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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, 1999
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.)
100 First Stamford Place, Stamford, CT 06902
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 348-9069
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 April 11, 2000, 12,009,479 shares of the Registrant's Common
Stock were outstanding, of which 12,007,179 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 April 10, 2000, was $92,305,189. The
exclusion of shares owned by any person from such amount shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.
Documents Incorporated by Reference
Part III - Portions of the Registrant's proxy statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 1999.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained herein which express "belief,"
"anticipation," "expectation," or "intention" or any other projection, insofar
as they may apply prospectively and are not historical facts, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the factors
set forth in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PART I
In this Part I of Form 10-K, all references to "$" or "U.S. dollars"
are to United States dollars all references to EUR are to euros 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 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, 1999 exchange rates. The
forint/U.S. dollar middle exchange rate as of December 31, 1999 was
approximately 252.52 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 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 "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
Operating Companies have incurred capital expenditures through December 31, 1999
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of $181 million (at historical exchange rates) to expand and upgrade their
network facilities which has resulted in the completion of a modern
communications network in each of the Operating Areas, which networks include
new digital switches and increased network capacity, utilizing the latest in
communications transmission technology. As of December 31, 1999, the Company's
telecommunications networks had approximately 200,500 access lines in service
(including pay phones). The completion of the Company's network construction
program has resulted in the addition of approximately 139,100 new access lines
in service (including pay phones) to the 61,400 access lines acquired from Matav
and the replacement of all of the 10,810 manual exchange lines acquired from
Matav.
The Company completed its network modernization and construction
program in each of its Operating Areas primarily through turnkey construction
contracts with Siemens Telefongyar Kft., Ericsson Technika and Fazis
Telecommunication System Design and Construction Corporation. The Company's
networks now have the capacity, with some additional capital expenditures, to
provide basic telephone services to virtually all of the estimated 276,500 homes
and 36,200 business and other institutional subscribers (including government
institutions) within its Operating Areas. The build-out was primarily financed
through a $170 million credit facility with Postabank es Takarekpenztar (the
"Original Postabank Credit Facility"), a Hungarian commercial bank
("Postabank"), which was subsequently refinanced and a $47.5 million contractor
financing facility. See "- Revision of Capital Structure," "- Recent
Developments," Item 3 "Legal Proceedings," Item 7 Management Discussion and
Analysis of Financial Conditions and Results of Operations - Introduction" and
Notes 1(a) and 10(d) of Notes to Consolidated Financial Statements.
The following table sets forth certain information as of December 31,
1999 with respect to each of the Operating Companies.
Raba-Com KNC Papatel Hungarotel Total
Population 65,300 146,400 64,000 398,500 674,200
Residences 26,300 59,600 24,000 166,600 276,500
Businesses and other(1) 4,300 6,300 3,300 22,300 36,200
Access lines in operation:
Residential 19,800 40,400 17,400 97,300 174,900
Business and other(2) 2,500 5,900 2,200 15,000 25,600
-------- -------- -------- --------- --------
Total 22,300 46,300 19,600 112,300 200,500
Pay phones 165 477 195 1,079 1,916
Population Penetration rate(3) 34.2 31.6 30.6 28.2 29.7
Residential Penetration rate (4) 75.3 67.8 72.5 58.4 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 and 1999.
Takeover 1995 1996 1997 1998 1999
-------- ---- ---- ---- ---- ----
Raba-Com 2,500(1) 5,100 14,000 20,600 21,400 22,300
KNC 13,000(1) 14,200 20,500 35,500 40,000 46,300
Papatel 3,800(2) 3,800 11,100 17,000 18,300 19,600
Hungarotel 42,100(2) 42,100 47,800 102,000 105,300 112,300
---------- ---------- --------- --------- --------- --------
Total 61,400 65,200 93,400 175,100 185,000 200,500
(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 10.1 million inhabitants, approximately 2 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 $20
billion. Foreign direct investment was approximately $2 billion in 1999 and is
expected to stay at that level in 2000. On a per capita basis, Hungary has been
the largest Central European recipient of foreign direct investment since the
transition to a market economy. In comparison to Poland and the Czech Republic,
Hungary received (on a per capita basis) nearly 3 times the level of foreign
direct investment of Poland and twice 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, and 4.9% in 1999. The unemployment rate has gradually
decreased from 11.1% in 1995 to 7.0% in 1999. 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; and
10.0% in 1999.
In March 1998, Hungary's application for membership in the European
Union ("EU") was accepted. Hungary is now in the process of negotiating the
terms of its official accession into the EU. Hungary is not expected to become a
member of the EU until 2003 at the earliest. In March 1999, Hungary joined the
North Atlantic Treaty Organization. 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 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 20% 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 a consortium called MagyarCom, a
company wholly owned by Deutsche Telekom AG, the German public telephone
operator ("Deutsche Telekom"), and Ameritech, the United States based
telecommunications company. 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, 1999, MagyarCom owned 59.5%
of Matav while 40.5% was publicly traded.
In 1992 the 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 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, 1999, 23 of the 25
concessions for which the 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); United Telecom Investment
Rt. ("UTI"), a consortium formed by Alcatel Austria AG and US Telecom East, Inc.
(4 areas); Vivendi-Telecom Hungary ("Vivendi") owned by affiliates of Vivendi SA
of France and General Electric Capital Corp. (5 areas); an affiliate of United
Pan-Europe Communications NV ("UPC") (1 area); a consortium comprised of Bezeq,
the Israeli PTO, and Matav (3 areas); 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
-5-
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
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 shareholders include Telenor Invest A/S, Norway
(25.8%); Tele Danmark A/S (6.6%); Sonera Holding NV (23%), Media Tel Holding Rt.
(15.2%); and KPN NV, the Dutch phone company ("KPN") (29.4%). In 1999, MediaOne
announced that it was going to sell its holdings in Westel 450 and Westel 900 to
Deutsche Telekom. Matav has announced that it intends to exercise an option it
has to purchase the interests in Westel 450 and Westel 900 that Deutsche Telekom
is acquiring from MediaOne.
In June 1999, a consortium comprised of Vodaphone Air Touch Plc.
(50.1%), RWE Telliance (19.9%), Antenna Hungaria (20%) and Magyar Posta (10%)
(together, "Vodaphone") 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, 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 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 started building its
telecommunications network in 1998 which network is nearly complete. The current
shareholders of Pan-Tel include MAV Rt. (the Hungarian railway company) (25.1%),
PT Investment Holding Company (25.9%) and KPN (49%).
The Hungarian Telecommunications Industry Today
The Ministry recently announced that it will revise its laws in 2000
regarding the regulation of the telecommunication 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.
-6-
Since the privatization of the Hungarian telecommunications market, the
LTOs and Matav have spent approximately $822 million as of September 30, 1998
(at September 30, 1998 exchange rates) to build modern state-of-the-art
telecommunications networks throughout Hungary. As a result of such
construction, Matav had approximately 2.9 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, 1999.
In the mobile telecommunications marketplace, Westel 450 and Westel 900
had 98,000 and 842,000 subscribers, respectively, as of December 31, 1999.
Pannon had approximately 669,000 subscribers as of December 31, 1999.
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 30 access lines per 100 inhabitants as of December 31, 1999.
Given that the Company's, Matav's, and the other LTOs' investments in the
Hungarian telecommunications market over the last several years produced a
significant increase in the overall penetration rate in Hungary to approximately
34% as of December 31, 1999 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 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 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 an organizational chart of the Company and its principal stockholders
as of April 11, 2000. Share ownership percentages of HTCC are based on shares of
HTCC's common stock (the "Common Stock") owned as of April 11, 2000, without
giving effect to outstanding options or warrants. Additionally, ownership
percentages for the Operating Companies do not give effect to future Hungarian
equity ownership requirements. See "-Regulation - Hungarian Equity Ownership
Requirements."
-7-
[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 100 First Stamford
Place, Stamford, Connecticut 06902; telephone (203) 348-9069. As of May 1, 2000,
the U.S. offices will be at Suite 32, Tokeneke Center, 30 Center Street, Darien,
CT 06820. 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 Utilities Company
Citizens Utilities Company (together with its subsidiaries, "Citizens")
is a New York Stock Exchange listed company which provides telecommunications
services and public services including gas distribution, electric distribution,
water distribution and wastewater treatment services to approximately 1.9
million customers. Citizens also owns 82% of Electric Lightwave, Inc. (NASDAQ:
ELIX), a facilities-based, integrated communications provider that offers a
broad range of services to telecommunications-intensive businesses throughout
the United States. During 1999, Citizens announced that it had entered into
various agreements to purchase approximately 900,000 telephone access lines from
GTE Corp. and US West Communications, Inc. In addition, Citizens announced that
it was divesting its public services businesses and that it had entered into
agreements to sell its electric and water and wastewater operations. Citizens
plans to use the proceeds from the divestitures to fund the acquisitions. At
December 31, 1999, Citizens had $5.8 billion of total assets and $2.1 billion in
shareholders' equity. For the year ended December 31, 1999, Citizens had $1.1
billion of revenues from continuing operations and $144.5 million of net income.
-8-
In May 1995, Citizens purchased 300,000 shares of Common Stock from
a former executive officer 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
outstanding Common Stock as of April 11, 2000, to 19.2%. In addition, as a
result of the Citizens Agreements, Citizens has received certain options to
purchase 4.5 million shares of Common Stock. These options expire on September
12, 2000, with per share exercise prices ranging from $12.75 to $18.00. 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. Assuming the exercise of all of its outstanding rights
and options to purchase Common Stock as of April 11, 2000, Citizens would own
35.1% of the outstanding Common Stock on a fully-diluted basis. For a more
detailed description of some of the Citizens Agreements, see Notes 11 and 15 of
Notes to Consolidated Financial Statements, Item 13 "Certain Relationships and
Related Party Transactions," Item 12 "Security Ownership of Certain Beneficial
Owners and Management," "- Revision of Capital Structure" and "- Recent
Developments."
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 3,628,000 telephone subscriber lines, 1,311,000 cellular users, 825,000
cable television customers and 393,000 Internet dial-up customers.
At December 31, 1999, Tele Danmark had total assets of Danish Kroner
54,625 billion (approximately $7.0 billion at current exchange rates) and
shareholders' equity of Danish Kroner 21,456 (approximately $2.7 billion at
current exchange rates). During 1999, Tele Danmark had net income of Danish
Kroner 3,513 billion (approximately $452 million at current exchange rates) on
net revenues of Danish Kroner 38,206 billion (approximately $4.9 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 more than 42% of Tele Danmark's net
revenues in 1999. Tele Danmark has investments in the Nordic region, continental
Western Europe as well as Central and Eastern Europe--among them Belgagom
(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.
-9-
As a result of certain agreements between the Company and Tele Danmark
(the "Tele Danmark Agreements"), the Company has issued 2,565,587 shares of
Common Stock to Tele Danmark. As of April 11, 2000, 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.
For a more detailed description of some of the Tele Danmark Agreements, see
Notes 8 and 11 of Notes to Consolidated Financial Statements, Item 13 "Certain
Relationships and Related Party Transactions," Item 12 "Security Ownership of
Certain Beneficial Owners and Management," "- Revision of Capital Structure,"
and "- Recent Developments."
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.
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. The bank has achieved significant growth since its inception. As of
December 31, 1999, its total assets were HUF 330 billion ($1.3 billion). Today
it is the fifth largest Hungarian financial institution in terms of total assets
and second in retail deposits with a 10% market share (6% market share in
corporate loans).
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. The
Company expects to pay off the outstanding balance on the Postabank Bridge Loan
Agreement with the proceeds of a syndicated loan agreement.
As of April 11, 2000, Postabank owned 20.2% of the outstanding Common
Stock and 24.3% of the outstanding Common Stock on a fully diluted basis. For a
more detailed description of some of the Postabank Agreements, see Notes 4, 5, 6
and 19 of Notes to Consolidated Financial Statements, Item 13 "Certain
Relationships and Related Party Transactions," Item 12 "Security Ownership of
Certain Beneficial Owners and Management," "- Revision of Capital Structure" and
"- Recent Developments."
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 Ministry of Foreign Affairs. The purpose is to promote Danish direct
investments in Central and Eastern Europe and to enhance the possibilities for
-10-
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 has been involved in Pannon from 1994
to 1996 and in two of the Operating Companies from 1994 to 1997. As of April 11,
2000, the Danish Fund owned 10.7% of the outstanding Common Stock. See Note 8 of
Notes to Consolidated Financial Statements.
International Finance Corporation
The International Finance Corporation (the "IFC") is the private-sector
financing organization of the World Bank, a global cooperative which provides
financial and other aid to developing countries. The IFC owns 20.0% of the
capital stock of Papatel.
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, each of which is a wholly-owned subsidiary of
Citizens Utilities Company. 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 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).
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The Company and Postabank entered into a Dual-Currency Bridge Loan
Agreement (the "Postabank Bridge Loan Agreement") 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. The loan is repayable by May 2000. HTCC and one of its
subsidiaries, HTCC Consulting Rt. were guarantors for the HTCC subsidiaries
under the Postabank Bridge Loan 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
Postabank Bridge Loan Agreement. The Company and Postabank entered into a series
of agreements to secure such obligations under the Postabank Bridge Loan
Agreement. On April 11, 2000, the Company entered into a EUR 130 million senior
security syndicated bank credit facility which funds will be used to pay off the
Postabank Bridge Loan Agreement. See " - Recent Developments."
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 cannot 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 then 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 accrue interest, which is payable semi-annually, at
3-1/2% plus the LIBOR rate for the applicable six month interest period. The
Notes which mature in 2007 are transferable subject to applicable security laws.
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 full or proportionately
prior to January 1, 2004 provided that the Company repays a proportionate amount
of the Notes and up to 7-1/2% of the aggregate principal amount of the Notes
repaid concurrently with the termination 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 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. Tele Danmark agreed not to transfer the
shares to any party prior to May 11, 2000 without the prior written consent of
the Company.
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 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 Danish Fund agreed not
to transfer the shares to any party except for Tele Danmark prior to May 11,
2000 without the prior written consent of the Company.
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 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
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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. The Citizens Stock Purchase
Agreement requires Citizens not to transfer any shares of HTCC common stock
which it may hold prior to May 15, 2000 without the prior written consent of the
Company and Postabank. Citizens also waived any and all preemptive and anti-
dilution rights in connection with the transactions described above.
Recent Developments
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 intends to draw down the entire
EUR 130 million ($124 million at current exchange rates), which funds will be
used in their entirety, along with another $6 million of other Company funds, to
pay off the entire outstanding balance (EUR 128 million, approximately $122
million at current exchange rates) of the Postabank Bridge Loan Agreement which
will result in the termination of the Postabank Bridge Loan Agreement which
matures on May 12, 2000, as well as 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 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 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 an escalating percentage of the amounts drawn down
(EUR 125 million). Any amounts borrowed under the Term Facility have to be drawn
down within thirty days of the execution of the Debt Agreement in either euros
or Hungarian forints. The Company intends to borrow the full EUR 125 million, or
its equivalent in euros and Hungarian forints. Any amounts borrowed in Hungarian
forints are 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 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 intends to choose 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 three months. The Company intends to choose 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.
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
-13-
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 intends to
borrow the full amount of the Revolving Facility to pay off the balance of the
Postabank Bridge Loan Agreement and fees associated with the transaction. 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 intends to choose six months. Interest is payable at the end of each
interest period calculated similar to a Term Facility loan denominated in euros.
As part of the Debt Agreement, the Company is required to hedge at
least 50% of the euro borrowings until a minimum of 50% of Facility A has been
cancelled, prepaid or repaid. Dependent on its cash flow, commencing in 2001,
the Company will be required to prepay the equivalent of $25 million on Facility
A 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.
The Company is obligated to pay a commitment fee equal to the lower of
.75% or 50% of the Applicable Margin on any available unused commitment. Since
the Company intends to borrow the full amount of the Debt Agreement soon, there
is no commitment fee payable at the present time. The Company will pay an
arrangement fee in the amount of EUR 2,665,000 (approximately $2.5 million at
current exchange rates) and an agency fee in the amount of $60,000. 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 the 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 the
customary events of default, which would trigger early repayment of the balance
on 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 32.1% 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.
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, increase its operational efficiencies and increased its marketing efforts.
The Company has implemented the following operational strategies in order to
further its business objectives.
-14-
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 44% of the Company's total call 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. The
Company plans to introduce Internet Protocol- based voice services to its
customers in 2000. This will enable the Company to offer long distance and
international calling services at discounted rates without violating Matav's
domestic long distance and international calling monopoly.
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.
-15-
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 special 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 offices 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.
Most of the Company's subscriber base consists of residential
customers. As of December 31, 1999, 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
-16-
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, 1999, the
Operating Companies had a total of 296 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, ISDN, 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 HUF 12.0 ($.048) per pulse for all local calls. The Ministry has
traditionally adjusted such fees annually based on the Hungarian Consumer Price
Index. However, the Ministry did not change the fees per pulse in 2000 as
compared to 1999 because of the Ministry's efforts to rebalance the fees for
telecommunications services. To that end, the Ministry did not change the length
between pulses for local calls but increased the length between pulses for
domestic long distance and international calls. The net result is that the fees
for local calls will not change from 1999 to 2000 while the fees for domestic
long distance and international calls in 2000 will decrease 40% from the rates
in 1999. For all local calls within an Operating Area, the Company retains all
of the revenues associated with the call. For domestic long distance calls
-17-
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 Ministry. 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 Ministry has 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.
The Company believes that this revised regulatory policy has resulted in an
overall increase in the Company's revenue per call in 1999 for domestic long
distance and international calls over the amount received in 1998 and that the
Company will realize additional benefits in the future. See "- Regulation - Rate
Setting and Revenue Sharing."
Subscription and Connection Fees. The Company collects a monthly
subscription fee from its customers. Such fees vary depending on such factors as
whether the services are provided to a residential or business or other customer
(including government institutions), and whether the customer is linked to a
digital or analog exchange. The Company charges a monthly subscription fee to
digital customers of HUF 1,532 ($6.07) for residential customers and HUF 2,672
($10.58) for business and other institutional subscribers (including government
institutions). These rates increased 32% from 1999. The company also offers some
of its low usage customers a reduced subscription fee with a limited amount of
local calls at the regular local calling rate but a higher local calling rate
for usage over such limit. See "- Regulation - Rate Setting and Revenue
Sharing."
Connection fees are earned when a customer is added to the 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. The
connection fee is not recognized as income until the customer receives a
telephone and the connection is made. Currently, connection fees are HUF 30,000
($118.80) for residential customers and HUF 90,000 ($356.41) for business and
other institutional subscribers (including government institutions), which are
the maximum allowable fees, pursuant to a decree of the Ministry. 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, 1999, approximately 3,323 leased lines were in service. In
addition, as of December 31, 1999, the Company had 1,916 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.
Pricing
Maximum pricing levels are set by the Ministry and historically 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
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. In addition to separate price caps for such
categories of services, the Ministry enacted a rebalancing formula, which
-18-
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 the Ministry 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 by the Ministry.
The Company has been allowing 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 manufactures. Customers can choose to buy the phone or lease the phone and
pay a monthly fee of HUF 180 ($0.71). Although there is no Ministry or other
governmental regulation relating to lease rates, the Company adjusts such rates
annually according to the Hungarian PPI. Approximately 49% of the Company's
subscribers as of December 31, 1999 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.
-19-
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.
The Operating Companies
The following is a brief description of each of the Operating
Companies:
-20-
Hungarotel
The Company holds a 99.0% interest in Hungarotel while a private
Hungarian investor owns the remaining 1.0%. 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 398,500 with an estimated 166,600 residences and 22,300
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,
1999, Hungarotel had 112,300 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 a 94.8% interest in KNC. The KNC Operating Area
municipalities own 5.0% and Antenna Hungaria owns the remaining 0.2%. 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 146,400, with an estimated 59,600 residences and 6,300 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 Irish dairy producer, Avonmore, and the Japanese company,
Paramount Glass. The Operating Area's proximity to Budapest, 1-1/2 hours by car,
and its many cultural attractions makes it a desirable weekend and tourist
destination. As of December 31, 1999, KNC had 46,300 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 a 79.2% interest in Papatel. The IFC owns a 20.0%
interest and Papa, the principal city in the Papatel Operating Area, owns the
remainder. 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
64,000 with an estimated 24,000 residences and 3,300 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, 1999,
Papatel had 19,600 access lines connected to its network. The Papatel network
utilizes a combination of a conventional build, fiber optic and wireless local
loop technology.
Raba-Com
The Company holds a 90.7% interest in Raba-Com. Municipalities in the
Raba-Com Operating Area own the remaining 9.3%. The Raba-Com Operating Area is
comprised of 63 municipalities in Vas County, which borders Austria and
-21-
Slovenia. The Raba-Com Operating Area has a population of approximately 65,300,
with an estimated 26,300 residences and 4,300 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 (the Hungarian
central natural gas distributor); Phillips (a Dutch-owned electronics
manufacturer); EcoPlast (a plastics producer); and Saga (a British-owned poultry
processor). As of December 31, 1999, Raba-Com had 22,300 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 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. In order to meet these obligations,
the Hungarian Telecom Act created a professional supervisory body, the
Telecommunications Chief Inspectorate (the "Inspectorate") which is supervised
by the Ministry. Its tasks include supervising the progress of the LTOs with
respect to build-out scheduling, equipment purchases and the quality of network
construction.
Concession Contracts
Pursuant to the Hungarian 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 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 to
the Ministry, 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 Ministry 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.
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 Ministry will have the right
to grant additional concessions for non-cellular local voice telephone services.
-22-
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. Each of the Operating Companies met their build-out
requirements in 1999.
See "- Fines."
Royalties. Each of the LTOs is required by the terms of its individual
concession contract to pay annual royalties to the Ministry equal to a
percentage of net revenue from basic telephone services. Net revenue for this
purpose are generally defined as gross revenue from basic telephone services
less interconnect 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. The Concession Contracts for Hungarotel require it to
pay an amount equal to 10 times the local occupational excise tax. The
applicability and enforceability of such obligation is presently uncertain.
However, the Ministry stated in a letter to Hungarotel that it will not enforce
this particular provision of Hungarotel's Concession Contract.
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 Ministry
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 by the Ministry 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 Ministry, although the existing Operating Company would have
priority in the event the Operating Company's proposal provides for the same
terms and conditions as that of another bidder.
Fines. The failure to meet required construction milestones may
result in the levying of fines by the Ministry. Such fines are computed based
on a contractual formula and may be substantial. Each of the Operating
Companies met their build-out requirements in 1999.
Termination upon Lack of Performance. If an LTO is unable to comply
with its Concession Contracts, the Ministry has the right to abrogate the
Concession Contract. In such an instance, the Ministry has authority to
determine alternative provisions for such service, which may include the sale of
the LTO's telecommunications assets to another provider. In such case, the LTO
would be obligated to sell its assets under the terms of a contract to the
provider to whom the concession is transferred. The Company believes that it has
demonstrated substantial performance to date under its Concession Contracts and
that its relations with the Ministry are good and, therefore, the chance of any
termination of any Concession Contract is remote.
-23-
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 Ministry has stipulated in the Concession Contracts for Hungarotel
and Papatel, as amended in June 1996, that each of the Operating Companies must
meet certain Hungarian ownership requirements so that by the end of the seventh
year 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 following the date or amendment of a
Concession Contract, as the case may be, 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 stricter 25% plus one share Hungarian
ownership requirement. 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.
If the Hungarian ownership does not meet the required levels, the LTO
is required to give notice to the Ministry, which may then require the LTO to
rectify the situation within three months, or a shorter period if the Ministry
considers that there has been a delay in the required notification. With respect
to the Company, Postabank, a Hungarian commercial bank, owns approximately 20.2%
of HTCC which is the majority owner of all of the Operating Companies.
Therefore, the Ministry deems the Company in compliance with the current 10%
ownership requirement, however, the Company is currently not in compliance with
the 25% ownership requirement. The Ministry is, however, currently reviewing the
Hungarian equity ownership requirements and has indicated that it is not going
to enforce at this time the 10% Hungarian equity ownership requirement. In the
event that the Ministry 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 might be
considered a serious breach of a Concession Contract, giving the Ministry 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.
-24-
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.
Rate-Setting and Revenue Sharing
Pursuant to the Hungarian Act LXXXVII of 1990 on Pricing (the "Pricing
Act") and the Telecom Act, the Ministry, 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 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 Tariff Decree set separate price caps for each
category of service through 2000, which price caps provided for annual rate
increases based on the CPI for the prior year. The Ministry may also reduce the
CPI percentage increase by an efficiency factor to obtain the maximum allowable
price increase. 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 2000, in accordance
with the general policies set forth in the 1997 Tariff Decree, the Ministry
adopted Decree No. 1/2000 (I.18) (the "2000 Tariff Decree") which provides for:
a 32% increase in the subscription fee for the Company's residential customers;
a 60% increase in the subscription fee for the Company's business customers; no
increase in local calls within an Operating Area; and a 40% decrease in long
distance and international calls. The intended effect of the 2000 Decree was to
provide for an overall 2000 price increase of a maximum 6% based on the
anticipated inflation rate in 2000. The 1999 increase in the Hungarian CPI was
10%.
The Ministry 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 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 2000, the Ministry adopted
Decree 8/2000 (III.29) (the "2000 Interconnection Decree") which provides for
each LTO to receive in 2000 an average interconnection fee of HUF 13.22/minute
for the initiation of a domestic long distance or international call and an
average fee of HUF 8.02/minute for the termination of a domestic long distance
or international call. For future years, the LTOs other than Matav as part of a
formal association (the "LTO Association") recently provided the Ministry with a
paper outlining its position with respect to the implementation of a longer term
cost-based interconnection fee regime, which is already a requirement for EU
members. See " - Competition."
-25-
The Ministry regulates the subscriber connection fees pursuant to
Decree 11/1995 (VII.12) KHVM, as amended, on the One-Time Access Fee Payable for
Establishment of Public Telephone Service Access Points (the "Connection Fee
Decree"). The Connection Fee Decree provides for maximum subscriber connection
fees at HUF 90,000 ($415.70) for business customers and HUF 30,000 ($138.57) 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%. The Operating Companies fulfilled certain criteria which
entitled them 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 1999 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 3,600 ($14.26) 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.
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. 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.
-26-
In 1998, the 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). In 1998 Pan-Tel started building its nationwide fiber optic backbone
network along the rights-of-way of MAV which is expected to be completed by the
end of 2000. 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 has recently initiated its own voice-over IP service. 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 the newest entrant Vodaphone.
Presently, the airtime and monthly fees charged by the cellular operators are
generally more than the fees for comparable services charged by the Company.
Another entrant into the marketplace, Novacom Telecommunications Kft.
("Novacom") 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 in order to compete in the telecommunications market. Novacom offers its
customers corporate network services, managed leased lines, ISDN, frame relay,
X25, ATM IP-based data transmission, closed user group voice and PBX services.
Novacom also recently initiated voice-over IP service.
Other Hungarian telecommunications providers include the following
entities: 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 state-owned, has a national microwave network and
recently announced plans to establish a joint venture with Hungarian Electricity
Works Rt. ("MVM") to operate MVM's existing telecom network; and Global One
Telecommunications Kft., which provides IP-based data transmission services.
There are also several other VSAT (very small aperture terminal) providers in
Hungary.
The Hungarian cable television market is highly fragmented with over
150 cable television providers. The Hungarian cable television industry is
undergoing consolidation. United Pan-Europe Communications NV ("UPC") is the
largest cable television operator in Hungary. UPC owners include UnitedGlobalCom
Inc., the global television operator of Denver, Colorado (51%), and Microsoft
Corp. (8%) of Redmond, Washington.
The Ministry recently announced that it will revise its laws in 2000
regarding the regulation of the telecommunication market 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.
-27-
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 665 employees, including 10
expatriates, as of March 1999. 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 30,749 (approximately $15,000 at current exchange rates). The
Company is in the process of selling its old office headquarters in Budapest.
The Company leases 1,157 square feet of office space at 100 First Stamford
Place, Stamford, CT at a monthly rental of $2,508. The Company is moving its
U.S. office to Suite 32, Tokeneke Center, 30 Center Street, Darien, CT 06820
effective May 1, 2000 at a monthly rental of $1,500. 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.
Item 3. Legal Proceedings
Hungarotel is a defendant in a lawsuit filed by Dialcont Kft.
("Dialcont") on March 28, 1996 in Hungary alleging a breach of contract for
services allegedly provided by Dialcont during 1994 and 1995. The Company
believes that Dialcont's claims are without merit and is vigorously defending
itself against such claims. Dialcont is seeking HUF 222 million ($879,000). This
action is still pending in the Hungarian court system.
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. Raba-Com prevailed on the merits in the lower court. The
plaintiff appealed the case in the appellate court which court overturned the
lower court's decision. Raba-Com filed an appeal with the Hungarian Supreme
Court which is still pending. Should, however, Raba-Com lose its appeal at the
Supreme Court level, the Company could be subject to additional claims for
refunds. The Company believes it has meritorious defenses to this claim and any
others that may be filed regarding this matter.
HTCC Consulting Rt. ("Consulting") and Papatel are involved in
several disputes with the Hungarian taxing authorities (the "APEH") pursuant
to which the APEH alleges that Consulting owes HUF 105 million (approximately
-28-
$416,000) and Papatel owes HUF 26 million (approximately $103,000) for
various reasons. The Operating Companies believe that the APEH claims are
without merit and are vigorously defending themselves against such claims.
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. As of December 31, 1998, the
balance owed by the Company on the contractor financing facility was
approximately $36.6 million. 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 of approximately HUF
700 million (approximately $2.8 million). In order to resolve these issues, the
Company purchased from Postabank the receivables owed by the contractor to
Postabank 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. The Company then set off its uncontested liabilities to the
contractor against the amounts owed to the Company by the contractor. 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 claims against the contractor
of approximately $31 million which is more than the contractor's claim. 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 and its subsidiaries are 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 adverse 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, 1999.
-29-
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.
The following table sets forth the high and low sale prices for the
Common Stock as reported by the Amex for each quarter in 1998 and 1999.
High Low
Quarter Ended:
- -------------
1998
March 31, 1998 . . . . . . . . . . . $11-1/8 $ 7-1/2
June 30, 1998. . . . . . . . . . . . 8-3/4 4-7/8
September 30, 1998 . . . . . . . . . 6-1/8 2-1/8
December 31, 1998. . . . . . . . . . 6-5/8 3
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
On April 11, 2000, the closing sale price for the Common Stock on the
Amex was $7-1/2.
Stockholders
As of April 11, 2000, the Company had 12,009,479 shares of Common Stock
outstanding held by 114 holders of record. The Company believes that it has
approximately 1,500 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, 1999, including financial statements filed therewith.
Stockholders wishing a copy may send their request to the Company at 100 First
Stamford Place, Suite 204, Stamford, CT 06902 until April 30, 2000 and to Suite
32, Tokeneke Center, 30 Center Street, Darien, CT 06820 thereafter.
-30-
Dividend Policy
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 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. Currently, the Operating Companies have
negative net equity and are not permitted to pay dividends.
Item 6. Selected Financial Data
HUNGARIAN TELEPHONE AND CABLE CORP.
AND SUBSIDIARIES
Selected Financial and Operating Data
(Dollars in Thousands, Except Per Share
Amounts)
<
1999 1998 1997 1996 1995
---------- --------- --------- --------- --------
For the Year
Operating revenues $ 45,438 $ 38,707 $ 37,891 $ 20,910 $ 4,070
Operating income (loss) $ 16,189 $ (6,059) $ (1,263) $(20,553) $(17,829)
Net loss before extraordinary items, net $(17,773) $(50,612) $(36,236) $(54,769) $(20,024)
Net income (loss) $ 3,172 $(50,612) $(36,236) $(54,769) $(20,024)
Net income (loss) per common share $ 0.33 $ (9.53) $ (7.97) $ (13.14) $ (6.30)
At Year-End
Total assets $154,683 $177,067 $186,485 $156,615 $110,387
Long-term debt, excluding
current installments $122,917 $202,881 $194,537 $148,472 $ 23,467
Total stockholders' (deficiency)
equity $ (6,946) $(89,037) $(41,837) $(23,790) $ 15,739
The extraordinary item in 1999 arose on the extinguishment of
liabilities to Citizens and amounts due under a contractor financing facility
offset in part by the write off of the remaining unamortized deferred costs
pertaining to a credit facility with Postabank, which was also extinguished
during the year.
-31-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
HTCC is engaged primarily in the provision of telecommunications
services through its majority-owned 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.
Now that the Company's network is 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, revenues per customer and on-going
construction costs. 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 the past several years primarily through a $170 million Postabank Credit
Facility (the "Original Postabank Credit Facility") and a $47.5 million
contractor financing facility. The Company and the Hungarian contractor which
granted the contractor financing facility have a disagreement with respect to
several issues relating to the quality and quantity of the work done by the
contractor. In addition, on March 31, 1999, the Company did not have sufficient
funds on hand to pay the first installment due on the Original Postabank Credit
Facility. Due to this fact, as well as the disagreement the Company has with the
Hungarian contractor, on March 30, 1999, and May 12, 1999, the Company entered
into a series of transactions (see notes 4, 5, 6, 8 and 11 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 which started in 1999, 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" below.
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
$181 million through December 31, 1999 (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 139,100
access lines through December 31, 1999 to the 61,400 access lines acquired
directly from Matav. As a result, the Company had 200,500 access lines in
operation at year end 1999.
-32-
Comparison of Year Ended December 31, 1999 to Year Ended December 31, 1998
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 are 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.
The growth in access lines is not fully reflected in increased measured service
revenues as newer customers require a period of maturity before producing
revenues similar to established telephone customers.
These revenues have been 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 have 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. Based upon recent negotiations with Matav and the Hungarian Ministry of
Telecommunications, the Company expects net interconnect, as a percentage of
call and subscription revenues, to remain consistent with 1999 levels in 2000.
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 the period, connection fees for the
year have remained relatively consistent in U.S dollar terms with 1998 amounts.
-33-
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 the Company achieved
productivity improvements and increased its focus on reducing operating
expenses, particularly through reductions in the number of expatriates working
for the Company. The Company does not expect significant decreases in operating
and maintenance expenses in 2000. However, on a per line basis, operating and
maintenance costs are expected to decline as additional access lines are added
during 2000.
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. However, due
to the devaluation of the Hungarian forint during the period, depreciation and
amortization charges for the year ended 1999 have remained relatively consistent
in U.S. dollar terms with 1998 amounts. The Company expects depreciation and
amortization charges in 2000 to increase in functional currency terms due to
additional capital expenditures in its operating subsidiaries, however, in U.S.
dollar terms the Company expects depreciation and amortization to remain
consistent with 1999 amounts due to devaluation of the operating subsidiaries'
functional currency.
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 is due to the termination of management services agreement between the
Company and Citizens International Management Services Company. See Note 15 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 15 of Notes to Consolidated Financial Statements.
-34-
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 the year.
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 the period. This increase in
foreign exchange losses during the period 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. The Company now has debt obligations
denominated in U.S. dollars and euros, as well as Hungarian forints. See
"Liquidity and Capital Resources" section below for information regarding the
Company's debt restructuring during the period. See also the "Inflation and
Foreign Currency" and "Market Risk Exposure" sections 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 the period 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 the period.
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 15
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.
-35-
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 $27.1
million which consists of a $9.0 million gain on extinguishment of the
liabilities the Company had with Citizens and a $18.1 million gain on
extinguishment of all amounts due under a contractor financing facility, offset
in part by a non-cash charge of $6.2 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.
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
Net Revenues
Year ended
(dollars in millions) 1998 1997
Measured service revenues $ 32.2 $ 26.2
Subscription revenues 10.7 7.2
Net interconnect charges (9.8) (10.2)
----- ------
Net measured service and subscription revenues 33.1 23.2
Connection fees 2.0 12.9
Other operating revenues, net 3.6 1.8
----- -----
Telephone Service Revenues, Net $ 38.7 $37.9
===== =====
The Company recorded a 2% increase in net telephone service revenues to
$38.7 million for the year ended December 31, 1998 from $37.9 million for the
year ended December 31, 1997.
Net measured service and subscription revenues increased 43% to $33.1
million for the year ended December 31, 1998 from $23.2 million for the year
ended December 31, 1997. Measured service revenues increased 23% to $32.2
million in 1998 from $26.2 million in 1997 while subscription revenues increased
49% to $10.7 million in 1998 from $7.2 million in 1997. These increases in call
and subscription fee revenues are the result of a 35% increase in average access
lines in service from approximately 132,000 lines for the year ended December
31, 1997 to approximately 178,000 lines for the year ended December 31, 1998.
The growth in access lines is not fully reflected in increased measured service
revenues as newer customers require a period of maturity before producing
revenues similar to established telephone customers.
-36-
These revenues have been offset by net interconnect charges which
totaled $9.8 million for the year ended December 31, 1998 as compared to $10.2
million for the year ended December 31, 1997. As a percentage of call and
subscription revenues, net interconnect charges have declined from 31% for the
year ended December 31, 1997 to 23% for the year ended December 31, 1998, 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,
1998.
Connection fees for the year ended December 31, 1998 totaled $2.0
million as compared to $12.9 million for the year ended December 31, 1997. This
decrease reflects the reduction in the number of new access lines connected from
approximately 81,700 during the year ended December 31, 1997 to approximately
9,900 lines during the year ended December 31, 1998. Connection fees were
expected to decline substantially during the year as the majority of wait-listed
customers have been provided with access lines. The Company expects connection
fees to continue to decline as no significant backlog of wait-listed customers
exists.
Other operating revenues increased 100% to $3.6 million during the year
ended December 31, 1998 compared to $1.8 million during the year ended December
31, 1997 due to revenues generated from the provision of direct lines and
revenues generated from Lucent PBX sales and related maintenance services.
Operating and Maintenance Expenses
Operating and maintenance expenses for the year ended December 31, 1998
decreased to $19.6 million compared to $25.0 million for the year ended December
31, 1997. On a per line basis, operating and maintenance expenses decreased to
approximately $110 per average access line for the year ended December 31, 1998
from $190 for the year ended December 31, 1997 as the Company achieved
productivity improvements, including discontinuing the use of labor intensive
manual switchboards through the use of modern switching technology, as well as
increased focus on reducing operating expenses.
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 15 of Notes to Consolidated Financial Statements.
Depreciation and Amortization
Depreciation and amortization charges increased to $11.6 million for
the year ended December 31, 1998 from $8.3 million for the year ended December
31, 1997.
Management Fees
Management fees pursuant to management service agreements decreased to
$2.5 million for the year ended December 31, 1998 from $5.8 million for the year
ended December 31, 1997. This decrease was due to the termination of management
services agreement between the Company and Citizens International Management
Services Company. See Note 15 of Notes to Consolidated Financial Statements. The
Company does not have any continuing management services agreement.
-37-
Loss from Operations
Loss from operations increased to $6.1 million for the year ended
December 31, 1998 compared to $1.3 million for the year ended December 31, 1997.
Excluding the cost of terminating the management services agreement and
management fees, income from operations for the years ended December 31, 1998
and 1997 would have been $7.6 million and $4.5 million, respectively.
Contributing to such improvements were higher revenues and lower operating and
maintenance expenses during the year ended December 31, 1998 as compared to the
year ended December 31, 1997, offset by increased depreciation and amortization
charges during the year
Foreign Exchange Loss
Foreign exchange losses decreased to $0.2 million for the year ended
December 31, 1998 from $0.5 million for the year ended December 31, 1997. Such
foreign exchange losses resulted from the devaluation of the Hungarian forint
against the U.S. dollar and the German Mark.
Interest Expense
Interest expense increased to $45.9 million for the year ended December
31, 1998 from $35.2 million for the year ended December 31, 1997. This increase
was attributable to higher average debt levels during the year ended December
31, 1998 as compared to the year ended December 31, 1997 as the Company incurred
additional indebtedness in order to continue the construction of its
telecommunications networks and repay other loan obligations. Interest
capitalized and included in the cost of construction of certain long term assets
amounted to approximately $0.3 million during 1998 and $4.5 million in 1997.
Other, net
Other, net income amounted to $0.8 million for the year ended December
31, 1998 as compared to $13,000 for the year ended December 31, 1997. This
increase during the year ended December 31, 1998 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. Under such termination agreement, the Company satisfied its
obligations, under a previous management services agreement, of $9.6 million by
issuing 100,000 shares of Common Stock valued at $513,000 and a promissory note
in the amount of $8.4 million. See Note 15 of Notes to Consolidated Financial
Statements.
Net Loss
As a result of the factors discussed above, the Company recorded a net
loss of $50.6 million, or $9.53 per share, for the year ended December 31, 1998
as compared to a net loss of $36.2 million, or $7.97 per share, for the year
ended December 31, 1997.
-38-
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 ($181 million at historical
exchange rates through December 31, 1999). The Company's networks now have the
capacity 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 in fees and costs representing settlement in
connection with the cancellation of the Company's proposed private placement of
debt securities. The remaining $5.1 million was used to pay management fees and
reimbursable costs owed to Citizens pursuant to the Management Services
Agreement with Citizens. An additional $5.6 million of the 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, and was 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
Postabank Credit Facility.
On May 12, 1999, the Company entered into various agreements as part of
a revision of its capital structure with the following parties: Postabank Rt.
("Postabank"); Tele Danmark A/S ("Tele Danmark"); the Danish Investment Fund for
Central and Eastern Europe (the "Danish Fund"); CU CapitalCorp and Citizens
International Management Services Company, each of which is a wholly-owned
subsidiary of Citizens Utilities Company (Citizens Utilities Company and its
subsidiaries are hereinafter referred to as "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 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 effect of these transactions has been a significant reduction in the
financial obligations of the Company. The Company has borrowed from Postabank
$138 million ($134 million at current exchange rates) under a one-year dual
-39-
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 12, 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).
The Company and Postabank entered into a Dual Currency Bridge Loan
Agreement (the "Postabank Bridge Loan Agreement") pursuant to which HTCC's
subsidiaries borrowed the equivalent of $111 million in Hungarian forints and
$27 million in euros which funds were applied to the repayment of the Original
Postabank Credit Facility. The loan is repayable on May 10, 2000 and bears
interest at an initial rate of 2.25% (the "Margin") plus the Budapest Bank
Offering Rate or Euro LIBOR Rate (currently approximately 15% and 2.5%,
respectively) which Margin increases incrementally to 4.25%, in quarterly
increments of 1% over the next year. HTCC and one of its subsidiaries, HTCC
Consulting Rt. are guarantors for the HTCC subsidiaries under the Postabank
Bridge Loan Agreement. The Company has 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 Postabank Bridge
Loan Agreement. The Company entered into a series of agreements to secure such
obligations under the Postabank Bridge Loan Agreement.
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 the Company's 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 cannot 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 then 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 accrue interest, which is payable semi-annually, at the
LIBOR rate applicable for the six month interest period, plus 4%. On April 11,
2000, the Notes were amended such that the interest rate was changed to LIBOR
plus 3.5%. The Notes which mature in 2007 are transferable subject to applicable
security laws. 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 full or
proportionately prior to January 1, 2004 provided that the Company repays a
proportionate amount of the Notes and an amount equal to 7-1/2% of the aggregate
principal amount of the Notes repaid, concurrently with the termination 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 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. Tele Danmark agreed not to transfer the
shares to any party prior to May 11, 2000 without the prior written consent of
the Company.
-40-
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 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 Danish Fund agreed not
to transfer the shares to any party except for Tele Danmark prior to May 11,
2000 without the prior written consent of the Company.
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 Common Stock and 30,000 shares of the Company's
Series A Preferred Stock, par value $0.01 (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, (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 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. 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 is less than $7.00 per share, then HTCC shall issue such
number of HTCC Preferred Shares (with a value of $70 per share) equal in value
to (i) 1,600,000 times (ii) $7.00 less the average closing price of HTCC common
stock for such twenty (20) trading day period. 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. The Citizens Stock Purchase Agreement also requires Citizens
not to transfer any shares of HTCC common stock which it may hold prior to May
15, 2000 without the prior written consent of the Company and Postabank.
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 the 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 Hungarian contractor which totalled $59.0 million in the
aggregate, $47.5 million of which was financed by a contractor financing
facility. The contractor financed the financing facility 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) 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). The purchase of the debt was financed by Postabank. On the same day,
the Company purchased HUF 4 billion (approximately $16.8 million) of loans the
contractor had with Postabank for HUF 900 million (approximately $3.8 million)
and subsequently offset the booked value of the loans purchased of HUF 900
million (approximately $3.8 million) 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 $18.1 million) during the second quarter of 1999
which reflects the extinguishment of all amounts due under the contractor
financing facility.
-41-
As a result of the agreements above, the Company had 11,981,579 shares
of common stock outstanding as of December 31, 1999. The following parties hold
the following percentages of such shares: Postabank 20.3%; Tele Danmark 21.4%;
the Danish Fund 10.7%; Citizens 19.2%; and others 28.4%. On a fully-diluted
basis, the Company had 20,218,638 shares outstanding. The following parties hold
the following percentages of such shares: Postabank 24.4%; Tele Danmark 12.7%;
the Danish Fund 6.4%; Citizens 35.2%; and others 21.3%.
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. The Company intends to draw down the entire EUR 130 million ($124
million at current exchange rates), which funds will be used in their entirety,
along with another $6 million of other Company funds, to pay off the entire
outstanding balance EUR 128 million (approximately $128 million at December 31,
1999 exchange rates) of the Postabank Bridge Loan Agreement which will result in
the termination of the Postabank Bridge Loan which matures on May 12, 2000, as
well as 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 Agreement.
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 semi-annually on each June 30 and December 31 beginning on June 30,
2001 and ending on December 31, 2007. The amount of the principal repayments on
the Term Facility are to be an escalating percentage of the amounts drawn down
(EUR 125 million). Any amounts borrowed under the Term Facility have to be drawn
down within thirty days of the execution of the Debt Agreement in either euros
or, if funded by the banking syndicate, Hungarian forints. The Company intends
to borrow the full EUR 125 million, or its equivalent in euros and Hungarian
forints. Any amounts borrowed in Hungarian forints are 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, at the Company's option in one, three or six months.
The Company intends to choose six months. The applicable interest period for
Term Facility Loans denominated in Hungarian forints is, at the Company's option
in one or three months. The Company intends to choose 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.
-42-
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 intends to
borrow the full amount of the Revolving Facility to pay off the balance of the
Postabank Bridge Loan Agreement and fees associated with the transaction. 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 intends to choose six months. Interest is payable at the end of each
interest period calculated similar to Term Facility A loans denominated in
euros.
As a part of the Debt Agreement, the Company is required to hedge at
least 50% of the euro borrowings until a minimum of 50% of Facility A has been
cancelled, prepaid or repaid. Dependent on its cash flow, commencing in 2001,
the Company will be required to prepay the equivalent of $25 million on Facility
A 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.
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. Since
the Company intends to borrow the full amount of the Debt Agreement soon, there
will be no commitment fee payable at the present time. The Company will pay an
arrangement fee in the amount of EUR 2,665,000 (approximately $2,500,000) and an
agency fee in the amount of $60,000. HTCC and one of its subsidiaries, HTCC
Consulting Rt., are guarantors for the HTCC operating subsidiaries under the
Debt Agreement. The Company has 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 and dispose of its
assets. The Debt Agreement contains the customary events of default, which would
trigger early repayment of the balance on the Debt Agreement including those
related to a change of control. 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
32.1% 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 Facility.
In 1995, the Company applied for network construction subsidies from
the Hungarian government. In December 1995, certain of the Company's
applications were approved, subject to certain conditions, which resulted in the
Company being awarded subsidies aggregating $0.9 million. The Company received
such subsidies in installments in the fourth quarter of 1996 and the first
quarter of 1997. One-half of such funds were received in the form of a grant and
one-half in the form of a non-interest bearing loan repayable over a three year
period beginning in 1997.
-43-
Net cash provided by operating activities totaled $18.5 million for the
year ended December 31, 1999 compared to $11.1 million for the year ended
December 31, 1998. For the years ended December 31, 1999 and 1998, the Company
used $9.9 million and $15.6 million, respectively, in investing activities,
which was primarily used to fund the construction of the Company's
telecommunications networks. Financing activities provided net cash of $1.0
million and $9.3 million for the years ended December 31, 1999 and 1998,
respectively.
Inflation and Foreign Currency
For the year ended December 31, 1999, inflation in Hungary was
approximately 10% on an annualized basis. It is the stated policy goal of the
Hungarian government to keep inflation from exceeding approximately 7% in 2000.
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
252.52 as of December 31, 1999, an effective devaluation during 1999 of 14.3%.
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. The Company's
resulting foreign currency exposure is difficult to hedge due to the significant
costs involved and the lack of a market for such hedging. 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's 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.
Year 2000
The Company initiated a project designed to identify and mitigate Year
2000 computer deficiencies in 1998. The Company formed a Year 2K project team
consisting of Company employees and representatives of systems vendors. The
Company also formed an oversight committee comprised of senior management to
oversee the Y2K issue.
The Company originally estimated the total costs of remediation, which
included the replacement and/or upgrade of certain equipment would be
approximately $785,000. However, due to agreements with its switch vendors
during 1999, the Company was able to obtain Y2K switching upgrades for no cost.
For the year ended December 31, 1999, the Company expensed approximately
$162,000 for remediation of the Y2K problem, which is included in the Company's
Consolidated Statement of Operations.
-44-
From December 31, 1999, to March 15, 2000, the Company operated a Y2K
information center to monitor the Company's facilities and operations. No
material problems were reported in any of the Company's facilities or operations
during this period. As of the date of this filing, the Company had not
experienced any material Year 2000 problems with its IT or non-IT systems, nor
had the Company experienced any material problems with any of its key customers
or suppliers. The Company will continue to monitor its systems for possible Y2K
related problems, but based on its experience since December 31, 1999, does not
expect that any material Y2K problems will emerge.
Prospective Accounting Pronouncements
In June 1998, Statement of Financial Account Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. The Statement, as amended by SFAS 137, is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company has not
purchased derivative instruments or entered into hedging activities during the
three years ended December 31, 1999. The Company will be required to enter into
hedging transactions under the terms of the Company's EUR 130 million Senior
Secured Debt Facility, which was entered into on April 11, 2000. The Company is
currently evaluating the effect, if any, the pronouncement will have on its
consolidated financial position and results of operations.
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 75% of operational costs are Hungarian forint based
and are therefore subject to exchange rate variability between the Hungarian
forint and U.S. dollar. This variability is mitigated by several factors,
including the Hungarian National Bank policy to peg the Hungarian forint to a
currency basket and the telecommunications pricing law. The "crawling peg"
policy of the National Bank of Hungary maintained a scheduled daily devaluation
of the Hungarian forint through a currency basket consisting of 70% euros and
30% U.S. dollars for 1999. Effective January 1, 2000, the Hungarian forint is
pegged 100% to the Euro. The Hungarian forint is allowed to trade within 2.25%
of the mid-point of its trading band. For the first quarter of 2000, the
Hungarian government devaluation policy was 0.4% per month. As of April 1, 2000,
the Hungarian government announced the monthly planned devaluation rate was
decreased to 0.3% per month for the Hungarian forint, which totals approximately
3.9% for 2000. The telecommunications pricing law allows prices to increase by
the Consumer Price Index (CPI) adjusted for an efficiency factor of up to 2%.
Thus, to the extent that adjusted CPI follows devaluation, 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 Interbank Offer Rate (BUBOR). The interest rates on the
euro and U.S. dollar denominated obligations are based on LIBOR. Over the medium
to long term, the BUBOR rate is expected to follow inflation and devaluation
-45-
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 $1.0 million based upon the
Company's year-end debt level. If a 1% change in the LIBOR interest rate were to
occur, the Company's interest expense would increase or decrease by
approximately $500,000.
The Company is also exposed to exchange rate risk in so far 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 $252,000. 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.
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.
Item 9(a). Change in Reporting Office of Independent Auditor
In 1999 KPMG Hungaria Kft., the Hungarian member firm of KPMG
International, assumed responsibility for the issue of the independent auditors'
report on the consolidated financial statements of the Company as of and for the
three year period ended December 31, 1999. The New York, New York office of KPMG
LLP was responsible for the issue of the independent auditors' report on the
consolidated financial statements of the Company as of and for the three years
ended December 31, 1998. The report issued thereon by KPMG LLP dated March 24,
1999 contained a "going concern" explanatory paragraph concerning the Company's
ability to continue as a going concern. The independent auditors' report
contained herein does not have a "going concern" explanatory paragraph.
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 - Nominees for Director" and
"- Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for the 2000 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
-46-
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 2000 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," "- Stock Ownership of Management" and "- Potential Change in
Control" in the Company's definitive proxy statement for the 2000 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 Party Transactions" and "- Indebtedness of Management" in the Company's
definitive proxy statement for the 2000 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.
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.
-47-
(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 June 24, 1997 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
June 24, 1997 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 Designations 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
-48-
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 to date
10.7 1992 Incentive Stock Option Plan of the Registrant, as amended
to date
10.8 Employment Agreement dated as of December 4, 1998 between the
Registrant and Ole Bertram filed as Exhibit 10.12 to the
Registrant's Form 10-K for 1998 filed on March 30, 1999.
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
-49-
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
-50-
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.
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.
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.
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.
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)
-51-
Exhibit
Number Description
21 Subsidiaries of the Registrant, filed as Exhibit 21 to the
Registrant's Form 10-K for the fiscal year ending December 31,
1997 and incorporated herein by reference
22 Published report regarding matters submitted to vote of
security holders (not required)
23 Consents of experts and counsel (not required)
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, on April 11, 2000.
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 April 11, 2000.
Signature/Name Title
/s/William T. McGann Treasurer and Controller
- --------------------------------------------
William T. McGann (Principal Accounting Officer;
Principal Financial Officer)
/s/David A. Finley Director, Chairman of the Board
- --------------------------------------------
David A. Finley
-52-
Signature/Name Title
/s/Daryl A. Ferguson Director
- ------------------------------------
Daryl A. Ferguson
/s/Torben V. Holm Director
- ------------------------------------
Torben V. Holm
/s/Lennart F. Meineche Director
- ------------------------------------
Lennart F. Meineche
/s/John B. Ryan Director
- ------------------------------------
John B. Ryan
/s/William E. Starkey Director
- ------------------------------------
William E. Starkey
/s/Leonard Tow Director
- ------------------------------------
Leonard Tow
-52-
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
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-33
Financial Statements Schedules:
All financial statement schedules are omitted as the
required information is not applicable or the information is presented
in the consolidated financial statements or related notes.
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles
in the United States of America.
KPMG HUNGARIA KFT.
Budapest, Hungary
April 12, 2000
F-2
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES DRAFT 4/11/00
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
Assets 1999 1998
------ ---- ----
Current assets:
Cash $ 17,197 8,489
Restricted cash 111 64
Accounts receivable, net of allowance
of $1,030 in 1999 and $962 in 1998 6,940 6,703
Inventories 885 1,111
Prepayments and other current assets 1,082 187
--------- -------
Total current assets 26,215 16,554
Property, plant and equipment, net 115,526 136,489
Goodwill, net of accumulated amortization
of $1,775 in 1999 and $1,303 in 1998 7,859 10,000
Other intangibles, net of accumulated amortization
of $1,156 in 1999 and $1,238 in 1998 4,526 5,592
Other assets 557 8,432
--------- ---------
Total assets $ 154,683 177,067
======= ========
Liabilities and Stockholders' Deficiency
Current liabilities:
Current installments of long-term debt $ - 31,804
Short-term loans 5,048 -
Accounts payable 3,994 2,061
Accruals 5,561 3,552
Other current liabilities 1,349 932
Due to related parties 996 1,011
-------- -------
Total current liabilities 16,948 39,360
Long-term debt, excluding current installments 122,917 202,881
Long-term notes payable, $25,000,000 aggregate face
amount; interest - LIBOR plus 4%, due March 31, 2007
(less unamortized discount based on imputed
interest rate of 5% - $8,256,000 in 1999; $0 in 1998) 16,744 -
Due to related parties 1,728 22,372
Deferred credits and other liabilities 3,292 1,491
--------- ---------
Total liabilities 161,629 266,104
-------- -------
Commitments and Contingencies
Stockholders' deficiency:
Preferred stock, $.01 par value; $70.00 liquidation value.
Authorized 200,000 shares; issued and outstanding
30,000 shares in 1999 and no shares in 1998 - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
11,981,579 shares in 1999 and 5,395,864 in 1998 11 5
Additional paid-in capital 144,052 71,467
Accumulated deficit (164,705) (167,809)
Accumulated other comprehensive income 13,696 7,300
--------- -----------
Total stockholders' deficiency (6,946) (89,037)
---------- -----------
Total liabilities and stockholders' deficiency $ 154,683 177,067
========== ===========
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, 1999, 1998 and 1997
(In thousands, except share and per share data)
1999 1998 1997
---- ---- ----
Telephone services revenues, net $ 45,438 38,707 37,891
------------- ------------- ------------
Operating expenses:
Operating and maintenance expenses 17,467 19,575 25,044
Depreciation and amortization 11,782 11,560 8,349
Management fees - 2,500 5,761
Termination of management
services agreement - 11,131 -
------------- ------------- -----------
Total operating expenses 29,249 44,766 39,154
------------- ------------- ------------
Income (loss) from operations 16,189 (6,059) (1,263)
Other income (expenses):
Foreign exchange losses, net (2,786) (230) (517)
Interest expense (32,450) (45,856) (35,159)
Interest income 1,708 686 690
Other, net (434) 847 13
------------- ------------- ------------
Loss before extraordinary items (17,773) (50,612) (36,236)
Extraordinary items, net 20,945 - -
------------- ------------- ------------
Net income (loss) $ 3,172 (50,612) (36,236)
Preferred stock dividends (68) - -
------------- ------------- ------------
Net income (loss) available for
common stockholders 3,104 (50,612) (36,236)
Comprehensive income adjustments 6,396 2,336 6,458
------------- ------------- ------------
Total comprehensive income (loss) $ 9,500 (48,276) (29,778)
============== ============= ============
Earnings (loss) per common share - basic and diluted:
Before extraordinary items $ (1.85) (9.53) (7.97)
Extraordinary items $ 2.18 - -
------------- ------------- ------------
Net earnings (loss) $ 0.33 (9.53) (7.97)
============= ============= ============
Weighted average number of
Common shares outstanding - basic and diluted 9,617,939 5,309,985 4,546,163
============= ============= ============
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, 1999, 1998 and 1997
(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, 1996 4,179,626 $ 4 - 59,327 (80,961) (1,494) (666) $(23,790)
Exercise of options and warrants 81,586 - - 635 - - - 635
Shares issued as compensation 5,000 - - 52 - - - 52
Options issued to officers - - - 70 - - - 70
Shares issued to Tele Danmark A/S 969,158 1 - 10,688 - - - 10,689
Earned compensation - - - - - - 285 285
Foreign currency translation adjustment - - - - - 6,458 - 6,458
Net loss - - - - (36,236) - - (36,236)
- ---------------------------------------------------------------------------------------------------------------------------------
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 adjustment - - - - - 2,336 - 2,336
- ---------------------------------------------------------------------------------------------------------------------------------
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 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)
- ---------------------------------------------------------------------------------------------------------------------------------
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, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
---- ---- ----
Net cash provided by operating activities $ 18,522 11,118 4,937
--------- -------- ---------
Cash flows from investing activities:
Construction of telecommunications
networks (9,998) (16,451) (83,055)
Decrease (increase) in construction deposits (17) 520 9,780
Other 86 301 -
--------- -------- ---------
Net cash used in investing activities (9,929) (15,630) (73,275)
---------- -------- ---------
Cash flows from financing activities:
Borrowings under long-term debt agreement 41,391 16,099 72,064
Borrowings under short-term debt agreements 124,753 - -
Proceeds from exercise of options and warrants - 224 635
Repayments and settlement of long-term debt (217,697) (7,048) (14,326)
Proceeds from issuance of common stock, net 52,511 - -
--------- -------- ---------
Net cash provided by financing activities 958 9,275 58,373
--------- -------- ---------
Effect of foreign exchange rate changes on cash (843) (305) (1,880)
---------- --------- ----------
Net increase (decrease) in cash 8,708 4,458 (11,845)
Cash at beginning of year 8,489 4,031 15,876
--------- -------- ---------
Cash at end of year $ 17,197 8,489 4,031
========= ======== =========
See accompanying notes to consolidated financial statements.
F-6
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Description of Business and Other Related Matters
Hungarian Telephone and Cable Corp. 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.
The Company, through two of its subsidiaries, commenced operations
in two concession regions in 1995 and through two other
subsidiaries, commenced operations in three additional concession
areas effective January 1, 1996. Accordingly, the Company devoted
substantially all of its efforts through 1994 and a considerable
portion of 1995 to obtaining concession rights, negotiating
acquisitions, raising capital in the form of debt and equity and
preparing to commence operations. As a result, the Company
recognized no revenues until 1995.
From 1995 through 1998, the Company's activities involved the
acquisition of the concessions and telecommunications networks
from Magyar Tavkozlesi Rt. ("Matav") and the subsequent design,
development and construction of the modern telecommunications
infrastructure that the Company now has in service. 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 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). 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 has spent $181 million
through December 31, 1999 (at historical exchange rates) on the
development and construction of its telecommunications
infrastructure. The Company funded these costs and working capital
needs primarily through a $170 million Credit Facility with
Postabank Rt. (the "Original Postabank Credit Facility") and a
$47.5 million contractor financing facility. The Company and the
Hungarian contractor which granted the contractor financing
facility have a disagreement with respect to several issues
relating to the quality and quantity of the work done by the
contractor. In addition, on March 31, 1999, the Company did not
have sufficient funds on hand to pay the first installment due on
the Original Postabank Credit Facility. Due to this fact, as well
as the disagreement the Company has with the Hungarian contractor,
on March 30, 1999, and May 12, 1999, the Company entered into a
series of transactions (see notes 4, 5, 6, 8 and 11) which
restructured the Company's debt and capital structure. As the
final step in the Company's debt and capital restructuring which
started in 1999, on April 11, 2000, the Company entered into a EUR
130 million Senior Secured Debt Facility with a European banking
syndicate (see note 19).
(b) Principles of Consolidation and the Use of Estimates
The consolidated financial statements include the financial
statements of the Hungarian Telephone and Cable Corp. 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"), HTCC Consulting Rt. ("HTCC Consulting") and
Pilistav Rt. ("Pilistav"). All material intercompany balances
and transactions have been eliminated.
F-7
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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.
Advance subscriber payments represent advance connection fees
received from telephone subscribers and are recognized as income
when the subscriber is connected to the telephone network. Advance
fees received are required to be repaid with interest if the
subscriber is not connected to the local telephone network.
(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, "Accounting for 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 majority owned 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-8
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(f) Inventories
Inventories consist primarily of telephones for resale and spare
parts, are valued using the FIFO method, and are stated at the
lower of cost or market.
(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) Intangible Assets
Intangible assets are comprised of concession fees paid and the
excess of cost over net assets acquired. The concession fees are
being amortized over the 25-year concession period using the
straight-line method. The excess of cost over net assets acquired,
goodwill, is also amortized over 25 years using the straight-line
method.
(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 and provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures
for employee stock option grants made in 1995 and future years as
if the fair-value-based method, as defined in SFAS No. 123, had
been applied. The Company has elected to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure required
by SFAS No. 123. See Note 12.
(j) Income Taxes
Deferred tax assets and liabilities, net of appropriate valuation
allowances, are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities, if any, are
measured using enacted tax rates expected to apply to taxable
income in the years in which those 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 are 100% exempt
from Hungarian income tax for a period of five years beginning
from January 1, 1994 and 60% exempt for the subsequent five years
as long as (1) capitalization stays above 50,000,000 HUF
(approximately $198,000 at December 31, 1999 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.
F-9
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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, 1999, 1998 and 1997.
The Company had potentially dilutive common stock equivalents of
8,237,059, 7,474,915 and 7,200,859 for the years ended December
31, 1999, 1998 and 1997, 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, including
goodwill, 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 carrying value exceeds the 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.
(2) Cash and Restricted Cash
(a) Concentration
At December 31, 1999, cash of $16,622,000 ($374,000 denominated in
U.S. dollars and the equivalent of $16,248,000 denominated in
Hungarian Forints) was on deposit with banks in Hungary. In
addition, cash of $575,000 denominated in U.S. dollars was on
deposit with two major banks in the United States.
(b) Restriction
At December 31, 1999, $22,000 of cash denominated in U.S. dollars
was deposited in escrow accounts under terms of construction
contracts. In addition, $89,000 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, 1999, 1998 and 1997
(3) Property, Plant and Equipment
The components of property, plant and equipment at December 31, 1999 and
1998 are as follows:
1999 1998 Estimated Useful Lives
---- ---- ----------------------
(in thousands)
Land and Buildings $ 6,526 7,402 25 to 50 years
Telecommunications equipment 128,116 141,752 7 to 25 years
Other equipment 5,766 5,891 5 years
Construction in progress 1,921 700
------- -------
142,329 155,745
Less: accumulated depreciation (26,803) (19,256)
-------- --------
$ 115,526 136,489
======== ========
Interest capitalized and included in the cost of construction of certain
long-term assets amounted to approximately $310,000 in 1998 and
$4,504,000 in 1997. No interest has been capitalized in 1999.
(4) Short-Term Loans
There were no short-term loans outstanding at December 31, 1998.
Short-term loans at December 31, 1999 consist of the following:
1999
(in thousands)
Bridge loan:
Euro - EUR 25,000,000 $ 25,238
Hungarian Forint - HUF 25,940,624,000 102,727
-------
Total short-term loans 127,965
Less amounts refinanced subsequent to December 31, 1999 122,917
-------
Short-term loans, excluding portion classified as
long-term debt $ 5,048
=========
On May 12, 1999, as a part of the restructuring of its debt and capital
structure, see Notes 5 and 11, 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 is repayable on May 12, 2000 and bears interest at an initial rate
of 2.25% (the "Margin") plus the Budapest Interbank Offering Rate or Euro
LIBOR Rate (14.64% and 3.47%, respectively at December 31, 1999) which
Margin increases incrementally to 4.25%, in quarterly increments of 1%
during the loan term. At December 31, 1999, the Margin was 3.25%. On
April 11, 2000, the Company signed a 130 million Euro senior secured debt
facility agreement with a syndicate of Hungarian and non-Hungarian banks,
the proceeds of which will be used to repay the existing bridge loan. As
a result of this refinancing, the Company has classified $123 million of
its short-term loans at December 31, 1999, as long-term debt. See Note 19
for further explanation of this subsequent event.
F-11
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
HTCC and one of its subsidiaries, HTCC Consulting Rt. are guarantors for
the HTCC subsidiaries under the Bridge Loan Agreement. The Company has
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 Bridge Loan Agreement.
(5) Long-term Debt
Long-term debt at December 31, 1999 consisted of short-term loans refinanced
subsequent to December 31, 1999 in the amount of $122,917,000. See Notes 4 and
19 for further explanation.
Long-term debt at December 31, 1998 consisted of the following:
1998
(in thousands)
Loan payable including deferred interest, interest at the National Bank
of Hungary weighted average Treasury Bill + 2.5% (19% at December 31,
1998), payable in 32 quarterly installments beginning March 31, 1999
with final payment due December 21, 2006; HUF 42,863,437,000
outstanding at December 31, 1998. $ 197,984
Construction loan including deferred interest, interest at the National
Bank of Hungary weighted average Treasury Bill + 2.5% (19% at
December 31, 1998) payable in 20 quarterly installments beginning
March 31, 1998 with final payment due December 31, 2002;
HUF 7,926,002,000 outstanding at December 31, 1998. 36,610
Loan payable, without interest due in equal annual installments
over three years 91
---------------
Total long-term debt $ 234,685
Less current installments 31,804
---------------
Long-term debt, excluding current installments $ 202,881
===============
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"). The Company utilized the funding
provided by the Original Postabank Credit Facility to continue
construction of its telecommunications networks, provide working capital,
and repay other debt obligations during 1997 and 1998. The Company did
not have sufficient funds to meet the required repayment obligations
under the Original Postabank Credit Facility as of March 31, 1999. 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
F-12
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Fund for Central and Eastern Europe (the "Danish Fund") (see Notes 8 and
11). 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. On the same day, 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 Note 6).
As a result of the extinguishment of the Original Postabank Credit
Facility, the Company recorded an extraordinary loss of HUF 1.5 billion
(approximately $6.2 million at historical exchange rates) during the
second quarter of 1999 which represented the write-off of the remaining
unamortized deferred financing costs, included in other assets and
deferred credits at December 31, 1998, pertaining to the Original
Postabank Credit Facility.
During 1996 and 1997, Hungarotel entered into several construction
contracts with a Hungarian contractor which totalled $59.0 million in
the aggregate (at historical exchange rates), $47.5 million of which was
financed by a contractor financing facility. The financing was provided
by the contractor. The contractor financed the financing facility
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 $18.1 million at historical exchange rates)
during the second quarter of 1999 which reflected the extinguishment of
all amounts due under the contractor financing facility.
In 1995, the Company was awarded subsidies from the Ministry aggregating
HUF 118,720,000 (approximately $850,000 at December 31, 1995 exchange
rates). The required conditions were satisfied in 1996 and the funds were
received one-half in the form of a grant and one-half in the form of a
non-interest bearing loan repayable over a three year period. As of
December 31, 1999, the loan had been fully repaid.
(6) Long-term Notes Payable
As described in Notes 4 and 5 above, on May 12, 1999, the Company entered
into various agreements as part of the restructuring of its debt and
capital structure. As one part of this overall restructuring, 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 LIBOR rate applicable for the six month
interest period plus 4%. On April 11, 2000, the Notes were amended such
that the interest rate was changed to six month LIBOR plus 3.5%. The
Notes which mature in 2007 are transferable subject to applicable
security laws.
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 fair value of the warrants amounted to $8.8 million
F-13
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
and has been charged directly to additional paid-in capital. The fair
value of the warrants was determined using the Black Scholes Warrant
Option valuation model. The unamortized discount on the notes at December
31, 1999 was approximately $8.3 million. The Company has the right to
terminate the Warrants in full or proportionately prior to January 1,
2004 provided that the Company repays a proportionate amount of the Notes
and an amount equal to 7-1/2% of the aggregate principal amount of the
Notes repaid, concurrently with the termination of the Warrants.
(7) Deferred Credits and Other Liabilities
During 1999, one of the Company's subsidiaries, Papatel, entered into an
agreement with the Hungarian Ministry of Transportation,
Telecommunications and Water Management (the "Ministry") for the
relinquishment of the subsidiary's right to use a broadcasting frequency
previously granted by the Ministry. The frequency was used to provide
telephone services to certain customers. In return for the subsidiary
agreeing to relinquish the use of the frequency, the Ministry paid a
total of 308 MHUF ($1,220,000 at December 31, 1999 exchange rates) as a
contribution towards the costs of purchasing and installing fixed
network equipment to replace the parts of the network using the
frequency. The new fixed network equipment was placed into service on
December 31, 1999, and the compensation received from the Ministry,
which is included in deferred credits and other liabilities at December
31, 1999, will be recognized over the new fixed network equipment's
depreciable life as a reduction in depreciation expense over the future
depreciable periods.
During 1999, another of the Company's subsidiaries, Hungarotel, entered
into an agreement with the Ministry for the relinquishment by July 2000
of the subsidiary's right to use a broadcasting frequency previously
granted by the Ministry. The frequency is used to provide telephone
services to certain customers. For relinquishing the right to use the
frequency, the Ministry has paid a total of 557 MHUF ($2,205,000 at
December 31, 1999 exchange rates) which is equivalent to the September
30, 1999 net book value of the assets utilizing the frequency, which
amount is included in deferred credits and other liabilities at December
31, 1999. In addition, the Ministry also granted Hungarotel the right to
an interest free loan in the amount of 334 MHUF ($1,323,000 at December
31, 1999 exchange rates). No amounts have been drawn under this loan as
of December 31, 1999. The 557 MHUF deferred credit will be recognized
over the remaining life of the assets utilizing the frequency to offset
depreciation expense on such assets. Any gain, as a result of selling the
equipment utilizing the frequency, will be recognized at such time as the
equipment is sold.
(8) Transactions with Tele Danmark A/S and the Danish Fund for Central and
Eastern Europe
On July 1, 1997, the Company entered into an agreement with Tele Danmark
A/S ("TDI") pursuant to which TDI agreed to exchange its 20% interest in
each of two operating subsidiaries for 420,908 shares of the Company's
common stock. The value of shares on the date of issue totalled
$3,630,000. Under the agreement, TDI was granted the preemptive right to
maintain its equity ownership percentage and the right, if TDI acquired
the 4.8% stake in each of the operating subsidiaries owned by the Danish
Fund for Central and Eastern Europe ("the Danish Fund"), to sell such
shares to the Company on similar terms.
On September 30, 1997, TDI exercised its right and agreed to exchange the
4.8% interest in each of two operating subsidiaries purchased from the
Danish Fund for 101,018 shares of the Company's common stock. The value
of shares on the date of issue totalled $1,301,000.
F-14
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The total value of shares issued relating to these two transactions has
been recorded as an increase to goodwill and to Common Stock and
additional paid-in capital.
On September 30, 1997, the Company and TDI entered into an agreement
whereby TDI agreed to exchange loans and accrued interest totalling
$5,534,000 to two operating subsidiaries for 447,232 shares of the
Company's common stock.
On May 12, 1999, the Company and TDI 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). TDI agreed not to transfer the shares to any party
prior to May 11, 2000 without the prior written consent of the Company.
As a result of these transactions, TDI's share ownership in the Company
is 21.4% of the shares outstanding at December 31, 1999. TDI has been
granted preemptive rights to maintain its ownership percentage.
On May 12, 1999, 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 (see Note 5). The Danish Fund agreed not to
transfer the shares to any party except for Tele Danmark prior to May 11,
2000 without the prior written consent of the Company. As a result of
this transaction, the Danish Fund's share ownership in the Company is
10.7% of the shares outstanding at December 31, 1999.
(9) Income Taxes
The statutory U.S. Federal tax rate for the years ended December 31,
1999, 1998 and 1997 was 35% and the Hungarian corporate income tax rate
for the years ended December 31, 1999, 1998 and 1997 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,
1999, 1998 and 1997 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, 1999 of approximately
$16,760,000 which expire in 2007, $142,000; 2008, $422,000; 2009,
$950,000; 2010, $6,507,000; 2011, $6,328,000; 2012, $1,906,000; 2018,
$14,000; and 2019, $491,000. As a result of various recent 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.
F-15
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
For Hungarian corporate income tax purposes, the Hungarian subsidiaries
have unused net operating loss carryforwards at December 31, 1999, at
current exchange rates, of approximately $62,972,000. Of this amount,
$12,437,000 may be carried forward indefinitely while $1,383,000 may be
carried forward until 2000, $7,760,000 until 2001, $11,741,000 until
2002, $19,532,000 until 2003 and $10,119,000 until 2004.
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
December 31
---------------------
1999 1998
---- ----
($ thousand)
Net operating loss carryforwards $ 5,866 5,982
Write down of assets 418 418
Stock compensation 1,467 1,467
Citizen's options 3,926 2,205
Termination benefits 746 1,169
Citizen's termination agreement - 3,896
Management fees 3,236 3,236
Interest expense 1,381 918
Other 474 674
-------- --------
Total gross deferred tax assets 17,514 19,965
Less valuation allowance (17,514) (19,965)
-------- --------
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 1999, the valuation
allowance decreased by $2,451,000, while in 1998 it increased by
$5,011,000.
(10) 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.
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 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.
F-16
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 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, 1999, the Company believes it has fulfilled these
service requirements in their concession areas in all material
respects, and has not provided for any potential liability.
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.
The Ministry has stipulated in the Concession Contracts for
Hungarotel and Papatel, as amended in June 1996, that each of the
Operating Companies must meet certain Hungarian ownership
requirements so that by the end of the seventh year of their
Concession Contracts Hungarian ownership must consist of 25% plus
one share of the relevant Operating Company. For the seven-year
period following the date or amendment of a Concession Contract,
as the case may be, 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 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.
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 11) 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
F-17
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
the end of the seven-year period might be considered a serious
breach of a Concession Contract, giving the Ministry 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 may be reduced proportionately.
(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 the year,
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, $2.6 million of which remains to be spent.
(c) Leases
The Company leases office facilities in Connecticut, which require
minimum annual rentals. Certain of the Company's subsidiaries also
rent office space and other facilities. Rent expense for the years
ended December 31, 1999, 1998 and 1997, was $395,000, $199,000 and
$160,000, respectively, and is included in operating and
maintenance expenses. Lease obligations for the subsequent five
years are as follows (at current exchange rates): 2000, $307,000;
2001, $280,000; 2002, $269,000; 2003, $270,000; and 2004,
$290,000.
(d) Legal Proceedings
Hungarotel is a defendant in a lawsuit brought in Hungary that
alleges breach of contract. The plaintiff is seeking payment of
approximately HUF 222 million (approximately $879,000 at December
31, 1999 exchange rates) plus interest. The Company believes it
has meritorious defenses to the claim and does not believe there
will be any material adverse effect from the outcome of this
proceeding.
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.
HTCC Consulting and Papatel are involved in several disputes with
the Hungarian taxing authorities (the "APEH") pursuant to which
the APEH alleges Consulting owes HUF 105 million (approximately
$416,000 at December 31, 1999 exchange rates) and Papatel owes HUF
26 million (approximately $103,000 at December 31, 1999 exchange
rates) for various reasons. The Operating Companies believe that
the APEH claims are without merit and are vigorously defending
themselves against such claims.
F-18
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 million of which was
financed by a contractor financing facility. At December 31, 1998,
the balance on the contractor financing facility was $36.6
million. 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
of approximately HUF 700 million (approximately $2.8 million at
December 31, 1999 exchange rates). Following a series of
transactions with the contractor's major creditor, the Company was
able to settle the contractor's claims arising from the accepted
but unpaid invoices. During 1998 the Company and the contractor
engaged in settlement discussions in order to resolve these issues
but were unable to reach a settlement. In addition, in March 1999,
Hungarotel acquired a HUF 4 billion (approximately $15.8 million
at December 31, 1999 exchange rates) claim against the contractor
in order to strengthen its position in any potential procedures
initiated by the contractor. 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 claims against the
contractor of approximately $31 million which is more than the
contractor's claim. The Company believes that it will prevail on
the merits such that it will not be responsible for the full
payment on the aggregate contractual amount. There can, however,
be no assurances as to the final outcome or course of action of
such dispute.
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 will not have a material adverse effect on the
Company's consolidated financial position, results of operations
or liquidity.
(e) Agreements with Lucent Technologies
In October 1997, the Company entered into an agreement with Lucent
Technologies to become the exclusive distributor of Lucent PBX and
Key System products in Hungary. As part of the agreement, the
Company purchased fixed assets and inventory valued at $470,000
and agreed to purchase commitments starting at $6 million for each
of the next three years. The agreement provided for the imposition
of penalties of up to $500,000 annually for failure to meet the
purchase requirements. The Company also assumed the employment of
36 employees. During the first quarter of 1998, the Company
amended the original agreement with Lucent. Under the first
amended agreement, the Company became the exclusive supplier of
PBX and Key System products in its Operating Areas while retaining
non-exclusive rights to service other Hungarian customers outside
its Operating Areas. In addition, the Company was entitled to sell
large call centers on a commission basis. The Company's minimum
purchase commitments, under the first amended agreement, were
reduced to $2 million annually with potential penalties being
reduced to a maximum of $200,000 annually for failure to meet the
purchase requirements. As a part of the first amended agreement,
the Company transferred back $400,000 of assets to Lucent and paid
$150,000 to Lucent. In addition, the Company transferred to a
third party subcontractor, 28 of the 36 employees originally
assumed. For 1998, the Company negotiated a penalty payment of
approximately $24,000 towards Lucent for non-performance under the
first amended agreement, and this was settled during 1999 in the
form of marketing and sales promotions expenses. Effective
February 1999, Lucent and the Company agreed that the Company
F-19
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
would give up its right of exclusivity in its Operating Areas. In
addition, as a part of this agreement, the Company no longer has
any minimum purchase commitments towards Lucent, nor are there any
potential penalty fees payable. At the present time, Lucent is
changing its distribution channels in Europe and has informed the
Company that once they have their new distribution channels in
place, the second amended agreement with Lucent will be terminated
and the Company will be able to enter into a new agreement with
Lucent. No details of the proposed new agreement have been
presented to the Company at the present time.
(f) Local Tax
Hungarotel's Concession Contracts require Hungarotel to pay an
amount equal to 10 times the local occupational excise tax. The
applicability and enforceability of such obligation is not certain
at this time, however, the Ministry has clearly stated in a letter
to Hungarotel that it will not enforce this particular provision
of the Concession Contract. It is not possible to predict with
certainty the effect, if any, such provision will have on the
Company. The Company has not accrued any amounts related to such
tax.
(g) Subsidiary Capital Requirements
In July 1998, Hungary adopted a law requiring corrective action by
certain Hungarian companies which have negative net equity for
more than two years. Each of the Operating Companies currently
have negative net equity. The effective date of the applicability
of the law to the Operating Companies is not certain at this time.
The Company's debt and equity restructuring which took place
during 1999, was the first step in several to remedy the capital
structure in each of the Operating Companies and the Company is
continuing to work on the matter in order to bring each of the
Operating Companies into compliance with the law. While the
Company believes that each of the Operating Companies will be able
to comply with the law if and when it affects the Operating
Companies, there can be no assurance that the Operating Companies
will be able to comply with such law.
(11) Common and Preferred Stock
In connection with a 1992 private placement and public offering, in
addition to a 1994 private placement, the Company issued warrants to
purchase 141,950 shares of Common Stock at prices ranging from $3.60 to
$14.00 per share. During 1998, warrants to purchase 4,650 shares of
Common Stock at $3.60 were exercised. Proceeds from the exercise of these
warrants totaled $17,000 in 1998.
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 1997, options to purchase 70,000 shares of Common Stock at prices
ranging from $7.00 to $10.00 per share and warrants to purchase 11,586
shares of Common Stock at $10.15 per share were exercised. Proceeds from
the exercise of these options and warrants amounted to approximately
$635,000. In addition, the company issued options to purchase up to
70,000 shares of Common Stock at below market prices to three officers as
compensation, resulting in a $70,000 increase to additional paid-in
capital.
F-20
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During the third quarter of 1997, the Company entered into various
agreements with TDI pursuant to which TDI agreed to exchange its
ownership interest and outstanding loans in each of two operating
subsidiaries for a total of 969,158 shares of the Company's Common Stock.
The value of shares on the dates of issue totaled $10,689,000 which was
recorded as an increase to Common Stock and additional paid-in capital.
During 1999, the Company issued 1,571,429 shares and 1,285,714 shares to
TDI and the Danish Fund, respectively, as part of its overall capital and
debt restructuring during the period (see Note 8).
During the third quarter of 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 settled its
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"). As part of the settlement of the
Management Services Agreement with Citizens (see note 15), the Company
issued 100,000 shares of Common Stock. 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.
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 Preferred Stock, par value
$0.001 (the "Preferred Shares") in consideration for the extinguishment
of liabilities the Company had with Citizens (see note 15). The value of
the common stock on the date of issue totaled $9,100,000 which 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 Preferred Stock and additional
paid-in capital. 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.
On May 12, 1999, the Company and Postabank entered into a Securities
Purchase Agreement (the "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 Securities Purchase
Agreement provides for one person designated by Postabank to be
nominated for election to the Company's Board of Directors. Postabank
cannot transfer its shares until the earlier of (x) the repayment in
full of all the obligations under the Bridge Loan Agreement or (y) May
10, 2000, and then 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 Securities Purchase
Agreement, the Company issued notes to Postabank in an aggregate amount
of $25 million (see Note 6) with detachable warrants. As a result of
this transaction, Postabank's share ownership in the Company was 20.3%
of the Company's outstanding common stock as of December 31, 1999.
F-21
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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.
The Company has reserved 8,237,059 shares as of December 31, 1999 for
issuance under stock option plans and agreements and warrants.
(12) 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
was increased to 250,000 at the 1994 Annual Meeting of Stockholders. In
1996, the stockholders of the Company approved an increase in the number
of shares available under the plan from 250,000 to 750,000. In 1998, the
stockholders of the Company approved an increase in the number of shares
available under the plan from 750,000 to 1,000,000. 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, 1999, 820,990
options provided for by the Plan had been issued, of which 167,500 were
exercised and 653,490 remained outstanding.
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,
1999, 80,000 options provided for by the Directors' Plan had been issued,
of which 5,000 were exercised and 75,000 remained outstanding.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options issued under the Plan and the Directors'
Plan. Had the Company determined compensation cost for options issued
under the plans based on the fair value at the grant date according to
SFAS No. 123, the Company's net pro forma income and Earnings Per Share
would have been as follows:
1999 1998 1997
---- ---- ----
(in thousands)
Net income (loss) As reported $3,172 ($50,612) ($36,236)
Pro forma $2,526 ($51,065) ($36,468)
Earnings (loss) Per Share As reported $0.33 ($9.53) ($7.97)
Pro forma $0.27 ($9.62) ($8.02)
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 5.03% in 1999, 5.58% in 1998 and 6.56% in 1997, (2) an
expected life of 5 years for 1999, 6 years for 1998 and 7 years for 1997,
and (3) volatility of approximately 81% for 1999, 84% for 1998 and 33%
for 1997.
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock
under SFAS 123 is not reflected in the pro forma net loss amounts because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
F-22
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following is a summary of stock options and warrants, including those
issued under the Plan and Directors' Plan referred to above, and other
agreements which were granted, exercised and cancelled for the three
years ended December 31, 1999:
-------------------------------------------------------------------------------------
Outstanding Option/Warrant Price
Options/Warrants Per Share
------------------------------------ ------------------------ -----------------------
December 31, 1996 705,476 $3.60-$20.00
Granted 140,000 $8.75-$11.69
Exercised (81,586) $7.00-$10.15
Cancelled (5,793) $10.15
------------------------------------ ------------------------ -----------------------
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
------------------------------------ ------------------------ -----------------------
The following table summarizes information about shares subject to
outstanding options as of December 31, 1999 which were issued to current
or former employees, directors or consultants pursuant to the Plan,
Directors' Plan, employment or other agreements.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Weighted- Average Weighted-
Number Range of Average Exercise Remaining Life Number Average
Outstanding Exercise Prices Price in Years Exercisable Exercise Price
----------- --------------- ----- -------- ----------- --------------
408,237 $3.25-$6.78 $4.43 4.45 343,237 $4.21
220,000 $8.00-$9.44 $8.57 3.32 220,000 $8.57
97,500 $11.69-$12.25 $12.16 0.51 97,500 $12.16
200,000 $14.00 $14.00 1.58 200,000 $14.00
------- -------
925,737 $3.25-$14.00 $8.29 3.15 860,737 $8.50
======== =======
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, 1999, 1998 and 1997
In March 1997, the Company issued 5,000 shares to a former officer as
compensation. An amount of $51,875, 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.
In October 1996, the Board of Directors of the Company amended and
restated employment agreements with three executive officers. As part of
these agreements, in March 1997, based on performance in 1996, options to
purchase 70,000 shares of stock at an exercise price of $8.75 were
granted which became effective April 1, 1997.
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 vest
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 $54,000 of compensation expense in 1999 as a result of the
modification.
F-24
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(13) 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, 1999, 1998 and 1997 follows:
1999 1998 1997
---- ---- ----
(in thousands)
Net income (loss) $ 3,172 (50,612) (36,236)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of property, plant and
equipment 11,008 10,598 7,445
Amortization of intangibles 774 962 904
Asset write-downs 237 45 162
Non-cash compensation 54 339 407
Unrealized foreign currency loss 2,580 353 209
Extraordinary items, net (20,193) - -
Termination charges - 11,131 -
Other (income)/expense (1,177) (787) 224
Unpaid interest 16,345 36,494 34,963
Changes in operating assets and liabilities
net of effects of acquisitions:
Accounts receivable (1,277) (2,199) (6,273)
Restricted cash 60 444 (4,797)
VAT receivable - 2,503 1,864
Other assets 2,508 1,461 (3,938)
Accounts payable and accruals 4,929 (6,156) (3,955)
Due to related parties (498) 2,144 4,364
-------- ------- -------
Net cash provided by operating activities $ 18,522 11,118 4,937
======= ======= =======
Cash paid during the year for:
Interest $ 10,521 9,362 196
======= ======= =======
Summary of non-cash transactions (figures in dollars):
During 1999 the Company:
o Issued 1,300,000 shares of Common Stock valued at $9,100,000 and 30,000
shares of 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.
F-25
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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.
During 1997 the Company:
o Issued 969,158 shares of Common Stock valued at $10,689,000 to TDI in
exchange for interests and loans in two operating subsidiaries.
o Issued 5,000 shares of Common Stock to a former officer and options to
purchase 70,000 shares of Common Stock to three officers at exercise
prices below market as compensation.
(14) 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 1999, 1998 and
1997 related to these agreements.
(b) Transactions with Citizens
Transactions with Citizens including those under the Management
Service Agreements are discussed in Footnote 15.
(c) Transactions with Postabank
Transactions with Postabank are discussed in Notes 4, 5, 6 and 11.
F-26
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Amounts payable to related parties as of December 31, 1999 and 1998, were
as follows:
1999 1998
---- ----
Payable to former officers and directors $ 2,656,000 $ 3,476,000
Due to Citizens 68,000 19,873,000
Due to Teleconstruct - 34,000
---------- ----------
$ 2,724,000 $ 23,383,000
========= ==========
(15) Agreements with Citizens
During 1995, the Company and certain subsidiaries of Citizens entered
into a Master Agreement, a Loan Agreement and related Promissory Note, a
Warrant to Purchase Shares of Common Stock to Citizens (the Warrant), a
Stock Pledge Agreement, a Stock Option Agreement and second Stock Option
Agreement, a Registration Agreement and a Management Services Agreement
(the "Citizens Agreements"). Simultaneously, Citizens entered into voting
agreements with three affiliates of the Company and consummated the
purchase of 300,000 shares of Common Stock of the Company from the then
President, Chief Executive Officer and Chief Financial Officer and
Director of the Company. Certain of these agreements were subsequently
amended in connection with Citizens providing additional financial
support to the Company and expanding its management services
responsibilities as a result of the Company's acquisition of additional
concession companies.
The Citizens Agreements, as amended, resulted in and provided for
among other matters the following:
o The nomination by Citizens of one representative to the Company's board of
directors (out of a minimum of six directors) for as long as Citizens owns
at least 300,000 shares of Common Stock of the Company.
o Citizen's receipt of options and a warrant to purchase an aggregate of
3,635,472 (as adjusted for items described below) additional shares of
Common Stock of the Company at exercise prices ranging from $13 to $18 per
share under the Stock Option Agreement and Warrant, as amended (the
"Citizens Options and Warrant"). The Citizens Options and Warrant were
originally due to expire at various dates from May 31, 1997 to September
12, 2000. Expiration dates of the warrant and certain options were extended
as discussed below. All of the options were subject to anti-dilution
provisions.
o Certain corporate, financial, technical, construction, marketing and
operational services were to be provided by Citizens to the Company under
the terms of the Management Services Agreement. Such services commenced on
July 1, 1995 and were to continue through December 31, 2007. All services
rendered by Citizens were subject to the oversight, supervision and
approval of the Company. The management fee payable to Citizens was the
greater of 5% of Adjusted Gross Revenues, as defined, or a fixed amount
ranging from $100,000 to $395,800 per month from July 1995 through December
31, 1996, and $416,600 per month for each month commencing January 1997 for
the remainder of the term, subject to adjustment for inflation. Management
fees payable to Citizens during 1998 amounted to $2,500,000, while 1997
fees amounted to $5,000,000 plus reimbursable costs of $691,000. There were
no fees payable in 1999 as a result of the September 30, 1998 settlement
with Citizens described below.
F-27
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
o The right for Citizens to purchase additional shares of Common Stock, if
the Company issues, in connection with any public or private offering,
shares of Common Stock, other stock of the Company or any securities
convertible into, or exchangeable or exercisable for shares of Common Stock
or other stock of the Company at the applicable offering price the number
of shares as is necessary to maintain Citizens' then existing percentage
ownership on a fully diluted basis.
o On October 18, 1996, the Company entered into certain agreements with
Citizens in consideration for, among other things, Citizens' support in
fulfilling all terms under a Citicorp Credit Facility and in obtaining the
Original Postabank Credit Facility (see note 5). Under such agreements, the
Company agreed to (i) extend to September 12, 2000 the exercise periods of
a warrant and certain stock options to purchase approximately 2,139,801
shares of Common Stock (as adjusted), (ii) grant Citizens the option to
purchase an additional 875,850 shares of Common Stock at an exercise price
of $12.75 exercisable through September 12, 2000, and (iii) pay Citizens
$750,000 in cash. The cost of this consideration to the Company
representing the increase in fair value of the options previously granted,
the fair value of the newly granted options and the cash payment amounted
to $11.97 million. The fair value of the options was determined using the
Black Scholes option pricing model. The Company reflected the portion of
the cost related to the financial support in fulfilling the terms of the
Citicorp Credit Facility, $5.7 million, as a charge in 1996. The remaining
$6.27 million had been capitalized in other assets with other direct costs
incurred in obtaining the Postabank Credit Facility and was being amortized
over the term of the related debt. As discussed in note 5 above, the
Company extinguished the Original Postabank Credit Facility during 1999 and
as a result, wrote-off the remaining unamortized deferred financing costs,
which included the $6.27 million mentioned above, pertaining to the
Original Postabank Credit Facility.
o 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").
o Such agreements provided for, among other things, (i) the termination of
the 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 (the "Note") 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-28
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
o The principal on the promissory note was payable in full on September 15,
2004 and bore interest at a varying rate per annum which was 2-1/2% per
annum above the one-year LIBOR rate with monthly adjustments in such
varying rate. Accrued interest was to be paid annually.
o 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 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.
o 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.
o 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 Preferred Stock, par value
$0.01 (the "Preferred Shares"). 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. 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. 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 is less than $7.00 per share, then HTCC shall
issue such number of HTCC Preferred Shares (with a value of $70 per share)
equal in value to (i) 1,600,000 times (ii) $7.00 less the average closing
price of HTCC common stock for such twenty (20) trading day period. 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. The Citizens Stock
Purchase Agreement also requires Citizens not to transfer any shares of
HTCC common stock which it may hold prior to May 15, 2000 without the prior
F-29
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
written consent of the Company and Postabank. Citizens also waived any and
all preemptive and anti-dilution rights in connection with the transactions
described in Notes 6, 8 and 11. 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.
Additionally, the Company is also obligated to bear the cost of
registering shares it has issued to Citizens, including shares issuable
under the Citizens Options. As a result of the above transactions, on
December 31, 1999 Citizens held 19.2% of the Company's outstanding
Common Stock and 4,511,322 options to purchase Common Stock. Citizens
ownership of the Company's outstanding shares on a fully diluted basis
is approximately 35.2% at December 31, 1999.
(16) 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 1999, 1998 or 1997.
(17) Segment Disclosures
The Company operates in a single industry segment, communications
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
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.
F-30
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The revenues generated by these products and services for the years
ended December 31 were as follows:
($ in thousands) 1999 1998 1997
---- ---- ----
Telephone services $42,088 $35,969 $36,738
Network services 2,193 1,402 797
Other service and product
revenues 1,157 1,336 356
------- ------- -------
45,438 $38,707 $37,891
======= ======= =======
Included in telephone services are connection fee revenues amounting to
$1,844,000, $1,958,000 and $12,925,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Major Customers
For the years ended December 31, 1999, 1998 and 1997, none of the
Company's customers accounted for more than 10% of the Company's total
revenue.
(18) Quarterly Financial Data (unaudited)
------------------------------------
($ in thousands)
Net Income (Loss)
Revenue Net Income (Loss) per Share
1999
First quarter 11,205 (8,014) (1.49)
Second quarter 10,790 15,977 1.77
Third quarter 11,169 (2,736) (0.23)
Fourth quarter 12,274 (2,055) (0.17)
1998
First quarter 9,372 (11,700) (2.22)
Second quarter 9,718 (10,955) (2.07)
Third quarter 9,412 (19,073) (3.61)
Fourth quarter 10,205 (8,884) (1.65)
(19) Subsequent Events
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. The Company intends to draw down the entire EUR 130
million ($124 million at current exchange rates), which funds will be
used in their entirety, along with another $6 million of other Company
funds, to pay off the entire outstanding balance EUR 128 million
(approximately $128 million at December 31, 1999 exchange rates) of the
Postabank Bridge Loan Agreement which will result in the termination of
the Postabank Bridge Loan which matures on May 12, 2000, as well as 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 Agreement.
F-31
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 semi-annually on each June 30 and December 31
beginning on June 30, 2001 and ending on December 31, 2007. The amount
of the principal repayments on the Term Facility are to be an escalating
percentage of the amounts drawn down (EUR 125 million). Any amounts
borrowed under the Term Facility have to be drawn down within thirty
days of the execution of the Debt Agreement in either euros or, if
funded by the banking syndicate, Hungarian forints. The Company intends
to borrow the full EUR 125 million, or its equivalent in euros and
Hungarian forints. Any amounts borrowed in Hungarian forints are
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, at the Company's
option in one, three or six months. The Company intends to choose six
months. The applicable interest period for Term Facility Loans
denominated in Hungarian forints is, at the Company's option in one or
three months. The Company intends to choose 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.
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 intends to borrow the full amount of the Revolving
Facility to pay off the balance of the Postabank Bridge Loan Agreement
and fees associated with the transaction. 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 intends to choose six months. Interest is payable at
the end of each interest period calculated similar to Term Facility A
loans denominated in euros.
As a part of the Debt Agreement, the Company is required to hedge at
least 50% of the euro borrowings until a minimum of 50% of Facility A
has been cancelled, prepaid or repaid. Dependent on its cash flow,
commencing in 2001, the Company will be required to prepay the
equivalent of $25 million on Facility A 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.
F-32
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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. Since the Company intends to borrow the full amount of the
Debt Agreement soon, there will be no commitment fee payable at the
present time. The Company will pay an arrangement fee in the amount of
EUR 2,665,000 (approximately $2,500,000) and an agency fee in the amount
of $60,000. HTCC and one of its subsidiaries, HTCC Consulting Rt., are
guarantors for the HTCC operating subsidiaries under the Debt Agreement.
The Company has 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 and dispose of its assets. The Debt
Agreement contains the customary events of default, which would trigger
early repayment of the balance on the Debt Agreement including those
related to a change of control. 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 32.1% 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.
F-33
HUNGARIAN TELEPHONE AND CABLE CORP.
Index to Exhibits
Exhibit No. Description
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.
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.
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.
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.
27.1 Financial Data Schedule