UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002 Commission file number 1-11484
-------------
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3652685
----------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1201 Third Avenue, Suite 3400 Seattle, WA 98101-3034
(Address of principal executive offices)
(206) 654-0204
(Registrant's telephone number, including area code)
32 Center Street, Darien, CT 06820
(Former Address)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest possible date:
Common Stock, $.001 par value 12,103,180 Shares
(Class) (Outstanding at August 13, 2002)
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information: Page No.
--------
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Operations
and Comprehensive Income 3
Condensed Consolidated Statements of Stockholders' Equity 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Quantitative and Qualitative Disclosures about Market Risk 26
Part II. Other Information 27
Signatures 29
- 1 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(In thousands, except share data)
Assets June 30, 2002 December 31, 2001
------ ------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 9,950 $ 9,262
Restricted cash 113 210
Accounts receivable, net 5,341 4,797
Other current assets 3,264 1,677
------- -------
Total current assets 18,668 15,946
Property, plant and equipment, net 110,616 100,971
Goodwill, less accumulated amortization 7,053 6,050
Other intangibles, less accumulated amortization 4,034 3,672
Deferred costs 6,396 6,652
Other assets 2,866 2,780
------- -------
Total assets $149,633 $136,071
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 16,382 $ 12,311
Short-term loans - 3,531
Accounts payable 574 1,015
Accruals 4,300 2,974
Other current liabilities 2,230 1,551
Due to related parties 433 957
------- -------
Total current liabilities 23,919 22,339
Long-term debt, excluding current installments 107,435 104,882
Deferred credits and other liabilities 8,425 8,484
------- -------
Total liabilities 139,779 135,705
------- -------
Commitments and Contingencies
Stockholders' equity:
Cumulative Convertible preferred stock, $.01 par value;
$70.00 liquidation value. Authorized 200,000 shares;
issued and outstanding 30,000 shares in 2002 and 2001 - -
Common stock, $.001 par value. Authorized
25,000,000 shares; issued and outstanding
12,103,180 shares in 2002 and 2001 12 12
Additional paid-in capital 144,744 144,706
Accumulated deficit (150,046) (159,151)
Accumulated other comprehensive income 15,144 14,799
------- -------
Total stockholders' equity 9,854 366
------- -------
Total liabilities and stockholders' equity $149,633 $136,071
======= =======
See accompanying notes to condensed consolidated financial statements.
- 2 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income
For the Three and Six Month Periods Ended June 30, 2002 and 2001
(In thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
2002 2001 2002 2001
----- ----- ----- -----
Telephone service revenues, net $12,402 $10,999 $24,261 $22,231
Operating expenses:
Operating and maintenance expenses 4,759 4,042 9,125 8,318
Depreciation and amortization 2,459 2,278 4,787 4,605
------ ------ ------ ------
Total operating expenses 7,218 6,320 13,912 12,923
------ ------ ------ ------
Income from operations 5,184 4,679 10,349 9,308
Other income (expenses):
Foreign exchange gains, net 2,662 7,476 3,331 5,340
Interest expense (2,423) (3,430) (4,966) (7,095)
Interest income 142 364 413 778
Other, net (3) (3) 30 25
------ ------ ------ ------
Net income $ 5,562 $ 9,086 $ 9,157 $ 8,356
Cumulative convertible preferred stock (26) (27) (52) (53)
dividends in arrears)
------ ------ ------ ------
Net income ascribable to common stockholders 5,536 9,059 9,105 8,303
Comprehensive income adjustments 374 (545) 345 330
------ ------ ------ ------
Total comprehensive income $ 5,910 $ 8,514 $ 9,450 $ 8,633
====== ====== ====== ======
Earnings per common share:
Basic $ 0.46 $ 0.75 $ 0.75 $ 0.69
====== ======= ====== ======
Diluted $ 0.44 $ 0.72 $ 0.73 $ 0.66
====== ======= ====== ======
Weighted average number of common shares
outstanding:
Basic 12,103,180 12,103,180 12,103,180 12,096,760
========== ========== ========== ==========
Diluted 12,590,695 12,567,788 12,522,230 12,600,935
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
- 3 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
(unaudited)
Accumulated
Other Total
Common Preferred Additional Paid-In Accumulated Comprehensive Stockholders'
Shares Stock Stock Capital deficit Income Equity
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 12,103,180 $ 12 - 144,706 (159,151) 14,799 $366
2001
Modification of option terms - - - 38 - - 38
Cumulative convertible
preferred stock dividends
(in arrears) - - - - (52) - (52)
Net Income - - - - 9,157 - 9,157
Foreign currency translation
adjustment - - - - - 345 345
-----------------------------------------------------------------------------------------------------------------------------
Balances at June 30 2002 12,103,180 $ 12 - 144,744 (150,046) 15,144 $9,854
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
- 4 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Month Periods Ended June 30, 2002 and 2001
(In thousands)
(unaudited)
2002 2001
---- ----
Net cash provided by operating activities $10,517 $ 5,089
------ ------
Cash flows from investing activities:
Construction of telecommunication networks (1,526) (2,263)
Decrease (increase) in construction deposits 48 (2,683)
Acquisition of minority interest in subsidiary (14) -
Proceeds from sale of assets 100 20
------ ------
Net cash used in investing activities (1,392) (4,926)
------ ------
Cash flows from financing activities:
Repayments of long-term debt (5,875) (3,291)
Repayments of short-term debt (3,595) -
Proceeds from exercise of stock options and pre- - 114
emptive rights
------ ------
Net cash (used in) provided by financing activities (9,470) (3,177)
------ ------
Effect of foreign exchange rate changes on cash 1,033 5
------ ------
Net increase (decrease) in cash and cash equivalents 688 (3,009)
Cash and cash equivalents at beginning of period 9,262 15,596
------ ------
Cash and cash equivalents at end of period $ 9,950 12,587
====== ======
See accompanying notes to condensed consolidated financial statements.
- 5 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation
The accompanying condensed consolidated financial statements of
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") have been
prepared without audit and, in the opinion of management, include all
adjustments, consisting mainly of normal recurring accruals, necessary
for a fair presentation. Results for interim periods are not
necessarily indicative of the results for a full year.
The accompanying condensed consolidated financial statements include the
financial statements of the Company and its majority owned subsidiaries:
Hungarotel Tavkozlesi Rt. ("Hungarotel") (the "Operating Company") and
Pilistav Rt. ("Pilistav"). Until December 31, 2001, the Company had
four other operating subsidiaries in Hungary, which merged into
Hungarotel as of that date. All material intercompany balances and
transactions have been eliminated.
The accompanying condensed 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. These estimates and assumptions affect reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, as well as revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
The condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of
Hungarian Telephone and Cable Corp. and its subsidiaries for the year
ended December 31, 2001, including the notes thereto, set forth in the
Company's annual report on Form 10-K filed with the United States
Securities and Exchange Commission ("SEC").
- 6 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(b) Earnings Per Share
Earnings per share ("EPS") is computed by dividing income ascribable to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similar to basic
earnings per share, except that the weighted average shares outstanding
are increased to include additional shares from the assumed exercise of
stock options and warrants, and the conversion of the convertible
preferred stock, where dilutive. The number of additional shares is
calculated by assuming that outstanding stock options were exercised, or
preferred securities were converted, and that the proceeds from such
exercises or conversions were used to acquire shares of common stock at
the average market price during the reporting period.
The following is a reconciliation from basic earnings per share to
diluted earnings per share for the three and six month periods ended
June 30, 2002 and 2001:
3 Months Ended 6 Months Ended
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
($ in thousands, except
share data)
Net income ascribable to
common stockholders (A) $ 5,536 $ 9,059 $ 9,105 $ 8,303
plus: preferred stock
dividends 26 27 52 53
------ ------ ------ ------
Net income (B) $ 5,562 $ 9,086 $ 9,157 $ 8,356
====== ====== ====== ======
Determination of shares:
Weighted average common
shares outstanding - basic
(C) 12,103,180 12,103,180 12,103,180 12,096,760
Assumed conversion of
dilutive stock options and
cumulative convertiable
preferred stock 487,515 464,608 419,050 504,175
-------- -------- -------- --------
Weighted average common
shares outstanding -
diluted (D) 12,590,695 12,567,788 12,522,230 12,600,935
Net income per
common share:
Basic (A/C) $0.46 $0.75 $0.75 $0.69
Diluted (B/D) $0.44 $0.72 $0.73 $0.66
- 7 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
For the three and six month periods ended June 30, 2002, 2,639,400 and
2,825,400 stock options and warrants, respectively, and for the three
and six month periods ended June 30, 2001, 2,934,400 and 2,889,400 stock
options and warrants, respectively, were excluded from the computation
of diluted earnings per share since such options and warrants have an
exercise price in excess of the average market value of the Company's
common stock during the period.
(c) Foreign Exchange Financial Instruments
Foreign exchange financial instrument contracts are utilized by the
Company to manage certain foreign exchange rate risks. Company policy
prohibits holding or issuing derivative financial instruments for
trading purposes.
(d) Foreign Currency Translation
Since commencement of revenue generating activities, the Company has
used the Hungarian forint as the functional currency for its Hungarian
subsidiaries. Accordingly, foreign currency assets and liabilities are
translated using the exchange rates in effect at the balance sheet date.
Results of operations are generally translated using the average
exchange rates for the period. The translation of the subsidiaries'
forint denominated accounts into U.S. dollars, as of June 30, 2002, has
been affected by the strengthening of the Hungarian forint against the
U.S. dollar from 279.03 as of December 31, 2001 to 246.72 as of June 30,
2002, an approximate 13% appreciation in value.
(2) Cash and Cash Equivalents
-------------------------
(a) Cash
At June 30, 2002, cash of $3,204,000 comprised the following: $475,000
on deposit in the United States, and $2,729,000 consisting of $202,000
denominated in U.S. dollars, the equivalent of $92,000 denominated in
euros and the equivalent of $2,435,000 denominated in Hungarian forints
on deposit with banks in Hungary.
(b) Cash Equivalents
Cash equivalents amounted to approximately $6,746,000 at June 30, 2002
and consisted of Hungarian government securities, denominated in
Hungarian forints, purchased under agreements to resell which mature
within three months.
- 8 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(3) Related Parties
---------------
Amounts due to related parties totalling $433,000 at June 30, 2002 is
comprised of the following: $333,000 due to a subsidiary of Citizens
Communications Company, representing cumulative preferred stock dividends in
arrears, and $100,000 representing payments due to three former officers
under separate termination, consulting and non-competition agreements. The
Company paid approximately $604,000, in the aggregate, during each of the
six month periods ended June 30, 2002 and 2001 to the former officers under
these agreements.
(4) Segment Disclosures
-------------------
The Company operates in a single industry segment, telecommunications
services. The Company has constructed a modern telecommunications
infrastructure in order to provide a full range of the Company's products
and services in its five concession areas in Hungary. While the Company's
chief operating decision maker monitors the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated based on the delivery of multiple services to customers over an
integrated network. Substantially all of the Company's assets are located
in Hungary and all of its operating revenues are generated in Hungary.
Products and Services
The Company groups its products and services into the following categories:
Telephone Services - local dial tone and switched products and services that
provide incoming and outgoing calls over the public switched network. This
category includes reciprocal compensation revenues and expenses (i.e.
interconnect).
Network Services - point-to-point dedicated services that provide a private
transmission channel for the Company's customers' exclusive use between two
or more locations, both in local and long distance applications.
Other Service and Product Revenues - PBX hardware sales and service
revenues, as well as miscellaneous other telephone service revenues.
- 9 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
The revenues generated by these products and services for the periods ended
June 30 were as follows:
3 Months Ended 6 Months Ended
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
($ in thousands)
Telephone services $11,166 $10,144 $21,880 $20,539
Network services 860 622 1,674 1,240
Other service and product
revenues 376 233 707 452
------ ------ ------ ------
$ 12,402 $10,999 $24,261 $22,231
======= ====== ====== ======
Major Customers
For the periods ended June 30, 2002 and 2001, none of the Company's
customers accounted for more than 10% of the Company's total revenues.
(5) Derivative Instruments and Hedging Activities
---------------------------------------------
The Company applies the provisions of Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities", as subsequently amended by Statement of Financial
Accounting Standards No. 138 ("SFAS 138") in its financial statements.
Accordingly, the Company carries its foreign currency forward contracts at
fair value in its consolidated balance sheet. The fair value is based on
forward rates provided by the counterparty bank with which the Company has
entered into the forward contract. The foreign currency forward contracts
the Company has entered into do not qualify for hedge accounting, as defined
under SFAS 133 and 138, and, accordingly, changes in the fair value of the
forward contracts are reported in the consolidated statement of operations
and comprehensive income, as a part of net foreign exchange gains (losses).
The fair value of the Company's foreign currency forward contracts at
December 31, 2001 was approximately $6,000. The Company did not have open
foreign currency forward contracts at June 30, 2002.
- 10 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(6) Goodwill, Intangible and Other Long-Lived Assets
------------------------------------------------
On January 1, 2002 the Company adopted Statement of Financial Accounting
Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which
establishes new accounting and reporting standards for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17. Goodwill and
intangible assets that have indefinite useful lives will no longer be
amortized but rather will be tested at least annually for impairment.
Intangible assets that have finite useful lives (whether or not acquired in
a business combination) will continue to be amortized over their useful
lives, which are no longer limited to a maximum of 40 years.
The Company recorded amortization expense related to goodwill of
approximately $107,000 and $214,000 for the three and six month periods
ended June 30, 2001, respectively. The adoption of the provisions of SFAS
142 has eliminated the goodwill charge in 2002. Intangible assets, which
consist of concession rights, have finite lives and continue to be amortized
over the twenty-five year concession period using the straight-line method.
During the first quarter of 2002, the Company performed the first step of
the required SFAS No. 142 impairment test, with respect to goodwill, as of
January 1, 2002. This first step required the Company to compare the
carrying value of any reporting unit that has goodwill to the estimated fair
value of the reporting unit. If the current fair value was less than the
carrying value, then the Company would perform the second step of the
impairment test. This second step would require the Company to measure the
excess of the recorded goodwill over the current value of the goodwill, and
to record any excess as an impairment. The Company completed step one
during the first quarter of 2002, and based upon the results, the Company
concluded that there is no impairment to the carrying value of goodwill
reported in its financial statements.
On January 1, 2002, the Company adopted SFAS No. 144 ("SFAS 144"),
"Accounting for Impairment or Disposal of Long-Lived Assets," which
establishes a single accounting method for long-lived assets to be disposed
of by sale and broadens the presentation of discontinued operations. The
guidance in SFAS 144, with regard to the impairment of long-lived assets
held for use, is substantially consistent with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," except that goodwill is subject to impairment testing under SFAS 142.
The adoption of this statement had no impact on the Company's results of
operations or financial position.
- 11 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(7) Commitments and Contingencies - Legal Proceedings
-------------------------------------------------
During 1996 and 1997, Hungarotel entered into several construction contracts
with a Hungarian contractor, which totaled $59.0 million in the aggregate,
$47.5 million of which was financed by a contractor financing facility. By
January 1998, it became clear to Hungarotel that there were problems with
the work undertaken by the contractor and Hungarotel rejected invoices in
the amount of approximately HUF 700 million (approximately $2.8 million at
June 30, 2002 exchange rates) for, among other reasons, the contractor's
failure to meet the contractual capacity requirements and breaches of
warranties regarding the quality of work. During 1998, the Company and the
contractor engaged in settlement discussions in order to resolve these
issues but were unable to reach a settlement. Following a series of
transactions in March 1999 with the contractor's major creditor, Hungarotel
acquired a HUF 3.1 billion (approximately $12.6 million at June 30, 2002
exchange rates) net claim against the contractor, at the same time settling,
through legal offset, the contractor's claims arising from accepted but
unpaid invoices in the amount of HUF 900 million (approximately $3.6 million
at June 30, 2002 exchange rates). These transactions were undertaken to
strengthen Hungarotel's position in any potential procedures initiated by
the contractor. The contractor is seeking payment under separate invoices in
the amount of approximately $24 million for work which the Company is
disputing because of quality and quantity issues. The Company still has
claims against the contractor of approximately $31 million which is more
than the contractor's claim.
In July 2001, the contractor filed an additional lawsuit challenging certain
transactions regarding litigated matters between the contractor's creditor
and the Company. A hearing was held on this matter in April 2002 in the
Metropolitan Court in Budapest, Hungary. At this hearing, the judge ordered
the parties to file some documents supporting their claims with the Court.
Following the filing of these documents, a new court hearing will be
scheduled for later this year. The Company believes that this additional
lawsuit is without merit and that the Company will prevail.
In December 1999, a debt collection company initiated debt collection
proceedings against the Hungarian contractor for non-payment of various
debts. In June 2000, the debt collection company claimed the benefit of
certain invoices that the contractor had issued to Hungarotel in the amount
of HUF 455 million (approximately $1.8 million at June 30, 2002 exchange
rates), stating that the contractor had assigned those invoices to it "as
security" in the debt collection proceedings. Hungarotel rejected the debt
collection company's claim for, among other reasons, the absence of a right
- 12 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
by the contractor to assign the invoices and that, in any event, Hungarotel
has a substantive defense and counterclaim on the merits to the underlying
claim on the invoices. After a court hearing in November 2001, the debt
collection company reduced its claim against Hungarotel to HUF 250 million
(approximately $1.0 million at June 30, 2002 exchange rates) (and
proportionally reduced the amount of interest claimed) because it could not
substantiate the HUF 455 million claim on the basis of the contractor's
assignment agreement. At a further hearing in December 2001, the court
terminated the proceedings, on the grounds that it had no jurisdiction to
deal with the matter because the terms of the contract between Hungarotel
and the contractor stated that disputes surrounding the contract are to be
resolved through arbitration proceedings. The debt collection company
successfully appealed to the Hungarian Supreme Court against this decision
and the matter has been remitted to the lower court, but no date for the
next substantive hearing has yet been set. The Company believes that it
will prevail.
Papatel, one of the Company's pre-merger operating subsidiaries, was
involved in a dispute with the Hungarian taxing authorities (the "APEH")
pursuant to which the APEH alleged that Papatel owed HUF 107 million
(approximately $434,000 at June 30, 2002 exchange rates). This amount
included late payment penalties and default interest on value added tax
("VAT"), which the APEH alleged should have been charged in 1999 to the
Ministry by Papatel when Papatel relinquished its rights to use broadcasting
frequencies previously granted by the Ministry. A court hearing was held in
March 2002, at which, the matter was suspended for at least six months. The
suspension was granted because the matter had concurrently been referred to
the Principal Tax Administration Department of the Ministry of Finance. By
its order made on June 25, 2002, the Principal Tax Administration Department
quashed the APEH resolutions establishing the alleged VAT shortfall. As a
result of this, it is expected that the APEH will issue a formal resolution
bringing the dispute to an end and that the court proceedings will be
terminated.
- 13 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") is engaged primarily
in the provision of telecommunications services through its operating
subsidiary, Hungarotel Tavkozlesi Rt. ("Hungarotel"). Until December 31, 2001,
the Company had four other operating subsidiaries in Hungary, which merged into
Hungarotel as of that date. 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).
Since commencing the provision of telecommunications services in 1995, the
Company's network construction and expansion program has added approximately
141,000 access lines through June 30, 2002 to the approximately 61,000 access
lines acquired directly from Magyar Tavkozlesi Rt. ("Matav"), the former State-
controlled monopoly telephone company. During the late 1990's, the development
and installation of the network in each of the Company's operating areas
required significant capital expenditures.
The Company achieved EBITDA1 of $7.6 million during the quarter ended June
30, 2002, up from EBITDA of $7.0 million for the quarter ended June 30, 2001.
Now that the Company's networks are built-out, the ability of the Company to
generate sufficient revenues to satisfy cash requirements and maintain
profitability will depend upon a number of factors, including the Company's
ability to attract additional customers both within and outside its operating
areas and increased revenues per customer. These factors are expected to be
primarily influenced by the success of the Company's operating and marketing
strategies, as well as market acceptance of telecommunications services both
within and outside 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 Company's results and financial position, reported in U.S. dollars,
continues to be significantly affected by movements in the Hungarian forint/U.S.
dollar exchange rate.
_____________________
EBITDA is defined, by the Company, as net revenue less operating and
maintenance expenses. The Company has included information concerning EBITDA
because it uses EBITDA and understands that it is used by certain investors as
one measure of a company's ability to service or incur indebtedness. EBITDA is
not a measure of financial performance under U.S. generally accepted accounting
principles and is not necessarily comparable to similarly titled measures used
by other companies. EBITDA should not be construed as an alternative to
operating or net income, or to cash flows from operating activities (as
determined in accordance with U.S. generally accepted accounting principles).
- 14 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements which
have been prepared in accordance with generally accepted accounting principles
in the United States ("US GAAP"). This preparation requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. US GAAP provides the framework from which to make these estimates,
assumption and disclosures. The Company chooses accounting policies within US
GAAP that management believes are appropriate to accurately and fairly report
the Company's operating results and financial position in a consistent manner.
Management regularly assesses these policies in light of current and forecasted
economic conditions. The accounting policies the Company believes to be
critical to understanding the results of operations and the effect of the more
significant judgments and estimates used in the preparation of the condensed
consolidated financial statements are the same as those described in its Annual
Report on Form 10-K for the year ended December 31, 2001.
In addition to those described in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, the Company believes the following
accounting policy is critical to understanding the results of operations and the
effect of the more significant judgments and estimates used in the preparation
of its condensed consolidated financial statements:
Goodwill - In 2002, and annually thereafter, the Company will assess the
fair value of goodwill. To the extent that information indicates that the
carrying amount of the Company's net assets exceed the Company's estimated fair
value, the Company will recognize an impairment charge. During the first
quarter of 2002, the Company performed its impairment testing with respect to
goodwill, as of January 1, 2002, and based upon the results, the Company
concluded that there is no impairment to the carrying value of goodwill reported
in its financial statements. The Company's estimates of fair value will be
subject to revision as market conditions change.
Comparison of Three Months Ended June 30, 2002 and Three Months Ended June 30,
2001
-------------------------------------------------------------------------------
The Company's Hungarian subsidiaries functional currency is the Hungarian
forint. The average Hungarian forint/U.S. dollar exchange rate for the three
months ended June 30, 2002 was 264.50, as compared to an average Hungarian
forint/U.S. dollar exchange rate for the three months ended June 30, 2001 of
294.57. When comparing the three months ended June 30, 2002 to the three months
ended June 30, 2001, it should be noted that all U.S. dollar reported amounts
have been affected by this 11% appreciation in the Hungarian subsidiaries'
functional currency.
- 15 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Net Revenues
Quarter Ended
June 30
(dollars in millions) 2002 2001 % change
Measured service revenues 7.4 7.1 4
Subscription revenues 4.9 4.0 23
Net interconnect charges (1.8) (1.6) (13)
---- ----
Net measured service and subscription revenues 10.5 9.5 11
Connection fees 0.6 0.5 20
Other operating revenues, net 1.3 1.0 30
---- ----
Telephone Service Revenues, Net 12.4 11.0 13
==== ====
The Company recorded a 13% increase in net telephone service revenues to
$12.4 million for the three months ended June 30, 2002 from $11.0 million for
the three months ended June 30, 2001.
Net measured service and subscription revenues increased 11% to $10.5
million for the three months ended June 30, 2002 from $9.5 million for the three
months ended June 30, 2001. Measured service revenues increased 4% to $7.4
million during the three months ended June 30, 2002 from $7.1 million during the
three months ended June 30, 2001. Subscription revenues increased 23% to $4.9
million during the three months ended June 30, 2002 from $4.0 million during the
three months ended June 30, 2001. Measured service revenues decreased in
functional currency terms by approximately 7% as a result of a decrease in
average access lines in service from approximately 205,600 for the three months
ended June 30, 2001 to approximately 202,300 during the three months ended June
30, 2002, and lower minutes of use for some telecommunications services. Due to
economic conditions and pricing issues, both within and outside the Company's
operating areas, the Company has not opted to raise call tariffs on most of its
calling services effective July 1, 2002, although it was allowed to do so by the
Hungarian regulatory authority. Subscription revenues increased in functional
currency terms by approximately 12% as a result of (i) an approximate 4%
increase in monthly subscription fees and (ii) the revenues associated with the
Company becoming a Universal Service Provider during the period. As a Universal
Service Provider the Company will receive funds from a Hungarian government fund
established to provide (i) country-wide access to fixed line telecommunications
services at reasonable prices, (ii) public pay telephones, (iii) operator
assisted services, and (iv) free emergency services. The funds to be received
by the Company are based upon the number of customers, which meet certain
requirements defined in government regulations.
These revenues have been reduced by net interconnect charges which totalled
$1.8 million for the three months ended June 30, 2002 compared to $1.6 million
for the three months ended June 30, 2001. As a percentage of measured
- 16 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
service and subscription revenues, net interconnect charges have remained
consistent at approximately 14% for each of the three month periods ended June
30, 2002 and 2001.
Operating and Maintenance Expenses
Operating and maintenance expenses increased 18% to $4.8 million for the
three months ended June 30, 2002, as compared to $4.0 million for the three
months ended June 30, 2001. In functional currency terms, operating and
maintenance expenses of Hungarotel increased approximately 2% for the three
months ended June 30, 2002, as compared to the three months ended June 30, 2001.
In U.S. dollar terms, however, the increase in such costs in functional currency
terms has been magnified by the 11% appreciation of the Hungarian forint. There
has also been an increase in the Company's U.S. dollar denominated operating
expenses, between the periods.
Depreciation and Amortization
Depreciation and amortization charges increased $0.2 million to $2.5
million for the three months ended June 30, 2002 from $2.3 million for the three
months ended June 30, 2001. Depreciation and amortization charges of Hungarotel
decreased in functional currency terms by approximately 3% due to the adoption
of SFAS 142, which requires the amortization of goodwill to cease effective
January 1, 2002. However, this decrease has been offset by the 11% appreciation
of the Hungarian forint between the periods. Included in depreciation and
amortization charges for the three months ended June 30, 2001 is approximately
$0.1 million of amortization relating to goodwill.
Income from Operations
Income from operations increased to $5.2 million for the three months ended
June 30, 2002 from $4.7 million for the three months ended June 30, 2001.
Contributing to such improvement were higher net telephone service revenues
offset by higher operating and maintenance expenses and slightly higher
depreciation and amortization charges.
Foreign Exchange Gains
Foreign exchange gains amounted to $2.7 million for the three months ended
June 30, 2002, compared to $7.5 million for the three months ended June 30,
2001. The foreign exchange gains for the three months ended June 30, 2002
resulted primarily from the effect of the appreciation of the Hungarian forint
against the U.S. dollar on the Company's 25 million U.S. dollar denominated debt
outstanding during the period. At June 30, 2002, the Hungarian forint had
appreciated in value by approximately 13% against the U.S. dollar, and was
consistent against the euro, as compared to March 31, 2002 levels. The foreign
exchange gains for the three months ended June 30, 2001 resulted primarily from
the effect of the appreciation of the Hungarian forint on the Company's U.S.
dollar 25 million and euro 88 million denominated debt during that period.
- 17 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
At June 30, 2001, the Hungarian forint had appreciated in value by approximately
9% against the euro and approximately 5% against the U.S. dollar as compared to
March 31, 2001 levels. Included in foreign exchange gains for the three months
ended June 30, 2002 is approximately $0.2 million of foreign exchange losses
relating to the Company's closed foreign currency forward contracts. When non-
Hungarian forint debt is re-measured into Hungarian forints, the Company reports
foreign exchange gains/losses in its consolidated financial statements as the
Hungarian forint appreciates/devalues against such non-forint currencies. See
the "Inflation and Foreign Currency" and "Market Risk Exposure" sections below.
Interest Expense
Interest expense decreased 29% to $2.4 million for the three months ended
June 30, 2002 from $3.4 million for the three months ended June 30, 2001. This
$1.0 million decrease is attributable to lower interest rates paid on the
Company's borrowings, as well as lower average debt levels outstanding between
the periods. The Company's weighted average interest rate on the Company's debt
obligations went from 8.92% for the three months ended June 30, 2001, to 6.52%
for the three months ended June 30, 2002, a 27% decrease. See "Liquidity and
Capital Resources" section below.
Interest Income
Interest income decreased to $0.1 million for the three months ended June
30, 2002, from $0.4 million for the three months ended June 30, 2001, due to
lower interest rates on Hungarian forint deposits, as well as lower average cash
balances between the periods.
Net Income
As a result of the factors discussed above, the Company recorded net income
ascribable to common stockholders of $5.5 million, or $0.46 per share, or $0.44
per share on a diluted basis, for the three months ended June 30, 2002 as
compared to $9.1 million, or $0.75 per share, or $0.72 per share on a diluted
basis, during the three months ended June 30, 2001.
Comparison of Six Months Ended June 30, 2002 to Six Months Ended June 30, 2001
------------------------------------------------------------------------------
As previously mentioned, the Company's Hungarian subsidiaries functional
currency is the Hungarian forint. The average Hungarian forint/U.S. dollar
exchange rate for the six months ended June 30, 2002 was 271.47, as compared to
an average Hungarian forint/U.S. dollar exchange rate for the six months ended
June 30, 2001 of 291.12. When comparing the six months ended June 30, 2002 to
the six months ended June 30, 2001, it should be noted that all U.S. dollar
- 18 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
reported amounts have been affected by this 7% appreciation in the Hungarian
subsidiaries' functional currency.
Net Revenues
Year-to-
date
(dollars in millions) 2002 2001 % change
Measured service revenues 14.5 14.5 -
Subscription revenues 9.5 7.9 20
Net interconnect charges (3.4) (3.2) (6)
---- ----
Net measured service and subscription revenues 20.6 19.2 7
Connection fees 1.2 1.1 9
Other operating revenues 2.5 1.9 32
---- ----
Telephone Service Revenues, Net 24.3 22.2 9
==== ====
The Company recorded a 9% increase in net telephone service revenues of
$24.3 million for the six months ended June 30, 2002 as compared to revenues of
$22.2 million for the six months ended June 30, 2001.
Net measured service and subscription revenues increased 7% to $20.6
million for the six months ended June 30, 2002 from $19.2 million for the six
months ended June 30, 2001. Measured service revenues remained consistent at
$14.5 million, while subscription revenues increased 20% to $9.5 million for the
six months ended June 30, 2002. Measured service revenues decreased in
functional currency terms by approximately 7% as a result of (i) a decrease in
average access lines in service from approximately 206,100 for the six months
ended June 30, 2001 to approximately 202,800 during the six months ended June
30, 2002, (ii) lower minutes of use for some telecommunications services, and
(iii) a slight decrease in call tariffs between the periods. Due to economic
conditions and pricing issues, both within and outside the Company's operating
areas, the Company has not opted to raise call tariffs on most of its calling
services effective July 1, 2002, although it was allowed to do so by the
Hungarian regulatory authority. Subscription revenues increased in functional
currency terms by approximately 13% as a result of (i) an approximate 4%
increase in monthly subscription fees and (ii) the revenues associated with the
Company becoming a Universal Service Provider during the period. As a Universal
Service Provider the Company will receive funds from a Hungarian government fund
established to provide (i) country-wide access to fixed line telecommunications
services at reasonable prices, (ii) public pay telephones, (iii) operator
assisted services, and (iv) free emergency services. The funds to be received
by the Company are based upon the number of customers, which meet certain
requirements defined in government regulations.
- 19 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
These revenues have been reduced by net interconnect charges which totalled
$3.4 million for the six months ended June 30, 2002 compared to $3.2 million for
the six months ended June 30, 2001. As a percentage of measured service and
subscription revenues, net interconnect charges have remained consistent at
approximately 14% for each of the six month periods ended June 30, 2002 and
2001.
Operating and Maintenance Expenses
Operating and maintenance expenses increased 10% to $9.1 million for the
six months ended June 30, 2002, as compared to $8.3 million for the six months
ended June 30, 2001. In functional currency terms, operating and maintenance
expenses of Hungarotel increased approximately 1% for the six months ended June
30, 2002, as compared to the six months ended June 30, 2001. In U.S. dollar
terms, however, the increase in such costs in functional currency terms has been
magnified by the 7% appreciation of the Hungarian forint. There has also been
an increase in the Company's U.S. dollar denominated operating expenses, between
the periods.
Depreciation and Amortization
Depreciation and amortization charges increased $0.2 million to $4.8
million for the six months ended June 30, 2002 from $4.6 million for the six
months ended June 30, 2001. Depreciation and amortization charges of Hungarotel
decreased in functional currency terms by approximately 3% due to the adoption
of SFAS 142, which requires the amortization of goodwill to cease effective
January 1, 2002. However, this decrease has been offset by the 7% appreciation
of the Hungarian forint between the periods. Included in depreciation and
amortization charges for the six months ended June 30, 2001 is approximately
$0.2 million of amortization relating to goodwill.
Income from Operations
Income from operations increased to $10.3 million for the six months ended
June 30, 2002 compared to $9.3 million for the six months ended June 30, 2001.
Contributing to such improvement were higher net telephone service revenues
offset by higher operating and maintenance expenses and slightly higher
depreciation and amortization charges.
Foreign Exchange Gains
Foreign exchange gains amounted to $3.3 million for the six months ended
June 30, 2002, compared to $5.3 million for the six months ended June 30, 2001.
The foreign exchange gains for the six months ended June 30, 2002 resulted
primarily from the effect of the appreciation of the Hungarian forint on the
- 20 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Company's average EUR 75.1 million and U.S. dollar 25 million denominated debt
outstanding during the period. At June 30, 2002, the Hungarian forint had
appreciated in value by approximately 1% against the euro, and by approximately
13% against the U.S. dollar as compared to December 31, 2001 levels. The foreign
exchange gains for the six months ended June 30, 2001 resulted primarily from
the effect of the appreciation of the Hungarian forint on the Company's euro 88
million denominated debt during that period. At June 30, 2001, the Hungarian
forint appreciated in value by approximately 8% against the euro as compared to
December 31, 2000 levels. Included in foreign exchange gains for the six months
ended June 30, 2002 is approximately $0.2 million of foreign exchange losses
relating to the Company's closed foreign currency forward contracts. When non-
Hungarian forint debt is re-measured into Hungarian forints, the Company reports
foreign exchange gains/losses in its consolidated financial statements as the
Hungarian forint appreciates/devalues against such non-forint currencies. See
the "Inflation and Foreign Currency" and "Market Risk Exposure" sections below.
Interest Expense
Interest expense decreased 30% to $5.0 million for the six months ended
June 30, 2002 from $7.1 million for the six months ended June 30, 2001. This
$2.1 million decrease is attributable to lower interest rates paid on the
Company's borrowings, as well as lower average debt levels outstanding between
the periods. The Company's weighted average interest rate on the Company's debt
obligations went from 8.99% for the six months ended June 30, 2001, to 6.67% for
the six months ended June 30, 2002, a 26% decrease. See "Liquidity and Capital
Resources" section below.
Net Income
As a result of the factors discussed above, the Company recorded net income
ascribable to common stockholders of $9.1 million, or $0.75 per share, or $0.73
per share on a diluted basis, for the six months ended June 30, 2002 as compared
to $8.3 million, or $0.69 per share, or $0.66 per share on a diluted basis, for
the six months ended June 30, 2001.
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 areas in which the
Company operates required significant capital expenditures ($198.5 million at
historical exchange rates through June 30, 2002). Since the end of 1998, the
Company's networks have had the capacity, with only normal additional capital
- 21 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
expenditure requirements, to provide basic telephone services to virtually all
of the potential subscribers within the areas in which it operates.
Net cash provided by operating activities totalled $10.5 million during the
six months ended June 30, 2002 compared to $5.1 million during the six months
ended June 30, 2001. The significant increase in net cash provided by operating
activities between the two periods is primarily due to (i) a decrease of
approximately $3 million in the amount of interest paid on the Company's debt
obligations in 2002, as compared to 2001, due to a change in the dates when
interest was paid in 2001, (ii) lower average interest rates and (iii) improved
working capital movements in 2002, as compared to 2001. For the six months
ended June 30, 2002 and 2001, the Company used $1.4 million and $4.9 million,
respectively, in investing activities, which was primarily used to fund
additions to the Company's telecommunications networks. Financing activities
used net cash of $9.5 million during the six months ended June 30, 2002 compared
to $3.2 million for the six months ended June 30, 2001. The cash used by
financing activities was for the scheduled repayments of the Company's short-
term and long-term debt obligations.
On April 11, 2000, the Company entered into an EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement") with a European banking
syndicate. The Company drew down EUR 129 million of the Facility on April 20,
2000 ($121 million at historical exchange rates). As of June 30, 2002, the
Company has repaid approximately $22.9 million, at historical exchange rates, of
the original EUR 129 million drawn down. The Company believes that its current
cash flow will allow it to meet its working capital needs, including its
obligations under the Debt Agreement.
The Company's major contractual cash obligations as disclosed in its
December 31, 2001 Form 10-K filing have not materially changed as of June 30,
2002. The Company's ability to generate sufficient cash flow from operations to
meet its contractual cash obligations is subject to many factors, including
regulatory developments, competition and customer behavior and acceptance of
additional fixed line telecommunications services. Under the Company's Debt
Agreement, the Company must maintain certain levels of earnings before interest,
foreign exchange gains/losses, taxes, depreciation and amortization and cash
flow in order to comply with its debt covenant ratios as set out in the Debt
Agreement. Until March 31, 2002, the ratios were calculated based on the
Company's U.S. dollar consolidated financial statements. With effect from June
30, 2002, the ratios are calculated based on the Company's U.S. dollar
consolidated financial statements translated into euros. This exposes the
Company to the possible risk of not meeting its debt covenant ratios, as
measured in euro terms, due to the effect of currency movements on translation
of its Hungarian forint denominated assets, liabilities, revenues and expenses
- 22 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
into euros. While management seeks to manage the business to be in compliance
with its Debt Agreement and related covenants, management operates in a
regulated environment which is subject to many factors outside of its control
(i.e. the ruling government party's political, social and public policy agenda).
The Company's liquidity may also be affected by exchange rate fluctuations due
to approximately 72% of its debt not being denominated in Hungarian forints.
The Company attempts to reduce this exchange rate risk, however, through the use
of forward hedging contracts.
Inflation and Foreign Currency
In May 2001, the National Bank of Hungary widened the trading band the
Hungarian forint is allowed to trade within from +/- 2.25% of the mid-point of
the band to +/- 15%. This widening caused the Hungarian forint to initially
appreciate in value against the euro by approximately 4%. Subsequent to the
band widening, and without any notice, in June 2001 the National Bank of Hungary
lifted all remaining foreign exchange restrictions concerning the Hungarian
forint, thus making the Hungarian forint fully and freely convertible. With the
widening of the trading band, the potential volatility of the Hungarian forint
has increased, as is evidenced by prior quarters exchange rate gains and losses.
See the "Market Risk Exposure" section below.
The Company's Hungarian operations generate revenues in Hungarian forints
and incur operating and other expenses, including capital expenditures,
predominately in Hungarian forints but also in U.S. dollars and euros. In
addition, certain of the Company's balance sheet accounts are denominated in
currencies other than the Hungarian forint, the functional currency of the
Company's Hungarian subsidiaries. Accordingly, when such accounts are
translated into Hungarian forints, the Company is subject to foreign exchange
gains and losses which are reflected as a component of net income. When the
subsidiaries' forint-denominated financial statements 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'
equity.
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, and as regulated
by the 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 not be sufficient to offset potential
negative exchange rate movements and 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.
- 23 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 87% of operating expenses are Hungarian forint based and are
therefore subject to exchange rate variability between the Hungarian forint and
the U.S. dollar. Due to the lifting of all foreign exchange restrictions
concerning the Hungarian forint in May 2001, and the volatility in euro/U.S.
dollar exchange rates, Hungarian forint/euro and Hungarian forint/U.S. dollar
exchange rate variability has increased. This increase in variability is
evident by the fact that the Hungarian forint/U.S. dollar exchange rate went
from 279.03 as of December 31, 2001 to 246.72 as of June 30, 2002, an
approximate 13% appreciation in value of the Hungarian forint versus the U.S.
dollar. At the same time, the Hungarian forint/euro exchange rate went from
246.33 as of December 31, 2001 to 244.67 as of June 30, 2002, an approximate 1%
appreciation in value of the Hungarian forint versus the euro.
The debt obligations of the Company are Hungarian forint, euro and U.S.
dollar denominated. The interest rate on the Hungarian forint debt obligations
is based on the Budapest Bank Offer Rate (BUBOR). The interest rates on the euro
and U.S. dollar denominated obligations are based on EURIBOR and USD LIBOR,
respectively. Over the medium to long term, the BUBOR rate is expected to
follow inflation and devaluation trends and the Company does not currently
believe it has any material interest rate risk on any of its Hungarian forint
denominated debt obligations. If a 1% change in the BUBOR interest rate were to
occur, the Company's interest expense would increase or decrease by
approximately $0.4 million annually based upon the Company's June 30, 2002 debt
level. If a 1% change in EURIBOR interest rates were to occur, the Company's
interest expense would increase or decrease by approximately $0.7 million
annually based upon the Company's June 30, 2002 debt level. If a 1% change in
USD LIBOR interest rates were to occur, the Company's interest expense would
increase or decrease by approximately $0.3 million annually based upon the
Company's June 30, 2002 debt level.
The Company is exposed to exchange rate risk insofar as the Company has
debt obligations in currencies other than the functional currency of its
Hungarian subsidiaries. Given the Company's debt obligations, which include
euro and U.S. dollar denominated debt, if a 5% change in Hungarian forint/euro
exchange rates were to occur, the Company's euro denominated debt, in U.S.
dollar terms, would increase or decrease by approximately $3.5 million, based
upon the Company's June 30, 2002 debt level. If a 5% change in Hungarian
forint/U.S. dollar exchange rates were to occur, the Company's foreign exchange
rate gain would increase or decrease by approximately $1.3 million based on
Hungarotel's U.S. dollar denominated borrowings from HTCC as of June 30, 2002.
- 24 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
The Company utilizes foreign currency forward contracts or purchases
foreign currencies in advance to reduce its exposure to exchange rate risks
associated with cash payments in euro maturing within six months under the
Company's long-term debt obligations. The forward contracts establish the
exchange rates at which the Company will sell the contracted amount of Hungarian
forints for euros at a future date. The Company utilizes forward contracts
which are six months in duration and at maturity will either receive or pay the
difference between the contracted forward rate and the exchange rate at the
settlement date. The Company did not have any open foreign currency forwards at
June 30, 2002. The counterparties to the Company's foreign currency forward
contracts are substantial and creditworthy multinational commercial banks which
are recognized market makers. The risk of counterparty nonperformance
associated with these contracts is not considered by the Company to be material.
Recent Accounting Pronouncements
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" (SFAS 141) and Statement No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 141 also provides new criteria to determine whether an
acquired intangible asset should be recognized separately from goodwill. Under
SFAS 142, the Company ceased to amortize goodwill effective January 1, 2002. As
required by SFAS 142, the Company reassessed the expected useful lives of
existing intangible assets, which resulted in no change.
During the first quarter of 2002, the Company performed the first step of
the required SFAS 142 impairment test, with respect to goodwill, as of January
1, 2002. This first step required the Company to compare the carrying value of
any reporting unit that has goodwill to the estimated fair value of the
reporting unit. If the current fair value was less than the carrying value,
then the Company would perform the second step of the impairment test. This
second step would require the Company to measure the excess of the recorded
goodwill over the current value of the goodwill, and to record any excess as an
impairment. The Company completed step one during the first quarter of 2002,
and based upon the results, the Company concluded that there is no impairment to
the carrying value of goodwill reported in its financial statements.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections". SFAS 145
provides for the rescission of several previously issued accounting standards,
new accounting guidance for the accounting for certain lease modifications and
various technical corrections that are not substantive in nature to existing
- 25 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
pronouncements. SFAS 145 will be adopted beginning January 1, 2003, except for
the provisions relating to the amendment of SFAS No. 13, which will be adopted
for transactions occurring subsequent to May 15, 2002. Management is assessing
the impact, if any, this Statement may have on its consolidated results of
operations or financial position.
On July 30, 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities". SFAS 146 nullifies Emerging
Issues Task Force Issue No. 94-3 ("EITF Issue No. 94-3"), "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity should be
recorded when it is incurred and initial measurement be at fair value. The
statement is effective for exit or disposal activities that are initiated after
December 31, 2002, although earlier adoption is encouraged.
Strategic Market Expansion Efforts
With the Hungarian telecommunications market continuing to become more
competitive, the Company is increasing its efforts to explore ways to increase
the Company's market presence within Hungary. However, there can be no
assurance that the Company will achieve its growth objectives.
Forward-Looking Statements
This report and other oral and written statements made by the Company to
the public contain and incorporate by reference forward-looking statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
These statements are not predictions, but rather are, statements of
expectations, estimates and current plans as they currently exist, and are
constantly under review by the Company. For these statements, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve risks, uncertainties and assumptions and such
statements are qualified by important factors that may cause actual results to
differ materially from those expressed in the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is contained under the heading "Market
Risk Exposure" under Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
- 26 -
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Legal Proceedings
As reported in Item 3. "Legal Proceedings" in the Company's Report on Form
10-K for the year ended December 31, 2001, the Company is involved in legal
proceedings with Fazis, a Hungarian contractor. As reported in the
Company's Report on Form 10-K, Reorg Rt. ("Reorg"), a company responsible
for collecting Fazi's creditor's debts, had initiated a proceeding against
the Company claiming the benefit of certain invoices that Fazi's issued to
the Company. The Metropolitan Court of Budapest dismissed Reorg's claims
based on jurisdictional grounds and ruled that the claim should be decided
by arbitration proceedings. Reorg appealed the Metropolitan Courts
decision to the Hungarian Supreme Court and won. The Hungarian Supreme
Court remitted the matter back to the Metropolitan Court.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
(a) None.
(b) On May 12, 1999, the Company issued 30,000 shares of Preferred Stock
Series A with a liquidation value of $70 per share to a subsidiary of
Citizens Communications Company. Any holder of such Preferred Shares
is entitled to receive cumulative cash dividends payable in arrears at
the annual rate of 5%, compounded annually, on the liquidation value.
As of June 30, 2002, the total arrearage on the Preferred Shares was
$333,000.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Registrant was held on May
22, 2002.
(b) Not Applicable.
(c) First Matter Voted on at the Annual Meeting of Stockholders of the
Registrant: Election of Directors
Votes Cast For Votes Withheld
-------------- --------------
Ole Bertram 11,467,285 32,201
Daryl A. Ferguson 11,392,583 106,903
Thomas Gelting 11,491,975 7,511
Torben V. Holm 11,492,000 7,486
John B. Ryan 11,392,638 106,848
William E. Starkey 11,392,638 106,848
Leonard Tow 11,358,818 140,668
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Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Second Matter Voted on at the Annual Meeting of Stockholders of the
Registrant: Approval of the proposal to amend the Registrant's
Incentive Stock Option Plan to extend the termination date of the plan
from April 30, 2003 to April 30, 2008 and rename the plan, the "2002
Incentive Stock Option Plan".
For Against Abstain Not Voted
--- ------- ------- ---------
9,269,452 74,507 32,900 2,122,627
Third Matter Voted on at the Annual Meeting of Stockholders of the
Registrant: Ratification of the appointment of KPMG Hungaria Kft. as
auditors of the Registrant for the fiscal year ending December 31,
2002.
For Against Abstain
--- ------- -------
11,496,351 1,310 1,825
(d) Not Applicable.
Item 5. Other Information
In July 2002, Hungarian Telephone and Cable Corp. moved its U.S. office
from 32 Center Street, Darien, CT to 1201 Third Avenue, Suite 3400,
Seattle, WA 98101-3034. Its new telephone number is (206)-654-0204. The
Company's subsidiary offices in Hungary have not changed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Description
2 Plan of acquisition, reorganization, arrangement, liquidation
or succession (None)
3(i) Certificate of Incorporation of the Registrant, as amended,
filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 filed on January 31, 2001 (File #333-
54688) and incorporated herein by reference
3(ii) By-laws of the Registrant, as amended, filed as Exhibit 4.2
to the Registrant's Registration Statement on Form S-8 filed
on January 31, 2001 (File #333-54688) and incorporated herein
by reference
4.1 Specimen Common Stock Certificate, filed as Exhibit 4(a) to
the Registrant's Registration Statement on From SB-2 filed on
October 27, 1994 and incorporated herein by reference (File
#33-80676)
- 28 -
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
4.2 Certificate of Designation of Series A - Preferred Stock of
Hungarian Telephone and Cable Corp., filed as Exhibit 4.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by
reference
11 Statement re computation of per share earnings (not required)
15 Letter re unaudited interim financial information (not
required)
18 Letter re change in accounting principles (none)
19 Report furnished to security holders (none)
22 Published report regarding matters submitted to vote of
security holders (not required)
24 Power of Attorney (not required)
99.1 Certificate of Chief Executive Officer and Principal
Financial Officer
(b) Reports on Form 8-K
None.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
August 13, 2002 By: /s/Ole Bertram
Ole Bertram
Chief Executive Officer and President
August 13, 2002 By: /s/William McGann
William McGann
Principal Accounting Officer,
Principal Financial Officer, Controller
and Treasurer
- 29 -
Hungarian Telephone and Cable Corp.
Index to Exhibits
Exhibit No. Description
99.1 Certificate of Chief Executive Officer and Principal Financial
Officer
EXHIBIT 99.1
HUNGARIAN TELEPHONE AND CABLE CORP.
CERTIFICATE OF CHIEF EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
I, Ole Bertram, President and Chief Executive Officer of Hungarian
Telephone and Cable Corp., certify, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
To the best of my knowledge and belief, based upon a review of this
quarterly report on Form 10-Q of Hungarian Telephone and Cable Corp. for
the quarterly period ended June 30, 2002, and, except as corrected or
supplemented in a subsequent report:
this quarterly report of Hungarian Telephone and Cable Corp. on
Form 10-Q for the quarterly period ended June 30, 2002 which this
statement accompanies fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
the information contained in this quarterly report on Form 10-Q
of Hungarian Telephone and Cable Corp. for the quarterly period
ended June 30, 2002 fairly presents, in all material respects,
the financial condition and results of operations of Hungarian
Telephone and Cable Corp.
By: /s/Ole Bertram
---------------
Ole Bertram
August 13, 2002
I, William T. McGann, Controller and Treasurer of Hungarian Telephone and
Cable Corp., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
To the best of my knowledge and belief, based upon a review of this
quarterly report on Form 10-Q of Hungarian Telephone and Cable Corp. for
the quarterly period ended June 30, 2002, and, except as corrected or
supplemented in a subsequent report:
this quarterly report of Hungarian Telephone and Cable Corp. on
Form 10-Q for the quarterly period ended June 30, 2002 which this
statement accompanies fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
the information contained in this quarterly report on Form 10-Q
of Hungarian Telephone and Cable Corp. for the quarterly period
ended June 30, 2002 fairly presents, in all material respects,
the financial condition and results of operations of Hungarian
Telephone and Cable Corp.
By: /s/William T. McGann
--------------------
William T. McGann
August 13, 2002