UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
32 Center Street, Darien, CT 06820
(Address of principal executive offices)
(203) 656-3882
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest possible date:
Common Stock, $.001 par value 12,103,180 Shares
(Class) (Outstanding at May 10, 2002)
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Table of Contents
Part I. Financial Information: Page No.
--------
Consolidated Condensed Balance Sheets 2
Consolidated Condensed Statements of Operations and
Comprehensive Income 3
Consolidated Condensed Statements of Stockholders' Equity 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Quantitative and Qualitative Disclosure about Market Risk 22
Part II. Other Information 23
Signatures 25
- 1 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(In thousands, except share data)
Assets March 31, 2002 December 31, 2001
------ -------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 14,488 $ 9,262
Restricted cash 207 210
Accounts receivable, net 4,747 4,797
Other current assets 2,065 1,677
------------ ------------
Total current assets 21,507 15,946
Property, plant and equipment, net 99,777 100,971
Goodwill, less accumulated amortization 6,036 6,050
Other intangibles, less accumulated amortization 3,618 3,672
Deferred costs 6,146 6,652
Other assets 2,638 2,780
------------ ------------
Total assets $ 139,722 $ 136,071
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term debt $ 12,211 $ 12,311
Short-term loans 3,489 3,531
Accounts payable 760 1,015
Accruals 4,570 2,974
Other current liabilities 1,689 1,551
Due to related parties 700 957
------------ ------------
Total current liabilities 23,419 22,339
Long-term debt, excluding current installments 104,439 104,882
Deferred credits and other liabilities 7,958 8,484
------------ ------------
Total liabilities 135,816 135,705
------------ ------------
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 144,706 144,706
Accumulated deficit (155,582) (159,151)
Accumulated other comprehensive income 14,770 14,799
------------ ------------
Total stockholders' equity 3,906 366
------------ ------------
Total liabilities and stockholders' equity $ 139,722 $ 136,071
============ ============
See accompanying notes to consolidated condensed financial statements.
- 2 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statement of Operations and Comprehensive Income
For the Three Month Periods Ended March 31, 2002 and 2001
(In thousands, except share and per share data)
(unaudited)
2002 2001
---- ----
Telephone service revenues, net $ 11,859 $ 11,232
Operating expenses:
Operating and maintenance expenses 4,366 4,276
Depreciation and amortization 2,328 2,327
----------- -----------
Total operating expenses 6,694 6,603
----------- -----------
Income from operations 5,165 4,629
Other income (expenses):
Foreign exchange gains (losses), net 669 (2,136)
Interest expense (2,543) (3,665)
Interest income 271 414
Other, net 33 28
----------- -----------
Net income (loss) $ 3,595 $ (730)
Cumulative convertible preferred stock
dividends (in arrears) (26) (26)
----------- -----------
Net income (loss) ascribable to common stockholders 3,569 (756)
Comprehensive income adjustments (29) 875
----------- -----------
Total comprehensive income $ 3,540 $ 119
=========== ===========
Earnings (loss) per common share:
Basic $ 0.29 $ (0.06)
=========== ===========
Diluted $ 0.29 $ (0.06)
=========== ===========
Weighted average number of common shares Outstanding:
Basic 12,103,180 12,090,268
=========== ===========
Diluted 12,448,150 12,090,268
=========== ===========
See accompanying notes to consolidated condensed financial statements.
- 3 -
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
(In thousands, except share data)
(unaudited)
Accumulated
Other Total
Common Preferred Additional Accumulated Comprehensive Stockholders'
Shares Stock Stock Paid-in Capital deficit Income Deficiency
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001 12,103,180 $ 12 - 144,706 (159,151) 14,799 $ 366
Cumulative convertible
preferred stock dividends
(in arrears) - - - - (26) - (26)
Net income - - - - 3,595 - 3,595
Foreign currency translation
adjustment - - - - - (29) (29)
------------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2002 12,103,180 $ 12 - 144,706 (155,582) 14,770 $3,906
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated condensed financial statements.
-4-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Three Month Periods Ended March 31, 2002 and 2001
(In thousands)
(unaudited)
2002 2001
---- ----
Net cash provided by operating activities $ 6,312 4,234
-------- --------
Cash flows from investing activities:
Construction of telecommunication networks (1,107) (643)
Decrease (increase) in construction deposits 47 (2,613)
Acquisition of interest in subsidiary (14) -
Proceeds from sale of assets 11 22
-------- --------
Net cash used in investing activities (1,063) (3,234)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of options and pre-emptive rights - 114
-------- --------
Net cash provided by financing activities - 114
-------- --------
Effect of foreign exchange rate changes on cash (23) (980)
-------- --------
Net increase in cash and cash equivalents 5,226 134
Cash and cash equivalents at beginning of period 9,262 15,596
-------- --------
Cash and cash equivalents at end of period $ 14,488 15,730
======== ========
See accompanying notes to consolidated condensed financial statements.
-5-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
(1) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation
The accompanying consolidated condensed financial statements of
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") have been
prepared without audit and, in the opinion of management, include all
adjustments, consisting mainly of normal recurring accruals, necessary
for a fair presentation. Results for interim periods are not
necessarily indicative of the results for a full year.
The accompanying consolidated condensed financial statements include
the financial statements of the Company and its majority owned
subsidiaries: Hungarotel Tavkozlesi Rt. ("Hungarotel") (the "Operating
Company") and Pilistav Rt. ("Pilistav"). Until December 31, 2001, the
Company had five operating subsidiaries in Hungary, which merged into
Hungarotel as of that date. All material intercompany balances and
transactions have been eliminated.
The accompanying consolidated condensed financial statements are
prepared in accordance with U.S. generally accepted accounting
principles (U.S. GAAP). In preparing financial statements in
conformity with U.S. GAAP, management is required to make estimates
and assumptions. These estimates and assumptions affect reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as
well as revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements of
Hungarian Telephone and Cable Corp. and its subsidiaries for the year
ended December 31, 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").
(b) Earnings (Loss) Per Share
Earnings (loss) per share ("EPS") is computed by dividing income or
loss 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
-6-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
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 month periods ended March 31,
2002 and 2001:
3 months ended
--------------
2002 2001
---- ----
($ in thousands,
except share data)
Net income (loss) ascribable to
common stockholders $ 3,569 $ (756)
plus: preferred stock dividends 26 26
----------- -----------
Net income (loss) $ 3,595 $ (730)
=========== ===========
Determination of shares:
Weighted average common
shares outstanding -
basic 12,103,180 12,090,268
Assumed conversion of
dilutive stock options and
cumulative convertible
preferred stock 344,970 -
---------- ----------
Weighted average common
shares outstanding -
diluted 12,448,150 12,090,268
========== ==========
Net income (loss) per
common share:
Basic $ 0.29 $ (0.06)
Diluted $ 0.29 $ (0.06)
-7-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
For the three month period ended March 31, 2002, 3,102,671 stock
options and warrants 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. For the three month
period ended March 31, 2001, all potentially dilutive common stock
equivalents and convertible preferred stock were excluded from the
computation of diluted net loss per common share because they were
antidilutive.
(c) Foreign Exchange Financial Instruments
Foreign exchange financial instrument contracts are utilized by
the Company to manage certain foreign exchange rate risks. Company
policy prohibits holding or issuing derivative financial
instruments for trading purposes.
(2) Cash, Cash Equivalents and Restricted Cash
------------------------------------------
(a) Cash
At March 31, 2002, cash of $6,099,000 comprised the following:
$629,000 on deposit in the United States, and $5,470,000
consisting of $115,000 denominated in U.S. dollars, the equivalent
of $3,560,000 denominated in euros and the equivalent of
$1,795,000 denominated in Hungarian forints on deposit with banks
in Hungary.
(b) Cash Equivalents
Cash equivalents amounted to approximately $8,389,000 at March 31,
2002 and consisted of Hungarian government securities, denominated
in Hungarian forints, purchased under agreements to resell which
mature within three months.
(c) Restricted Cash
At March 31, 2002, approximately $93,000 of cash denominated in
U.S. dollars was deposited in escrow accounts under terms of
construction contracts. In addition, approximately $114,000 was
restricted pursuant to certain arrangements with other parties.
(3) Related Parties
---------------
Current amounts due to related parties totalling $700,000 at March 31,
2002 are comprised of the following: $307,000 due to a subsidiary of
Citizens Communications Company, representing cumulative preferred stock
dividends in arrears, and $393,000 representing
-8-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
payments due to three former officers under separate termination,
consulting and non-competition agreements. The Company paid approximately
$302,000, in the aggregate, during each of the three months ended March
31, 2002 and 2001 to the three former officers under these agreements.
(4) Segment Disclosures
-------------------
The Company operates in a single industry segment, telecommunications
services. The Company has constructed a modern telecommunications
infrastructure in order to provide a full range of the Company's products
and services in its five concession areas in Hungary. While the Company's
chief operating decision maker monitors the revenue streams of the
various products and services, operations are managed and financial
performance is evaluated based on the delivery of multiple services to
customers over an integrated network. Substantially all of the Company's
assets are located in Hungary and all of its operating revenues are
generated in Hungary.
Products and Services
The Company groups its products and services into the following
categories:
Telephone Services - local dial tone and switched products and services
that provide incoming and outgoing calls over the public switched
network. This category includes reciprocal compensation revenues and
expenses (i.e. interconnect).
Network Services - point-to-point dedicated services that provide a
private transmission channel for the Company's customers' exclusive use
between two or more locations, both in local and long distance
applications.
Other Service and Product Revenues - PBX hardware sales and service
revenues, as well as miscellaneous other telephony service revenues.
The revenues generated by these products and services for the periods
ended March 31 were as follows:
($ in thousands) 2002 2001
---- ----
Telephone services $10,714 $10,395
Network services 814 618
Other service and product
Revenues 331 219
------- -------
$11,859 $11,232
======= =======
-9-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
Major Customers
For the periods ended March 31, 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
March 31, 2002 and December 31, 2001 are approximately $123,000 and
$6,000, respectively.
(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 not
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 40 years.
The Company recorded amortization expense related to goodwill of
approximately $107,000 for the three month period ended March 31, 2001.
The adoption of the provisions of SFAS 142 has eliminated the goodwill
charge in the first quarter of 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.
-10-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
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 not subject
to impairment testing under SFAS 144, but rather 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.
(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 $2.5 million at March 31, 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 $11.1 million at March 31, 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 $3.2 million at March 31, 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 a lawsuit challenging certain
transactions 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 lawsuit is without merit
and that it will prevail.
-11-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(unaudited)
In December 1999, a debt collection company initiated debt collection
proceedings against the Hungarian contractor for non-payment of various
debts. In June 2000, the debt collection company claimed the benefit of
certain invoices that the contractor had issued to Hungarotel in the
amount of HUF 455 million (approximately $1.6 million at March 31, 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 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 $0.9 million at March 31,
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 states that disputes
surrounding the contract are to be resolved through arbitration
proceedings. The debt collection company has appealed to the Hungarian
Supreme Court against this decision and Hungarotel has counter-appealed,
seeking to uphold the decision of the lower court. No hearing date for
the appeal to the Supreme Court has been set. The Company believes that
it will prevail.
-12-
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
142,000 access lines through March 31, 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 EBITDA/1/ of $7.5 million during the quarter ended
March 31, 2002, up from EBITDA of $7.0 million for the quarter ended March 31,
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.
-----------------
/1/ EBITDA is defined 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 income or to cash
flows from operating activities (as determined in accordance with U.S. generally
accepted accounting principles).
-13-
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 Company believes the following accounting policies are
critical to understanding the results of operations and the effect of the more
significant judgments and estimates used in the preparation of the consolidated
financial statements:
Revenue Recognition Policies - The Company recognizes revenues, net of
interconnect charges, when services are rendered to the customer. The Company's
pricing is subject to oversight by the Hungarian regulators. Such regulation
also covers interconnection, competition and other public policy issues.
Regulatory interpretation of the Hungarian Communications Act and related
decrees, Hungary's planned accession into the EU and changes in the political
environment within Hungary all could result in changes in the level of the
Company's revenues. The Company monitors the decisions of the regulators and the
Hungarian market closely, and will make adjustments to revenue and associated
expenses if necessary. The Company defers incremental direct installation
revenue associated with connecting new customers to the Company's networks,
along with the associated incremental direct costs of installation. The Company
amortizes these amounts over an estimated customer life of seven years. If a
significant number of customers were to leave the service of the Company, the
amortization of those deferred costs and revenues would accelerate.
Allowance for Doubtful Accounts - The Company reviews the valuation of
accounts receivable on a monthly basis. The allowance for doubtful accounts is
estimated based on historical experience and expectations of future conditions
that might impact the collectibility of accounts.
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. The Company's estimates
of fair value will be subject to revision as market conditions change.
Long-Lived Asset Recovery - Long-lived assets, consisting primarily of
property, plant and equipment and concession rights, comprise a significant
portion of the Company's total assets. Changes in technology or changes in the
Company's intended use of these assets may cause the estimated period of use or
the value of these assets to change. These assets are reviewed for impairment,
in accordance with SFAS No. 144, "Accounting for Impairment of
-14-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Disposal of Long-Lived Assets," whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. Impairment is
deemed to have occurred if projected undiscounted cash flows related to the
asset are less than its carrying value. If impairment is deemed to have
occurred, the carrying values of the assets are written down, through a charge
against earnings, to their fair value. Estimates and assumptions used in both
setting depreciable lives and reviewing recoverability require both judgement
and estimation by management.
Contingent Liabilities - The Company establishes accruals for estimated
loss contingencies when it is management's assessment that a loss is probable
and the amount of the loss can be reasonably estimated. Revisions to contingent
liabilities are reflected in income in the period in which different facts or
information become known or circumstances change that affect the previous
assessments as to the likelihood of and estimated amount of loss. Accruals for
contingent liabilities are based upon management's assumptions and estimates,
after giving consideration to the advice of legal counsel and other information
relevant to the assessment of the probable outcome of the matter. Should the
outcome differ from the assumptions and estimates, revisions to the estimated
accruals for contingent liabilities would be required.
Income Taxes - 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 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. Actual income taxes could vary from these estimates due to
future changes in the income tax laws or the results from reviews of the
Company's tax returns by taxing authorities.
Comparison of Three Months Ended March 31, 2002 and Three Months Ended March 31,
--------------------------------------------------------------------------------
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 March 31, 2002 was 278.44, as compared to an average
Hungarian forint/U.S. dollar exchange rate for the three months ended March 31,
2001 of 287.67. When comparing the three months ended March 31, 2002 to the
three months ended March 31, 2001, it should be noted that all U.S. dollar
reported amounts have been affected by this 3% appreciation in the Hungarian
subsidiaries' functional currency.
-15-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Net Revenues - unaudited
Quarter ended
March 31,
(dollars in millions) 2002 2001 % change
Measured service revenues $ 7.2 $ 7.4 (3)
Subscription revenues 4.6 3.9 18
Net interconnect charges (1.6) (1.6) -
------ ------
Net measured service and subscription revenues 10.2 9.7 5
Connection fees 0.6 0.5 20
Other operating revenues, net 1.1 1.0 10
------ ------
Telephone Service Revenues, Net $ 11.9 $ 11.2 6
====== ======
The Company recorded a 6% increase in net telephone service revenues to
$11.9 million for the three months ended March 31, 2002 from $11.2 million for
the three months ended March 31, 2001.
Net measured service and subscription revenues increased 5% to $10.2
million for the three months ended March 31, 2002 from $9.7 million for the
three months ended March 31, 2001. Measured service revenues decreased 3% to
$7.2 million during the three months ended March 31, 2002 from $7.4 million
during the three months ended March 31, 2001. Subscription revenues increased
18% to $4.6 million during the three months ended March 31, 2002 from $3.9
million during the three months ended March 31, 2001. Measured service revenues
decreased in functional currency terms by approximately 6% as a result of (i) a
decrease in average access lines in service from approximately 206,600 for the
three months ended March 31, 2001 to approximately 203,200 during the three
months ended March 31, 2002, (ii) lower minutes of use for some
telecommunications services, and (iii) a slight decrease in call tariffs between
the periods. During the period, call tariffs, which were due to be adjusted by
the regulator, were not adjusted. The Company expects that regulated call
tariffs will be adjusted effective July 1, 2002. Subscription revenues increased
in functional currency terms by approximately 14% 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 governmental requirements.
These revenues have been reduced by net interconnect charges which
totalled $1.6 million during the three month periods ended March 31, 2002 and
2001. As a percentage of measured service and subscription revenues, net
interconnect charges have remained consistent at approximately 14% for each of
the three month periods ended March 31, 2002 and 2001.
-16-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Operating and Maintenance Expenses
Operating and maintenance expenses increased 2% to $4.4 million for the
three months ended March 31, 2002, as compared to $4.3 million for the three
months ended March 31, 2001. In functional currency terms, operating and
maintenance expenses increased approximately 1% for the three months ended March
31, 2002, as compared to the three months ended March 31, 2001. In U.S. dollar
terms, however, the increase in such costs in functional currency terms has been
magnified by the 3% appreciation of the Hungarian forint, partially offset by a
reduction in the Company's U.S. dollar denominated operating expenses, between
the periods.
Depreciation and Amortization
Depreciation and amortization charges remained consistent at $2.3
million for each of the three month periods ended March 31, 2002 and 2001.
Depreciation and amortization charges decreased in functional currency terms by
approximately 3% due to the adoption of SFAS 142, which requires the
amortization of goodwill to be ceased effective January 1, 2002, being offset by
the 3% appreciation of the Hungarian forint between the periods. Included in
depreciation and amortization charges for the three months ended March 31, 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 March 31, 2002 from $4.6 million for the three months ended March 31,
2001. Contributing to such improvement were higher net telephone service
revenues partially offset by slightly higher operating and maintenance expenses.
Foreign Exchange Gains (Losses)
Foreign exchange gains amounted to $0.7 million for the three months
ended March 31, 2002, compared to foreign exchange losses of $2.1 for the three
months ended March 31, 2001. The foreign exchange gains resulted primarily from
the appreciation of the Hungarian forint against the Company's average EUR 78
million denominated debt outstanding during the period. At March 31, 2002, the
Hungarian forint had appreciated in value by approximately 1% against the euro,
and was consistent against the U.S. dollar as compared to January 1, 2002
levels. Included in foreign exchange gains for the three months ended March 31,
2002 is approximately $0.1 million of foreign exchange losses relating to the
Company's 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.
-17-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Interest Expense
Interest expense decreased 31% to $2.5 million for the three months
ended March 31, 2002 from $3.7 million for the three months ended March 31,
2001. This $1.2 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. As a result of the lower interest rates on the Company's
borrowings, the Company's weighted average interest rate on its debt obligations
went from 9.06% for the three months ended March 31, 2001, to 6.82% for the
three months ended March 31, 2002, a 25% decrease. See "Liquidity and Capital
Resources" section below.
Interest Income
Interest income decreased to $0.3 million for the three months ended
March 31, 2002, from $0.4 million for the three months ended March 31, 2001,
primarily due to lower interest rates on Hungarian forint deposits between the
periods.
Net Income (Loss)
As a result of the factors discussed above, the Company recorded net
income ascribable to common stockholders of $3.6 million, or $0.29 per share on
a basic and diluted basis, for the three months ended March 31, 2002 as compared
to a net loss ascribable to common stockholders of $0.8 million, or $0.06 per
share on a basic and diluted basis, during the three months ended March 31,
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 million at
historical exchange rates through March 31, 2002). Since the end of 1998, the
Company's networks have had the capacity, with only normal additional capital
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 $6.3 million during
the three months ended March 31, 2002 compared to $4.2 million during the three
months ended March 31, 2001. For the three months ended March 31, 2002 and 2001,
the Company used $1.1 million and $3.2 million, respectively, in investing
activities, which was primarily used to fund additions to the Company's
telecommunications networks. Financing activities provided net cash of $0.1
million for the three months ended March 31, 2001. No cash was provided by
financing activities for the three months ended March 31, 2002.
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 March 31, 2002, the
Company has repaid approximately $13.4 million, at
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Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 March 31,
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 allow it to comply with its debt covenant ratios as set out in
the Debt Agreement. The ratios are calculated based on the Company's U.S. dollar
consolidated financial statements. This fact exposes the Company to an
additional risk of not meeting its debt covenant ratios, as measured in U.S.
dollar terms, due to the effect of currency movements on translation of its euro
and Hungarian forint denominated assets, liabilities, revenues and expenses into
U.S. dollars. 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. change in governing party and the party's political, social and public
policy agenda). The Company's liquidity may also be affected by exchange rate
fluctuations due to 75% of its debt not being denominated in Hungarian forints.
The Company attempts to reduce this exchange rate risk, however, through its 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 or loss. When the
Company and its subsidiaries' forint-denominated accounts are translated into
U.S. dollars for financial reporting purposes, the Company is subject to
translation adjustments, the effect of which is reflected as a component of
stockholders' equity.
-19-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
While the Company has the ability to increase the prices it charges for
its services commensurate with increases in the Hungarian Consumer Price Index
("CPI") pursuant to its licenses from the Hungarian government, 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.
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 89% of operating expenses are Hungarian forint based
and are therefore subject to exchange rate variability between the Hungarian
forint and the U.S. dollar. In the past, the "crawling peg" policy of the
Hungarian National Bank, combined with the +/- 2.25% trading band, allowed the
Hungarian forint to be somewhat predictable versus the euro (e.g. the Hungarian
forint/euro exchange rate went from 264.58 as of January 1, 2001 to 266.70 as of
March 31, 2001). However, due to the lifting of all foreign exchange
restrictions concerning the Hungarian forint 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 268.67 as of May 2, 2002, an approximate 4%
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 243.15 as of May 2, 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 $0.3
million annually based upon the Company's March 31, 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 March 31, 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 March 31, 2002 debt
level.
The Company is exposed to exchange rate risk insofar as the Company has
debt obligations in other than the functional currency of its Hungarian
subsidiaries. Given the
-20-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 $3.4 million, based upon the Company's March 31, 2002
debt level. If a 5% change in Hungarian forint/U.S. dollar exchange rates were
to occur, the Company's exchange rate risk would increase or decrease by
approximately $1.3 million.
The Company utilizes foreign currency forward contracts to reduce its
exposure to exchange rate risks associated with cash payments in euro maturing
within six months under the Company's long-term debt obligations. The forward
contracts establish the exchange rates at which the Company will sell the
contracted amount of Hungarian forints for euros at a future date. The Company
utilizes forward contracts which are six months in duration and at maturity will
either receive or pay the difference between the contracted forward rate and the
exchange rate at the settlement date. The contracted amount of foreign currency
forwards at March 31, 2002 is EUR 6,085,000 (approximately $5,307,000 at March
31, 2002 exchange rates). The fair value of the Company's foreign currency
forward contracts at March 31, 2002 is approximately $123,000. The
counterparties to the Company's foreign currency forward contracts are
substantial and creditworthy multinational commercial banks which are recognized
market makers. The risk of counterparty nonperformance associated with these
contracts is not considered by the Company to be material.
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. See
further discussion of this effect in Footnote 6 in the Notes to the Consolidated
Condensed Financial Statements.
During 2002, the Company will perform the first step of the required
SFAS No. 142 impairment tests, with respect to goodwill, as of January 1, 2002.
This first step requires 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 is less than the carrying value, then the
Company will perform the second step of the impairment test. This second step
requires the Company to measure the excess of the recorded goodwill over the
current value of the goodwill, and to record any excess as impairment. The
Company has completed step one during the period, and based upon its results,
the Company does not believe there is any 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
-21-
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
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 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.
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 Disclosure About Market Risk
The information required by this Item is contained under the heading
"Market Risk Exposure" under Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
-22-
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, a hearing was to be 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.
Item 2. Change 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 Utilities Company. Any holder of such
Preferred Shares is entitled to receive cumulative cash dividends
payable in arrears at the annual rate of 5%, compounded annually,
on the liquidation value. As of March 31, 2002, the total
arrearage on the Preferred Shares was $307,000.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
-23-
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Description
------- -----------
2 Plan of acquisition, reorganization, arrangement,
liquidation or succession (None)
3(i) Certificate of Incorporation of the Registrant, as
amended, filed as Exhibit 4.1 to the Registrant's
Registration Statement on Form S-8 filed on January
31, 2001 (File #333-54688) and incorporated herein
by reference
3(ii) By-laws of the Registrant, as amended, filed as
Exhibit 4.2 to the Registrant's Registration
Statement on Form S-8 filed on January 31, 2001
(File #333-54688) and incorporated herein by
reference
4.1 Specimen Common Stock Certificate, filed as Exhibit
4(a) to the Registrant's Registration Statement on
From SB-2 filed on October 27, 1994 and
incorporated herein by reference (File #33-80676)
4.2 Certificate of Designation of Series A - Preferred Stock of
Hungarian Telephone and Cable Corp., filed as Exhibit 4.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and incorporated herein by
reference
11 Statement re computation of per share earnings (not
required)
15 Letter re unaudited interim financial information (none)
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)
(b) Reports on Form 8-K
None.
-24-
Part II. Other Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARIES
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hungarian Telephone and Cable Corp.
May 10, 2002 By:/s/Ole Bertram
--------------
Ole Bertram
Chief Executive Officer and President
May 10, 2002 By:/s/William McGann
-----------------
William McGann
Chief Accounting Officer,
Controller and Treasurer
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