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Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000
OR
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to ________
Commission File Number 1-11484
HUNGARIAN TELEPHONE AND CABLE CORP.
(Exact Name of Registrant as specified in its charter)
Delaware 13-3652685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
32 Center Street, Darien, CT 06820
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 656-3882
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, par value $.001 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 28, 2001, 12,103,180 shares of the Registrant's Common
Stock were outstanding, of which 12,095,467 were held by non-affiliates of the
Registrant. The aggregate market value of the Registrant's Common Stock held by
non-affiliates, computed by reference to the closing price of the Common Stock
on the American Stock Exchange as of March 27, 2001, was $89,506,456. The
exclusion of shares owned by any person from such amount shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.
Documents Incorporated by Reference
Part III - Portions of the Registrant's proxy statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 2000.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained herein which express "belief,"
"anticipation," "expectation," or "intention" or any other projection, insofar
as they may apply prospectively and are not historical facts, are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the factors
set forth in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures
about Market Risk."
PART I
In this Form 10-K, all references to "$" or "U.S. dollars" are to
United States dollars, all references to "EUR" or "euros" are to the euro which
is the currency of the European Monetary Union, and all references to "HUF" or
"forints" are to Hungarian forints. Certain amounts stated in euros and forints
herein also have been stated in U.S. dollars solely for the informational
purposes of the reader, and should not be construed as a representation that
such euro or forint amounts actually represent such U.S. dollar amounts or could
be, or could have been, converted into U.S. dollars at the rate indicated or at
any other rate. Unless otherwise stated or the context otherwise requires, such
amounts have been stated at December 31, 2000 exchange rates. The forint/U.S.
dollar middle exchange rate as of December 31, 2000 was approximately 284.73
forints per U.S. dollar.
Item 1. Business
Company Overview
Hungarian Telephone and Cable Corp. ("HTCC" or the "Registrant" and,
together with its consolidated subsidiaries, the "Company") provides basic
telephone services in five defined regions within the Republic of Hungary (each,
an "Operating Area" and together, the "Operating Areas") pursuant to 25-year
telecommunications concessions granted by the Hungarian government. HTCC,
through its four majority-owned Hungarian operating subsidiaries (each, an
Operating Company and together, the "Operating Companies"), owns and operates
virtually all existing public telephone exchanges and local loop
telecommunications network facilities in its Operating Areas and is the
exclusive provider through November 1, 2002 of non-cellular local voice
telephone services in such areas.
The Company acquired its concession rights from the Hungarian Ministry
of Transportation, Telecommunications and Water Management (the "TTW Ministry")
for $11.5 million (at historical exchange rates) and purchased the existing
telecommunications infrastructure in the Operating Areas, including
approximately 61,400 access lines, from Magyar Tavkozlesi Rt. ("Matav"), the
formerly State-controlled monopoly telephone company, for $23.2 million (at
historical exchange rates). Kelet-Nograd Com Rt. ("KNC") and Raba Com. Rt.
("Raba-Com"), two of the Operating Companies, acquired the existing
telecommunications assets in their respective Operating Areas in the first
quarter of 1995, while Papa es Tersege Telefon Koncesszios Rt. ("Papatel") and
Hungarotel Tavkozlesi Rt. ("Hungarotel"), the other two Operating Companies,
acquired the existing telecommunications assets in their respective Operating
Areas on January 1, 1996. Since the acquisition of such existing networks, the
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Operating Companies have incurred capital expenditures through December 31, 2000
of $190 million (at historical exchange rates) to expand and upgrade their
network facilities which has resulted in the completion of a modern
telecommunications network in each of the Operating Areas. As of December 31,
2000, the Company's telecommunications networks had approximately 206,900 access
lines in service, an addition of approximately 145,500 access lines to the
61,400 access lines acquired from Matav. The Company's networks now have the
capacity, with some normal additional capital expenditures, to provide basic
telephone services to virtually all of the estimated 283,300 homes and 38,400
business and other institutional subscribers (including government institutions)
within its Operating Areas.
The Company completed its network modernization and construction
program in each of its Operating Areas primarily through turnkey construction
contracts with Siemens, Ericsson and Fazis Telecommunication System Design and
Construction Corporation. The build-out was primarily financed through a $170
million credit facility with Postabank es Takarekpenztar, a Hungarian commercial
bank ("Postabank"), which was subsequently refinanced and a $47.5 million
contractor financing facility. See "- Revision of Capital Structure," Item 3
"Legal Proceedings," Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," and
Notes 4, 5 and 8(d) of Notes to Consolidated Financial Statements.
The following table sets forth certain information as of December 31,
2000 with respect to each of the Operating Companies.
Raba-Com KNC Papatel Hungarotel Total
-------- --- ------- ---------- -------
Population........................ 63,900 149,000 63,200 391,700 667,800
Residences........................ 25,900 66,400 24,100 166,900 283,300
Businesses and other(1)........... 3,300 8,300 3,800 23,000 38,400
Access lines in operation:
Residential.................. 20,000 41,200 17,800 100,300 179,300
Business and other(2)........ 2,700 6,500 2,400 16,000 27,600
-------- -------- -------- --------- --------
Total.................. 22,700 47,700 20,200 116,300 206,900
Pay phones........................ 167 480 202 1,073 1,922
Population Penetration rate(3).... 35.5 32.0 32.0 29.7 31.0
Residential Penetration rate (4).. 77.2 62.0 73.9 60.1 63.3
- --------
(1) Represents Company estimates of business and other institutional subscribers
or potential subscribers (including government institutions).
(2) Represents Company estimates of subscribers which are businesses and other
institutional subscribers (including government institutions), leased lines
and pay phones. Includes ISDN equivalent lines.
(3) Population Penetration rate is defined as the number of access lines per 100
inhabitants.
(4) Residential Penetration rate is defined as the number of residential
access lines per 100 residences.
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The following table sets forth the number of access lines served by each
of the Operating Companies at takeover from Matav and at the end of 1995, 1996,
1997, 1998, 1999 and 2000.
Takeover 1995 1996 1997 1998 1999 2000
-------- ---- ---- ---- ---- ---- ----
Raba-Com 2,500(1) 5,100 14,000 20,600 21,400 22,300 22,700
KNC 13,000(1) 14,200 20,500 35,500 40,000 46,300 47,700
Papatel 3,800(2) 3,800 11,100 17,000 18,300 19,600 20,200
Hungarotel 42,100(2) 42,100 47,800 102,000 105,300 112,300 116,300
----------- --------- -------- -------- -------- -------- -------
Total 61,400 65,200 93,400 175,100 185,000 200,500 206,900
(1) 1st Quarter 1995
(2) Year-End 1995
The Republic of Hungary
Hungary is located in Central Europe bordering on Austria, Slovenia,
Croatia, Yugoslavia, Romania, Ukraine and Slovakia. Six West European capitals
are within a one-hour flight. Its total area is approximately 93,030 square
kilometers. It has 10 million inhabitants, approximately 1.8 million of whom
reside in Hungary's capital, Budapest.
For nearly 40 years, Hungary was under central state control with a
one-party government and a centrally planned economy. Democracy was restored and
the foundations of a market economy were built between 1988 and 1990. Free
elections were held in 1990. Today, Hungary has a parliamentary democracy with a
single-chamber National Assembly. As a result of a large scale privatization
effort, private enterprise has become the basis of the Hungarian economy.
Today, Hungary is considered the most developed country in Central
Europe. Since 1989, foreign direct investment has been approximately $19.9
billion. Foreign direct investment was approximately $1.95 billion in 2000. On a
per capita basis, Hungary has been one of the largest Central European
recipients of foreign direct investment since the transition to a market
economy. Hungary has received (on a per capita basis) nearly twice the level of
foreign direct investment of Poland and about the same as that of the Czech
Republic.
Since 1995, the Hungarian government has embarked on an economic
stabilization effort aimed at putting the economy on a sustainable path of
low-inflationary growth. Hungary has experienced the following annual GDP growth
rates since the initiation of that effort: 1.7% in 1995; 1.3% in 1996; 3.5% in
1997; 5% in 1998; 4.9% in 1999; and 5.3% in 2000. The unemployment rate has
gradually decreased from 11.1% in 1995 to 6.4% in 2000. The Hungarian inflation
rate has been steadily decreasing as well as evidenced by the following
declining annual inflation rates: 28.2% in 1995; 23.6% in 1996; 18.2% in 1997;
14.5% in 1998; 10.0% in 1999; and 9.8% in 2000.
Hungary's application for membership in the European Union ("EU") was
accepted in 1998. Hungary is now in the process of negotiating the terms of its
accession into the EU. Hungary is not expected to become a member of the EU
until 2003 at the earliest. Hungary joined the North Atlantic Treaty
Organization in 1999. Hungary is also a member of the World Trade Organization.
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Overview of Hungarian Telecommunications Industry
Early State of Hungarian Telecommunications Industry
In 1989, the Hungarian state-owned Post, Telegraph and Telephone ("PTT")
was divided into three separate companies: the Hungarian Broadcasting Company
("Antenna Hungaria"), the Hungarian Post Office ("Magyar Posta") and Matav. The
Hungarian PTT was historically the exclusive provider of telecommunications
services in Hungary. The Hungarian telecommunications market was significantly
underdeveloped without the necessary investment in the telecommunications
infrastructure necessary to achieve a comparable level of teledensity to that of
Western Europe. As of December 31, 1995, Hungary had a basic telephone
penetration rate of approximately 21 telephone access lines per 100 inhabitants
compared to a European Union average of approximately 48 access lines per 100
inhabitants and a United States average of approximately 60 access lines per 100
inhabitants. Of such access lines in Hungary, approximately 40% were located in
Budapest (in which approximately 18% of Hungary's population resides). In the
Company's Operating Areas, access line penetration was approximately nine access
lines per 100 inhabitants as of December 31, 1995. By comparison, basic
telephone penetration rates in other Eastern European countries such as the
Czech Republic, Poland, Slovakia and Bulgaria, as of December 31, 1995, were 23,
15, 21 and 28 access lines per 100 inhabitants, respectively.
Privatization of Matav and Local Telephone Service
Beginning in 1992, the Hungarian government began the process of
privatizing Hungary's telecommunications industry by selling an initial 30%
stake in Matav (raised to 67% in 1995) to MagyarCom, a company then wholly owned
by Deutsche Telekom AG, the German public telephone operator ("Deutsche
Telekom"), and Ameritech, the United States based telecommunications company.
(In 2000 Deutsche Telekom purchased the entire ownership interest of SBC
Communications (Ameritech's successor) in MagyarCom). In 1997 Matav completed
its initial public offering pursuant to which MagyarCom's stake in Matav was
reduced to approximately 60% and the Hungarian State's stake was reduced to
approximately 6%. The Hungarian State also retained certain shareholder rights
by retaining one "Golden Share." In 1999 the Hungarian State sold its remaining
6% ownership interest in Matav but retained its "Golden Share." As of December
31, 2000, MagyarCom owned 59.5% of Matav while 40.5% was publicly traded.
In 1992 the TTW Ministry divided the country into 54 primary
telecommunications service areas in order to take some of such primary
telecommunications service areas out of Matav's national network with respect to
the provision of local basic telephone service while allowing Matav to continue
its monopoly in the provision of domestic and international long distance
services. In 1993, the TTW Ministry solicited bids for concessions to build, own
and operate telecommunications networks in the 25 service areas which had been
chosen to exit the Matav system. As of December 31, 2000, 23 of the 25
concessions for which the TTW Ministry solicited bids had been awarded. Holders
of those concessions today (each a Local Telephone Operator, "LTO", and together
the "LTOs") include: the Company (presently 5 areas); Vivendi Telecom Hungary
("Vivendi") owned by affiliates of Vivendi SA of France and General Electric
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Capital Corp. (9 areas); an affiliate of United Pan-Europe Communications NV
("UPC") (1 area); a consortium comprised of Bezeq (the Israeli PTO), Poalim
Investment (an Israeli investment and holding company) and Matav (3 areas)
(Matav has recently announced an agreement to buy out the ownership interests of
Bezeq and Poalim, which transaction is subject to regulatory review); and Matav
(5 areas). Matav also retained the rights to service 2 areas for which there
were no successful bidders. Each of the LTOs (including Matav) received 25 year
licenses to provide local basic telephone service with exclusivity rights in
their respective concessions through 2002 (2001 in the case of Matav except for
5 areas in which Matav has exclusivity rights through 2002). In addition to the
fees paid to the government which aggregated approximately $80.0 million (at
historical exchange rates), each of the non-Matav LTOs negotiated a separate
asset purchase agreement with Matav for each concession area's existing basic
telephone plant and equipment, which led to the transfer of approximately
260,000 access lines from a total of 1.2 million access lines in the Matav
system. Matav's concession areas presently cover approximately 75% of Hungary's
population and approximately 70% of its geographic area.
Cellular Service
In addition to the liberalization of basic telephone services, the TTW
Ministry also initially selected two consortia to provide nationwide cellular
telephone services. A consortium comprised of Matav and MediaOne Group Inc.,
formerly part of U.S. West, was granted two licenses to provide both analog
(NMT-450) ("Westel 450") and digital (GSM-900) ("Westel 900") services while
Pannon GSM Tavkozlesi ("Pannon") was granted a license to provide only digital
cellular services. Pannon's current shareholders include: Telenor AS (the
Norwegian telecommunications company) (25.8%); Tele Danmark A/S (the Danish
telecommunications company) (6.6%); Sonera Corporation (the Finish
telecommunications company) (23%); and KPN NV (the Dutch telecommunications
company, "KPN") (44.6%). MediaOne subsequently sold its holdings in Westel 450
and Westel 900 to Deutsche Telekom. Matav is in the process of exercising an
option it holds to purchase the interests in Westel 450 and Westel 900 that
Deutsche Telekom acquired from MediaOne.
In June 1999, a consortium comprised of Vodafone Group Plc. (50.1%),
RWE Telliance (19.9%), Antenna Hungaria (20%) and Magyar Posta (10%) (together,
"Vodafone") was the winning bidder for a digital 1800-megahertz (or DCS
frequency) mobile phone license. It began operations in late 1999.
Domestic and International Long Distance Services
At the end of 2001 with the further liberalization of the Hungarian
telecommunications market, Matav's right to provide exclusive domestic and
international long distance voice transmission is due to expire. In 1998, to
further stimulate future competition in this market, the TTW Ministry awarded
Pan-Tel Rt., a newly formed Hungarian company ("Pan-Tel"), the licenses to
provide such services as data transmission, voice mail and other services which
are not subject to exclusive concessions. Pan-Tel built its own country-wide
telecommunications network. The current shareholders of Pan-Tel include MAV Rt.
(the Hungarian railway company) (10.1%), PT Investment Holding Company (14.7%)
and KPN (75.2%).
The Hungarian Telecommunications Industry Today
During 2000 the Hungarian government moved the telecommunications
portfolio from the Ministry of Transportation, Telecommunications and Water
Management to the Prime Minister's Office. The Prime Minister's Office is headed
by the Chancellor (who is effectively the Deputy Prime Minister) and the
Chancellor now has ministerial responsibility for telecommunications. An
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Information Technology Commissioner was appointed to assist the Chancellor. The
Hungarian government is currently working on new legislation for 2002 to further
liberalize the telecommunications market in accordance with European Union
standards. The regulation of telephony, cable television and the Internet would
be affected. However, the Company does not expect that the exclusivity period of
its concession rights will be affected.
Since the privatization of the Hungarian telecommunications market, the
LTOs and Matav have spent approximately $1 billion (at historical exchange
rates) to build modern state-of-the-art telecommunications networks throughout
Hungary. As a result of such investment, Matav had approximately 3.0 million
access lines connected to its telecommunications networks and the other LTOs
(including the Company) had over 800,000 access lines connected to their
telecommunications networks as of December 31, 2000.
In the mobile telecommunications marketplace, Westel 450 and Westel 900
had 76,000 and 1,600,000 subscribers, respectively, as of December 31, 2000.
Pannon had approximately 1,250,000 subscribers as of December 31, 2000. Vodafone
had approximately 188,0000 subscribers as of December 31, 2000. As of December
31, 2000, the overall penetration rate for cellular service in Hungary was 31%.
Due to the completion of the Company's network modernization and
construction program, access line penetration in the Company's Operating Areas
has increased to 31 access lines per 100 inhabitants as of December 31, 2000.
Given that the overall investment in the Hungarian telecommunications market
over the last several years has produced a significant increase in the overall
penetration rate in Hungary to approximately 38% as of December 31, 2000 and the
expansion of the mobile telecommunications market, the Company expects to
benefit from a continued increase in the use of its telecommunications services
by its customer base as the overall Hungarian telecommunications market
continues to expand. See also "- Competition."
HTCC and its Operating Companies
In 1994, the TTW Ministry awarded KNC and Raba-Com concession rights to
construct local telephone exchanges and provide non-cellular local voice
telephone services for a period of 25 years, with exclusivity for the first
eight years. The Company subsequently acquired two other Operating Companies,
Hungarotel and Papatel, that had been awarded substantially identical concession
rights by the TTW Ministry. Matav continues to be the sole provider of domestic
and international long distance non-cellular voice telephone services through
2001.
HTCC conducts its operations through the Operating Companies. Set forth
below is a chart of HTCC and its principal subsidiaries and stockholders as of
March 28, 2001. Share ownership percentages of HTCC are based on shares of
HTCC's common stock (the "Common Stock") owned as of March 28, 2001, without
giving effect to outstanding options or warrants. The ownership percentages for
the Operating Companies could be affected by certain Hungarian equity ownership
requirements. See "- Regulation - Hungarian Equity Ownership Requirements."
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[CHART]
HTCC was organized under the laws of the State of Delaware on March 23,
1992. The Common Stock is traded on the American Stock Exchange under the symbol
"HTC." The Company's United States office is located at 32 Center Street,
Darien, Connecticut 06820; telephone (203) 656-3882. The Company's principal
office in Hungary is located at Terez krt. 46, H-1066, Budapest; telephone (361)
474-7700.
Certain Stockholders
The Company has benefited from the extensive telecommunications
experience and capabilities of certain of its stockholders. Set forth below is a
brief description of such stockholders.
Citizens Communications Company
Citizens Communications Company (together with its subsidiaries,
"Citizens") is a New York Stock Exchange listed company which serves 1.4 million
access lines in 17 states and is acquiring an additional 1.7 million access
lines. Citizens also owns 85% of Electric Lightwave, Inc. (NASDAQ: ELIX), a
facilities-based, integrated communications provider that offers a broad range
of telecommunications-intensive businesses throughout the United States. At
December 31, 2000, Citizens had $7.0 billion of total assets and $1.7 billion in
shareholders' equity. For the year ended December 31, 2000, Citizens had $1.8
billion of revenue and $121.8 million in operating income.
In May 1995, Citizens purchased 300,000 shares of HTCC's common stock
from a former executive of the Company and has since acquired an additional
1,902,908 shares of Common Stock and 30,000 shares of the Company's Series A
Preferred Stock convertible into 300,000 shares of Common Stock, pursuant to
certain agreements entered into with HTCC (as amended and restated in certain
cases to date, the "Citizens Agreements"). Citizens also purchased 103,000
shares of Common Stock on the open market bringing its ownership of the
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outstanding Common Stock as of March 28, 2001 to 19.1%. The Citizens Agreements
provide Citizens with certain preemptive rights to purchase, upon the issuance
of Common Stock in certain circumstances to third parties, shares of Common
Stock in order to maintain its percentage ownership interest on a fully diluted
basis. For a more detailed description of some of the Citizens Agreements, see
Notes 9 and 12 of Notes to Consolidated Financial Statements, Item 12 "Security
Ownership of Certain Beneficial Owners and Management," and "- Revision of
Capital Structure."
Tele Danmark A/S
Tele Danmark A/S (together with its affiliates, "Tele Danmark") is the
preeminent provider of telecommunications services in Denmark. Tele Danmark
provides a full range of telecommunications services in Denmark, including
landline and cellular telephone services, data communications, Internet, leased
lines, directory and operator services and cable television. Domestic operations
include 3,735,000 telephone subscriber lines, 1,648,000 cellular users, 801,000
cable television customers and 618,000 Internet dial-up customers.
At December 31, 1999, Tele Danmark had total assets of Danish Kroner
75.1 billion (approximately $9.0 billion at current exchange rates) and
shareholders' equity of Danish Kroner 32.6 billion (approximately $3.9 billion
at current exchange rates). During 2000, Tele Danmark had net income of Danish
Kroner 3.591 billion (approximately $428 million at current exchange rates) on
net revenues of Danish Kroner 44.552 billion (approximately $5.3 billion at
current exchange rates.)
Tele Danmark's activities abroad have been an important growth areas
over the last several years. Tele Danmark operates in 12 European countries.
International operations accounted for 48% of Tele Danmark's net revenues in
2000. Tele Danmark has investments in the Nordic region, continental Western
Europe as well as Central and Eastern Europe--among them Belgacom (Belgium), Ben
(the Netherlands), Sunrise (Switzerland), Talkline (Germany), Polkomtel
(Poland), Contactel (the Czech Republic) and UMC (Ukraine). In Hungary, Tele
Danmark also holds a 6.6% stake in Pannon, one of the three digital cellular
phone providers in Hungary.
As a result of certain agreements between the Company and Tele Danmark
(the "Tele Danmark Agreements"), the Company has issued 2,579,588 shares of
Common Stock to Tele Danmark. As of March 28, 2001, Tele Danmark owned 21.3% of
the Company's outstanding Common Stock. The Tele Danmark Agreements provide Tele
Danmark with certain preemptive rights to purchase, upon the issuance of Common
Stock in certain circumstances to third parties, shares of Common Stock in order
to maintain its percentage ownership interest of the outstanding Common Stock.
See Notes 9 and 12 of Notes to Consolidated Financial Statements, Item 12
"Security Ownership of Certain Beneficial Owners and Management," and "-
Revision of Capital Structure."
Tele Danmark's stock trades on the Copenhagen Stock Exchange and the
New York Stock Exchange. SBC Communications of San Antonio, Texas owns 42% of
the shares, with the remaining shares held by individual and institutional
shareowners all over the world.
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Postabank Rt.
Postabank was established in 1988 and provides a wide range of
commercial and retail banking services to its private and corporate customers in
Hungary. As of December 31, 2000, its total assets were HUF 331 billion ($1.2
billion). Today it is the sixth largest Hungarian retail bank in terms of total
assets with a 4.7% market share of the deposits and a 1.5% market share of the
loan market. The Hungarian government owns a controlling interest in Postabank.
In October 1996, the Company entered into a $170 million 10-Year
Multi-Currency Credit Facility with Postabank (the "Original Postabank Credit
Facility"). In May 1999, as part of a revision of its capital structure, the
Company issued 2,428,572 shares of Common Stock, warrants to purchase 2,500,000
shares of Common Stock and notes in the aggregate amount of $25 million to
Postabank. The Company also entered into a $138 million Dual-Currency Bridge
Loan Agreement with Postabank (the "Postabank Bridge Loan Agreement"). As a
result of such issuances and other agreements, the Company paid off the balance
on the Original Postabank Credit Facility and terminated such agreement. In
April 2000 the Company paid off the outstanding balance on the Postabank Bridge
Loan Agreement with the proceeds of a syndicated loan agreement. See "- Revision
of Capital Structure," Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," and Notes 4, 5 and 9 of Notes to Consolidated Financial Statements.
As of March 28, 2001, Postabank owned 20.1% of the outstanding Common
Stock and 30.9% of the Common Stock on a fully diluted basis. For a more
detailed description of some of the Postabank Agreements, see Notes 4, 5 and 9
of Notes to Consolidated Financial Statements, Item 13 "Certain Relationships
and Related Transactions," Item 12 "Security Ownership of Certain Beneficial
Owners and Management," and "- Revision of Capital Structure."
The Danish Investment Fund for Central and Eastern Europe
The Investment Fund for Central and Eastern Europe (the "Danish Fund")
is a Danish government initiated and financed investment fund founded in 1989 by
the Danish Parliament. The purpose is to promote Danish direct investments in
Central and Eastern Europe and to enhance the possibilities for closer
cooperation between Danish and Central and Eastern European companies. The
Danish Fund engages in projects via equity capital and/or loans in joint
ventures with a participation of one or more Danish companies. The Danish Fund
has experience in Hungary (currently four projects) and in particular the
Hungarian telecommunications sector, as it was involved in Pannon from 1994 to
1996 and in two of the Operating Companies from 1994 to 1997. As of March 28,
2001, the Danish Fund owned 10.6% of the outstanding Common Stock. See Item 12
"Security Ownership of Certain Beneficial Owners and Management."
Revision of Capital Structure
In May 1999 the Company entered into various agreements as part of a
revision of its capital structure with the following parties: Postabank; Tele
Danmark; the Danish Fund; and CU CapitalCorp and Citizens International
Management Services Company, two wholly-owned subsidiaries of Citizens
Communications Company. As a result of such agreements, the Company extinguished
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all of its obligations (i) to Postabank under the Original Postabank Credit
Facility in the amount of approximately $193 million and the amounts borrowed to
settle a portion due under a contractor financing facility in the amount of
approximately $16 million; (ii) to one of its contractors under a contractor
financing facility in the amount of approximately $35 million; and (iii) to
Citizens under a $8.4 million promissory note which was payable in 2004 and an
obligation to pay Citizens $21 million in 28 quarterly installments of $750,000
each from 2004 through and including 2010. The Company borrowed $138 million
from Postabank under a one-year Dual-Currency Bridge Loan Agreement in Hungarian
forints and euros and $25 million pursuant to certain unsecured notes which
mature in 2007. Some of the various agreements which were entered into as of May
10, 1999 are described herein. (The descriptions and summaries herein do not
purport to be complete, and are subject to, and qualified in their entirety by,
reference to each such agreement, copies of which are filed as exhibits hereto.
See Item 14 below).
The Company and Postabank entered into a Dual-Currency Bridge Loan
Agreement (the "Postabank Bridge Loan") pursuant to which HTCC's subsidiaries
borrowed the equivalent of $111 million in Hungarian forints (at historical
exchange rates) and $27 million in euros (at historical exchange rates) which
funds were applied to the repayment of the Original Postabank Credit Facility.
On April 11, 2000, the Company entered into a EUR 130 million senior secured
syndicated bank credit facility which funds were used to pay off the Postabank
Bridge Loan.
The Company and Postabank also entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") pursuant to which Postabank
purchased 2,428,572 shares of Common Stock for an aggregate purchase price of
$34 million. The Securities Purchase Agreement provides for one person
designated by Postabank to be nominated for election to the Company's Board of
Directors. Postabank could not transfer its shares until the earlier of (x) the
repayment in full of all the obligations under the Postabank Bridge Loan
Agreement or (y) May 10, 2000, and now Postabank can only transfer such shares
incrementally through 2003 subject to the Company's right of first refusal. The
Company's right of first refusal expires in January 2003 and is assignable by
the Company to any beneficial holder of more than 10% of the Company's
outstanding common stock. The Company applied the proceeds from the stock
issuance to the repayment of the Original Postabank Credit Facility. Pursuant to
the Securities Purchase Agreement, the Company issued notes to Postabank in an
aggregate amount of $25 million (the "Notes") with detachable warrants (the
"Warrants"). The Notes, as amended, accrue interest, which is payable
semi-annually, at 3.5% plus the LIBOR rate for the applicable six month interest
period. The Notes, which mature in 2007, are transferable. The Warrants which
were issued pursuant to a series of Warrant Agreements between the Company and
Postabank enable Postabank to purchase 2,500,000 shares of the Company's common
stock at an exercise price of $10 per share. The exercise period commences on
January 1, 2004 and terminates on March 31, 2007. The Company has the right to
terminate the Warrants in whole or in part prior to January 1, 2004 provided
that the Company (i) repays a proportionate amount of the outstanding principal
on the Notes to the holders of such Notes and (ii) pays an additional 7.5% of
the aggregate principal amount of the Notes repaid concurrently with the
termination of the Warrants to the holders of the Warrants.
The Company and Tele Danmark entered into a Stock Purchase Agreement
(the "TD Stock Purchase Agreement") pursuant to which the Company issued
1,571,429 shares of the Company's common stock in exchange for $11 million. The
Company applied the proceeds from the TD Stock Purchase Agreement to the
repayment of the Original Postabank Credit Facility.
-11-
The Company and the Danish Fund entered into a Stock Purchase Agreement
(the "Danish Fund Stock Purchase Agreement") pursuant to which the Company
issued 1,285,714 shares of the Company's common stock in exchange for $9
million. The Company applied the proceeds from the Danish Fund Stock Purchase
Agreement to the repayment of the Original Postabank Credit Facility.
The Company and Citizens entered into a Stock Purchase Agreement (the
"Citizens Stock Purchase Agreement') pursuant to which the Company issued to
Citizens 1,300,000 shares of the Company's common stock and 30,000 shares of the
Company's Series A Preferred Stock, par value $0.001 (the "Preferred Shares").
In consideration for such shares, Citizens (i) transferred to the Company for
cancellation a $8.4 million promissory note issued by the Company to Citizens
which was to mature in 2004, and (ii) agreed to renounce and forego any rights
whatsoever to any payment of the $21 million which was payable by the Company to
Citizens in quarterly installments of $750,000 from 2004 through and including
2010. Citizens, as the holder of the Preferred Shares, is entitled to receive
cumulative cash dividends at an annual rate of 5%, compounded annually on the
liquidation value of $70 per share. The Company may redeem the Preferred Shares
at any time. Citizens can convert each of the Preferred Shares into shares of
the Company's common stock on a one for ten basis. Citizens also waived any and
all preemptive and anti-dilution rights in connection with the transactions
described above.
The April 2000 Syndicated Credit Facility
On April 11, 2000, the Company entered into a EUR 130 million Senior
Secured Debt Facility Agreement (the "Debt Agreement") with a European banking
syndicate which was arranged by Citibank N.A. ("Citibank") and Westdeutsche
Landesbank Girozentrale ("WestLB"). The Company drew down EUR 129 million ($121
million at April 20, 2000 exchange rates), which funds were used, along with
another $7.3 million of other Company funds, to pay off the entire outstanding
balance of EUR 134 million (approximately $126 million at April 20, 2000
exchange rates) on the Postabank Bridge Loan, and fees relating to the Debt
Agreement. The borrowers under the Debt Agreement are the Operating Companies
who were the borrowers under the Postabank Bridge Loan Agreement. The Debt
Agreement and some of the related agreements are described below. (The
descriptions and summaries herein do not purport to be complete, and are subject
to, and qualified in their entirety by, reference to each such agreement, copies
of some of which are filed as exhibits hereto. See Item 14 below.)
The Debt Agreement has two facilities. Facility A is a floating rate
term loan in the amount of EUR 125 million (the "Term Facility") which principal
is repayable in installments semi-annually on each June 30 and December 31
beginning on June 30, 2001 and ending on December 31, 2007. The amounts of the
principal repayments on the Term Facility are to be escalating percentages of
the amount of the facility which was drawn down (EUR 125 million). The Company
borrowed the full EUR 125 million, of which EUR 84.1 million was funded, and is
repayable, in euros and the equivalent of EUR 40.9 million was funded, and is
repayable in, Hungarian forints. The Term Facility loans denominated in euros
accrues interest at the rate of the Applicable Margin (defined below) plus the
EURIBOR rate for the applicable interest period. The EURIBOR rate is the
percentage rate per annum determined by the Banking Federation of the European
Union for the applicable interest period. The portion of the Term Facility loan
denominated in Hungarian forints accrues interest at the rate of the Applicable
Margin (defined below) plus the BUBOR rate for the applicable interest period.
The BUBOR rate is the percentage rate per annum determined according to the
rules established by the Hungarian Forex Association and published by the
National Bank of Hungary for the applicable interest period. The applicable
interest period for the portion of the Term Facility loans denominated in euros
is, at the Company's option, one, three or six months. The Company chose six
months. The applicable interest period for the portion of the Term Facility
loans denominated in Hungarian forints is, at the Company's option, in one or
-12-
three months. The Company chose three months. Interest is payable at the end of
each interest period. The Applicable Margin is initially, subject to adjustment,
1.75%. The Applicable Margin may be adjusted downward incrementally to a minimum
of 1.15% subject to the financial performance of the Company as measured by the
ratio of the Company's debt to its earnings before interest, taxes, depreciation
and amortization.
Facility B is a floating rate revolving loan in the amount of EUR 5
million (the "Revolving Facility") which can only be drawn down in euros. The
Revolving Facility will be reduced to EUR 2.5 million on December 31, 2005. The
Revolving Facility is available until December 31, 2007. The Company borrowed
EUR 4 million of the Revolving Facility to pay off the balance of the Postabank
Bridge Loan and fees associated with the transaction on April 20, 2000. The
principal amount borrowed under the Revolving Facility is due at the end of each
interest period at which point the Company can, subject to certain conditions,
roll over the amount of principal borrowed. The applicable interest period for
the Revolving Facility is, at the Company's option, one, three, or six months.
The Company has chosen six months at the present time. Interest is payable at
the end of each interest period calculated similar to that for the Term Facility
loan denominated in euros.
Dependent on its cash flow, the Company is required to prepay up to the
equivalent of $25 million on the Term Facility. The amount of the prepayment in
any year shall be at least 50% of the Company's excess cash flow, if any, for
the previous financial year as defined in the Debt Agreement. The prepayment
amount is due within 15 days of the filing of each annual report on Form 10-K
with the Securities and Exchange Commission. There was no "excess cash flow", as
defined in the Debt Agreement, for 2000 and, therefore, there will be no
prepayment in 2001.
The Company paid an arrangement fee in the amount of EUR 2,665,000
(approximately $2.5 million at April 20, 2000 exchange rates), which is included
in other assets along with other direct costs incurred in obtaining the Debt
Agreement, and is being amortized over the term of the related debt. The Company
also paid an agency fee in the amount of $60,000. The Company is obligated to
pay an annual commitment fee equal to the lower of 0.75% or 50% of the
Applicable Margin on any available unused commitment on the Revolving Facility.
HTCC and one of its subsidiaries, HTCC Consulting Rt., are guarantors
for the HTCC subsidiaries under the Debt Agreement. The Company pledged all of
its intangible and tangible assets, including HTCC's ownership interests in its
subsidiaries, and its real property to secure all of the obligations under the
Debt Agreement. The Company and Citibank Rt. (as security agent) entered into a
series of agreements to secure all of the Company's obligations under the Debt
Agreement. The Debt Agreement contains customary representation and warranties.
The Company is subject to some restrictive covenants including restrictions
regarding the ability of the Company to pay dividends, borrow funds, merge with
another company and dispose of its assets. The Debt Agreement contains customary
events of default, which would trigger early repayment of the Debt Agreement
including those related to a change of control. If prior to the later of
December 31, 2001 or the Trigger Date (as defined below), Tele Danmark sells any
of the shares of Common Stock that it currently owns or Tele Danmark and the
Danish Fund no longer own, in the aggregate, at least 30.1% of the outstanding
Common Stock, the Company would be in default under the Debt Agreement. Tele
Danmark and the Danish Fund currently own 31.9% of the outstanding Common Stock.
The Trigger Date is defined as the date on which for the prior two fiscal
quarters the Company's debt to EBITDA ratio is less than 3.5 to 1. Following the
Trigger Date, Tele Danmark can only transfer its shares with the prior written
consent of banks holding at least 66.7% of the Company's outstanding debt under
the Debt Agreement.
-13-
Strategy
The Company's primary focus is to continue to increase call revenues
and reduce operating costs while continuing to add residential and business
customers to its networks. To accomplish these goals, the Company is continuing
its efforts to expand its product and service offerings to its entire customer
base, improve its customer service, increase its operational efficiencies and
increase its marketing efforts. The Company has implemented the following
operational strategies in order to further its business objectives.
Revenue Growth
The Company intends to continue to increase its call revenues by
increasing the usage of its product and service offerings by both its
residential and business customers. Since the availability of modern
telecommunications services is a relatively new phenomena in Hungary, the key
factor in increasing the usage is educating both customer segments on the
availability and benefits of the Company's products and services. For the
residential customers, the Company is focusing its efforts on educating the
residential customer on the availability of such products and services as voice
mail, caller ID and call waiting, which are all new to the Company's residential
customer base. The Company is also highlighting the benefits of the Internet and
encouraging its use by offering special discounted rates for Internet usage. One
of the tools that the Company is deploying to increase customer awareness of
these services is video and personal demonstrations in the customer service
centers which are located in each of the Operating Areas. The Company is also
focusing its marketing and educating efforts at its business customers, which
represent 40% of the Company's total revenues. The Company has placed emphasis
on increasing the installation and usage levels of the Company's business
customers by focusing on the marketing and sales of deregulated services
including managed lease lines, PBX sales and services, ISDN, Internet and
Digifon Services (e.g. call forwarding, call waiting, call barring). The Company
has assigned an account manager to each business customer who is responsible for
meeting with each business customer to find out such customer's
telecommunications needs. The account manager can then demonstrate each of the
Company's products and services and, working together with that customer,
develop a telecommunications strategy using the Company's products and services
which can best enhance that customer's business.
The Company plans to continue its revenue growth by increasing the
penetration levels in the residential sector. To that end, the Company is
continuing its mass marketing efforts to the residences who have not yet had
service. The Company is also marketing the benefits of additional lines to its
existing residential and business customer.
New Products and Services
The Company continues to offer the latest telecommunications products and
services as they become available in the telecommunications marketplace. In
2000, the Company introduced Internet Protocol-based voice services to its
customers. This enables the Company to offer long distance and international
calling services at discounted rates without violating Matav's domestic long
distance and international calling monopoly. The Company is planning to become
an Internet Service Provider in all of its Operating Areas in 2001.
-14-
Marketing
As the exclusive provider of basic telephone services in the Operating
Areas, the Company's primary marketing objective is to increase the usage of its
telephone services by its existing residential and business customers. In
addition, the Company intends to attract new subscribers by targeting the needs
of various market segments, while maintaining superior customer service and
reliability based on current "state of the art" telecommunications technology.
The Company's targeted market segments are: (i) residential customers; (ii)
small businesses and professionals; (iii) medium and large businesses; and (iv)
government institutions.
For its residential customers and potential customers, the Company's
marketing efforts include advertising on radio and television, door-to-door
marketing surveys, newspaper advertising, participation in local trade shows,
direct mail, community meetings and billboard advertising. The Company is also
offering discounts for Internet users. To increase the residential penetration
rate, the Company has implemented short marketing campaigns targeting those
residences without phone service. To induce the potential customers the Company
has offered special limited time only rates on the connection fee. Since many
Hungarians still prefer face-to-face personal marketing, the Company has
leveraged the benefits of having a customer service center in each Operating
Area to give personal demonstrations.
For its larger business customers, the Company has trained account
managers to service these customers and potential customers by educating them on
the availability of "turn-key" business communications solutions and several
"value added services" including the premium rate services, voice mail and all
of the Digifon services (e.g. call forwarding, call waiting, call barring). The
Company believes that this effort will result in a greater understanding by its
business customers and potential business customers of the potential revenue
gains that can be achieved with advanced telecommunications technology.
Customer Service
The Company believes that providing a high level of customer service is
important to achieving its objective of attracting additional customers and
increasing the usage of existing services by its current customer base. Prior to
completion of the construction program, some customers waited for over 20 years
for telephone service. Today, most residences and businesses can be connected to
one of the Company's networks within 7 days. The Company also operates full time
operator service centers in each of the Operating Areas which are staffed by
operators capable of providing, among other things, call completion assistance,
directory assistance and trouble reporting on a 24 hour basis. In addition, the
Company operates customer service centers in each of the Operating Areas which
offer facsimile, Internet, photocopying and telephone bill payment services.
These service centers also sell communications equipment, process telephone
service applications and handle billing inquiries. The Company reorganized its
customer service centers by implementing the necessary changes to make such
centers more "customer friendly." The Company is providing more choices for its
customers and more product information instruction. For its business customers,
the Company has account representatives for each customer.
-15-
Most of the Company's subscriber base consists of residential
customers. As of December 31, 2000, 87% of subscribers were residential
customers and 13% were business and other institutional subscribers (including
government institutions).
Operational Efficiency
The Company is increasing its productivity and operational efficiency
by achieving certain economies of scale with respect to network management,
administration, customer service, billing, accounts receivable, payroll
processing, purchasing and network maintenance. For example, the Company has
implemented its own centralized operating and accounting system in all of its
Operating Areas. A significant increase in operational efficiency has resulted
from the implementation of this system specifically in the areas of customer
billing and financial accountability. In addition, some of the Company's
Operating Areas are contiguous, which facilitates the realization of certain
economies of scale. For example, by using fiber optic technology between
contiguous Operating Areas, the Company realizes certain operational
efficiencies by centralizing certain functions. As of December 31, 2000, the
Operating Companies had a total of 321 access lines per employee.
Mergers and Strategic Alliances
As the Hungarian telecommunications market continues to develop and
become more liberalized as the monopolies of Matav and the LTOs expire and the
newer entrants expand their presence in Hungary, the Company will continue to
review its options with respect to any merger or strategic alliance
possibilities that will enhance shareholder value.
Operations
Services
The Company provides non-cellular local voice telephone service in the
Operating Areas which allows subscribers to have facsimile, and modem
transmission capabilities and makes available to its subscribers, through
interconnection with Matav, domestic and international long distance services.
In addition to these standard services, the Company currently offers its
subscribers data transmission and other value-added services, including
Internet, voice mail, Internet Protocol-based voice services, caller ID, call
waiting, call forwarding, three-way calling, toll free calling services and
audio text services.
The Company's revenues are derived from the provision of local and
domestic and international long distance telephone services which consist of (i)
charges for measured telephone service, which vary depending on the day, the
time of day, distance and duration of the call, (ii) connection and subscription
fees, and (iii) other operating revenues consisting principally of charges and
fees from leased lines, public phones, detailed billing and other customer
services, including revenues from the sale and lease of telephone equipment.
Measured Service. Charges for local and domestic and international long
distance measured service vary with the number of pulses generated by a call.
The number of pulses generated for a particular call depends upon the day, the
time of day, the distance covered and the duration of the call. Currently, the
Company charges either HUF 10.20 ($.035) or HUF 13.80 ($0.048) per minute for
peak local calls and HUF 3.0 ($0.011) per minute for off-peak local calls. The
TTW Ministry has traditionally adjusted such fees annually based on the
Hungarian Consumer Price Index. However, for the last several years, the
Hungarian government has been rebalancing the fees in order to give more weight
to local calls and subscription fees at the expense of the charges for domestic
long distance and international calls. For all local calls within an Operating
-16-
Area, the Company retains all of the revenues associated with the call. For
domestic long distance calls outside of an Operating Area (including those
between Operating Areas, including adjacent Operating Areas) and all
international calls, the Company has a revenue sharing arrangement with Matav
the terms of which are governed by a decree of the Prime Minister's Office.
Pursuant to this revenue sharing arrangement, the Company charges for and
collects from its customers the fees for domestic long distance and
international calls. The Company then pays these fees to Matav but retains an
interconnection fee. For domestic long distance and international calls to the
Company's customers, the Company receives an interconnection fee. Mobile
telephone calls to customers in the Operating Areas and calls from customers in
the Operating Areas to mobile phones are included in long-distance service
revenues shared with Matav. Since 1998 the TTW Ministry and now the Prime
Minister's Office have taken gradual steps to regulate the interconnection fees
in accordance with internationally accepted benchmarks with the goal of creating
a cost-based interconnection fee regime. See "- Regulation - Rate Setting and
Revenue Sharing."
Subscription and Connection Fees. The Company collects a monthly
subscription fee from its customers. The basic monthly fee is HUF 3,000
($10.54). The company also offers some of its low usage customers (residential
customers) a reduced subscription fee of either HUF 1,700 ($5.97) or HUF 1,100
($3.86). For such reduced monthly subscription rates, any such customer pays
their regular monthly measured service fee plus an additional charge of either
.24 times their monthly measured service fee (in the case of HUF 1,700 monthly
subscription fee customers) or .9 times their monthly measured service fee (in
the case of HUF 1,100 monthly subscription fee customers). See "- Regulation -
Rate Setting and Revenue Sharing."
The Company charges its customers connection fees when they are added
to the Company's network. The Company may collect the full connection fee
provided that the customer is connected within 30 days; otherwise, the Company
may only collect a portion of the connection fee and must connect the subscriber
within one year. Upon connection, the Company may collect the remaining portion
of the fee. Connection fees are recognized as income over the expected customer
life (seven years) from the date that the connection is made. Currently,
connection fees are HUF 30,000 ($105.36) for residential customers and HUF
80,000 ($280.97) for business and other institutional subscribers (including
government institutions), which are the maximum allowable fees, pursuant to a
decree of the Prime Minister's Office. Customers requesting additional access
lines are charged an additional connection fee per line.
Other Operating Revenue. The Company supplies private line service
(point-to-point and point-to-multi-point) primarily to businesses. As of
December 31, 2000, approximately 3,367 leased lines were in service. In
addition, as of December 31, 2000, the Company had 1,922 public pay phones in
the Operating Areas in accordance with the terms of the Concession Contracts.
The Company generates additional revenues from the provision of value-added
services, including ISDN, voice mail, call waiting, call forwarding, and
three-way calling, as well as through the sale and leasing of telephone
equipment.
-17-
Pricing
Maximum pricing levels have historically been set by the TTW Ministry
(now by the Prime Minister's Office) and such rate increases have tracked
inflation, as measured by either the Hungarian Producer Price Index ("PPI") or
the Hungarian Consumer Price Index ("CPI"). In 1997, the TTW Ministry set forth
a new regulatory framework for regulating annual increases in the fees for (a)
local calls, (b) domestic long distance and international calls and (c)
subscription fees, which included a rebalancing formula, which provides for
greater increases in charges for subscription fees and local calls than in
domestic long distance and international calls. See also "- Regulation - Rate
Setting and Revenue Sharing." The Company's customers are on a one-month billing
cycle. For domestic long distance and international calls, the Company is
required to charge the same tariffs as Matav. For local calls, the Company may
choose to increase its rates up to the permitted amount or charge a lower rate.
Measured service rate increases are effected by either increasing charges per
pulse or reducing the time interval between pulses, depending on the time of day
and other factors. In addition, the Company charges additional fees for services
such as data transmission, voice mail, call waiting and call transfer in all of
its Operating Areas. The fees charged for these services are not subject to
regulation.
The Company allows its subscribers to pay connection fees on various
installment basis plans and encourages customers to lease their telephones. The
Company believes that to date the various installment plans have resulted in an
increase in the number of subscribers in the Operating Areas.
The Company currently purchases telephone sets in bulk from a variety
of manufacturers. Customers can choose to buy the phone or lease the phone and
pay a monthly fee of HUF 220 ($0.77). Although there is no governmental
regulation relating to lease rates, the Company adjusts such rates annually
according to the Hungarian PPI. Approximately 50% of the Company's subscribers
as of December 31, 2000 leased their phones from the Company.
Network Design, Construction and Performance
The Company has constructed a versatile modern communications network
which substantially replaced the antiquated system purchased from Matav. This
new system provides many of the technologically advanced services currently
available in the United States and Western Europe. The Company's networks
maintain the North American standard, or "P01", grade of service. The P01
standard means that one call out of 100 will be blocked in the busiest hour of
the busiest season. The Company believes that its ability to meet the
telecommunications requirements of its customers through a combination of
conventional fiber optic and wireless local loop technology affords it
significant flexibility with respect to network development and network capital
expenditures. The Company has replaced all manually operated local battery and
common battery cord type switchboards purchased from Matav while retaining
certain analog switching systems. The Company upgraded such analog switching
systems allowing such systems to mimic many of the features available in modern
digital switching systems with a minimal investment.
Conventional Network Design
In developing its networks, the Company has implemented service quality
and redundancy objectives on par with Western European and North American
digital network standards. Certain of the networks constructed are based on
digital hosts and remotes with fiber optic rings and copper feeder and
distribution. Such a distribution system is the conventional system used in the
United States and Western Europe. Telecommunications services are transmitted to
the home through twisted pair copper wire telephone cable.
-18-
The Company's conventional networks have been designed to employ an
open architecture, generally using Synchronous Digital Hierarchy ("SDH")
technology for system resilience. The Company's networks are designed to provide
voice and high speed data services. The Company believes that the flexible
design of the conventional networks it has constructed allows it to readily
implement new technologies and provide enhanced or new services. The Company's
switches in its conventional networks allow it to connect to networks operated
by other LTOs or by Matav in order to route voice and data transmissions between
subscribers.
Wireless Network Design
In certain portions of the Operating Areas, the Company is deploying
wireless network technology based upon the Digital Enhanced Cordless
Telecommunications ("DECT") system which interfaces radio technology to
fiber-optic, digital microwave or fixed copper networks. The use of DECT
technology generally reduces the time and expense of installation and securing
rights of way. In a conventional network build, significant investment must be
made in order to offer service to a large proportion of potential customers
whether or not they become actual customers. By contrast, the use of the DECT
system in a network build-out provides for capital investment proportional to
the number of customers actually connected because the radio links and other
required equipment are installed only for those households choosing to take the
service and are installed only at the time service is requested.
In many areas in which the Company is utilizing a wireless network
design, the Company is deploying a fiber optic cable to the node in the same
fashion as in a conventional network build-out. At each newly constructed node,
the Company has constructed a radio base station ("RBS"), rather than switching
to twisted pair copper wire distribution to the home. Each RBS has the capacity
to provide service to between 200 and 600 customers. As additional customers are
brought onto the network, the Company will install a transceiver unit at the
subscriber's premises. Such transceiver's operating software is digitally
encrypted so that it will operate only with its supporting RBS. A conventional
telephone jack is then installed in the subscriber's household near an
electrical outlet which is used to power the transceiver unit. The subscriber
then uses a conventional phone to make outgoing and receive incoming calls.
The DECT-based wireless local loop system provides the same grade of
service as a conventional telephone network. In addition, a DECT-based network
is able to provide many of the same services as a conventional copper network
including voice mail, call forwarding and call barring.
Network Administration
The Company actively monitors the switching centers and all critical
network operational parameters in each Operating Area. As digital features are
introduced into their respective networks, the network technicians have the
ability to monitor the networks and evaluate and respond accordingly. The
Company will also be able to analyze the performance data generated by these
systems in order to make the operating adjustments or capital expenditures
necessary to enhance individual network operations.
-19-
The Operating Companies
The following is a brief description of each of the Operating
Companies:
Hungarotel
The Company holds a 99.0% interest in Hungarotel. The Hungarotel
Operating Area encompasses the southern portion of Bekes County, which borders
Romania. The Hungarotel Operating Area is comprised of 75 municipalities and has
a population of approximately 391,700 with an estimated 166,900 residences and
23,000 business and other potential subscribers (including government
institutions). Bekes is the most intensively cultivated agrarian region in
Hungary and produces a substantial portion of Hungary's total wheat production.
Industry, generally related to food processing, glass and textile production, is
also a strong employer in the region. Foreign investors in the Operating Area
include Owens Illinois of the United States and a number of European
manufacturers. The region is also a center for natural gas exploration and
production. As of December 31, 2000, Hungarotel had 116,300 access lines
connected to its network. The Hungarotel network utilizes a combination of a
conventional build, fiber optic and wireless local loop technology.
KNC
The Company holds nearly a 100% interest in KNC. The KNC Operating Area
is comprised of 74 municipalities in the eastern portion of Nograd County, which
borders Slovakia. The KNC Operating Area has a population of approximately
149,000, with an estimated 66,400 residences and 8,300 business and other
potential subscribers (including government institutions). The principal
economic activities in the KNC Operating Area include light manufacturing,
tourism, some coal mining and agriculture. Foreign investors in the region
include the dairy producer, Avonmore, and the Japanese company, Paramount Glass.
The Operating Area's proximity to Budapest, 1.5 hours by car, and its many
cultural attractions makes it a desirable weekend and tourist destination. As of
December 31, 2000, KNC had 47,700 access lines connected to its network. The KNC
network utilizes a combination of a conventional build, fiber optic and wireless
local loop technology.
Papatel
The Company holds nearly a 100% interest in Papatel. The Operating Area
is composed of 51 municipalities located in the northern portion of Veszprem
County and is contiguous with the Raba-Com Operating Area. The population of the
Papatel Operating Area is approximately 63,200 with an estimated 24,100
residences and 3,800 business and other potential subscribers (including
government institutions). The region is relatively underdeveloped economically
with the principal economic activities centering around light industry,
appliance manufacturing, agriculture and forest products. Significant foreign
investors in the Operating Area include ATAG, the Dutch appliance maker, and
Electricite de France. As of December 31, 2000, Papatel had 20,200 access lines
connected to its network. The Papatel network utilizes a combination of a
conventional build, fiber optic and wireless local loop technology.
-20-
Raba-Com
The Company holds a 99.9% interest in Raba-Com. The Raba-Com Operating
Area is comprised of 63 municipalities in Vas County, which borders Austria and
Slovenia. The Raba-Com Operating Area has a population of approximately 63,900,
with an estimated 25,900 residences and 3,300 business and other institutional
subscribers (including government institutions). The principal economic
activities in the Raba-Com Operating Area include heavy manufacturing,
agriculture and tourism. Significant employers include: Linde (a German natural
gas distributor): Philips (a Dutch-owned electronics manufacturer); EcoPlast (a
plastics producer); and Saga (a British-owned poultry processor). As of December
31, 2000, Raba-Com had 22,700 access lines connected to its network. The
Raba-Com network utilizes a combination of a conventional build and fiber optic
infrastructure.
Regulation
In November 1992, the Hungarian Parliament enacted the Hungarian
Telecommunications Act of 1992 (the "Telecom Act") which took effect in 1993.
The Hungarian Telecom Act provided for, among other things, the establishment of
the conditions under which individuals and companies (including Matav, foreign
persons and foreign owned companies) could bid for concessions to build, own and
operate local telecommunications networks in designated service areas. The
Hungarian Telecom Act also gave the TTW Ministry the authority to regulate the
industry, including the setting of local, domestic long distance and
international rates, the sharing of revenues between the LTOs and Matav, the
accrediting of equipment vendors and the setting of standards in respect of
network development and services offered. The oversight of the
telecommunications industry has been transferred to the Prime Minister's Office.
See "- Overview of Hungarian Telecommunications Industry - The Hungarian
Telecommunications Industry Today." In order to meet these obligations, the
Hungarian Telecom Act created a professional supervisory body, the
Communications Authority. Its tasks include supervising the progress of the LTOs
with respect to build-out scheduling, equipment purchases and the quality of
network construction. The Telecom Act will be replaced by new legislation on
telecommunications, which is currently being drafted by the Hungarian
government. Such new legislation may substantially change the terms upon which
the Company provides its services. At this time, the Company can not predict
with certainty what the final terms of any new legislation will be or how such
legislation will affect the Company's operations. See "- Overview of Hungarian
Telecommunications Industry - The Hungarian Telecommunications Industry Today."
Concession Contracts
Pursuant to the Telecom Act and in accordance with the Concession Act
of 1991, in connection with the award of a concession, each of the LTOs entered
into a Concession Contract with the TTW Ministry governing the rights and
obligations of the LTO with respect to each concession. Topics addressed by
individual concession contracts include the royalties to be paid, guidelines
concerning LTO capital structure, build-out milestones, employment guidelines
and the level of required contributions to meet social and educational
requirements. For example, the Concession Contracts stipulate that an LTO may
not change its capital structure by more than 10% without the express written
consent of the TTW Ministry (now the Prime Minister's Office) and that former
Matav employees generally must be retained for the first five to eight years of
operation. The Company may, however, enter into termination agreements with its
employees.
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Corporate Governance. The amended Concession Contracts for Hungarotel
and Papatel provide that two out of every five members of their Boards of
Directors and one-half of the members of their Supervisory Boards be Hungarian
citizens.
Exclusivity. The Concession Contracts provide that each Operating
Company has the exclusive right to provide non-cellular local voice telephone
services for eight years. Commencing in 2002, the Hungarian government will have
the right to grant additional concessions for non-cellular local voice telephone
services.
Milestones/Network Construction. Each of the Concession Contracts
prescribe certain build-out obligations ("milestones") that require each
Operating Company to install a specified number of access lines within
prescribed time periods. The failure to meet required construction milestones
may result in the levying of fines by the Prime Minister's Office. Such fines
are computed based on a contractual formula and may be substantial. The Company
believes that each of the Operating Companies has met their build-out
requirements to date in all material respects.
Royalties. Each of the LTOs is required by the terms of its individual
concession contract to pay annual royalties equal to a percentage of net revenue
from basic telephone services. Net revenue for this purpose is generally defined
as gross revenue from basic telephone services less the fees paid to Matav. The
royalty percentage may also differ by region. For example, the Operating
Companies must pay royalties in the following percentage amounts: KNC 0.1%;
Raba-Com 1.5%; Hungarotel (Bekescsaba) 2.3%; Hungarotel (Oroshaza) 0.3%; and
Papatel 2.3%. These amounts are paid annually, in arrears.
Social and Educational Contributions. In addition to the royalties
described above, Concession Contracts may also call for social and educational
contributions based on revenues of the Operating Company, excluding VAT. The
Concession Contracts for KNC and Raba-Com require them to contribute 1.5% and
1.0% of such revenues, respectively, to support social and educational projects
in their Operating Areas.
Renewal. Each Concession Contract provides for a 25-year term with the
right to submit a proposal, within 18 months prior to the expiration of the
Concession Contract to apply for an additional 12-1/2 years which the Prime
Minister's Office may grant if it approves the Operating Company's proposal,
subject to consultation with local authorities and professional and consumer
protection bodies. Such extension would involve the payment of an additional
concession fee to be set prior to the submission of the proposal. In the event
the proposal is rejected or is not timely filed, the concession would be
auctioned by the appropriate Hungarian regulatory authority, although the
existing Operating Company would have priority in the event the Operating
Company's proposal provides for substantially the same terms and conditions as
that of another bidder.
Termination upon Lack of Performance. If an LTO is unable to comply
with its Concession Contracts, the Prime Minister's Office has the right to
abrogate the Concession Contract. In such an instance, the Prime Minister's
Office has authority to determine alternative provisions for such service, which
may include the sale of the LTO's telecommunications assets to an alternative
provider. The Company believes that it has demonstrated substantial performance
to date under its Concession Contracts and that its relations with the Prime
Minister's Office are good and, therefore, the chance of any termination of any
Concession Contract is remote.
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Dispute Resolution. Any disputes arising with respect to the
interpretation of a Concession Contract will be adjudicated by a Hungarian
court.
Hungarian Equity Ownership Requirements.
The TTW Ministry stipulated in the Concession Contracts for Hungarotel
and Papatel, as amended on June 3, 1996, that each of the Operating Companies
must meet certain Hungarian ownership requirements so that by the seventh year
anniversary of such amendments (June 3, 2003) of their Concession Contracts,
Hungarian ownership must consist of 25% plus one share of the relevant Operating
Company. For the first three months after assuming operations of an Operating
Area from Matav, no Hungarian ownership was required. For the seven-year period
ending June 3, 2003, Hungarian ownership must be at least 10%, except that
during such period, such ownership may be reduced to as low as 1% for a period
of up to two years. During such seven-year period, while the Hungarian ownership
block is required to be at least 10%, such Hungarian owners of a 10% equity
holding in an Operating Company must have voting power of at least 25% plus one
share, thus providing Hungarian owners the right to block certain transactions
which, under Hungarian corporate law, require a supermajority (75%) of
stockholders voting on the matter, such as mergers and consolidations, increases
in share capital and winding-up.
For these purposes, Hungarian ownership of shares means shares owned by
Hungarian citizens. Shares owned by a corporation are considered Hungarian owned
only in proportion to the Hungarian ownership of such corporation. The LTOs can
also fulfill the 25% plus one share Hungarian ownership requirement by listing
such shares on the Budapest Stock Exchange.
The equity ownership requirements and exceptions described above are
contained in the June 1996 amended Concession Contracts for Hungarotel and
Papatel. The equity ownership requirements expressly set forth in KNC's and
Raba-Com's Concession Contracts call for a strict 25% plus one share Hungarian
ownership requirement. However, the TTW Ministry has stated, pursuant to a
letter dated September 18, 1996, that it intends that all of the Operating
Companies be treated equally with respect to such ownership requirements and,
therefore, the Company deems these Hungarian ownership requirements for Papatel
and Hungarotel applicable to KNC and Raba-Com as well.
If the Hungarian ownership does not meet the required levels, the LTO
is required to give notice to the Prime Minister's Office, which may then
require the LTO to rectify the situation within three months, or a shorter
period if it is determined that there has been a delay in the required
notification. With respect to the Company, Postabank, a Hungarian commercial
bank, owns approximately 20.1% of HTCC which is the majority owner of all of the
Operating Companies. Therefore, the TTW Ministry deemed the Company in
compliance with the current 10% ownership requirement. In the event that the
Prime Minister's Office adopts new Hungarian equity ownership requirements, the
Company will formulate plans to meet any such Hungarian equity ownership
requirements. Failure to do so, or failure to comply with the greater than 25%
Hungarian ownership requirement at the end of the seven-year period, which
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expires in 2003, might be considered a serious breach of a Concession Contract,
giving the Prime Minister's Office the right, among other things, to terminate
the Concession Contract. There can be no assurance that the Company will be able
to increase the Hungarian ownership in the Operating Companies in a manner
sufficient to comply with such requirements in the future.
The Hungarian ownership requirements would effectively give minority
Hungarian stockholders in the Operating Companies the ability to block certain
corporate transactions requiring the approval of 75% of stockholders voting on
the matter, including mergers and consolidations, increases in share capital and
winding-up. In addition, unless the Hungarian ownership requirements are
formally changed, compliance would result in a reduction in the Company's
ownership in the Operating Companies, and, consequently, the Company's share of
income, if any, or loss of the Operating Companies will be reduced
proportionately.
New regulations for the liberalized Hungarian telecommunications market
may remove the Hungarian ownership requirement, but neither the content, effect
or timing of any new regulations are known by the Company at this time.
Rate-Setting and Revenue Sharing
Pursuant to the Hungarian Act LXXXVII of 1990 on Pricing (the "Pricing
Act") and the Telecom Act, the Prime Minister's Office as successor to the TTW
Ministry in oversight of the telecommunications industry, issues, in agreement
with the Hungarian Ministry of Finance, decrees regulating the tariffs for
telecommunications services provided by the Company, Matav and the other LTOs.
In 1997 the TTW Ministry adopted Decree No. 31/1997 of the KHVM on Fees
Related to Telecommunication Services Subject to Concession (the "1997 Tariff
Decree") which regulated the Operating Companies' subscription fees, fees for
local calls, and fees collected on behalf of Matav for long distance and
international calls. The 1997 Decree also provided for a rebalancing formula,
which allowed greater increases in the charges for subscription fees and local
calls than in domestic long distance or international calls.
For 2001, in accordance with the general policies set forth in the 1997
Tariff Decree, the Prime Minister's Office adopted Decree No. 1/2001 (I.26) (the
"2001 Tariff Decree") which provides for the following changes to the
subscription fees from those charged by the Company in 2000: an 11% increase in
the subscription fee for the Company's residential customers (based on the
discounted monthly subscription fee for 2001 of HUF 1,700); and a 12% increase
in the subscription fee for the Company's business customers and residential
customers not opting for either of the discounted monthly subscription fee plans
(of which the HUF 1,700 monthly subscription fee referred to above is one). See
"- Operations - Services - Subscription and Connection Fees." For measured
service calls, the 2001 Tariff Decree provided for: no increase or a two forint
per minute decrease in off-peak local calls; a 13% increase in certain peak
local calls and no increase in certain other peak local calls; a decrease in
long distance calls of between 11% and 17%; and decreases in international calls
ranging from 3% to 22%. See "- Operations - Services - Measured Service." The
2001 Tariff Decree set a price cap for all service categories through 2001,
which provides for a rate increase based on anticipated CPI for 2001. The Prime
Minister's Office may also reduce the CPI percentage increase by an efficiency
factor in calculating the maximum allowable price increase. The intended effect
of the 2001 Tariff Decree was to provide for an overall 2001 price increase of
6% as compared to 2000 based on the anticipated inflation rate in 2001. The 2000
increase in the Hungarian CPI, which for the purposes on the Tariff Decree is
based on the twelve-month period ending October 2000, was 10.4%.
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The Prime Minister's Office also regulates the revenue sharing
arrangements between the LTOs (including the Operating Companies) and Matav with
respect to long distance and international calls. The revenue sharing
arrangements provide for the Operating Companies to retain an interconnection
fee from the fees collected from the Operating Companies' customers for long
distance and international calls and for Matav to pay the Operating Companies an
interconnection fee for domestic long distance or international calls
terminating with one of the Operating Company's customers. In 1998 the TTW
Ministry announced that it intended to start regulating the interconnection fees
based on internationally accepted benchmarks with the goal of creating a
cost-based interconnection fee regime within the parameters of European Union
standards. To that end, starting in 1999, the interconnection fees were revised
to compensate the LTOs more favorably for costs than in the prior years. For
2001, the Ministry adopted Decree 8/2001 (III.9) (the "2001 Interconnection
Decree") which provides for the Operating Companies to receive in 2001 an
average interconnection fee of HUF 12.94/minute for the initiation of mobile,
domestic long distance and international calls and an average fee of HUF
6.38/minute for the termination of mobile, domestic long distance and
international calls. Over the last year, the Company has continued to lobby the
Prime Minister's Office with regard to the implementation of a longer term
cost-oriented interconnection fee regime, which is already a requirement for
European Union members. Cost-based interconnection fees are likely to be
implemented in 2002 when Matav's exclusivity rights expire. See "-Competition."
The Prime Minister's Office regulates the subscriber connection fees
which are currently HUF 80,000 ($280.97) for business customers and HUF 30,000
($105.36) for residential customers. See "- Operations - Services - Subscription
and Connection Fees."
Hungarian Taxation
Corporate Income Tax. The operations of the Company's Hungarian
subsidiaries, including the Operating Companies, are subject to Hungarian
corporate income tax. Generally, Hungarian corporations are subject to tax at an
annual rate of 18.0%. Companies which fulfilled certain criteria were entitled
to a 100.0% reduction in income taxes for the five year period ending December
31, 1998 and a 60.0% reduction in income taxes for the subsequent five year
period ending December 31, 2003, provided certain criteria continue to be met.
See Note 1(j) of Notes to Consolidated Financial Statements. The Operating
Companies are currently eligible for such tax treatment. However, the corporate
income tax is reviewed, and subject to change, annually. Any tax increase or
change in the tax exempt status of the Operating Companies could have a material
adverse effect on the Company.
Value Added Tax ("VAT"). The Hungarian VAT system is virtually
identical to the one used in most European countries. VAT is a consumption tax
which is fully borne by the final consumer of a product or service. The current
rates of VAT in Hungary vary between 0.0% and 25.0%, depending on the type of
product or service.
Social Insurance Contributions. The level of contributions for social
insurance in Hungary is one of the highest in Europe. In 2000 employers were
required to pay the state 33% of an employee's gross salary as a social security
contribution and 3.0% of an employee's gross salary as the employer's
contribution to the unemployment fund. In addition, the Company must pay an
additional HUF 3,900 ($13.70) per month for each employee for health insurance.
The Company's share of pension, unemployment, social security and health
insurance payments are reflected in operating and maintenance expenses.
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Competition
The Concession Contracts provide for an eight-year period of
exclusivity in the provision of non-cellular local voice telephone services,
which ends in 2002, while the initial 25-year terms of the Concession Contracts
are scheduled to expire in 2019. See also "- Regulation - Concession Contracts".
Other telecommunications service providers presently are permitted to apply for
licenses to provide non-exclusive services (e.g., data transmission and voice
mail) throughout Hungary, including the Operating Areas. In addition, beginning
in 2002, other competitors may choose to enter the non-cellular local voice
telephone services market, but the terms and conditions upon which such market
entry will be effected are today unclear.
In 1998, the TTW Ministry awarded Pan-Tel the license to provide
non-exclusive telecommunications services such as data transmission and voice
mail. The current shareholders of Pan-Tel include MAV Rt. (the Hungarian railway
company, "MAV"), PT Investment Holding Company and KPN NV (the Dutch telephone
company). Pan-Tel has substantially built a nationwide fiber optic backbone
network along the rights-of-way of MAV. Pan-Tel is currently providing business
communications services such as digital data, fax and video transmission using
Internet Protocol ("IP") data transmission technology, primarily to large
customers. Pan-Tel focused on the large, multinational companies and government
organizations as its initial target market. In 1999, the Hungarian government
granted Pan-Tel two separate licenses to provide IP-based voice services to
residential and business customers. The Hungarian government determined that
such service did not violate Matav's monopolistic voice concession since
voice-over IP is considered "data transfer". Matav, some of the other LTOs
(including the Company), and certain newer entrants into the marketplace have
initiated voice-over IP services. Pan-Tel also owns a majority stake in one of
Hungary's largest Internet Service Providers.
The Company faces competition from the four Hungarian cellular
providers: Westel 450; Westel 900; Pannon; and Vodafone. Historically, the
airtime and monthly fees charged by the cellular operators are generally more
than the fees for comparable services charged by the Company. The cellular
telephone providers are, however, currently deploying various discounted
pre-paid plans, which make pricing comparisons difficult.
Other Hungarian telecommunications providers, and potential providers,
include the following entities which have either entered, or plan to enter, the
telecommunications marketplace, particularly the business marketplace: Novacom
Telecommunications Kft., which is owned by affiliates of RWE Telliance AG, a
German telecommunications company, EnBW AG, a German electricity provider and
Elmu Rt., the Hungarian electricity distributor ("Elmu"), is expanding the fiber
optic infrastructure of Elmu; GTS Hungary Kft. ("GTS") which provides data
transmission services through a nationwide microwave network and a satellite
based network (GTS also owns one of the leading Hungarian ISPs); Antenna
Hungaria, the national broadcaster which is still controlled by the state;
Global One Telecommunications Kft., which provides IP-based data transmission
services; Ireland-based eTel Hungary, which is targeting the corporate market;
BT Hungaria, an affiliate of British Telecom; Sweden's Telia AB; the Hungarian
oil and gas company MOL Rt; Germany's Infigate GmbH; and U.S.-based UUNet, an
affiliate of MCI WORLDCOM.
The Hungarian cable television market is highly fragmented with over
150 cable television providers. The Hungarian cable television industry is
undergoing consolidation. An affiliate of United Pan-Europe Communications NV
("UPC") is the largest cable television operator in Hungary and owns a LTO with
one concession area. UPC owners include UnitedGlobalCom Inc., the global
television operator of Denver, Colorado (51%), and Microsoft Corp. (8%) of
Redmond, Washington.
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The Hungarian government is in the process of revising its laws
regarding the regulation of the telecommunications market in Hungary in
accordance with European Union standards. The regulation of telephony, cable
television and the Internet would be affected. The Company does not expect that
the exclusivity period of its concession rights, which expire in 2002, will be
affected. However, the outcome of any future telecommunications laws can not be
predicted with any certainty at this point in time.
Hungary's application for membership in the European Union (the "EU")
was accepted. Hungary is now in the process of negotiating the terms of its
accession into the EU. The EU has adopted numerous directives providing for an
open telecommunications market among its member nations. Hungary is not expected
to become a member of the European Union until 2003 at the earliest by which
time the exclusivity rights of the LTOs and Matav will have expired.
Employees
The Company had a total of approximately 645 employees, including 5
expatriates, as of March 2001. The Company considers its relations with its
employees to be satisfactory.
Item 2. Properties
The Company leases its office space in Budapest at a current monthly
rental of DM 30,750 (approximately $14,000 at current exchange rates). The
Company leases 800 square feet of office space at 32 Center Street, Darien, CT
at a monthly rental of $1,600. The Company believes that its leased and owned
office space is adequate for its present needs but is currently reviewing its
alternatives as to its future needs.
In addition, each Operating Company owns or leases the following office
or customer service space in its respective Operating Area: KNC owns or leases
57,000 square feet of total space; Raba-Com owns or leases 15,000 square feet of
total space; Hungarotel owns or leases 119,594 square feet of total space; and
Papatel owns or leases 18,000 square feet of total space. The Company has
secured all the necessary rights-of-way with respect to its telecommunications
networks.
Item 3. Legal Proceedings
Hungarotel is a defendant in a lawsuit filed by Dialcont Kft.
("Dialcont") on March 28, 1996 alleging a breach of contract for services
allegedly provided by Dialcont during 1994 and 1995. Dialcont claimed HUF 222
million ($779,700). The Metropolitan Court in Budapest awarded Dialcont HUF 77.7
million ($273,000) plus interest and costs of HUF 135.5 million ($476,000) in a
judgement issued in October 2000. Hungarotel has filed an appeal to the
Hungarian Supreme Court.
A provision in Hungarotel's Concession Contracts provides for a payment
by Hungarotel of a sum equal to ten times the local business tax. At the time of
the inception of the Concession Contracts, the local business tax was 0%. When
this increased in one of the regions within the Hungarotel Operating Area in
1996, one municipality claimed that Hungarotel was liable to pay the local
business tax at ten times the prevailing rate. However, the municipality has not
been able to enforce this undertaking because it is not a party to the
Concession Contracts. The municipality has taken this matter up with both the
Communications Authority and the TTW Ministry. In May 1999, the then Hungarian
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Deputy State Secretary gave a verbal confirmation that the TTW Ministry would
not enforce the undertaking against Hungarotel. Subsequently, in November 1999,
the TTW Ministry sent a letter to the municipality informing it that the
disputed business tax provision was not enforceable because the indefinite
nature of the undertaking constituted an unjustified burden on Hungarotel and
that the undertaking was not in compliance with the laws on Local Business Tax.
The most recent development in this matter is a letter from the municipality
dated January 18, 2001, demanding the sum of HUF 648.0 million ($2.3 million).
The letter states that, in the absence of payment, the municipality will take
the matter up with the Prime Minister's Office, the Communications Authority and
others. Hungarotel intends to defend this action and believes that such
provision is unenforceable.
Raba-Com is a defendant in a lawsuit filed by an individual residential
customer in Hungary on December 4, 1997. The plaintiff sought a refund of a
minimal amount alleging that his home was connected to Raba-Com's network in an
untimely fashion. The court ruled against Raba-Com and Raba-Com has appealed to
the Hungarian Supreme Court. Should, however, Raba-Com lose its appeal at the
Supreme Court level, the Company could be subject to additional claims from
other residential customers for refunds. The Company believes it has meritorious
defenses against this claim and any others that may be filed regarding this
matter.
A portion of KNC's network used wireless technology to certain homes
instead of a fixed connection. One village in KNC's Operating Area filed a
lawsuit demanding that KNC install fixed lines to all of the homes in the
village. It is KNC's position that it is permissible to use wireless technology
as it deems appropriate. KNC lost in the lower court but won on appeal. The
plaintiff village has until April 27, 2001 to file a request for review with the
Hungarian Supreme Court. The village would have to show that the lower court
erred in the application of the law. The Company believes that the plaintiff has
no valid grounds for a review and believes that KNC would prevail on the merits
of its case.
During 1996 and 1997, the Company entered into several construction
contracts with a Hungarian contractor which totaled $59.0 million in the
aggregate, $47.5 of which was financed by a contractor financing facility. The
contractor financed the facility through Postabank. The Company and the
contractor have a disagreement with respect to several issues relating to the
quality and quantity of the work done by the contractor. The Company has
rejected invoices from the contractor in the amount of approximately HUF 700
million (approximately $2.5 million). In order to resolve these issues, the
Company purchased from Postabank some of Postabank's receivables owed by the
contractor to Postabank (approximately $14 million) with respect to the
contractor financing facility. The Company also purchased from Postabank some of
the obligations which the Company owed to the contractor under the contractor
financing facility which were assumed by Postabank (approximately $25 million).
The Company then set off its remaining uncontested liabilities owed to the
contractor (approximately $3.2 million) against the amounts owed to the Company
by the contractor (approximately $14 million). The contractor is now seeking
payment under separate invoices in the amount of approximately $24 million for
work which the Company is disputing because of quality and quantity issues. The
Company still has contractual claims against the contractor of approximately $31
million attributable to deficiencies in the work performed by the contractor. In
1999, Reorg Rt., a subsidiary of Postabank ("Reorg"), responsible for collecting
Postabank's bad debts initiated debt collection proceedings against the
contractor. In June 2000 Reorg claimed the benefit of certain invoices in the
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amount of HUF 455 million ($1.6 million) that the contractor had issued to
Hungarotel, asserting that the contractor had assigned those invoices to it as
security in the debt collection proceedings. Hungarotel rejected Reorg's claim
on the grounds that the contractor had no right to assign the invoices and that,
in any event, Hungarotel has a substantive defense and a counterclaim on the
merits to the underlying claims on the invoices. A court hearing on Reorg's
claim against Hungarotel will be held in April 2001. The Company is reviewing
its options with respect to such dispute. At this time the outcome of such
dispute cannot be predicted with certainty. The Company believes that it will
prevail on the merits such that it will not be responsible for the full amount
of the contractor's claims. There can, however, be no assurances as to the final
outcome or course of action of such dispute.
The Company is involved in various other legal actions arising in the
ordinary course of business. The Company is contesting these legal actions in
addition to the suits noted above; however, the outcome of individual matters is
not predictable with assurance. Although the ultimate resolution of these
actions (including the actions discussed above) is not presently determinable,
the Company believes that any liability resulting from the current pending legal
actions involving the Company, in excess of amounts provided therefor, will not
have a material effect on the Company's consolidated financial position, results
of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock trades on the American Stock Exchange (the
"Amex") under the symbol "HTC." Trading of the Common Stock on the Amex
commenced on December 20, 1995. From December 8, 1994 through December 19, 1995,
the Common Stock was quoted on the Nasdaq National Market and from December 28,
1992 through December 7, 1994 the Common Stock was quoted on the Nasdaq
Small-Cap Market. In 1998, NASD, parent of The Nasdaq Stock Market, merged with
the American Stock Exchange. Subsequent to the merger, The Nasdaq-Amex Market
Group was created as a holding company under which both The Nasdaq Stock Market
and the American Stock Exchange function as independent subsidiaries, with
separate listed companies.
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The following table sets forth the high and low sale prices for the
Common Stock as reported by the Amex for each quarter in 1999 and 2000.
High Low
Quarter Ended:
- -------------
1999
March 31, 1999 . . . . . . . . . $ 5-1/4 $ 3-1/4
June 30, 1999. . . . . . . . . . 7 3-3/4
September 30, 1999 . . . . . . . 6-1/2 4-9/16
December 31, 1999. . . . . . . . 7-1/4 4-13/16
2000
March 31, 2000 . . . . . . . . . $10-1/2 $ 6-7/8
June 30, 2000. . . . . . . . . . 8-5/8 5-1/2
September 30, 2000 . . . . . . . 7-3/8 4-3/4
December 31, 2000. . . . . . . . 6-3/8 4-1/8
On March 27, 2001, the closing sale price for the Common Stock on the
Amex was $7.40.
Stockholders
As of March 28, 2001, the Company had 12,103,180 shares of Common Stock
outstanding held by 104 holders of record. The Company believes that it has
approximately 1,300 beneficial owners who hold their shares in street names.
The Company will furnish, without charge, on the written request of any
stockholder, a copy of the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, including financial statements filed therewith.
Stockholders wishing a copy may send their request to the Company at 32 Center
Street, Darien, CT 06820.
Dividend Policy
In 1999, the Company issued 30,000 shares of its Series A Cumulative
Convertible Preferred Stock with a liquidation value of $70 per share to
Citizens. Any holder of such Preferred Shares is entitled to receive cumulative
cash dividends in arrears at the annual rate of 5%, compounded annually on the
liquidation value. As of December 31, 2000, the total arrearage on the Preferred
Shares was $175,000. Under Delaware law, HTCC is restricted from paying
dividends at this time. Therefore, the Company does not anticipate paying any
dividend on its preferred stock until such time as it is legally permissible.
Furthermore, it is the present policy of the Company to retain earnings, if any,
to finance the development and growth of its businesses. Accordingly, the Board
of Directors does not anticipate that cash dividends will be paid on its common
stock until earnings of the Company warrant such dividends, and there can be no
assurance that the Company can achieve such earnings.
At present, HTCC's only source of revenues is payments, including
repayment of any intercompany loans, payments under its management service
agreements and dividends, if any, from the Operating Companies. The Operating
Companies' ability to pay dividends or make other capital distributions to the
Company is governed by Hungarian law, and is significantly restricted by certain
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obligations of the Operating Companies. The Operating Companies are the
borrowers under the Debt Agreement which provides that the Operating Companies
can only make distributions to HTCC for limited purposes which does not include
dividends. See Item 1 "Business - Revision of Capital Structure - The April 2000
Syndicated Credit Facility."
Recent Sales of Unregistered Securities
On September 1, 1998, the Company issued 18,469 shares of Common Stock
to Alcatel Austria AG as further and final consideration for the purchase by the
Company in 1995 of controlling equity interests in Hungarotel and Papatel.
On September 30, 1998, the Company issued 100,000 shares of Common
Stock to Citizens as part of a settlement of the termination of a management
services agreement.
On May 12, 1999 the Company entered into a series of transactions with
Citizens, the Danish Fund, Postabank and Tele Danmark pursuant to which the
Company revised its capital structure. As part of such transactions, the Company
issued: 1,300,000 shares of Common Stock to Citizens; 1,285,714 shares of Common
Stock to the Danish Fund; 2,428,572 shares of Common Stock to Postabank; and
1,571,429 shares of Common Stock to Tele Danmark. The Company also issued 30,000
shares of its Series A Cumulative Convertible Preferred Stock to Citizens. The
30,000 shares of preferred stock are convertible by Citizens into 300,000 shares
of Common Stock. The shares of preferred stock are redeemable by the Company at
the liquidation value of $70 per share. The Company also issued warrants to
Postabank to purchase 2,500,000 shares of Common Stock at $10 per share. The
exercise period is from January 1, 2004 through March 31, 2007. For a more
detailed description of these agreements, see Item 1 "Business - Revision of
Capital Structure" and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
On December 21, 2000, the Company issued 72,000 shares of Common Stock
to the International Finance Corporation, a member of the World Bank Group (the
"IFC"). The Company issued the shares in exchange for the IFC's 20% equity
interest in Papatel.
All of these unregistered issuances were in reliance upon an exemption
from the registration provisions of the Securities Act of 1933 (the "Securities
Act") set forth in Section 4(2) thereof relative to transactions by an issuer
not involving any public offering. Each of the purchasers was informed that the
transactions were being effected without registration under the Securities Act
and that the shares acquired could not be resold without registration under the
Securities Act unless the sale is effected pursuant to an exemption from the
registration requirements of the Securities Act.
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Item 6. Selected Financial Data
HUNGARIAN TELEPHONE AND CABLE CORP.
AND SUBSIDIARIES
Selected Financial and Operating Data
(Dollars in Thousands, Except Per Share Amounts)
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
For the Year
Operating revenues, net $42,974 $ 45,438 $ 38,707 $26,522* $17,126*
Operating income (loss) $16,469 $ 16,189 $ (6,059) $ (1,263) $(20,553)
Operating income (loss) per
common share $1.37 $1.68 ($1.14) ($0.28) ($4.93)
Loss before extraordinary items $(5,331) $(17,773) $(50,612) $(36,236) $(54,769)
Net income (loss) $(5,331) $ 3,172 $(50,612) $(36,236) $(54,769)
Net income (loss) per common share $(0.45) $ 0.33 $ (9.53) $(7.97) $(13.14)
At Year-End
Total assets $147,318 $154,683 $177,067 $186,485 $156,615
Long-term debt, excluding
current installments $124,814 $139,661 $202,881 $194,537 $148,472
Total stockholders' (deficiency)
equity $(10,878) $(6,946) $(89,037) $(41,837) $(23,790)
* Revenues are adjusted to reflect the requirements of the SEC's Staff
Accounting Bulletin 101 ("SAB 101") which requires the deferral of
installation revenue and related installment costs. These adjustments did
not affect the previously reported net losses; such adjustments resulted in a
reduction of previously reported revenues and costs of $11,369,000 and
3,784,000 in 1997 and 1996, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company is engaged primarily in the provision of telecommunications
services through its operating subsidiaries, KNC, Raba-Com, Papatel and
Hungarotel. The Company earns substantially all of its telecommunications
revenue from measured service fees, monthly line rental fees, connection fees,
public pay telephone services and ancillary services (including charges for
additional services purchased at the customer's discretion).
During 1996 and 1997 the Company embarked on a significant network
development program which met its substantial demand backlog, increased the
number of basic telephone access lines in service and modernized existing
facilities. The development and installation of the network in each of the
Company's Operating Areas required significant capital expenditures.
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Now that the Company's networks are substantially built-out, the
ability of the Company to generate sufficient revenues to satisfy cash
requirements and become profitable will depend upon a number of factors,
including the Company's ability to attract additional customers and increased
revenues per customer. These factors are expected to be primarily influenced by
the success of the Company's operating and marketing strategies as well as
market acceptance of telecommunications services in the Company's Operating
Areas. In addition, the Company's profitability may be affected by changes in
the Company's regulatory environment and other factors that are beyond the
Company's control. The success of the Company's strategy is dependent upon its
ability to increase revenues through increased usage and the addition of new
subscribers.
The Company funded its construction costs and working capital needs
over several years primarily through Credit Facilities with Postabank and a
$47.5 million contractor financing facility. On March 30, 1999, and May 12,
1999, the Company entered into a series of transactions (see Notes 4, 5 and 9 of
Notes to Consolidated Financial Statements) which restructured the Company's
debt and capital structure. As the final step in the Company's debt and equity
restructuring, on April 11, 2000, the Company entered into a EUR 130 million
Senior Secured Debt Facility with a European banking syndicate. See "- Liquidity
and Capital Resources."
To date, the Company's activities have involved the acquisition of the
concessions and telecommunications networks from Matav and the subsequent
design, development and construction of the modern telecommunications
infrastructure that the Company now has in service. The Company paid the
Ministry $11.5 million (at historical exchange rates) for its concessions, spent
approximately $23.2 million (at historical exchange rates) to acquire the
existing telecommunications assets in its Operating Areas from Matav, and spent
$190 million through December 31, 2000 (at historical exchange rates) on the
development and construction of its telecommunications infrastructure. Since
commencing the provision of telecommunications services in the first quarter of
1995, the Company's network construction and expansion program has added 145,500
access lines through December 31, 2000 to the 61,400 access lines acquired
directly from Matav. As a result, the Company had 206,900 access lines in
operation at year end 2000.
Comparison of Year Ended December 31, 2000 to Year Ended December 31, 1999
The Company's Hungarian subsidiaries' functional currency is the
Hungarian forint. The average Hungarian forint/U.S. dollar exchange rate for the
year ended December 31, 2000 was 281.10, as compared to an average Hungarian
forint/U.S. dollar exchange rate for the year ended December 31, 1999 of 238.08.
This devaluation of the Hungarian forint against the U.S. dollar reflects the
strengthening of the U.S. dollar against the Hungarian forint during the period.
When comparing the year ended December 31, 2000 to the year ended December