waited for over 20 years
for telephone service. Today, most residences and businesses can be connected to
one of the Company's networks within 7 days. The Company also operates full time
operator service centers in each of the Operating Areas which are staffed by
operators capable of providing, among other things, call completion assistance,
directory assistance and trouble reporting on a 24 hour basis. In addition, the
Company operates customer service centers in each of the Operating Areas which
offer facsimile, Internet, photocopying and telephone bill payment services.
These service centers also sell communications equipment, process telephone
service applications and handle billing inquiries. The Company reorganized its
customer service centers by implementing the necessary changes to make such
centers more "customer friendly." The Company is providing more choices for its
customers and more product information instruction. For its business customers,
the Company has account representatives for each customer.
-15-
Most of the Company's subscriber base consists of residential
customers. As of December 31, 2000, 87% of subscribers were residential
customers and 13% were business and other institutional subscribers (including
government institutions).
Operational Efficiency
The Company is increasing its productivity and operational efficiency
by achieving certain economies of scale with respect to network management,
administration, customer service, billing, accounts receivable, payroll
processing, purchasing and network maintenance. For example, the Company has
implemented its own centralized operating and accounting system in all of its
Operating Areas. A significant increase in operational efficiency has resulted
from the implementation of this system specifically in the areas of customer
billing and financial accountability. In addition, some of the Company's
Operating Areas are contiguous, which facilitates the realization of certain
economies of scale. For example, by using fiber optic technology between
contiguous Operating Areas, the Company realizes certain operational
efficiencies by centralizing certain functions. As of December 31, 2000, the
Operating Companies had a total of 321 access lines per employee.
Mergers and Strategic Alliances
As the Hungarian telecommunications market continues to develop and
become more liberalized as the monopolies of Matav and the LTOs expire and the
newer entrants expand their presence in Hungary, the Company will continue to
review its options with respect to any merger or strategic alliance
possibilities that will enhance shareholder value.
Operations
Services
The Company provides non-cellular local voice telephone service in the
Operating Areas which allows subscribers to have facsimile, and modem
transmission capabilities and makes available to its subscribers, through
interconnection with Matav, domestic and international long distance services.
In addition to these standard services, the Company currently offers its
subscribers data transmission and other value-added services, including
Internet, voice mail, Internet Protocol-based voice services, caller ID, call
waiting, call forwarding, three-way calling, toll free calling services and
audio text services.
The Company's revenues are derived from the provision of local and
domestic and international long distance telephone services which consist of (i)
charges for measured telephone service, which vary depending on the day, the
time of day, distance and duration of the call, (ii) connection and subscription
fees, and (iii) other operating revenues consisting principally of charges and
fees from leased lines, public phones, detailed billing and other customer
services, including revenues from the sale and lease of telephone equipment.
Measured Service. Charges for local and domestic and international long
distance measured service vary with the number of pulses generated by a call.
The number of pulses generated for a particular call depends upon the day, the
time of day, the distance covered and the duration of the call. Currently, the
Company charges either HUF 10.20 ($.035) or HUF 13.80 ($0.048) per minute for
peak local calls and HUF 3.0 ($0.011) per minute for off-peak local calls. The
TTW Ministry has traditionally adjusted such fees annually based on the
Hungarian Consumer Price Index. However, for the last several years, the
Hungarian government has been rebalancing the fees in order to give more weight
to local calls and subscription fees at the expense of the charges for domestic
long distance and international calls. For all local calls within an Operating
-16-
Area, the Company retains all of the revenues associated with the call. For
domestic long distance calls outside of an Operating Area (including those
between Operating Areas, including adjacent Operating Areas) and all
international calls, the Company has a revenue sharing arrangement with Matav
the terms of which are governed by a decree of the Prime Minister's Office.
Pursuant to this revenue sharing arrangement, the Company charges for and
collects from its customers the fees for domestic long distance and
international calls. The Company then pays these fees to Matav but retains an
interconnection fee. For domestic long distance and international calls to the
Company's customers, the Company receives an interconnection fee. Mobile
telephone calls to customers in the Operating Areas and calls from customers in
the Operating Areas to mobile phones are included in long-distance service
revenues shared with Matav. Since 1998 the TTW Ministry and now the Prime
Minister's Office have taken gradual steps to regulate the interconnection fees
in accordance with internationally accepted benchmarks with the goal of creating
a cost-based interconnection fee regime. See "- Regulation - Rate Setting and
Revenue Sharing."
Subscription and Connection Fees. The Company collects a monthly
subscription fee from its customers. The basic monthly fee is HUF 3,000
($10.54). The company also offers some of its low usage customers (residential
customers) a reduced subscription fee of either HUF 1,700 ($5.97) or HUF 1,100
($3.86). For such reduced monthly subscription rates, any such customer pays
their regular monthly measured service fee plus an additional charge of either
.24 times their monthly measured service fee (in the case of HUF 1,700 monthly
subscription fee customers) or .9 times their monthly measured service fee (in
the case of HUF 1,100 monthly subscription fee customers). See "- Regulation -
Rate Setting and Revenue Sharing."
The Company charges its customers connection fees when they are added
to the Company's network. The Company may collect the full connection fee
provided that the customer is connected within 30 days; otherwise, the Company
may only collect a portion of the connection fee and must connect the subscriber
within one year. Upon connection, the Company may collect the remaining portion
of the fee. Connection fees are recognized as income over the expected customer
life (seven years) from the date that the connection is made. Currently,
connection fees are HUF 30,000 ($105.36) for residential customers and HUF
80,000 ($280.97) for business and other institutional subscribers (including
government institutions), which are the maximum allowable fees, pursuant to a
decree of the Prime Minister's Office. Customers requesting additional access
lines are charged an additional connection fee per line.
Other Operating Revenue. The Company supplies private line service
(point-to-point and point-to-multi-point) primarily to businesses. As of
December 31, 2000, approximately 3,367 leased lines were in service. In
addition, as of December 31, 2000, the Company had 1,922 public pay phones in
the Operating Areas in accordance with the terms of the Concession Contracts.
The Company generates additional revenues from the provision of value-added
services, including ISDN, voice mail, call waiting, call forwarding, and
three-way calling, as well as through the sale and leasing of telephone
equipment.
-17-
Pricing
Maximum pricing levels have historically been set by the TTW Ministry
(now by the Prime Minister's Office) and such rate increases have tracked
inflation, as measured by either the Hungarian Producer Price Index ("PPI") or
the Hungarian Consumer Price Index ("CPI"). In 1997, the TTW Ministry set forth
a new regulatory framework for regulating annual increases in the fees for (a)
local calls, (b) domestic long distance and international calls and (c)
subscription fees, which included a rebalancing formula, which provides for
greater increases in charges for subscription fees and local calls than in
domestic long distance and international calls. See also "- Regulation - Rate
Setting and Revenue Sharing." The Company's customers are on a one-month billing
cycle. For domestic long distance and international calls, the Company is
required to charge the same tariffs as Matav. For local calls, the Company may
choose to increase its rates up to the permitted amount or charge a lower rate.
Measured service rate increases are effected by either increasing charges per
pulse or reducing the time interval between pulses, depending on the time of day
and other factors. In addition, the Company charges additional fees for services
such as data transmission, voice mail, call waiting and call transfer in all of
its Operating Areas. The fees charged for these services are not subject to
regulation.
The Company allows its subscribers to pay connection fees on various
installment basis plans and encourages customers to lease their telephones. The
Company believes that to date the various installment plans have resulted in an
increase in the number of subscribers in the Operating Areas.
The Company currently purchases telephone sets in bulk from a variety
of manufacturers. Customers can choose to buy the phone or lease the phone and
pay a monthly fee of HUF 220 ($0.77). Although there is no governmental
regulation relating to lease rates, the Company adjusts such rates annually
according to the Hungarian PPI. Approximately 50% of the Company's subscribers
as of December 31, 2000 leased their phones from the Company.
Network Design, Construction and Performance
The Company has constructed a versatile modern communications network
which substantially replaced the antiquated system purchased from Matav. This
new system provides many of the technologically advanced services currently
available in the United States and Western Europe. The Company's networks
maintain the North American standard, or "P01", grade of service. The P01
standard means that one call out of 100 will be blocked in the busiest hour of
the busiest season. The Company believes that its ability to meet the
telecommunications requirements of its customers through a combination of
conventional fiber optic and wireless local loop technology affords it
significant flexibility with respect to network development and network capital
expenditures. The Company has replaced all manually operated local battery and
common battery cord type switchboards purchased from Matav while retaining
certain analog switching systems. The Company upgraded such analog switching
systems allowing such systems to mimic many of the features available in modern
digital switching systems with a minimal investment.
Conventional Network Design
In developing its networks, the Company has implemented service quality
and redundancy objectives on par with Western European and North American
digital network standards. Certain of the networks constructed are based on
digital hosts and remotes with fiber optic rings and copper feeder and
distribution. Such a distribution system is the conventional system used in the
United States and Western Europe. Telecommunications services are transmitted to
the home through twisted pair copper wire telephone cable.
-18-
The Company's conventional networks have been designed to employ an
open architecture, generally using Synchronous Digital Hierarchy ("SDH")
technology for system resilience. The Company's networks are designed to provide
voice and high speed data services. The Company believes that the flexible
design of the conventional networks it has constructed allows it to readily
implement new technologies and provide enhanced or new services. The Company's
switches in its conventional networks allow it to connect to networks operated
by other LTOs or by Matav in order to route voice and data transmissions between
subscribers.
Wireless Network Design
In certain portions of the Operating Areas, the Company is deploying
wireless network technology based upon the Digital Enhanced Cordless
Telecommunications ("DECT") system which interfaces radio technology to
fiber-optic, digital microwave or fixed copper networks. The use of DECT
technology generally reduces the time and expense of installation and securing
rights of way. In a conventional network build, significant investment must be
made in order to offer service to a large proportion of potential customers
whether or not they become actual customers. By contrast, the use of the DECT
system in a network build-out provides for capital investment proportional to
the number of customers actually connected because the radio links and other
required equipment are installed only for those households choosing to take the
service and are installed only at the time service is requested.
In many areas in which the Company is utilizing a wireless network
design, the Company is deploying a fiber optic cable to the node in the same
fashion as in a conventional network build-out. At each newly constructed node,
the Company has constructed a radio base station ("RBS"), rather than switching
to twisted pair copper wire distribution to the home. Each RBS has the capacity
to provide service to between 200 and 600 customers. As additional customers are
brought onto the network, the Company will install a transceiver unit at the
subscriber's premises. Such transceiver's operating software is digitally
encrypted so that it will operate only with its supporting RBS. A conventional
telephone jack is then installed in the subscriber's household near an
electrical outlet which is used to power the transceiver unit. The subscriber
then uses a conventional phone to make outgoing and receive incoming calls.
The DECT-based wireless local loop system provides the same grade of
service as a conventional telephone network. In addition, a DECT-based network
is able to provide many of the same services as a conventional copper network
including voice mail, call forwarding and call barring.
Network Administration
The Company actively monitors the switching centers and all critical
network operational parameters in each Operating Area. As digital features are
introduced into their respective networks, the network technicians have the
ability to monitor the networks and evaluate and respond accordingly. The
Company will also be able to analyze the performance data generated by these
systems in order to make the operating adjustments or capital expenditures
necessary to enhance individual network operations.
-19-
The Operating Companies
The following is a brief description of each of the Operating
Companies:
Hungarotel
The Company holds a 99.0% interest in Hungarotel. The Hungarotel
Operating Area encompasses the southern portion of Bekes County, which borders
Romania. The Hungarotel Operating Area is comprised of 75 municipalities and has
a population of approximately 391,700 with an estimated 166,900 residences and
23,000 business and other potential subscribers (including government
institutions). Bekes is the most intensively cultivated agrarian region in
Hungary and produces a substantial portion of Hungary's total wheat production.
Industry, generally related to food processing, glass and textile production, is
also a strong employer in the region. Foreign investors in the Operating Area
include Owens Illinois of the United States and a number of European
manufacturers. The region is also a center for natural gas exploration and
production. As of December 31, 2000, Hungarotel had 116,300 access lines
connected to its network. The Hungarotel network utilizes a combination of a
conventional build, fiber optic and wireless local loop technology.
KNC
The Company holds nearly a 100% interest in KNC. The KNC Operating Area
is comprised of 74 municipalities in the eastern portion of Nograd County, which
borders Slovakia. The KNC Operating Area has a population of approximately
149,000, with an estimated 66,400 residences and 8,300 business and other
potential subscribers (including government institutions). The principal
economic activities in the KNC Operating Area include light manufacturing,
tourism, some coal mining and agriculture. Foreign investors in the region
include the dairy producer, Avonmore, and the Japanese company, Paramount Glass.
The Operating Area's proximity to Budapest, 1.5 hours by car, and its many
cultural attractions makes it a desirable weekend and tourist destination. As of
December 31, 2000, KNC had 47,700 access lines connected to its network. The KNC
network utilizes a combination of a conventional build, fiber optic and wireless
local loop technology.
Papatel
The Company holds nearly a 100% interest in Papatel. The Operating Area
is composed of 51 municipalities located in the northern portion of Veszprem
County and is contiguous with the Raba-Com Operating Area. The population of the
Papatel Operating Area is approximately 63,200 with an estimated 24,100
residences and 3,800 business and other potential subscribers (including
government institutions). The region is relatively underdeveloped economically
with the principal economic activities centering around light industry,
appliance manufacturing, agriculture and forest products. Significant foreign
investors in the Operating Area include ATAG, the Dutch appliance maker, and
Electricite de France. As of December 31, 2000, Papatel had 20,200 access lines
connected to its network. The Papatel network utilizes a combination of a
conventional build, fiber optic and wireless local loop technology.
-20-
Raba-Com
The Company holds a 99.9% interest in Raba-Com. The Raba-Com Operating
Area is comprised of 63 municipalities in Vas County, which borders Austria and
Slovenia. The Raba-Com Operating Area has a population of approximately 63,900,
with an estimated 25,900 residences and 3,300 business and other institutional
subscribers (including government institutions). The principal economic
activities in the Raba-Com Operating Area include heavy manufacturing,
agriculture and tourism. Significant employers include: Linde (a German natural
gas distributor): Philips (a Dutch-owned electronics manufacturer); EcoPlast (a
plastics producer); and Saga (a British-owned poultry processor). As of December
31, 2000, Raba-Com had 22,700 access lines connected to its network. The
Raba-Com network utilizes a combination of a conventional build and fiber optic
infrastructure.
Regulation
In November 1992, the Hungarian Parliament enacted the Hungarian
Telecommunications Act of 1992 (the "Telecom Act") which took effect in 1993.
The Hungarian Telecom Act provided for, among other things, the establishment of
the conditions under which individuals and companies (including Matav, foreign
persons and foreign owned companies) could bid for concessions to build, own and
operate local telecommunications networks in designated service areas. The
Hungarian Telecom Act also gave the TTW Ministry the authority to regulate the
industry, including the setting of local, domestic long distance and
international rates, the sharing of revenues between the LTOs and Matav, the
accrediting of equipment vendors and the setting of standards in respect of
network development and services offered. The oversight of the
telecommunications industry has been transferred to the Prime Minister's Office.
See "- Overview of Hungarian Telecommunications Industry - The Hungarian
Telecommunications Industry Today." In order to meet these obligations, the
Hungarian Telecom Act created a professional supervisory body, the
Communications Authority. Its tasks include supervising the progress of the LTOs
with respect to build-out scheduling, equipment purchases and the quality of
network construction. The Telecom Act will be replaced by new legislation on
telecommunications, which is currently being drafted by the Hungarian
government. Such new legislation may substantially change the terms upon which
the Company provides its services. At this time, the Company can not predict
with certainty what the final terms of any new legislation will be or how such
legislation will affect the Company's operations. See "- Overview of Hungarian
Telecommunications Industry - The Hungarian Telecommunications Industry Today."
Concession Contracts
Pursuant to the Telecom Act and in accordance with the Concession Act
of 1991, in connection with the award of a concession, each of the LTOs entered
into a Concession Contract with the TTW Ministry governing the rights and
obligations of the LTO with respect to each concession. Topics addressed by
individual concession contracts include the royalties to be paid, guidelines
concerning LTO capital structure, build-out milestones, employment guidelines
and the level of required contributions to meet social and educational
requirements. For example, the Concession Contracts stipulate that an LTO may
not change its capital structure by more than 10% without the express written
consent of the TTW Ministry (now the Prime Minister's Office) and that former
Matav employees generally must be retained for the first five to eight years of
operation. The Company may, however, enter into termination agreements with its
employees.
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Corporate Governance. The amended Concession Contracts for Hungarotel
and Papatel provide that two out of every five members of their Boards of
Directors and one-half of the members of their Supervisory Boards be Hungarian
citizens.
Exclusivity. The Concession Contracts provide that each Operating
Company has the exclusive right to provide non-cellular local voice telephone
services for eight years. Commencing in 2002, the Hungarian government will have
the right to grant additional concessions for non-cellular local voice telephone
services.
Milestones/Network Construction. Each of the Concession Contracts
prescribe certain build-out obligations ("milestones") that require each
Operating Company to install a specified number of access lines within
prescribed time periods. The failure to meet required construction milestones
may result in the levying of fines by the Prime Minister's Office. Such fines
are computed based on a contractual formula and may be substantial. The Company
believes that each of the Operating Companies has met their build-out
requirements to date in all material respects.
Royalties. Each of the LTOs is required by the terms of its individual
concession contract to pay annual royalties equal to a percentage of net revenue
from basic telephone services. Net revenue for this purpose is generally defined
as gross revenue from basic telephone services less the fees paid to Matav. The
royalty percentage may also differ by region. For example, the Operating
Companies must pay royalties in the following percentage amounts: KNC 0.1%;
Raba-Com 1.5%; Hungarotel (Bekescsaba) 2.3%; Hungarotel (Oroshaza) 0.3%; and
Papatel 2.3%. These amounts are paid annually, in arrears.
Social and Educational Contributions. In addition to the royalties
described above, Concession Contracts may also call for social and educational
contributions based on revenues of the Operating Company, excluding VAT. The
Concession Contracts for KNC and Raba-Com require them to contribute 1.5% and
1.0% of such revenues, respectively, to support social and educational projects
in their Operating Areas.
Renewal. Each Concession Contract provides for a 25-year term with the
right to submit a proposal, within 18 months prior to the expiration of the
Concession Contract to apply for an additional 12-1/2 years which the Prime
Minister's Office may grant if it approves the Operating Company's proposal,
subject to consultation with local authorities and professional and consumer
protection bodies. Such extension would involve the payment of an additional
concession fee to be set prior to the submission of the proposal. In the event
the proposal is rejected or is not timely filed, the concession would be
auctioned by the appropriate Hungarian regulatory authority, although the
existing Operating Company would have priority in the event the Operating
Company's proposal provides for substantially the same terms and conditions as
that of another bidder.
Termination upon Lack of Performance. If an LTO is unable to comply
with its Concession Contracts, the Prime Minister's Office has the right to
abrogate the Concession Contract. In such an instance, the Prime Minister's
Office has authority to determine alternative provisions for such service, which
may include the sale of the LTO's telecommunications assets to an alternative
provider. The Company believes that it has demonstrated substantial performance
to date under its Concession Contracts and that its relations with the Prime
Minister's Office are good and, therefore, the chance of any termination of any
Concession Contract is remote.
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Dispute Resolution. Any disputes arising with respect to the
interpretation of a Concession Contract will be adjudicated by a Hungarian
court.
Hungarian Equity Ownership Requirements.
The TTW Ministry stipulated in the Concession Contracts for Hungarotel
and Papatel, as amended on June 3, 1996, that each of the Operating Companies
must meet certain Hungarian ownership requirements so that by the seventh year
anniversary of such amendments (June 3, 2003) of their Concession Contracts,
Hungarian ownership must consist of 25% plus one share of the relevant Operating
Company. For the first three months after assuming operations of an Operating
Area from Matav, no Hungarian ownership was required. For the seven-year period
ending June 3, 2003, Hungarian ownership must be at least 10%, except that
during such period, such ownership may be reduced to as low as 1% for a period
of up to two years. During such seven-year period, while the Hungarian ownership
block is required to be at least 10%, such Hungarian owners of a 10% equity
holding in an Operating Company must have voting power of at least 25% plus one
share, thus providing Hungarian owners the right to block certain transactions
which, under Hungarian corporate law, require a supermajority (75%) of
stockholders voting on the matter, such as mergers and consolidations, increases
in share capital and winding-up.
For these purposes, Hungarian ownership of shares means shares owned by
Hungarian citizens. Shares owned by a corporation are considered Hungarian owned
only in proportion to the Hungarian ownership of such corporation. The LTOs can
also fulfill the 25% plus one share Hungarian ownership requirement by listing
such shares on the Budapest Stock Exchange.
The equity ownership requirements and exceptions described above are
contained in the June 1996 amended Concession Contracts for Hungarotel and
Papatel. The equity ownership requirements expressly set forth in KNC's and
Raba-Com's Concession Contracts call for a strict 25% plus one share Hungarian
ownership requirement. However, the TTW Ministry has stated, pursuant to a
letter dated September 18, 1996, that it intends that all of the Operating
Companies be treated equally with respect to such ownership requirements and,
therefore, the Company deems these Hungarian ownership requirements for Papatel
and Hungarotel applicable to KNC and Raba-Com as well.
If the Hungarian ownership does not meet the required levels, the LTO
is required to give notice to the Prime Minister's Office, which may then
require the LTO to rectify the situation within three months, or a shorter
period if it is determined that there has been a delay in the required
notification. With respect to the Company, Postabank, a Hungarian commercial
bank, owns approximately 20.1% of HTCC which is the majority owner of all of the
Operating Companies. Therefore, the TTW Ministry deemed the Company in
compliance with the current 10% ownership requirement. In the event that the
Prime Minister's Office adopts new Hungarian equity ownership requirements, the
Company will formulate plans to meet any such Hungarian equity ownership
requirements. Failure to do so, or failure to comply with the greater than 25%
Hungarian ownership requirement at the end of the seven-year period, which
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expires in 2003, might be considered a serious breach of a Concession Contract,
giving the Prime Minister's Office the right, among other things, to terminate
the Concession Contract. There can be no assurance that the Company will be able
to increase the Hungarian ownership in the Operating Companies in a manner
sufficient to comply with such requirements in the future.
The Hungarian ownership requirements would effectively give minority
Hungarian stockholders in the Operating Companies the ability to block certain
corporate transactions requiring the approval of 75% of stockholders voting on
the matter, including mergers and consolidations, increases in share capital and
winding-up. In addition, unless the Hungarian ownership requirements are
formally changed, compliance would result in a reduction in the Company's
ownership in the Operating Companies, and, consequently, the Company's share of
income, if any, or loss of the Operating Companies will be reduced
proportionately.
New regulations for the liberalized Hungarian telecommunications market
may remove the Hungarian ownership requirement, but neither the content, effect
or timing of any new regulations are known by the Company at this time.
Rate-Setting and Revenue Sharing
Pursuant to the Hungarian Act LXXXVII of 1990 on Pricing (the "Pricing
Act") and the Telecom Act, the Prime Minister's Office as successor to the TTW
Ministry in oversight of the telecommunications industry, issues, in agreement
with the Hungarian Ministry of Finance, decrees regulating the tariffs for
telecommunications services provided by the Company, Matav and the other LTOs.
In 1997 the TTW Ministry adopted Decree No. 31/1997 of the KHVM on Fees
Related to Telecommunication Services Subject to Concession (the "1997 Tariff
Decree") which regulated the Operating Companies' subscription fees, fees for
local calls, and fees collected on behalf of Matav for long distance and
international calls. The 1997 Decree also provided for a rebalancing formula,
which allowed greater increases in the charges for subscription fees and local
calls than in domestic long distance or international calls.
For 2001, in accordance with the general policies set forth in the 1997
Tariff Decree, the Prime Minister's Office adopted Decree No. 1/2001 (I.26) (the
"2001 Tariff Decree") which provides for the following changes to the
subscription fees from those charged by the Company in 2000: an 11% increase in
the subscription fee for the Company's residential customers (based on the
discounted monthly subscription fee for 2001 of HUF 1,700); and a 12% increase
in the subscription fee for the Company's business customers and residential
customers not opting for either of the discounted monthly subscription fee plans
(of which the HUF 1,700 monthly subscription fee referred to above is one). See
"- Operations - Services - Subscription and Connection Fees." For measured
service calls, the 2001 Tariff Decree provided for: no increase or a two forint
per minute decrease in off-peak local calls; a 13% increase in certain peak
local calls and no increase in certain other peak local calls; a decrease in
long distance calls of between 11% and 17%; and decreases in international calls
ranging from 3% to 22%. See "- Operations - Services - Measured Service." The
2001 Tariff Decree set a price cap for all service categories through 2001,
which provides for a rate increase based on anticipated CPI for 2001. The Prime
Minister's Office may also reduce the CPI percentage increase by an efficiency
factor in calculating the maximum allowable price increase. The intended effect
of the 2001 Tariff Decree was to provide for an overall 2001 price increase of
6% as compared to 2000 based on the anticipated inflation rate in 2001. The 2000
increase in the Hungarian CPI, which for the purposes on the Tariff Decree is
based on the twelve-month period ending October 2000, was 10.4%.
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The Prime Minister's Office also regulates the revenue sharing
arrangements between the LTOs (including the Operating Companies) and Matav with
respect to long distance and international calls. The revenue sharing
arrangements provide for the Operating Companies to retain an interconnection
fee from the fees collected from the Operating Companies' customers for long
distance and international calls and for Matav to pay the Operating Companies an
interconnection fee for domestic long distance or international calls
terminating with one of the Operating Company's customers. In 1998 the TTW
Ministry announced that it intended to start regulating the interconnection fees
based on internationally accepted benchmarks with the goal of creating a
cost-based interconnection fee regime within the parameters of European Union
standards. To that end, starting in 1999, the interconnection fees were revised
to compensate the LTOs more favorably for costs than in the prior years. For
2001, the Ministry adopted Decree 8/2001 (III.9) (the "2001 Interconnection
Decree") which provides for the Operating Companies to receive in 2001 an
average interconnection fee of HUF 12.94/minute for the initiation of mobile,
domestic long distance and international calls and an average fee of HUF
6.38/minute for the termination of mobile, domestic long distance and
international calls. Over the last year, the Company has continued to lobby the
Prime Minister's Office with regard to the implementation of a longer term
cost-oriented interconnection fee regime, which is already a requirement for
European Union members. Cost-based interconnection fees are likely to be
implemented in 2002 when Matav's exclusivity rights expire. See "-Competition."
The Prime Minister's Office regulates the subscriber connection fees
which are currently HUF 80,000 ($280.97) for business customers and HUF 30,000
($105.36) for residential customers. See "- Operations - Services - Subscription
and Connection Fees."
Hungarian Taxation
Corporate Income Tax. The operations of the Company's Hungarian
subsidiaries, including the Operating Companies, are subject to Hungarian
corporate income tax. Generally, Hungarian corporations are subject to tax at an
annual rate of 18.0%. Companies which fulfilled certain criteria were entitled
to a 100.0% reduction in income taxes for the five year period ending December
31, 1998 and a 60.0% reduction in income taxes for the subsequent five year
period ending December 31, 2003, provided certain criteria continue to be met.
See Note 1(j) of Notes to Consolidated Financial Statements. The Operating
Companies are currently eligible for such tax treatment. However, the corporate
income tax is reviewed, and subject to change, annually. Any tax increase or
change in the tax exempt status of the Operating Companies could have a material
adverse effect on the Company.
Value Added Tax ("VAT"). The Hungarian VAT system is virtually
identical to the one used in most European countries. VAT is a consumption tax
which is fully borne by the final consumer of a product or service. The current
rates of VAT in Hungary vary between 0.0% and 25.0%, depending on the type of
product or service.
Social Insurance Contributions. The level of contributions for social
insurance in Hungary is one of the highest in Europe. In 2000 employers were
required to pay the state 33% of an employee's gross salary as a social security
contribution and 3.0% of an employee's gross salary as the employer's
contribution to the unemployment fund. In addition, the Company must pay an
additional HUF 3,900 ($13.70) per month for each employee for health insurance.
The Company's share of pension, unemployment, social security and health
insurance payments are reflected in operating and maintenance expenses.
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Competition
The Concession Contracts provide for an eight-year period of
exclusivity in the provision of non-cellular local voice telephone services,
which ends in 2002, while the initial 25-year terms of the Concession Contracts
are scheduled to expire in 2019. See also "- Regulation - Concession Contracts".
Other telecommunications service providers presently are permitted to apply for
licenses to provide non-exclusive services (e.g., data transmission and voice
mail) throughout Hungary, including the Operating Areas. In addition, beginning
in 2002, other competitors may choose to enter the non-cellular local voice
telephone services market, but the terms and conditions upon which such market
entry will be effected are today unclear.
In 1998, the TTW Ministry awarded Pan-Tel the license to provide
non-exclusive telecommunications services such as data transmission and voice
mail. The current shareholders of Pan-Tel include MAV Rt. (the Hungarian railway
company, "MAV"), PT Investment Holding Company and KPN NV (the Dutch telephone
company). Pan-Tel has substantially built a nationwide fiber optic backbone
network along the rights-of-way of MAV. Pan-Tel is currently providing business
communications services such as digital data, fax and video transmission using
Internet Protocol ("IP") data transmission technology, primarily to large
customers. Pan-Tel focused on the large, multinational companies and government
organizations as its initial target market. In 1999, the Hungarian government
granted Pan-Tel two separate licenses to provide IP-based voice services to
residential and business customers. The Hungarian government determined that
such service did not violate Matav's monopolistic voice concession since
voice-over IP is considered "data transfer". Matav, some of the other LTOs
(including the Company), and certain newer entrants into the marketplace have
initiated voice-over IP services. Pan-Tel also owns a majority stake in one of
Hungary's largest Internet Service Providers.
The Company faces competition from the four Hungarian cellular
providers: Westel 450; Westel 900; Pannon; and Vodafone. Historically, the
airtime and monthly fees charged by the cellular operators are generally more
than the fees for comparable services charged by the Company. The cellular
telephone providers are, however, currently deploying various discounted
pre-paid plans, which make pricing comparisons difficult.
Other Hungarian telecommunications providers, and potential providers,
include the following entities which have either entered, or plan to enter, the
telecommunications marketplace, particularly the business marketplace: Novacom
Telecommunications Kft., which is owned by affiliates of RWE Telliance AG, a
German telecommunications company, EnBW AG, a German electricity provider and
Elmu Rt., the Hungarian electricity distributor ("Elmu"), is expanding the fiber
optic infrastructure of Elmu; GTS Hungary Kft. ("GTS") which provides data
transmission services through a nationwide microwave network and a satellite
based network (GTS also owns one of the leading Hungarian ISPs); Antenna
Hungaria, the national broadcaster which is still controlled by the state;
Global One Telecommunications Kft., which provides IP-based data transmission
services; Ireland-based eTel Hungary, which is targeting the corporate market;
BT Hungaria, an affiliate of British Telecom; Sweden's Telia AB; the Hungarian
oil and gas company MOL Rt; Germany's Infigate GmbH; and U.S.-based UUNet, an
affiliate of MCI WORLDCOM.
The Hungarian cable television market is highly fragmented with over
150 cable television providers. The Hungarian cable television industry is
undergoing consolidation. An affiliate of United Pan-Europe Communications NV
("UPC") is the largest cable television operator in Hungary and owns a LTO with
one concession area. UPC owners include UnitedGlobalCom Inc., the global
television operator of Denver, Colorado (51%), and Microsoft Corp. (8%) of
Redmond, Washington.
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The Hungarian government is in the process of revising its laws
regarding the regulation of the telecommunications market in Hungary in
accordance with European Union standards. The regulation of telephony, cable
television and the Internet would be affected. The Company does not expect that
the exclusivity period of its concession rights, which expire in 2002, will be
affected. However, the outcome of any future telecommunications laws can not be
predicted with any certainty at this point in time.
Hungary's application for membership in the European Union (the "EU")
was accepted. Hungary is now in the process of negotiating the terms of its
accession into the EU. The EU has adopted numerous directives providing for an
open telecommunications market among its member nations. Hungary is not expected
to become a member of the European Union until 2003 at the earliest by which
time the exclusivity rights of the LTOs and Matav will have expired.
Employees
The Company had a total of approximately 645 employees, including 5
expatriates, as of March 2001. The Company considers its relations with its
employees to be satisfactory.
Item 2. Properties
The Company leases its office space in Budapest at a current monthly
rental of DM 30,750 (approximately $14,000 at current exchange rates). The
Company leases 800 square feet of office space at 32 Center Street, Darien, CT
at a monthly rental of $1,600. The Company believes that its leased and owned
office space is adequate for its present needs but is currently reviewing its
alternatives as to its future needs.
In addition, each Operating Company owns or leases the following office
or customer service space in its respective Operating Area: KNC owns or leases
57,000 square feet of total space; Raba-Com owns or leases 15,000 square feet of
total space; Hungarotel owns or leases 119,594 square feet of total space; and
Papatel owns or leases 18,000 square feet of total space. The Company has
secured all the necessary rights-of-way with respect to its telecommunications
networks.
Item 3. Legal Proceedings
Hungarotel is a defendant in a lawsuit filed by Dialcont Kft.
("Dialcont") on March 28, 1996 alleging a breach of contract for services
allegedly provided by Dialcont during 1994 and 1995. Dialcont claimed HUF 222
million ($779,700). The Metropolitan Court in Budapest awarded Dialcont HUF 77.7
million ($273,000) plus interest and costs of HUF 135.5 million ($476,000) in a
judgement issued in October 2000. Hungarotel has filed an appeal to the
Hungarian Supreme Court.
A provision in Hungarotel's Concession Contracts provides for a payment
by Hungarotel of a sum equal to ten times the local business tax. At the time of
the inception of the Concession Contracts, the local business tax was 0%. When
this increased in one of the regions within the Hungarotel Operating Area in
1996, one municipality claimed that Hungarotel was liable to pay the local
business tax at ten times the prevailing rate. However, the municipality has not
been able to enforce this undertaking because it is not a party to the
Concession Contracts. The municipality has taken this matter up with both the
Communications Authority and the TTW Ministry. In May 1999, the then Hungarian
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Deputy State Secretary gave a verbal confirmation that the TTW Ministry would
not enforce the undertaking against Hungarotel. Subsequently, in November 1999,
the TTW Ministry sent a letter to the municipality informing it that the
disputed business tax provision was not enforceable because the indefinite
nature of the undertaking constituted an unjustified burden on Hungarotel and
that the undertaking was not in compliance with the laws on Local Business Tax.
The most recent development in this matter is a letter from the municipality
dated January 18, 2001, demanding the sum of HUF 648.0 million ($2.3 million).
The letter states that, in the absence of payment, the municipality will take
the matter up with the Prime Minister's Office, the Communications Authority and
others. Hungarotel intends to defend this action and believes that such
provision is unenforceable.
Raba-Com is a defendant in a lawsuit filed by an individual residential
customer in Hungary on December 4, 1997. The plaintiff sought a refund of a
minimal amount alleging that his home was connected to Raba-Com's network in an
untimely fashion. The court ruled against Raba-Com and Raba-Com has appealed to
the Hungarian Supreme Court. Should, however, Raba-Com lose its appeal at the
Supreme Court level, the Company could be subject to additional claims from
other residential customers for refunds. The Company believes it has meritorious
defenses against this claim and any others that may be filed regarding this
matter.
A portion of KNC's network used wireless technology to certain homes
instead of a fixed connection. One village in KNC's Operating Area filed a
lawsuit demanding that KNC install fixed lines to all of the homes in the
village. It is KNC's position that it is permissible to use wireless technology
as it deems appropriate. KNC lost in the lower court but won on appeal. The
plaintiff village has until April 27, 2001 to file a request for review with the
Hungarian Supreme Court. The village would have to show that the lower court
erred in the application of the law. The Company believes that the plaintiff has
no valid grounds for a review and believes that KNC would prevail on the merits
of its case.
During 1996 and 1997, the Company entered into several construction
contracts with a Hungarian contractor which totaled $59.0 million in the
aggregate, $47.5 of which was financed by a contractor financing facility. The
contractor financed the facility through Postabank. The Company and the
contractor have a disagreement with respect to several issues relating to the
quality and quantity of the work done by the contractor. The Company has
rejected invoices from the contractor in the amount of approximately HUF 700
million (approximately $2.5 million). In order to resolve these issues, the
Company purchased from Postabank some of Postabank's receivables owed by the
contractor to Postabank (approximately $14 million) with respect to the
contractor financing facility. The Company also purchased from Postabank some of
the obligations which the Company owed to the contractor under the contractor
financing facility which were assumed by Postabank (approximately $25 million).
The Company then set off its remaining uncontested liabilities owed to the
contractor (approximately $3.2 million) against the amounts owed to the Company
by the contractor (approximately $14 million). The contractor is now seeking
payment under separate invoices in the amount of approximately $24 million for
work which the Company is disputing because of quality and quantity issues. The
Company still has contractual claims against the contractor of approximately $31
million attributable to deficiencies in the work performed by the contractor. In
1999, Reorg Rt., a subsidiary of Postabank ("Reorg"), responsible for collecting
Postabank's bad debts initiated debt collection proceedings against the
contractor. In June 2000 Reorg claimed the benefit of certain invoices in the
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amount of HUF 455 million ($1.6 million) that the contractor had issued to
Hungarotel, asserting that the contractor had assigned those invoices to it as
security in the debt collection proceedings. Hungarotel rejected Reorg's claim
on the grounds that the contractor had no right to assign the invoices and that,
in any event, Hungarotel has a substantive defense and a counterclaim on the
merits to the underlying claims on the invoices. A court hearing on Reorg's
claim against Hungarotel will be held in April 2001. The Company is reviewing
its options with respect to such dispute. At this time the outcome of such
dispute cannot be predicted with certainty. The Company believes that it will
prevail on the merits such that it will not be responsible for the full amount
of the contractor's claims. There can, however, be no assurances as to the final
outcome or course of action of such dispute.
The Company is involved in various other legal actions arising in the
ordinary course of business. The Company is contesting these legal actions in
addition to the suits noted above; however, the outcome of individual matters is
not predictable with assurance. Although the ultimate resolution of these
actions (including the actions discussed above) is not presently determinable,
the Company believes that any liability resulting from the current pending legal
actions involving the Company, in excess of amounts provided therefor, will not
have a material effect on the Company's consolidated financial position, results
of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock trades on the American Stock Exchange (the
"Amex") under the symbol "HTC." Trading of the Common Stock on the Amex
commenced on December 20, 1995. From December 8, 1994 through December 19, 1995,
the Common Stock was quoted on the Nasdaq National Market and from December 28,
1992 through December 7, 1994 the Common Stock was quoted on the Nasdaq
Small-Cap Market. In 1998, NASD, parent of The Nasdaq Stock Market, merged with
the American Stock Exchange. Subsequent to the merger, The Nasdaq-Amex Market
Group was created as a holding company under which both The Nasdaq Stock Market
and the American Stock Exchange function as independent subsidiaries, with
separate listed companies.
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The following table sets forth the high and low sale prices for the
Common Stock as reported by the Amex for each quarter in 1999 and 2000.
High Low
Quarter Ended:
-------------
1999
March 31, 1999 . . . . . . . . . $ 5-1/4 $ 3-1/4
June 30, 1999. . . . . . . . . . 7 3-3/4
September 30, 1999 . . . . . . . 6-1/2 4-9/16
December 31, 1999. . . . . . . . 7-1/4 4-13/16
2000
March 31, 2000 . . . . . . . . . $10-1/2 $ 6-7/8
June 30, 2000. . . . . . . . . . 8-5/8 5-1/2
September 30, 2000 . . . . . . . 7-3/8 4-3/4
December 31, 2000. . . . . . . . 6-3/8 4-1/8
On March 27, 2001, the closing sale price for the Common Stock on the
Amex was $7.40.
Stockholders
As of March 28, 2001, the Company had 12,103,180 shares of Common Stock
outstanding held by 104 holders of record. The Company believes that it has
approximately 1,300 beneficial owners who hold their shares in street names.
The Company will furnish, without charge, on the written request of any
stockholder, a copy of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, including financial statements filed therewith.
Stockholders wishing a copy may send their request to the Company at 32 Center
Street, Darien, CT 06820.
Dividend Policy
In 1999, the Company issued 30,000 shares of its Series A Cumulative
Convertible Preferred Stock with a liquidation value of $70 per share to
Citizens. Any holder of such Preferred Shares is entitled to receive cumulative
cash dividends in arrears at the annual rate of 5%, compounded annually on the
liquidation value. As of December 31, 2000, the total arrearage on the Preferred
Shares was $175,000. Under Delaware law, HTCC is restricted from paying
dividends at this time. Therefore, the Company does not anticipate paying any
dividend on its preferred stock until such time as it is legally permissible.
Furthermore, it is the present policy of the Company to retain earnings, if any,
to finance the development and growth of its businesses. Accordingly, the Board
of Directors does not anticipate that cash dividends will be paid on its common
stock until earnings of the Company warrant such dividends, and there can be no
assurance that the Company can achieve such earnings.
At present, HTCC's only source of revenues is payments, including
repayment of any intercompany loans, payments under its management service
agreements and dividends, if any, from the Operating Companies. The Operating
Companies' ability to pay dividends or make other capital distributions to the
Company is governed by Hungarian law, and is significantly restricted by certain
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obligations of the Operating Companies. The Operating Companies are the
borrowers under the Debt Agreement which provides that the Operating Companies
can only make distributions to HTCC for limited purposes which does not include
dividends. See Item 1 "Business - Revision of Capital Structure - The April 2000
Syndicated Credit Facility."
Recent Sales of Unregistered Securities
On September 1, 1998, the Company issued 18,469 shares of Common Stock
to Alcatel Austria AG as further and final consideration for the purchase by the
Company in 1995 of controlling equity interests in Hungarotel and Papatel.
On September 30, 1998, the Company issued 100,000 shares of Common
Stock to Citizens as part of a settlement of the termination of a management
services agreement.
On May 12, 1999 the Company entered into a series of transactions with
Citizens, the Danish Fund, Postabank and Tele Danmark pursuant to which the
Company revised its capital structure. As part of such transactions, the Company
issued: 1,300,000 shares of Common Stock to Citizens; 1,285,714 shares of Common
Stock to the Danish Fund; 2,428,572 shares of Common Stock to Postabank; and
1,571,429 shares of Common Stock to Tele Danmark. The Company also issued 30,000
shares of its Series A Cumulative Convertible Preferred Stock to Citizens. The
30,000 shares of preferred stock are convertible by Citizens into 300,000 shares
of Common Stock. The shares of preferred stock are redeemable by the Company at
the liquidation value of $70 per share. The Company also issued warrants to
Postabank to purchase 2,500,000 shares of Common Stock at $10 per share. The
exercise period is from January 1, 2004 through March 31, 2007. For a more
detailed description of these agreements, see Item 1 "Business - Revision of
Capital Structure" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
On December 21, 2000, the Company issued 72,000 shares of Common Stock
to the International Finance Corporation, a member of the World Bank Group (the
"IFC"). The Company issued the shares in exchange for the IFC's 20% equity
interest in Papatel.
All of these unregistered issuances were in reliance upon an exemption
from the registration provisions of the Securities Act of 1933 (the "Securities
Act") set forth in Section 4(2) thereof relative to transactions by an issuer
not involving any public offering. Each of the purchasers was informed that the
transactions were being effected without registration under the Securities Act
and that the shares acquired could not be resold without registration under the
Securities Act unless the sale is effected pursuant to an exemption from the
registration requirements of the Securities Act.
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Item 6. Selected Financial Data
HUNGARIAN TELEPHONE AND CABLE CORP.
AND SUBSIDIARIES
Selected Financial and Operating Data
(Dollars in Thousands, Except Per Share Amounts)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
For the Year
Operating revenues, net $42,974 $ 45,438 $ 38,707 $26,522* $17,126*
Operating income (loss) $16,469 $ 16,189 $ (6,059) $ (1,263) $(20,553)
Operating income (loss) per
common share $1.37 $1.68 ($1.14) ($0.28) ($4.93)
Loss before extraordinary items $(5,331) $(17,773) $(50,612) $(36,236) $(54,769)
Net income (loss) $(5,331) $ 3,172 $(50,612) $(36,236) $(54,769)
Net income (loss) per common share $(0.45) $ 0.33 $ (9.53) $(7.97) $(13.14)
At Year-End
Total assets $147,318 $154,683 $177,067 $186,485 $156,615
Long-term debt, excluding
current installments $124,814 $139,661 $202,881 $194,537 $148,472
Total stockholders' (deficiency)
equity $(10,878) $(6,946) $(89,037) $(41,837) $(23,790)
* Revenues are adjusted to reflect the requirements of the SEC's Staff
Accounting Bulletin 101 ("SAB 101") which requires the deferral of
installation revenue and related installment costs. These adjustments did
not affect the previously reported net losses; such adjustments resulted in a
reduction of previously reported revenues and costs of $11,369,000 and
3,784,000 in 1997 and 1996, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company is engaged primarily in the provision of telecommunications
services through its operating subsidiaries, KNC, Raba-Com, Papatel and
Hungarotel. The Company earns substantially all of its telecommunications
revenue from measured service fees, monthly line rental fees, connection fees,
public pay telephone services and ancillary services (including charges for
additional services purchased at the customer's discretion).
During 1996 and 1997 the Company embarked on a significant network
development program which met its substantial demand backlog, increased the
number of basic telephone access lines in service and modernized existing
facilities. The development and installation of the network in each of the
Company's Operating Areas required significant capital expenditures.
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Now that the Company's networks are substantially built-out, the
ability of the Company to generate sufficient revenues to satisfy cash
requirements and become profitable will depend upon a number of factors,
including the Company's ability to attract additional customers and increased
revenues per customer. These factors are expected to be primarily influenced by
the success of the Company's operating and marketing strategies as well as
market acceptance of telecommunications services in the Company's Operating
Areas. In addition, the Company's profitability may be affected by changes in
the Company's regulatory environment and other factors that are beyond the
Company's control. The success of the Company's strategy is dependent upon its
ability to increase revenues through increased usage and the addition of new
subscribers.
The Company funded its construction costs and working capital needs
over several years primarily through Credit Facilities with Postabank and a
$47.5 million contractor financing facility. On March 30, 1999, and May 12,
1999, the Company entered into a series of transactions (see Notes 4, 5 and 9 of
Notes to Consolidated Financial Statements) which restructured the Company's
debt and capital structure. As the final step in the Company's debt and equity
restructuring, on April 11, 2000, the Company entered into a EUR 130 million
Senior Secured Debt Facility with a European banking syndicate. See "- Liquidity
and Capital Resources."
To date, the Company's activities have involved the acquisition of the
concessions and telecommunications networks from Matav and the subsequent
design, development and construction of the modern telecommunications
infrastructure that the Company now has in service. The Company paid the
Ministry $11.5 million (at historical exchange rates) for its concessions, spent
approximately $23.2 million (at historical exchange rates) to acquire the
existing telecommunications assets in its Operating Areas from Matav, and spent
$190 million through December 31, 2000 (at historical exchange rates) on the
development and construction of its telecommunications infrastructure. Since
commencing the provision of telecommunications services in the first quarter of
1995, the Company's network construction and expansion program has added 145,500
access lines through December 31, 2000 to the 61,400 access lines acquired
directly from Matav. As a result, the Company had 206,900 access lines in
operation at year end 2000.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
The Company's Hungarian subsidiaries' functional currency is the
Hungarian forint. The average Hungarian forint/U.S. dollar exchange rate for the
year ended December 31, 2000 was 281.10, as compared to an average Hungarian
forint/U.S. dollar exchange rate for the year ended December 31, 1999 of 238.08.
This devaluation of the Hungarian forint against the U.S. dollar reflects the
strengthening of the U.S. dollar against the Hungarian forint during the period.
When comparing the year ended December 31, 2000 to the year ended December 31,
1999, it should be noted that all U.S. dollar reported amounts have been
affected by this 18% devaluation in the Hungarian subsidiaries' functional
currency.
Net Revenues
Year ended
(dollars in millions) 2000 1999
Measured service revenues $ 30.7 $ 35.2
Subscription revenues 13.1 10.9
Net interconnect charges (6.5) (7.0)
----- -----
Net measured service and subscription revenues 37.3 39.1
Connection fees 2.1 1.8
Other operating revenues, net 3.6 4.5
----- -----
Telephone Service Revenues, Net $43.0 $45.4
===== =====
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The Company recorded a 5% decrease in net telephone service revenues to
$43.0 million for the year ended December 31, 2000 from $45.4 million for the
year ended December 31, 1999.
Net measured service and subscription revenues decreased to $37.3
million for the year ended December 31, 2000 from $39.1 million for the year
ended December 31, 1999. Measured service revenues decreased 13% to $30.7
million in 2000 from $35.2 million in 1999, while subscription revenues
increased 20% to $13.1 million in 2000 from $10.9 million in 1999. Measured
service revenues increased in functional currency terms by approximately 2% as a
result of an increase in average access lines in service from approximately
190,000 lines for the year ended December 31, 1999 to approximately 202,400
lines for the year ended December 31, 2000, offset by an average 3.6% decrease
in call tariffs between 1999 and 2000 as a result of tariff re-balancing which
was introduced during 2000. Under tariff re-balancing, a more cost-driven
payment structure is envisaged with monthly subscription fees increasing to
cover network infrastructure expenses over time. In Hungary, over the past
several years, as in many other countries, cheaper local call charges have been
subsidized by expensive international and domestic long-distance calls. The
overall effect on a gross revenue basis for the telecom industry, as a whole, is
expected to be neutral. The increase in measured service revenues in functional
currency terms, however, has been offset by the approximate 18% devaluation of
the functional currency during the year and, therefore, measured service
revenues show a 13% decrease year-on-year in U.S. dollar terms. Subscription
revenues increased in functional currency terms by approximately 41% as a result
of tariff re-balancing effective February 1, 2000, as well as the increase in
average access lines in service. The increase in subscription revenues in
functional currency terms, however, has been offset by the approximate 18%
devaluation of the functional currency during the year and therefore
subscription revenues show only a 20% increase in U.S. Dollar terms
year-on-year.
These revenues have been reduced by net interconnect charges which
totaled $6.5 million for the year ended December 31, 2000 as compared to $7.0
million for the year ended December 31, 1999. As a percentage of call and
subscription revenues, net interconnect charges have declined from 15.2% for the
year ended December 31, 1999 to 14.8% for the year ended December 31, 2000.
Based upon recent negotiations with Matav and the TTW Ministry (later the Prime
Minister's Office), the Company expects net interconnect charges, as a
percentage of call and subscription revenues, to decrease in 2001 compared with
2000 levels.
Connection fees, which represent fees paid by customers to connect to
the Company's networks, increased 17% for the year ended December 31, 2000 to
$2.1 million from $1.8 million for the year ended December 31, 1999. In the
fourth quarter of 2000, the Company implemented the Securities and Exchange's
Staff Accounting Bulletin No. 101 ("SAB 101"), with effect from January 1, 2000,
which requires connection fees and corresponding direct incremental costs to be
deferred and amortized over future periods. As a result of the implementation of
SAB 101, certain connection fees and costs recognized in prior periods have been
deferred and are being amortized over the estimated average subscriber life of 7
years. There was no cumulative effect on earnings from the adoption of SAB 101,
nor has its adoption had a material impact on the Company's results of
operations. Following the adoption of SAB 101, the amortization of deferred
connection fee revenue and associated direct incremental costs is included in
telephone service revenues and operating and maintenance expenses.
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Other operating revenues, which include revenues generated from the
provision of direct lines and other miscellaneous telephone service revenues,
totaled $3.6 million for the year ended December 31, 2000, as compared to $4.5
million during the year ended December 31, 1999.
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 2% to $17.1 million for
the year ended December 31, 2000 as compared to $17.5 million for the year ended
December 31, 1999. In functional currency terms, operating and maintenance
expenses increased 6%, excluding the effect of the change in accounting for
connection fees and corresponding direct incremental costs, for the year ended
December 31, 2000, as compared to the year ended December 31, 1999. This
increase in functional currency terms is due to inflationary increases in costs
at the Company's Hungarian subsidiaries, offset by savings related to reductions
in the number of ex-patriates working for the Company. On a per line basis,
operating and maintenance expenses decreased to approximately $84 per average
access line for the year ended December 31, 2000 from $92 for the year ended
December 31, 1999. On a per line basis, operating and maintenance costs are
expected to decline as additional access lines are added during 2001.
Depreciation and Amortization
Depreciation and amortization charges decreased $2.4 million, or 20%,
to $9.4 million for the year ended December 31, 2000 from $11.8 million for the
year ended December 31, 1999. This decrease in U.S. Dollar terms is due to
depreciation and amortization charges decreasing in functional currency terms by
approximately 6% combined with the 18% devaluation of the Hungarian forint
during the period. The 6% decrease in depreciation and amortization charges in
functional currency terms is due to additional depreciation being recorded at
two of the Company's subsidiaries during 1999 ($0.7 million at historical
exchange rates) on certain network equipment. The equipment was replaced due to
the subsidiaries' relinquishment of rights to use certain broadcasting
frequencies, previously granted by TTW Ministry.
Income from Operations
Income from operations increased to $16.5 million for the year ended
December 31, 2000 from $16.2 million for the year ended December 31, 1999.
Contributing to such improvement were lower operating and maintenance expenses
and lower depreciation and amortization charges.
Foreign Exchange Losses
Foreign exchange losses increased $2.0 million, net of a gain of $0.9
million related to the Company's forward hedging contracts, to $4.8 million for
the year ended December 31, 2000 from $2.8 million for the year ended December
31, 1999. Such foreign exchange losses resulted primarily from the devaluation
of the Hungarian forint against the U.S. dollar and euro during the period. This
increase in foreign exchange losses during the period is also due to the
Company's refinancing of its debt obligations in April 2000. Prior to its
refinancing, approximately 20% of the Company's debt was denominated in
currencies other than the Hungarian forint, whereas subsequent to its
refinancing, the Company's debt is approximately 69% denominated in currencies
-35-
other than the Hungarian forint. Therefore, when such non-forint debt is
converted into Hungarian forints, the Company reports foreign exchange losses on
its consolidated financial statements when the Hungarian forint devalues against
such non-forint currencies during the reporting period. See "- Inflation and
Foreign Currency," and Item 7A "Quantitative and Qualitative Disclosures About
Market Risk - Market Risk Exposure."
Interest Expense
Interest expense decreased 43% to $18.5 million for the year ended
December 31, 2000 from $32.5 million for the year ended December 31, 1999. This
$14.0 million decrease was partially attributable to lower average debt levels
during the year ended December 31, 2000 as compared to the year ended December
31, 1999, due to the Company's restructuring of its debt obligations in May 1999
and the subsequent refinancing of those obligations in April 2000. As a result
of the refinancing in April 2000, the Company's borrowings went from being
mostly Hungarian forint denominated to mostly euro denominated. The decrease
also reflects the lower interest rates paid on borrowings in U.S. dollars and
euros, compared to Hungarian forints. As a result of the restructuring in May
1999 and the refinancing in April 2000, the Company's weighted average interest
rate on its debt obligations went from 13.17% for the year ended December 31,
1999, to 10.70% for the year ended December 31, 2000, a 19% decrease. Included
in interest expense for the year ended December 31, 2000 is approximately $1.6
million of amortization of the forward points on the Company's forward foreign
currency contracts. See "- Liquidity and Capital Resources."
Interest Income
Interest income decreased to $1.5 million for the year ended December
31, 2000 from $1.7 million for the year ended December 31, 1999 primarily due to
lower interest rates on Hungarian forint deposits during the period.
Loss Before Extraordinary Items
As a result of the factors discussed above, the Company recorded a loss
before extraordinary items of $5.3 million, or $0.45 per share, for the year
ended December 31, 2000 as compared to a loss before extraordinary items of
$17.8 million, or $1.85 per share, for the year ended December 31, 1999.
Extraordinary Items, net
For the year ended December 31, 1999, the Company recorded an
extraordinary item, net of $20.9 million comprised of extraordinary income of
$27.2 million which consists of a $9.0 million gain on extinguishment of the
liabilities the Company had with Citizens and a $18.2 million gain on
extinguishment of all amounts due under a contractor financing facility, offset
in part by a non-cash charge of $6.3 million related to the write-off of the
remaining unamortized deferred financing costs and credits pertaining to the
Original Postabank Credit Facility.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded a net
loss available for common stockholders of $5.4 million, or $0.45 per share, for
the year ended December 31, 2000 as compared to net income available for common
stockholders of $3.1 million, or $0.33 per share for the year ended December 31,
1999.
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Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
The average Hungarian forint/U.S. dollar exchange rate for the year
ended December 31, 1999 was 238.08, as compared to an average Hungarian
forint/U.S. dollar exchange rate for the year ended December 31, 1998 of 214.98.
When comparing the year ended December 31, 1999 to the year ended December 31,
1998, it should be noted that all U.S. dollar reported amounts have been
affected by this 11% devaluation in the Hungarian subsidiaries' functional
currency.
Net Revenues
Year ended
(dollars in millions) 1999 1998
Measured service revenues $ 35.2 $ 32.2
Subscription revenues 10.9 10.7
Net interconnect charges (7.0) (9.8)
----- -----
Net measured service and subscription revenues 39.1 33.1
Connection fees 1.8 2.0
Other operating revenues, net 4.5 3.6
----- -----
Telephone Service Revenues, Net $45.4 $38.7
===== =====
The Company recorded a 17% increase in net telephone service revenues
to $45.4 million for the year ended December 31, 1999 from $38.7 million for the
year ended December 31, 1998.
Net measured service and subscription revenues increased 18% to $39.1
million for the year ended December 31, 1999 from $33.1 million for the year
ended December 31, 1998. Measured service revenues increased 9% to $35.2 million
in 1999 from $32.2 million in 1998 while subscription revenues increased 2% to
$10.9 million in 1999 from $10.7 million in 1998. These increases in call and
subscription fee revenues were the result of a 7% increase in average access
lines in service from approximately 178,000 lines for the year ended December
31, 1998 to approximately 190,000 lines for the year ended December 31, 1999.
These revenues were offset by net interconnect charges which totaled
$7.0 million for the year ended December 31, 1999 as compared to $9.8 million
for the year ended December 31, 1998. As a percentage of call and subscription
revenues, net interconnect charges declined from 23% for the year ended December
31, 1998 to 15% for the year ended December 31, 1999, due to a higher proportion
of local traffic as additional access lines are placed in service plus a
negotiated reduction in interconnect fees effective January 1, 1999.
Connection fees for the year ended December 31, 1999 totaled $1.8
million as compared to $2.0 million for the year ended December 31, 1998.
Connection fees increased in functional currency terms by 5% due to additional
access lines being connected in 1999 as compared to 1998. However, due to the
devaluation of the Hungarian Forint during 1999, connection fees for 1999
remained relatively consistent in U.S dollar terms with 1998 amounts.
-37-
Other operating revenues increased 25% to $4.5 million during the year
ended December 31, 1999 compared to $3.6 million during the year ended December
31, 1998 due to revenues generated from the provision of direct lines and other
miscellaneous telephony service revenues.
Operating and Maintenance Expenses
Operating and maintenance expenses for the year ended December 31, 1999
decreased to $17.5 million compared to $19.6 million for the year ended December
31, 1998. On a per line basis, operating and maintenance expenses decreased to
approximately $92 per average access line for the year ended December 31, 1999
from $110 for the year ended December 31, 1998 as a result of the Company
achieving productivity improvements and increasing its focus on reducing
operating expenses, particularly through reductions in the number of
ex-patriates working for the Company, as well as the devaluation of the
Hungarian forint.
Depreciation and Amortization
Depreciation and amortization charges increased to $11.8 million for
the year ended December 31, 1999 from $11.6 million for the year ended December
31, 1998. Depreciation and amortization charges increased in functional currency
terms by approximately 13% due to additional capital expenditures between 1998
and 1999 and extra depreciation on certain network equipment. However, due to
the devaluation of the Hungarian forint during 1999, depreciation and
amortization charges for the year ended 1999 remained relatively consistent in
U.S. dollar terms with 1998 amounts.
Management Fees
There was no management fee expense for the year ended December 31,
1999 as compared to $2.5 million for the year ended December 31, 1998. This
decrease was due to the termination of a management services agreement between
the Company and Citizens International Management Services Company. See Note 12
of Notes to Consolidated Financial Statements. The Company does not have any
continuing management services agreements.
Cost of Termination of Management Services Agreement
For the year ended December 31, 1998, the Company recorded a charge
totaling $11.1 million representing the present value of payments due to
Citizens International Management Services Company under a termination and
consulting agreement. See Note 12 of Notes to Consolidated Financial Statements.
Income (Loss) from Operations
Income from operations was $16.2 million for the year ended December
31, 1999 compared to a loss from operations of $6.1 million for the year ended
December 31, 1998. Adjusted for the cost of terminating the management services
agreement and management fees, income from operations for the year ended
December 31, 1998 amounted to $7.6 million. Contributing to such improvements
were higher revenues and lower operating and maintenance expenses and the
elimination of the management fees described above during the year ended
December 31, 1999 as compared to the year ended December 31, 1998, offset by
increased depreciation and amortization charges during 1999.
-38-
Foreign Exchange Losses
Foreign exchange losses increased $2.6 million to $2.8 million for the
year ended December 31, 1999 from $0.2 million for the year ended December 31,
1998. Such foreign exchange losses resulted primarily from the devaluation of
the Hungarian forint against the U.S. dollar during 1999. This increase in
foreign exchange losses during 1999 is due to the Company's restructuring of its
debt obligations in May 1999. Prior to its restructuring the Company had debt
denominated in Hungarian forints. Subsequent to the Company's restructuring, it
has debt obligations denominated in U.S. dollars and euros, as well as Hungarian
forints. Therefore, when such non-forint debt is converted into Hungarian
forints, the Company reports foreign exchange losses on its consolidated
financial statements when the Hungarian forint devalues against such non-forint
currencies during the reporting period. See "- Liquidity and Capital Resources"
below for information regarding the Company's debt restructuring. See also "-
Inflation and Foreign Currency," and Item 7A Quantitative and Qualitative
Disclosures About Market Risk - Market Risk Exposure" below.
Interest Expense
Interest expense decreased to $32.5 million for the year ended December
31, 1999 from $45.9 million for the year ended December 31, 1998. This decrease
was attributable to lower average debt levels during the year ended December 31,
1999 as compared to the year ended December 31, 1998. This reduction in average
debt levels outstanding during 1999 is due to the Company's restructuring of its
debt obligations in May 1999. The decrease also reflects lower interest rates
paid on borrowings in U.S. Dollars and Euros compared to Hungarian Forints.
Interest Income
Interest income increased to $1.7 million for the year ended December
31, 1999 from $0.7 million for the year ended December 31, 1998 primarily due to
higher average cash balances outstanding during 1999.
Other, net
Other expense amounted to $0.4 million for the year ended December 31,
1999 as compared to other income of $0.8 million for the year ended December 31,
1998. This decrease is due to an approximate $0.8 million gain realized related
to the termination of the former management services agreement between the
Company and Citizens International Management Services Company during 1998. The
Company does not have any continuing management services agreements. See Note 12
of Notes to Consolidated Financial Statements.
Loss Before Extraordinary Items
As a result of the factors discussed above, the Company recorded a loss
before extraordinary items of $17.8 million, or $1.85 per share, for the year
ended December 31, 1999 as compared to a loss before extraordinary items of
$50.6 million, or $9.53 per share, for the year ended December 31, 1998.
-39-
Extraordinary Items, net
For the year ended December 31, 1999, the Company recorded an
extraordinary item of $20.9 million comprised of extraordinary income of $27.2
million which consists of a $9.0 million gain on extinguishment of the
liabilities the Company had with Citizens and a $18.2 million gain on
extinguishment of all amounts due under a contractor financing facility, offset
in part by a non-cash charge of $6.3 million related to the write-off the
remaining unamortized deferred financing costs and credits pertaining to the
Original Postabank Credit Facility.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded net
income of $3.2 million, or $0.33 per share for the year ended December 31, 1999
as compared to a net loss of $50.6 million, or ($9.53) per share for the year
ended December 31, 1998.
Liquidity and Capital Resources
The Company has historically funded its capital requirements primarily
through a combination of debt, equity and vendor financing. The ongoing
development and installation of the network in each of the Company's operating
areas required significant capital expenditures ($190 million at historical
exchange rates through December 31, 2000). By the end of 1998, the Company's
networks had the capacity, with only normal capital expenditure requirements in
the future, to provide basic telephone services to virtually all of the
potential subscribers within its Operating Areas.
On October 15, 1996, the Company entered into a $170 million 10-year
Multi-Currency Credit Facility with Postabank (the "Original Postabank Credit
Facility"). Proceeds from the Original Postabank Credit Facility could be drawn
entirely in Hungarian forints and up to 20% of the principal could be drawn in
U.S. dollars through March 31, 1999. Drawdowns in Hungarian forints bore
interest at a rate of 2.5% above the average of the yield on six- and
twelve-month discounted Hungarian treasury bills while drawdowns in U.S. Dollars
bore interest at 2.5% above LIBOR. Interest for the first two years was deferred
at the Company's option. Amounts outstanding in Hungarian Forints, including any
deferred interest, were payable in 32 equal quarterly installments beginning on
March 31, 1999.
In October 1996, the Company borrowed the equivalent of $82.3 million
in Hungarian forints under the Original Postabank Credit Facility. Approximately
$75.2 million of this amount was used to repay Citicorp all funds advanced
pursuant to a $75.0 million secured term loan credit facility entered into in
March 1996, and $2.0 million was paid for certain other fees. The remaining $5.1
million was used to pay management fees and reimbursable costs owed to Citizens
pursuant to a Management Services Agreement with Citizens. An additional $5.6
million of the Original Postabank Credit Facility was used to pay loan
origination fees and costs to Postabank under the terms of the loan agreement,
$2 million of which were reimbursed to the Company in equal quarterly
installments over a two year period, with the net amount being amortized over
the life of the loan facility. The remainder of the proceeds were used to
complete construction of the Company's telecommunication networks, provide
additional working capital, and refinance or repay other existing debt
obligations. As of December 31, 1998, the Company had borrowed the entire $170
million under the Original Postabank Credit Facility.
-40-
On May 12, 1999, the Company entered into various agreements as part of
a revision of its capital structure with the following parties: Postabank; Tele
Danmark; the Danish Fund; and CU CapitalCorp and Citizens International
Management Services Company, two wholly-owned subsidiaries of Citizens. As a
result of such agreements, the Company extinguished all of its obligations (i)
to Postabank under the Original Postabank Credit Facility in the amount of
approximately $193 million, and the amounts borrowed to settle a portion due
under a contractor financing facility in the amount of approximately $16
million; (ii) to one of its contractors under a contractor financing facility in
the amount of approximately $35 million; and (iii) to Citizens under an $8.4
million promissory note which was payable in 2004 and an obligation to pay
Citizens $21 million in 28 quarterly installments of $750,000 each from 2004
through and including 2010. The effect of these transactions caused a
significant reduction in the financial obligations of the Company. The Company
simultaneously borrowed from Postabank $138 million (at historical exchange
rates) under a one-year dual currency bridge loan agreement (the "Postabank
Bridge Loan ") in Hungarian forints and euros and $25 million pursuant to
certain unsecured notes which mature in 2007. Some of the various agreements
which were entered into as of May 12, 1999 are further described below.
Pursuant to the Postabank Bridge Loan, HTCC's subsidiaries borrowed the
equivalent of $111 million (at historical exchange rates) in Hungarian forints
and $27 million in euros (at historical exchange rates), which funds were
applied to the repayment of the Original Postabank Credit Facility. The loan was
repayable no later than May 10, 2000 and bore interest at an initial rate of
2.25% (the "Margin") plus the Budapest Bank Offering Rate or Euro LIBOR Rate,
which Margin increased incrementally to 4.25%, in quarterly increments of 1%
over the loan term.
The Company and Postabank also entered into a Securities Purchase
Agreement (the "Postabank Securities Purchase Agreement") pursuant to which
Postabank purchased 2,428,572 shares of the Company's common stock for an
aggregate purchase price of $34 million. The Postabank Securities Purchase
Agreement provides for one person designated by Postabank to be nominated for
election to the Company's Board of Directors. Postabank can only transfer such
shares incrementally through 2003 subject to the Company's right of first
refusal. The Company's right of first refusal expires in January 2003 and is
assignable by the Company to any beneficial holder of more than 10% of the
Company's outstanding common stock. The Company applied the proceeds from the
stock issuance to the repayment of the Original Postabank Credit Facility.
Pursuant to the Postabank Securities Purchase Agreement, the Company issued
notes to Postabank in an aggregate amount of $25 million (the "Notes") with
detachable warrants (the "Warrants"). The Notes accrue interest, which is
payable semi-annually, at the LIBOR rate applicable for the six month interest
period, plus 3.5%. The Notes which mature in 2007, are transferable. The
Warrants enable Postabank to purchase 2,500,000 shares of the Company's common
stock at an exercise price of $10 per share. The exercise period commences on
January 1, 2004 and terminates on March 31, 2007. The Company has the right to
terminate the Warrants in full or proportionately prior to January 1, 2004
provided that the Company (i) repays a proportionate amount of the outstanding
principal on the Notes to the holders of such Notes and (ii) pays an additional
7.5% of the aggregate principal amount of the Notes repaid concurrently with the
termination of the Warrants to the holders of the Warrants.
The Company and Tele Danmark entered into a Stock Purchase Agreement
(the "TD Stock Purchase Agreement") pursuant to which the Company issued
1,571,429 shares of the Company's common stock in exchange for $11 million. The
Company applied the proceeds from the TD Stock Purchase Agreement to the
repayment of the Original Postabank Credit Facility.
-41-
The Company and the Danish Fund for Central and Eastern Europe (the
"Danish Fund") entered into a Stock Purchase Agreement (the "Danish Fund Stock
Purchase Agreement") pursuant to which the Company issued 1,285,714 shares of
the Company's common stock in exchange for $9 million. The Company applied the
proceeds from the Danish Fund Stock Purchase Agreement to the repayment of the
Original Postabank Credit Facility.
The Company and Citizens entered into a Stock Purchase Agreement (the
"Citizens Stock Purchase Agreement') pursuant to which the Company issued to
Citizens 1,300,000 shares of the Company's common stock and 30,000 shares of the
Company's Series A Cumulative Convertible Preferred Stock, par value $0.01 (the
"Preferred Stock"). In consideration for such shares, Citizens (i) transferred
to the Company for cancellation an $8.4 million promissory note issued by the
Company to Citizens which was to mature in 2004, (ii) agreed to forego half of
the accrued interest due on the promissory note through May 15, 1999 and (iii)
agreed to renounce and forego any rights whatsoever to any payment of the $21
million which was payable by the Company to Citizens in quarterly installments
of $750,000 from 2004 through and including 2010. Citizens, as the holder of the
Preferred Stock, is entitled to receive cumulative cash dividends at an annual
rate of 5%, compounded annually on the liquidation value of $70 per share. The
Company may redeem the Preferred Shares at any time. Citizens can convert each
of the Preferred Shares into shares of the Company's common stock on a one for
ten basis. The Citizens Stock Purchase Agreement provided that if the average
closing price of HTCC's common stock for the twenty (20) trading days ending
March 31, 2000 was less than $7.00 per share, then the Company would issue
additional shares of Preferred Stock to Citizens. The average closing price of
the Company's common stock for the above mentioned period was more than $7.00
per share and, as a result, no additional shares of Preferred Stock was issued
to Citizens. Citizens also waived any and all preemptive and anti-dilution
rights in connection with the transactions described above. As a result of the
Stock Purchase Agreement with Citizens, the Company recorded extraordinary
income of $9.0 million during the second quarter of 1999 which represented a
gain on the extinguishment of the liabilities the Company had with Citizens.
During 1996 and 1997, the Company entered into several construction
contracts with a contractor which totaled $59.0 million in the aggregate, $47.5
million of which was financed by a contractor financing facility. The contractor
financed the construction through a facility provided by Postabank. As of
December 31, 1998, the balance owed under the contractor financing facility was
$36.6 million. On March 30, 1999, Postabank assumed HUF 7 billion plus accrued
interest of HUF 348 million (approximately $30.9 million at historical exchange
rates) of the Company's liability under the contractor financing facility from
the contractor, due to the contractor's financial difficulties, and sold this
debt back to the Company for HUF 3 billion (approximately $12.6 million at
historical exchange rates). The purchase of the debt was financed by Postabank.
On the same day, the Company purchased HUF 4 billion (approximately $16.8
million at historical exchange rates) of loans the contractor had with Postabank
for HUF 900 million (approximately $3.8 million at historical exchange rates)
and subsequently offset the booked value of the loans purchased of HUF 900
million (approximately $3.8 million at historical exchange rates) against the
outstanding amounts owed to the contractor. The purchase of these loans was also
financed by Postabank. As a result of the above transactions, the Company
recorded an extraordinary gain of HUF 4.3 billion (approximately $18.2 million
at historical exchange rates) during the second quarter of 1999, which reflected
the extinguishment of all amounts due under the contractor financing facility.
-42-
On April 11, 2000, the Company entered into an EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement") with a European banking
syndicate. The Company drew down EUR 129 million of the Facility on April 20,
2000 ($121 million at April 20, 2000 exchange rates), which funds were used,
along with $7.3 million of other Company funds (at April 20, 2000 exchange
rates) to pay off the entire outstanding EUR 134 million (approximately $126
million at April 20, 2000 exchange rates) principal and interest due on the
Postabank Bridge Loan which was due to mature on May 12, 2000, and to pay fees
associated with the Debt Agreement. The borrowers under the Debt Agreement are
the Operating Companies who were the borrowers under the Postabank Bridge Loan.
The Debt Agreement and some of the related agreements are further described
below.
The Debt Agreement has two facilities. Facility A is a floating rate
term loan in the amount of EUR 125 million (the "Term Facility") which principal
is repayable in installments semi-annually on each June 30 and December 31
beginning on June 30, 2001 and ending on December 31, 2007. The amounts of the
principal repayments on the Term Facility are to be escalating percentages of
the amounts drawn down. The Company has borrowed the full EUR 125 million, of
which EUR 84.1 million was funded in, an is repayable in, euros and the
equivalent of EUR 40.9 million was funded in, and is repayable in, Hungarian
forints. The portion of the Term Facility loan denominated in euros accrues
interest at the rate of the Applicable Margin (defined below) plus the EURIBOR
rate for the applicable interest period. The EURIBOR rate is the percentage rate
per annum determined by the Banking Federation of the European Union for the
applicable interest period. The portion of the Term Facility loan denominated in
Hungarian forints accrues interest at the rate of the Applicable Margin (defined
below) plus the BUBOR rate for the applicable interest period. The BUBOR rate is
the percentage rate per annum determined according to the rules established by
the Hungarian Forex Association and published by the National Bank of Hungary
for the applicable interest period. The applicable interest period for the
portion of the Term Facility loan denominated in euros is six months. The
applicable interest period for the portion of Term Facility loan denominated in
Hungarian forints is three months. Interest is payable at the end of each
interest period. The Applicable Margin is initially 1.75%. The Applicable Margin
may be adjusted downward incrementally to a minimum of 1.15% subject to the
financial performance of the Company as measured by the ratio of the Company's
senior debt to its earnings before interest, taxes, depreciation and
amortization. Dependent on its cash flow, the Company will be required to prepay
the equivalent of $25 million on the Term Facility until such time as $25
million has been prepaid. The amount of the prepayment in any year shall be at
least 50% of the Company's excess cash flow, if any, for the previous financial
year as defined in the Debt Agreement. The prepayment amount is due within 15
days of the publication of each annual Form 10-K filing. For the year ended
December 31, 2000, the Company does not have any excess cash flow, as defined in
the Debt Agreement, and therefore no mandatory prepayment is going to be made by
the Company in 2001.
Facility B is a floating rate revolving loan in the amount of EUR 5
million (the "Revolving Facility") which can only be drawn down in euros. The
Revolving Facility will be reduced to EUR 2.5 million on December 31, 2005. The
Revolving Facility is available until December 31, 2007. The Company borrowed
EUR 4 million of the Revolving Facility to pay off the balance of the Postabank
Bridge Loan and fees associated with the transaction on April 20, 2000. The
principal amount borrowed under the Revolving Facility is due at the end of each
interest period at which point the Company can, subject to certain conditions,
-43-
roll over the amount of principal borrowed. The applicable interest period for
the Revolving Facility is, at the Company's option, one, three, or six months.
The Company has chosen six months at the present time. Interest is payable at
the end of each interest period calculated similarly to that for a Term Facility
loan denominated in euros.
The Company paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2.5 million at April 20, 2000 exchange rates), which has been
capitalized with other direct costs incurred in obtaining the Debt Agreement and
is being amortized over the term of the related debt. In addition, an agency fee
in the amount of $60,000 has also been paid. The Company is obligated to pay a
commitment fee equal to the lower of 0.75% or 50% of the Applicable Margin on
any available unused commitment on the Revolving Facility.
HTCC and one of its subsidiaries, HTCC Consulting Rt., are guarantors
for the Operating Companies under the Debt Agreement. The Company and Citibank
Rt. (as security agent) have entered into a series of agreements to secure all
of the Company's obligations under the Debt Agreement pursuant to which the
Company has pledged all of its intangible and tangible assets, including HTCC's
ownership interests in its subsidiaries, and its real property. The Company is
subject to restrictive covenants, including restrictions regarding the ability
of the Company to pay dividends, borrow funds, merge and dispose of its assets.
The Debt Agreement contains customary representations and warranties and
customary events of default, including those related to a change of control,
which would trigger early repayment of the balance under the Debt Agreement. If
prior to the later of the December 31, 2001 or the Trigger Date (as defined
below), Tele Danmark sells any of the shares of Common Stock that it currently
owns or Tele Danmark and the Danish Fund, together, no longer own 30.1% of the
outstanding Common Stock, then an event of default shall have occurred. Tele
Danmark and the Danish Fund currently own a combined total of 31.9% of the
outstanding common stock. The Trigger Date is defined as the date on which for
the prior two fiscal quarters the Company's debt to EBITDA ratio is less than
3.5 to 1. Following the Trigger Date, Tele Danmark can only transfer its shares
with the prior written consent of banks holding at least 66.7% of the Company's
outstanding debt under the Debt Agreement.
The Company had 12,087,179 shares of common stock outstanding as of
December 31, 2000, which were held by the following parties in the percentages
indicated: Postabank 20.1%; Tele Danmark 21.2%; the Danish Fund 10.6%; Citizens
19.1%; and others 29.0%. On a fully-diluted basis, the Company has 15,821,816
shares outstanding, which were held by the following parties in the percentages
indicated: Postabank 31.2%; Tele Danmark 16.2%; the Danish Fund 8.1%; Citizens
16.5%; and others 28.0%.
Net cash provided by operating activities totaled $8.3 million for the
year ended December 31, 2000 compared to $18.5 million for the year ended
December 31, 1999. For the period ended December 31, 1999, cash provided by
operations reflects the deferral of $13.3 million of interest, which was added
to amounts due under the Postabank Bridge Loan. For the years ended December 31,
2000 and 1999, the Company used $8.8 million and $9.9 million, respectively, in
investing activities, which was primarily used to fund additions to the
Company's telecommunications networks. Financing activities provided net cash of
$0.5 million and $1.0 million for the years ended December 31, 2000 and 1999,
respectively.
-44-
Inflation and Foreign Currency
For the year ended December 31, 2000, inflation in Hungary was
approximately 9.8% on an annualized basis. It is the stated policy goal of the
Hungarian government to keep inflation from exceeding approximately 6% in 2001.
Due to the strengthening of the U.S. dollar on international currency markets
during the year, the Hungarian forint/U.S. dollar exchange rate increased to
284.73 as of December 31, 2000, as compared to an exchange rate of 252.52 as of
December 31, 1999, an effective year-on-year devaluation of 12.8%.
The Company's Hungarian operations generate revenues in Hungarian
forints and incur operating and other expenses, including capital expenditures,
predominately in Hungarian forints but also in U.S. dollars and euros. In
addition, certain of the Company's balance sheet accounts are expressed in
foreign currencies other than the Hungarian forint, the Company's Hungarian
subsidiaries' functional currency. Accordingly, when such accounts are converted
into Hungarian forints, the Company is subject to foreign exchange gains and
losses which are reflected as a component of net income or loss. When the
Company and its subsidiaries' forint-denominated accounts are translated into
U.S. dollars for financial reporting purposes, the Company is subject to
translation adjustments, the effect of which is reflected as a component of
stockholders' deficiency.
While the Company has the ability to increase the prices it charges for
its services commensurate with increases in the Hungarian Consumer Price Index
("CPI") pursuant to its licenses from the Hungarian government, it may choose
not to implement the full amount of the increase permitted due to competitive
and other concerns. In addition, the rate of increase in the Hungarian CPI may
be less than the rate at which the Hungarian forint devalues. As a result, the
Company may be unable to generate cash flows to the degree necessary to meet its
obligation in currencies other than the Hungarian forint.
Prospective Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued by
the Financial Accounting Standards Board in June 1998 and subsequently amended
by Statement of Financial Accounting Standards No. 138 ("SFAS 138") issued in
June 1999. SFAS 133 and SFAS 138 standardize the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under the Standards, entities are required to carry all derivative
instruments in the statement of financial position at fair value.
The Company adopted SFAS 133 and SFAS 138 on January 1, 2001. The
Company does not anticipate that the adoption of SFAS 133 and SFAS 138 will have
a material effect on the Company's consolidated financial position and results
of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
The Company is exposed to various types of risk in the normal course of
its business, including the impact of foreign currency exchange rate
fluctuations and interest rate changes. Company operations, including all
revenues and approximately 84% of operational costs are Hungarian forint based
and are therefore subject to exchange rate variability between the Hungarian
forint and the U.S. dollar. This variability is mitigated by several factors,
including the Hungarian National Bank policy to peg the Hungarian forint and the
-45-
telecommunications pricing law. The "crawling peg" policy of the National Bank
of Hungary maintains a scheduled daily devaluation of the Hungarian forint which
has been pegged 100% to the euro since January 1, 2000. The Hungarian forint is
allowed to trade within 2.25% of the mid-point of this trading band. For the
first quarter of 2001, the Hungarian government's devaluation policy is 0.3% per
month. The Hungarian government has announced that the monthly planned
devaluation rate will be decreased as of April 1, 2001 to 0.2% per month for the
Hungarian forint, which would total approximately 2.7% for 2001. The
telecommunications pricing law allows prices to increase by the Consumer Price
Index (CPI), adjusted for an efficiency factor of 2% in 2000 and 2.9% in 2001.
Thus, to the extent that adjusted CPI follows devaluation, and to the extent the
Company elects and is able to increase its revenues proportionate to increases
in the CPI, revenues are somewhat insulated from exchange rate risk.
The debt obligations of the Company are Hungarian forint, euro and U.S.
dollar denominated. The interest rate on the Hungarian forint debt obligations
is based on the Budapest Bank Offer Rate (BUBOR). The interest rates on the euro
and U.S. dollar denominated obligations are based on EURIBOR and USD LIBOR,
respectively. Over the medium to long term, the BUBOR rate is expected to follow
inflation and devaluation trends and the Company does not currently believe it
has any material interest rate risk on any of its Hungarian forint denominated
debt obligations. If a 1% change in the BUBOR interest rate were to occur, the
Company's interest expense would increase or decrease by approximately $369,000
annually based upon the Company's current debt level. If a 1% change in EURIBOR
interest rates were to occur, the Company's interest expense would increase or
decrease by approximately $0.8 million annually based upon the Company's current
debt level. If a 1% change in USD LIBOR interest rates were to occur, the
Company's interest expense would increase or decrease by approximately $0.3
million annually based upon the Company's current debt level.
The Company is also exposed to exchange rate risk insofar as the
Company has debt obligations in other than the functional currency of its
majority owned Hungarian subsidiaries. Given the Company's debt obligations,
which include euro and U.S. dollar denominated debt, if a 1% change in Hungarian
forint/euro exchange rates were to occur, the Company's exchange rate risk would
increase or decrease by approximately $820,000 annually based upon the Company's
current debt level. If a 1% change in Hungarian forint/U.S. dollar exchange
rates were to occur, the Company's exchange rate risk would increase or decrease
by approximately $250,000 annually.
The Company utilizes foreign currency forward contracts to reduce
certain exposure to exchange rate risks associated with cash requirements under
the Company's long-term debt obligations that mature within six months. The
forward contracts establish the exchange rates at which the Company will sell
the contracted amount of Hungarian forints for euros at a future date. The
Company utilizes forward contracts which are six months in duration and at
maturity will either receive or pay the difference between the contracted
forward rate and the exchange rate at the settlement date. The contracted amount
of foreign currency forwards at December 31, 2000 is EUR 2,998,000
(approximately $2,790,000). The counterparties to the Company's foreign currency
forward contracts are substantial and creditworthy multinational commercial
banks or other financial institutions which are recognized market makers.
Neither the risks of counterparty nonperformance nor the economic consequences
of counterparty nonperformance associated with these contracts are considered by
the Company to be material.
-46-
Item 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements of the
Company, beginning with the index thereto on page F-1.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
There is incorporated in this Item 10 by reference the information
appearing under the captions "Election of Directors - Current Directors and
Nominees for Director" and "- Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the 2001 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 11. Executive Compensation
There is incorporated in this Item 11 by reference the information
appearing under the caption "Election of Directors" in the Company's definitive
proxy statement for the 2001 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There is incorporated in this Item 12 by reference the information
appearing under the captions "Introduction - Stock Ownership of Certain
Beneficial Owners," and "- Stock Ownership of Management" in the Company's
definitive proxy statement for the 2001 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
Item 13. Certain Relationships And Related Transactions
There is incorporated in this Item 13 by reference the information
appearing under the caption "Election of Directors - Certain Relationships and
Related Transactions" and "- Indebtedness of Management" in the Company's
definitive proxy statement for the 2001 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
-47-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) List of Financial Statements
Reference is made to the index on page F-1 for a list of all
financial statements filed as part of this Form 10-K.
(a)(2) List of Financial Statement Schedules
Reference is made to the index on page F-1 for a list of all
financial statement schedules filed as part of this Form 10-K.
-48-
(a)(3) List of Exhibits
Exhibit
Number Description
-------- --------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession (None)
3(i) Certificate of Incorporation of the Registrant, as amended,
filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 filed on January 31, 2001 (File
#333-54688) and incorporated herein by reference
3(ii) By-laws of the Registrant, as amended, filed as Exhibit 4.2 to
the Registrant's Registration Statement on Form S-8 filed on
January 31, 2001 (File #333-54688) and incorporated herein by
reference
4.1 Specimen Common Stock Certificate, filed as Exhibit 4(a) to
the Registrant's Registration Statement on From SB-2 filed on
October 27, 1994 and incorporated herein by reference (File
#33-80676)
4.2 Certificate of Designation of Series A - Preferred Stock of
Hungarian Telephone and Cable Corp., filed as Exhibit 4.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 and incorporated herein by reference
9 Voting trust agreement (None)
10 Material contracts:
10.1 Concession Agreement dated May 10, 1994 between the Ministry
of Transportation, Telecommunications and Water Management of
the Republic of Hungary and Raba-Com Rt., filed as
Exhibit 10(y)(y) to the Registrant's Current Report on Form
8-K for February 28, 1994 (Registrant File #1-11484) and
incorporated herein by reference
10.2 Concession Agreement dated May 10, 1994 between the Ministry
of Transportation, Telecommunications and Water Management of
the Republic of Hungary and Kelet-Nograd Com Rt., filed as
Exhibit 10(z)(z) to the Registrant's Current Report on Form
8-K for February 28, 1994 (Registrant File #1-11484) and
incorporated herein by reference
10.3 English translation of Amended and Restated Concession
Contract between Papa es Tersege Telefon Koncesszios Rt. and
the Hungarian Ministry for Transportation, Telecommunications
and Water Management dated as of June 3, 1996, filed as
Exhibit 10.78 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated
herein by reference
10.4 English translation of Amended and Restated Concession
Contract between Hungarotel Tavkozlesi Rt. and the Hungarian
Ministry for Transportation, Telecommunications and Water
Management dated as of June 3, 1996 (Oroshaza), filed as
Exhibit 10.79 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated
herein by reference
-49-
Exhibit
Number Description
-------- ---------------------------------------------------------------
10.5 English translation of Amended and Restated Concession
Contract between Hungarotel Tavkozlesi Rt. and the Hungarian
Ministry for Transportation, Telecommunications and Water
Management dated as of June 3, 1996 (Bekescsaba), filed as
Exhibit 10.80 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated
herein by reference
10.6 Non-Employee Director Stock Option Plan, as amended as of May
25, 2000
10.7 1992 Incentive Stock Option Plan of the Registrant, as amended
to date, filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 filed on January 31, 2001 (File #333-
5688)and incorporated herein by reference
10.8 Amended and Restated Employment Agreement dated as of January
30, 2001 between the Registrant and Ole Bertram
10.9 Termination and Release Agreement dated as of July 26, 1996
between the Registrant and Robert Genova, filed as Exhibit
10.62 to the Registrant's Current Report on Form 8-K for July
26, 1996 and incorporated herein by reference
10.10 Consulting Agreement dated as of July 26, 1996 between the
Registrant and Robert Genova, filed as Exhibit 10.63 to the
Registrant's Current Report on Form 8-K for July 26, 1996 and
incorporated herein by reference
10.11 Noncompetition Agreement dated as of July 26, 1996 between the
Registrant and Robert Genova, filed as Exhibit 10.64 to the
Registrant's Current Report on Form 8-K for July 26, 1996 and
incorporated herein by reference
10.12 Irrevocable Proxy dated July 26, 1996 executed by Robert
Genova appointing Hungarian Telephone and Cable Corp. as his
proxy, filed as Exhibit 10.65 to the Registrant's Current
Report on Form 8-K for July 26, 1996 and incorporated herein
by reference
10.13 Termination and Release Agreement dated as of July 26, 1996
between the Registrant and Frank R. Cohen, filed as Exhibit
10.66 to the Registrant's Current Report on Form 8-K for July
26, 1996 and incorporated herein by reference
10.14 Consulting Agreement dated as of July 26, 1996 between the
Registrant and Frank R. Cohen, filed as Exhibit 10.67 to the
Registrant's Current Report on Form 8-K for July 26, 1996 and
incorporated herein by reference
10.15 Noncompetition Agreement dated as of July 26, 1996 between the
Registrant and Frank R. Cohen, filed as Exhibit 10.68 to the
Registrant's Current Report on Form 8-K for July 26, 1996 and
incorporated herein by reference
10.16 Irrevocable Proxy dated July 26, 1996 executed by Frank R.
Cohen appointing Hungarian Telephone and Cable Corp. as his
proxy, filed as Exhibit 10.69 to the Registrant's Current
Report on Form 8-K for July 26, 1996 and incorporated herein
by reference
10.17 Termination and Release Agreement dated as of July 26, 1996
between the Registrant and Donald K. Roberton, filed as
Exhibit 10.70 to the Registrant's Current Report on Form 8-K
for July 26, 1996 and incorporated herein by reference
-50-
Exhibit
Number Description
-------- ---------------------------------------------------------------
10.18 Consulting Agreement dated as of July 26, 1996 between the
Registrant and Donald K. Roberton, filed as Exhibit 10.71 to
the Registrant's Current Report on Form 8-K for July 26, 1996
and incorporated herein by reference
10.19 Noncompetition Agreement dated as of July 26, 1996 between the
Registrant and Donald K. Roberton, filed as Exhibit 10.72 to
the Registrant's Current Report on Form 8-K for July 26, 1996
and incorporated herein by reference
10.20 Irrevocable Proxy dated July 26, 1996 executed by Donald K.
Roberton appointing Hungarian Telephone and Cable Corp. as his
proxy, filed as Exhibit 10.73 to the Registrant's Current
Report on Form 8-K for July 26, 1996 and incorporated herein
by reference
10.21 Registration Agreement, dated May 31, 1995, between the
Registrant and CU CapitalCorp., filed as Exhibit 10(f)(f) to
the Registrant's Current Report on Form 8-K for May 31, 1995
and incorporated herein by reference
10.22 Replacement and Termination Agreement, dated as of September
30, 1998, between the Registrant and Citizens International
Management Services Company and CU CapitalCorp. filed as
Exhibit 10.69 to the Registrant's Current Report on Form 8-K
for September 30, 1998 and incorporated herein by reference
10.23 Form of Promissory Note dated September 30, 1998 issued by the
Registrant payable to Citizens International Management
Services Company filed as Exhibit 10.70 to the Registrant's
Current Report on Form 8 -K for September 30, 1998 and
incorporated herein by reference
10.24 Amended, Restated and Consolidated Stock Option Agreement
dated as of September 30, 1998, between the Registrant and CU
CapitalCorp. filed as Exhibit 10.71 to the Registrant's
Current Report on Form 8-K for September 30, 1998 and
incorporated herein by reference
10.25 Dual-Currency Bridge Loan Agreement between Hungarian
Telephone and Cable Corp. and its subsidiaries and Postabank
es Takarekpenztar Reszvenytarsasag, as Lender, Facility Agent
and Security Agent dated as of May 12, 1999, filed as Exhibit
10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by
reference
10.26 Securities Purchase Agreement between Hungarian Telephone and
Cable Corp., as Seller and Postabank es Takarekpenztar
Reszvenytarsasag, as Buyer, dated as of May 12, 1999, filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 and incorporated herein
by reference
10.27 Form of Warrant to Purchase Common Stock of Hungarian
Telephone and Cable Corp., dated as of May 12, 1999, filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 and incorporated herein
by reference
-51-
Exhibit
Number Description
-------- ---------------------------------------------------------------
10.28 Form of Unsecured Note issued by Hungarian Telephone and Cable
Corp. to Postabank es Takarekpenztar Reszvenytarsasag, dated
as of May 12, 1999, filed as Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 and incorporated herein by reference
10.29 Stock Purchase Agreement between Hungarian Telephone and Cable
Corp., as Seller, and Tele Danmark A/S, as Buyer, dated as of
May 12, 1999, filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 and incorporated herein by reference
10.30 Stock Purchase Agreement between Hungarian Telephone and Cable
Corp., as Seller, and the Danish Investment Fund for Central
and Eastern Europe, as Buyer, dated as of May 12, 1999, filed
as Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated
herein by reference
10.31 Stock Purchase Agreement among Hungarian Telephone and Cable
Corp., as Seller, and Citizens International Management
Services Company, as Buyer, and CU CapitalCorp., dated as of
May 12, 1999, filed as Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 and incorporated herein by reference
10.32 EUR 130 million Senior Secured Debt Facility dated April 11,
2000 among Hungarian Telephone and Cable Corp. and its
subsidiaries; Citibank N.A. and Westdeutsche Landesbank
Girozentrale, as arrangers; Citibank International PLC as
facility agent; and Citibank Rt. as Security Agent, filed as
Exhibit 10.32 to the Registrant's Report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by
reference.
10.33 Form of Amended and Restated Unsecured Note issued by
Hungarian Telephone and Cable Corp. to Postabank es
Takarekpenztar Reszvenytarsasag, dated as of April 11, 2000,
filed as Exhibit 10.33 to the Registrant's Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein
by reference.
10.34 Security Deposit Agreement dated April 11, 2000 among
Hungarian Telephone and Cable Corp. as Depositor; Citibank
Rt., as Depositee and Security Agent; and Hungarotel
Tavkozlesi Rt., Raba Com. Rt., Papa es Tersege Telefon
Koncesszios Rt., and Kelet-Nograd Com Rt., as Countersignors,
filed as Exhibit 10.34 to the Registrant's Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein
by reference.
10.35 Security Deposit Agreement dated April 11, 2000 among HTCC
Consulting Rt., as Depositor; Citibank Rt., as Depositee and
Security Agent; and Hungarotel Tavkozlesi Rt., Raba Com. Rt.,
Papa es Tersege Telefon Koncesszios Rt., and Kelet-Nograd Com
Rt., as Countersignors, filed as Exhibit 10.35 to the
Registrant's Report on Form 10-K for the year ended December
31, 1999 and incorporated herein by reference.
-52-
Exhibit
Number Description
-------- ---------------------------------------------------------------
11 Statement re computation of per share earnings (not required)
12 Statement re computation of ratios (not required)
13 Annual report to security holders (not required)
16 Letter re change in certifying accountant (not required)
18 Letter re change in accounting principles (None)
21 Subsidiaries of the Registrant
22 Published report regarding matters submitted to vote of
security holders (not required)
23 Consent of KPMG Hungaria Kft.
24 Power of Attorney (not required)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of March 29, 2001.
HUNGARIAN TELEPHONE AND CABLE CORP.
(Registrant)
By /s/ Ole Bertram
------------------------------------------
Ole Bertram
President and Chief Executive Officer,
Director
Pursuant to the requirements of the Securities Exchange of 1934, this
Report has been signed below by the following persons and on behalf of the
Registrant and in the capacities indicated as of March 29, 2001.
Signature/Name Title
/s/William T. McGann Treasurer and Controller
-----------------------------------
William T. McGann (Principal Accounting Officer;
Principal Financial Officer)
/s/Daryl A. Ferguson Director, Co-Chairman of the Board
-----------------------------------
Daryl A. Ferguson
-53-
Signature/Name Title
/s/Torben V. Holm Director, Co-Chairman of the Board
------------------------------------
Torben V. Holm
/s/Soren Eriksen Director
------------------------------------
Soren Eriksen
/s/John B. Ryan Director
------------------------------------
John B. Ryan
/s/William E. Starkey Director
------------------------------------
William E. Starkey
/s/Leonard Tow Director
-----------------------------------
Leonard Tow
-54-
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statements Schedules
The following information is included on the pages indicated:
Consolidated Financial Statements: Page
Independent Auditors' Report................................F-2
Consolidated Balance Sheets.................................F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss)..........................................F-4
Consolidated Statements of Stockholders' Deficiency.........F-5
Consolidated Statements of Cash Flows.......................F-6
Notes to Consolidated Financial Statements...........F-7 - F-29
Financial Statements Schedules:
Schedule of Quarterly Financial Data........................S-1
Schedule II - Valuation Accounts............................S-2
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Hungarian Telephone and Cable Corp.
We have audited the accompanying consolidated balance sheets of
Hungarian Telephone and Cable Corp. and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' deficiency
and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Hungarian Telephone and Cable Corp. and subsidiaries as of December
31, 2000 and 1999, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 2000, in conformity with generally accepted accounting principles
in the United States of America.
KPMG HUNGARIA KFT.
Budapest, Hungary
March 9, 2001
F-2
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(In thousands, except share data)
Assets 2000 1999
------ ---- ----
Current assets:
Cash and cash equivalents $ 15,596 17,197
Restricted cash 107 111
Accounts receivable, net of allowance
of $1,140 in 2000 and $1,030 in 1999 5,511 6,940
Other current assets 2,917 1,967
--------- ---------
Total current assets 24,131 26,215
Property, plant and equipment, net 101,670 115,526
Goodwill, net of accumulated amortization
of $1,883 in 2000 and $1,628 in 1999 6,331 7,859
Other intangibles, net of accumulated amortization
of $1,232 in 2000 and $1,156 in 1999 3,806 4,526
Deferred costs 8,212 -
Other assets 3,168 557
--------- -------
Total assets $ 147,318 154,683
======= ========
Liabilities and Stockholders' Deficiency
Current liabilities:
Current installments of long-term debt $ 8,063 -
Short-term loans 3,722 5,048
Accounts payable 2,577 3,994
Accruals 5,307 5,561
Other current liabilities 1,725 1,349
Due to related parties 1,226 996
---------- --------
Total current liabilities 22,620 16,948
Long-term debt, excluding current installments 124,814 139,661
Due to related parties 676 1,728
Deferred credits and other liabilities 10,086 3,292
---------- ---------
Total liabilities 158,196 161,629
-------- -------
Commitments and Contingencies
Stockholders' deficiency:
Cumulative Convertible Preferred stock, $.01 par value;
$70.00 liquidation value. Authorized 200,000 shares;
issued and outstanding 30,000 shares in 2000 and 1999 - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
12,087,179 shares in 2000 and 11,981,579 in 1999 12 11
Additional paid-in capital 144,601 144,052
Accumulated deficit (170,143) (164,705)
Accumulated other comprehensive income 14,652 13,696
--------- -----------
Total stockholders' deficiency (10,878) (6,946)
----------- ----------
Total liabilities and stockholders' deficiency $ 147,318 154,683
========== ===========
See accompanying notes to consolidated financial statements.
F-3
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2000, 1999
and 1998 (In thousands, except share
and per share data)
2000 1999 1998
---- ---- ----
Telephone services revenues, net $ 42,974 45,438 38,707
------------ ------------ ------------
Operating expenses:
Operating and maintenance expenses 17,077 17,467 19,575
Depreciation and amortization 9,428 11,782 11,560
Management fees - - 2,500
Termination of management
services agreement - - 11,131
------------ ------------ -----------
Total operating expenses 26,505 29,249 44,766
------------ ------------ ------------
Income (loss) from operations 16,469 16,189 (6,059)
Other income (expenses):
Foreign exchange losses, net (4,842) (2,786) (230)
Interest expense (18,500) (32,450) (45,856)
Interest income 1,482 1,708 686
Other, net 60 (434) 847
------------ ------------ ------------
Loss before extraordinary items (5,331) (17,773) (50,612)
Extraordinary items, net - 20,945 -
------------ ------------ ------------
Net income (loss) $ (5,331) 3,172 (50,612)
Cumulative convertible preferred stock
dividends (in arrears) (107) (68) -
------------ ------------ ------------
Net income (loss) available for
common stockholders (5,438) 3,104 (50,612)
Comprehensive income adjustments 956 6,396 2,336
------------ ------------ ------------
Total comprehensive income (loss) $ (4,482) 9,500 (48,276)
============= ============ ============
Earnings (loss) per common share -
basic and diluted:
Before extraordinary items $ (0.45) (1.85) (9.53)
Extraordinary items $ - 2.18 -
------------ ------------ ------------
Net earnings (loss) $ (0.45) 0.33 (9.53)
============ ============ ============
Weighted average number of
Common shares outstanding -
basic and diluted 12,010,660 9,617,939 5,309,985
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
Years ended December 31, 2000, 1999 and 1998
(In thousands, except share data)
Accumulated
Additional Other Total
Common Preferred Paid-in Accumulated Comprehensive Deferred Stockholders'
Shares Stock Stock Capital Deficit Income Compensation Deficiency
---------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 5,235,370 $ 5 - 70,772 (117,197) 4,964 (381) $(41,837)
Earned compensation - - - - - - 125 125
Cancellation of shares (25,000) - - (256) - - 256 -
Exercise of options and warrants 56,400 - - 224 - - - 224
Shares issued as compensation 10,625 - - 93 - - - 93
Shares issued to Citizens 100,000 - - 513 - - - 513
Shares issued as consideration
relating to former acquisitions 18,469 - - - - - - -
Options granted in connection with
termination agreement - - - 121 - - - 121
Net loss - - - - (50,612) - - (50,612)
Foreign currency translation - - - - - 2,336 - 2,336
adjustment
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 5,395,864 $ 5 - 71,467 (167,809) 7,300 - $ (89,037)
Shares issued to Tele Danmark A/S 1,571,429 2 - 10,998 - - - 11,000
Shares issued to Postabank 2,428,572 2 - 33,998 - - - 34,000
Shares issued to Citizens 1,300,000 1 - 11,199 - - - 11,200
Shares issued to Danish Fund 1,285,714 1 - 8,999 - - - 9,000
Stock issuance cost - - - (1,488) - - (1,488)
Warrant issued in connection with
long-term notes - - - 8,825 - - - 8,825
Modification of option terms - - - 54 - - - 54
Cumulative convertible preferred
stock dividends (in arrears) - - - - (68) - - (68)
Net income - - - - 3,172 - - 3,172
Foreign currency translation
adjustment - - - - - 6,396 - 6,396
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 11,981,579 $ 11 - 144,052 (164,705) 13,696 - $(6,946)
Exercise of options and warrants 33,600 - - 262 - - - 262
Modification of option terms - - - (45) - - - (45)
Shares issued to International
Finance Corporation 72,000 1 - 332 - - - 333
Cumulative convertible preferred
stock dividends (in arrears) - - - - (107) - - (107)
Net loss - - - - (5,331) - - (5,331)
Foreign currency translation
adjustment - - - - - 956 - 956
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 12,087,179 $ 12 - 144,601 (170,143) 14,652 - $(10,878)
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
---- ---- ----
Net cash provided by operating activities $ 8,291 18,522 11,118
--------- -------- ---------
Cash flows from investing activities:
Construction of telecommunications
networks (8,786) (9,998) (16,451)
Decrease (increase) in construction deposits 26 (17) 520
Acquisition of interests in subsidiaries (343) - -
Other 288 86 301
--------- -------- ---------
Net cash used in investing activities (8,815) (9,929) (15,630)
---------- -------- ---------
Cash flows from financing activities:
Borrowings under long-term debt agreements 117,170 41,391 16,099
Borrowings under short-term debt agreements 3,754 124,753 -
Proceeds from exercise of options and warrants 262 - 224
Deferred financing costs paid under long-term
debt agreements (3,104) - -
Repayments and settlement of long-term debt (117,534) (217,697) (7,048)
Proceeds from issuance of common stock, net - 52,511 -
--------- -------- ---------
Net cash provided by financing activities 548 958 9,275
--------- -------- ---------
Effect of foreign exchange rate changes on cash (1,625) (843) (305)
---------- --------- ----------
Net increase (decrease) in cash (1,601) 8,708 4,458
Cash at beginning of year 17,197 8,489 4,031
--------- -------- ---------
Cash at end of year $ 15,596 17,197 8,489
========= ======== =========
See accompanying notes to consolidated financial statements.
F-6
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(1) Summary of Significant Accounting Policies
-------------------------------------------------------------------------
(a) Description of Business and Other Related Matters
Hungarian Telephone and Cable Corp. ("HTCC" and together with its
consolidated subsidiaries, the "Company") was organized on March
23, 1992 to own and manage telecommunications companies in
Hungary. Four subsidiaries of the Company ("the Operating
Companies") are presently engaged in the ownership and operation
of public switched telephone service. Two of the operating
companies commenced operations in two concession regions in 1995
and the other two commenced operations in three additional
concession areas effective January 1, 1996.
By the end of 1998, the Company's networks had the capacity, with
only normal capital expenditure requirements in the future, to
provide basic telephone services to virtually all of the potential
subscribers within its operating areas. The Company funded its
network construction and working capital needs primarily through
various credit facilities with Postabank Rt. and a contractor
financing facility. On March 30, 1999, and May 12, 1999, the
Company entered into a series of transactions (see Notes 4, 5, 9
and 12) which restructured the Company's debt and capital
structure. As the final step in the Company's debt and capital
restructuring, on April 11, 2000, the Company entered into a EUR
130 million Senior Secured Debt Facility with a European banking
syndicate (see Note 5).
(b) Principles of Consolidation and the Use of Estimates
The consolidated financial statements include the financial
statements of Hungarian Telephone and Cable Corp. and its
subsidiaries; Kelet-Nograd Com Rt., ("KNC"), Raba-Com Rt.,
("Raba-Com"), Hungarotel Tavkozlesi Rt. ("Hungarotel"), Papa es
Tersege Telefon Koncesszios Rt. ("Papatel"), HTCC Consulting Rt.
("HTCC Consulting") and Pilistav Rt. ("Pilistav"). All material
intercompany balances and transactions have been eliminated.
The consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles (U.S. GAAP). In
preparing financial statements in conformity with U.S. GAAP,
management is required to make estimates and assumptions that
affect reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(c) Revenue Recognition
Telephone service revenues are recognized when earned and are
primarily derived from usage of the Company's local exchange
networks and facilities or under revenue sharing agreements with
Matav, the international and national long distance interconnect
service provider. Revenues are stated net of interconnect charges.
In the fourth quarter of 2000, the Company implemented the SEC's
Staff Accounting Bulletin No. 101 ("SAB 101"), with effect from
January 1, 2000, which requires connection fees and corresponding
direct incremental costs to be deferred and amortized over future
periods. As a result of the implementation of SAB 101, certain
connection fees and costs recognized in prior periods have been
deferred and are being amortized over the estimated average
subscriber life of 7 years. There was no cumulative effect on
F-7
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
earnings from the adoption of SAB 101, nor has its adoption had a
material impact on the Company's results of operations for any
period presented. Following the adoption of SAB 101, the
amortization of deferred connection fee revenue and associated
direct incremental costs is included in telephone service revenues
and operating and maintenance expenses.
(d) Foreign Currency Translation
The statutory accounts of the Company's consolidated subsidiaries
and affiliates are maintained in accordance with local accounting
regulations and are stated in local currencies. Local statements
are adjusted to U.S. GAAP and then translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No.
52, "Foreign Currency Translation" ("SFAS 52").
Since commencement of revenue generating activities, the Company
has used the Hungarian forint ("HUF") as the functional currency
for its Hungarian subsidiaries. Accordingly, foreign currency
assets and liabilities are translated using the exchange rates in
effect at the balance sheet date. Results of operations are
generally translated using the average exchange rates prevailing
throughout the year. The effects of exchange rate fluctuations on
translating foreign currency assets and liabilities into U.S.
dollars are accumulated as part of other comprehensive income in
stockholders' equity. Foreign exchange fluctuations related to
intercompany balances are included in equity if such balances are
intended to be long-term in nature. At the time the Company
settles such balances, the resulting gain or loss is reflected in
the consolidated statement of operations. Gains and losses from
foreign currency transactions are included in operations in the
period in which they occur.
(e) Cash Equivalents
For the 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.
(f) Inventories
Inventories, which are included in other current assets, consist
primarily of telephones for resale and spare parts, are stated at
the lower of cost or market, and are valued using the FIFO method.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful
lives of the respective assets.
(h) Goodwill and Other Intangible Assets
The excess of cost over net assets acquired, goodwill, is
amortized over the 25-year concession period using the
straight-line method. Other intangible assets represent the cost
of concession fees paid and are being amortized over the 25-year
concession period using the straight-line method.
F-8
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(i) Stock Based Compensation
The Company accounts for its stock option plans in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 123,
which allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, in measuring
compensation cost for stock based compensation awards, and to
provide pro forma net income (loss) and pro forma earnings (loss)
per share disclosures for employee stock option grants made in
1995 and thereafter as if the fair-value-based method, as defined
in SFAS No. 123, had been applied.
(j) Income Taxes
Deferred tax assets and liabilities, net of valuation allowances,
are recognized for the future tax consequences attributable to
operating loss and tax credit carry-forwards and differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities, if any, are measured using enacted tax
rates expected to apply to taxable income in the years in which
these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that
includes the enactment date.
The Company's Hungarian operating subsidiaries were 100% exempt
from Hungarian income tax for a period of five years beginning
from January 1, 1994 and are 60% exempt for the subsequent five
years, as long as (1) capitalization stays above 50,000,000 HUF
(approximately $176,000 at December 31, 2000 exchange rates), (2)
foreign ownership exceeds 30% of the registered capital, and (3)
more than 50% of the revenue earned arises from telecommunication
services.
(k) Net Earnings (Loss) Per Share
Basic earnings (loss) per share ("EPS") is computed by dividing
income or loss attributable to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock.
Net earnings (loss) and weighted average shares outstanding used
for computing diluted loss per common share were the same as that
used for computing basic loss per common share for each of the
years ended December 31, 2000, 1999 and 1998. The Company had
potentially dilutive common stock equivalents of 3,734,637,
8,237,059 and 7,474,915 for the years ended December 31, 2000,
1999 and 1998, respectively, which were not included in the
computation of diluted net loss per common share because they were
antidilutive for the periods presented. The basis for determining
whether common stock equivalents were potentially dilutive was
loss before extraordinary items.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of
The Company evaluates the carrying value of long-lived assets to
be held and used, including goodwill, whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. The carrying value of a long-lived asset is
considered impaired when the projected undiscounted future cash
flows related to the asset are less than its carrying value. The
Company measures impairment based on the amount by which the
F-9
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
carrying value of the respective asset exceeds its fair market
value. Fair market value is determined primarily using the
projected future cash flows discounted at a rate commensurate with
the risk involved. Losses on long-lived assets to be disposed of
are determined in a similar manner, except that fair market values
are reduced for the cost to dispose.
(m) Foreign Exchange Financial Instruments
Foreign exchange financial instrument contracts are utilized by
the Company to manage certain foreign exchange rate risks. Company
policy prohibits holding or issuing derivative financial
instruments for trading purposes.
The Company accounts for foreign exchange financial instruments
under SFAS 52. To qualify for hedge accounting under SFAS 52, the
contracts must meet defined correlation and effectiveness
criteria, be designated as hedges and result in cash flows and
financial statement effects which substantially offset those of
the position being hedged.
Under SFAS 52 hedge accounting, these contracts are valued at
current spot rates on a monthly basis. The change in value is
recognized currently in income through foreign exchange gains
(losses) and is intended to offset the transaction losses or gains
on the foreign currency denominated liabilities which the
contracts are intended to hedge. The foreign exchange loss for the
year ended December 31, 2000 of $4,842,000 is stated net of a gain
of $880,000 relating to the Company's forward hedging contracts.
Any forward points on these contracts are amortized over the life
of the contract through interest expense.
(2) Cash, Restricted Cash and Short-Term Investments
(a) Cash
At December 31, 2000, cash of $5,957,000 comprise the following:
$335,000 on deposit in the United States and $5,622,000 consisting
of $874,000 denominated in U.S. dollars and the equivalent of
$4,748,000 denominated in Hungarian forints on deposit with banks
in Hungary.
(b) Cash Equivalents
Cash equivalents amounted to approximately $9,639,000 at December
31, 2000 and consisted of Hungarian government securities,
denominated in Hungarian forints, purchased under agreements to
resell which mature within three months.
(b) Restricted Cash
At December 31, 2000, approximately $7,000 of cash denominated in
U.S. dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $100,000 of
cash denominated in Hungarian forints was restricted pursuant to
certain arrangements with other parties.
F-10
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(3) Property, Plant and Equipment
The components of property, plant and equipment at December 31, 2000 and
1999 are as follows:
2000 1999 Estimated Useful Lives
---- ---- ----------------------
(in thousands)
Land and Buildings $ 5,763 6,526 25 to 50 years
Telecommunications equipment 121,457 128,116 7 to 25 years
Other equipment 5,613 5,766 5 years
Construction in progress 952 1,921
-------- --------
133,785 142,329
Less: accumulated depreciation (32,115) (26,803)
-------- --------
$ 101,670 115,526
======== ========
(4) Short-Term Loans
Short-term loans at December 31, 2000 and 1999 consist of the following:
2000 1999
---- ----
(in thousands)
Revolving loan:
Euro - EUR 4,000,000 outstanding $ 3,722 -
Bridge loan:
Euro - EUR 25,000,000 - 25,238
Hungarian Forint - HUF 25,940,624,000 - 102,727
-------- --------
Total short-term loans 3,722 127,965
Less amounts refinanced subsequent
To year-end - (122,917)
-------- --------
Short-term loans $ 3,722 5,048
======== ========
On May 12, 1999, as a part of the restructuring of its debt and capital
structure, see Notes 5 and 9, the Company borrowed from Postabank es
Takarekpenztar ("Postabank"), a Hungarian commercial bank, $138 million
($128 million at December 31, 1999 exchange rates) under a one-year dual
currency bridge loan agreement in Hungarian forints and euros. The bridge
loan was repayable on May 12, 2000 and bore interest at an initial rate
of 2.25% (the "Margin") plus the Budapest Interbank Offering Rate
("BUBOR") or the Banking Federation of the European Union Interbank
Offering Rate ("EURIBOR") which Margin increased incrementally to 4.25%,
in quarterly increments of 1% during the loan term. On April 11, 2000,
the Company signed a EUR 130 million senior secured debt facility
agreement with a syndicate of Hungarian and non-Hungarian banks, the
proceeds of which were used to repay the bridge loan. As a result of this
refinancing, the Company classified $123 million (at historical exchange
rates) of its short-term loans at December 31, 1999, as long-term debt.
The principal amount borrowed under the Revolving Loan Facility, a EUR 5
million facility, which will reduce to a EUR 2.5 million facility on
December 31, 2005, and which forms part of the EUR 130 million Senior
Secured Debt Facility, is due at the end of each interest period at
F-11
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
which point the Company can, subject to certain conditions, roll over
the amount of principal borrowed until the expiration of the facility in
December 2007. The applicable interest period for this Facility is, at
the Company's option, one, three, or six months. The Company has chosen
six months at the present time. Interest is payable at the end of each
interest period calculated similar to that for the Term Facility loan
denominated in euros. See Note 5 for further information regarding the
EUR 130 million senior secured debt facility agreement.
(5) Long-term Debt
Long-term debt at December 31, 2000 and 1999 consists of the following:
2000 1999
(in thousands)
Loan payable, interest at EURIBOR + applicable
margin (6.82% at December 31, 2000), payable
in 14 semi-annual installments beginning
June 30, 2001 with final payment due
December 31, 2007; EUR 84,135,000 outstanding
at December 31, 2000. $ 78,288 -
Loan payable, interest at BUBOR + applicable
margin (13.78% at December 31, 2000), payable
in 14 semi-annual installments beginning June
30, 2001 with final payment due December 31,
2007; HUF 10,504,856,000 outstanding at
December 31, 2000 36,893 -
Notes payable, interest at USD LIBOR + 3.5%
(10.23% at December 31, 2000), due March 31,
2007 (less unamortized discount based on
imputed interest rate of 5% - $7,304,000 in
2000; $8,256,000 in 1999) 17,696 16,744
Short-term loans refinanced subsequent to
year-end - 122,917
---------- ---------
Total long-term debt $ 132,877 139,661
Less current installments 8,063 -
---------- ---------
Long-term debt, excluding current installments $ 124,814 139,661
========== =========
The aggregate amounts of maturities of long-term debt for each of the
next five years, and in aggregate thereafter, at December 31, 2000
exchange rates, are as follows: 2001, $8,063,000; 2002, $12,670,000;
2003, $16,125,000; 2004, $16,125,000; 2005, $18,429,000 and $61,465,000
thereafter.
F-12
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
On October 15, 1996, the Company and its subsidiaries entered into a $170
million 10-year Multi-Currency Credit Facility with Postabank (the
"Original Postabank Credit Facility"). On May 12, 1999, the Company
entered into various agreements as part of the restructuring of its
capital structure with the following parties: Postabank; Tele Danmark A/S
("Tele Danmark"); and the Danish Investment Fund for Central and Eastern
Europe (the "Danish Fund") (see Notes 9 and 12). As a result of such
agreements, the Company extinguished all of its obligations to Postabank
under the Original Postabank Credit Facility in the amount of
approximately $193 million and the $16.4 million borrowed in settlement
of the amount due under the contractor financing facility described
below. As part of these transactions, the Company borrowed from Postabank
$138 million ($128 million at December 31, 1999 exchange rates) under a
one-year dual currency bridge loan agreement in Hungarian forints and
euros and $25 million pursuant to certain unsecured notes payable (the
"Notes") (see below). Proceeds from the Senior Secured Debt Facility
Agreement in April 2000, as described below, were subsequently used to
refinance $122,917,000 of the outstanding Postabank loan as of December
31, 1999. Accordingly, long-term debt as of December 31, 1999 includes
$122,917,000 borrowed in May 1999 which was refinanced subsequent to
December 31, 1999. See below and Note 4 for further explanation.
As a result of the extinguishment of the Original Postabank Credit
Facility, the Company recorded an extraordinary loss of HUF 1.5 billion
(approximately $6.3 million at historical exchange rates) during the
second quarter of 1999 which represented the write-off of the remaining
unamortized deferred financing costs pertaining to the Original Postabank
Credit Facility.
During 1996 and 1997, Hungarotel entered into several construction
contracts with a Hungarian contractor which totaled $59.0 million in the
aggregate (at historical exchange rates), $47.5 million of which was
financed by a contractor financing facility. The contractor financed the
construction through a facility provided by Postabank. As of December 31,
1998, the balance owed under the contractor financing facility was $36.6
million. On March 30, 1999, Postabank assumed HUF 7 billion plus accrued
interest of HUF 348 million (approximately $30.9 million at historical
exchange rates) of the Company's liability under the contractor financing
facility from the contractor, due to the contractor's financial
difficulties, and sold this debt back to the Company for HUF 3 billion
(approximately $12.6 million at historical exchange rates). The purchase
of the debt was financed by Postabank. On the same day, the Company
purchased HUF 4 billion (approximately $16.8 million at historical
exchange rates) of loans the contractor had with Postabank for HUF 900
million (approximately $3.8 million at historical exchange rates) and
subsequently offset the booked value of the loans purchased of HUF 900
million (approximately $3.8 million at historical exchange rates) against
the outstanding amounts owed to the contractor. The purchase of these
loans was also financed by Postabank. As a result of the above
transactions, the Company recorded an extraordinary gain of HUF 4.3
billion (approximately $18.2 million at historical exchange rates) during
the second quarter of 1999 which reflected the extinguishment of all
amounts due under the contractor financing facility.
On April 11, 2000, the Company entered into an EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement" or "Facility")
with a European banking syndicate. The Company drew down EUR 129 million
of the Facility on April 20, 2000 ($121 million at April 20, 2000
exchange rates), the funds of which were used, along with $7.3 million
of other Company funds (at April 20, 2000 exchange rates) to pay off the
outstanding EUR 134 million (approximately $126 million at April 20,
2000 exchange rates) principal and interest due on the Postabank Bridge
Loan which was due to mature on May 12, 2000, and to pay fees associated
with the Debt Agreement. The borrowers under the Debt Agreement are the
Operating Companies who were the borrowers under the Postabank Bridge
Loan. The Debt Agreement has two facilities, which are comprised of the
Revolving Facility described in Note 4 and the Term Facility described
below.
F-13
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Term Facility is a floating rate term loan in the amount of EUR 125
million, for which principal is repayable semi-annually on each June 30
and December 31 beginning on June 30, 2001 and ending on December 31,
2007. The amounts of the principal repayments on the Term Facility are
to be escalating percentages of the amounts drawn down. The Company
borrowed the full EUR 125 million, of which EUR 84,135,000 was funded,
and is repayable, in euros and the equivalent of EUR 40,865,000 was
funded, and is repayable, in Hungarian forints. The Term Facility loans
denominated in euros accrue interest at the rate of the Applicable
Margin (defined below) plus the EURIBOR rate for the applicable interest
period. The EURIBOR rate is the percentage rate per annum determined by
the Banking Federation of the European Union for the applicable interest
period. The Term Facility loans denominated in Hungarian forints accrue
interest at the rate of the Applicable Margin (defined below) plus the
BUBOR rate for the applicable interest period. The BUBOR rate is the
percentage rate per annum determined according to the rules established
by the Hungarian Forex Association and published by the National Bank of
Hungary for the applicable interest period. The applicable interest
period for Term Facility Loans denominated in euros is six months. The
applicable interest period for Term Facility Loans denominated in
Hungarian forints is three months. Interest is payable at the end of
each interest period. The Applicable Margin is initially 1.75%. The
Applicable Margin may be adjusted downward incrementally to a minimum of
1.15% subject to the financial performance of the Company as measured by
the ratio of the Company's senior debt to its earnings before interest,
taxes, depreciation and amortization. Dependent on its cash flow, the
Company will be required to prepay the equivalent of $25 million on the
Term Facility until such time as $25 million has been prepaid. The
amount of the prepayment in any year shall be at least 50% of the
Company's excess cash flow, if any, for the previous financial year as
defined in the Debt Agreement. The prepayment amount is due within 15
days of the publication of each annual Form 10-K filing. For the year
ended December 31, 2000, the Company does not have any excess cash flow,
as defined in the Debt Agreement, and therefore no mandatory prepayment
is going to be made by the Company in 2001.
The Company paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2,508,000 at April 20, 2000 exchange rates), which is
included in other assets along with other direct costs incurred in
obtaining the Debt Agreement, and is being amortized over the term of the
related debt. In addition, an agency fee in the amount of $60,000 has
also been paid. The Company is obligated to pay an annual commitment fee
equal to the lower of 0.75% or 50% of the Applicable Margin on any
available unused commitment on the Revolving Loan Facility.
The Company utilizes foreign currency forward contracts to reduce certain
exposure to exchange rate risks associated with cash requirements under
the Company's long-term debt obligations that mature within six months.
The forward contracts establish the exchange rates at which the Company
will sell the contracted amount of Hungarian forints for euros at a
future date. The Company utilizes forward contracts which are six months
in duration and at maturity will either receive or pay the difference
between the contracted forward rate and the exchange rate at the
settlement date. The contracted amount of foreign currency forwards at
December 31, 2000 is EUR 2,998,000 (approximately $2,790,000).
HTCC and one of its subsidiaries, HTCC Consulting Rt., are guarantors for
the Operating Companies under the Debt Agreement. The Company and
Citibank Rt. (as security agent) have entered into a series of agreements
to secure all of the Company's obligations under the Debt Agreement
pursuant to which the Company has pledged all of its intangible and
tangible assets, including HTCC's ownership interests in its
subsidiaries, and its real property. The Company is subject to
restrictive covenants, including restrictions regarding the ability of
the Company to pay dividends, borrow funds, merge and dispose of its
assets. The Debt Agreement contains customary representations and
warranties and customary events of default, including those related to a
F-14
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
change of control, which would trigger early repayment of the balance
under the Debt Agreement. If prior to the later of December 31, 2001 or
the Trigger Date (as defined below), Tele Danmark sells any of the shares
of Common Stock that it currently owns or Tele Danmark and the Danish
Fund, together, no longer own 30.1% of the outstanding Common Stock, then
an event of default shall have occurred. Tele Danmark and the Danish Fund
currently own a combined total of 31.9% of the outstanding common stock.
The Trigger Date is defined as the date on which for the prior two fiscal
quarters the Company's debt to EBITDA ratio is less than 3.5 to 1.
Following the Trigger Date, Tele Danmark can only transfer its shares
with the prior written consent of banks holding at least 66.7% of the
Company's outstanding debt under the Debt Agreement.
In connection with the restructuring of its capital structure in May
1999, as described above, the Company issued notes to Postabank in an
aggregate amount of $25 million with detachable warrants (the
"Warrants"). The Notes accrue interest, which is payable semi-annually,
at the USD LIBOR rate applicable for the six month interest period plus
3.5% (10.23% at December 31, 2000). The Notes which mature in 2007 are
transferable. The Warrants enable Postabank to purchase 2,500,000 shares
of the Company's common stock at an exercise price of $10 per share. The
exercise period commences on January 1, 2004 and terminates on March 31,
2007. The fair value of the warrants amounted to $8.8 million and was
credited to additional paid-in capital, with the offsetting charge being
accounted for as a discount on the Notes. The fair value of the warrants
was determined using the Black-Scholes Option valuation model. The
unamortized discount on the notes at December 31, 2000 was approximately
$7.3 million, and is reflected as a reduction of the carrying amount of
the Notes. The Company has the right to terminate the Warrants in full or
proportionately prior to January 1, 2004 provided that the Company (i)
repays a proportionate amount of the outstanding principal on the Notes
to the holders of such Notes and (ii) pays an additional 7.5% of the
aggregate principal amount of the Notes repaid concurrently with the
termination of the Warrants to the holders of the Warrants.
(6) Deferred Credits and Other Liabilities
During 1999, two of the Company's operating subsidiaries entered into
agreements with the Hungarian Ministry of Transportation,
Telecommunications and Water Management (the "Ministry") for the
relinquishment of rights to use broadcasting frequencies previously
granted by the Ministry. The frequencies were used to provide telephone
services to certain customers. Under the first agreement, the Ministry
paid HUF 557 million ($2,205,000 at historical exchange rates), which
was equal to the net book value of the equipment which was required to
be taken out of service. Under the second agreement, the Ministry paid
HUF 308 million ($1,278,000 at historical exchange rates) as a
contribution towards the cost of new fixed network equipment. The
amounts received under these agreements were credited to deferred
credits and other liabilities, and under the first agreement are offset
against the cost of the related equipment and, under the second
agreement, are offset against the cost of the new equipment.
Included in deferred credits and other liabilities at December 31, 2000,
is $8,212,000 of connection fee revenues, from current and prior years,
which have been deferred following the Company's implementation of SAB
101 during the fourth quarter of 2000. A similar amount, representing
the associated deferred costs, is included in deferred costs at December
31, 2000.
F-15
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(7) Income Taxes
The statutory U.S. Federal tax rate for the years ended December 31,
2000, 1999 and 1998 was 35% and the Hungarian corporate income tax rate
for the years ended December 31, 2000, 1999 and 1998 was 18%. For
Hungarian corporate income tax purposes, the operating companies were
entitled to a 100% reduction in income taxes for the five year period
ending December 31, 1998 and are now entitled to a 60% reduction in
income taxes for the subsequent five year period ending December 31,
2003. The effective tax rate was zero for the years ended December 31,
2000, 1999 and 1998 due to the Company incurring net operating losses for
which no tax benefit was recorded.
For U.S. Federal income tax purposes, the Company has unused net
operating loss carryforwards at December 31, 2000 of approximately
$28,477,000 which expire as follows: 2010, $6,025,000; 2011, $6,328,000;
2012, $2,256,000; 2018, $1,925,000; and 2019, $11,943,000. As a result of
various equity transactions, management believes the Company experienced
an "ownership change" in 1999, as defined by Section 382 of the Internal
Revenue Code which limits the annual utilization of net operating loss
carryforwards incurred prior to the ownership change.
For Hungarian corporate income tax purposes, the Hungarian subsidiaries
have unused net operating loss carryforwards at December 31, 2000, at
current exchange rates, of approximately $65,234,000. Of this amount,
$11,030,000 may be carried forward indefinitely while $6,882,000 may be
carried forward until 2001, $10,413,000 until 2002, $17,322,000 until
2003, $9,429,000 until 2004 and $10,158,000 until 2005.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
December 31
-----------------------------
2000 1999
---- ----
(in thousands)
Net operating loss carryforwards $ 9,967 5,866
Write down of assets 167 418
Stock compensation 1,467 1,467
Citizen's options - 3,926
Termination benefits 323 746
Management fees - 3,236
Interest expense 1,699 1,381
Other 231 474
-------- --------
Total gross deferred tax assets 13,854 17,514
Less valuation allowance (13,854) (17,514)
-------- --------
Net deferred tax assets $ 0 0
======== ========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers projected future taxable income and tax
planning in making these assessments. During 2000 and 1999, the valuation
allowance decreased by $3,660,000 and $2,451,000, respectively.
F-16
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(8) Commitments and Contingencies
(a) Concession Agreements
Certain subsidiaries of the Company have been awarded concession
rights by the Hungarian Ministry of Transportation,
Telecommunications and Water Management ("the Ministry") to own
and operate local public telephone networks in five regions of
Hungary. Each of the concession agreements are for a term of 25
years and provide for an eight-year exclusivity period.
During 2000, the Ministry was restructured, with responsibility
for telecommunications being moved to the Prime Minister's Office,
a government department presided over by the Chancellor
(effectively, the Deputy Prime Minister). References to "the
Ministry" for the period post restructuring are, accordingly,
references to the Prime Minister's Office.
Agreements providing concession rights in two regions to
Hungarotel and one region to Papatel were entered into prior to
their acquisition by the Company and were renegotiated by the
Company. The renegotiated concession agreements provided for an
initial payment to the Ministry of HUF 938,250,000 (approximately
$6.7 million at December 31, 1995 exchange rates) which was paid
in November 1995, and for annual concession fees based upon 2.3%
and 0.3% of net telephone service revenues for the regions
operated by Hungarotel and 2.3% of net telephone service revenues
for the region operated by Papatel.
In 1994, the Ministry awarded concession rights to own and operate
local public telephone networks to KNC and Raba-Com under
agreements which provide for annual concession fees based upon
0.1% and 1.5% of net telephone service revenues for the regions
operated by KNC and Raba-Com, respectively.
The concession agreements provide for, among other things, the
subsidiaries to provide telephone service to specific numbers of
customers by specified dates or be subject to possible monetary
penalties and possibly reduction in the period of exclusivity. As
of December 31, 2000, the Company believes it has fulfilled these
service requirements in its concession areas in all material
respects.
The activities of the subsidiaries which own concession rights are
regulated by the Ministry and by the terms of their respective
concession agreements. The Ministry regulates the construction,
operation and sale of local telephone exchanges and has been given
the authority to regulate the industry. This authority includes
approving local, long distance and international rates, the
sharing of revenues between concession companies and Matav, the
equipment that can be used in the public switched telephone
network and requiring local companies to meet specified standards
as to growth and services.
F-17
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Ministry has stipulated in the Concession Contracts for
Hungarotel and Papatel, as amended on June 3, 1996, that each of
these two Operating Companies must meet certain Hungarian
ownership requirements so that by the seventh anniversary of the
amendment, Hungarian ownership must consist of at least 25% plus
one share of the relevant Operating Company. For the seven-year
period following the date of the amendment, Hungarian ownership
must be at least 10%, except that during such period, such
ownership may be reduced to as low as 1% for a period of up to two
years. During such seven-year period, while the Hungarian
ownership block is required to be at least 10%, such Hungarian
ownership of a 10% equity holding in an Operating Company must
have voting power of at least 25% plus one share, thus providing
Hungarian owners the right to block certain transactions which,
under Hungarian corporate law, require a supermajority (75%) of
stockholders voting on the matter, such as mergers and
consolidations, increases in share capital and winding-up.
For these purposes, Hungarian ownership of shares means shares
owned by Hungarian citizens. Shares owned by a corporation are
considered Hungarian owned only in proportion to the Hungarian
ownership of such corporation. The Operating Companies can also
fulfill the 25% plus one share Hungarian ownership requirement by
listing their shares on the Budapest Stock Exchange.
The equity ownership requirements and exceptions described above
are contained in the June 1996 amended Concession Contracts for
Hungarotel and Papatel. The equity ownership requirements
expressly set forth in KNC's and Raba-Com's Concession Contracts
call for a strict 25% plus one share Hungarian ownership.
However, the Ministry has stated, pursuant to a letter dated
September 18, 1996, that it intends that all of the Operating
Companies be treated equally with respect to such ownership
requirements.
Following a capital transaction with Postabank in May 1999 (see
Note 9) each of the Operating Companies is deemed in compliance
with the 10% ownership requirement, however none of the Companies
are currently in compliance with the 25% voting requirement.
Failure to comply with the 25% Hungarian ownership requirement at
the end of the seven-year period, which expires in 2003, might be
considered a serious breach of a Concession Contract, giving the
Ministry the right, among other things, to terminate the
Concession Contracts. New regulations for the liberalized
telecommunications market in 2002 may remove the Hungarian
ownership requirement, but the content, effect or timing of any
new regulations on this issue are unknown at the present time.
However, in the event the ownership requirement is enforced, the
Company believes that it will be able to restructure its
ownership components in a manner satisfactory to the Ministry.
(b) Construction Commitments
KNC has a long-term frame contract with Siemens which provides for
the continued construction of a local telephone network and the
addition of new subscribers in its service area. During 1999, the
contract was amended to expand the number of subscribers the
contractor must connect in order to complete the contract. This
contract totals, with the amendment during 1999, approximately
$20.0 million, $2.3 million of which remains to be expended.
F-18
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Hungarotel has two contracts with Siemens for continued network
expansion to meet current and expected future customer demand. The
contracts totalled approximately $4.9 million, of which
approximately $3.0 million remains to be expended in 2001. In
connection with one of the Siemens contracts, Hungarotel is also
building a new office building in one of its concession areas. The
cost of the building is expected to be approximately $0.5 million,
at December 31, 2000 exchange rates, the full amount of which will
be expended in 2001.
(c) Leases
The Company and its subsidiaries lease office and other facilities
in the United States and Hungary, which require minimum annual
rentals. Rent expense under operating lease agreements for the
years ended December 31, 2000, 1999 and 1998, was $301,000,
$395,000 and $199,000, respectively, and is included in operating
and maintenance expenses. Lease obligations for each of the next
five years, and in the aggregate thereafter, are as follows (at
December 31, 2000 exchange rates): 2001, $327,000; 2002, $314,000;
2003, $320,000; 2004, $323,000; and 2005, $327,000.
(d) Legal Proceedings
Hungarotel is a defendant in a lawsuit brought in Hungary that
alleges breach of contract. The plaintiff was seeking payment of
approximately HUF 222 million (approximately $780,000 at December
31, 2000 exchange rates) plus interest. By a judgement in October
2000, a Hungarian court made an award in favor of the plaintiff in
the amount of HUF 77.7 million (approximately $273,000 at December
31, 2000 exchange rates) plus interest. As of December 31, 2000,
interest and costs stood at approximately HUF 141.5 million
(approximately $497,000 at December 31, 2000 exchange rates). The
Company continues to believe that it has satisfactory defenses
against the claims and has filed an appeal with the Hungarian
Supreme Court against this judgement. The Company has accrued in
its financial statements an amount which it believes will be
sufficient to satisfy the ultimate cost of resolving this
litigation.
During 1996 and 1997, Hungarotel entered into several
construction contracts with a Hungarian contractor which totaled
$59.0 million in the aggregate, $47.5 million of which was
financed by a contractor financing facility. By January 1998 it
became clear to Hungarotel that there were problems with the work
undertaken by the contractor and Hungarotel rejected invoices in
the amount of approximately HUF 700 million (approximately $2.5
million at December 31, 2000 exchange rates) for, among other
reasons, the contractor's failure to meet the contractual
capacity requirements and breaches of warranties regarding the
quality of work. During 1998 the Company and the contractor
engaged in settlement discussions in order to resolve these
issues but were unable to reach a settlement. Following a series
of transactions with the contractor's major creditor, the Company
was able to settle, through legal offset, the contractor's claims
arising from the accepted but unpaid invoices. In addition, in
March 1999, Hungarotel acquired a HUF 3.1 billion (approximately
$10.9 million at December 31, 2000 exchange rates) net claim
against the contractor in order to strengthen its position in any
potential procedures initiated by the contractor. The contractor
is seeking payment under separate invoices in the amount of
approximately $24 million for work which the Company is disputing
F-19
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
because of quality and quantity issues. The Company still has
claims against the contractor of approximately $31 million which
is more than the contractor's claim. In December 1999, a debt
collection company initiated debt collection proceedings against
the Hungarian contractor for non-payment of various debts. In
June 2000, the debt collection company claimed the benefit of
certain invoices that the contractor had issued to Hungarotel in
the amount of HUF 455 million (approximately $1.6 million at
December 31, 2000 exchange rates), stating that the contractor
had assigned those invoices to it "as security" in the debt
collection proceedings. Hungarotel rejected the debt collection
company's claim for, among other reasons, the absence of a right
by the contractor to assign the invoices and that, in any event,
Hungarotel has a substantive defense and counterclaim on the
merits to the underlying claim on the invoices. A court hearing
regarding the HUF 455 million claim plus interest and costs is
scheduled for the early spring 2001. The Company believes that it
will prevail.
Raba-Com is a defendant in a lawsuit seeking refund of the
connection fee paid by a residential customer due to delay in
providing telephone service. Management believes there are
meritorious defenses to the claim and expects to prevail. Should,
however, the legal proceedings result in a final unfavorable
outcome, the Company could be subject to additional claims for
refunds of connection fees received.
Papatel is involved in a dispute with the Hungarian taxing
authorities (the "APEH") pursuant to which the APEH alleges
Papatel owes HUF 26 million (approximately $91,000 at December
31, 2000 exchange rates) for various reasons. Papatel believes
that the APEH claim is without merit and is vigorously defending
itself against such claims.
The Company and its subsidiaries are involved in various other
claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition
of these matters and those described above will not have a
material effect on the Company's consolidated financial position,
results of operations or liquidity.
(9) Common Stock and Cumulative Convertible Preferred Stock
On September 30, 1998, the Company entered into certain agreements with
certain wholly-owned subsidiaries of Citizens Utilities Company (Citizens
Utilities Company and its subsidiaries are hereinafter referred to as
"Citizens") pursuant to which the Company issued 100,000 shares of Common
Stock (see Note 12). The value of the shares on the date of issue totaled
$513,000 which was recorded as an increase to Common Stock and additional
paid-in capital.
During 1998, the Company issued 18,469 shares of Common Stock as
contingent consideration related to the acquisition of Hungarotel and
Papatel in 1995, per the acquisition agreement.
F-20
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
On May 12, 1999, the Company and Tele Danmark A/S ("TD") entered into a
Stock Purchase Agreement (the "TD Stock Purchase Agreement") pursuant to
which the Company issued 1,571,429 shares of the Company's common stock
in exchange for $11 million. The Company applied the proceeds from the TD
Stock Purchase Agreement to the repayment of the Original Postabank
Credit Facility (see Note 5).
On May 12, 1999, the Company and the Danish Fund for Central and Eastern
Europe (the "Danish Fund") entered into a Stock Purchase Agreement (the
"Danish Fund Stock Purchase Agreement") pursuant to which the Company
issued 1,285,714 shares of the Company's common stock in exchange for $9
million. The Company applied the proceeds from the Danish Fund Stock
Purchase Agreement to the repayment of the Original Postabank Credit
Facility (see Note 5).
On May 12, 1999, the Company and Citizens entered into a Stock Purchase
Agreement (the "Citizens Stock Purchase Agreement") pursuant to which the
Company issued to Citizens 1,300,000 shares of the Company's common stock
and 30,000 shares of the Company's Series A Cumulative Convertible
Preferred Stock, par value $0.01 (the "Preferred Stock") in consideration
for the extinguishment of liabilities the Company had with Citizens (see
Note 12). The value of the common stock on the date of issue totaled
$9,100,000 and was recorded as an increase to Common Stock and additional
paid-in capital. The value of the preferred shares on the date of issue
totaled $2,100,000 which was recorded as an increase to Cumulative
Convertible Preferred Stock and additional paid-in capital. Citizens, as
the holder of the Cumulative Convertible Preferred Stock, is entitled to
receive cumulative cash dividends at an annual rate of 5%, compounded
annually on the liquidation value of $70 per share. The Company may, at
its option, redeem the Preferred Stock at any time. The Cumulative
Convertible Preferred Stock is convertible into shares of the Company's
common stock on a one for ten basis.
On May 12, 1999, the Company and Postabank entered into a Securities
Purchase Agreement (the "Postabank Securities Purchase Agreement")
pursuant to which Postabank purchased 2,428,572 shares of the Company's
common stock for an aggregate purchase price of $34 million. The
Postabank Securities Purchase Agreement provides for one person
designated by Postabank to be nominated for election to the Company's
Board of Directors. Postabank can only transfer such shares
incrementally through 2003 subject to the Company's right of first
refusal. The Company's right of first refusal expires in January 2003
and is assignable by the Company to any beneficial holder of more than
10% of the Company's outstanding common stock. The Company applied the
proceeds from the stock issuance to the repayment of the Original
Postabank Credit Facility (see Note 5). Pursuant to the Postabank
Securities Purchase Agreement, the Company issued notes to Postabank in
an aggregate amount of $25 million with detachable warrants (see Note
5).
During the fourth quarter of 2000, the Company entered into an agreement
with the International Finance Corporation ("IFC") pursuant to which the
IFC agreed to exchange its 20% ownership interest in Papatel for a total
of 72,000 shares of the Company's Common Stock. The value of the shares
on the date of issue totaled $333,000, which was recorded as an increase
to Common Stock and additional paid-in capital.
As of December 31, 2000 and 1999, the Company had 30,000 shares of its
cumulative convertible preferred stock, with a $70.00 liquidation value,
outstanding. Any holder of the cumulative convertible preferred stock is
entitled to receive cumulative cash dividends payable in arrears, at an
annual rate of 5%, compounded annually on the liquidation value of $70.00
per share. As of December 31, 2000 and 1999, the total arrearage on the
cumulative convertible preferred stock was $175,000 and $68,000,
respectively, and is included in due to related parties. The Company is
currently legally prohibited under Delaware law from paying any dividends
on the cumulative convertible preferred stock.
F-21
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Company has reserved 3,734,637 shares as of December 31, 2000 for
issuance under stock option plans, compensation agreements, warrants and
under the conversion terms applicable to its outstanding cumulative
convertible preferred stock.
(10) Stock Based Compensation
Stock Option Plans
The Company adopted a stock option plan (the "Plan") in April 1992 which
provided for the issuance of an aggregate of 90,000 stock options, which
has since been increased following stockholder approval, to 1,250,000 as
of December 31, 2000. Under the Plan, incentive and non-qualified options
may be granted to officers, directors and consultants to the Company. The
plan is administered by the Board of Directors, which may designate a
committee to fulfill its responsibilities. Options granted under the Plan
are exercisable for up to 10 years from the date of grant. As of December
31, 2000, 853,490 options provided for by the Plan had been issued, of
which 196,100 were exercised and 657,390 remained outstanding.
During 1998, a former officer exercised options to purchase 51,750 shares
of Common Stock at $4.00 per share. Proceeds from the exercise of these
options totaled $207,000. During 2000, a former officer exercised options
to purchase 28,600 shares of Common Stock at $8.00 per share. Proceeds
from the exercise of these options totaled $228,800. The options
exercised were issued from the Company's stock option plan.
In 1997, the Company adopted a director stock option plan (the
"Directors' Plan") which provides for the issuance of an aggregate of
250,000 stock options. Options granted under the Directors' Plan are
exercisable for up to 10 years from the date of grant. As of December 31,
2000, 90,000 options provided for by the Directors' Plan had been issued,
of which 10,000 were exercised and 80,000 remained outstanding.
During 2000, a former director exercised options, granted from the
Directors' Plan, to purchase 5,000 shares of Common Stock at $6.78 per
share. Proceeds from the exercise of these options totaled $33,900.
The Company applies APB Opinion No. 25 and related interpretations in
measuring compensation cost under its stock based compensation plans,
including the Directors' Plan. As a result, no compensation expense has
been recognized by the Company with regard to employee and director
awards under its stock option plans, as the exercise price of all options
has equaled or exceeded the fair market value of the Company's common
stock price at the respective grant dates. Had the Company determined
compensation cost for options issued under the plans based on the fair
value at the grant date in conformity with SFAS No. 123, the Company's
net pro forma income (loss) and Earnings (Loss) Per Share would have been
as follows:
2000 1999 1998
---- ---- ----
(in thousands)
Net income (loss) As reported ($5,331) $3,172 ($50,612)
Pro forma ($5,850) $2,526 ($51,065)
Earnings (loss) per share As reported ($0.45) $0.33 ($9.53)
Pro forma ($0.50) $0.27 ($9.62)
For purposes of the pro forma calculation under SFAS 123, the fair value
of each option grant has been estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1) a
risk free rate of 6.69% in 2000, 5.03% in 1999 and 5.58% in 1998, (2) an
expected life of 6 years for 2000, 5 years for 1999 and 6 years for 1998,
and (3) volatility of approximately 72% for 2000, 81% for 1999 and 84%
for 1998.
F-22
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The following is a summary of stock options, including those issued under
the Plan and Directors' Plan referred to above, and other compensation
agreements which were granted, exercised and cancelled for the three
years ended December 31, 2000:
Outstanding Option Price
Options Per Share
------------------------------------- ---------------- ------------------
December 31, 1997 758,097 $3.60-$20.00
Granted 151,000 $5.81-$8.00
Exercised (56,400) $3.60-$4.00
Cancelled - -
------------------------------------- ---------------- ------------------
December 31, 1998 852,697 $4.00-$20.00
Granted 189,990 $3.25-$6.00
Exercised - -
Cancelled (116,950) $8.00-$20.00
------------------------------------- ---------------- ------------------
December 31, 1999 925,737 $3.25-$14.00
Granted 140,000 $5.93-$6.21
Exercised (33,600) $6.78-$8.00
Cancelled (97,500) $9.44-$12.25
------------------------------------- ---------------- ------------------
December 31, 2000 934,637 $3.25-$14.00
------------------------------------- ---------------- ------------------
The following table summarizes information about shares subject to
outstanding options as of December 31, 2000 which were issued to current
or former employees, or directors pursuant to the Plan, Directors' Plan,
employment or other agreements.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Weighted- Average Weighted-
Number Range of Average Remaining Life Number Average
Outstanding Exercise Prices Exercise Price in Years Exercisable Exercise Price
----------- --------------- -------------- -------------- ----------- --------------
543,237 $3.25-$6.78 $4.80 3.69 523,237 $4.75
176,400 $8.00-$9.44 $8.58 2.23 176,400 $8.58
15,000 $11.69 $11.69 1.83 15,000 $11.69
200,000 $14.00 $14.00 0.58 200,000 $14.00
------- -------
934,637 $3.25-$14.00 $7.60 2.72 914,637 $7.63
======= =======
Stock Grants
During the second quarter of 1998, the Company issued 10,625 shares of
Common Stock to two former officers as compensation. An amount of
$93,000, representing the fair market value of the stock on the date of
grant, has been recorded as compensation expense and as an increase in
Common Stock and additional paid-in-capital.
F-23
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
In December 1995, the Company entered into employment agreements with
three executives, which provided for, among other things, the granting of
a total of 102,500 shares of Common Stock. The Common Stock grants vested
over a four-year period from the effective date of each agreement. As a
result of these employment agreements, in 1995 the Company recorded an
increase in additional paid-in-capital of $1,050,000, and a corresponding
increase in deferred compensation, which was being amortized over the
vesting period. During 1998, the Company canceled 25,000 shares of the
total 102,500 shares granted in December 1995. As a result of the
cancellation, the Company recorded a decrease in additional
paid-in-capital of $256,000, and a corresponding decrease in deferred
compensation.
In November 1999, the Company cancelled 30,000 fully vested employee
stock options previously issued with an original exercise price of $8.00
per share and an expiration date of March 31, 2003, and issued 30,000
options with like terms except that the newly issued options have been
granted with an exercise price of $5.46 per share, the fair value of such
options at the date of modification. The Company has recognized
approximately $45,000 of compensation income in 2000 and $54,000 of
compensation expense in 1999 as a result of the modification.
(11) Reconciliation of Net Income (Loss) to Net Cash Provided by Operating
Activities
-------------------------------------------------------------------------
The reconciliation of net income (loss) to net cash provided by operating
activities for the years ended December 31, 2000, 1999 and 1998 follows:
2000 1999 1998
---- ---- ----
(in thousands)
Net income (loss) $ (5,331) 3,172 (50,612)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of property, plant and
equipment 8,772 11,008 10,598
Amortization of intangibles 656 774 962
Asset write-downs 183 237 45
Non-cash compensation (45) 54 339
Unrealized foreign currency loss 5,050 2,580 353
Extraordinary items, net - (20,193) -
Termination charges - - 11,131
Other (income)/expense 38 (1,177) (787)
Unpaid/non-cash interest 1,478 16,345 36,494
Changes in operating assets and liabilities:
Accounts receivable 654 (1,277) 2,199
Restricted cash (9) 60 444
VAT receivable - - 2,503
Other assets (754) 2,508 1,461
Accounts payable and accruals (1,473) 4,929 (6,156)
Due to related parties (928) (498) 2,144
-------- -------- -------
Net cash provided by operating activities $ 8,291 18,522 11,118
======= ======= =======
Cash paid during the year for:
Interest $ 12,526 10,521 9,362
======= ======= =======
F-24
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Summary of non-cash transactions:
During 2000 the Company:
o Issued 72,000 shares of Common Stock valued at $333,000 to the IFC in
exchange for its interest in one operating subsidiary.
During 1999 the Company:
o Issued 1,300,000 shares of Common Stock valued at
$9,100,000 and 30,000 shares of Cumulative Convertible Preferred
Stock valued at $2,100,000 in settlement of an $8.4 million promissory
note and Citizens' renouncement and forgiveness of any rights
whatsoever in respect of the $21 million aggregate amount payable to
Citizens beginning in 2004.
o Modified the exercise price on 30,000 stock options issued to an
executive pursuant to a termination agreement.
During 1998 the Company:
o Issued 100,000 shares of Common Stock valued at $513,000 and a
promissory note in the amount of $8.4 million to Citizens in
settlement of $9.6 million of accrued fees and expenses due and
payable to Citizens under the terminated management services
agreement.
o Issued 10,625 shares of Common Stock as compensation to two former
executive officers valued at $93,000.
o Canceled 25,000 restricted shares to a former executive pursuant to
a retirement agreement.
o Issued 2,110,896 options to purchase Common Stock valued at $121,000
in settlement of Citizens' accrued preemptive rights.
(12) Related Parties
Transactions entered into with certain related parties are as follows:
(a) Transactions with former officers and directors
On July 26, 1996, the Company entered into Termination and Release
Agreements, Consulting Agreements and Non-competition Agreements
with its former Chairman and Chief Executive Officer, former Vice
Chairman and former Chief Financial Officer, Treasurer, Secretary
and Director. Pursuant to these agreements, the Company agreed to
make payments for severance, consulting fees and non-compete
agreements amounting to $7.25 million, in equal monthly
installments over a 72 month period commencing August 31, 1996,
and also issued options to purchase 200,000 shares of Common Stock
at an exercise price of $14.00 per share. These commitments are
supported by letters of credit. The Company recorded a charge of
approximately $6.3 million in 1996 and has made payments
aggregating approximately $1,208,000 in each of 2000, 1999 and
1998 related to these agreements.
F-25
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
(b) Transactions with Tele Danmark A/S
After the transaction with Tele Danmark, as discussed in Note 9,
TD's share ownership in the Company is 21.2% of the Company's
outstanding common stock as of December 31, 2000. TD has been
granted preemptive rights to maintain its ownership percentage.
(c) Transactions with the Danish Fund
As a result of the transaction with the Danish Fund, as discussed
in Note 9, the Danish Fund's share ownership in the Company is
10.6% of the Company's outstanding common stock as of December 31,
2000.
(d) Transactions with Postabank
As a result of the transactions with Postabank discussed in Notes
4, 5 and 9, Postabank's share ownership in the Company is 20.1% of
the Company's outstanding common stock as of December 31, 2000.
(e) Transactions with Citizens
On September 30, 1998, the Company entered into certain
agreements with Citizens pursuant to which the Company settled
disagreements with Citizens regarding certain issues with respect
to (i) 2.1 million shares of the Company's common stock subject
to Citizens' accrued preemptive rights and (ii) the Company's
management services agreement with Citizens dated as of May 31,
1995, as amended (the "Management Services Agreement").
Such agreements provided for, among other things, (i) the
termination of a Master Agreement dated as of May 31, 1995
between the Company and Citizens; (ii) the issuance by the
Company to Citizens of 100,000 shares of the Company's common
stock and a promissory note in the principal amount of $8,374,498
in settlement of $9.6 million accrued fees and expenses due and
payable to Citizens under the Management Services Agreement;
(iii) the termination of the Management Services Agreement; (iv)
payments by the Company to Citizens in the aggregate amount of
$21,000,000 payable in 28 quarterly installments from 2004
through and including 2010 in part as consideration for Citizens'
agreement to terminate the Management Services Agreement and in
part as consideration for certain consulting services to be
provided by Citizens to the Company from 2004 through and
including 2010; (v) the grant by the Company to Citizens of
certain preemptive rights in connection with any public or
private issuances by the Company of shares of its common stock to
purchase within 30 days for cash such number of shares of the
Company's common stock sufficient to maintain Citizens' then
existing percentage ownership interest of the Company's common
stock on a fully diluted basis; and (vi) the right of one
Citizens designee to the Company's Board of Directors to be
renominated for reelection to the Company's Board of Directors
for so long as Citizens owns at least 300,000 shares of the
Company's common stock.
F-26
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
The Company recorded a charge totaling $11.1 million in 1998
representing the present value of the $21 million aggregate amount
payable to Citizens beginning in 2004.
The agreements included an Amended, Restated and Consolidated
Stock Option Agreement (the "Restated Stock Option Agreement")
pursuant to which the Company granted Citizens an option to
purchase 2,110,896 shares of the Company's common stock at a price
of $13.00 per share with an expiration date of July 1, 1999 in
settlement of Citizens' accrued preemptive rights. The Restated
Stock Option agreement also acknowledged Citizens existing options
to date to purchase an aggregate of 4,511,322 shares of the
Company's common stock at exercise prices ranging from $12.75 to
$18.00 per share with an expiration date of September 12, 2000.
The cost of this consideration to the Company, representing the
fair value of the newly granted options in settlement of Citizen's
accrued preemptive rights, amounted to $121,000. The fair value of
the newly granted options was determined using the Black-Scholes
option pricing model. The Company reflected this cost as a charge
in 1998. All of the Citizens options have expired unexercised.
On May 12, 1999, the Company and Citizens entered into a Stock
Purchase Agreement (the "Citizens Stock Purchase Agreement')
pursuant to which the Company issued to Citizens 1,300,000 shares
of the Company's common stock and 30,000 shares of the Company's
Series A Cumulative Convertible Preferred Stock, par value $0.01
(the "Preferred Stock"). In consideration for such shares,
Citizens (i) transferred to the Company for cancellation the
$8,374,000 promissory note issued by the Company to Citizens which
was to mature in 2004, (ii) forgave half of the accrued interest
due on the promissory note through May 15, 1999 and (iii) agreed
to renounce and forego any rights whatsoever to any payment of the
$21 million which was payable by the Company to Citizens in
quarterly installments of $750,000 each from 2004 through and
including 2010. The Citizens Stock Purchase Agreement provided
that if the average closing price of the Company's common stock
for the twenty (20) trading days ending March 31, 2000 was less
than $7.00 per share, then HTCC would issue additional Preferred
Stock to Citizens. The average closing price of the Company's
common stock for the above mentioned period was more than $7.00
per share and as a result, no additional shares of HTCC Preferred
Stock have been issued to Citizens. Citizens also waived any and
all preemptive and anti-dilution rights in connection with the
transactions described in Notes 5 and 9. As a result of the Stock
Purchase Agreement with Citizens, the Company recorded
extraordinary income of $9.0 million during the second quarter of
1999, which represented the gain on the extinguishment of the
liabilities the Company had with Citizens.
After the above transactions, on December 31, 2000 Citizens held
19.1% of the Company's outstanding common stock.
F-27
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Amounts payable to related parties as of December 31, 2000 and 1999,
excluding long-term debt, were as follows:
2000 1999
---- ----
Payable to former officers and directors $ 1,727,000 $ 2,656,000
Due to Citizens 175,000 68,000
--------- ------------
$ 1,902,000 $ 2,724,000
========= ============
(13) Extraordinary Items
The extraordinary item in 1999 resulted from a series of transactions as
follows:
Gain on extinguishment of amounts due under a contractor
financing facility (see Note 5) $18,161,000
Gain on extinguishment of liabilities to Citizens (see Note
12(e)) 9,039,000
Less: write-off of unamortized deferred financing costs and
credits pertaining to the Original Postabank Credit
Facility (see Note 5) (6,255,000)
-------------
$20,945,000
=============
(14) Employee Benefit Plan
Effective December 1996, the Company established a 401(k) salary deferral
plan (the "401(k) Plan") on behalf of its U.S. employees. The 401(k) Plan
is a qualified defined contribution plan and allows participating
employees to defer up to 15% of their compensation, subject to certain
limitations. Under the 401(k) Plan, the Company has the discretion to
match contributions made by the employee. No matching contributions were
made by the Company in 2000, 1999 or 1998.
(15) Segment Disclosures
The Company operates in a single industry segment, telecommunications
services. The Company's operations involve developing and constructing a
modern telecommunications infrastructure in order to provide a full range
of the Company's products and services in its five concession areas in
Hungary. While the Company's chief operating decision maker monitors the
revenue streams of the various products and services, operations are
managed and financial performance is evaluated based on the delivery of
multiple services to customers over an integrated network. Substantially
all of the Company's assets are located in Hungary and all of its
operating revenues are generated in Hungary.
Products and Services
The Company groups its products and services into the following
categories:
Telephone Services - local dial tone and switched products and services
that provide incoming and outgoing calls over the public switched
network. This category includes reciprocal compensation revenues and
expenses (i.e. interconnect).
F-28
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
Network Services - point-to-point dedicated services that provide a
private transmission channel for the Company's customers' exclusive use
between two or more locations, both in local and long distance
applications.
Other Service and Product Revenues - PBX hardware sales and service
revenues, as well as miscellaneous other telephony service revenues
The revenues generated by these products and services for the years ended
December 31 were as follows:
(in thousands) 2000 1999 1998
---- ---- ----
Telephone services $39,867 $42,088 $35,969
Network services 2,398 2,193 1,402
Other service and product
revenues 709 1,157 1,336
------- ------- ------
$42,974 $45,438 $38,707
======== ======= =======
Major Customers
For the years ended December 31, 2000, 1999 and 1998, none of the
Company's customers accounted for more than 10% of the Company's total
revenue.
F-29
Schedule of Quarterly Financial Data (unaudited)
December 31 September 30 June 30 March 31
(amounts in thousands, except per share amounts)
Fiscal 2000 quarters ended:
Net revenues* $ 10,288 $ 10,662 $ 10,887 $ 11,137
Operating income 3,623 4,368 4,466 4,012
Net income (loss) available for
common stockholders 954 (2,700) (209) (3,456)
Earnings (loss) per share:
Net income (loss) $ 0.08 $ (0.22) $ (0.02) $ (0.29)
======== ======== ======== ========
Fiscal 1999 quarters ended:
Net revenues $ 12,274 $ 11,169 $ 10,790 $ 11,205
Operating income 4,900 3,796 3,537 3,956
Income (loss) before
extraordinary items (2,055) (2,736) (4,968) (8,014)
Extraordinary items, net** - - 20,945 -
Net income (loss) available
for common stockholders (2,082) (2,763) 15,963 (8,014)
Earnings (loss) per share:
Before extraordinary items $ (0.17) $ (0.23) $ (0.55) $ (1.49)
Extraordinary items - - 2.32 -
-------- -------- -------- --------
Net income (loss) $ (0.17) $ (0.23) $ 1.77 $ (1.49)
======== ======== ======== ========
* Revenues for the first three quarters of 2000, as previously reported, have
been restated to reflect a change in accounting for connection fees in
conformity with the SEC's Staff Accounting Bulletin No. 101. The effect of
this change resulted in net revenues, as previously reported, increasing for
the quarters ended September 30, June 30, and March 31 by $258,000, $231,000
and $306,000, respectively.
**For a description of the second quarter 1999 extraordinary items, see Note 13
of Notes to Consolidated Financial Statements.
S-1
Schedule II - Valuation Accounts
Balance at Provision for Balance
the Beginning Bad Debt Translation at the End
DESCRIPTION of Year Expense Adjustment of Year
-----------------------------------------------------
Allowance for doubtful
accounts receivable
Year ended
December 31, 1998 $540,000 $469,000 ($47,000) $962,000
========= ========= ======== =========
Year ended
December 31, 1999 $962,000 $227,000 ($159,000) $1,030,000
========= ========= ======== =========
Year ended
December 31, 2000 $1,030,000 $230,000 ($120,000) $1,140,000
========= ========= ======== =========
S-2
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Description
10.6 Hungarian Telephone and Cable Corp. Non-Employee Director Stock
Option Plan, as amended as of May 25, 2000.
10.8 Employment Agreement between Hungarian Telephone and Cable Corp.
and Ole Bertram as amended as of January 31, 2001.
21 Hungarian Telephone and Cable Corp. Subsidiaries.
23 Consent of KPMG Hungaria Kft.
27.1 Financial Data Schedule.