UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001 Commission file number 1-11484
--------------
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3652685
--------------------------------------- --------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
32 Center Street, Darien, CT 06820
(Address of principal executive offices)
(203) 656-3882
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest possible date:
Common Stock, $.001 par value 12,103,180 Shares
(Class) (Outstanding at May 10, 2001)
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information: Page No.
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Consolidated Condensed Balance Sheets 2
Consolidated Condensed Statements of Operations and
Comprehensive Income (Loss) 3
Consolidated Condensed Statements of Stockholders' Deficiency 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information 17
Signature 19
- 1 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(In thousands, except share data)
Assets March 31, 2001 December 31, 2000
------ -------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 15,730 $ 15,596
Restricted cash 107 107
Accounts receivable, net 5,601 5,511
Other current assets 1,474 2,917
------------ ------------
Total current assets 22,912 24,131
Property, plant and equipment, net 94,131 101,670
Goodwill, less accumulated amortization 5,745 6,331
Other intangibles, less accumulated amortization 3,531 3,806
Deferred costs 7,358 8,212
Other assets 5,381 3,168
------------ ------------
Total assets $ 139,058 $ 147,318
============ ============
Liabilities and Stockholders' Deficiency
Current liabilities:
Current installments of long-term debt $ 7,616 $ 8,063
Short-term loans 3,523 3,722
Accounts payable 711 2,577
Accruals 6,793 5,307
Other current liabilities 1,088 1,725
Due to related parties 1,285 1,226
------------ ------------
Total current liabilities 21,016 22,620
Long-term debt, excluding current installments 119,126 124,814
Due to related parties 392 676
Deferred credits and other liabilities 9,098 10,086
------------ ------------
Total liabilities 149,632 158,196
------------ ------------
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 2001 and 2000 - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
12,103,180 shares in 2001 and 12,087,179 in 2000 12 12
Additional paid-in capital 144,786 144,601
Accumulated deficit (170,899) (170,143)
Accumulated other comprehensive income 15,527 14,652
------------ ------------
Total stockholders' deficiency (10,574) (10,878)
------------ ------------
Total liabilities and stockholders' deficiency $ 139,058 $ 147,318
============ ============
See accompanying notes to consolidated condensed financial statements.
- 2 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations and Comprehensive Income (Loss)
For the Three Month Periods Ended March 31, 2001 and
2000 (In thousands, except share and per share data)
(unaudited)
2001 2000
---- ----
Telephone service revenues, net $ 11,232 $ 11,137
Operating expenses:
Operating and maintenance expenses 4,276 4,624
Depreciation and amortization 2,327 2,501
----------- -----------
Total operating expenses 6,603 7,125
----------- -----------
Income from operations 4,629 4,012
Other income (expenses):
Foreign exchange losses, net (2,136) (1,978)
Interest expense (3,665) (5,927)
Interest income 414 460
Other, net 28 3
----------- -----------
Net loss $ (730) $ (3,430)
Cumulative convertible preferred stock
dividends (in arrears) (26) (26)
----------- -----------
Net loss ascribable to common stockholders (756) (3,456)
Comprehensive income adjustments 875 972
----------- -----------
Total comprehensive income (loss) $ 119 $ (2,484)
=========== ============
Net loss per common share - basic and diluted $ (0.06) $ (0.29)
=========== ===========
Weighted average number of common shares
Outstanding - basic and diluted $12,090,268 $11,989,428
=========== ===========
See accompanying notes to consolidated condensed financial statements.
- 3 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Deficiency
(In thousands, except share data)
(unaudited)
Accumulated
Other Total
Common Preferred Additional Accumulated Comprehensive Stockholders'
Shares Stock Stock Paid-in Capital deficit Income Deficiency
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31,
2000 12,087,179 $ 12 - 144,601 (170,143) 14,652 $ (10,878)
Exercise of options and
pre-emptive rights 16,001 - - 114 - - 114
Modification of option - - - 71 - - 71
terms
- - - - (26) - (26)
Cumulative convertible
preferred stock
dividends
(in arrears)
Net loss - - - - (730) - (730)
Foreign currency
translation - - - - - 875 875
adjustment
------------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2001 12,103,180 $ 12 - 144,786 (170,899) 15,527 $ (10,574)
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
- 4 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Three Month Periods Ended March 31, 2001 and 2000
(In thousands)
(unaudited)
2001 2000
---- ----
Net cash provided by operating activities $ 4,234 4,901
---------- -----------
Cash flows from investing activities:
Construction of telecommunication networks (643) (976)
Increase in construction deposits (2,613) (1)
Proceeds from sale of assets 22 31
---------- -----------
Net cash used in investing activities (3,234) (946)
---------- -----------
Cash flows from financing activities:
Repayment of long-term debt - (30)
Proceeds from exercise of options and pre-emptive rights 114 217
---------- -----------
Net cash provided by financing activities 114 187
---------- -----------
Effect of foreign exchange rate changes on cash (980) (1,058)
----------- -----------
Net increase in cash and cash equivalents 134 3,084
Cash and cash equivalents at beginning of period 15,596 17,197
---------- -----------
Cash and cash equivalents at end of period $ 15,730 20,281
========== ===========
See accompanying notes to consolidated condensed financial statements.
- 5 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated condensed financial statements
of Hungarian Telephone and Cable Corp. ("HTCC" or the
"Registrant" and, together with its consolidated subsidiaries,
the "Company") have been prepared without audit and, in the
opinion of management, include all adjustments, consisting
mainly of normal recurring accruals, necessary for a fair
presentation. Results for interim periods are not necessarily
indicative of the results for a full year.
The accompanying consolidated condensed financial statements
include the financial statements of the Company and its
majority owned subsidiaries; Kelet-Nograd Com Rt., ("KNC"),
Raba-Com Rt., ("Raba-Com"), Hungarotel Tavkozlesi Rt.
("Hungarotel"), Papa es Tersege Telefon Koncesszios Rt.
("Papatel") (KNC, Raba-Com, Hungarotel and Papatel is each an
Operating Company and together, the "Operating Companies"),
HTCC Consulting Rt. ("HTCC Consulting") and Pilistav Rt.
("Pilistav"). All material intercompany balances and
transactions have been eliminated.
The accompanying consolidated condensed 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. These estimates
and assumptions affect reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well
as revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The consolidated condensed financial statements should be read
in conjunction with the audited consolidated financial
statements of Hungarian Telephone and Cable Corp. and its
subsidiaries for the year ended December 31, 2000, including
the notes thereto, set forth in the Company's annual report on
Form 10-K filed with the Securities and Exchange Commission
("SEC").
- 6 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(b) Net Loss Per Share
Basic earnings 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 loss and weighted average shares outstanding used for
computing diluted loss per common share were the same as those
used for computing basic loss per common share for each of the
periods ended March 31, 2001 and 2000.
The Company had potentially dilutive common stock equivalents
of 3,869,908 and 8,246,659 for the periods ended March 31,
2001 and 2000, respectively, which were not included in the
computation of diluted net loss per common share because they
were antidilutive for the periods presented.
(c) Foreign Exchange Financial Instruments
Foreign exchange financial instrument contracts are utilized
by the Company to manage certain foreign exchange rate risks.
Company policy prohibits holding or issuing derivative
financial instruments for trading purposes.
(2) Cash, Cash Equivalents and Restricted Cash
(a) Cash
At March 31, 2001, cash of $3,599,000 comprised the following:
$178,000 on deposit in the United States, and $3,421,000
consisting of $171,000 denominated in U.S. dollars and the
equivalent of $3,250,000 denominated in Hungarian Forints on
deposit with banks in Hungary.
(b) Cash Equivalents
Cash equivalents amounted to approximately $12,131,000 at
March 31, 2001 and consisted of Hungarian government
securities, denominated in Hungarian Forints, purchased under
agreements to resell which mature within three months.
(c) Restricted Cash
At March 31, 2001, approximately $14,000 of cash denominated
in U.S. Dollars was deposited in escrow accounts under terms
of construction contracts. In addition, approximately $93,000
was restricted pursuant to certain arrangements with other
parties.
- 7 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(3) Related Parties
Current and long-term amounts due to related parties totalling
$1,677,000 at March 31, 2001 is comprised of the following: $201,000
due to a subsidiary of Citizens Communications Company, representing
cumulative preferred stock dividends in arrears, and $1,476,000
representing payments due to three former officers under separate
termination, consulting and non-competition agreements. The Company
paid approximately $302,000 during each of the three months ended March
31, 2001 and 2000 to three former officers under these agreements.
(4) Segment Disclosures
The Company operates in a single industry segment, telecommunications
services. The Company has constructed a modern telecommunications
infrastructure in order to provide a full range of the Company's
products and services in its five concession areas in Hungary. While
the Company's chief operating decision maker monitors the revenue
streams of the various products and services, operations are managed
and financial performance is evaluated based on the delivery of
multiple services to customers over an integrated network.
Substantially all of the Company's assets are located in Hungary and
all of its operating revenues are generated in Hungary.
Products and Services
The Company groups its products and services into the following
categories:
Telephone Services - local dial tone and switched products and services
that provide incoming and outgoing calls over the public switched
network. This category includes reciprocal compensation revenues and
expenses (i.e. interconnect).
Network Services - point-to-point dedicated services that provide a
private transmission channel for the Company's customers' exclusive use
between two or more locations, both in local and long distance
applications.
Other Service and Product Revenues - PBX hardware sales and service
revenues, as well as miscellaneous other telephony service revenues.
- 8 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
The revenues generated by these products and services for the periods
ended March 31 were as follows:
($ in thousands) 2001 2000
---- ----
Telephone services $10,395 $10,392
Network services 618 551
Other service and product
revenues 219 194
------- -------
$11,232 $11,137
======= =======
Major Customers
For the periods ended March 31, 2001 and 2000, none of the Company's
customers accounted for more than 10% of the Company's total revenues.
(5) Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", as subsequently amended by
Statement of Financial Accounting Standards No. 138 ("SFAS 138").
Accordingly, the Company carries its foreign currency forward contracts
at fair value in its consolidated balance sheet. The fair value is
based on forward rates provided by the counterparty bank with which the
Company has entered into the forward contract. The foreign currency
forward contracts the Company has entered into do not qualify for hedge
accounting, as defined under SFAS 133 and 138, and accordingly changes
in the fair value of the forward contracts are reported in the
consolidated statement of operations and comprehensive income, as a
part of net foreign exchange losses.
Prior to the adoption of SFAS 133 and 138, the Company accounted for
its foreign currency forward contracts under Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS
52"). The transition adjustment on adoption of SFAS 133 and 138 was not
material and has not been separately presented as the effect of a
change in accounting principle. The fair value of the Company's foreign
currency forward contracts at March 31, 2001 and December 31, 2000 are
approximately $49,000 and $13,000, respectively.
- 9 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") is engaged primarily
in the provision of telecommunications services through its operating
subsidiaries, Kelet-Nograd Com Rt. ("KNC"), Raba Com Rt. ("Raba-Com"), Papa es
Tersege Telefon Koncesszios Rt. ("Papatel") and Hungarotel Tavkozlesi Rt.
("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.
The Company achieved EBITDA1 of $7.0 million during the quarter ended
March 31, 2001, up from EBITDA of $6.5 million for the quarter ended March 31,
2000. 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.
Since commencing the provision of telecommunications services in the
first quarter of 1995, the Company's network construction and expansion program
has added approximately 145,000 access lines through March 31, 2001 to the
approximately 61,000 access lines acquired directly from Magyar Tavkozlesi Rt.
("MATAV"), the former State-controlled monopoly telephone company. The success
of the Company's strategy is dependent upon its ability to increase revenues
through increased usage and the addition of new subscribers.
--------
1 EBITDA is defined as net revenue less operating and maintenance expenses. The
Company has included information concerning EBITDA because it understands that
it is used by certain investors as one measure of a company's ability to service
or incur indebtedness. EBITDA is not a measure of financial performance under
U.S. generally accepted accounting principles and is not necessarily comparable
to similarly titled measures used by other companies. EBITDA should not be
construed as an alternative to operating income or to cash flows from operating
activities (as determined in accordance with U.S. generally accepted accounting
principles) as a measure of liquidity.
- 10 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Comparison of Three Months Ended March 31, 2001 and Three Months Ended March 31,
2000
The Company's Hungarian subsidiaries functional currency is the
Hungarian forint. The average Hungarian forint/U.S. dollar exchange rate for the
three months ended March 31, 2001 was 287.67, as compared to an average
Hungarian forint/U.S. dollar exchange rate for the three months ended March 31,
2000 of 261.48. This 10% devaluation of the Hungarian forint against the U.S.
dollar reflects the strengthening of the U.S. dollar against the Hungarian
forint between the periods. When comparing the three months ended March 31, 2001
to the three months ended March 31, 2000, it should be noted that all U.S.
dollar reported amounts have been affected by this 10% devaluation in the
Hungarian subsidiaries' functional currency.
Net Revenues - unaudited
Quarter ended
March 31,
(dollars in millions) 2001 2000 % change
Measured service revenues $ 7.4 $ 8.0 (8)
Subscription revenues 3.9 3.2 22
Net interconnect charges (1.6) (1.6) -
------ -----
Net measured service and subscription revenues 9.7 9.6 1
Connection fees 0.5 0.5 -
Other operating revenues, net 1.0 1.0 -
------ -----
Telephone Service Revenues, Net $ 11.2 $11.1 1
====== =====
The Company recorded a 1% increase in telephone service revenues to
$11.2 million for the three months ended March 31, 2001 from $11.1 million for
the three months ended March 31, 2000.
Net measured service and subscription revenues increased 1% to $9.7
million for the three months ended March 31, 2001 from $9.6 million for the
three months ended March 31, 2000. Measured service revenues decreased 8% to
$7.4 million during the three months ended March 31, 2001 from $8.0 million
during the three months ended March 31, 2000. Subscription revenues increased
22% to $3.9 million during the three months ended March 31, 2001 from $3.2
million during the three months ended March 31, 2000. Measured service revenues
increased in functional currency terms by approximately 1% as a result of an
increase in average access lines in service from approximately 200,900 for the
three months ended March 31, 2000 to approximately 206,600 during the three
months ended March 31, 2001, offset by an average 2.6% decrease in call tariffs
between 2000 and 2001 as a result of continued 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, as in many other
countries over the past several years, 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 10% devaluation of
the functional currency during the period and therefore measured service
revenues show an 8% decrease quarter-on-quarter in
- 11 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
U.S. dollar terms. Subscription revenues increased in functional currency terms
by approximately 32% as a result of continued tariff re-balancing, as well as
the increase in average access lines in service. However, the increase in
subscription revenues in functional currency terms has been offset by the
approximate 10% devaluation of the functional currency between the periods and,
therefore, subscription revenues show only a 22% increase in U.S. dollar terms.
These revenues have been reduced by net interconnect charges which
totalled $1.6 million during the three month periods ended March 31, 2001 and
2000. As a percentage of call and subscription revenues, net interconnect
charges have remained consistent at 14% for each of the three month periods
ended March 31, 2001 and 2000.
Connection fees, which represent fees paid by customers to connect to
the Company's networks, remained consistent at $0.5 million for each of the
three month periods ended March 31, 2001 and 2000. During 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 were deferred and are being amortized over
the estimated average subscriber life of 7 years. The adoption of SAB 101 has
not had a material impact on the Company's results of operations and the
amortization of deferred connection fee revenue and associated direct
incremental costs is included in net telephone service revenues and operating
and maintenance expenses. The adoption of SAB 101 in the fourth quarter of 2000
caused connection fee revenues for the three months ended March 31, 2000 to be
restated from what was previously reported of $0.2 million to $0.5 million.
Operating and Maintenance Expenses
Operating and maintenance expenses decreased 7% to $4.3 million for the
three months ended March 31, 2001 as compared to $4.6 million for the three
months ended March 31, 2000. The adoption of SAB 101 in the fourth quarter of
2000 caused operating and maintenance expenses for the three months ended March
31, 2000 to be restated from what was previously reported of $4.3 million to
$4.6 million. In functional currency terms, operating and maintenance expenses
increased approximately 3% for the three months ended March 31, 2001, as
compared to the three months ended March 31, 2000. This increase in functional
currency terms is due to inflationary increases in costs at the Company's
Hungarian subsidiaries. On a per line basis, operating and maintenance expenses
decreased to approximately $21 per average access line for the three months
ended March 31, 2001 from $23 for the three months ended March 31, 2000. The
Company does not expect a significant decrease in operating and maintenance
expenses in 2001 in U.S. dollar terms. However, on a per line basis, operating
and maintenance costs are expected to continue to decline as additional access
lines are added during 2001.
- 12 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Depreciation and Amortization
Depreciation and amortization charges decreased $0.2 million to $2.3
million for the three months ended March 31, 2001 from $2.5 million for the
three months ended March 31, 2000. Depreciation and amortization charges
increased in functional currency terms by approximately 2% due to additional
capital expenditures. However, due to the devaluation of the Hungarian forint
between the periods, depreciation and amortization charges for the three months
ended March 31, 2001 have decreased in U.S. dollar terms compared to the three
months ended March 31, 2000.
Income from Operations
Income from operations increased to $4.6 million for the three months
ended March 31, 2001 from $4.0 million for the three months ended March 31,
2000. Contributing to such improvement were slightly higher net telephone
service revenues and lower operating and maintenance expenses and lower
depreciation and amortization charges.
Foreign Exchange Losses
Foreign exchange losses increased $0.1 million to $2.1 for the three
months ended March 31, 2001 from $2.0 million for the three months ended March
31, 2000. Such foreign exchange losses resulted primarily from the devaluation
of the Hungarian forint against the Company's U.S. dollar and euro denominated
debt during the period. When non-Hungarian 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 the "Inflation and
Foreign Currency" and "Market Risk Exposure" sections below.
Interest Expense
Interest expense decreased to $3.7 million for the three months ended
March 31, 2001 from $5.9 million for the three months ended March 31, 2000. This
$2.2 million decrease is attributable to lower interest rates paid on borrowings
in currencies other than the Hungarian forint. As a result of the Company's
medium-term credit facility entered into in April 2000, the Company's borrowings
went from being mostly Hungarian forint denominated to mostly euro denominated.
Thus the decrease reflects the lower interest rates paid on borrowings in euros
compared to Hungarian forints. As a result of the Company's medium-term credit
facility entered into in April 2000, the Company's weighted average interest
rate on its debt obligations went from 14.38% for the three months ended March
31, 2000, to 9.06% for the three months ended March 31, 2001, a 37% decrease.
See "Liquidity and Capital Resources" section below.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss ascribable to common stockholders of $0.8 million, or $0.06 per share,
during the three months ended March 31, 2001 as compared to a net loss
ascribable to common stockholders of $3.5 million, or $0.29 per share, during
the three months ended March 31, 2000.
- 13 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 ($191 million at historical
exchange rates through March 31, 2001). Since the end of 1998, the Company's
networks have had the capacity, with only normal capital expenditure
requirements, to provide basic telephone services to virtually all of the
potential subscribers within its operating areas.
Net cash provided by operating activities totalled $4.2 million during
the three months ended March 31, 2001 compared to $4.9 million during the three
months ended March 31, 2000. For the three months ended March 31, 2001 and 2000,
the Company used $3.2 million and $0.9 million, respectively, in investing
activities, which was primarily used to fund additions to the Company's
telecommunications networks. Financing activities provided net cash of $0.1
million and $0.2 million for the three months ended March 31, 2001 and 2000,
respectively.
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 a bridge
loan which was due to mature on May 12, 2000, and to pay fees associated with
the Debt Agreement. The Company believes that its current cash flow will allow
it to meet its working capital needs and continue its network development plans,
as well as meet its obligations under the Debt Agreement.
INFLATION AND FOREIGN CURRENCY
Due to the continued strengthening of the U.S. Dollar on international
currency markets, the Hungarian forint/U.S. Dollar exchange rate increased to
302.79 as of March 31, 2001, compared to a December 31, 2000 exchange rate of
284.73, an effective year-to-date devaluation of 6.3%.
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 denominated in
foreign currencies other than the Hungarian forint, the Company's Hungarian
subsidiaries' functional currency. Accordingly, when such accounts are
translated 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.
- 14 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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.
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 86% of operating expenses are Hungarian forint based
and are therefore subject to exchange rate variability between the Hungarian
forint and the U.S. dollar. This variability is mitigated by several factors,
including the Hungarian National Bank policy to peg the Hungarian forint and the
telecommunications pricing law. The "crawling peg" policy of the National Bank
of Hungary maintains a scheduled daily devaluation of the Hungarian forint which
has been pegged 100% to the euro since January 1, 2000. For the first quarter of
2001, the Hungarian government's devaluation policy was 0.3% per month. As of
April 1, 2001, the monthly devaluation rate was decreased to 0.2% per month for
the Hungarian forint, which would total approximately 2.7% for 2001. In May
2001, the National Bank of Hungary widened the trading band from +/- 2.25% of
the mid-point of the band to +/- 15%. 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, increases in
revenues will somewhat mitigate 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 $0.3
million annually based upon the Company's March 31, 2001 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 March 31, 2001 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 March 31, 2001 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
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
a 1% change in Hungarian forint/euro exchange rates were to occur, the Company's
exchange rate risk would increase or decrease by approximately $776,000 annually
based upon the Company's March 31, 2001 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 its
exposure to exchange rate risks associated with cash payments in euro maturing
within six months under the Company's long-term debt obligations. The forward
contracts establish the exchange rates at which the Company will sell the
contracted amount of Hungarian forints for euros at a future date. The Company
utilizes forward contracts which are six months in duration and at maturity will
either receive or pay the difference between the contracted forward rate and the
exchange rate at the settlement date. The contracted amount of foreign currency
forwards at March 31, 2001 is EUR 5,522,000 (approximately $4,859,000). The
counterparties to the Company's foreign currency forward contracts are
substantial and creditworthy multinational commercial banks which are recognized
market makers. The risk of counterparty nonperformance associated with these
contracts is not considered by the Company to be material.
FORWARD-LOOKING STATEMENTS
This report and other oral and written statements made by the Company
to the public contain and incorporate by reference forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements are only predictions or statements of current plans that are
constantly under review by the Company. For these statements, the Company claims
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks, uncertainties and assumptions and such statements are
qualified by important factors that may cause actual results to differ
materially from those expressed in the forward-looking statements. In addition
to the factors set out elsewhere in this report, the factors, among others, set
forth in Exhibit 99.1 attached hereto and incorporated herein by reference could
cause the Company's actual results to differ materially from those expressed in
the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The information required by this Item is contained under the heading
"Market Risk Exposure" under Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Legal Proceedings
As reported in Item 3. "Legal Proceedings" in the Company's Report on
Form 10-K for the year ended December 31, 2000, the Company is involved
in legal proceedings with a contractor and the contractor's bank and a
court hearing in these matters was scheduled for April 2001. The
hearing was postponed until November 2001.
Item 2. Change in Securities and Use of Proceeds
(a) None.
(b) None.
(c) Sale of Unregistered Securities - On March 14, 2001, the
Company sold 14,001 shares of its common stock to Tele Danmark
A/S for $98,007 pursuant to certain preemptive rights that the
Company granted to Tele Danmark. The sale was 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 related to transactions by an issuer not
involving any public offering. The purchaser was informed that
the transaction was 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.
(d) None.
Item 3. Default Upon Senior Securities
(a) None.
(b) On May 12, 1999, the Company issued 30,000 shares of Preferred
Stock Series A with a liquidation value of $70 per share to a
subsidiary of Citizens Utilities Company. Any holder of such
Preferred Shares is entitled to receive cumulative cash
dividends payable in arrears at the annual rate of 5%,
compounded annually, on the liquidation value. As of March 31,
2001, the total arrearage on the Preferred Shares was
$201,000.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) 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
11 Statement re computation of per share earnings (not
required)
18 Letter re change in accounting principles (none)
19 Report furnished to security holders (none)
22 Published report regarding matters submitted to vote
of security holders (not required)
24 Power of Attorney (not required)
27.1 Financial Data Schedule
99.1 Cautionary Statements Regarding "Safe Harbor"
Provisions of the Private Securities Litigation
Reform Act of 1995
(b) Reports on Form 8-K
None.
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Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
May 10, 2001 By: /s/Ole Bertram
----------------------------------
Ole Bertram
Chief Executive Officer and President
May 10, 2001 By: /s/William McGann
-----------------------------------
William McGann
Chief Accounting Officer,
Controller and Treasurer
- 19 -
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Exhibits
Exhibit No. Description
27.1 Financial Data Schedule
99.1 Cautionary Statements Regarding "Safe Harbor" Provisions of
the Private Securities Litigation Reform Act of 1995
- 20 -