Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(D)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
March 31, 1996 0-26808
HUNGARIAN BROADCASTING CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3787223
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
445 Park Avenue, New York, NY 10022
(Address of principal executive offices)
(212) 758-9870
The 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
requirement for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Common Stock, $.001 par value 2,577,500 Shares
(Class) (Outstanding at March 31, 1996)
<PAGE>
HUNGARIAN BROADCASTING CORP.
INDEX
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets as of March 31, 1996 (unaudited)
and June 30, 1995 (audited) 2
Consolidated statements of operations (unaudited) for the three
months ended March 31, 1996, nine months ended March 31, 1996
and the period from September 14, 1994 (date of inception)
to March 31, 1995 3
Consolidated statements of stockholders' equity (unaudited)
for the nine months ended March 31, 1996 and the period
from September 14, 1994 (date of inception) to March 31, 1995 4
Consolidated statements of cash flows (unaudited) for the nine
months ended March 31, 1996 and the period from September 14,
1994 (date of inception) to March 31, 1995 5
Notes to consolidated financial statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. Other Information 20
Signature 23
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
March 31, 1996 June 30, 1995
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,658,675 $ 295,006
Accounts receivable 177,436 87,598
VAT refund receivable 8,367 83,429
Prepaid expenses and other current assets 30,447 5,000
Total current assets 2,874,925 471,033
Office and transportation equipment,
less accumulated depreciation of $10,208
and $47,310 125,264 58,562
Broadcast license costs, less accumulated
amortization of $324,329 and $35,453 1,826,185 2,115,061
Deferred program costs 750,000
Deferred financing expenses, less accumulated
amortization of $92,552 and $46,655 29,547 75,445
Organization costs, net 28,478 35,196
Deferred offering cost 35,000
Other assets 231,141 438
$5,865,540 $2,790,735
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable $ $ 959,156
Accounts payable 609,093 264,112
Accrued expenses 124,821 89,627
Due to related parties 503,740 495,995
Other 430,696 47,424
Total current liabilities 1,668,350 1,856,314
LONG-TERM LIABILITIES
Notes payable, less current portion 954,268 890,839
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value - shares
authorized 4,780,000 and 5,000,000;
issued and outstanding 2,577,500 and
1,265,000 2,577 1,265
Additional paid-in capital 6,752,497 862,545
Accumulated deficit (3,480,646) (830,358)
Currency translation adjustment (31,506) 10,130
Total stockholders' equity 3,242,922 43,582
$5,865,540 $2,790,735
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
September 14,
Three Months Nine Months 1994 (Date of
Ended Ended Inception) to
March 31, March 31, March 31,
1996 1996 1995*
REVENUE $ 47,527 $ 431,198 $ 8,842
STATION EXPENSES
Operating costs and expenses 274,096 941,262 374,586
Amortization of broadcast
license costs 94,693 294,155
Selling, general and
administrative expenses 537,057 1,381,324 110,692
Total station expenses 905,846 2,616,741 485,278
Station operating loss (858,319) (2,185,543) (476,436)
CORPORATE EXPENSES
Amortization of deferred financing
costs and original issue discount 27,051 210,170 117,243
Write-off of deferred offering costs 129,631
Depreciation 1,568 13,000 243
Total corporate expenses 28,619 352,801 117,486
Operating loss (886,938) (2,538,344) (593,922)
Interest and other income 95,493 98,450 650
Interest expense (138,807) (210,394) (42,400)
Net loss $ (930,252) $(2,650,288) $(635,672)
Net loss per share $ (.36) $ (1.37) $ (.61)
Weighted average number of
common shares outstanding 2,577,500 1,935,973 1,039,548
*The amounts shown in this column also represent amounts for the three months
and nine months ended March 31, 1995, as the Company was organized on
September 14, 1994 and had no income or expenses prior to October 1994.
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional Currency
Common Stock Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustment
NINE MONTHS ENDED
MARCH 31, 1996:
Balance,
July 1, 1995 1,265,000 $1,265 $862,545 $ (830,358) $ 10,130
Issuance of common
stock - July 1995 182,500 182 499,818
Issuance of common
stock - August 1995 200,000 200 549,612
Shares contributed
by officers for
cancellation in
December 1995 (220,000) (220) 220
Initial public offering
in December 1995 1,150,000 1,150 4,840,302
Foreign currency
translation adjustment (41,636)
Net loss (2,650,288)
Balance,
March 31, 1996 2,577,500 $2,577 $6,752,497 $(3,480,646) $(31,506)
PERIOD FROM SEPTEMBER 14,
1994 (DATE OF INCEPTION)
TO MARCH 31, 1995*:
Balance, September 14,
1994 (date of
inception) - $ - $ - $ - $ -
Initial issuance of
common stock -
September 1994 850,000 850 7,650
Sale of common stock
to private placement
investors - November
and December 1994 265,000 265 405,045
Issuance of common stock
- March 1995 150,000 150 449,850
Foreign currency
translation adjustment (22,126)
Net loss (635,672)
Balance,
March 31, 1995 1,265,000 $1,265 $ 862,545 $(635,672) $(22,126)
*The amounts shown for this period also represent amounts for the nine months
ended March 31, 1995, as the Company was organized on September 14, 1994.
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period From
September 14,
Nine Months 1994 (Date of
Ended Inception) to
March 31, March 31,
1996 1995*
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,650,288) $ (635,672)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of deferred financing costs and
original issue discount 210,170 117,243
Amortization of organization costs 6,718
Amortization of broadcast license costs 294,155
Write-off of deferred offering costs 129,631
Depreciation 13,000 243
Changes in operating assets and liabilities:
Increase in accounts receivable (89,838)
(Increase)decrease in VAT refund receivable 75,062 (57,820)
Increase in prepaid expenses and other assets (261,428) (707,088)
Increase in accounts payable 344,981 187,146
Increase in accrued expenses 35,194 43,950
Increase in other liabilities 383,272 1,500
Net cash used in operating activities (1,509,371) (1,050,498)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable (450,000)
Increase in deferred program costs (750,000)
Purchase of office and transportation equipment (79,702) (17,746)
Payments for organization costs (521)
Net cash used in investing activities (829,702) (468,267)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from related parties 7,745
Proceeds from issuance of common stock 5,891,264 426,810
Proceeds from issuance of notes payable 2,120,000
Payment of notes payable (1,060,000)
Payments for offering costs (94,631)
Payments for deferred financing costs (121,915)
Net cash provided by financing activities 4,744,378 2,424,895
EFFECT OF FOREIGN TRANSLATION ADJUSTMENTS ON CASH (41,636) (22,126)
INCREASE IN CASH AND CASH EQUIVALENTS 2,363,669 884,004
Cash and cash equivalents at beginning of period 295,006 -0-
Cash and cash equivalents at end of period $ 2,658,675 $ 884,004
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 130,894 NONE
*The amounts shown for this period also represent amounts for the nine months
ended March 31, 1996, as the Company was organized on September 14, 1994.
See accompanying notes to consolidated financial statements.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Hungarian Broadcasting Corp. (the "Company") which was incorporated in the
State of Delaware on September 14, 1994, was organized to acquire interests
in companies that have commercial broadcasting licenses to own, develop,
expand and operate television stations in Hungary. The Company operates
in Hungary through a wholly-owned subsidiary known as HBC (Hungary) Kft.
("HBC") which was organized in November 1994. The Company acquired a
90% interest in VI-DOK Video es Filmgyarto Studio Kft. ("VI-DOK") as of
June 16, 1995, and an 80% interest in DNTV Kft. ("DNTV") as of May 30, 1995,
two Hungarian companies (the "Licensees") which had been granted television
licenses by the Hungarian Cultural Ministry in April to broadcast over
Budapest Channel AM-micro A3 ("A3") from July 1, 1994 through July 1, 2000,
daily between 6 a.m. and 5 p.m. and between 7:30 p.m. and 6 a.m. with a
maximum advertising time of 20%. Broadcasting on A3 commenced in September
1994. The 90% interest in VI-DOK was acquired for $240,000 and the 80%
interest in DNTV for $176,000. The acquisitions were accounted for by the
purchase method of accounting; the acquisitions and purchase price
allocation were computed as follows:
The Company acquired a 90% interest in VI-DOK's assets of $76,471 and
assumed 90% of its liabilities of $1,437,328. The excess of VI-DOK's
liabilities over its assets acquired was $1,224,771 (90% of $1,360,857).
The Company acquired an 80% interest in DNTV's assets of $7,409 and
assumed 80% of its liabilities of $744,707 for an excess of liabilities
over assets acquired of $589,838 (80% of $737,298). The Company paid
$416,000 ($240,000 plus $176,000) for the excess of the two companies'
liabilities over assets acquired ($1,224,771 plus $589,838) for a total
consideration of $2,230,609. After applying a valuation allowance of
$80,095, the Company assigned the balance of $2,150,514 to the acquired
broadcast license costss; this amount is being amortized over approximately
five year. Prior to September 14, 1994, when broadcasting began, VI-DOK
had been in the business of producing and editing motion picture films on
a contract by contract basis. From its organization in December 1991
until September 14, 1994, VI-DOK worked on three primary contracts. On
March 31, 1994 (two days after acquiring the broadcast license) VI-DOK
organized Pest-Buda as a division to conduct its broadcasting activities.
Pest-Buda was dissolved as a division on June 16, 1995, the date VI-DOK
was acquired by the Company. DNTV, organized in February 1994, broadcast
from September 1994 through May 30, 1995 (date of acquisition). The
Licensee egfectively ceased operations shortly after their acquisition
and the Company's wholly-owned subsidiary HBC continued the broadcasting
thereafter.
From the date of inception through September 30, 1995, the Company's
consolidated financial statements reflected nominal revenues and the
Company was considered to be in the development stage. In management's
opinion, the Company emerged from the development stage during the three
months ended December 31, 1995.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiary and its 80% and 90%-owned
subsidiaries, from their respective acquisition dates. All material
intercompany transactions and balances have been eliminated.
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(b) Fiscal Year
The Company's reporting period is the fiscal year ending June 30.
(c) Revenue Recognition
Revenues result from the sale of advertising time. Advertising
revenue is recognized at the time the commercials are broadcast.
(d) Barter Transactions
Revenues from barter transactions (television advertising in exchange
for goods and services) is recognized when advertisements are broadcast;
merchandise or services received are charged to expense
(or capitalized, as appropriate) when received or used.
Receivables and payables arising from barter transactions are offset
when the services have been rendered to the customer and the merchandise
or services are received from the vendor.
(e) Program and Film Rights
Program and film rights acquired under license agreements and the related
obligations incurred are recorded as assets and liabilities when the
license period begins, the cost of each program is determinable,
and the program is available for telecast. The capitalized costs
are amortized using the straight-line method based upon the estimated
period of usage.
(f) Production Costs
Production costs for self-produced programs are capitalized
and expensed when the program is first broadcast, except where
the program has potential to generate future revenues. In that
case, production costs are capitalized and amortized on the same
basis as programming obtained from third parties.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(g) Office and Transportation Equipment
Property and equipment are carried at cost and depreciated on a
straight-line basis using the shorter of estimated useful lives, or,
if applicable, the underlying lease period.
(h) Broadcast License Costs
The costs of acquiring licenses to broadcast are capitalized and
amortized over the life of the related licenses. It is the Company's
policy to value broadcast licenses at the lower of amortized cost or
fair value. As part of an ongoing review of the valuation and
amortization of such assets, management assesses the carrying value
of such assets if facts and circumstances suggest that they may be
impaired. If this review indicates that the assets will not be
recoverable, the carrying value of these assets would be reduced to
its estimated fair market value. As a result of such review,
management has determined that such assets are fairly stated at the
respective balance sheet dates.
(i) Organization Costs
The Company has capitalized $39,020 of organization costs, which are
being amortized over five years. Amortization of $6,718, including
a prior period adjustment, has been provided for the nine months ended
March 31, 1996.
(j) Income Taxes
At June 30, 1995, its initial fiscal year-end, the Company sustained
a net operating loss of approximately $386,000. Such loss may be
carried over and applied to reduce taxable income over a period of up
to 15 years, ending in the year 2010. Under SFAS 109, "Accounting
for Income Taxes," because of the uncertainty as to the realizability
of such loss, the Company has set up a full valuation allowance against
any future tax benefit that may accrue from the net operating loss,
and no deferred tax asset has been recognized. In addition, income
taxes have not been recorded in the accompanying financial statements as
no tax is due for this period because of the incurred loss.
(k) Deferred Financing Expenses
Deferred financing expenses represent the costs associated with the
debt portion of a consummated private placement financing and are
being amortized on a straight-line basis over the expected term of
the related borrowing.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(l) Foreign Currency Translation and Transactions
The assets and liabilities of the foreign subsidiaries were
translated using the exchange rate in effect at the balance sheet
date. Income and expense accounts were translated at the average
rates in effect during the period. Translation adjustments are
included in the stockholders' equity section in the accompanying
balance sheets.
Foreign currency transaction gains and losses are recorded for
changes in exchange rates affecting cash denominated in U.S. dollars
held in Hungarian bank accounts.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
(n) Dividend Policy
The Company has never paid and does not anticipate paying any cash
dividends on the common stock in the foreseeable future. The Company
is dependent upon payment of dividends by its Hungarian subsidiary
companies as the source of its own dividends. Hungarian companies
are permitted to pay annual dividends out of profits determined on
the basis of Hungarian accounting principles, which differ from U.S.
generally accepted accounting principles ("GAAP"). Significant
differences between U.S. GAAP and Hungarian accounting principles
include the accounting for long-term investments which
principles, are valued at the lower of cost or
market value. In addition, no deferred taxes are
presented on the face of Hungarian financial statements,
although note disclosure may be required. Leases are not
capitalized and unrealized foreign currency translation
gains are not reflected in financial statements of Hungarian
entities. Dividends are payable to foreign investors such
as the Company in forints, which may be converted into U.S.
dollars at the official rate of exchange set by the National Bank
of Hungary.
(o) Loss Per Share
Net loss per share has been calculated based on the weighted average
number of common shares outstanding during each period.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
3. Interim financial Information
The accompanying consolidated financial statements for the three months
ended March 31, 1996, nine months ended March 31, 1996 and the period from
September 14, 1994 (date of inception) to March 31, 1995 are unaudited
but, in the opinion of management, include all adjustments, consisting
mainly of normal recurring accruals necessary for fair presentation.
Results for the interim periods are not necesarily indicative of the
results for a full year.
4. Incorporation by Reference
Reference is made to the Company's consolidated financial statements, and
the notes thereto, which were included in the Registration Statement Form
SB-2 filed with the U.S. Securities and Exchange Commission on December 20,
1995, and which are incorporated herein by reference.
5. Concentration of Cash and Cash Equivalents
At March 31, 1996, cash of $2,392,166 denominated in U.S. dollars was on
deposit with a major U.S. money center bank. In addition, $266,509
(denominated partly in U.S. dollars and partly in Hungarian forintes) was
on deposit with a Hungarian government-owned bank. At March 31, 1996, the
amount on deposit in the U.S. bank exceeded the FDIC insurance limit of
$100,000.
6. Notes Payable
From November 1994 through March 1995, the Company sold (in a private
placement) offering units consisting of $2,120,000 aggregate principal
amount of unsecured promissory notes and 265,000 shares of common stock
for an aggregate purchase price of $2,120,000. The Company incurred
$153,789 of financing expenses relating to the private placement, of which
$122,100 and $31,689 has been allocated to debt and equity, respectively.
The $153,789 includes legal fees of $28,200 paid to the Company's
secretary/stockholder. The notes bear interest at 6% per annum and were
originally due upon the earlier of December 31, 1995 or the successful
consummation of the IPO, which was rescinded during November 1995 (see
Note 7(b)). The revised terms required that only one-half of the notes
were due upon the earlier of December 31, 1995 or the successful
consummation of the subsequent IPO. The balance of the notes are due on
June 30, 1997. Consequently, the amortization expense relating to the
original issue discount and deferred financing expenses were recomputed
over the revised expected term of the notes. Total original issue discount
of $437,000 (an imputed interest rate of 19% per annum) has been
recorded and is being amortized over the expected term of the notes, along
with the $122,100 of financing expenses related to the debt portion of
the private placement. The remaining unamortized original issue discount
and deferred financing expenses totaled $105,732 and $29,547, respectively,
as of March 31, 1996. During January 1996, $1,060,000 of the notes were
repaid. Should the remaining notes be repaid before June 30, 1997, any
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
unamortizaed portion of the original issue discount and deferred financing
expenses will be charged to operations at the time of repayment.
Notes payable of $954,268 at March 31, 1996 consist of $1,060,000
principal amount of the notes, less the unamortized portion of the
original issue discount of $105,732.
The private placement investors have the right to include their shares in
any registration statement filed by the Company after the IPO to the
extent that the managing underwriter of the public offering advises the
Company that such inclusion would not interfere with the orderly sale of
the securities to be publicly offered.
7. Common Stock
(a) In July 1995, the Company sold 182,500 shares of common stock at a
price of $3 per share for an aggregate of $547,500 ($500,000 net) of
which 30,000 shares were sold to a director and officer of the
Company. In August 1995, the Company sold 200,000 shares of common
stock at a price of $3 per share for an aggregate of $600,000
(approximatley 550,00 net). $100,000, representing the remaining
stock subscription receivable at September 30, 1995, was received on
October 4, 1995. On December 6, 1995, three of the Company's
officers, Messrs. Klenner, Genova and Cohen, contributed to the
Company for cancellation 100,000, 100,000 and 20,000 common shares,
respectively, for no consideration.
(b) The Company made a public offering of 1,000,000 shares of common
stock at $7 per share in November 1995. The offering was rescinded
after the shares offered traded below $7 per share between the
effective date and the scheduled closing date of the offering. The
Company incurred $129,631 of expenses in connection with that
offering, which were shown as deferred offering costs in the
financial statements at September 30, 1995 and were charged to
operations during the quarter ended December 31, 1995.
(c) On December 20, 1995 the Company completed an IPO of 1,150,000 shares
of its common stock at $5 per share and 1,610,000 redeemable common
stock purchase warrants at $.15 per warrant. Each warrant entitles
the holder to purchase one share of common stock at an exercise price
of $6.00 per share during the five-year period commencing on the date
of the IPO. The warrants will be redeemable, commencing 16 months
after the date of the IPO. The Company also issued to the underwriter
warrants for the purchase of 100,000 shares of common stock at
$8.25 per share and 140,000 common stock purchase warrants at
$0.225 per warrant. The proceeds of this offering amounted to
approximately $4,841,000, net of underwriting commissions and
expenses.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
8. Stock Option Plan
The Company has adopted a Stock Option Plan (the "Plan") which authorizes
issuance of an aggregate of 100,000 shares of common stock. The Plan
provides that incentive and non-qualified options may be granted to
officers, employees, directors and consultants to the Company for the
purpose of providing an incentive to those persons to work for the Company.
The Plan will be administered by the compensation committee of the Board
of Directors (the "Committee"). The Committee determines, among other
things, the persons to whom stock options are granted, the number of
shares subject to each option, the date or dates upon which each option
may be exercised and the exercise price per share.
Options granted under the Plan are exercisable for a period of up to ten
years from the date of the grant. Options terminate upon the optionee's
termination of employment or consulting arrangement with the Company,
except that, under certain circumstances, an optionee may exercise an
option within the three-month period after such termination of employment.
An optionee may not transfer any options except that an option may be
exercised by the personal representative of a deceased optionee within
the three-month period folowwing the optionee's death. Incentive options
granted to any employee who owns more that 10% of the Company's
outstanding common stock immediately before the grant must have an
exercise price of not less than 110% of the fair market value of all
underlying stock on the date of the grant and the exercise term may not
exceed five years. The aggregate fair market value of common stock
(determined at the date of the grant) for which any employee may exercise
incentive options in any calendar year, may not exceed $100,000.
In addition, the Company will not grant a nonqualified option with an
exercise price less than 85% of the fair market value of the underlying
common stock on the date of the grant. On December 20, 1995, the Company
granted to certain directors options to purchase an aggregate of 100,000
shares of common stock at $5.00 per share, not exercisable before
December 20, 1996 (the first anniversary of the IPO). On January 17,
1996, options for 40,000 shares were cancelled and on March 20, 1996,
one employee was granted options to purchase 25,000 shares at $8 per share,
which was the market price at that date.
The following table is a summary of all stock options as of March 31, 1996:
Outstanding Option price
options per share
January 1, 1995 - 0 -
Granted in 1995 100,000 $5.00
Balance at December 31, 1995 100,000 $5.00
Granted in 1996 25,000 $8.00
Cancelled in 1996 (40,000) 5.00
Balance at March 31, 1996 85,000 $5.00 - $8.00
As of March 31, 1996, none of the stock options were exercisable.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
9. Related Party Transactions
Certain officers and directors of the Company control a company ("the
related party") that purchased $800,000 of unsecured promissory notes and
100,000 shares of common stock in the November 1994 private placement. As
additional compensation, the related party received an option (which was
exercised in March 1995) to purchase 150,000 shares of common stock at $3
per share and the right of first refusal for a three-year period to act as
general contractor for all broadcast facilities to be built by the
Company.
At June 30, 1995, the minority stockholders were owed $416,000 payable on
September 1, 1995, relating to the Company's purchase of their stock. On
February 5, 1996, $189,800 was repaid, leaving a balance due of $226,200 at
March 31, 1996.
The amount due to related parties at March 31, 1996 also includes $127,909
due to an officer/stockholder.
10. VAT Refund Receivable
Value-added tax of $8,367 paid in Hungary for which a reimbursement claim
was submitted by the Company, has been included in current assets as of
March 31, 1996.
11. Commitments
(a) Consulting and Compensation Agreements
The Company has a five-year employment agreement with its President
and Chief Financial Officer effective one month after the completion
of the IPO at a monthly salary of $10,000. He will also be entitled
to receive reimbursement for ordinary and necessary business expenses.
The Company has a two-year employment agreement with its Executive
Vice President effective one month after the completion of the IPO at
a monthly salary of $10,000. He will also be entitled to receive
reimbursement for ordinary and necessary business expenses.
The Company's secretary is a partner in a firm which has a two-year
retainer agreement to provide all S.E.C. related legal services for
the Company, except for services in connection with private
placements or public offerings, for a fee of $100,000 per year,
beginning in 1996.
A financial and management consultant receives a fee of $3,000 per
month for a two-year term commencing with the month following the
completion of the IPO.
As compensation to outside directors, the Company pays directors'
fees equal to $2,000 per meeting, minimum of four meetings per year,
and reimburses their travel and other out of pocket expenses.
Officers do not receive any compensation for serving as directors.
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
(b) Leases
The Company has a lease for office facilities in Budapest, Hungary,
with minimum monthly payments including taxes of $3,125, expiring
May 30, 2000, cancellable by the Company upon 90 days notice.
12. Legal Proceedings
(a) License Proceeding
TV 3, a competitor of A3 ("Plaintiff") which was granted a six year,
24 hour per day microwave license but has never aired more than six
hours per day brought an action against the Ministry of Culture (the
"Ministry") in the Municipal Court of Budapest to overturn the grant
of the A3 license to the Licensees and NAP TV made on March 29, 1994
on the ground that proper procedures were not followed because the
authority of the committee that awarded the licenses had expired prior
to the date the licenses were granted. At a hearing held on December 1,
1994, the Municipal Court ordered the Ministry to follow prescribed
procedures and make a new award. The Ministry appealed this decision
to the Appeals Court of Budapest and in addition ruled that in any
event, A3 can continue broadcasting until a new award is made. On
April 25, 1995, the Company received a letter from the Ministry
confirming that the license had been granted to the Licensees and that
the Licensees may operate in accordance with the terms of the license.
On December 21, 1995, the Hungarian Parliament enacted a Media Law,
which provided that a National Radio and Television Board be appointed
with sole authority to issue frequency licenses. The Act further
provided that any person who held a frequency license on December 21,
1995 may file a claim on or before March 31, 1996 with the Board to
transform the license into a broadcasting contract. The Company did
file its claim with the Board prior to March 31, 1996 and is awaiting
a decision of the Board. If the board refuses to grant the Company's
claim, the Company could be materially adversely affected to the
extent its business depends at such time on microwave transmission of
its programming. At present, 350,000 of the 850,000 household
receive the A3 signal through microwave transmission.
(b) Underwriters Breach of Contract Actions
Prior to November 20, 1995, the Company filed a Registration Statement
with the Securities and Exchange Commission on Form SB-2 for an IPO of
1,000,000 of its shares of Common Stock at $7 per share, which
Registration Statement became effective at 5:30 p.m. on Friday,
November 17, 1995. On Monday, November 20, 1995, the Company entered
into a firm commitment underwriting agreement with Coleman and
Company, Inc. ("Coleman") for sale of 1,000,000 of its shares at $7
per share. Starr Securities Inc. ("Starr") was named in the underwriting
agreement. Trading of the shares on NASDAQ commenced soon thereafter
with a contract closing scheduled for November 27, 1995. At the
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
closing, Coleman advised the Company that it did not have the funds to
close, that it was unilaterally rescinding the contract, and that it
would request NASDAQ to cancel all trades made since November 20, 1995.
On January 3, 1996, the Company commenced an action against Coleman
and Starr in the United States District Court, Southern District
of New York for breach of contract, demanding judgment of the full
contract price of the public offering together with such other
compensatory and consequential damages in an amount to be determined
at trial. Answers denying liability have been interposed by each of
the defendants. Plaintiff and defendants have since commenced
discovery procedures.
On January 19, 1996, Starr commenced an action in the Supreme Court of
New York against the Company and its former Chairman of the Board,
Robert Genova, for libel and defamation of Starr's character, and for
threatening to continue to defame Starr's character by stating that
Starr "walked away" from the IPO deal and breached its contract with
the Company unless Starr made a bridge loan to or a private placement
for the Company. The Complaint further alleged that when Starr did
not accede to the Company's demands, the Company continued to vilify
Starr in the financial community by stating that Starr walked away
from the IPO deal and breached its contract with the Company and by
commencing an action in the U.S. District Court, Southern District of
New York falsely accusing Starr of breach of contract. Starr further
included a cause of action on the same facts for prima facie tort.
The Company had this action removed to the U.S. District Court,
Southern District of New York. On motion, Starr was granted until
April 1, 1996 by the court to move to remand both actions to the New
York Supreme Court on the groun of lack of diversity of citizenship,
which motion was made and a decision is being awaited.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company was organized in September 1994 and in October it commenced
exploring opportunities to own, operate and develop a regional private
commercial television station in Hungary. In November, it obtained a six
month option to acquire majority interests in DNTV and VI-DOK, two Hungarian
corporations (the "Licensees") that were granted licenses in March 1994 for a
six year term commencing July 1, 1994 to operate on Channel A3. The Licensees
commenced their broadcasting on A3 on a limited basis in September 1994, and
increased their broadcasting to 21 1/2 hours per day in December, 1994. During
the option period, the Company loaned approximately $2,100,000 to the
Licensees, which was used by them principally to produce and purchase
programming.
During the option period, the Company incurred significant costs in preparing
business plans and developing an advertising sales staff, a station management
team, and a program format.
In May and June 1995, the Company acquired majority interests in the two
Licensee companies by purchasing 80% of DNTV and 90% of VI-DOK and assumed
operational control of the two companies.
The Company's revenues are derived principally from the sale of television
advertising to local, national and international advertisers. The Company
also engages in certain barter transactions in which the stations exchange
unsold commercial advertising time for goods and services such as broadcasting
equipment, hotel rooms, car rentals and newspaper advertising space. Although
the Company's television broadcasting activities began only recently, the
experience of the television industry is that advertising sales tend to be
lowest during the third quarter of each calendar year, which includes the
summer holiday schedule (typically July and August) and highest during the
fourth quarter of each calendar year.
The primary expenses incurred in operating television stations are employee
salaries, programming costs, broadcast studio and transmission expenses and
selling, general and administrative expenses.
In management's opinion, the Company emerged from the development stage
effective during the three months ended December 31, 1995.
For the nine months ended March 31, 1996, the Company had consolidated
revenues of $431,198 (primarily from the sale of advertising time) and
incurred a net loss for the period of $2,650,288. Expenses consisted of
station expenses aggregating $2,616,741, including amortization of broadcast
license costs of $294,155. Corporate expenses, which included amortization of
deferred financing costs and original issue discount, aggregated $352,801.
The original issue discount and financing costs relate to the 6% Bridge Notes
issued between November 1994 and March 1995.
<PAGE>
For the period from September 14, 1994 (date of inception) to March 31, 1995,
the Company incurred a net loss of $635,672. Station expenses aggregated
$485,278. Corporate expenses, which included amortization of deferred
financing costs and original issue discount, aggregated $117,486. The
original issue discount and financing costs relate to the 6% Bridge Notes
issued in November 1994 and March 1995.
A3 broadcasted only video music clips prior to June 1995, when the Company
assumed control. The Company changed the format in June 1995 so as to replace
video music clips with civic events produced live on location during daytime
hours, and with game shows, sitcoms and movies at night. In October 1995, the
Company again changed the format to return to video music clips during the
day. This change of format was based on conversations with the Company's
advertisers who expressed a preference for music clips during the daytime
hours. In addition, the cost of music clips programming was substantially
lower than the cost of civic events programming primarily because the Company
was broadcasting the music clips from its own facility instead of from the
Land studio, a leased broadcasting facility. After the Company assumed
control of A3, it reduced the management staff and operating expenses while
expanding, training and motivating its sales staff. The Company believes that
operating costs will decrease in 1996 as a result of actions it has taken to
shift production of its programming to its own studio instead of a leased
broadcasting facility and by increasing the number of hours of programming
devoted to music clips and decreasing the number of hours devoted to civic
events which are more expensive to produce. The Company retained two media
companies to market air time. It also believes that revenues will continue to
increase as it reaches a larger audience through a satellite-to-cable network.
The Company intends to increase its non-music programming costs as revenues
increase in order to improve the quality of its programming. The Company
believes that it will show a profit for fiscal 1997, although there can be no
assurance that this will occur.
The Company obtains its video music clips from record producers and music
publishing companies free of charge. It then has to pay royalties to the
American Society of Composers and Performing Artists ("ASCAP") and Broadcast
Music Inc. ("BMI") each time it broadcasts a composition. The Company also
pays monthly fees to Antenna Hungaria for distributing its signal to the cable
companies and permitting access to their networks and approximately $70,000
per month to Land under a contract that terminated December 31, 1995. The
Company is also producing live talk shows and game shows each evening and has
management and overhead expenses of about $35,000 per month. Commencing in
1996, the Company anticipates that its studio costs, whether at Land studio or
elsewhere, will be reduced and it expects to add satellite-to-cable
broadcasting at an additional cost of $60,000 per month.
While the Company carried a substantial civic events format, it had
operational costs averaging approximately $300,000 per month, including
production costs for civic events of approximately $150,000 per month. By
eliminating substantially all the civic events format, the Company reduced
expenses by approximately $100,000 per month.
<PAGE>
Based upon conversations with current and prospective advertisers and other
knowledgeable persons, the Company anticipates that it will receive higher
rates from the advertisers after it commences satellite-to-cable broadcasting
because it will reach a larger audience.
The Company had a public offering of shares of common stock in November 1995,
which offering was rescinded by the underwriters of that offering after the
shares traded below $7 per share between the effective date and the scheduled
closing date. As a result of such rescission, the Company sustained a charge
to operations of $129,631 during the quarter ended December 31, 1995.
Liquidity and Capital Resources
From its inception through September 30, 1995, the Company sold 1,647,500
shares of common stock in a series of private transactions for proceeds of
$1,913,622, net of issuance costs and, in addition, issued promissory notes in
an aggregate amount of $2,120,000. On December 6, 1995, 220,000 shares owned
by three officers of the Registrant were contributed to the Company for no
consideration.
On December 20, 1995, the Company completed an IPO of 1,150,000 shares of its
common stock at $5 per share and 1,610,000 redeemable common stock purchase
warrants at $.15 per warrant. Each warrant entitles the holder to purchase
one share of common stock at an exercise price of $6.00 per share during the
five-year period commencing on the date of the IPO. The warrants will be
redeemable, commencing 16 months after the date of the IPO. The Company also
issued to the underwriter warrants for the purchase of 100,000 shares of common
stock at $8.25 per share and 140,000 common stock purchase warrants at $0.225
per warrant. The proceeds of this offering amounted to approximately
$4,841,000, net of underwriting commission and expenses.
The Company believes that its existing cash balance and cash from future
operations will be sufficient to fund the balance of acquisition costs
($226,200), repayment of the remaining balance of bridge notes ($1,060,000),
construction and equipping of a broadcasting studio ($250,000), purchasing a
fully equipped mobile-studio van ($500,000) and launching an initial promotion
campaign for the station ($400,000). The Company further believes that by
operating out of its own studio it will reduce studio costs and that its cash
balances and cash from operations will be sufficient to fund its operations,
lease, satellite costs, and management costs for the foreseeable future. The
Company anticipates that its cash requirements for the foregoing will be
approximately $5,000,000 during 1996. Even though the Company believes that
it will have adequate funds to sustain operations for at least 12 months, it
may seek a bank line of credit if additional funds are needed to sustain
operations. There is no assurance that it will be able to obtain a bank line
of credit. The Company anticipates that it will be able to repay the
remaining fifty percent of the bridge notes of $1,060,000 plus interest on
June 30, 1997 out of proceeds that may be received through the exercise of
warrants, cash flow from operations, from borrowings or from the sale of
additional shares of stock. There can be no assurance that the Company will
be able to repay the bridge notes on their due date of June 30, 1997.
<PAGE>
Although the Company's studio facility lease with Land Studio Kft ("Land")
terminated on December 31, 1995, the Company does not believe that this
termination is reasonably likely to have a material impact on net sales or
revenues or income from continuing operations since the Company now has an
operational broadcasting facility on its premises and is currently
broadcasting all of its video music clips from this facility. The Company
does not presently have an agreement from Land to extend the lease, but there
are other studios suitable for the Company's needs available for rent in the
Budapest area on a short-term or a month-to-month basis that could also
provide post-production editing and special production facilities.
Foreign Currency
The Company's broadcasting operations in Hungary incur both general revenues
and operating expenses in forints. Asset and liability accounts are
translated from foreign currencies into United States dollars at the period-
end exchange rate; income and expense accounts are translated at the average
exchange rate for the period. The resulting translation adjustments are
reflected in a component of shareholders' equity. Currency translation
adjustments relating to transactions of the Company and its subsidiaries in
currencies other than the functional currency of the entity involved are
reflected in the operating results of the Company.
Since virtually all revenues and expenses are in local currency, the Company
does not hedge against foreign currency exchange risks.
<PAGE>
PART II
Item 1. Legal Proceedings
License Proceeding
TV 3, a competitor of A3 ("Plaintiff") which was granted a six year, 24
hour per day microwave license but has never aired more than six hours per
day brought an action against the Ministry of Culture (the "Ministry") in
the Municipal Court of Budapest to overturn the grant of the A3 license to
the Licensees and NAP TV made on March 29, 1994 on the ground that proper
procedures were not followed because the authority of the committee that
awarded the licenses had expired prior to the date the licenses were
granted. At a hearing held on December 1, 1994, the Municipal Court
ordered the Ministry to follow prescribed procedures and make a new award.
The Ministry appealed this decision to the Appeals Court of Budapest and
in addition ruled that in any event, A3 can continue broadcasting until a
new award is made. On April 25, 1995, the Company received a letter from
the Ministry confirming that the license had been granted to the Licensees
and that the Licensees may operate in accordance with the terms of the
license. On December 21, 1995, the Hungarian Parliament enacted a Media
Law, which provided that a National Radio and Television Board be
appointed with sole authority to issue frequency licenses. The Act
further provided that any person who held a frequency license on December 21,
1995 may file a claim on or before March 31, 1996 with the Board to
transform the license into a broadcasting contract. The Company did file
its claim with the Board prior to March 31, 1996 and is awaiting a
decision of the Board. If the Board refuses to grant the Company's claim,
the Company could be materially adversely affected to the extent its
business depends at such time on microwave transmission of its
programming. At present, 350,000 of the 850,000 households receive the A3
signal through microwave transmission.
Underwriters Breach of Contract Actions
Prior to November 20, 1995, the Company filed a Registration Statement
with the Securities and Exchange Commission on Form SB-2 for an IPO of
1,000,000 of its shares of Common Stock at $7 per share, which
Registration Statement became effective at 5:30 p.m. on Friday,
November 17, 1995. On Monday, November 20, 1995, the Company entered into
a firm commitment underwriting agreement with Coleman and Company, Inc.
("Coleman") for sale of 1,000,000 of its shares at $7 per share. Starr
Securities Inc. ("Starr") was named as a co-underwriter in the
Registration Statement and in the underwriting agreement. Trading of the
shares on NASDAQ commenced soon thereafter with a contract closing
scheduled for November 27, 1995. At the closing, Coleman advised the
Company that it did not have the funds to close, that it was unilaterally
rescinding the contract, and that it would request NASDAQ to cancel all
trades made since November 20, 1995.
<PAGE>
On January 3, 1996, the Company commenced an action against Coleman and
Starr in the United States District Court, Southern District of New York
for breach of contract, demanding judgment of the full contract price of
the public offering together with such other compensatory and
consequential damages in an amount to be determined at trial. Answers
denying liability have been interposed by each of the defendants.
Plaintiff and defendants have since commenced discovery procedures.
On January 19, 1996, Starr commenced an action in the Supreme Court of New
York against the Company and its former Chairman of the Board, Robert
Genova, for libel and defamation of Starr's character, and for threatening
to continue to defame Starr's character by stating that Starr "walked
away" from the IPO deal and breached its contract with the Company unless
Starr made a bridge loan to or a private placement for the Company. The
Complaint further alleged that when Starr did not accede to the Company's
demands, the Company continued to vilify Starr in the financial community
by stating that Starr walked away from the IPO deal and breached its
contract with the Company and by commencing an action in the U.s. District
Court, Southern District of New York falsely accusing Starr of breach of
contract. Starr further included a cause of action on the same facts for
prima facie tort. The Company had this action removed to the U.S.
District Court, Southern District of New York. On motion, Starr was
granted until April 1, 1996 by the court to move to remand both actions to
the New York Supreme Court on the ground of lack of diversity of
citizenship, which motion was made and a decision is being awaited.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits* (numbers below reference Regulations S-B)
(3) (a) Certificate of Incorporation filed September 14, 1994*
(b) By-laws*
(4) (a) Form of Warrant Agreement**
(a)(i) Form of Common Stock Purchase Warrant Certificate**
(b) Form of Underwriters' Warrant**
(c) Form of Underwriters' Stock Warrant**
(10) (a) Employment Agreement between Registrant and Peter E. Klenner*
(b) Employment Agreement between Registrant and Imre M. Kovats*
(c) Financial Consultant Agreement between Registrant and Robert
Genova*
(d) 1994 Incentive Stock Plan*
(e) Sharing agreement for space and facilities between
Registrant and Hungarian Telephone and Cable Corp.*
(f) Agreement to purchase shares in DNTV*
(g) Agreement to purchase shares in VI-DOK*
(h) Letter of intent with Kablecom*
(i) Offer from OKK Kft to Registrant to rent satellite space
to Company*
(j) Agreement with Land Studios Kft*
(k) Lease agreement with HAKON Ltd. for space at Szamado, Budapest*
(l) Form of 6% Bridge Note*
(m) License to broadcast on A3*
(n) Form of Consulting Agreement with J.W. Barclay & Co., Inc.**
(o) Form of Mergers and Acquisitions Agreement with J.W.
Barclay & Co., Inc.**
(21) Subsidiaries of the Registrant*
* Filed with Registration Statement No. 33-96674
** Filed with Registration Statement No. 33-80177
B. The following reports on Form 8-K have been filed during the three months
ended March 31, 1996:
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 29 day of May, 1996.
HUNGARIAN BROADCASTING CORP.
Registrant
By Frank R. Cohen
Frank R. Cohen
Treasurer and Chief Financial Officer
