UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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 incorporation or organization) |
(I.R.S. Employer Identification No.) |
1201 Third Avenue, Suite 3400 Seattle, WA 98101-3034
(Address of principal executive offices)
(206) 654-0204
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.
Yes x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest possible date:
| Common Stock, $.001 par value | 12,320,170 Shares | |
| (Class) | (Outstanding at May 13, 2004) |
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
| Page No. | ||
| Part I. Financial Information: |
||
| 2 | ||
| Consolidated Condensed Statements of Operations and Comprehensive Income |
3 | |
| 4 | ||
| 5 | ||
| 6 | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 | |
| Quantitative and Qualitative Disclosures about Market Risk Controls and Procedures |
26 | |
| 27 | ||
| 30 | ||
1
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(In thousands, except share data)
| March 31, 2004 |
December 31, 2003 |
||||||
| (unaudited) | |||||||
| Assets | |||||||
| Current assets: |
|||||||
| Cash and cash equivalents |
$ | 24,856 | 21,191 | ||||
| Restricted cash |
30 | 12 | |||||
| Accounts receivable, net |
6,032 | 6,474 | |||||
| Current deferred tax asset |
1,853 | 2,714 | |||||
| Other current assets |
4,333 | 3,622 | |||||
| Total current assets |
37,104 | 34,013 | |||||
| Property, plant and equipment, net |
121,062 | 120,258 | |||||
| Goodwill, less accumulated amortization |
8,947 | 8,727 | |||||
| Other intangibles, less accumulated amortization |
4,427 | 4,407 | |||||
| Deferred costs |
3,102 | 3,598 | |||||
| Deferred tax asset |
3,297 | 3,291 | |||||
| Other assets |
2,124 | 2,262 | |||||
| Total assets |
$ | 180,063 | 176,556 | ||||
| Liabilities and Stockholders’ Equity | |||||||
| Current liabilities: |
|||||||
| Current installments of long-term debt |
$ | 21,619 | 21,929 | ||||
| Excess cash amounts due under long-term debt agreement |
— | 3,820 | |||||
| Accounts payable |
2,360 | 2,263 | |||||
| Accruals |
2,652 | 2,803 | |||||
| Other current liabilities |
2,100 | 2,280 | |||||
| Due to related parties |
519 | 493 | |||||
| Total current liabilities |
29,250 | 33,588 | |||||
| Long-term debt, excluding current installments |
90,185 | 90,839 | |||||
| Deferred credits and other liabilities |
5,294 | 5,770 | |||||
| Total liabilities |
124,729 | 130,197 | |||||
| Commitments and Contingencies |
|||||||
| Stockholders’ equity: |
|||||||
| Cumulative Convertible Preferred stock, $.01 par value; $70.00 liquidation value. Authorized 200,000 shares; issued and outstanding 30,000 shares in 2004 and 2003 |
— | — | |||||
| Common stock, $.001 par value. Authorized 25,000,000 shares; issued and outstanding 12,320,170 shares in 2004 and 12,230,670 in 2003 |
12 | 12 | |||||
| Additional paid-in capital |
145,912 | 145,616 | |||||
| Accumulated deficit |
(111,912 | ) | (119,548 | ) | |||
| Accumulated other comprehensive income |
21,322 | 20,279 | |||||
| Total stockholders’ equity |
55,334 | 46,359 | |||||
| Total liabilities and stockholders’ equity |
$ | 180,063 | 176,556 | ||||
See accompanying notes to consolidated financial statements.
2
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Consolidated Condensed Statements of Operations and Comprehensive Income
For the Three Month Periods Ended March 31, 2004 and 2003
(In thousands, except share and per share data)
(unaudited)
| 2004 |
2003 |
|||||||
| Telephone service revenues, net |
$ | 15,461 | $ | 15,017 | ||||
| Operating expenses: |
||||||||
| Operating and maintenance expenses |
5,770 | 5,321 | ||||||
| Depreciation and amortization |
2,967 | 2,735 | ||||||
| Total operating expenses |
8,737 | 8,056 | ||||||
| Income from operations |
6,724 | 6,961 | ||||||
| Other income (expenses): |
||||||||
| Foreign exchange gains (losses), net |
3,698 | (3,328 | ) | |||||
| Interest expense |
(2,449 | ) | (2,454 | ) | ||||
| Interest income |
586 | 192 | ||||||
| Other, net |
69 | 16 | ||||||
| Net income before income taxes |
8,628 | 1,387 | ||||||
| Income tax expense |
(966 | ) | (347 | ) | ||||
| Net income |
$ | 7,662 | $ | 1,040 | ||||
| Cumulative convertible preferred stock dividends (in arrears) |
(26 | ) | (26 | ) | ||||
| Net income attributable to common stockholders |
7,636 | 1,014 | ||||||
| Comprehensive income adjustments |
1,043 | (203 | ) | |||||
| Total comprehensive income |
$ | 8,679 | $ | 811 | ||||
| Earnings per common share: |
||||||||
| Basic |
$ | 0.62 | $ | 0.08 | ||||
| Diluted |
$ | 0.59 | $ | 0.08 | ||||
| Weighted average number of common shares Outstanding: |
||||||||
| Basic |
12,298,835 | 12,113,319 | ||||||
| Diluted |
12,920,886 | 12,738,802 | ||||||
See accompanying notes to consolidated condensed financial statements.
3
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Consolidated Condensed Statements of Stockholders’ Equity
(In thousands, except share data)
(unaudited)
| Shares |
Common Stock |
Preferred Stock |
Additional Paid-in Capital |
Accumulated deficit |
Accumulated Other Comprehensive Income |
Total Stockholders’ Equity |
||||||||||||
| Balances at December 31, 2003 |
12,230,670 | $ | 12 | — | 145,616 | (119,548 | ) | 20,279 | $ | 46,359 | ||||||||
| Proceeds from option exercise |
74,000 | — | — | 296 | — | — | 296 | |||||||||||
| Common stock granted to employee |
15,500 | — | — | — | — | — | — | |||||||||||
| Cumulative convertible preferred stock dividends (in arrears) |
— | — | — | — | (26 | ) | — | (26 | ) | |||||||||
| Net income |
— | — | — | — | 7,662 | — | 7,662 | |||||||||||
| Foreign currency translation adjustment |
— | — | — | — | — | 1,043 | 1,043 | |||||||||||
| Balances at March 31, 2004 |
12,320,170 | $ | 12 | — | 145,912 | (111,912 | ) | 21,322 | $ | 55,334 | ||||||||
See accompanying notes to consolidated condensed financial statements.
4
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
For the Three Month Periods Ended March 31, 2004 and 2003
(In thousands)
(unaudited)
| 2004 |
2003 |
||||||
| Net cash provided by operating activities |
$ | 7,944 | 7,380 | ||||
| Cash flows from investing activities: |
|||||||
| Construction of telecommunication networks |
(1,293 | ) | (666 | ) | |||
| Proceeds from sale of assets |
21 | 5 | |||||
| Net cash used in investing activities |
(1,272 | ) | (661 | ) | |||
| Cash flows from financing activities: |
|||||||
| Repayments of long term debt |
(3,759 | ) | (2,584 | ) | |||
| Proceeds from exercise of options |
296 | 584 | |||||
| Net cash used in financing activities |
(3,463 | ) | (2,000 | ) | |||
| Effect of foreign exchange rate changes on cash |
456 | (146 | ) | ||||
| Net increase in cash and cash equivalents |
3,665 | 4,573 | |||||
| Cash and cash equivalents at beginning of period |
21,191 | 13,922 | |||||
| Cash and cash equivalents at end of period |
$ | 24,856 | 18,495 | ||||
See accompanying notes to consolidated condensed financial statements.
5
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(unaudited)
| (1) | Summary of Significant Accounting Policies |
| (a) | Basis of Presentation |
The accompanying unaudited consolidated condensed financial statements of Hungarian Telephone and Cable Corp. (“HTCC” or the “Registrant” and, together with its consolidated subsidiary, Hungarotel, the “Company”), include all adjustments, consisting mainly of normal recurring accruals, necessary for a fair presentation. Results for interim periods are not necessarily indicative of the results for a full year.
The accompanying unaudited consolidated condensed financial statements include the financial statements of the Company and its majority owned subsidiary: Hungarotel Távközlési Rt. (“Hungarotel”) (the “Operating Company”). All material intercompany balances and transactions have been eliminated.
The accompanying unaudited consolidated condensed financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions. These estimates and assumptions affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results could differ from those estimates.
The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2003, including the notes thereto, set forth in the Company’s annual report on Form 10-K filed with the United States Securities and Exchange Commission (“SEC”).
| (b) | Earnings Per Share |
Earnings per share (“EPS”) is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. The computation of diluted EPS is similar to the computation of basic EPS, except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, and the conversion of the convertible preferred stock, where dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised, or preferred securities were converted, and that the proceeds from such exercises or conversions were used to acquire shares of common stock at the average market price during the reporting period.
6
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(unaudited)
The following is a reconciliation from basic earnings per share to diluted earnings per share for the three month periods ended March 31, 2004 and 2003:
| 3 months ended | ||||||
| 2004 |
2003 | |||||
| ($ in thousands, except share data) | ||||||
| Net income attributable to common stockholders (A) |
$ | 7,636 | $ | 1,014 | ||
| plus: preferred stock dividends |
26 | 26 | ||||
| Net income (B) |
$ | 7,662 | $ | 1,040 | ||
| Determination of shares: |
||||||
| Weighted average common shares outstanding – basic (C) |
12,298,835 | 12,113,319 | ||||
| Assumed conversion of dilutive stock options and cumulative convertible preferred stock |
622,051 | 625,483 | ||||
| Weighted average common shares outstanding – diluted (D) |
12,920,886 | 12,738,802 | ||||
| Net income per common share: |
||||||
| Basic (A/C) |
$ | 0.62 | $ | 0.08 | ||
| Diluted (B/D) |
$ | 0.59 | $ | 0.08 | ||
For the three month periods ended March 31, 2004 and 2003, 30,000 and 2,530,000 stock options and warrants, respectively, were excluded from the computation of diluted earnings per share since such options and warrants have an exercise price in excess of the average market value of the Company’s common stock during the periods.
| (c) | Foreign Currency Translation |
The Company uses the Hungarian forint as the functional currency for its Hungarian subsidiary. Accordingly, foreign currency assets and liabilities are translated using the exchange rates in effect at the balance sheet date. Results of operations are generally translated using the average exchange rates for the period. The translation
7
Part I. Financial Information
HUNGARIAN TELEPHONE AND CABLE CORP. AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
(unaudited)
of the subsidiary’s forint denominated financial statements into U.S. dollars, as of March 31, 2004, has been affected by the strengthening of the Hungarian forint against the U.S. dollar from 207.92 as of December 31, 2003 to 203.65 as of March 31, 2004, an approximate 2% appreciation in value.
| (2) | Cash, Cash Equivalents and Restricted Cash |
| (a) | Cash |
At March 31, 2004, cash of $1,811,000 comprised the following: $953,000 on deposit in the United States, and $858,000 consisting of $41,000 denominated in U.S. dollars, the equivalent of $18,000 denominated in euros and the equivalent of $799,000 denominated in Hungarian forints on deposit with banks in Hungary.
Cash equivalents amounted to approximately $23,045,000 at March 31, 2004 and consisted of Hungarian government securities, denominated in Hungarian fori