<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 33-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HUNGARIAN BROADCASTING CORP
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
----------------
DELAWARE 4833 13-36787223
(STATE OR JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL IDENTIFICATION NO.)
ORGANIZATION) CLASSIFICATION CODE
NUMBER)
445 PARK AVENUE, 15TH FLOOR, NEW YORK, NEW YORK 10022 (212) 758-9870
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
----------------
PETER E. KLENNER
445 PARK AVENUE, 15TH FLOOR NEW YORK, NEW YORK 10022, (212) 758-9870
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
FRANK R. COHEN, ESQ. HENRY C. MALON, ESQ.
COHEN & COHEN 1 BATTERY PARK PLAZA, 3RD FLOOR
445 PARK AVENUE, 15TH FLOOR NEW YORK, NY 10004
NEW YORK, NEW YORK 10022 TEL: (212) 483-9600
TEL: (212) 758-9870
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this registration statement becomes effective. If any of the Securities
being registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, check the
following box [X] .
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [_] .
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_] .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [_] .
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
AMOUNT MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units each consisting of
one share of Preferred
Stock, $.001 par value,
and one Common Stock
Purchase Warrant(2).... 560,000 $12.00 $ 6,720,000 $2,317.00
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Common Stock, ($.001 par
value)(3).............. 560,000 $ 6.00 $ 3,360,000 $1,159.00
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Underwriter's Unit
Purchase Options(4).... 40,000 $ .001 $ 40 $ 0.00
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Units to be issued to
the Underwriters, each
consisting of one share
of Preferred Stock,
$.001 par value, and
one Common Stock
Purchase Warrant(5).... 40,000 $12.00 $ 480,000 $ 165.00
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Common Stock, $.001 par
value(6)............... 40,000 $ 6.00 $ 240,000 $ 83.00
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Total registration Fee.. $10,800,000 $3,724.00
</TABLE>
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(1) Estimated solely for the purpose of computing the registration fee.
(2) Includes 60,000 Units subject to the Underwriter's over-allotment option.
(3) Represents shares of Common Stock issuable upon the exercise of Warrants.
The Registration Statement also covers any additional shares which may
become issuable pursuant to antidilution provisions in the aforementioned
warrants.
(4) To be issued to the Underwriter.
(5) Issuable upon exercise of the Underwriter's Unit Purchase Options.
(6) Issuable upon exercise of Warrants included in the Units issuable upon
exercise of the Underwriter's Unit Purchase Options. The Registration
Statement also covers any additional shares which may become issuable
pursuant to antidilution provisions in the aforementioned warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 3, 1996
PROSPECTUS
HUNGARIAN BROADCASTING CORP.
500,000 Units
----------------
Each unit (the "Units") consists of one share of Series A Convertible
Cumulative Redeemable Preferred Stock (the "Preferred Shares") and one Common
Stock Purchase Warrant (the "Warrants"). The Warrants are exercisable
commencing nine months after the date hereof, or such earlier date as either
J.W. Barclay & Co., Inc. (the "Underwriter") may determine or in the event of
redemption of either the Preferred Shares or the Warrants by the Company (the
"Separation Date"). The Warrants are neither detachable nor separately
transferable until the Separation Date. Each Common Stock Purchase Warrant
entitles the holder to purchase one share of Common Stock at a price of $6 per
share until December 20, 2000. Each Preferred Share is convertible into one
and one half shares of Common Stock and pays a cumulative annual dividend of
$1.20 per share on December 31 of each year commencing December 31, 1997.
Of the 500,000 Units offered hereby, 400,000 Units are being sold by the
Company and 100,000 are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any proceeds from the sale of the Units by the Selling
Stockholders.
---------------- (Continued on page 2)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
----------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(4)
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<S> <C> <C> <C> <C>
Per Unit................. $ $ $ $
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Total(3)................. $ $ $ $
</TABLE>
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(1) Does not reflect additional compensation to the Underwriter, including (a)
a nonaccountable expense allowance equal to 3% of the aggregate purchase
price of the Units; and (b) issuance of Unit Purchase Options to the
Underwriter entitling the Underwriter to purchase up to 40,000 Units from
the Company, for a period of four years commencing one year after the
effective date of the Offering, at an exercise price equal to 120% of the
public offering price of the Units. The Company and the Underwriter have
also agreed to indemnify each other against certain civil liabilities
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering estimated at $ which includes
the Underwriter's nonaccountable expense allowance.
(3) The Company has granted an option to the Underwriter exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
60,000 Units, on the same terms, solely to cover over-allotments, if any.
If the over allotment option is exercised in full, the total "Price to
Public," "Underwriting Discounts and Commissions" and "Proceeds to
Company" would be $ , $ , and $ , respectively. See "Underwriting."
(4) None of the expenses of the Offering are payable by the Selling
Stockholders. See "Principal and Selling Stockholders."
----------------
The Units are being offered by the Underwriter on a "firm commitment" basis,
subject to prior sales, receipt and acceptance, the approval of certain legal
matters by counsel and certain other conditions. The Underwriter reserves the
right to reject orders in whole or in part. It is expected that delivery of
the certificates representing the Units will be made at the offices of J.W.
Barclay & Co., Inc., One Battery Park Plaza, New York, New York 10004 on or
about , 1996.
The date of this Prospectus is , 1996
J.W. BARCLAY & CO., INC.
<PAGE>
(Continued from Cover Page)
Dividends on the Preferred Shares may be paid in shares of Common Stock or
cash at the Company's option. For the foreseeable future, the Company expects
to make dividend payments in shares of Common Stock to the extent it may
legally do so. The Company has been operating at a loss since its commenced
operations. In the period ended June 30, 1995 and the year ended 1996, the
Company had losses of $560,333 and $4,149,682, respectively. Unless previously
redeemed by the Company, Preferred Shares are convertible at the rate of one
and one-half (1 1/2) shares of Common Stock for each Preferred Share, subject
to adjustment under certain circumstances, at any time, after January 1, 1997.
Each Preferred Share is redeemable by the Company after January 1, 1997 on not
less than 30 nor more than 60 days' written notice to the registered holders,
at $12 per share plus accumulated dividends, provided the Company may not
redeem any Preferred Share unless the closing price of the Common Stock for 20
of the 30 days prior to the date of the redemption notice is more than $10 as
adjusted. The Warrants may be redeemed by the Company after April 20, 1997
under certain circumstance. See "Description of Securities."
The Common Stock and the Common Stock Purchase Warrants (the "Warrants") are
traded on the NASDAQ Small-Cap Market under the symbols HBCO and HBCOW,
respectively. There is presently no market for the Units or the Preferred
Shares. It is expected that after this offering, the Units will trade on the
NASDAQ Small-Cap Market under the symbol HBCOU. After separation, it is
expected that the Preferred Shares will be traded on the NASDAQ Small-Cap
Market, but there can be no assurance that a market will develop for the Units
or Preferred Shares. It is currently anticipated that the initial public
offering price of the Units will be between $8 and $12 per share. See
"Underwriting." On September 24, 1996, the closing bid prices of the Common
Stock and Warrants, as reported by NASDAQ was $7 and $2 1/8, respectively. See
"Price Range of Securities."
2
<PAGE>
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933 (the
"Act") with respect to the securities to which this Prospectus relates. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information set forth in the Registration Statement.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including the
exhibits thereto, which may be obtained, together with other information about
the Company, from the Public Reference Section of the Commission upon payment
of the prescribed fees.
The Company will provide without charge to any person who receives a copy of
this Prospectus, upon written or oral request of such person, a copy of any of
the information that is incorporated by reference in this Prospectus. Any such
request should be directed to the attention of Frank R. Cohen, Secretary,
Hungarian Broadcasting Corp. at 445 Park Avenue, New York, New York 10022,
telephone number: (212) 758-9870.
The Company furnishes its stockholders after the close of each fiscal year,
annual reports containing financial statements audited by its independent
certified public accountants. The Company will also furnish other reports as
it may determine or as may be required by law.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance with
Section 12(g) thereunder, files reports, proxy statements, and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at its Regional Offices located at 7 World Trade Center, New York,
New York 10048 and 500 West Madison Street, Chicago, Illinois 60601.
The Commission maintains a Web Site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
requirements, such as the Company, that file documents electronically with the
Commission.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY.
SUCH STATEMENTS REFLECT SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY
THE COMPANY'S MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER, SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING
STATEMENTS. FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS." INVESTORS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE UNDERWRITER HAS NOT ATTEMPTED TO
VERIFY THE BASIS FOR ANY SUCH STATEMENTS INDEPENDENTLY AND NEITHER THE
UNDERWRITER NOR THE COMPANY UNDERTAKES ANY OBLIGATION TO RELEASE PUBLICLY ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OCCURRING OR
CIRCUMSTANCES ARISING AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this prospectus. Except as otherwise noted (i) the information in
this prospectus assumes that the Underwriter's over-allotment option will not
be exercised, and (ii) all statistical and financial information presented in
this Prospectus has been converted into United States Dollars using exchange
rates as of June 30, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Foreign Currency." All
references to $ or Dollars are to United States Dollars; all references to
"HUF" are to Hungarian Forints. As of June 30, 1996, the Exchange Rate was HUF
153.03 to $1.
THE COMPANY
Hungarian Broadcasting Corp. ("HBC") was incorporated in the State of
Delaware on September 14, 1994 to acquire interests in companies that have
commercial broadcasting licenses to own, develop, expand and operate television
stations in Hungary.
The Company acquired an 80% equity interest in a film studio company known as
DNTV Kft. ("DNTV") as of May 30, 1995 and a 90% equity interest in a film
studio company known as VI-DOK video es Filmgyarto Studio Kft. ("VI-DOK") as of
June 16, 1995. Both DNTV and VI-DOK held studio licenses which permitted them
to produce films and other television programs. In April 1994 each studio was
granted a frequency license which permitted them to broadcast over Budapest
Television 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. by the
Hungarian Cultural Ministry (the "Ministry"). An unaffiliated studio company,
NAP TV Kft., received the license for broadcasting between 5 p.m. and 7:30 p.m.
on A3. Hereinafter, DNTV and VI-DOK will be sometimes referred to as the
"Licensees." HBC Kft., a Hungarian company wholly owned by HBC, administers the
Company's operations in Hungary. Broadcasting on A3 commenced in September
1994. In September 1996, the Company began broadcasting throughout Hungary via
satellite. This method of distribution carries 24 hours per day of programming.
The two basic methods of television transmission in Hungary are over-the-air
(terrestrial) broadcasting, which can be either local or national in scope, and
satellite-to-cable broadcasting. In over-the-air broadcasting, the station
operator obtains a license from the appropriate regulatory authority to
broadcast its signal at an established frequency and power via one or more
land-based transmitters, each with a limited geographic range. This signal can
be picked up by the conventional rooftop antennae and by cable heads in the
area. In satellite-to-cable broadcasting, the station operator transmits its
programming signal to a satellite which redirects the signal to either a land
based transmitter which retransmits the signal to a cable system head or
directly to a home that has installed a dish.
A3's signal is carried over-the-air through a microwave network in an area
with a radius of 50 miles and currently reaches approximately 350,000
households. In addition, the signal reaches approximately 500,000 households
through cable networks in the signal's area. The Company has contracts with
approximately 25 owners of cable networks in its cachement (reach) area and
pays these owners an average $.05 per month per subscriber for carrying its
signal. In September 1996, the Company began broadcasting throughout Hungary
via satellite. The Company does not pay cable operators who retransmit A3's
satellite signals to their subscribers.
On January 29, 1996, both VI-DOK and DNTV were issued licenses from the
Ministry to distribute their TV programs nationwide on satellite.
Prior to April 1994, all radio and television broadcasting stations were
owned and operated by the State. The State permitted limited commercial
advertising commencing in 1990 on State owned stations. Based on a
4
<PAGE>
report prepared by Saatchi & Saatchi/Zenith Media World Wide, TV advertising
expenditures in Hungary 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. Most of this television advertising money is spent on three state owned
stations. The Company expects TV advertising expenditures to continue to grow
in Hungary as advertisers increasingly use television as an integral part of
their advertising strategy and as consumer oriented multi-national companies
market their products to satisfy the emerging demand for basic goods as well as
convenience products. The Company's operating results are primarily dependent
upon the sale of commercial advertising time.
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 IE
Satellite. As of September 20, 1996, 30 cable operators had installed downlink
satellite equipment adding 190,000 subscribers to the Company's distribution.
Over the next six months it is anticipated that Hungarian Broadcasting Corp.
will increase its distribution to approximately 1.8 million households, or 49%
of all TV households, throughout Hungary.
Advertising billing is determined by the specific program ratings provided by
AGB-Hungaria Meter System, 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 year 1998 or ever.
The Company has entered into a ten year agreement with Nethold Electronic
Media B.V. ("Nethold"), a satellite owner located in the Netherlands to rent to
the Company space on its satellite known as "Hot Bird 2," for the distribution
of its programs to cable systems and home television sets that receive cable
programs. It is anticipated that Hot Bird 2 will be launched in the fall of
1996 and be fully operational or about January 1, 1997. Until this launching,
the Company will continue to broadcast on the Astra IE satellite on a month-to-
month basis.
Specific goals of the Company's operating strategy with respect to its
existing and proposed new markets include (i) utilizing regular and consistent
scheduling of programming, (ii) promoting programming effectively, (iii)
controlling station operating costs, and increasing advertising sales by
expanding, motivating and training the sales force using techniques widely
practiced in the commercial television industry in the United States.
Unless the context otherwise requires, when used herein, the term "Company"
shall include Hungarian Broadcasting Corp., the Delaware corporation, and its
Hungarian subsidiaries VI-DOK, DNTV, and HBC, Kft., a wholly owned Hungarian
subsidiary, which administers the Company's operations in Hungary. The office
of the Company in the United States is c/o Cohen & Cohen, 445 Park Avenue, New
York, NY 10022; Telephone number: (212) 758-9870. The office in Hungary is 1118
Budapest, Kelenhegyi ut 39; Telephone number: (361) 209-0520.
5
<PAGE>
THE OFFERING(1)
Securities Offered by the Company and by
Selling Stockholders..................... 400,000 Units offered by the
Company and 100,000 Units offered
by Selling Stockholders, each unit
consists of one Preferred Share and
One Common Stock Purchase Warrant.
The Underwriter has an option to
purchase up to 60,000 additional
Units to cover over-allotments. See
"Underwriting." The Preferred
Shares and the Common Stock
Purchase Warrants are not
detachable, separately transferable
or exercisable until nine months
from the date of this Prospectus
except in certain circumstances
(the "Separation Date"). See
"Description of Securities."
Rights of the Preferred Shares:
Dividends............................. Cumulative annual dividends of
$1.20 are payable on December 31 of
each year beginning December 31,
1997. Unpaid dividends will
accumulate and be payable prior to
the payment of dividends on the
Common Stock. The Company may, at
its option, pay dividends in shares
of Common Stock, in lieu of cash.
Shares used for such purpose will
be valued at the average closing
bid price during the ten trading
days ending on the tenth day before
the dividend payment date, subject
to certain conditions. For the
foreseeable future, the Company
expects to make dividend payments
on the Preferred Shares in shares
of Common Stock. See "Description
of Securities."
Conversion Rights..................... Unless previously redeemed,
Preferred Shares are convertible at
any time at the option of the
holder, commencing on the
Separation Date (nine months after
the Offering), at the rate of one
and one half (1 1/2) shares of
Common Stock for each Preferred
Share, subject to adjustment under
certain circumstances. No
fractional shares of Common Stock
will be issued but in lieu thereof,
the Company shall "round up" any
fractional shares over 50% of a
share to a full share of Common
Stock and round down any fractional
share under 50% of a share.
Redemption............................ The Preferred Shares are redeemable
after January 1, 1997 at the option
of the Company, on not less than 30
nor more than 60 days' written
notice to registered holders at the
6
<PAGE>
redemption price of $12 per share
plus accumulated dividends,
provided the Company may not redeem
the Preferred Shares unless the
closing price of the Common Stock
for 20 of the 30 days prior to the
date of the redemption notice is
more than $10.
Voting Rights......................... Preferred Shares will be entitled
to one vote per share voting
together with the Common Stock, as
one class except as otherwise
provided by the Delaware General
Corporation Law or in connection
with certain issuances of Preferred
Stock.
Warrants:
Exercise Price........................ $ 6.00 per share subject to
adjustment in certain circumstances.
See "Description of Securities--
Warrants." The Warrants may be
exercised at any time commencing on
the Separation Date (nine months
after the Offering).
Expiration Date....................... December 20, 2000.
Redemption............................ Redeemable by the Company at any
time commencing April 20, 1997, (or
earlier with the consent of the
Underwriter), and prior to their
expiration, at a price of $.25 per
Warrant, upon not less than 30
days' prior written notice to the
holders of Warrants, provided that
the closing bid price per share of
the Common Stock on the NASDAQ
SmallCap Market, or the last sale
price per share if listed on the
NASDAQ National Market or a
national exchange, has been at
least $8.50 per share for 20 of the
immediate prior 30 trading days
ending within 15 days of the date
on which the Company gives notice
of redemption. See "Description of
Securities--Warrants."
Common Stock Outstanding (prior to and
after Offering(2))....................... 2,577,500 shares of Common Stock.
Preferred Stock Outstanding:
Prior to the Offering................. 100,000 Preferred Shares.
After the Offering(3)................. 500,000 Preferred Shares.
Warrants Outstanding(2)
Prior to the Offering................. 1,710,000 Warrants
After the Offering.................... 2,110,000 Warrants
7
<PAGE>
The net proceeds of the Offering
Use of Proceeds........................... will be used to purchase equipment
for Broadcasting Studio and Dubbing
Studio, to pay for programming and
for working capital (see "Use of
Proceeds").
Risk Factors.............................. The securities offered hereby
involve a high degree of risk and
immediate substantial dilution. See
"Risk Factors."
NASDAQ Symbols:
Common Stock.......................... HBCO
Preferred Shares......................
HBCOP
Warrants.............................. HBCOW
Units................................. HBCOU
- --------
(1) Unless otherwise indicated, all information in this Prospectus assumes that
no portion of the Over-allotment Option is exercised.
(2) Does not include an aggregate of 3,250,000 shares of Common Stock, reserved
as follows: (i) 350,000 shares reserved for outstanding options granted or
to be granted pursuant to the Company' Stock Option Plan; (ii) 1,710,000
shares reserved to cover exercise of outstanding Common Stock Purchase
Warrants; (iii) 100,000 shares reserved upon exercise of Underwriter's
Stock Warrants, and 140,000 reserved upon exercise of Underwriter's
warrants both issued on December 20, 1995; (iv) 840,000 shares issuable
upon conversion of the Preferred Shares including shares issuable on
exercise of the over-allotment option and of outstanding Preferred Shares;
(v) 60,000 shares issuable upon conversion of the Preferred Shares
underlying the Underwriter Preferred Share Warrants. In addition, shares of
Common Stock may be issuable upon payment of dividends on the Preferred
Shares; and (vi) 50,000 shares issuable on exercise of options granted to a
director.
(3) Does not include 60,000 units reserved to cover Underwriter's Over-
Allotment Option.
8
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following table summarizes certain selected consolidated financial data
derived from the financial statements of the Company, and is qualified in its
entirety by the more detailed consolidated financial statements included
elsewhere herein.
OPERATING STATEMENT DATA
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 14, 1994
(DATE OF INCEPTION) YEAR ENDED
THROUGH JUNE 30, 1995 JUNE 30, 1996
--------------------- -------------
<S> <C> <C>
Operating revenues..................... $ 72,043 $ 672,108
Operating expenses..................... $ 560,393 $ 4,351,869
Net loss after minority interest....... $(560,333) $(4,149,682)
Net loss per share..................... $ (0.39) $ (2.01)
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
<S> <C> <C>
Current assets.................................... $2,319,652 $5,874,152
Current liabilities............................... 2,269,757 2,269,757
Working capital................................... 49,895 3,604,395
Total assets...................................... 4,252,051 7,806,551
Stockholders' equity.............................. 1,941,968 5,496,468
Book value per share(2)........................... $ 0.75 1.65
</TABLE>
- --------
(1) Adjusted for post June 30, 1996 sale of 100,000 Units consisting of 100,000
shares of Preferred Stock and 100,000 Common Stock Purchase Warrants plus
the Units to be sold by the Company in this Offering.
(2) Includes 750,000 Common Shares resulting from conversion of Preferred
Shares Does not include an aggregate of 2,500,000 shares of Common Stock,
reserved as follows: (i) 350,000 shares reserved for outstanding options
granted or to be granted pursuant to the Company' Stock Option Plan; (ii)
1,710,000 shares reserved to cover exercise of outstanding Common Stock
Purchase Warrants; (iii) 100,000 shares reserved upon exercise of
Underwriter's Stock Warrants, and 140,000 reserved upon exercise of
Underwriter's warrants both issued on December 20, 1995; (iv) 90,000 shares
issuable upon conversion of the Preferred Shares resulting from possible
exercise of the over-allotment option and of outstanding Preferred Shares;
(v) 60,000 shares issuable upon conversion of the Preferred Shares
underlying the Underwriter Preferred Share Warrants. In addition, shares of
Common Stock may be issuable upon payment of dividends on the Preferred
Shares; and (vi) 50,000 shares issuable on exercise of options granted to a
director.
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other things, the
following factors concerning the business of the Company and this Offering, as
well as all other information set forth elsewhere in this Prospectus.
1. Limited Operating History; Risks of New Industry. The Company was
incorporated in Delaware on September 14, 1994. The broadcast license
under which A3 in Budapest operates was awarded to two unaffiliated
Hungarian companies (the "Licensees") in April 1994 and broadcasting
commenced on A3 in September 1994. The Company loaned funds to the
Licensees to finance operating costs which included programming costs,
from November 1994 until it acquired majority interests in the Licensees
in May and June 1995. Commercial television supported by advertising
revenues represents a new industry in Hungary, the viability of which is
unproven, and there can be no assurance that the Company will be
successful in achieving its objectives. See "The Company."
2. Accumulated Deficit; Operating Losses. At June 30, 1996, the Company had
an accumulated deficit of $4,980,040 representing a consolidated net loss
for the period from its inception through June 30, 1996. The consolidated
loss was caused primarily by the costs involved in producing live
programming, purchasing programming and in operating costs and in seeking
customer identification for A3. The Company's ability to achieve
profitability is dependent upon its ability to realize revenues from
advertising that exceed costs. See "Financial Statements."
3. Government Regulation. Broadcast operations in Hungary are subject to
extensive government regulation. Regulations govern the issuance, renewal,
transfer and ownership of station licenses, and the timing, content and
amount of commercial advertising permitted. There are also regulations
requiring that certain percentages of programming be produced or
originated in local markets. These regulations are substantially different
from regulations relating to television broadcast operations in the United
States. While the Company believes that it is, and the station it controls
is, in compliance in all material respects with applicable laws, rules and
regulations, there can be no assurance that in fact it is in compliance,
that it will be able to continue to comply with all such laws, rules and
regulations or that more restrictive laws, rules, regulations or
enforcement policies will not be adopted in the future which could make
compliance more difficult or expensive or otherwise adversely affect the
Company's business or prospects. See "The Company."
4. Business is Subject to Substantial Competition. The Company encounters,
and expects to continue to encounter, substantial competition in the
television broadcasting industry and from other media which compete for
advertising revenues. The Company believes that it will be able to compete
effectively against its existing and future competitors but there can be
no assurance that it will be able to continue to compete effectively. See
"The Company."
5. Dependence on Key Personnel and Lack of Experience of Management. The
success of the Company is particularly dependent upon the active
involvement of Peter E. Klenner, President and Chief Executive Officer of
the Company. The loss of the services of Mr. Klenner could have a material
adverse effect on the Company. The Company has an employment agreement
with Mr. Klenner which expires December 20, 2000. See "Management--
Employment Agreements." None of the directors or officers of the Company
has had experience in operating a television broadcasting company other
than Justin Bodle, a director and consultant to the Company, who has 16
years experience with broadcasting.
6. Future Sales of Common Stock Could Have an Adverse Effect on the Market
Value. 1,427,500 of the 2,557,000 shares of Common Stock outstanding as of
the date of this Offering are "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act of 1933, as
amended. In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate
of the Company, who has owned restricted shares of Common Stock
10
<PAGE>
beneficially for at least two years, is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class, or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the sale, as reported by all national securities exchanges
on which the Common Stock is traded and/or the automated quotation system
of a registered securities association. A person who has not been an
affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned shares of Common Stock
for at least three years is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. Of the 1,427,500
restricted shares, the holders of 910,000 shares have entered into
agreements with the Underwriters not to sell or otherwise dispose of such
shares until December 20, 1997 without the written consent of the
Underwriter. Of the holders of the remaining 547,500 shares, 165,000 will
satisfy their holding period in November 1996, 182,500 will satisfy their
holding period in July 1997 and 200,000 will satisfy their holding period
in August 1997. Nevertheless, the possibility that substantial amounts of
Common Stock may be sold in the public market may have an adverse effect
on prevailing market prices for the Common Stock and could impair the
Company's ability to raise capital through the sale of its equity
securities. See "Description of Securities."
7. Possible Conflict of Interest with Affiliates. The Company has engaged in
certain transactions with companies in which directors of the Company are
also officers, directors or shareholders. Such transactions include
issuance of capital stock and the borrowing of money to finance the
operations of the Company. 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. The Company believes that all
transactions with affiliates prior to the date of this Offering were on
terms no less favorable to the Company than could be obtained from an
independent third party. Any transactions with an affiliate in the future
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. See "Management" and "Certain
Transactions."
8. No Prior Sustained Public Market; Determination of Offering Price. Prior
to the Offering, there has been no public market for Preferred Shares.
Accordingly, there can be no assurance that an active trading market will
develop or continue after the completion of the Offering. The initial
public offering price of the Preferred Shares has been determined by
negotiations between the Company and the Underwriter and may not be
indicative of the market price for the Preferred Shares after the
Offering. See "Cover Page." Since December 20, 1995, however, the Common
Stock and the Common Stock Purchase Warrants have traded on the NASDAQ
SmallCap Market.
9. Risks Inherent in Foreign Investment. The Company has invested substantial
resources in operations in Hungary. Risks inherent in foreign operations
include loss of revenue, property and equipment from expropriation,
governmental royalties and fees and involuntary renegotiation of contracts
with or licenses from foreign governments. The Company is also exposed to
the risk of changes in foreign and domestic laws, regulations and policies
that govern operations of overseas-based companies. See "Republic of
Hungary."
10. Inflation and Local Currency Devaluation. The Hungarian economy has been
characterized by high rates of inflation and devaluation of the Hungarian
Forint against the U.S. Dollar and certain European currencies. In 1993,
1994 and 1995, the annual reported inflation rate in Hungary (measured by
the national consumer price index) was approximately 23%, 19% and 30%,
respectively and 9% in the first three months of 1996. The Hungarian
Forint was devalued against the U.S. Dollar in 1992, 1993, 1994 and 1995
by 5.4%, 14.2%, 15.9%, and 26.7%, respectively. In March 1995, an
immediate 9% devaluation of the
11
<PAGE>
Hungarian Forint was announced together with a new policy of daily or
"crawling peg" devaluation. This involved daily devaluations amounting to
1.9% monthly in the second quarter of 1995 and 1.3% monthly during the
second half of that year. During 1996 the monthly devaluation rate was
established pursuant to governmental decree at 1.2% for the first half of
the year. The monthly rate is presently expected to be further decreased,
subject to Hungary's economic condition. The exchange rate for the
Hungarian Forint, as set by the National Bank of Hungary, declined from
100.70 Forints per U.S. Dollar at December 31, 1993 to 153.03 Forints per
U.S. Dollar at June 30, 1996. See "Republic of Hungary."
11. Foreign Currency and Exchange Risks and Regulation. The Company will be
subject to significant foreign exchange risk. There are currently no
meaningful ways to hedge currency risk in Hungary. Therefore, the
Company's ability to limit its exposure to currency fluctuations is
significantly restricted.
Although the Forint has recently become exchangeable outside Hungary,
there is not yet a freely convertible exchange market in place for the
Forint. In addition, Hungarian law permits the repatriation of foreign
currency only for dividends to the extent of capital investment and
earnings, as determined under applicable Hungarian law. There can no
assurances as to the future exchangeability or convertibility of Forints.
See "Republic of Hungary."
12. Regulatory and Tax Aspects of Dividends Paid in Common Stock; Loss of
Dividends Upon Conversion of Preferred Shares. The Dividends payable on
the Preferred Shares are cumulative and may be paid either in cash or in
shares of Common Stock or partly in cash and partly in stock. Accrued
dividends will not be paid on the Preferred Shares if they are converted
between a dividend payment date and the next record date for dividend
payment. The first dividend is scheduled to be paid on December 31, 1997.
Dividends on the Preferred Shares are payable, at the option of the
Company, in either cash or shares of Common Stock. The Company expects to
make dividend payments in shares of Common Stock for the foreseeable
future to the extent it may legally do so. The Company will be unable to
legally issue Common Stock as dividend payments on the Preferred Shares
unless it has sufficient authorized shares of Common Stock, is able to
maintain an effective registration statement for such shares, qualifies
such shares under the appropriate state securities laws and has surplus
available for such purpose. Payment of dividends in shares of Common Stock
will create federal income tax liability, equivalent to the then current
market price of such Common Stock, to the recipient without the receipt by
such recipient of any cash to pay such tax liability.
For federal income tax purposes, distributions of Common Stock with
respect to Preferred Shares are treated as taxable distributions of
property. The fair market value of such shares of Common Stock distributed
will be treated as a taxable dividend (to the extent of the Company's
current or accumulated earnings and profits) or a taxable gain (if the
excess of the fair market value of such shares over the Company's current
or accumulated earnings and profit per share exceeds the shareholder's tax
basis in his Preferred Shares. The cash portion of the dividend, if any,
may not be sufficient to pay the total federal income tax payable on the
cash portion of the dividend and on shares of Common Stock treated as a
taxable dividend or taxable gain (if the excess of the fair market value
of such shares over the Company's current or accumulated earnings and
profits per share exceeds the shareholder's tax basis in his Preferred
Shares).
13. Possible Negative Effects of Preferred Stock. Immediately prior to the
closing of this Offering, the Company will have authorized 5,000,000
shares of Preferred Stock, the designation, rights and preferences of
which (including voting, dividend, redemption and liquidation rights) may
be fixed by the Company's Board of Directors, from time to time, without
further shareholder action. Shares of this Preferred Stock could be issued
in the future with such rights and preferences as could make the possible
takeover of the Company or the removal of management of the Company more
difficult or could otherwise adversely impact the rights of holders of
Common Stock. Further, under current regulations of the Securities and
Exchange Commission, if any such Preferred Stock were issued by the
Company with such voting rights as had the effect of nullifying,
restricting or disparately reducing the per share voting rights of holders
of
12
<PAGE>
Common Stock, such issuance could result in the disqualification of the
Company's securities from listing on NASDAQ or on a securities exchange.
14. Dividends. The Company has not previously paid any dividends on its Common
Stock and intends to follow a policy of retaining all of its cash flow
from operations, if any, to finance the development and expansion of its
business. The Company intends to pay dividends on the Preferred Shares in
Common Stock, to the extent legally permissible.
15. Voting Rights of Preferred Shares. Until conversion, the Preferred Shares
will be entitled to only one vote per share, voting together with the
Common Stock as one class on all matters except as otherwise provided by
Delaware law and with respect to the issuance of certain additional shares
of Preferred Stock. Each Preferred Share is convertible into one and one-
half (1 1/2) shares of Common Stock, each of which is entitled to one
vote.
13
<PAGE>
PRICE RANGE OF SECURITIES
Effective December 20, 1995, the Company's Common Stock and certain Common
Stock Purchase 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.
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.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------- -------------
HIGH LOW HIGH LOW
------- ------ ------ ------
<S> <C> <C> <C> <C>
1995
Fourth Quarter (December 20-31)................. $ 8.375 $5.500 $4.000 $1.000
1996
First Quarter................................... $11.850 $7.625 $5.750 $2.500
Second Quarter.................................. $11.250 $9.000 $5.125 $3.000
Third Quarter (to September 20)................. $ 9.125 $5.375 $3.375 $1.500
</TABLE>
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 1,610,000
outstanding Warrants. The closing bid prices of the Common Stock and Warrants
on June 30, 1996 was 9 1/4 and 3 3/8 respectively. There is presently no
market for the Preferred Shares, and there can be no assurance that a public
trading market for the Preferred Shares will develop after this Offering. The
Underwriter has advised the Company that it intends to make a market for the
Preferred Shares immediately after the public offering of these securities but
may discontinue these activities at any time.
14
<PAGE>
DILUTION
In September 1994, officers and directors of the Company purchased 850,000
shares of Common Stock for $8,500. Between November 1994 and March 1995, the
Company received $2,120,000 in proceeds from a private placement of 53 Units,
each Unit consisting of a Bridge Note in the principal amount of $40,000 and
5,000 shares of Common Stock. Fifty percent of the Bridge Notes were repaid
with interest from the proceeds of the Offering in December 1995 and half of
the remaining balance will be repaid out of this Offering. In March, July and
August 1995, the Company received gross proceeds of $450,000, $547,500 and
$600,000, respectively, from private placements of 150,000, 182,500 and
200,000 shares of Common Stock respectively, at $3 per share. $800,000 for the
purchase of 20 Units and $450,000 for the purchase of shares of Common Stock
was paid in March 1995 by an affiliate of the Company. Thirty thousand of the
shares sold in the July 1995 private placement were purchased by Peter E.
Klenner, President of the Company. In December 1995, the Company sold
1,150,000 Shares at $5 per share, 1,610,000 Common Stock Purchase Warrants at
$.15 per Warrant in a public offering. The purchasers of the Shares being
offered hereby will be paying significantly more than the prices paid by the
officers, directors and an affiliate of the Company and by the private
placement and public offering purchasers.
At June 30, 1996, the Company had a net tangible book value of $1,941,968 or
$0.75 per share of Common Stock. Net tangible book value per share represents
the amount of the Company's total tangible assets less liabilities, divided by
the number of shares of Common Stock outstanding.
Giving retroactive effect to the sale of 400,000 Preferred Shares offered by
the Company hereby and to 100,000 Preferred Shares issued by the Company in a
private placement offering, after June 30, 1996 and the receipt of net
proceeds from that offering and assuming a public offering price for the
Preferred Shares offered hereby of $10.00 per share and the receipt of the net
proceeds of this Offering , and assuming that (i) all Preferred Shares are
converted; (ii) no previously outstanding stock options or stock purchase
warrants are exercised, and (iii) the over-allotment option and the
Underwriter's Warrants are not exercised, the pro forma net tangible book
value of the Common Stock at June 30, 1996 would have been $1.04 per share,
representing an immediate increase in net tangible book value of $.86 per
share to present stockholders and an immediate dilution to investors in this
Offering of $4.77 per share from the public offering price. Dilution per share
represents the difference between the public offering price imputed to each
share of Common Stock issuable upon conversion of the Preferred Shares and the
pro forma net tangible book value per share after the Offering.
The following table illustrates this per share dilution to be incurred by
investors in this Offering from the public offering price based on the above
assumptions:
<TABLE>
<S> <C> <C>
Assumed public offering price per Preferred Share of $10.00(1).. $6.67
Net tangible book value per share of Common Stock before
Offering..................................................... $0.75
Net tangible book value per Share of Common Stock before
offering but after private sale of 100,000 shares of
Preferred Stock.............................................. 0.84
Increase per share of Common Stock attributable to investors in
this Offering(2)............................................... 0.81
Pro forma net tangible book value per share of Common Stock
after Offering................................................. 1.65
-----
Dilution of net tangible book value per share of Common Stock to
investors in this Offering(2).................................. $5.02
=====
</TABLE>
After giving effect to the assumptions described above, the following table
sets forth the difference between the present stockholders and the investors
in this Offering with respect to the number of shares purchased from the
Company, the total consideration paid and the average per share:
15
<PAGE>
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------------------------
AVERAGE
PERCENT PERCENT PRICE
NUMBER OF TOTAL AMOUNT OF TOTAL PER SHARE(7)
--------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Shares of Common Stock
purchased by original
investors(3)........... 1,427,500 43% $ 2,042,900 20% $1.43
Shares of Common Stock
purchased by investors
in Initial Public
Offering............... 1,150,000 35% $ 4,841,452(4) 46% $4.21
Preferred Shares
purchased in Bridge
Financing assuming full
conversion(8).......... 150,000 4% $ 354,500(5) 3% $2.36
Preferred Shares to be
purchased by investors
in this Offering
assuming full
conversion(8).......... 600,000 18% $ 3,200,000(6) 31% $5.33
--------- --- ----------- ---
Total................. 3,327500 100% $10,438,852 100%
========= === =========== ===
</TABLE>
- --------
(1) Before deducting underwriting discounts and offering expenses payable by
the Company.
(2) The above discussion and tables assume no exercise of the over-allotment
option, the exercise of which in full would reduce the dilution to public
investors to $4.89 per share as the pro forma net tangible book value
after the Offering would increase from $5,496,468 to $6,036,468.
(3) Includes shares issued through August 1, 1996 exclusive of Initial Public
Offering.
(4) After Offering costs of $908,548.
(5) After Offering costs of $95,500.
(6) After Offering costs of $800,000.
(7) Net of expenses.
(8) 100% of Unit cost allocated to Preferred Stock.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, and adjusted to give effect to the sale of 400,000 Preferred Shares
offered by the Company and the application of the proceeds therefrom as
described in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
AS
ACTUAL(2) ADJUSTED(1)
----------- -----------
<S> <C> <C>
Bridge Notes......................................... $ 975,412 $ 975,412
Stockholders' equity:
Common Stock, $.001 par value; 15,000,000 shares
authorized; 2,577,500 issued; as adjusted
2,577,500......................................... 2,587 2,587
Series A Convertible
Cumulative Redeemable Preferred Stock $.001 par
value, 5,000,000 shares authorized; issued
100,000 shares; as adjusted 500,000............. 100 500
Additional paid-in capital(1)...................... 7,143,429 10,343,029
Deficit............................................ (4,980,040) (4,980,040)
Currency translation adjustments................... 130,396 130,396
Total Stockholders' Equity......................... 2,296,468 5,486,468
Total capitalization............................... 3,666,706 6,866,706
</TABLE>
- --------
(1) Unless otherwise indicated, all information in this Prospectus assumes
that no portion of the Over-allotment Option is exercised.
(2) Includes sale of 100,000 Units of bridge financing.
16
<PAGE>
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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of Preferred Shares (after
deduction of underwriting discounts and commissions and other expenses of this
Offering) are estimated to be approximately $3,200,000 (or $3,722,000 if the
over-allotment option is exercised in full). The Company intends to use such
net proceeds as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS APPROXIMATE AMOUNT
----------------------- ------------------
<S> <C>
Purchase Equipment for Broadcasting Studio and
Dubbing Studio...................................... $ 520,000
Six Months Payment Satellite Fees.................... 380,000
Payment for Certain Programming for Calendar 1997.... 600,000
Working Capital and General Corporate Purposes....... 1,700,000
----------
Total.............................................. $3,200,000
==========
</TABLE>
Any additional net proceeds received from the exercise of the Underwriter's
Over-allotment Option will be added to working capital.
Pending expenditure of the proceeds from the Offering, the Company may make
temporary investments in interest bearing savings accounts, certificates of
deposit, or short term United States government obligations. In the opinion of
management, the above proceeds should be sufficient for the Company's
operations together with internally generated funds to provide the Companys
working capital needs at least until December 31, 1997.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
The financial information set forth below for the period ended June 30, 1995
and for the year ended June 30, 1996 should be read in conjunction with the
Company's audited financial statements and accompanying notes appearing
elsewhere in this Prospectus.
OPERATING STATEMENT DATA
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 14, 1994
(DATE OF INCEPTION) YEAR ENDED
THROUGH JUNE 30, 1995 JUNE 30, 1996
--------------------- -------------
<S> <C> <C>
Operating revenues..................... $ 72,043 $ 672,108
Operating expenses..................... $ 560,393 $ 4,351,869
Net loss after minority interest....... $(560,333) $(4,149,682)
Net loss per share..................... $ (0.39) $ (2.01)
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30
-----------------------
1995 1996
----------- ----------
<S> <C> <C>
Current assets...................................... $ 471,033 $2,319,652
Current liabilities................................. 1,856,314 2,269,757
Working capital..................................... (1,385,281) 49,895
Total assets........................................ 2,790,735 4,252,051
Stockholders' equity................................ 43,582 1,941,968
Book value per share................................ $ 0.03 $ 0.75
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The Company was organized in September 1994 and in October it commenced
exploring opportunities to own, operate and develop a regional private
commercial television station in Hungary. In November, it obtained a six month
option to acquire majority interests in DNTV and VI-DOK, two Hungarian
corporations (the "Licensees") that were granted licenses in March 1994 for a
six year term commencing July 1, 1994 to operate Channel A3. The Licensees
commenced their broadcasting on A3 on a limited basis in September 1994, and
increased their broadcasting to 21 1/2 hours per day in December, 1994. During
the option period, the Company loaned approximately $2,100,000 to the
Licensees, which was used by 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 national, international and local 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 consisted of station expenses
aggregating $4,351,869, including amortization of broadcast license costs of
$423,052.
For the period from September 14, 1994 (date of inception) to June 30, 1995,
the Company incurred a net loss of $635,672. Station expenses aggregated
$560,393. Net interest expense was $71,983.
A3 broadcast 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.
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 IE
Satellite. Over the next six months it is anticipated that Hungarian
Broadcasting Corp. will increase its distribution to approximately 1.8 million
households throughout Hungary.
19
<PAGE>
Advertising billing is determined by the 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.
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 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 140,000 common stock purchase warrants at $0.225 per
warrant. The proceeds of this Offering amounted to approximately $4,841,000,
net of underwriting commission and expenses.
In September 1996, the Company sold 100,000 Units at $4.50 per unit for
proceeds of $354,500 net of issuance costs.
The Company believes that its existing cash balance, cash from future
operations and the net proceeds of this Offering will be sufficient to fund
the Company's operations at least until December 31, 1997 including satellite
costs, repayment of the balance of the remaining Bridge Notes of $975,412 plus
interest and advance expenses incurred for the purchase or production of
programming and the dubbing of programming.
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 U.S. Dollars at the period-end exchange rate;
income and expense accounts are translated at the average exchange rate for
the period. The resulting translation adjustments are reflected in a component
of shareholders' equity. Currency translation adjustments relating to
transactions of the Company and its subsidiaries in currencies other than the
functional currency of the entity involved are reflected in the operating
results of the Company.
Since virtually all revenues and expenses are in local currency, the Company
does not hedge against foreign currency exchange risks.
BUSINESS
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 1994, television
advertising expenditures totaled $30.6 billion in the United States and an
aggregate of $18.3 billion in 16 countries of Western Europe.
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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.
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
Television I ("MTV 1"), which started broadcasting in 1957, and Magyar
Television 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.
A household requires a dish to receive signals from channels transmitting
over a microwave frequency or directly via satellite.
The AM Micro system is a low cost 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 a higher rate for
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
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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 as to DNTV in May 1995, and in
June 1995, as to VI-DOK. 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.
In September 1996, the Company added satellite-to-cable broadcasting, and
began broadcasting 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.
NATURE OF HUNGARIAN CORPORATIONS
The three subsidiaries of the Company were organized under the Hungarian Law
on Business Organizations as limited liability companies ("KFT"). Those
persons who provide the capital own percentages of the companies in proportion
to their respective capital contributions. All the capital of HBC Kft., which
was formed on November 29, 1994, was provided by the Company. The Company, on
May 30, 1995, purchased 80% of the ownership interest from each of the three
owners of DNTV and, on June 16, 1995, purchased 90% of the ownership interests
from each of the two owners of VI-DOK. The owners of each of the two companies
then held membership meetings to approve the transfer of the interests and to
appoint Peter E. Klenner and Imre Kovats as the managing directors of each
company. The ownership interests and the names of the managing directors are
registered by the Municipal Court of Budapest in a registry that is available
for public inspection. The Media Act of 1996 provides that all broadcasting
companies have to be converted from limited liability companies (Kft's) to
share capital corporations, "Reszveny Tarsasag" (RT's) by to the end of 1996.
The Company is currently in the process of converting each of its subsidiaries
from Kft to a RT. Accordingly, the owners will hold shares in the subsidiaries
instead of interests.
POPULATION REACH AND DEMOGRAPHICS
A3's signal is carried over-the-air and currently reaches approximately
350,000 households through the AM Microwave network and approximately 500,000
households through cable networks located in Budapest and its environs. As of
September 20, 1996, additional cable companies have received A3's satellite
transmission and their 190,000 subscribers receive A3's 24 hour per day
programming.
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The Company entered into a ten year agreement with Nethold to rent to the
Company space on its satellite known as "Hotbird 2", commencing on January 1,
1997. This satellite will enable the Company to reach approximately 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 year 1997 to up 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.
The Company intends to use part of the proceeds of this Offering to finance
its satellite to cable broadcasting.
The Company designs its program schedule to appeal to and attract viewers in
the 14 to 35 year old age group.
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--institute fundamental cost controls and
operating efficiencies
.Increase Advertising Sales--expand, motivate and train the sales force.
BROADCASTING FACILITIES
The Company entered into a five year lease as of July 1, 1996 for
approximately 12,000 square feet on four floors at 1118 Budapest, 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 as of January 1, 1997) using downlink facilities leased from Banknet
to the cable system heads and to the direct-to-home subscribers.
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
into Hungarian by the Company 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 Blue, Pacific Drive, Homicide, and The Benny Hill Show. The
Company also produces or plans to produce variety shows, magazine format
shows, talk shows and game shows.
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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.
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-tapes and scripts
of the shows. The Company dubs the video-tapes into the Hungarian language.
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.
ADVERTISING SALES
Advertising sales to national, international and local advertisers is the
principal source of revenue 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
since 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 advertising sales force under the
direction of a sales manager. The Company's executive vice president of sales
and marketing, Mr. Imre Kovats, interacts on a regular basis with the sales
force in each market.
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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 also competes 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 including NAP TV that broadcast to
parts of the Budapest area sporadically and have insignificant audiences.
Competition for viewers also comes from stations transmitting through cable
and satellite TV. These stations broadcast in either English, German or
French. Currently, none broadcast in Hungarian.
A3 also competes for revenues with other media, such as newspapers, radio
magazines, outdoor advertising, telephone directory advertising, and direct
mail.
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.
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.
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 and voice over professionals. The Company believes that its
relations with its employees are good.
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.
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.
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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.
INVESTMENT CONSIDERATIONS--POLITICAL, ECONOMIC AND OTHER FACTORS REGARDING
HUNGARY
Investment in the Company involves certain special investment considerations
not usually associated with investing in securities of U.S. companies,
including risks related to (a) greater social, economic and political
uncertainty; (b) certain restrictions on foreign investment and repatriation
of capital; (c) exchange control regulations; (d) currency exchange rate
fluctuations, which may increase the costs associated with conversion of
investment principal and income from one currency to another; (e) higher rates
of inflation; and (f) greater governmental involvement in the economy.
The value of the Company's assets may be adversely affected by political,
economic and social factors, changes in the law or regulations of Hungary, and
the status of political and economic foreign relations of Hungary.
Developments in the region may also affect the value of the Company's assets.
In addition, the economy of Hungary may differ favorably or unfavorably from
the U.S. economy in such respects as the rate of growth of gross domestic
product, the rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments position. Actions of the government of
Hungary in the future may affect the local economy, which may affect private
sector companies, market conditions and general economic stability.
Until 1988, the economy of Hungary was tightly controlled by Communist
governments and composed almost exclusively of state-owned enterprises.
Accordingly, this country faces many challenges arising from decades of
Communist rule. Although Hungary has begun to initiate a number of market-
oriented reforms, there can be no assurance that these reforms will persist.
Hungary lacks a recent history of operating in a market-oriented system.
Geography
Hungary is located in the Danubian Basin in East Central Europe. In terms of
square kilometers, Hungary ranks 18th amongst the European countries, with a
territory of about 93,033 square km (36,296 square miles, about the size of
the state of Indiana). According to the latest population census of January
1995, Hungary has a population of 10.4 million. Currently, about 3.2 million
people are living in Budapest and environs, the capital of Hungary. Budapest
is the administrative, cultural, industrial, commercial and economic center of
the country. No other urban area in Hungary has over 220,000 people.
Political and Economic Environment
The nobility, landowners and middle class was virtually wiped out during
World War II, leaving the industrial proletariat and peasants to run the
government. Hungary was physically occupied by Soviet military forces after
World War II. A coalition government took over consisting of four political
parties besides the Communists. The government enacted a new electoral law and
in 1948 the Communists declared themselves
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victorious. In 1956, an uprising against the communist system was crushed with
the aid of Russian troops. The Soviet Union installed Janos Kadar in 1956 as
head of the "revolutionary workers-peasant" government and Kadar remained in
control until 1988. In 1956 Khrushchev was the leader in Russia. Kadar eased
the Communist dictatorship, allowing more personal freedom and travel to the
West, and introduced limited market economy including the production of
consumer goods and block houses.
In order to improve communication with the populace, the state commenced
building a trunk network of television transmitter stations in 1956. Since the
opening of the Budapest transmitter station in 1957, 17 transmitter stations
were built with 19 main transmitters in operation. The state subsidized the
sale of television sets and made it easy for households to purchase them so
that the households could watch the two state owned stations--MTV1 and MTV2,
which broadcast very few programs that were of interest to the general
population and fewer that were of interest to the 14 to 35 year old age group.
The State also started to experiment with satellite broadcasting transmission
and commenced building an AM-microwave network in the 1970s and encouraged and
subsidized cities and towns to build local cable systems throughout Hungary so
that they could receive programs broadcast over AM microwave frequencies and
by satellite transmission. As a result, most of the Hungarian cities and towns
currently have operating cable systems.
Beginning in 1968, Kadar introduced a series of economic reforms known
collectively as the New Economic Mechanism aimed at easing restrictions on
private enterprise and reducing the role of central planning in the economy,
and trying to combine a market economy with the Socialist system. Chief among
these changes were reforms to the banking system, which introduced a two-
tiered banking system modeled after Western Europe, and the Companies Act,
which allowed for non-state ownership of business organizations, liberalized
prices and wages, substantially reduced government subsidies, and provided for
a more advanced Western style legal system. Occupying Russian forces started
departing from Hungary in 1988, with the last units departing Hungary in July
1991. Kadar was dismissed as leader by the governing Communist party in 1988.
In 1989, the governing party amended the Hungarian Constitution so as to
provide for free elections every four years and separating powers among
executive, legislative and judiciary branches.
In the elections of March and April 1990, the Hungarian Democratic Forum
emerged as the strongest parliamentary party. Prime Minister Jozsef Antall
formed a coalition government with two smaller conservative parties, the
Independent Smallholders Party and the Christian Democrats. The Communist
Party consequently lost control of the government. In the elections of 1994, a
Socialist Party was the strongest parliamentary party and formed a coalition
with the Free Democrats to form a government.
Current economic policy identifies a number of key steps to establish the
institutional framework for a market economy by 1998. Its main goals include
reduction of the inflation rate, privatization of state owned enterprises,
currency convertibility and integration into Western trade flows. The
government is actively inviting tenders for the privatization of public
utilities, the energy sector, and TV broadcasting. In connection with this
privatization program, the government is seeking to attract foreign capital
investments.
Foreign Relations
Hungary joined the United Nations in 1955 and became a member of the
International Monetary Fund and the World Bank in 1982. In 1985, Hungary
joined the International Finance Corporation, an affiliate of the World Bank
and the International Development Association. Hungary is also a signatory to
the General Agreement on Tariffs and Trade ("GATT").
Hungary's association with the Council of Mutual Economic Aid ("COMECON")
and the Warsaw Pact ended when both these organizations were disbanded in
1991. An Association Agreement between the EC and Hungary was signed on
December 16, 1991. Under the Agreement, all customs duties, quantitative
restrictions and other trade barriers in areas other than agriculture will be
eliminated by both sides by December 1, 2000. The EC lifted some customs
duties immediately and the rest will be removed over the next nine years.
Hungary was given a three year grace period and began reducing customs duties
and quantitative restrictions in 1994.
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The Hungarian government has undertaken measures to replace communist
alliances with alliances with Western European countries and the United
States. Hungary is a member of the Council of Europe, and has been an
Associate Member of the European Union since February 1994. The government
applied for full membership of the European Union in April 1994. Hungary is a
member of the United Nations, International Monetary Fund, the World Bank, the
International Finance Corporation and the European Bank for Reconstruction and
Development. It also takes part in NATO's Partnership for Peace initiative,
and the government has expressed its desire to eventually join NATO.
FOREIGN INVESTMENT, FOREIGN EXCHANGE AND INFLATION IN HUNGARY
Foreign Investment
Act XXIV of 1988 on the Investments of Foreigners in Hungary (the "Foreign
Investment Act"), effective January 1, 1989, provided for significant tax
benefits to foreigners investing in Hungarian companies. These benefits have
since been reduced by an amendment to the Foreign Investment Act which went
into effect on January 1, 1991. Generally, the profits of Hungarian companies
are subject to tax at the rate of 40 percent of their profits.
The Foreign Investment Act provides for the benefit of foreign investors:
--a state indemnity against any damage resulting from expropriation or
nationalization of investments with compensation at "actual value" in the
currency of investment;
--for direct investment in Hungarian business organizations, whether new or
existing; and
--for free repatriation in the currency of investment of any dividends,
share of profits and share of capital from the sale or winding-up of any
investment. There are no restrictions or limitations in the amount of
Forints that a company can convert or on the amount of currency that can
be removed from Hungary.
--any conversion of Forints into foreign currency and vice-versa must be
made at the rate of exchange officially quoted by the National Bank of
Hungary.
Foreign Exchange and Revaluation
The Hungarian Forint is a convertible currency in Hungary, but not
internationally at this time. Its exchange rate is set by the National Bank of
Hungary against a basket of convertible currencies. Any devaluation exceeding
5% requires government approval. The National Bank of Hungary has announced
that its policy in the future will be to adjust the Forint on a continual
floating basis, thereby avoiding large devaluations. As of date of this
prospectus, the exchange rate of the Forint is based on a ratio consisting of
70% European Currency Union ("ECU") and 30% United States Dollars. The
Hungarian Forint has been devalued against the U.S. Dollar in 1992, 1993,
1994, and 1995 by 5.4%, 14.2%, 15.9% and 20.7%, respectively. In March 1995,
an immediate 9.0% devaluation of the Hungarian Forint was announced together
with a new policy of daily or "crawling peg" devaluation. This involved daily
devaluations amounting to approximately 1.9% monthly in the second quarter of
1995 and 1.3% monthly during the second half of 1995, and 1.2% for the first
half of 1966. The amount of monthly devaluation is presently expected to be
decrease further, subject to Hungary's economic and financial condition. The
exchange rate for the Hungarian Forint, as set by the National Bank of
Hungary, declined from approximately 100 Forints per U.S. Dollar at December
31, 1993 to 153 Forints per U.S. Dollar at June 30, 1996.
Inflation
The Hungarian economy is characterized by high inflation as measured by the
consumer price index (23 percent in 1993, 19 percent in 1994, 30% in 1995 and
9% for the first three months of 1996) and slow or negative growth in gross
domestic product. Prices have been rising rapidly in recent years mainly
because of reduction or removal of subsidies and price controls, not because
of expansionist monetary policies. The Company believes that, as the removal
of price controls and subsidy programs is completed, the inflation rate may
decline in the future. If the inflation rate exceeds the rate of increase in
advertising rates, the Company's profits could be adversely affected.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
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
</TABLE>
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, investment banking, and merger and acquisition
work. 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.
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.
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<PAGE>
REMUNERATION
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 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
30
<PAGE>
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of June 30, 1996, and as adjusted to reflect
the sale of the Units offered hereby (assuming (1) no exercise of the
Underwriter's over-allotment option; and (2) the Preferred Shares included in
the Units had been immediately and fully converted as of the date of this
Offering) 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. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment powers with respect to all shares of Common Stock beneficially
owned by it or him as set forth opposite its or his name.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
NAME AND ADDRESS PRIOR TO OFFERING NUMBER OF AFTER OFFERING
- ---------------- --------------------- SHARES ---------------------
NUMBER PERCENT TO BE OFFERED NUMBER PERCENT
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Peter E. Klenner(1)(2).. 390,000 15.10% 390,000 12.02%
Szamado u. 19
Budapest, Hungary
Hungarian Teleconstruct 250,000 9.70% 250,000 7.70%
Corp.(1)................
Szamado u. 19
Budapest, Hungary
Frank R. Cohen(1)(2).... 30,000 1.20% 30,000 0.92%
445 Park Avenue
New York, NY 10022
Imre Kovats............. 35,000 1.36% 35,000 1.08%
Szamado u. 19
Budapest, Hungary
Justin Bodle............ 0 0.00% 0 0.00%
Szamado u. 19
Budapest, Hungary
Dean Rivera(3).......... 15,000 0.71% 15,000 0 0.00%
1852 Oakland Avenue
Wantagh, NY 11793
Patricia 15,000 0.71% 15,000 0 0.00%
Weremeychik(3)..........
2514 Riverside Avenue
Seaford, NY 11793
Mark Lyons(3)........... 15,000 0.71% 15,000 0 0.00%
3713 Lufberry Avenue
Wantagh, NY 11793
Joan Downey(3).......... 30,000 1.42% 30,000 0 0.00%
29 Hewlett Road
Towaco, NJ 07082
Louis Spadafora(3)...... 15,000 0.71% 15,000 0 0.00%
68 Buel Avenue
Staten Island, NY 10304
Matthew Langdon(3)...... 30,000 1.42% 30,000 0 0.00%
32450 Crown Valley Pkwy
#105
Dana Pt., CA 92929
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
NAME AND ADDRESS PRIOR TO OFFERING NUMBER OF AFTER OFFERING
- ---------------- --------------------- SHARES ---------------------
NUMBER PERCENT TO BE OFFERED NUMBER PERCENT
---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
John Delgaizo(3)........ 30,000 1.42% 30,000 0 0.00%
19 Fieldway Avenue
Staten Island, NY 10308
All officers and direc- 455,000 17.66% 455,000 14.02%
tors as a group (5 per-
sons)...................
</TABLE>
- --------
(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.
(3) The Company agreed to register such Selling Stockholders Shares and pay
all expenses in connection therewith (other than brokerage commission). No
officer, director, stockholder or affiliate of the Selling Stockholders
has ever held any position or office with the Company or had any other
material relationship with the Company.
CERTAIN 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.
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.
33
<PAGE>
The Company licensed for $750,000 the exclusive rights to programming for A3
for the period April through December 1996 from Power Telecom Limited
("Powtel"), a company managed by Justin Bodle, one of the Company's directors.
The programming included rights to TV series "Beauty and the Beast," "Sirens,"
"Pacific Blue," "Benny Hill Shows" and others. In July 1996, the Company
agreed to license for $1,183,000 the exclusive rights to programming for the
period October 1, 1996 through December 31, 1997 from Powtel. The programming
included rights to such series as "L.A. Law," "Cops" and "Homicide." The
Company believes the terms of the transaction were no less favorable to the
Company than could be obtained from an independent third party.
See "Management--Remuneration" for details of employment agreement with
Peter E. Klenner and Imre M. Kovats, and consulting agreement with Justin
Bodle.
DESCRIPTION OF SECURITIES
The Company's authorized capitalization consists of 15,000,000 shares of
Common Stock, par value $.001 per share and 5,000,000 shares of Preferred
Stock, par value $.001 per share, which may be issued in one or more series.
As of the date of this prospectus, the Company had 2,583,600 of Common Stock
outstanding and 100,000 Preferred Shares outstanding. The following summary
description of the Units, Common Stock, Preferred Stock and Preferred Shares,
the first series of Preferred Stock to be authorized, are qualified in their
entirety by reference to the Company's Certificate of Incorporation.
UNITS
The Company is offering 500,000 Units hereby, 400,000 on behalf of the
Company and 100,000 on behalf of certain Selling Shareholders. Each Unit
offered hereby consists of one Preferred Share and one Common Stock Purchase
Warrant. The components of the Units will not be separately transferable until
nine months from the date of this prospectus, or such earlier date as may be
determined by the Underwriter or by the Company calling the Preferred Shares
for redemption or redeeming the Warrants.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by Shareholders. The holders of shares of Common
Stock are entitled to dividends when and as declared by the Board of Directors
from funds legally available therefor, and, upon liquidation, are entitled to
share pro rata in any distribution to stockholders after payments to creditors
and after paying or providing for any liquidation preferences to the Preferred
Stock. There are no conversion or redemption privileges, nor sinking fund
provisions with respect to the Common Stock, and stockholders have no
preemptive rights to acquire shares of Common Stock issued by the Company in
the future. All of the outstanding shares of Common Stock are validly issued,
fully paid and non-assessable.
The Common Stock is traded over-the-counter and is quoted by NASDAQ on its
Small-Cap list under the symbol HBCO.
PREFERRED STOCK
The Preferred Stock may be issued in one or more series, to be determined
and to bear such title or designation as may be fixed by resolution of the
Board of Directors prior to the issuance of any shares thereof. Each series of
Preferred Stock will have such voting powers, if any, preferences, and other
rights as determined by the Board of Directors, with such qualifications,
limitations or restrictions as may be stated in the resolutions of the Board
of Directors adopted prior to the issuance of any shares of such series of
Preferred Stock.
The Preferred Shares being offered hereby are the first series of Preferred
Stock designated by the Board of Directors. The Board has no present plans to
issue any other series of Preferred Stock. However, purchasers of
34
<PAGE>
the Preferred Shares offered hereby should be aware that the holders of any
series of the Preferred Stock which may be issued in the future could have
voting rights, rights to receive dividends or rights to distribution in
liquidation superior to those of holders of the Preferred Shares or Common
Stock, thereby diluting or negating the voting rights, dividend rights or
liquidation rights of the holders of the Preferred Shares or Common Stock;
provided, however that without the approval of the holders of a majority of
the Preferred Shares, no other share of Preferred Stock shall be given voting
rights greater than the higher of one vote per share or one vote for each
share of Common Stock into which it is convertible, if any, nor rank superior
to the Preferred Shares with respect to the receipt of the respective
dividends or liquidation preferences, if any, to which such shares are
entitled.
Because the terms of each series of Preferred Stock may be fixed by the
Company's Board of Directors without shareholder action, the Preferred Stock
could be issued with terms calculated to defeat a proposed takeover of the
Company, or to make the removal of the Company's management more difficult.
Under certain circumstances, this could have the effect of decreasing the
market price of the Preferred Shares, the publicly held Warrants, and the
Common Stock. Management of the Company is not aware of any such threatened
transaction to obtain control of the Company.
SERIES A CONVERTIBLE CUMULATIVE PREFERRED STOCK
Prior to the closing of this Offering, the Board of Directors will file a
Certificate of Designation designating 600,000 shares of Preferred Stock as
"Series A Convertible Cumulative Preferred Stock" with the following rights,
preferences and privileges:
Conversion. Unless previously redeemed by the Company, the holders of the
Preferred Shares are entitled at any time at their option, commencing January
1, 1997, unless the Underwriter permits earlier, to convert each Preferred
Share into one and one-half (1 1/2) shares of Common Stock subject to
adjustment described below. No fractional shares of Common Stock will be
issued but in lieu thereof the Company shall "round up" any fractional shares
where the fraction is over 50% to a full share of Common Stock and shall round
down any fractional share where the fraction is less than 50%. No adjustment
for dividends will be made on conversion of any Preferred Shares. Accordingly,
accrued dividends will not be paid on a Preferred Share if it is converted
between a dividend payment date and the next record date for dividend
payments. Dividends will be paid on any annual dividend payment date (a
"Dividend Payment Date") with respect to the Preferred Shares surrendered for
conversion after any annual record date for the payment of dividends (a
"Record Date") to the registered holder on the Record Date. In the case of
Preferred Shares called for redemption, conversion rights will expire at the
close of business on the redemption date.
The Conversion Price is subject to adjustment upon the occurrence of certain
events, including the issuance of stock of the Company as a dividend or
distribution on the Common Stock but not as dividends on the Preferred Shares;
sub-divisions and combinations of Common Stock; certain reclassifications,
consolidations, mergers and sales of property of the Company; the issuance to
all holders of Common Stock of certain rights or warrants; and the
distribution to all holders of Common Stock of evidence of indebtedness of the
Company or of assets (excluding cash dividends or distributions from retained
earnings). Except as stated above, the Conversion Price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock, or carrying the right to purchase any of the
foregoing, in exchange for cash, property or services.
Dividends. Each Preferred Share is entitled to cumulative annual dividends
of $1.20 payable on July 1 of each year commencing July 1, 1997. Unpaid
dividends will accumulate and be payable prior to the payment of dividends on
the Common Stock. The Company may, at its option, pay dividends in shares of
Common Stock, in lieu of cash. Shares used for such purpose will be valued at
the average closing bid price during the ten trading days ending on the tenth
day before the dividend payment date, subject to certain conditions. For the
foreseeable future, the Company expects to make dividend payments on the
Preferred Shares in shares of Common Stock.
Redemption. The Preferred Shares are redeemable after January 1, 1997 at the
option of the Company, on not less than 30 days' written notice to registered
holders at the redemption price of $12 per share plus
35
<PAGE>
accumulated dividends, provided the Company may not redeem the Preferred
Shares unless the closing price of the Common Stock for 20 of the 30 days
prior to the date of the redemption notice is more than $10.
Voting Rights. Preferred Shares are entitled to one vote per share voting
together with the Common Stock as one class, except as otherwise provided by
the Delaware General Corporation Law provided, however, that the Company shall
not (i) issue any new series of Preferred Stock with rights superior to the
Preferred Shares on liquidation or to dividends or having class voting rights,
other than as provided by the Delaware General Corporation Law, or a number of
votes per share greater than the higher of one vote per share or one vote for
each share of Common Stock into which each share of such series may be
converted, or (ii) issue shares of any new series of Preferred Stock ranking
equal to the Preferred Shares whenever the Company is in arrears in the
payment of dividends on the Preferred Shares without, in either case, the
affirmative vote of a majority of the outstanding Preferred Shares.
Preference on Liquidation. Preferred Shares will be entitled to a preference
on liquidation equal to $10 per share, plus accumulated unpaid dividends.
No Sinking Fund. The Company is not required to provide for the retirement
or redemption of the Preferred Shares through the operation of a sinking fund.
COMMON STOCK PURCHASE WARRANTS
The Company has outstanding 1,710,000 Common Stock Purchase Warrants (the
"Warrants"). Each Warrant entitles the holder to purchase until December 20,
2000 one share of Common Stock at an exercise price of $6.00. The Warrants are
subject to redemption by the Company at any time after April 20, 1997 on 30
days notice at $.25 per Warrant provided that the closing high bid price of
the Common Stock on the NASDAQ SmallCap Market, or the last sale price per
share of the Common Stock if listed on the NASDAQ National Market or on a
national exchange is at least $8.50 per share for a period of 20 of the
immediate prior 30 trading days ending within 15 days of the date on which the
notice of redemption is given. Holders of Warrants shall have exercise rights
until the close of the business day preceding the date fixed for redemption.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends and distributions, stock splits, recapitalizations, mergers and
consolidations. No adjustment exists for the issuance of shares of Common
Stock, among other circumstances, upon exercise of any of the Warrants or
options granted under any stock option plan or the Underwriter's Warrant. The
Company is not required to issue fractional shares. The holder of a Warrant
does not possess any rights as a stockholder of the Company unless he
exercises his Warrant and obtains Common Stock. The Warrants have been issued
in registered form under a Warrant Agreement dated as of December 20, 1995
between the Company and American Stock Transfer & Trust Company as Warrant
Agent. The shares of Common Stock issued upon exercise of a Warrant, will be
fully paid and non-assessable.
A Warrant may be exercised upon the surrender of a duly completed warrant
certificate on or prior to its expiration, accompanied by cash or certified
bank check for the exercise price.
UNDERWRITER'S WARRANTS
The Company sold to J.W. Barclay & Co., Inc. (the underwriter in the Public
Offering in December 1995 and underwriter in this Offering) at a price of
$.001 per Warrant 100,000 warrants (the "Underwriter's Stock Warrants") to
purchase a like number of shares of Common Stock of the Company and 140,000
warrants (the "Underwriter's Warrants") to purchase a like number of Common
Stock Purchase Warrants. The Underwriter's Stock Warrants will be exercisable
at a price of $8.25 per share and the Underwriter's Warrants will be
exercisable at a price of $0.225 per Common Stock Purchase Warrant for a
period of five years, and will not be transferable prior to December 20, 1996
except to selected dealers and officers and partners of the Underwriter and
selected dealers. The Company sold 40,000 Unit Purchase Options at $.001 per
share to purchase a like
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<PAGE>
number of Units at an exercise price of $ per unit. Any profit realized upon
any resale of the Underwriter's Stock Warrants, the Underwriter's Warrants or
Units or upon any sale of the shares of Common Stock or Common Stock Purchase
Warrants underlying same or Units may be deemed to be additional Underwriter's
compensation. The Company has agreed to register (or file a post-effective
amendment with respect to any registration statement registering) the
Underwriter's Stock Warrants and the Underwriter's Warrants or the
Underwriter's Unit Purchase Options and their underlying securities under the
Securities Act at its expense on one occasion, and at the expense of the
holders thereof on another occasion, upon the request of a majority of the
holders thereof. The Company has also agreed to certain "piggy-back"
registration rights for the holders of the Underwriter's Stock Warrants and
the Underwriter's Warrants and their underlying securities.
BRIDGE NOTE FINANCING
From November 1994 to March 1995, the Company sold 53 Units (including 20
Units sold to Teleconstruct), each Unit consisting of one $40,000 principal
amount of 6% Promissory Notes and 5,000 shares of Common Stock at a price of
$40,000 per Unit (the "Private Placement") for an aggregate of $2,120,000 and
265,000 shares of Common Stock. The net proceeds of such Private Placement has
been used for acquiring and financing the Company's Hungarian subsidiaries and
for operational funds for the Company. A portion of the net proceeds from the
December 1995 Offering was used to repay one-half of the 6% Promissory Notes.
CERTAIN TAX CONSIDERATIONS
The following discussion sets forth what the Company believes are the
material federal income tax consequences, under current law, of a purchase of
the Preferred Shares. However, the Company has not requested a ruling from the
Internal Revenue Service or a formal tax opinion from its counsel. Prospective
purchasers of the Preferred Shares should consult their own tax advisors with
respect to the consequences to them of the purchase and holding of such
securities including the Preferred Shares and the applicability and effect of
federal, state and other tax laws.
The sale of a Preferred Share will result in the recognition of gain or loss
to the holder in an amount equal to the difference between the amount realized
and his adjusted basis therein. Such a sale will result in capital gain or
loss, provided the security is a capital asset in the hands of the holder.
Such capital gain or capital loss will be long-term gain or loss if the
Preferred Share being sold has been held for more than one year at the time of
such sale of exchange. Shares of Common Stock received on conversion of
Preferred Shares will have the same tax basis and holding period as the
Preferred Shares converted into such shares and will be accorded the same tax
treatment on sale as the Preferred Shares.
Dividends paid on the Preferred Shares will be includable in income, for
federal income tax purposes, by the holders thereof. If the dividend is paid
in Common Stock (rather than in cash) the amount of dividend so includible
will be equal to the fair market value of the Common Stock on the date of
payment (which is expected to be equal to the amount of cash that otherwise
would have been paid as a dividend), and the amount so includible will become
the holder's tax basis in the Common Stock. The holding period of any Common
Stock paid as a dividend will commence on the date of payment.
A holder of Preferred Shares or Common Stock may be subject to backup
withholding at the rate of 20% with respect to interest or dividends paid on
the Preferred Shares or the Common Stock, respectively and with respect to the
gross proceeds of amounts paid to redeem the Preferred Shares if such proceeds
are received by the holder's broker, unless such holder (a) is a corporation
or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a current taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding
rules.
The Company will report to the holders of the Preferred Shares and the
Common Stock and to the Internal Revenue Service the amount of any "reportable
payments" for each calendar year and the amount of tax withheld, if any, with
respect to payments on the securities.
37
<PAGE>
The tax consequences referred to in the preceding paragraphs are based on
the current provisions of the Internal Revenue Code of 1986, as amended, and
the currently applicable regulations, in final and proposed form, promulgated
thereunder. In addition to the foregoing, the Internal Revenue Code of 1986,
as amended, provides that (i) for taxable years commencing in 1988 for
individuals, and (ii) for taxable years commencing on or after July 1, 1987
for corporations, gain from the sale of long term capital assets will be taxed
at the same rates as ordinary income. There can be no assurance, however, that
any such provisions may not change in the future, either retroactively or
prospectively, resulting in changes in such tax consequences.
There may, in addition, be other federal, state, local or foreign tax
considerations applicable to the circumstances of a prospective investor.
BECAUSE THE MATTERS DISCUSSED ABOVE ARE NOT, AS A MATTER OF FEDERAL INCOME
TAX LAW, FREE FROM DOUBT, AND APPLICABLE PROPOSED REGULATIONS OF THE INTERNAL
REVENUE SERVICE ARE SUBJECT TO VARYING INTERPRETATIONS, PURCHASERS OF THE
SECURITIES OFFERED HEREBY ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THIS OFFERING, AS WELL AS WITH RESPECT TO OTHER FEDERAL, STATE AND
LOCAL TAX CONSIDERATIONS WHICH MAY BE RELEVANT TO THEIR SITUATIONS.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the persons who
purchased the 265,000 shares of its Common Stock in the Private Placement.
These investors have the right to include their shares in any registration
statement filed by the Company ("Piggy Back Registration Rights") unless, in
the reasonable opinion of the managing underwriter of the Offering so
registered, such registration would adversely affect the plan of distribution
contemplated.
TRANSFER AGENT
The transfer agent for the Common Stock and for the Preferred Shares is
American Stock Transfer & Trust Co., 40 Wall Street, New York, New York 10005.
REPORTS TO SHAREHOLDERS
The Company intends to furnish its shareholders with annual reports
containing financial statements audited and reported upon by its independent
accounting firm and intends to furnish other reports as it may determine or
may be required by law.
APPLICATION FOR LISTING
It is anticipated that after this Offering, the Units will be quoted on
NASDAQ SmallCap under the symbols "HBCOU" and after the Separation Date, the
Preferred Shares will be quoted on NASDAQ SmallCap under the symbol "HBCOP."
The Common Stock and the Warrants are currently being quoted on the NASDAQ
SmallCap Market under the symbols "HBCO" and "HBCOW." No assurance can be
given that a trading market for the Company's Preferred Shares will develop or
be sustained.
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 2,577,500 shares of Common Stock outstanding. Of
these shares, 1,150,000 are freely tradeable and 1,427,500 are restricted
securities as that term is defined under Rule 144 under the Securities Act of
1933 (the "Act") and may not be resold except in compliance with the
registration requirements of the Securities Act, or pursuant to Rule 144 or
pursuant to some other exemption from registration. See "Certain
Transactions."
38
<PAGE>
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or persons whose shares are aggregated under the terms of Rule
144), who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell, within any three-month period, a number
of shares that does not exceed the greater of 1% of the total number of
outstanding shares of the same class, or the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the sale. A person
who has not been an affiliate of the Company for at least the three months
immediately preceding the sale and who has beneficially owned shares of Common
Stock for at least three years is entitled to sell such shares under Rule 144
without regard to the volume limitations described above. The Private
Placement stockholders who acquired 165,000 shares from November 1994 through
March 1995, cannot sell or otherwise dispose of any of these shares under Rule
144 until November 1996 through March 1997. The Private Placement stockholders
who acquired 182,500 shares in July 1995, cannot sell or otherwise dispose of
any of these shares under Rule 144 until July 1997 and the Private Placement
stockholders who acquired 200,000 shares in August 1995, cannot sell or
otherwise dispose of any of their shares under Rule 144 until August 1997. The
remaining current stockholders of the Company owning 880,000 shares, including
all current and former directors and officers of the Company and affiliates,
have agreed not to sell or otherwise dispose of any of their shares of Common
Stock for a period of 24 months from the date of this Prospectus without the
prior written consent of the Underwriter.
The Company is unable to predict the effect that sales of the Company's
securities made under Rule 144, pursuant to future registration statements or
otherwise, may have on the then prevailing market price of securities of the
Company , although it is likely that sales of a large number of shares would
depress such market prices.
The Company currently has outstanding 100,000 Preferred Shares all of which
are restricted securities. These Preferred Shares will be registered and sold
to other investors pursuant to this Offering.
UNDERWRITING
J. W. Barclay & Co., Inc., the Underwriter, has agreed, subject to the terms
and conditions of the underwriting agreement (the "Underwriting Agreement"),
to purchase from the Company and the Company has agreed to sell to the
Underwriter, on a firm commitment basis, 400,000 Unit (each Unit consists of
one Preferred Share and one Common Stock Purchase Warrant.
The Underwriter is committed to purchase all Units offered hereby, if any of
such Units are purchased.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the offering prices set forth on the cover page of this
Prospectus and that it may allow to certain dealers who are members in good
standing of the National Association of Securities Dealers, Inc. ("NASD")
concessions, not in excess of $ per Unit. The Underwriter may allow, and
such dealers may reallow, a concession not in excess of $ per Unit to
certain other dealers. After the Initial Public Offering, the public offering
price, concession and reallowance to dealers may be changed by the
Underwriter.
The Company has granted the Underwriter an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 60,000 Units from it at
the public offering prices less the underwriting discounts set forth on the
cover page of this Prospectus. The Underwriter may exercise this option,
solely to cover over-allotments in the sale of the Units offered hereby.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds of the Units sold by the Company
in the Offering.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain civil liabilities, including
liabilities under the Securities Act.
39
<PAGE>
The Company has agreed to sell to the Underwriter or its designees, at a
price of $.001 per warrant, a total of 40,000 warrants (the "Underwriter's
Warrants") to purchase a like number of Units of the Company. The
Underwriter's Warrants will be exercisable at a price equal to 120% of the
initial offering price set forth on the cover page of this Prospectus for a
period of five years, and will not be transferable for one year from the date
hereof except to selected dealers and officers and partners of the Underwriter
and selected dealers. Any profit realized upon any resale of the Underwriter's
Warrants or upon any sale of the shares underlying same may be deemed to be
additional Underwriter's compensation. The Company has agreed to register (or
file a post-effective amendment with respect to any registration statement
registering) the Underwriter's Warrants and their underlying securities under
the Act at its expense on one occasion, and at the expense of the holders
thereof on another occasion, upon the request of a majority of the holders
thereof. The Company has also agreed to certain "piggy-back" registration
rights for the holders of the Underwriter's Warrants and their underlying
securities.
The Underwriter has informed the Company that it does not expect sales of
the Securities to be made to any discretionary accounts.
LEGAL MATTERS
The validity of the Units (including the Preferred Shares and the Common
Stock Purchase Warrants) offered hereby will be passed upon for the Company by
Cohen & Cohen, 445 Park Avenue, New York, New York 10022. (Cohen & Cohen will
rely upon Simon, Buros & Partners of Budapest, Hungary, special Hungarian
counsel for the Company, as to certain matters of Hungarian law). Frank R.
Cohen, a partner in Cohen & Cohen, owns 30,000 shares of the Common Stock and
holds options to purchase an additional 10,000 shares of Common Stock and is
Treasurer, Secretary and a director of the Company. Certain legal matters in
connection with this Offering are being passed upon for the Underwriter by
Henry C. Malon, Esq., 1 Battery Park Plaza, New York, NY 10004.
EXPERTS
The consolidated balance sheet as of June 30, 1996 and the consolidated
statement of operations, stockholders' equity and cash flows for the year then
ended appearing in this Prospectus have been included herein in reliance on
the report, which includes an explanatory paragraph related to the Company's
further public offering, of Coopers & Lybrand, independent accountants, given
on the authority of that firm as experts in accounting and auditing.
The consolidated balance sheet as of June 30, 1995 and the consolidated
statement of operations, stockholders' equity and cash flows for the year then
ended appearing in this Registration Statement have been included herein in
reliance on the report of Todman & Co., CPAs, P.C., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The discussion contained in the Prospectus under the headings "Business,"
and "Dividends" relating to Hungarian laws and conditions and the legal
proceedings involving the broadcast licenses have been reviewed by the law
firm of Simon, Buros & Partner, of Budapest, Hungary, Hungarian special
counsel to the Company.
CHANGE IN ACCOUNTANTS
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
40
<PAGE>
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.
41
<PAGE>
HUNGARIAN BROADCASTING CORP.
FINANCIAL STATEMENTS
INDEX
<TABLE>
<S> <C>
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 - F-15
</TABLE>
F-1
<PAGE>
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
September 19, 1996
F-1
<PAGE>
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 allowance for
doubtful accounts of $ 82,536 (1995: $0).. 191,715 87,598
VAT receivable............................. 4 123,175 83,429
Deferred program costs, less accumulated
amortization of $250,000.................. 5 500,000 --
Prepaid expenses and other current assets.. 42,383 5,000
----------- -----------
Total Current Assets..................... 2,319,652 471,033
Investments.................................. 653 --
Office and transportation equipment, less
accumulated depreciation of $14,067 (1995:
$7,310)..................................... 6 136,296 58,562
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.
F-2
<PAGE>
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 expenses....... 1,639,989 339,471
----------- ----------
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 shares
outstanding......................................... 2,067,008 1,427,500
</TABLE>
The notes on pages 6 to 15 are an integral part of these financial statements.
F-3
<PAGE>
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- CURRENCY
----------------- IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT
--------- ------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PERIOD TO JUNE 30, 1995
Initial issuance of
common stock--
September, 1994........ 850,000 $ 850 $ 7,650 $ -- $ --
Sale of common stock to
private placement
investors--Nov. and
Dec. 1994.............. 265,000 265 405,045
Issuance of common
stock--March 1995...... 150,000 150 449,850
Net losses for period... (830,358)
Foreign currency
translation
adjustment............. 10,130
--------- ------ ----------- ----------- ---------
BALANCE, JUNE 30, 1995.. 1,265,000 1,265 862,545 (830,358) 10,130
YEAR ENDED JUNE 30, 1996
Issuance of common
stock--July 1995....... 182,500 182 499,818
Issuance of common
stock--August 1995..... 200,000 200 549,612
Shares contributed by
officers for
cancellation in
December 1995.......... (220,000) (220) 220
Initial public offering
in December 1995....... 1,150,000 1,150 5,990,590
Public Offering Costs... (1,150,286)
Exercise of warrants
during year............ 6,100 6 36,530
Foreign currency
translation
adjustment............. 120,266
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.
F-4
<PAGE>
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.
F-5
<PAGE>
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.
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.
F-6
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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
F-7
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(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 U.S. dollars held in Hungarian
bank accounts.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
(n) Dividend Policy
The Company has never paid and does not anticipate paying any cash dividends
on 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.
F-8
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(o) Loss Per Share
Net loss per share has been calculated based on the weighted average number
of common shares outstanding during each period.
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 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.
F-9
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 140,000 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.
(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
F-10
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-11
<PAGE>
HUNGARIAN BROADCASTING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-12
<PAGE>
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.
F-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
UNITS OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE UNITS OR FROM ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THERE HAS BEEN NO CHANGE IN THE BUSINESS OR AFFAIRS OF THE COM-
PANY SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 4
Summary of Financial Information.......................................... 9
Risk Factors.............................................................. 10
Price Range of Securities................................................. 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Dividend Policy........................................................... 17
Use of Proceeds........................................................... 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 19
Business.................................................................. 20
Management................................................................ 29
Principal Stockholders.................................................... 32
Certain Transactions...................................................... 33
Description of Securities................................................. 34
Shares Eligible for Future Sale........................................... 38
Underwriting.............................................................. 39
Legal Matters............................................................. 40
Experts................................................................... 40
Change in Accountants..................................................... 40
Index to Financial Statements............................................. F-1
----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TODELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIRUNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
500,000 UNITS
HUNGARIAN BROADCASTING CORP.
----------------
PROSPECTUS
----------------
J.W. BARCLAY & CO., INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General corporation Law of the State of Delaware ("DGCL")
provides, in general, that a corporation incorporated under the laws of the
State of Delaware, such as registrant, may indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than a derivative action by or in
the right of the corporation) by reason of the fact that such person is or was
a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonable
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe such director, officer, employee or agent of the corporation
person's conduct was unlawful. In the case of a derivative action, a Delaware
corporation may indemnify any such person against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such
person is fairly and reasonably entitled to indemnity for such expenses.
Section 10 of the Company's Certificate of Incorporation, and Article X of the
Company's By-laws provide that the Company shall indemnify its officers,
directors, employees and agents to the extent permitted by the DGCL. In
addition, Section 9 of the company's Certificate of Incorporation provides, in
general, that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for beach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL (which provides that under certain
circumstances, directors may be jointly and severally liable for willful or
negligent violations of the DGCL provisions regarding the payment of dividends
or stock repurchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses of the registrant, other than underwriting discounts and
commissions, to be incurred in connection with the issuance and distribution
of the securities being registered hereby are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.....................
NASD registration fee...................................................
The NASDAQ SMALLCAP Market listing fee..................................
Printing and engraving expenses*........................................
Accounting fees and expenses*...........................................
Legal Fees and expenses*................................................
Blue sky fees and expenses (including counsel fees and expenses)*.......
Transfer agent fees and expenses*.......................................
Miscellaneous*..........................................................
---
Total*................................................................
===
</TABLE>
- --------
* Estimated
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold securities to a limited
number of persons, as described below. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith. The purchasers of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the certificates for the securities issued in such transactions. All
purchasers of securities in each such transaction had adequate access to
information about the Registrant.
(1) On September 14, 1994, Registrant sold 850,000 Shares at $.01 per share
to Peter E. Klenner, (480,000), to Robert Genova, (320,000), and to Frank R.
Cohen (50,000). In July 1995, Mr. Genova transferred 30,000 shares to an
unaffiliated person and Mr. Klenner transferred 20,000 shares to two
unaffiliated persons. The issuances of these securities were considered to be
exempt from registration under Section 4(2) of the Securities Act of 1933 and
the regulations promulgated thereunder.
(2) In December 1994 and March 1995, Hungarian Teleconstruct Corp. ("HTEL"),
an affiliated corporation purchased 20 Units in a private placement, each Unit
consisting of the Company's 6% Bridge Note in the principal amount of $40,000
($800,000 aggregate) and 5,000 shares (100,000 aggregate) of Common Stock, for
a total purchase price of $800,000. This purchase was deemed part of the
"November Bridge Financing." As additional consideration for the purchase,
registrant granted to HTEL an option to purchase 150,000 shares exercisable at
$3 per share. In March 1995, HTEL exercised its option and was issued 150,000
shares against payment of $450,000. HTEL is an affiliate of Registrant. The
issuances of these securities were considered to be exempt from registration
under Section 4(2) of the Securities Act of 1933, and the regulations
promulgated thereunder.
(3) From November 1994 to March 1995, Registrant sold to 31 persons an
aggregate of 33 units (the "Units"), each Unit consisting of the Company's 6%
Bridge Note in the principal amount of $40,000 and 5,000 shares of Common
Stock for a purchase price of $40,000 per Unit, or an aggregate of $1,320,000
(the "November Bridge Financing") and 165,000 shares. Adding the 20 units
referred to in paragraph 2 above to the 33 units referred to herein, a total
of 53 units were sold to private investors in the November Bridge Financing,
for an aggregate purchase price of $2,120,000. One-half of the 6% Bridge Notes
was repaid with a portion of the proceeds of the December 20, 1996 Offering.
An additional 25% of the 6% Bridge Notes will be repaid with a portion of the
proceeds of this Offering. In connection with the November Bridge Financing,
the Registrant paid selling commissions of $114,000 to unaffiliated NASD
brokers. Officers and directors who effected sales received no compensation
for their services. Each of the purchasers signed a letter indicating an
agreement to hold the shares for investment. The issuance of such securities
was exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) thereof and Regulation D promulgated thereunder. The names of the
persons purchasing units pursuant to the private placement are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF NUMBER OF AMOUNT
NAME NOTES SHARES PAID
---- --------- --------- -------
<S> <C> <C> <C>
Walter W. Mathews................................. $40,000 5,000 $40,000
Elias J. Lehaf.................................... $40,000 5,000 $40,000
Arie and Bonnie Seidler Joint Tenants with Rights
of Survivorship.................................. $20,000 2,500 $20,000
Richard G. David.................................. $20,000 2,500 $20,000
Arthur Inden...................................... $40,000 5,000 $40,000
Peter Rosenbauer.................................. $40,000 5,000 $40,000
Ara
Vermogensverwaltung GmbH.......................... $40,000 5,000 $40,000
Dr. Barbara A. Lenehan............................ $80,000 10,000 $80,000
Ben L. Berg....................................... $40,000 5,000 $40,000
W.L. Abt Inc. .................................... $40,000 5,000 $40,000
Peter P. Smigowski................................ $60,000 7,500 $60,000
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF NUMBER OF AMOUNT
NAME NOTES SHARES PAID
---- --------- --------- --------
<S> <C> <C> <C>
CP Baker Venture Fund I LP....................... $ 40,000 5,000 $ 40,000
Lawrence Auriana................................. $120,000 15,000 $120,000
Dezso J. Ladanyi and Alice R. Ladanyi, Joint
Tenants with Rights of Survivorship............. $ 80,000 10,000 $ 80,000
Peter Lerner..................................... $ 60,000 7,500 $ 60,000
James G. Schindler............................... $ 40,000 5,000 $ 40,000
John A. Miller................................... $ 20,000 2,500 $ 20,000
Lifelines Care, Inc.............................. $ 20,000 2,500 $ 20,000
David C. Palmer.................................. $ 40,000 5,000 $ 40,000
Stephen N. Gibbs................................. $ 40,000 5,000 $ 40,000
Dr. Paul H. Drugel............................... $ 20,000 2,500 $ 20,000
Gerald Greenberg................................. $ 40,000 5,000 $ 40,000
Joseph H. Dowling................................ $ 40,000 5,000 $ 40,000
Thomas J. Kramer................................. $ 20,000 2,500 $ 20,000
NFC ABW Trading Ltd. Edward M. Rose, Director.... $100,000 12,500 $100,000
Robert N. and Verena Erickson Joint Tenants with
Right of Survivorship........................... $ 20,000 2,500 $ 20,000
Christopher P. Baker............................. $ 40,000 5,000 $ 40,000
Martin T. Orne................................... $ 40,000 5,000 $ 40,000
Les C. Vinney.................................... $ 40,000 5,000 $ 40,000
Mildred J. Geiss................................. $ 20,000 2,500 $ 20,000
IRA F/B/O Christopher P. Baker DLSSC as
Custodian....................................... $ 20,000 2,500 $ 20,000
</TABLE>
(4) In July 1995, Registrant sold 182,500 shares to 11 persons at a price of
$3 per share, totaling $547,500 (the "July Bridge Financing"). One of the
persons purchasing shares was Peter E. Klenner who purchased 30,000 shares for
$90,000 and no commissions were paid in connection with this sale. Sales of
the shares were made by an unaffiliated NASD broker who received $1,500 as
commissions and by a European company which acted as a finder and received a
fee of $30,000. Each of the purchasers signed a letter indicating an agreement
to hold the shares for investment. The issuance of such securities was exempt
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof and Regulation D promulgated thereunder. The names of the persons
purchasing shares pursuant to the private placement are as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
NAME PURCHASED PAID
---- --------- -------
<S> <C> <C>
Joseph H. Dowling....................................... 5,000 $15,000
John A. Miller.......................................... 7,500 22,500
Christopher P. Baker.................................... 10,000 30,000
CP Baker Venture Fund I LP.............................. 5,000 15,000
Dr. Elias J. Lehaf...................................... 5,000 15,000
Walter Abt.............................................. 5,000 15,000
James Schindler......................................... 5,000 15,000
Peter Rosenbauer........................................ 10,000 30,000
Arabella S.A............................................ 66,667 200,000
World Media Group Limited............................... 33,333 100,000
Peter E. Klenner........................................ 30,000 90,000
</TABLE>
(5) In August 1995, Registrant sold 200,000 shares to three persons for a
price of $3 per share ($600,000 aggregate) (the "August Bridge Financing").
Sales of these shares were effected in Europe through a European broker who
received a 10% commission. Each of the purchasers signed a letter indicating
an agreement to hold the shares for investment. The issuance of these
securities were considered exempt from registration under
II-3
<PAGE>
Section 4(2) of the Securities Act of 1933, and the regulations promulgated
thereunder. The names of the three investors and the number of shares purchase
and the amounts paid are as follows:
<TABLE>
<CAPTION>
NAME SHARES PURCHASED AMOUNT PAID
---- ---------------- -----------
<S> <C> <C>
M.M. Warburg & Co. KgaA....................... 140,000 $420,000
European Value Fund LP........................ 50,000 20,000
Stephan Eilesbrecht--Kemena................... 10,000 30,000
</TABLE>
In September 1996, the Company sold 100,000 Shares of Series A Convertible
Cumulative Redeemable Preferred Stock (the "Preferred Stock") to seven persons
for a price of $4.50 per share ($450,000 aggregate). Each of the purchasers
signed a letter indicating an agreement to hold the shares for investment. The
issuance of these securities were considered exempt from registration under
Section 4(2) of the Securities Act of 1933, and the Regulation D promulgated
thereunder. The names of the seven investors, the number of shares of
Preferred Stock purchased and the amounts paid are as follows:
<TABLE>
<CAPTION>
NAME SHARES PURCHASED AMOUNT PAID
---- ---------------- -----------
<S> <C> <C>
Dean Rivera................................... 10,000 $45,000
Patricia Weremeychik.......................... 10,000 $45,000
Mark Lyons.................................... 10,000 $45,000
Joan Downey................................... 20,000 $90,000
Louis Spadafora............................... 10,000 $45,000
Matthew Langdon............................... 20,000 $90,000
John Delgaizo................................. 20,000 $90,000
</TABLE>
ITEM 27. EXHIBITS
<TABLE>
<C> <C> <S>
(1) Form of Underwriting Agreement; and Selected Dealer Agreement
(a) Certificate of Amendment to Certificate of Incorporation filed
(3) June 28, 1996.
(b) Certificate of Incorporation filed September 14, 1994
(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
(5) (a) Opinion of Cohen & Cohen as to legality of shares being offered*
(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 Kable Com
(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.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C> <C>
(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.
(21) Subsidiaries of the Registrant.
(23) (a) Consent of Cohen & Cohen (included in their opinion to be filed as Exhibit 5(a))*
(b) Consent of Simon, Buros & Partners*
(c) Consent of Coopers & Lybrand.*
(d) Consent of Todman & Co.*
(25) Power of Attorney (included on signature page)*
</TABLE>
- --------
* Filed with this Registration Statement
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events which
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii) to include any additional or changed material on the plan of
distribution.
(2) That, for determining any liability under the Securities Act, it will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering;
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the Offering.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For determining any liability under the Securities Act it will treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as
of the time it was declared effective.
(2) For determining any liability under the Securities Act, it will treat
each post-effective amendment that contains a form of prospectus as to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time as the initial bona fide
offering of these securities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS OF FILING ON FORM SB-2, AND AUTHORIZED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON OCTOBER 3, 1996.
Hungarian Broadcasting Corp.
By: _________________________________
PETER E. KLENNER PRESIDENT
EACH OF THE UNDERSIGN DO HEREBY APPOINT PETER E. KLENNER AND FRANK R. COHEN
AND EACH OF THEM SEVERALLY, ITS OR HIS TRUE AND LAWFUL ATTORNEYS TO EXECUTE ON
BEHALF OF THE UNDERSIGNED ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION. EACH OF SUCH ATTORNEYS SHALL HAVE THE
POWER TO ACT HEREUNDER WITH OR WITHOUT THE OTHER.
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT WAS SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES STATED:
SIGNATURE TITLE DATE
President and October 3, 1996
- ------------------------------------- Director (Principal
Executive Officer)
PETER E. KLENNER Executive Vice October 3, 1996
- ------------------------------------- President and
IMRE KOVATS Director
Secretary, Treasurer October 3, 1996
- ------------------------------------- and Director
FRANK R. COHEN
Director October 3, 1996
- -------------------------------------
JUSTIN BODLE
Principal Financial October 3, 1996
- ------------------------------------- Officer and
JAMES H. SEASON Principal
Accounting Officer
II-6
<PAGE>
[LOGO]
October 2, 1996
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: HUNGARIAN BROADCASTING CORP.
COMMISSION FILE. NO. 0-26808
Gentlemen:
This opinion is being furnished to you with respect to a public offering and
sale by Hungarian Broadcasting Corp., ("HBCO") (the "Company") of 500,000
units (the "Units"), each consisting of one share of Common Stock, (the
"Shares") and one Common Stock Purchase Warrant (the "Warrants"), which public
offering is more fully described in the Registration Statement on Form SB-2,
and Amendments thereto, No. 33- filed by the Company with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended.
We have acted as legal counsel to the Company in connection with the
preparation of the Registration Statement and in connection with various
related matters. During the course of the preparation of the Registration
Statement, we participated in conferences (telephone and/or in person) with
officers of the Company, with representatives of the Company's independent
accountants and with representatives of J.W. Barclay & Co., Inc., during which
the contents of the Registration Statement and various other related matters
were discussed. We have also examined the Certificate of Incorporation of the
Company as amended (as filed with the Secretary of State of Delaware), the By-
Laws of the Company and such other corporate records and other documents as we
have deemed necessary or desirable as the basis for our opinion hereinafter
set forth:
Based upon and subject to the foregoing, we are of the opinion that:
(a) The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware and has full corporate power to own
its properties and to conduct its business as such is described in the
Registration Statement.
(b) The Units and the Shares and Warrants comprising such Units have been
duly authorized and will, upon payment therefor and delivery thereof in
accordance with the Registration Statement, be validly issued and fully
paid and non-assessable, and all corporate action required to be taken by
the Company for the authorization, issuance and sale of the Units, Shares
and Warrants has been validly and sufficiently taken and the certificates
representing the Shares and Warrants are in proper legal form.
(c) The underlying stock has been duly and validly authorized and
reserved for issuance upon exercise of the Warrants and when issued in
accordance with the terms of the Warrants, will be validly issued, fully
paid and non-assessable.
We consent to the filing of this opinion as an Exhibit to the aforesaid
Registration Statement and further consent to the reference made to this law
firm under the caption "Legal Opinions" in the Prospectus constituting a part
of such Registration Statement.
Very truly yours
Cohen & Cohen
[ART]
Frank R. Cohen
FRC:kc
<PAGE>
EXHIBIT 23(B)
CONSENT OF SIMON, BUROS & PARTNERS
Hungarian Broadcasting Corp.
445 Park Avenue, 15th Floor
New York, NY 10022
To whom it may concern:
Our firm is acting for you, Hungarian Broadcasting Corp., a Delaware
corporation, hereby states the pending legal action in regard to A3 license
was dismissed by Hungarian Courts on June 24, 1996.
We consent to the filing of this opinion with all the Securities and
Exchange Commission in connection with your public offering.
Simon, Buros & Partners
Attorney at Law
Budapest, September 6, 1996
<PAGE>
EXHIBIT 23(C)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 30, 1995, relating to the
financial statements of Hungarian Broadcasting Corp., and to our reports dated
November 8, 1995 related to VI-DOK Video es Filmgyarto Studio KFT and DNTV
KFT, which are contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
Todman & Co., CPAs, P.C.
New York, New York
November 26, 1995
<PAGE>
EXHIBIT 23(D)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form SB-2 of
our report, which includes an explanatory paragraph related to the Company's
further public offering, dated September 19, 1996 on our audit of the
consolidated financial statements of the Hungarian Broadcasting Corp. and
subsidiaries as of June 30, 1996 and for the year then ended. We also consent
to the reference to our firm under the caption "Experts."
Coopers & Lybrand
Budapest, Hungary
October 2, 1996
