Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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 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, 15th Floor, New York NY 10022
(Address of principal executive offices)
The Registrant's telephone number, including area code:
(212) 758-9870
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on which Registered
Common Stock, NASDAQ
par value $.001 per share
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-KSB or any amendment to this Form 10-KSB. [ ]
Registrant had revenues of $672,108 for the year ended June 30, 1996.
As of August 30, 1996, 2,577,500 shares of Common Stock were
outstanding of which 1,150,000 were held by non-affiliates of the
Company. The aggregate market value of the Common Stock held by
non-affiliates of the Company as of August 30, 1996 was $7,475,000 (based
upon the closing bid price on such date on NASDAQ).
Documents Incorporated by Reference
Part III-Portions of the Registrant's proxy statement for the
Annual Meeting of Stockholders for the fiscal year ended June 30,
1996.
<PAGE>
PART I
Item 1. Business
(a) General Development of Business
1. Industry Overview
Private commercial television stations (those which derive the majority
of their revenues from the sale of advertising) generally began
broadcasting in the United States in the 1940s, in parts of Western Europe
in the 1950s, in Germany in the 1980s, and in Scandinavia and Central
Europe (including Hungary) in the 1990s. Austrian TV channels are still
owned by the state. Commercial television has become an important medium
for advertisers in the more developed advertising markets. For example, in
1995, television advertising expenditures totaled $30.6 billion in the
United States and an aggregate of $18.3 billion in 16 countries of Western
Europe.
An advertising industry has been developing in Hungary since 1991.
Based on a report published by Saatchi & Saatchi/Zenith Media World Wide,
TV advertising expenditure increased from $45 million in 1991, to $107
million in 1992, to $128 million in 1993, to $138 million in 1994, and to
$157 million in 1995.
The Hungarian Parliament enacted a Media Law on December 21, 1995 which
provided for the privatization through a tender process of one of the two
state owned TV channels (MTV 2) and the sale of a currently dormant
frequency. The Company believes that it is currently operating in
compliance with the provisions of the Media Law.
The two basic methods of television transmission in use in Hungary are
(i) over-the-air television broadcasting, which can be either local or
national in scope (these operations are often referred to as "terrestrial"
broadcast operations) and (ii) satellite-to-cable broadcasting. In
over-the-air broadcasting, the station operator obtains a license from the
appropriate regulatory authority with a limited geographic range. In
satellite-to-cable broadcasting, the station operator transmits its
programming signal to a satellite which redirects the signal to either a
ground based antenna which is connected to a cable system or to a home
television via a satellite dish ("direct-to-home").
While over-the-air broadcasters can typically be received by virtually
all of the television households in the geographic area covered by their
broadcast signal, satellite-to-cable broadcasters can only be received by
television households connected to a cable system or households that have
satellite dishes positioned to receive the broadcast signal. Cable
television growth in Hungary initially occurred in the most heavily
populated areas and has been extended to less populated areas. Households
with cable service in the most heavily populated areas in Hungary are
sought after by advertisers because these households tend to have higher
disposable incomes and greater access to advertised goods and services.
2. General
The Company was formed in September 1994 to acquire majority interests
in companies owning broadcasting licenses and becoming the operator of the
licensed broadcasting stations.
Hungary has three state owned and operated television channels Magyar
Televizio I ("MTV 1"), which started broadcasting in 1957, and Magyar
Televizio 2 ("MTV 2"), which started broadcasting in 1972 and DUNA TV,
which started to broadcast via satellite in 1993. The signals of MTV 1, MTV
2 and the microwave signal of A-3 (the Company's channel) are over-the-air
(terrestrial) and are transmitted by Antenna Hungaria, a state owned
company which built, owns and operates a trunk network of transmitter
stations consisting of 19 transmitter stations and 90 relay stations. The
signals of MTV 1 reaches over 96% of the households of Hungary and MTV 2
reaches approximately 80% of the households of Hungary. To receive the
signals of MTV 1 and MTV 2, a household merely needs a pair of "ears" or
antennae and does not require any dish.
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A household requires a dish to receive signals from channels
transmitting over a microwave frequency or directly via satellite.
The AM Micro system is the least expensive system for consumers. The
receiving equipment is limited to a dish (smaller than a comparable
satellite receiver) and a receiving head (converter). The equipment costs
average $100 per household. However, equipment for one household can
service four households if they are located in the same building. Equipment
for cable networks costs $150 per household and for satellite antenna
systems $300 per household. The monthly fee transmission charged directly
to households by Antenna Hungaria is $1 for AM-Micro access as compared to
$4 to $8 for cable and satellite access.
In 1994, based on a decree enacted by the Hungarian Parliament in July
1993, the Hungarian Ministry of Culture and Education made a tender offer
to open only to holders of studio licenses for a license to broadcast over
Channel A3 using AM-Micro technology over an area of Budapest plus 30 km
(18 miles). Fourteen contenders applied for the license. The license was
given to three of the contenders as follows, each for the time period from
July 1, 1994 to July 1, 2000.
VI-DOK: Mondays, Wednesdays, Fridays and Sundays from 6:00 a.m. to
5:00 p.m. and 7:30 p.m. to 6 a.m.
DNTV: Tuesdays, Thursdays and Saturdays from 6:00 a.m. to 5:00 p.m.
and 7:30 p.m. to 6 a.m.
NAP TV: Daily from 5:00 p.m. to 7:30 p.m.
VI-DOK and DNTV had no prior television broadcasting experience. DNTV
was organized on February 14, 1994 and VI-DOK was organized on December 10,
1991. The Ministry granted licenses to DNTV and to VI-DOK on March 29,
1994. VI-DOK then organized Pest-Buda Televizio Kft ("Pest-Buda") on March
31, 1994 as a vehicle from which to conduct the broadcasting operations
under the license. Between the date of grant and the commencement of
broadcasting on A3 in September 1994, DNTV and VI-DOK devoted their
energies to seeking an equity partner. The two companies started
broadcasting in September 1994 as a music channel using the broadcasting
facilities of Land Studios rather than their own studios to provide
programming and technical personnel.
VI-DOK and DNTV, acting jointly thereafter sought an equity partner. In
November 1994, the Company commenced negotiations to acquire majority
interests in each of the two licensed companies. At the same time, the
Company agreed to provide loans aggregating approximately $2,000,000 to the
Licensees to help finance their operating and programming costs (which
loans were to be deemed capital contributions in the event the acquisitions
were completed) until it could complete its due diligence in connection
with the acquisitions. The Company then recruited a management staff, a
sales staff and a station operating staff and completed its acquisition of
DNTV and VI-DOK in May 1995 and June 1995, respectively. The Company
acquired 90% and 80% of the capital interests of VI-DOK and DNTV for
$240,000 and $176,000, respectively, from the existing owners of VI-DOK and
DNTV and contributed the loans to the capital of the two licensee companies
as additional acquisition costs, and assumed the operational control of A3
in May 1995.
On September 6, 1996, the Company added satellite-to-cable (and direct
- -to-home) broadcasting, which enabled it to broadcast 24 hours per day,
including the hours of 5:00 p.m. to 7:30 p.m. daily to its cable
networks. It still broadcasts 21 1/2 hours per day through its AM Micro
network
3. Population Reach and Demographics
Prior to September 1996, A3's signal was carried over-the-air and
reached approximately 350,000 households through the AM Microwave network
and approximately 500,000 households through cable networks located in
Budapest and its environs.
<PAGE>
The Company entered into a ten year agreement with Nethold to rent to
the Company space on its satellite known as "Hotbird 2". Satellite
broadcasting (which began September 6, 1996), together with its existing AM
Micro network will enable the Company to reach an estimated 1.8 million TV
households or 49% of the 3.7 million TV households (3.9 million total
households) in Hungary. This includes all nine of the cable systems
operated by Kable Com Kft, the Hungarian affiliate of HBO, which reaches
in the aggregate of 210,000 households. The Company intends to increase its
reach in calendar 1997 to close to 60% by equipping small cable networks
with decoders and by reaching individual TV homes that are equipped with
decoders through direct-to-home broadcasting. The Company also entered into
a ten year agreement with Banknet to provide uplink and downlink facilities
for satellite broadcasting. As of September 18, 1996, 28 cable television
companies have installed and have begun operating down link equipment
enabling their 190,000 subscribers to receive A 3's broadcast via the
satellite.
The Company designs its program schedule to appeal to and attract
viewers in the 14 to 35 year old age group.
4. Strategy
The Company's strategy is to improve the operating results and market
share of A3. Specific elements of the Company's operating strategy include:
Utilize Viewer-Oriented Scheduling make it easier for viewers to
find the programs they prefer to watch by regular and consistent
scheduling of programming
Promote Programs advertise and promote both on A3 and in other media
its programming to increase ratings and viewer identification
Control Station Operating Costs continue fundamental cost controls
and operating efficiencies
Increase Advertising Sales expand, train and motivate the sales
force.
5. Programming
The Company's programming strategy is to broadcast cost-effective
programs that are capable of achieving high rating thresholds and targeted
to its 14 to 35 year old viewer audience. In addition, the Company
believes that its strategy of emphasizing programming in Hungarian will
lead to an increase in market revenue share among key demographic groups
and improving the image of the station among advertisers and viewers.
The Company's strategy in purchasing international programs for
broadcasting in Hungary is to acquire programs that were successful on
United States, United Kingdom or Australian prime time television. These
programs are dubbed by the Company into Hungarian and include television
series, serials and soap operas. Movies previously dubbed into Hungarian
are also acquired. Popular international programs currently broadcast by
the Company include Beauty and the Beast, Pacific Drive, Homicide, and The
Benny Hill Show. The Company also produces or plans to produce local news,
variety shows, magazine format shows, talk shows and game shows.
The Company is currently the only television station in Hungary that
broadcasts a number of western series in the Hungarian language.
A3 programming, from 12:00 a.m. to 5:00 p.m. consists principally of
computerized music clips of Western and Hungarian recording artists plus
generally a movie in the afternoon. From 5:00 p.m. to 7:30 p.m., A3
broadcasts primarily from its library of foreign shows to its viewers who
receive the Company's signal via satellite. From 7:30 p.m. to 12:00 a.m.,
the programming features acquired programming dubbed into Hungarian,
locally produced shows or movies dubbed into Hungarian. The key target
audience of A3 is the 14 to 35 age group. Of the 168 hours of programming
broadcast by the Company, approximately 90 hours (54%) is Hungarian
production.
<PAGE>
The Company receives video music clips directly from recording
companies such as Sony or EMI, or music publishing companies without charge
to the Company. If and when the Company broadcasts a composition, the
Company pays a royalty on the use of the composition to the Hungarian
Association of Record Producers ("HARP"). In the case of its own
productions, the Company's staff selects the program and oversees the
production. The Company believes its production programming staff of 25
persons together with approximately 62 professionals employed on an as
needed basis is adequate to produce its programming. The Company acquires
rights to international sitcoms and other series for a limited number of
showings together with video-discs and scripts of the shows. The Company
dubs the video-discs into the Hungarian language in its dubbing production
studio. The Company believes its staff of 21 persons is adequate for this
activity.
From time to time, A3 broadcasts a special sporting or cultural event
and replaces the regularly scheduled program with this event.
The Company is continually working on new ideas for programming and
intends to change its schedule from time to time to increase "audience
flow," which involves consecutively scheduling programs with similar
audience demographics so as to retain as many viewers as possible from one
program to the next. These scheduling practices are used widely in the
United States and help build viewer loyalty and overall market share. The
Company also advertises and promotes its programming on A3.
The Company has not and does not expect to conduct, or to expend any
funds on, any research or development activities.
6. Advertising Sales
Advertising sales to national, international and local advertisers are
the principal source of revenues for the Company. The Company has been able
to implement a number of sales practices that have been effectively used in
the United States market and in other more developed television
broadcasting markets. First, the Company has cooperated with other
broadcasters to implement accurate, independent rating surveys in each of
its markets. Second, the Company's sales efforts focus on educating the
media buying market on how to use television as an effective advertising
medium.
In Hungary, AGB-Hungaria Meter System began providing ratings
information in 1993 on a national basis and has been providing rating
information for certain local areas including Budapest since 1996. The
Company believes that more accurate ratings information accelerates the
development of commercial television markets because advertisers with more
accurate ratings information are more willing to allocate a greater
percentage of their advertising budget to television advertising.
The Company employs an experienced sales force under the direction of a
sales manager. The Company's executive vice president, Mr. Imre Kovats,
interacts on a regular basis with the sales force in each market.
7. Competition
A3 competes with MTV1 and MTV2, both government owned and operated
national television terrestrial stations and with DUNA-TV, a government
owned and operated national television satellite station for audience, for
programming and advertising. It is anticipated that both MTV 2 and channel
58 (a former Russian military channel now inactive), will be privatized and
will offer competition to the Company. It also competes with NAP TV; and
with TV3 and SZIV TV, privately owned commercial stations with AM-Micro
licenses similar to that of the Company, and with other localized stations
in Budapest that broadcast to parts of the Budapest area sporadically and
have insignificant audiences. In September, TV3 began to broadcast via
satellite.
Competition for viewers also comes from foreign stations such as CNN
and TNT transmitting via satellite TV to cable. These stations broadcast in
either English, German or French. Currently, none broadcast in Hungarian.
<PAGE>
A3 also competes for revenues with other media, such as newspapers,
radio, magazines, outdoor advertising, telephone directory advertising and
direct mail.
8. Regulation
On December 21, 1995, the Media Act was enacted by Parliament. Under
the Act, A3 is required to comply with a number of restrictions on
programming and advertising. The Company believes that currently A3 is
complying with all the restrictions provided for in the Act and that none
of the restrictions has a material adverse effect on A3. These restrictions
include that 30% of A3's broadcast time must be programming of Hungarian
origin, which includes the news, events, talk shows, and sports. If Hungary
becomes a member of the European Union, A3 will be subject to additional
program content regulation. The Company currently devotes approximately 54%
of its broadcasting time to programming of Hungarian origin. The Media Act
also provides rules and regulations pertaining to renewing or extending
licenses; and provides that the state owned MTV2 and Channel 58 should be
privatized.
There is no specific environmental regulation in Hungary to which the
Company is subject, and the Company has not expended and does not expect to
expend any funds on environmental compliance costs.
9. Employees
As of June 30, 1996, the Company had three executive officers and a
central staff of 33 full-time employees, consisting of 25 in production and
in programming, four in sales and four in finance and administration. None
of the Company's employees are covered by a collective bargaining
agreement. The Company also employs from time to time, on an as-needed
basis, additional temporary personnel drawn from a pool of approximately 62
production professionals, such as directors, camera or lighting operators,
and engineers and 21 dubbing professionals. The Company believes that its
relations with its employees are good.
Item 2. Description of Property
The Company entered into a five year lease as of July 1, 1996 for
approximately 12,000 square feet on four floors at Kelenhegyi ut 39, 1118
Budapest, Hungary at a rental of $144,000 per year plus a 25% VAT fee and
maintenance fees. The Company is using the third floor for its executive
offices, the second floor for sales and other offices, the first floor as a
broadcast studio and offices for the production group, and the basement
floor as a dubbing studio and as a post production studio. The basement
floor also houses the master control. Live broadcast signals are
transmitted from the broadcast studio using uplink facilities leased from
Banknet to the back haul satellite Orion Atlantic. Their signals are
received in the Netherlands and retransmitted to the Astra IE satellite
(Hotbird 2 satellite after January 1, 1997) using downlink facilities
leased from Banknet to the cable system heads and to the direct-to-home
subscribers.
Item 3. Legal Proceedings
Prior to November 20, 1995, the Company filed a Registration Statement
with the Securities and Exchange Commission on Form SB-2 for an Initial
Public Offering 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 of the 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.
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 Initial Public Offering 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 Initial
Public Offering deal and breached its contract with the Company and by
commencing an action in the U.S. District Southern District of New York on
January 3, 1996, 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. Starr moved to remand both actions to the New York
Supreme Court on the ground of lack of diversity of citizenship, which
motion was granted. The Company then recommenced its action in the New York
Supreme Court and consolidated its action with the Starr proceeding. The
Company believes its action has merit and that it has valid defenses to the
action brought by Starr.
Item 4. Submission of Matters to a Vote of Security Holders
On June 21, 1996, a special meeting of stockholders was held to vote on
proposals to amend the Certificate of Incorporation; (1) to increase the
number of authorized shares of Common Stock from 5,000,000 to 15,000,000;
(2) to authorize the issuance of up to 5,000,000 shares of preferred stock;
and (3) to increase the number of shares of the Company's 1995 Incentive
Stock Option Plan from 100,000 to 350,000 shares. The stockholders voted in
favor of each of the proposals.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Effective December 20, 1995, the Company's Common Stock and certain
publicly held redeemable common stock purchase warrants ("Warrants")
commenced trading on NASDAQ Small-Cap Market under the symbols HBCO and
HBCOW respectively. Prior to December 20, 1995, there was no established
public trading market for the Company's Common Stock or Warrants. In August
1996, the Company sold 100,000 shares of Preferred Stock in a private
placement. There is presently no market for the Preferred Stock.
The following table sets forth the range of high and low bid prices as
reported by NASDAQ. Bid quotations reflect interdealer prices without
retail mark-up, mark-down or commission transactions.
Common Stock Warrants
High Low High Low
1995
Fourth Quarter) $ 8.375 $5.500 $4.000 $1.000
(December 20-31
1996
First Quarter $11.850 $7.625 $5.750 $2.500
Second Quarter $11.250 $9.000 $5.125 $3.000
Third Quarter $ 9.125 $5.375 $3.375 $1.500
(to September 18)
Shareholders
As of August 1, 1996, there were 52 holders of record of the 2,577,500
outstanding shares of the Common Stock and two holders of the 1,609,900
outstanding Warrants and no holders of Preferred Stock. The closing bid
prices of the Common Stock and Warrants on June 30, 1996 was 9 1/4 and 3
respectively.
Dividend Policy
The Company has never paid any cash dividends on the Common Stock. The
Company anticipates that in the foreseeable future, earnings, if any, will
be retained for use in the business or for other corporate purposes, and it
is not anticipated that cash dividends will be paid either on the Preferred
Shares or Common Stock. Dividends on the Preferred Shares will be paid in
Common Stock if the Company is legally able to do so. The Company is
dependent upon payment of dividends from its Hungarian subsidiary companies
as the source of its own cash dividends.
Hungarian companies are permitted to pay annual dividends out of
profits, determined on the basis of Hungarian accounting principles,
following recommendation of its Board of Directors and a declaration by the
Annual General Meeting which must be held in the first four months of each
year. 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.
Certain Information
The Company is presently subject to the informational requirements of
the Security Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission.
<PAGE>
Transfer Agent
The transfer agent for the Common Stock is, and for the Preferred Shares will
be, American Stock Transfer & Trust Co., 40 Wall Street, New York,
New York 10005.
Item 6. Management's Discussion and Analysis of Financial Conditions
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
April 1994 for a six year term commencing July 1, 1994 to operate 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
$2,000,000 to the Licensees, which was used by the Licensees 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.
Although the Company's television broadcasting activities have begun 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 year ended June 30, 1996, the Company had consolidated revenues
of $672,108 (primarily from the sale of advertising time) and incurred a
net loss for the period of $4,149,682. Expenses aggregated $4,351,869,
including amortization of broadcast license costs of $423,052. Corporate
expenses, which included amortization of deferred financing costs and
original issue discount, aggregated $86,645. The original issue discount
and financing costs relate to the 6% Bridge Notes issued between November
1994 and March 1995.
For the period from September 14, 1994 (date of inception) to June 30,
1995, the Company incurred a net loss of $560,333. Expenses aggregated
$560,393. Corporate expenses, which included amortization of deferred
financing costs and original issue discount, aggregated $117,486. The
original issue discount and financing costs related to the 6% Bridge Notes
issued in November 1994 and March 1995.
A3 broadcasts only video music clips prior to June 1995 when the
Company assumed control. After changing to a civic events format in June
1995, the Company returned to the video music clips format in October 1995
which was less expensive to produce.
<PAGE>
On December 28, 1995 the Company received the proceeds from the sale of
shares and warrants in its Initial Public Offering and determined to
relaunch Channel A3 as a Western style station. In April 1996, the Company
introduced new programming for the hours 7:30 to 11 p.m. featuring
American, United Kingdom and Australian syndicated series that had been
successful in prime time in their home countries. The Company dubbed these
programs into the Hungarian language. Generally, the audience acceptance of
these programs has been favorable and viewership has been high and has
increased over time.
On September 6, 1996, A3 began transmitting its signal from the Astra
Satellite. Over the next few months it is anticipated that Hungarian
Broadcasting Corp. will increase its distribution to in excess of 1.8
million households throughout Hungary, of which about 50% of this increase
in distribution will be picked up on the first 30 days as major cable
operators are the first to install the appropriate down link equipment.
Advertising billing is determined by the specific program ratings
provided by AGB, an independent audience rating service. As the Company's
distribution more than doubles, its advertising rates should more than
double. And as the coverage broadens, the station is of increasing interest
to national and international advertisers. As a result of conversations
with advertisers and media buying groups together with booked advertising
and the improving trend of bookings, Management believes that it should
begin generating positive cash flow on a monthly basis prior to the end of
fiscal 1997.
Nevertheless, since its inception, the Company has run at a deficit in
each month of its operations and should continue to run deficits for the
next few months. There can be no assurance that the Company can generate
enough revenues to cover its expenses in fiscal 1998 or ever.
Liquidity and Capital Resources
From its inception through December 1, 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 the 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 Initial Public Offering
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 Initial Public Offering. The warrants will be redeemable, commencing
16 months after the date of the Initial Public Offering. 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 sock purchase warrants
at $0.225 per warrant. The proceeds of this Offering amounted to
approximately $4,841,000, net of underwriting commission and expenses.
In September 1996, the Company sold 100,000 Preferred Shares at $4.50
per share and 100,000 purchase warrants with the same terms as sold with
the initial public offering for proceeds of $354,500 net of issuance costs.
The Company intends to issue further securities to the public in the near
future to fund the continual development and operations of the Company.
The Company believes that its existing cash balance and cash from
future operations and fundings should be sufficient to fund the Company's
operation for fiscal 1997.
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
<PAGE>
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. However,
the current rate of inflation in Hungary approximates 22%.
<PAGE>
Item 7. Financial Statements
HUNGARIAN BROADCASTING CORP.
FINANCIAL STATEMENTS
INDEX
Report of Independent Accountants F - 1
Consolidated balance sheets as of June 30, 1996,
and June 30, 1995. F - 2
Consolidated statements of operations for the year
ended June 30, 1996, and the period September 14,
1994 (date of inception) through June 30, 1995. F - 3
Consolidated statements of stockholders' equity for the
year ended June 30, 1996, and the period September
14, 1994 (date of inception) through June 30, 1995. F - 4
Consolidated statements of cash flows for the year
ended June 30, 1996, and the period September 14,
1994 (date of inception) through June 30, 1995. F - 5
Notes to consolidated financial statements F - 6
<PAGE>
F - 1
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF HUNGARIAN BROADCASTING
CORP.
We have audited the consolidated balance sheet of Hungarian Broadcasting Corp.
and subsidiaries (the "Company") as of June 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the
Company as of June 30, 1995, were audited by other auditors whose report dated
August 30, 1995 (and December 19, 1995, as to notes 5 and 12) included an
explanatory paragraph that described two restatements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hungarian
Broadcasting Corp., as of June 30, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles in the United States.
We draw to your attention, as described in Note 14, that the Company plans a
further public offering to finance its continued development and operations.
Coopers & Lybrand
Budapest, Hungary
19 September, 1996
<PAGE>
F - 2
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1996 AND JUNE 30, 1995
(EXPRESSED IN US$)
<TABLE>
<CAPTION>
Notes June 30, 1996 June 30, 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3 1,462,379 295,006
Accounts receivable, net of 191,715 87,598
allowance for doubtful accounts
of $82,536 (1995; $0)
VAT receivable 4 123,175 83,429
Deferred program costs, less
accumulated amortization of 5 500,000 -
$250,000
Prepaid expenses and other current assets 42,383 5,000
----------- ----------
Total Current Assets 2,319,652 471,033
Investments
Office and transportation equipment,
less accumulated depreciation of 6 136,296 58,562
$14,067 (1995: $7,310)
Broadcast license costs, less
accumulated amortization of
$458,405 (1995: $35,453) 7 1,692,109 2,115,061
Other deferred financing and other
expenses, less accumulated amortization
of $98,460 (1995: $46,655) 103,341 146,079
----------- ----------
Total Assets $ 4,252,051 $2,790,735
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable 8 975,412 959,156
Accounts payable 479,047 264,112
Accrued expenses 129,271 89,627
Due to related parties 454,720 495,995
Other 231,307 47,424
----------- ----------
Total Current Liabilities 2,269,757 1,856,314
----------- ----------
LONG-TERM LIABILITIES
Notes payable, less current portion 8 - 890,839
----------- ----------
MINORITY INTEREST 40,326 -
----------- ----------
Total Liabilities 2,310,083 2,747,153
----------- ----------
COMMITMENTS AND CONTINGENCIES 12
STOCKHOLDERS' EQUITY
Common stock, $.001 par value - shares authorized 15,000,000
(1995: 5,000,000); issued and outstanding 2,583,600 (1995:
1,265,000) 9 2,583 1,265
Additional paid-in capital 9 6,789,029 862,545
Accumulated deficit 9 (4,980,040) (830,358)
Currency translation adjustment 9 130,396 10,130
----------- ----------
Total Stockholders' Equity 1,941,968 43,582
----------- ----------
$ 4,252,051 $2,790,735
=========== ==========
</TABLE>
The notes on pages 6 to 15 are an integral part of these
financial statements.
<PAGE>
F - 3
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996, AND THE
PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION)
THROUGH JUNE 30, 1995
(EXPRESSED IN US$)
<TABLE>
<CAPTION>
1995/1996 1994/1995
- ------------------------------------------- ------------------------
<S> <C> <C>
Revenues 672,108 72,043
Expenses
Operating costs and expenses 2,038,828 185,469
Amortization of broadcast license costs 423,052 35,453
Amortization of deferred program costs 250,000 -
Selling, general and administrative 1,639,989 339,471
expenses
4,351,869 560,393
----------- ----------
Operating loss (3,679,761) (488,350)
Interest and other income 49,671 2,327
Interest expense (481,238) (74,310)
----------- ----------
Net loss (4,111,328) (560,333)
Minority interest (38,354) -
----------- ----------
Net loss after minority interest $(4,149,682) $ (560,333)
=========== ==========
Net loss per share $(2.01) $(0.39)
Weighted average number of common 2,067,008 1,427,500
shares outstanding
</TABLE>
The notes on pages 6 to 15 are an integral part of these
financial statements.
<PAGE>
F - 4
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE TWELVE MONTHS ENDED JUNE 30, 1996 AND
THE PERIOD SEPTEMBER 14, 1994 (DATE OF INCEPTION)
THROUGH JUNE 30, 1995 (EXPRESSED IN US$)
<TABLE>
<CAPTION>
Common Stock Additional paid-in Accumulated Currency
capital deficit translation
Shares Amount $ $ $ adjustment $
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PERIOD TO JUNE 30,
1995
Initial issuance of 850,000 850 7,650
common - stock
September, 1994
Sale of common 265,000 265 405,045
stock to private
placement investors
- - Nov. and Dec.
1994
Issuance of common 150,000 150 449,850
stock - March 1995
Net losses for period (830,358)
Foreign currency 10,130
translation
adjustment
--------- ------ ----------- ------------ ---------
BALANCE, JUNE 30, 1,265,000 1,265 862,545 (830,358) 10,130
1995
YEAR ENDED JUNE
30, 1996
Issuance of common 182,500 182 499,818
stock - July 1995
Issuance of common 200,000 200 549,612
stock - August 1995
Shares contributed by (220,000) (220) 220
officers for
cancellation
in December 1995
Initial public 1,150,000 1,150 5,990,590
offering in
December 1995
Public Offering Costs (1,150,286)
Exercise of warrants 6,100 6.00 36,530
during year
Foreign currency 120,266
translation adjustment
Net loss (4,149,682)
--------- ------ ----------- ------------ --------
BALANCE, JUNE 30, 1996 2,583,600 $ 2,583 $ 6,789,029 $ (4,980,040) $ 130,396
========= ====== =========== ============ ========
</TABLE>
The notes on pages 6 to 15 are an integral part of these financial statements.
<PAGE>
F- 5
HUNGARIAN BROADCASTING CORP. CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED
JUNE 30, 1996, AND THE PERIOD SEPTEMBER 14,1994
(DATE OF INCEPTION) THROUGH JUNE 30, 1995 (EXPRESSED IN US$)
<TABLE>
<CAPTION>
1995/1996 1994/1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (4,149,682) (560,333)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of deferred financing
costs and organization 51,805 213,650
Amortization of program costs 250,000 -
Amortization of broadcast license costs 422,952 35,453
Depreciation of fixed assets 13,798 1,786
Currency translation adjustment 120,266 -
Changes in operating assets and
liabilities:
Increase in accounts receivable (104,117) (87,598)
Increase in VAT receivable (39,746) (83,429)
Increase in prepaid expenses and other
assets (37,383) (5,000)
Increase in accounts payable 214,935 264,112
Increase in accrued expenses 39,644 89,627
Increase in other liabilities 183,883 15,734
---------- ----------
Net cash used in operating activities (3,033,645) (115,998)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for broadcast license cost - (2,146,744)
Purchase of office and transportation
equipment net of disposal (91,532) (105,872)
Payment for organizational costs - (40,165)
Investments (653) -
Purchase of programs (750,000) -
Net increase in deferred timing costs (9,067) -
---------- ----------
Net cash used in investing activities (851,252) (2,292,781)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease)/Increase in advances from
related parties (41,275) 160,285
Proceeds from issuance of common stock 5,927,802 458,500
Proceeds from issuance of notes payable - 2,120,000
Payments of notes payable, net of issue
discount (874,583) -
Payments for offering costs - (35,000)
Increase in liability to minorities 40,326 -
---------- ----------
Net cash provided by financing
activities 5,052,270 2,703,785
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,167,373 295,006
Cash and cash equivalents at beginning
of period 295,006 -
---------- ----------
Cash and cash equivalents at end of
period 1,462,379 295,006
========== ==========
</TABLE>
The notes on pages 6 to 15 are an integral part of these financial statements.
<PAGE>
F - 6
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. As disclosed in the financial statements drawn up as
at June 30, 1995, 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 costs;
this amount is being amortized over approximately five years. 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
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 Licensees effectively 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>
F - 7
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The operations of the Company are essentially in Hungary where the majority of
revenues and expenditures are incurred. With the exception of cash and cash
equivalents amounting to $1,375,532 and notes payable of $975,412, the assets
and liabilities of the company relate to Hungary.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of the Company and
all its subsidiaries (which are all majority owned by the Company), from their
respective acquisition dates. All material intercompany transactions and
balances have been eliminated.
The subsidiaries of the Company are as follows:-
<TABLE>
<CAPTION>
NAME COUNTRY OF INCORPORATION PERCENTAGE OWNED
<S> <C> <C>
HBC Kft Hungary 100%
VI-DOK Kft Hungary 90%
DNTV Kft Hungary 80%
</TABLE>
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.
(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) are 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.
<PAGE>
F - 8
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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.
(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
based on a cash flow analysis, the carrying value of these assets would be
reduced to its estimated fair market value.
(i) Organization Costs
The Company has capitalized organization costs, which are being amortized over
five years.
(j) Income Taxes
At June 30, 1996, the Company sustained a net loss of approximately $4,110,000.
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", due to 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 due to the incurred
losses.
<PAGE>
F - 9
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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.
(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 US. 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
its 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
differs 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, under Hungarian accounting
principles are valued at the lower of cost or market value. In addition,
deferred taxes are not 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. As at June 30,
1996, there were no significant distributable reserves in the Hungarian
subsidiaries of the Company.
(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>
F - 10
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. CASH AND CASH EQUIVALENTS
At June 30, 1996, cash of $1,375,532 denominated in U.S. dollars was on deposit
with a major U.S. money center bank. In addition, $86,847 (denominated partly in
U.S. dollars and partly in Hungarian forints) was on deposit with a Hungarian
bank.
4. VAT RECEIVABLE
Value-added taxes paid in Hungary for which a reimbursement claim was submitted
by the Company, have been included in current assets.
5. DEFERRED PROGRAM COSTS
During the year, the Company purchased program rights for a total of $750,000.
These are being amortized over the life of the related rights of nine months.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes television broadcasting and production
equipment, vehicles and office equipment, fixtures and fittings. These are
being depreciated on a straight line basis over their estimated useful lives,
being between three and ten years.
7. BROADCAST LICENSE COSTS
Broadcast license costs acquired for $2,150,514 are being amortized over the
life of the relevant licenses which terminate in July 2000.
8. NOTES PAYABLE
From November 1994 through March 1995, the Company sold (in a private placement)
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 13(b)). The revised terms require 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
<PAGE>
F - 11
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
$84,588, and $23,640, respectively, as of June 30, 1996. During January 1996,
$1,060,000 of the notes were repaid. Should the remaining notes be repaid before
June 30, 1997, any unamortized portion of the original issue discount and
deferred financing expenses will be charged to operations.
Notes payable of $975,412 at June 30, 1996 (all short-term liability) consist of
the original $2,120,000 principal amount of the notes, less notes of $1,060,000
repaid during the year ended June 30, 1996, less the unamortized portion of the
original issue discount of $84,588.
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.
9. COMMON STOCK
(a) In July 1995, the Company sold 182,500 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 (approximate $550,000 net). The remaining stock subscription receivable
at September 30, 1995, of $100,000, 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 three months ended December 31, 1995.
(c) On December 20, 1995 the Company completed an IPO of 1,150,000 shares of
its common stock at $5.00 per share and 1,610,000 redeemable common stock
purchase warrants at $0.15 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 ending December 20, 2000. The warrants will be
redeemable, commencing April 20, 1997. The Company also issued to the
underwriter warrants for the purchase of 100,000 shares of common stock at $8.25
per share and 10,000 common stock purchase warrants at $0.225 per warrant. The
proceeds of this offering amounted to $4,995,338, net of underwriting
commissions and expenses.
<PAGE>
F - 12
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(d) On June 21, 1996, the Company increased the number of authorized shares of
Common Stock from 5,000,000 to 15, 000,000; authorized the issuance of up to
5,000,000 shares of preferred stock; and increased the number of shares of the
Common Stock available under the Company's 1994 Incentive Stock Option Plan, as
amended, from 100,000 shares to 350,000 shares for use as incentive awards to
certain key employees, directors and consultants.
10. STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Plan"). 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 following the optionee's
death. Incentive options granted to any employee who owns more than 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 non-
qualified 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 following table is a summary of all stock options as of June 30, 1996:
<TABLE>
<CAPTION>
Outstanding options Option price per share
<S> <C> <C>
July 1, 1995 - -
Granted in 1995 100,000 $5.00
-------
Balance at June 30, 1996 100,000 $5.00
=======
</TABLE>
As of June 30, 1996, none of the stock options were exercisable.
<PAGE>
F - 13
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11. 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 a November 1994 private placement (Note 8). 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. In addition, the related party
had advanced approximately $120,000 to the Company amounts which were repaid in
January 1996.
12. COMMITMENTS AND CONTINGENCIES
(a) Consulting and Compensation Agreements
The Company has a five-year employment agreement with its President and Chief
Financial Officer effective beginning in January 1996, at a monthly salary of
$10,000. The employment agreement also permits reimbursement of ordinary and
necessary business expenses.
The Company has a two-year employment agreement with its Executive Vice
President effective beginning in January 1996, at a monthly salary of $10,000.
He is also entitled to receive reimbursement for ordinary and necessary business
expenses.
The Secretary is a partner in a firm which has a two-year retainer agreement to
provide all SEC related legal services for the Company 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, beginning in January 1996.
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.
(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, cancelable by
the Company upon 90 days notice.
<PAGE>
F - 14
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
13. LEGAL PROCEEDINGS
(a) License Proceeding
TV 3, a competitor of A3, which was granted a six year, 24 hour per day
microwave license, applied to the Ministry of Culture 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. The Ministry of Culture denied the application and held that even if a
new committee were acting, it would also have granted the A3 license to the
Licensees and to NAP TV. TV 3 thereafter instituted a legal action on December
1, 1994 against the Ministry of Culture, but not against either of the
Licensees, to overturn its decision in awarding the A3 broadcast license in the
Metropolitan Court of Budapest. At a hearing held on December 1, 1994, the
Municipal Court ordered the Ministry to follow prescribed procedures and make a
new decision. The Ministry appealed this decision to the Appeals Court of
Budapest. On April 25, 1995, the Company received a letter from the Ministry
confirming that the license had been granted to the Licensees and the Licensees
may operate in accordance with the terms of the license. On November 6, 1995,
the Appeals Court vacated the decision of the Metropolitan Court on the ground
that no notice of the hearing had been given to the Licensees (which had not had
an opportunity to appear at that hearing). The Appeals Court ruled that the only
issue to be decided by the Metropolitan Court is whether the Ministry's
committee was properly constituted to grant the licenses and remanded the matter
for a hearing in the Fall 1996 term. In particular, the Appeals Court ruled that
the Metropolitan Court does not have jurisdiction to revoke the grant of the
licenses or otherwise modify the decision of the Ministry's committee and,
accordingly, the Licensees may continue to operate under the licenses, pending a
final determination by the Ministry committee. In its ruling dated June 24,
1996, the Metropolitan Court has now ruled in favor of the Company.
(b) Claim regarding underwriters
Prior to November 20, 1995, the Company filed a Registration Statement with the
Securities and Exchange Commission of Form SB-2 for an Initial Public Offering
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 closing schedule 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.
On January 3, 1996, the Company commenced an action against Coleman and Starr in
the United States District Court of the 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.
<PAGE>
F - 15
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 Initial
Public Offering 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 Initial Public Offering deal and breached its
contract with the Company and by commencing an action in the U.S. District
Court, Southern District of New York on January 3, 1996, falsely accusing Starr
of breach of contract. Starr further included a course of action on the same
facts for prima facie tort. The Company had this action removed to the US.
District Court, Southern District of New York. Starr moved to remand both
actions to the New York Supreme Court on the ground of lack of diversity of
citizenship, which motion was granted. The Company then recommenced its action
in the New York Supreme Court and consolidated its action with the Starr
proceeding. The Company believes its action has merit and that it has valid
defenses to the action brought by Starr.
Management believes that the outcome of the above litigation matters will not
have a material adverse effect on the consolidated financial position, liquidity
or results of operations of the Company.
14. SUBSEQUENT EVENT
In September 1996, the Company sold 100,000 Preferred Shares at $4.50 per share
and 100,000 common stock purchase warrants with the same terms as warrants sold
with the initial public offering. Proceeds were $354,500, net of issuance costs.
The Company intends to issue further securities to the public in the near future
to fund the continued development and operations of the Company. On September
18, 1996, J.W. Barclay & Co. signed a letter of intent to underwrite this issue.
Under the terms of this letter of intent, it is anticipated that the proceeds to
the company upon completion of the issue will be between $2,880,000 and
$4,320,000. In the event that this issue is not completed, the Company would be
required to seek alternative sources of financing to fund the continued
development and operations of the Company.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On April 11, 1996, the Board of Directors of the Company selected
Coopers & Lybrand as its new independent auditor. Todman & Co., CPAs, P.C.
had served as the Company's independent auditor until that time. The
Company made the change because Coopers & Lybrand has an auditing staff in
the Republic of Hungary, while Todman & Co., CPAs, P.C. does not. The
Company believes that such a local auditing presence in Hungary will serve
the Company better during its anticipated growth period. The Board of
Directors approved the decision to change public accountants based on the
reasons stated above. The Board of Directors did not dismiss Todman & Co.,
CPAs, P.C., nor did Todman & Co., CPAs, P.C. resign or decline to serve if
reappointed. None of Todman & Co., CPAs, P.C. reports on the financial
statements for any year contained an adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principle. There were no disagreements with Todman & Co., CPAs,
P.C. on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure in connection with the
audits of the Company at any time.
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are:
Name Age Position
Peter E. Klenner 37 President, Chief
Executive Officer,
and Director
Imre M. Kovats 40 Executive Vice
President and Director
Frank R. Cohen 75 Secretary and
Treasurer, Director
Justin Bodle 35 Director
James H. Season 52 Chief Financial
Officer
Peter E. Klenner, a German national, has served as President, Chief
Financial Officer and a director of the Company since its inception in
1994. Mr. Klenner has also served as President, Chief Executive Officer and
a director of Hungarian Teleconstruct Corp. ("Teleconstruct"), a publicly
traded construction corporation since 1993. In February 1992, Mr. Klenner
founded Hungarian Telephone and Cable Corp. ("HTCC"), an owner of local
telephone exchanges, and served as President, Chief Executive Officer, and
Chief Financial Officer from February 1992 until May 1995, when he resigned
in order to devote his time to the Broadcasting Company. From June 1991 to
May 1992 he served as Chairman of the Board of Montavid Engineering AG, a
Budapest based building and engineering firm. Mr. Klenner attended the
University of Munich.
Imre M. Kovats, of Austro-Hungarian nationality, has been Executive
Vice President of the Company since 1995 and a director since August 1995.
In 1990, he founded the Saatchi & Saatchi Group Hungary and was Group
Chairman until 1994. The Saatchi & Saatchi Group Hungary engaged in its
business of buying time from broadcasting companies for their clients and
in producing commercials for their clients for use in broadcasting
stations. Mr. Kovats graduated from the University of Translators and
Interpreters at Vienna and attended the University of Law of Vienna.
Frank R. Cohen has served as Secretary, Treasurer, and director since
the Company's inception in 1994. He has been practicing law in the City of
New York since 1946. Since 1985 he has been a member of the law firm of
Cohen & Cohen, counsel to the Company. He also serves as Secretary-Treasurer
and a director of Teleconstruct. Mr. Cohen is a graduate of Columbia
University Law School.
Justin Bodle has been a director since June 1996. Since 1992, he has
been managing director of Power Television Limited, his own company,
specializing in distributing and licensing television programs. Power TV is
the largest syndication company in Central Europe. From 1989 to 1992, he
was Managing Director and Board Member of Carat Entertainment, the largest
media buying company in Europe. Prior to 1989, he was Sales Director for
all of Jim Henson international productions. Mr. Bodle is a graduate of
Eton and Sandhurst.
James H. Season was appointed Chief Financial Officer in August 1996.
Mr. Season was managing director with RHL Management Group, Inc., based in
Greenwich, Connecticut since 1990, where he has been involved in financial
consulting, crisis management and investment banking. From 1986 to 1990,
Mr. Season was a Group Vice President and Chief Investment Officer of
Golodetz Trading Corporation, an international trading firm based in New
York City. Prior to 1986, Mr. Season was a Managing Director of Chase
Manhattan Bank, N.A. He also serves as a director of Hungarian Telephone
and Cable Corp. Mr. Season holds a J.D. degree from the University of
Virginia and an M.B.A. from the University of Michigan.
<PAGE>
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company and until their successors are
elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors. Officers do not receive any
compensation for serving as directors.
Item 10. Executive Compensation
Prior to January 1996, no officer or director received any compensation
from the Company.
In July 1995, the Company entered into a five year employment agreement
with Peter E. Klenner effective January 1, 1996 at a monthly salary of
$10,000. He is entitled to receive reimbursement of ordinary and necessary
business expenses.
In July 1995, the Company entered into a two year employment agreement
with Imre M. Kovats effective January 1, 1996 at a monthly salary of
$10,000. He also is entitled to receive reimbursement of ordinary and
necessary business expenses.
In July 1996, the Company retained Justin Bodle as a consultant to
supervise programming and station management for the Company at a fee of
1,000 shares of Common Stock per month for a two year period. Mr. Bodle
also received an option to purchase 25,000 shares of the Company's Common
Stock at $10 per share after the first profitable quarter before June 30,
1997 and an additional 25,000 shares after the second profitable quarter
before December 31, 1997.
In August 1996, the Company retained James H. Season as its Chief
Financial Officer at a fee of $6,500 per month through December 1996 and
thereafter at a fee of $8,000 per month on a month to month basis plus
living expenses.
Limitation of Liability for Directors
The Company's Certificate of Incorporation provides that its directors
shall not be liable for monetary damages for breach of the directors'
fiduciary duty of care to the Company and its stockholders as a director
except in the case of (i) any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
payments of dividends or approvals of stock repurchases or redemptions that
are unlawful under Delaware law, or (iv) any transactions from which the
directors derived an improper personal benefit. Currently under Delaware
law, such provisions do not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
relief will remain available under Delaware law. This provision does not
affect a director's responsibilities under federal securities laws.
Pursuant to the Company's Certificate of Incorporation, current and former
directors and officers are indemnified to the maximum extent permitted,
from time to time, by the Delaware General Corporation Law.
In addition, the By-laws of the Company provide that the Company shall
indemnify any and all of its Directors and Officers or former Directors and
Officers or any person who may have served at its request as a Director or
Officer of another Corporation in which it owns shares of capital stock or
of which it is a creditor against expenses actually and necessarily
incurred by them in connection with the defense of any action, suit or
proceeding in which they, or any of them, are made parties, or a party, by
reason of being or having been Directors or a Director or Officer of the
Company, or such other corporation, except, in relation to matters as to
which any such Director or Officer or person shall be adjudged in such
action, suit or proceeding to be liable for negligence or misconduct, in
the performance of duty.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and persons controlling
<PAGE>
the Company pursuant to the foregoing provisions or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable.
Stock Option Plan
In 1994 the Company adopted a Stock Option Plan (the "Plan"). An
aggregate of 350,000 shares of Common Stock are authorized for issuance
under the Plan. 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 a Committee of the Board
of Directors. 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 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 following the optionee's death. Incentive options
granted to any employee who owns more than 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
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 non-qualified option with an exercise price less than 85% of the
fair market value of the underlying Common Stock on the date of the grant.
Options to purchase an aggregate of 185,000 shares of Common Stock have
been granted under the Plan including options to purchase 50,000, 30,000,
and 10,000 shares granted to Messrs. Klenner, Kovats and Cohen
respectively. The options granted to Messrs. Klenner and Cohen cannot be
exercised until December 20, 1996.
The Company has no pension or profit sharing plan or other contingent
forms of remuneration.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and beneficial owners
of over 10% of the Common Stock to file reports of holdings and
transactions in the Common Stock. Based upon a review of the Forms 3, 4 and
5 required to be filed by such directors, executive officers and beneficial
owners pursuant to Section 16(a) for the Company's fiscal year ended June
30, 1996, the Company has complied with the reporting requirements.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to the
beneficial ownership of the Common Stock as of June 30, 1996 by (i) each
person known by the Company to own beneficially more than 5% of the
outstanding Common Stock; (ii) each director of the Company; and (iii) all
directors and officers as a group.
<PAGE>
Name and Address Shares Beneficially Owned
Number Percent
Peter E. Klenner(1)(2)
Szamado u. 19
Budapest, Hungary 390,000 15.10%
Hungarian Teleconstruct Corp.(1)
Szamado u. 19
Budapest, Hungary 250,000 9.70%
Frank R. Cohen(1)(2)
445 Park Avenue
New York, NY 10022 30,000 1.20%
Imre Kovats
Szamado u. 19
Budapest, Hungary 35,000 1.36%
Justin Bodle
Szamado u. 19
Budapest, Hungary 0 0.00%
James H. Season
Szamado u. 19
Budapest, Hungary 0 0.00%
All officers and directors as a group
(5 persons) 455,000 17.66%
(1) Messrs. Klenner and Cohen own 17.2% and 2.3% respectively of the
outstanding shares of Hungarian Teleconstruct Corp. including
options currently exercisable and constitute two out of the five
members of its Board of Directors. Messrs. Klenner and Cohen
disclaim that they will be able to control the voting of these
shares.
(2) Messrs. Klenner and Cohen may be deemed to be the "promoters" or
"parents" of the Company, as those terms are defined in the rules
and regulations as adopted under the Securities Act of 1933, as
amended.
Item 12. Certain Relationships and Related Transactions
On September 14, 1994, the Company sold 480,000 shares to Peter E.
Klenner, president of the Company for $4,800 ($.01 per share); 320,000 shares
to Robert Genova, formerly Chairman of the Board for $3,200 ($.01 per share);
and 50,000 shares to Frank R. Cohen, Secretary, Treasurer, Director and
Counsel to the Company for $500 ($.01 per share) for an aggregate of $8,500.
In December 1994 and March 1995, the Company borrowed $800,000 from
Hungarian Teleconstruct Corp. ("HTEL"), at 6% per annum interest. Fifty
percent of the loan was repaid in January 1996. As an additional
consideration, the Company (1) issued 100,000 shares of its Common Stock to
HTEL; (ii) granted HTEL an option to purchase 150,000 additional shares of
Common Stock at $3 per share from the Company exercisable until April 30,
1995. HTEL exercised its option to purchase 150,000 additional shares in
March 1995. Messrs. Klenner and Cohen, officers and directors of the Company,
own approximately 17.2% and 2.3%, respectively, of the outstanding shares of
the Common Stock (including shares subject to exercisable options) of HTEL.
<PAGE>
In connection with the July private placement in which the Company sold
182,500 shares at $3 per share, Peter E. Klenner purchased 30,000 shares on
the same terms as the other investors.
In December 1995, Messrs. Klenner, Genova and Cohen contributed 100,000
shares, 100,000 shares, and 20,000 shares, respectively to the Company
without cost to the Company for cancellation as a condition to the
Underwriter agreeing to underwrite the Offering.
The Company does not intend in the future to have any transactions with
affiliates. The Company has no arrangement, understanding or intention to
enter into any transaction or participate in any business opportunity with
any Officer, Director or principal stockholder or with any firm or business
organization with which they are affiliated, whether by reason of stock
ownership, position as Officer or Director, or otherwise, that poses a
conflict of interest. However, should the company enter into any affiliated
transaction with any Officer, Director or principal stockholder of the
company, such transaction will be approved by a resolution of at least a
majority of the independent members of the Board of Directors of the company.
Any transaction with an affiliate will be on terms no less favorable to the
Company than could be obtained from an independent third party. Failure of
the Company and its management to conduct the Company's business in its best
interests may result in liability to the Company and its management.
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) List of Financial Statements
Reference is made to Item 8 for a list of all financial
statements filed as part of this Form 10-K.
(a)(2) List of Financial Statement Schedules
Reference is made to Item 8 on page 12 for a list of all
financial statement schedules filed as part of this Form 10-K.
(a)(3) List of Exhibits * (numbers below are references to Regulation S-B)
(3)(a) Certificate of Incorporation filed September 14, 1994*
(b) Certificate of Amendment to Certificate of
Incorporation filed June 28, 1996.***
(c) By-laws
(4)(a) Form of Warrant Agreement**
(a) (i) Form of Common Stock Purchase Warrant Certificate**
(b) Form of Underwriter's Warrant**
(c) Form of Underwriter's 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 Option Plan*
(e) Sharing agreement for space and facilities between
Registrant and Hungarian Telephone & 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.**
(p) Contracts for purchase of programming between Power TV
Ltd. and Registrant dated February 28 and July 29,
1996.***
(q) Lease for satellite space between Nethold Central
Europe BV and Registrant dated July 5, 1996.***
(r) Management consulting agreement between Registrant and
Justine Bodle dated June 15, 1996.***
(s) Agreement to set up uplink and downlink between
Registrant and Banknet dated June 26, 1996.***
(t) Rental lease between Registrant and Investor Holding
RT dated June 25, 1996.***
* Filed with Registration Statement No. 33-96674.
** Filed with Registration Statement No. 33-80177.
*** Filed with this report
B. The following reports on Form 8-K have been filed during the three months
ended June 30, 1996::
On April 11, 1996 a report on change of accountants, was filed on form 8-K.
<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 30th day of September 1996.
HUNGARIAN BROADCASTING CORP
(Registrant)
/s/___________________________________
By Frank R. Cohen
Frank R. Cohen, Secretary, Treasurer
(Duly Authorized Representative)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Hungarian Broadcasting Corp., a corporation organized and existing under
and by virtue of the General Corporation law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Hungarian
Broadcasting Corp., resolutions were duly adopted setting
forth a proposed amendment of the Certificate of Incorporation
of said corporation, declaring said amendment to be advisable
and calling a meeting of the stockholders of said corporation
for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing the Article thereof
numbered FOURTH so that, as amended said Article shall be and
read as follows:
FOURTH: The notal number of shares of all classes of
stock which the corporation is authorized to issue is
twenty million (20,000,000), consisting of five million
(5,000,000) shares of preferred stock, par value one-tenth of
one cent ($.001) per share (the "Preferred Stock"), and fifteen
million (15,000,000) shares of common stock, par value
one-tenth of one cent ($.001) per share (the "Common Stock").
Each issued and outstanding share of Common Stock shall
entitle the holder of record thereof to one vote.
The Preferred Stock may be issued in one or more series
as may be determined from time to time by the Board of
Directors. All shares of any one series of Preferred
Stock will be identical except as to the date of issue
and the dates from which dividends on shares of the
series issued on different dates will cumulate, if
cumulative. Authority is hereby expressly granted to the
Board of Directors to authorize the issuance of one or
more series of Preferred Stock, and to fix by resolution
or resolutions providing for the issue of each such
series the voting powers, the designations, preferences,
and relative, participating, optional, redemption,
conversion, exchange or other special rights,
qualifications, limitations or restrictions of such
series, and the number of shares in each series, to the
full extent now or hereafter permitted by law.
The redemption or acquiring by the Company of any shares
of its Preferred Stock, shall not be deemed to reduce
the authorized number of shares of Preferred Stock of
the Company. Any shares of the Company's Preferred Stock
redeemed, retired, purchased or otherwise acquired
(including shares acquired by conversion) shall be
canceled and shall assume the status of authorized but
unissued Preferred Stock in the same manner as if the
shares had never been issued as shares of any series of
Preferred Stock and be undesignated as to future series.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a meeting of the stockholders of said corporation
was duly called and held, upon notice in accordance with
Section 222 of the General Corporation Law of the State of
Delaware at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of
the State of Delaware.
FOURTH: That the capital of said corporation shall not be reduced
under or by reason of said amendment.
IN WITNESS WHEREOF, said Hungarian Broadcasting Corp., has caused this
certificate to be signed by Peter E. Klenner, its President, and Frank R.
Cohen, its Secretary, this 24th day of June, 1996.
By: /s/
Peter E. Klenner
President
By: /s/
Frank R. Cohen
Secretary
CONTRACT AGREEMENT
Television Programme Licence between POWER TELEVISION LIMITED and HUNGARIAN
BROADCASTING CORPORATION as of 28th February 1996.
THE PARTIES :
LICENSEE : Hungarian Broadcasting Corporation (HBCO) , 90 West Street, New
York, NY10006
LICENSOR : POWER TELEVISION LIMITED, P.O. Box 95, 2a Lord Street, Isle of
Man ( PTV )
BASIC PROVISIONS:
It is understood in this agreement Basic Provisions shall include
all Terms and Conditions listed herein and Television Licence Agreement .
COPYRIGHT:
By separate agreement Power Television acts as distributor and licensor in
Hungary for the series listed, whose copyright is owned by seperate
agreement.
TELEVISION LICENCE AGREEMENT
1 LICENSED STATION : A3 (HUNGARY)
2 RIGHTS : Cable and AM Micro (Budapest only)
3 EXCLUSIVE RIGHTS : 1 APRIL 1996- 31 DECEMBER 1996
LICENSED
Page 2/...
PROGRAMMING
ROAR TV (HUNGARIAN VERSION)
PACIFIC DRIVE
SIRENS
HOLLYWOOD TODAY
FASHION TV (or equivalent to be confirmed)
PACIFIC BLUE
OUTER BOUNDS
OO LA LA (or equivalent to be confirmed)
HOMOCIDE
BENNY HILL
BEAUTY AND THE BEAST
OOPS DA (or equivalent to be confirmed)
5 TERRITORY : HUNGARY
6 TOTAL LICENCE FEE: : US$750,000 (Seven hundred and fifty thousand UNITED
STATES dollars)
7 MATERIAL TO BE FURNISHED : BETA SP, with FULL ENGLISH
SCRIPTS PER EPISODE AND PRESS MATERIALS
8 NET CHARGE FOR MATERIAL : At Licensee s cost to a maximum
of US$40,000 (forty thousand United States Dollars). Shipping freight
forward.
9. BANKING DETAILS: Power Television Limited, Royal Bank of
Scotland, Victory House, Prospect Hill, Douglas, Isle of Man,
Account Name: POWTEL-USD1 Sort Code: 16-58-80
10 SHIPPING INFORMATION : Ship to : A3, HBC KFT, 1118
Budapest, Szamado Ut.19, Hungary ( A3 )
11 NEEDED BY : 15th March 1996
12 AIR/SURFACE : AIR FREIGHT FORWARD
13 MATERIAL INVOICE INFORMATION : Ship to : Marian Peppers, A3, HBC KFT,
1118 Budapest, Szamado
Ut.19, Hungary ( A3 )
14 ADDITIONAL TERMS :
14.1 It is agreed that subject to Power TV or nominated company being a
shareholder in excess of 5% of outstanding issued shares in Licensee that
Licensee agrees to purchase a minimum of 50% of its programming schedule by
mutual approval between the broadcast hours of 19.30 hours and 24.00 hours
under similar terms and conditions for the broadcast period between 1st
January 1997 and 31st December 1998; It is agreed that the license fee for
1997/1998 shall include a minimum of 20 minutes (twenty minutes) of
commercial airtime per month for exploitation under similar terms and
conditions.
Page 3/...
14.2 It is agreed that the license fee shall contain additional commercial
minutage to the value of US$16,500 (sixteen thousand five hundred United
States Dollars) per month to be made available to Power TV for its
commercial exploitation during the period of April and December 1996,
subject to Power TV making this airtime available to Initiative Media only.
14.3 A3 will be responsible for providing the Hungarian translations and
the Hungarian dub for each episode subject to Standard Terms and
Conditions, and a minimum requirement of voices.
15 PAYMENT TERMS:
It is agreed that US$200,000 (Two hundred thousand United States Dollars)
be paid into bank account as nominated by Licensor by no later than 29th
February 1996.
It is agreed that US$200,000 (Two hundred thousand United States Dollars)
be paid into bank account as nominated by Licensor by no later than 31st
March 1996.
It is agreed that US$40,000 (Forty thousand United States Dollars) be paid
into bank account as nominated by Licensor no later than 8th April 1996,
and thereafter US$40,000 (Forty thousand United States Dollars) will be
paid monthly by no later than the 8th day of each month, up to and
including 8th November 1996, totalling US$320,000 (Three hundred and twenty
thousand United States Dollars).
It is agreed that US$30,000 (Thirty thousand United States Dollars) be
paid into bank account as nominated by Licensor no later than 8th December
1996.
It is the essence of this agreement that all payments are made by the due
dates.
16 PROMOTIONAL INFORMATION :
It is agreed that A3 will use its best efforts to promote to both the
trade and audience the programming listed in this licence agreement. PTV
will use its best efforts to provide support material and assistance
in the promotion of this programming as soon as possible.
17 RATING INFORMATION :
It is agreed that the licensee will provide PTV with all relevant rating
information including demographics for all programming licensed under this
agreement agreed under this license agreement within 15 days after the end
of the month of broadcast.
18 CONFIDENTIALITY
The Parties here to shall not disclose to any third party neither the
underlying deal structure nor the Terms and Conditions of this Agreement
without the prior written permission of the Parties, the details of which
shall remain in strictest confidence.
Page 4/...
19 WARRANTIES :
19.1 PTV warrants that it has the right to enter into and perform this
agreement and that the performance of this agreement by either party shall
not infringe upon the rights or result in any liability or obligation
to any third parties except as specifically set forth herein; each of PTV
and A3 hereby indemnifies and holds harmless the other, its successors,
licensees and permitted assigns from and against any and all damages,
losses, costs, and expenses (including reasonable attorneys fees) arising
out of any breach of representation, warranty or agreement made by the
indemnifying party.
20 AGREEMENT :
20.1 This Agreement shall be binding on the parties unless or until they
are superseded by another instrument in writing, signed by the parties,
and;
20.2 This Agreement contains the entire agreement of the parties as
currently subsisting and themselves supersede all other agreements,
understanding or arrangements previously subsisting between the parties in
relation to the subject matter hereof.
20.3 This Agreement includes all the Terms and Conditions as listed in
Standard Terms and Conditions attached hereto.
20.4 This Agreement shall not be deemed to create any partnership or any
such relationship between the parties hereto.
20.5 This Agreement and/or any part of this Agreement is personal to the
parties and may not be assigned except to a related company or to a
division or part of its corporate grouping in which case appropriate notice
in writing shall be given to the other party hereto.
20.6 This Agreement shall be construed in accordance with English Law and
the parties submit themselves to the exclusive jurisdiction of the English
courts.
IN WITNESS whereof the parties hereto have set their hands the day month
and year first herein before written.
HUNGARIAN BROADCASTING CORPORATION Peter Klenner, President & CEO
(Authorised signatory) (Print Name and Title)
POWER TELEVISION LTD Justin Bodle
(Authorised signatory) (Authorized Signatory
Page 5
CONTRACT AGREEMENT
Television Programme Licence between POWER TELEVISION LIMITED and HUNGARIAN
BROADCASTING CORPORATION as of 29th July 1996 FOR DAYTIME PROGRAMMING.
THE PARTIES :
LICENSEE : Hungarian Broadcasting Corporation, (HBCO), 90 West Street, New
York, NY 10006
LICENSOR : POWER TELEVISION LIMITED,PO BOX 95, 2a Lord Street, Isle of Man
('PTV')
BASIC PROVISIONS:
It is understood in this agreement "Basic Provisions" shall include all
"Standard Terms and Conditions" listed herein and "Television Licence
Agreement".
COPYRIGHT:
By separate agreement Power Television acts as distributor and
licensor in Hungary for the series listed, whose copyright is owned by
separate agreement.
TELEVISION LICENCE AGREEMENT
1 LICENSED STATION : A3 (HUNGARY)
2 RIGHTS: Digital Satellite , Cable and AM Micro (Budapest only)
3 EXCLUSIVE RIGHTS LICENSED: 1 OCTOBER 1996 - 31 DECEMBER 1997
Page 6
4 PROGRAMMING "JIM HENSON'S ANIMAL SHOW"
"SNORKS"(animation)
"THE PERSUADERS"
"FANTASY ISLAND"
"OUTER BOUNDS"
"SIRENS"
"KIMBA THE WHITE LION"(animation)
"POPEYE"(animation)
"FOOFUR"(animation)
"SEABERT"(animation)
"POWER RANGERS"
5 TERRITORY: HUNGARY
6 TOTAL LICENCE FEE:US$195,000 (one hundred and ninety-five thousand
US dollars)
7 TOTAL NUMBER OF
BROADCAST HOURS: 595
8 MATERIAL TO BE FURNISHED : BETA SP, with FULL ENGLISH SCRIPTS PER
EPISODE AND PRESS MATERIALS
9 NET CHARGE FOR MATERIAL : At Licensee's cost to a maximum of US$ 15,000
(fifteen thousand US dollars) . Shipping freight forward.
10 BANKING DETAILS: Power Television Limited, Royal Bank of Scotland,
Victory House, Prospect Hill, Douglas, Isle of Man. Account Name: POWTEL-USD1
Sort Code: 16-58-80
11 SHIPPING INFORMATION : Ship to :
Marian Peppers, A3, HBC KFT, 3rd Floor EMKE Building, Rakoczi Utca 42,
Budapest, H-1072, Hungary
12 NEEDED BY : 1st September 1996 (Delivery One)
13 AIR/SURFACE : AIR FREIGHT FORWARD
14 MATERIAL INVOICE INFORMATION : Ship to :
Marian Peppers, A3, HBC KFT, 3rd Floor EMKE Building, Rakoczi Utca 42,
Budapest, H-1072, Hungary
15 ADDITIONAL TERMS :
15.1 It is agreed that the license fee shall contain additional commercial
minutage of one minute per airing of Power Rangers the Series per episode to
be made available to Power TV for its commercial expoitation during the
period of 1st September 1996 to December 1997.
Page 7
15.2 A3 will be responsible for providing the Hungarian translations and the
Hungarian dub for each episode subject to Standard Terms and Conditions, and
a mimimum requirement of voices. It is understood that over 60% of all
programming has pre-recorded Hungarian dub tracks.
16 PAYMENT TERMS:
It is agreed that US$100,000 (one hundred thousand US dollars) be paid
into bank account as nominated by Licensor by no later than 31st October
1996.
It is agreed that US$95,000 (ninety-five thousand US dollars) be paid
into bank account as nominated by Licensor by no later than 8th January
1997.
It is the essence of this agreement that all payments are made by their
due dates.
17 PROMOTIONAL INFORMATION :
It is agreed that A3 will use its best efforts to promote to both the
trade and audience the programming listed in this licence agreement. PTV
will use its best efforts to provide support material and assistance in the
promotion of this programming as soon as possible.
18 RATING INFORMATION :
It is agreed that the licensee will provide PTV with all relevant
rating information including demographics for all programming licensed under
this agreement agreed under this licence agreement within 15 days after the
end of the month of broadcast.
19 CONFIDENTIALITY
The Parties here to shall not disclose to any third party neither the
underlying deal structure nor the Terms and Conditions of this Agreement
without the prior written permission of the Parties, the details of which
shall remain in strictest confidence.
20 WARRANTIES :
20.1 PTV warrants that it has the right to enter into and perform this
agreement. and that the performance of this agreement by either party shall
not infringe upon the rights or result in any liability or obligation to any
third parties except as specifically set forth herein; each of PTV and A3
hereby indemnifies and holds harmless the other, its successors, licensees
and permitted assigns from and against any and all damages, losses, costs,
and expenses (including reasonable attorneys fees) arising out of any breach
of representation, warranty or agreement made by the indemnifying party.
Page 8
21 AGREEMENT :
21.1 This agreement shall be binding on the parties unless or until they are
superseded by another instrument in writing, signed by the parties, and;
21.2 This Agreement contains the entire agreement of the parties as
currently subsisting and themselves supersede all other agreements,
understanding or arrangements previously subsisting between the parties in
relation to the subject matter hereof.
21.3 This Agreement includes all the Terms and Conditions as listed in
Standard Terms and Conditions attached hereto.
21.4 This Agreement shall not be deemed to create any partnership or any
such relationship between the parties hereto.
21.5 This Agreement and/or any part of this Agreement is personal to the
parties and may not be assigned except to a related company or to a division
or part of its corporate grouping in which case appropriate notice in writing
shall be given to the other party hereto.
21.6 This Agreement shall be construed in accordance with English Law and
the parties submit themselves to the exclusive jurisdiction of the English
courts
IN WITNESS whereof the parties hereto have set their hands the day month and
year first herein before written.
HUNGARIAN BROADCASTING CORPORATION Peter Klenner, President & CEO
(Authorised signatory) (Print Name and Title)
POWER TELEVISION LIMITED Justin Bodle
(Authorised signatorory) (Print Name and Title)
CONFIDENTIAL
HEADS OF AGREEMENT
These Heads of Agreement ("these Heads") are entered into on
the 5th of July 1996 between:
(1) NETHOLD CENTRAL EUROPE B.V., a company incorporated in
The Netherlands, whose registered office is at
Jupiterstraat 56, 2132 HD Hoofddorp, The Netherlands
("NetHold"); and
(2) HUNGARIAN BROADCASTING CORPORATION US, INC., a company
incorporated in the United States of America with a
principal place of business at 445 Park Avenue, New
York, NY 10022, USA (referred to herein as "HBC").
WHEREAS:
(A) NetHold or its affiliated companies have leased
transponder capacity on various satellites for
transmission of television programme signals in Europe,
including a package of television and audio services in
digital format referred to herein as the "NetHold
Package," in respect of which one of NetHold's
affiliated MultiChoice companies will provide the
relevant subscriber management services and other
affiliated and third party companies the relevant
technical expertise;
(B) HBC currently operates a channel in the Hungarian
language currently known as "A3" more fully described
in Schedule A attached hereto and by this reference
incorporated herein (the "Channel");
(C) HBC desires that NetHold distributes the Channel in
digital format with a view to: (i) cable operators in
the Territory being able to access the digital signals
of the Channel and cablecast the same on their cable
systems in analogue or digital format; and (ii) NetHold
including the Channel in the NetHold Package for
distribution throughout the Territory.
NOW THEREFORE THE PARTIES HERETO HEREBY AGREE AS FOLLOWS:
1. TERM
1.1 These Heads and the Definitive Agreement referred in
Paragraph 14 below shall be deemed to take effect on
the date of execution hereof and shall continue
thereafter for a period of 5 (five) years from the
Start Date (the "Initial Term").
1.2 The Initial Term shall automatically be extended for
additional periods of 1 (one) year each unless either
party shall have given written notice to the other
party terminating this Agreement at least 6 (six)
months' prior to the expiration of the Initial Term or
any anniversary thereof. The Initial Term and any
extension thereof pursuant hereto shall be referred to
herein as the "Term."
1.3 The Start Date shall be the operation service date of
Eutelsat Hot Bird 2 ("Hot Bird"), being the date upon
which NetHold shall commence distribution of the
Channel pursuant hereto. NetHold agrees to provide HBC
with as much notice as is reasonably practical of the
Start Date.
2. TERRITORY
2.1 For the purposes hereof, the territory shall consist of
Hungary and any other territories within the footprint
of the Hot Bird transponder on which the Channel is
distributed pursuant hereto to which NetHold
distributes the NetHold Package, in respect of which
HBC has cleared all necessary rights and which are
notified in writing by HBC to NetHold during the Term
hereof (the "Territory").
3. DIGITIZATION OF THE CHANNEL
3.1 HBC agrees, at its cost, to deliver the signals of the
Channel to the multiplex and uplinking facilities (the
"Facilities") specified in the technical specification
to be agreed between the parties as soon as practicable
after the signing of this Agreement (the "Technical
Specification") in accordance with technical
specifications and quality standards set out in the
Technical Specification.
3.2 NetHold agrees that, upon receipt of the signals of the
Channel at the Facilities NetHold shall procure:
3.2.1 that the signals of the Channel are digitally
compressed, multiplexed and encrypted; and
3.2.2 uplinked to the relevant Hot Bird transponder
specified in the Technical Specification (the
"Satellite") for transmission and reception
throughout the Territory.
3.3 NetHold agrees that all times throughout the Term:
3.3.1 it shall obtain and maintain (either directly
or indirectly) such transponder capacity,
digital compression equipment, transmission
and uplinking facilities and equipment and
encryption hardware and software as may be
required to fulfil its obligations set out in
Paragraph 3.2 above;
3.3.2 It shall ensure that the Channel is of a good
broadcast quality as set out in the Technical
Specification and shall at all times
distribute the same in accordance with the
Technical Specification.
3.4 HBC acknowledges and agrees that the first 3 (three)
months of the Term from the Start Date shall be viewed
as a trial period (the "Trial Period") during which
NetHold may make interruptions to the digital
transmissions of the Channel for reasons related to
evaluation, testing, adjustment or failure of technical
facilities and equipment used in receiving and
distributing the signals of the Channel ("Essential
Interruptions"). HBC agrees that it shall not have any
claim or other legal remedy against NetHold in respect
of any damages or loss arising from interruptions of
the transmissions of the Channel during such trial
period. For the avoidance of doubt, no fees shall be
payable by either party in respect of the Trial Period.
4. DISTRIBUTION RIGHTS GRANTED TO NETHOLD
4.1 Subject to the cable distribution rights set out in
Paragraphs 5.1 and 5.2 below, HBC hereby grants to
NetHold the exclusive right to distribute the Channel
as part of a multi-channel service to viewers via
direct to home ("DTH") means, SMATV systems and cable
systems throughout the Territory in digital format.
4.2 NetHold shall have the right to package the Channel, as
it sees fit, provided that it shall not distribute the
Channel as part of a tier of programming of the NetHold
Package in respect of which no subscription fee is
charged to Subscribers.
5. CABLE DISTRIBUTION IN THE TERRITORY
5.1 NetHold agrees that HBC may authorize cable operators
in the Territory ("Operators");
5.1.1 to receive the signals of the Channel as
distributed by NetHold in digital format
pursuant hereto; and
5.1.2 de-compress, de-digitize and decrypt the
signals of the Channel and reconvert the same
into analogue format prior to distributing
the same via their systems in analogue
format.
5.2 NetHold agrees that HBC may authorize Operators not
less than 25% (twenty-five percent) of the issued
shares of which are owned either by Mr. Peter E.
Klenner of Szamado U.19, H-1118, Budapest, Hungary, a
company controlled by Mr. Peter E. Klenner or the
Hungarian Telephone and Cable Corporation, Inc. having
a place of business at Szamado U.19, H-1118, Budapest,
Hungary:
5.2.1 to receive the signals of the Channel as
distributed by NetHold in digital format
pursuant hereto; and
5.2.2 distribute the same via their systems to
their subscribers in digital format.
For the purposes of this clause 5.2, control shall mean
the right to exercise, whether directly or indirectly,
more than 50% of the voting rights attributable to the
shares of a company and the ability to direct or cause
the direction of the management, actions or policies of
that company.
5.3 HBC acknowledges that, save where HBC enters into a
cable representation agreement with NetHold in respect
thereof (the terms of which would be the subject of a
separate agreement between the parties), HBC shall be
responsible for entering into agreements directly with
Operators regarding the carriage of the Channel on
cable systems in the Territory under Paragraph 5.1 or
5.2.
5.4 HBC agrees to provide NetHold with as much notice as is
reasonable practical of the cable systems in the
Territory in which it requires distribution of the
Channel. NetHold agrees to help facilitate the
acquisition by HBC of the professional decoders
("ProfDecs") required by Operators in order to access
the signals of the Channel pursuant to Paragraph 5.1
above; provided that HBC acknowledges and agrees that
HBC shall be solely responsible for entering into
agreements directly for the acquisition of the ProfDecs
and for any and all cost associated therewith and that
NetHold's role in this regard shall be solely as
facilitator.
5.5 The foregoing notwithstanding, NetHold agrees to
provide smart cards to Operators and to carry out
authorization and enablement of the Channel vis such
smart cards in accordance with HBC's instructions, at a
cost of US $100 per enabled smart card per year.
6. CONSIDERATION
6.1 HBC agrees that in consideration of NetHold providing
carriage for the Channel as outlined herein, HBC shall
be liable to pay fees to NetHold in the amount of US
$700,000 (Seven Hundred Thousand US Dollars) per annum;
provided that the parties agree that such consideration
shall be payable as follows:
6.1.1 HBC shall pay to NetHold US$400,000 (Four
Hundred Thousand US Dollars) per annum in
cash throughout the Term (the "Annual Fee"),
such Annual Fee being payable in equal
installments, quarterly, in advance (payment
in respect of each quarter being due and
payable on the last day of the preceding
quarter), throughout the Terms. For the
avoidance of doubt, the first payment in
respect of the Annual Fee shall be made on
the last day of the Trial Period and only
US$300,000 (Three Hundred Thousand US
Dollars) shall be payable in respect of the
first year of the Term; PLUS
6.1.2 HBC shall provide to NetHold free of charge,
advertising time to a value of US$300,000
(Three Hundred Thousand US Dollars)(the "Free
Spots") for the promotion of NetHold, its
affiliates and the NetHold Package. The Free
Spots shall be transmitted by HBC at times
selected by NetHold's appointed media buying
agency. The value of the Free Spots shall be
calculated at the lesser of HBC's ratecard
for advertising on the Channel and the
average market rate, in each case less a
discount of 40% (forty percent). The average
market rate shall be determined by a third
party, the identity of which is to be
mutually agreed between the parties. Failing
such agreement, the average market rate shall
be determined by NetHold's auditors. HBC
agrees to insert such advertising into the
Channel at no cost to NetHold prior to
transmission of the Channel. Material
transmitted in the free spots shall be
produced by or on behalf of NetHold and
delivered in the format generally required by
HBC from its advertisers and, for the
avoidance of doubt, the costs of production
of such material shall, as between NetHold
and HBC, be borne by NetHold.
6.2 The parties hereto agree that the Annual Fee and the
DTH Subscriber Fees shall be increased each year by a
percentage equivalent to the percentage increase in the
Dutch CPI during the previous twelve month period.
6.3 HBC shall, as a condition precedent to the performance
by NetHold of its obligations hereunder, prior to the
Start Date and in any event no later than 1 September
1996, provide NetHold with a deposit in the sum of
US$100,000 (One Hundred Thousand US Dollars) as
security for the due and proper performance by HBC of
its obligations hereunder (the "Deposit"). Following
termination of this Agreement NetHold will return the
Deposit to HBC less any sums retained to meet any
liability of HBC under this Agreement. HBC shall not
deduct the amount of the Deposit from the Annual Fee
payable by it.
7. DTH SUBSCRIBER FEES, REPORTING AND PAYMENT
7.1 NetHold shall contribute towards the payment of
properly incurred television programming and music
rights clearance fees for DTH distribution of the
Channel in the Territory by paying the Channel Supplier
US$0.083 (Eight Point Three US cents) in respect of
each Subscriber to the Channel receiving the Channel by
way of DTH in the Territory (each a "DTH Subscriber")
up to a maximum of US$8,300 (Eight Thousand Three
Hundred US Dollars) per month (the "DTH Subscriber
Fees"). Payments of the DTH Subscriber Fees shall be
made monthly in arrears and shall commence in respect
of the month starting after the end of the Trial
Period.
7.2 The foregoing notwithstanding, The Channel Supplier
agrees that in the event that NetHold offers incentives
to potential DTH Subscribers in the form of free
viewing periods, NetHold shall not be obliged to pay
any DTH Subscribers Fees to the Channel Supplier in
respect of potential new DTH Subscribers during such
free viewing periods.
7.3 Within 30 (thirty) days after the end of each month and
with effect from the Start Date, NetHold shall deliver
to The Channel Supplier a statement relating to the
preceding month recording the total numbers of
Subscribers to the Channel (breaking down the numbers
by country and type) respectively on the first and last
days of such month and the average number of DTH
Subscribers to the Channel in the relevant month
calculated by adding the number of DTH Subscribers on
the first and last days of the relevant month and
dividing that figure by two. Following receipt of the
statement, and subject to the periods during which no
DTH Subscriber Fees shall be payable by NetHold to The
Channel Supplier pursuant hereto, The Channel Supplier
shall invoice NetHold in respect of the average number
of DTH Subscribers to the Channel during the relevant
month and NetHold shall pay such invoice in full no
later than 60 (sixty) days after the date of receipt
thereof.
8. MARKETING AND PROMOTION
8.1 NetHold agrees to use all reasonable endeavors to
market and promote the Channel as part of the NetHold
Package to potential subscribers and subscribers in the
Territory, the nature of such activities being in the
absolute discretion of NetHold.
8.2 HBC agrees to provide to NetHold, at HBC's cost,
monthly listings of the programme schedules for the
Channel, in as final a form as possible, at least 45
(forty-five) days before the start of the calendar
month in which such programmes are to be transmitted.
Such listings shall be in such format(s) (including
electronic format) as NetHold may reasonably require.
HBC shall provide NetHold promptly with any updates
thereto in the requested format.
8.3 HBC further agrees to use its reasonable endeavors to
provide to NetHold, at HBC's cost, and on a timely
basis, such other information and materials relating to
the Channel as, and in such format as, NetHold may
reasonably request for inclusion in NetHold's marketing
and promotional materials, including, without
limitation, still pictures and programme synopses.
NetHold may use the listings and any other information
or materials provided pursuant hereto in any printed,
electronic or other media created by or on behalf of
NetHold in order to market and promote the NetHold
Package and shall have editorial freedom to adapt such
materials as it deems appropriate, provided that
NetHold agrees to comply with reasonable guidelines
supplied by HBC in respect thereof and any such
adaptation shall not misrepresent the contents of the
same or have an adverse affect on HBC.
8.4 HBC further agrees that, on request, it shall provide
reasonable amounts of video promotional material for
insertion in any promotional channel produced by
NetHold in respect of the NetHold Package (the
"Promotional Channel"). If NetHold identifies excerpts
from the Channel which it wishes to include in the
Promotional Channel, it shall notify HBC thereof who
shall notify NetHold within 10 (ten) days of whether
NetHold may record such excerpts from the Channel for
inclusion in the Promotional Channel and of any
relevant restrictions applicable thereto.
9. IRDs AND VIEWING CARDS
9.1 HBC acknowledges that NetHold will not itself
manufacture digital decoders in the Territory but will
use reasonable efforts to procure that manufacturers
and distributors are granted such licenses and/or
authorizations as may be necessary for the manufacture
of such decoders and for their distribution in the
Territory.
9.2 NetHold agrees that throughout the Term it shall obtain
and distribute Viewing Cards to viewers who have
acquired a digital decoder for the purpose of viewing
the NetHold Package and from time to time replace the
same as it may deem appropriate.
10. PROGRAMME CLEARANCES AND CONTENT
10.1 HBC acknowledges and agrees that it is solely
responsible for the content of the Channel and shall
ensure compliance with any laws, rules, regulatory
codes, orders and directions applicable from time to
time to the transmission, reception and/or content of
and/or advertising contained in the Channel. For the
avoidance of doubt, both parties acknowledge and agree
that HBC shall not be responsible for any licenses,
consents or permissions required in respect of the
uplinking or downlinking of the signals of the Channel
in accordance with this Agreement.
10.2 HBC warrants that it shall clear all necessary
television programming and music rights (including, but
not limited to, music performing rights) in respect of
the Channel at its cost throughout the Terms and in
particular, but without limitation, warrants that
neither the Channel nor any materials of any nature
provided to NetHold by HBC nor any part thereof or
material therein (other than any material inserted in
the Channel by NetHold as expressly permitted herein)
will infringe the copyright, performing right, right of
privacy, trade mark, moral right or other proprietary
right or interest of any third party or will constitute
a misuse of any confidential information of a third
party.
10.3 Without limitation to the generality of Clause 10.2,
HBC warrants that it shall clear all necessary
television programming and music rights for DTH
distribution of the Channel in the Territory prior to
28 February 1997, and shall continue to clear such
rights throughout the remainder of the Term. Failing
which and without prejudice to any other remedies
available to it, NetHold shall be entitled at its
discretion, not to distribute the channel by way of DTH
or to terminate this agreement.
10.4 NetHold and HBC each agree to obtain and maintain such
licenses, consents and permissions as are required from
any third party and/or appropriate governmental
authority and/or regulatory body or authority for such
party to perform its obligations under this Agreement;
including, without limitation, in the case of HBC, a
broadcast license in respect of the Channel and any
other permissions required by broadcasters to
facilitate the broadcast of the Channel as set out
herein.
10.5 NetHold agrees that it shall not during this Agreement
interrupt, alter, add to, delete or edit any part of
the Channel in any way, save as is envisaged in this
Agreement or required by any applicable law nor record
the Channel or any part thereof, except as may be
required by law or otherwise to comply with the terms
of any license, consent or permission.
10.6 NetHold acknowledges and agrees that it shall be
responsible for the encryption of the signals of the
Channel before their distribution as permitted herein.
NetHold is not aware of any significant breach of the
security of the encryption technology to be used to
encrypt the Channel as at the date hereof and shall
employ all reasonable security systems and procedures
to prevent any loss, theft, piracy, unauthorized use,
reception or copying of the Channel or any part thereof
and shall immediately notify HBC if it knows that such
event has occurred.
10.7 Each party agrees to indemnify the other party and hold
it harmless against any damages (including reasonable
legal costs) which may be awarded or agreed to be paid
to any third party in respect of any claim or action
arising out of any actual or alleged breach of any
undertaking, warranty or obligation on the part of such
party contained in the Paragraph 10.
11. TERMINATION
11.1 Either party may terminate this Agreement at any time
by giving notice in writing to the other party where:
11.1.1 The other party has committed a material
breach of any of its obligations under the
Agreement which is incapable of remedy; or
11.1.2 the other party has committed a material
breach of any of its obligations under the
Agreement (including the persistent breach of
any provision hereof) which is capable of
remedy and which the other party has not
remedied within 30 (thirty) days of receipt
of written notice to do so; or
11.1.3 an order is made for the other party's
winding up, dissolution or reorganization
(otherwise than while solvent and for the
purpose of bona fide reconstruction or
amalgamation) or the other party becomes
bankrupt or insolvent or files any
application, petition or action for relief
under any bankruptcy, insolvency or
moratorium law, or the other party admits in
writing its inability to pay its debts or is
unable to pay its debts as they fall due, or
the other party suffers any event of
insolvency or bankruptcy or any event
analogous thereto under the terms of the law
applicable the jurisdiction of its domicile,
or an application is made for an
administration (or similar) order to be made
in respect of the other part; or suspends or
threatens to suspend its operations.
11.2 Within 20 (twenty) days of the termination of this
Agreement (howsoever occasioned), each party shall, at
the direction of the other party either destroy or
return to the other party all materials furnished to it
under this Agreement and in its possession or under its
control and shall certify in writing to the other party
that the other party's direction has been complied
with. The above obligations shall not apply to any
material which either party is able to demonstrate to
the reasonable satisfaction of the other is required to
be retained for the purposes of compliance with
applicable law provided that such material is returned
or destroyed as soon as is permissible under the
relevant legal provision.
11.3 Termination of this Agreement by either party for
whatever reason shall not prejudice or affect the
rights or remedies of such party against the other
party in respect of any antecedent breach of this
Agreement.
12. GENERAL
12.1 These Heads (and the Definitive Agreement) shall be
governed by and construed in accordance with the laws
of England.
12.2 Notices shall be in writing and shall be sent to the
address of the relevant party as set out hereinabove
marked for the attention of the Chief Executive Officer
or to such other address as may be designated by notice
given in the manner provided herein. Notices given by
telefax shall be confirmed by mail.
12.3 Nothing in these Heads shall be deemed to create any
joint venture or partnership between HBC and NetHold
and neither party shall hold itself out in its
advertising or otherwise in any manner which would
indicate or imply any such relationship with the other.
12.4 NetHold shall be entitled to assign any of its rights
and/or obligations hereunder to its parent, subsidiary
or affiliated companies upon notifying HBC thereof in
writing, provided that in the event of any such
assignment NetHold shall remain jointly and severally
liable with the assignee for the performance of this
Agreement by the assignee. Otherwise neither party
shall be entitled to assign, sub-license, transfer or
otherwise dispose of any of its rights or sub-contract,
transfer or otherwise dispose of any of its rights or
obligations, hereunder without the prior written
consent of the other party (such consent not to be
unreasonably withheld or delayed).
12.5 A waiver (whether express or implied) by one of the
parties of any of the provisions set out herein or of
any breach of or default by the other party in
performing any of those provisions shall not constitute
a continuing waiver and that waiver shall not prevent
the waving party from subsequently enforcing any of the
provisions hereof not waived or from acting on any
subsequent breach of or default by the other party
under any of the provisions of this agreement.
12.6 Neither party shall be liable to the other for any
delay or non-performance of its obligations hereunder
arising from any cause beyond its reasonable control,
including, without limitation, an act of God, satellite
failure or governmental regulation or directives
("event of force majeure"). The party so delaying or
failing to perform shall use all reasonable efforts to
resume performance of its obligations as soon as
practical provided that if performance is not resumed
within sixty (60) days either party shall be entitled
to terminate these Heads or the Definitive Agreement
forthwith upon notice in writing to the other.
12.7 Neither party shall be liable to the other for any
indirect losses, including loss of profits and
consequential damages, arising from any breach of these
Heads (or the Definitive Agreement).
12.8 Each party hereby undertakes to treat the terms of
these Heads (and the Definitive Agreement) as
confidential together with all information whether of a
technical nature or otherwise relating in any manner to
the business or affairs of the other party as may be
communicated to it hereunder or otherwise and will not
disclose such information to any person (other than to
its parent, subsidiary or affiliated companies,
auditors or other professional advisers) and will not
use such information other than for the purposes
hereof. Any public announcement of the consummation of
this deal shall be made jointly by the parties hereto.
12.9 Any amendments or variations to the terms of this
Agreement shall be in writing and signed by the duly
authorized representatives of both parties.
13. FUTURE CHANNELS
13.1 The parties hereto agree that in the event that HBC
develops new channels during the Terms hereof, similar
in quality to the Channel (the "New Channels"), the
parties shall enter into good faith negotiations
regarding the carriage of such New Channels as part of
the NetHold Package on terms and conditions to be
agreed between the parties, it being acknowledged that
the timing of the carriage of any such new channels
will be dependent, inter alia, on the availability of
transponder capacity leased by NetHold.
14. DEFINITIVE AGREEMENT
15. These Heads, upon the signing hereof by NetHold and
HBC, shall create legally binding obligations pending
the finalization of a Definitive Agreement into which
the terms of these Heads shall be included and which
the parties shall negotiate in good faith with a view
to concluding the same by not later than 31 August 1996
("Completion Date"). The parties hereto shall, until
the Definitive Agreement is concluded, remain bound by
these Heads and whether or not the Definitive Agreement
has been concluded by the Completion Date.
IN WITNESS WHEREOF these Heads of Agreement have been
executed on the day and year first above written.
SIGNED BY SIGNED BY
/s/ /s/
for and on behalf of for and on
behalf of
NETHOLD CENTRAL EUROPE B.V. HUNGARIAN
BROADCASTING CORPORATION US, INC.
Signed Peter E. Klenner
<PAGE>
SCHEDULE A
(Description of the Channel)
Description of Channel:
Transmission Hours:
Components of Channel:
MANAGEMENT CONSULTING AGREEMENT
AGREEMENT made as of this 15th day of June 1996 by and
between Justin Bodle (herein referred to as "Consultant"), and
Hungarian Broadcasting Corp., with offices at Szamado ut 19,
1118 Budapest, Hungary.
WHEREAS, Client desires to obtain Consultant's management
consulting services in connection with Client's business
affairs, and Consultant is willing to render such services as
hereinafter more fully set forth.
NOW, THEREFORE, the parties agree as follows:
1. Client hereby engages and retains Consultant and
Consultant hereby agrees to use his best efforts, to render to
client the financial consulting services hereinafter described
for a period of two years commencing June 15, 1996.
2. Consultant's services hereunder shall consist of
consultations with Client concerning the management and
operations of Client's business as Client may from time to time
require during the term of this Agreement ("Agreement"). His
responsibilities would be to assist in building the network and
would include:
a. assisting in the maximization of income
b. recognizing means of amortizing costs and implementing
c. non-exclusive right to assist in programming
acquisitions
d. creating new broadcasting and cable opportunities
e. directing the strategy of the stations
f. maximizing the share price valuation
g. assisting in the general management of A3 and any other
stations under the HBCO banner.
h. building a western style infrastructure to the stations
to ensure a smooth running team
i. maximizing the opportunity to grow the Corporation's
assets in Hungary and the region
j. assisting in the management of both the uplink and
downlink elements, vital to ensure the penetration of
the market place.
k. assisting in preparation of Company's budgets.
3. Consultant shall devote approximately ten man-days per
month specifically to Client in such form of consultation,
advice and assistance on the foregoing matters and on such
matters as Client requests. Such services may include, at the
request of the Client, written reports, attendance at meetings
of the Client's Board of Directors and review, analysis and
report on proposed investment opportunities, and on operational
policies. Client agrees that Consultant shall not be prevented
or barred from rendering services of similar or dissimilar
nature for or on behalf of any person, firm or corporation other
than Client.
4. Consultant agrees to serve as a member of the Company's
Board of Directors during the period of this Agreement.
5. Client agrees to pay to Consultant for his services
hereunder one thousand shares of the Company's Common Stock for
each month during the term of the Agreement.
6. Client also agrees to grant to Consultant 50,000 stock
options available under the Company's 1995 Incentive Stock
Option Plan. These options shall be exercisable for a two year
period commencing June 15, 1996 at an exercise price of $10 per
share of Common Stock as follows: 25,000 options after the first
profitable quarter of the Company prior to June 30, 1997 and
25,000 after the second profitable quarter before December 31,
1997. In the event the Company does not have a profitable
quarter before June 30, 1997 as reported by the Company in its
report on Form 10-QSB to the U.S. Securities and Exchange
Commission, 25,000 of the foregoing options shall be canceled.
Similarly, 25,000 of the foregoing options shall be canceled in
the event the Company does not have two profitable quarters
before December 31, 1997.
7. Consultant shall be entitled to reimbursement by Client
of such reasonable out-of-pocket expenses as Consultant may
incur in performing services under this Agreement.
8. All final decisions with respect to consultations or
services rendered by Client or presented to Client by Consultant
shall be those of Client, and there shall be no liability on the
part of the Consultant in respect thereof. This Agreement
contains the entire agreement of the parties hereto with respect
to the subject matter hereof, and there are no representations
or warranties other than as contained herein or therein. No
waiver or modification hereof shall be valid unless in writing.
Waiver or the breach of any terms or conditions hereof shall not
be deemed a waiver of any other subsequent breach, whether or
like or different nature.
9. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the parties, hereto have caused this
Agreement to be signed as of the day and year first above
written.
/s/
Justin Bodle
HUNGARIAN BROADCASTING CORP.
By:/s/
Peter E. Klenner, President
Agreement between HBC and BankNet
4 Mbps simplex satellite services between
A3 and NETHOLD premises
HBC Inc. Hungarian Broadcasting Corporation Inc. (445 Park Avenue, New York,
10022, NY. US), NETHOLD and BankNet (1016 Budapest, Naphegy ter 8 sz.,
Hungary) analysed the possibility to set up a link between HBC and NETHOLD
for digital transmission of 4 Mbps.
The final link will use HOT Bird II satellite. In the interim period, BankNet
will use HOT Bird I or some other satellite, on an agreed basis according to
the suitability and feasibility of that satellite.
BankNet services cover the design, implementation and maintenance services
for the uplink site, which is at the A3 premises. The contract is valid for
the length of the operation, which is 10 years. Longer service contract can
be discussed later. The validity of the contract will start at the day of the
operation of the link, and expires 10 years later. The Parties agree that the
acceptance document will be an integral part of this contract, specifying the
dsata of start of the contract.
The hardware will consist of:
at uplink site
antenna of appropriate size,
redundant Radio Frequency RF head,
redundant satellite modem with 70 MHz +/- 18 MHz input,
automatic switch
at receiver site 2 equivalent units with automatic redundancy, each consists
of
antenna of appropriate size,
LNB
demodulator, output L band.
The digital equioment at both ends will be delivered by HBC or HBC's partner.
The hardware vendor and the interim period satellite will be selected by the
Parties together. The hardware will be paid by HBC or by any other company
which is appointed by HBC.
The fees to be paid for services to BankNet:
1. Design, licence, import permissions, site survey and permissions for the
uplink site: 26,000 USD, payable within 15 days after the acceptance.
2. Installation fee for the uplink site: 7,500 USD, payable within 15 days
after acceptance.
3. Cut over period from the interim period satellite to HOT Bird II: 7,500
USD for the installation, and 10,000 USD for the re-commissioning the new
link. Payable within 15 days after acceptance.
4. Monthly maintenance fee of the uplink site: 1.5% of the landed cost of the
total hardware, but not less than 1,800 USD/month. This fee includes the
regular maintenance, and call-outs as well, with spare part supplied by
BankNet.
5. HBC will pay the satellite link to the satellite service provider directly
and bears all costs related with the satellite link.
6. BankNet will not install hardware and will not start to give similar
services to any other companies with similar profile within 6 months after
the date of commissioning the uplink, except a prior agreement with HBC
allows that.
7. The parties agree that if it is appropriate, the contact can be signed by
any other company on which the parties agree.
8. This agreement is equivalent with a Contract. The Parties agree that the
point in this agreement will be integrated into a service contract without
any modification. Also Perties agree that they are obliged to deliver and pay
the services above.
Budapest, June 20, 1996
Gabor David Imre Kovats
BankNet Country Director, Hungary HBC NY. Executive Vice President
Rental Contract
concluded between on the one part INVESTOR Holding Rt (1136 Budapest,
Pannonia str. 11) - hereafter: Lessor - and on the other part HBC Kft.
(1118 Budapest, Szamado str. 19) - hereafter: Lessee - on the
undersigned place and date, under the following conditions:
1) Subject of the rent: the premises in Lessor's proprietorship in
Budapest, 11th district, Kelenhegyi str. 39 with an area of 2952 m2
together with the superstructures of totally 1100 m2 on it, in the
conditions viewed and known by Lessee, in good working conditions suited
in every respect to Lessee's purposes of use. Period of the contract:
from 1st July 1996 on, for a period of 5 years.
Parties agree that 6 months prior to the expiry of the definite period,
they may agree in the establishment of a new rental relationship.
2) a) Parties agree that the rental fee of the rented properties totals
the amount in HUF+VAT/month equivalent to 6,000 USD for July 1996 and
following this: 12,000 USD calculated at the official HNB middle rate
valid on the day of invoicing. Should the day of invoicing fall on a
bank holiday, then the rate valid on the first working day the closest
to the day of invoicing shall prevail.
Lessor issues invoices on the 20th prior to the actual month to Lessee,
of the rental fee payable monthly in advance by Lessee and Lessee is
obliged to meet its rental fee payment obligation until the 1st day of
the next month, by bank transfer.
b) Should Lessee meet dilatorily any of its payment obligations as per
this contract, it is bound to pay to Lessor a default interest with the
size of the actual libor + 5% for the days of the delay.
3) Lessee undertakes the obligation of utilizing the objects of rent
with proprietary solicitude for television purposes and properly, it
protects and maintains at its own cost their present substance and
state.
Also, Lessee undertakes the obligation of continuously keeping all the
objects of rent in good condition, to perform or have performed at its
own cost the repairs, maintenances implied by their proper use, becoming
necessary from time to time, furthermore, to bear all the costs of the
property insurance contract, to be concluded by Lessee for its assets
placed in the rented property. Lessor has a valid insurance contract in
respect of the property.
Should Lessee want to extend or modify its scope of activities carried
out in the rented property, then it is obliged to obtain Lessor's
preliminary approval to.
Parties agree that Lessor is entitled to supervise constantly and
continuously the fulfilment of Lessee's obligations, and Lessee is
obliged to tolerate these supervisions, and within the frame of it to
supply Lessor with the necessary verbal and written information.
Lessor is obliged to inform Lessee of the time of its supervisions 48
hours before starting the supervisions.
4) Lessee may establish a legal relationship with third persons, aimed
at further rental,
sub-rental or use of the objects of rent, by Lessor's approval only.
Also, Lessor's approval is needed to the transfer of Lessee's rights and
obligations according to the present contract to any third party.
5) In addition to rental fees, Lessee is obliged to bear all present
general expenses as well as those arising during the period of the
rental contract, connected with the use of the rented property.
Accordingly, Lessee is obliged to pay to Lessor - on the basis of the
relating invoice - keeping a payment deadline of 8 days according to the
invoice - all costs of public utilities such as costs of water and
sewage, gas heating, rubbish transport, telephone and all other costs of
public utilities. Lessee is obliged to bear alone the public utility
costs of the used electric energy, and for the sake of this Lessor will
agree that the electric meters will be transferred to and at the cost of
Lessee.
6) It's Lessee's obligation to obtain all the specialised authorities'
and other licences necessary to exercise its activity pursued on the
rented property, furthermore, it is obliged to fulfil all the official
provisions, stipulations of environmental protection, fire-protection,
accident prevention, labour protection, public hygiene and others and
to bear the costs arising in connection with the fulfilment of these.
Lessee is obliged to answer for pecuniary and non-pecuniary damages
eventually arising during the use of the rented property as a result of
its careless or wilful behaviour, and to compensate the damaged party
for these damages.
7) Lessee may store, use and operate on the rented property movables,
valuables that form its own or a third person's property, at its own
risk and responsibility .
8) Parties agree that Lessee is entitled to effect on the rented
property a transformation, refurbishment other than protection of
substance with Lessor's preliminary approval only.
a) Costs of the change and replacement of central equipments of the
rented property as well as the connected repair costs will be borne by
Lessee until the limit of 100,000 HUF+VAT/equipment, costs exceeding
this limit will be paid by Lessor, and the parties are obliged to do a
reconciliation - with the involvement of an expert, if justified - about
the justifiability of works and the acceptance of the relating amounts.
b) Lessor's approval will be needed when placing on the walls of the
rented property inscriptions, advertising media referring to Lessee's
activity.
c) Lessee is entitled to modify, replace, alter the public utility
cables and meters only if having Lessor's approval. Cost of damages in
connection with the overload or falling out of public utility services
will be borne by Lessee.
d) Parties agree that Lessor is not obliged to bear costs of maintenance
works of the rented property - other than included in a) - during the
period of the rent, these costs will be borne fully by Lessee.
9) The rental legal relationship according to this contract shall cease:
a) in case of Lessee's cessation without legal successor,
b) in case Lessor terminates the present rental contract with immediate
effect by the date stated in its relevant notices. Lessor may exercise
this right of him:
b.a) in spite of Lessor's two written notices, Lessee does not
comply with its obligation of paying the rental fee or any of the
general expenses,
b.b) Lessee does not use properly the objects of the rent and does
not cease its such behaviour upon a written notice either,
b.c) violates the provisions of the present contract,
c) by mutual agreement,
d) in case Lessor will cease the rental relationship by ordinary
termination, keeping a notice period of 6 months. Parties agree that in
this case Lessor is obliged to pay to Lessee the net remainder -
relevant on the day the contract will be ceased - of investments
effected by Lessor and justified by invoices, which can be accounted
according to Hungarian accounting regulations in respect of
depreciation.
10. In case the rental relationship ceases, Lessor is not obliged to
offer to Lessee an other adequete rented property, and Lessee may not
claim from Lessor financial reimbursement or that its placement should
be ensured in nature, since Lessee is obliged to arrange its further
placement at its own cost, by itself.
11. In case the rental relationship ceases, Lessee is obliged to return
to Lessor's possession the rented property - as per an inventory -
vacated from Lessee's movables, in a clean state, suitable for proper
use, without a special notice.
Should any equipments of the rent be missing on return, Lessee is
obliged to compensate Lessor for the shortage either in cash or in
nature.
Should any object of the rent be faulty, not suitable for proper use on
return, Lessee is obliged to bear the costs related to the re-establishment of
the state suitable for proper use, to have the repair necessary for this
performed at its own cost or to pay these costs to Lessor.
12. Lessee undertakes the obligation to pay to Lessor as a kind of
guarantee of payment obligations to be met by Lessee according to the
present rental contract, a caution money in cash in HUF equal to 18,000
USD until the day of 15th July 1996 and also, the amount in cash in HUF
equal to 18,000 USD until 15th September 1996, thus, a caution money of
totally 3 months rental fee. Out of the amount of this caution Lessor
is entitled to directly satisfy its claims in the case of the
non-fulfilment/non-contractual fulfilment of the conditions of this
contract, in case Lessee wouldn't fulfil any of its obligations despite
Lessor's repeated notice.
Parties agree that interests on the caution-money will be due to Lessee,
Lessor is obliged to transfer to Lessee within 8 days the interests
credited by the bank.
Should Lessor be entitled during the rental period to directly satisfy
its requirements to the debit of the caution-money, Lessee is obliged to
fill up the remaining amount of caution-money to the original amount
within 8 days.
Parties agree that upon the cessation of the rental relationship they
will account with the caution-money with each other.
13. Parties agree that the present contract is subject to the
suspending condition that Lessee pays to Lessor the first instalment -
meaning an amount equal to one and a half months rental fee - of the
referred caution regulated in article 12.
14. Parties agree that in case the present rental relationship would not
be established between them on the basis of the present contractual
conditions, they will not raise any claims under any title towards each
other, and every party will bear in its own the risks, costs arisen or
to be arising during the preparation and establishment of the present
legal case.
15. In issues not regulated by the present contract, the stipulations of
the Civil Code relating to rental relationships as well as the law no.
LXXVIII of 1993 and other legal provisions connected to these legal
rules will be guiding.
The contractual parties have signed the present contract after having
read and interpreted it in agreement, as being in every respect in
accordance with their will.
Budapest, ..... June 1996
In the representation of
Lessor:Politzer Tamas Lessee: Imre Kovats
