Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
- --------------------- ----------------------
September 30,1997 0-26808
HUNGARIAN BROADCASTING CORP.
(Exact name of Registrant as specified in its charter)
Delaware 13-3787223
-------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
445 PARK AVENUE, NEW YORK, NY 10022
(Address of principal executive offices)
(212) 758-9870
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest possible date:
Common Stock, $.001 par value 2,891,491 Shares
- ----------------------------- ------------------
(Class) (Outstanding at
November 1, 1997)
<PAGE>
HUNGARIAN BROADCASTING CORP.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
Part I. Financial Information
Consolidated balance sheets as of September 30, 1997 (unaudited)
and December 31, 1996 2
Consolidated statements of operations for the quarters ended September 30, 1997
(unaudited) and 1996 (unaudited) and the nine months ended September 30, 1997
(unaudited) and 1996 (unaudited) 3
Consolidated statements of cash flows for the nine months ended September 30,
1997 (unaudited) and 1996 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5-8
Management's discussion and analysis of financial condition
and results of operations 9-13
Part II. Other Information 14
Signature 16
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
(Expressed in US$)
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
A S S E T S
Current assets
<S> <C> <C>
Cash and cash equivalents $ 331,272 $ 375,823
Accounts receivable, net of allowance for doubtful accounts
of $23,498 and $28,546 508,148 605,826
Other receivable 226,720 --
Program rights costs, net of amortization of $1,092,500
and $236,000 285,500 1,142,000
Prepaid expenses and other current assets 228,179 117,331
Due from related parties 350,000 --
------------ ------------
Total current assets 1,929,819 2,240,980
Plant, property and equipment, net of accumulated depreciation
of $81,690 and $44,080 413,302 443,633
Movie copyrights 248,817 --
Movie production 513,342 --
Broadcast license costs, net of accumulated amortization of
$987,217 and $669,931 1,163,297 1,480,583
Deferred financing and other intangibles, net of accumulated
amortization of $10,028 and $28,870 31,810 46,329
Other -- 89,680
------------ ------------
Total assets $ 4,300,387 $ 4,301,205
============ ============
</TABLE>
<TABLE>
<CAPTION>
L I A B I L I T I E S A N D S T O C K H O L D E R S E Q U I T Y
Current liabilities
<S> <C> <C>
Current portion of notes payable $ 1,020,000 $ 1,867,700
Accounts payable 487,405 763,821
Accrued expenses 375,401 387,844
VAT payable 59,101 --
Due to related parties 749,036 1,731,737
Other 255,926 60,852
------------ ------------
Total current liabilities 2,946,869 4,811,954
------------ ------------
Minority interest 11,147 --
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, $.001 par value - shares authorized 5,000,000;
issued and outstanding 526,500 and 100,000 527 100
Common stock, $.001 par value - shares authorized 15,000,000;
issued and outstanding 2,891,491 and 2,583,600 2,891 2,583
Additional paid-in capital 10,875,208 7,119,001
Accumulated deficit (9,654,227) (7,758,648)
Cumulative translation adjustment 117,972 126,215
------------ ------------
Total stockholders' equity 1,342,371 (510,749)
------------ ------------
Total liabilities and stockholders' equity $ 4,300,387 $ 4,301,205
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Expressed in US$, except share amounts)
Quarter Nine Months
Ended Ended
------------------------------- ---------------------------------
Sept. 30, 1997 Sept. 30,1996 Sept. 30, 1997 Sept. 30,1996
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 679,645 $ 353,315 $ 2,396,504 $ 641,752
Expenses
Other operating costs and expenses 478,484 611,355 1,613,179 1,841,954
Amortization of deferred program costs 285,500 250,000 856,500 500,000
Amortization of broadcast license costs 102,772 105,763 317,284 329,353
Selling, general and administrative exp 662,054 353,848 2,685,787 1,149,570
----------- ----------- ----------- -----------
1,528,810 1,320,966 5,472,750 3,820,877
----------- ----------- ----------- -----------
Operating loss (849,165) (967,651) (3,076,246) (3,179,125)
Interest and other income 63,209 25,951 1,267,196 72,665
Interest expense (9,599 (65,453) (128,059) (330,339)
Foreign currency exchange rate (loss)/gain 37,404 (95,240) 41,530 (95,240)
----------- ----------- ----------- -----------
Net loss $ (758,151) $(1,102,393) $(1,895,579) $(3,532,039)
Minority interest -- 5,864 -- 5,864
----------- ----------- ----------- -----------
Net loss after minority interest $ (758,151) $(1,096,529) $(1,895,579) $(3,526,175)
Net loss per share $ (0.28) $ (0.42) $ (0.72) $ (1.37)
Weighted average number of
common shares outstanding 2,749,926 2,583,933 2,640,651 2,581,678
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
<TABLE>
<CAPTION>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Expressed in US$)
Nine Months Ended Nine Months Ended
September 30,1997 September 30, 1996
----------------- ------------------
Cash flows from operating activities
<S> <C> <C>
Net loss $(1,895,579) $(3,526,175)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intangibles 1,255,830 583,826
Provision for doubtful accounts (5,454) 49,536
Depreciation 68,324 9,546
Foreign exchange losses(gains) (23,918) 215,506
Gain on repayment of notes payable (16,600) --
Minority interest (14,791) --
Changes in operating assets and liabilities
(net of business acquired):
(Increase)decrease in accounts receivables 50,655 (300,582)
Increase in other receivables (231,289) --
Increase in VAT receivables -- (22,677)
(Increase)decrease in prepaid expenses (127,983) 78,328
Decrease in other assets 89,680 --
Increase(decrease) in accounts payable (93,214) 55,054
Increase in accrued expenses 2,888 34,851
Increase in VAT payable 36,251 --
Increase(decrease) in other liabilities 192,028 (199,259)
----------- -----------
Net cash used in operating activities (713,172) (3,022,046)
----------- -----------
Cash flows from investing activities:
Purchase of plant, property and equipment (43,782) (296,673)
Purchase of program rights costs -- (750,000)
Purchase of investments (200,000) (653)
Acquisition of business, net of cash acquired (241,630) --
----------- -----------
Net cash used in investing activities (485,412) (1,047,326)
----------- -----------
Cash flows from financing activities:
Decrease in advances from related parties (1,178,326) (75,975)
Proceeds from issuance of common stock -- 10,000
Proceeds from issuance of preferred stock 4,265,000 450,000
Payments for offering costs (974,881) (127,284)
Payment of notes payable (880,000) (874,583)
Increase liability to minority stockholders -- 40,326
----------- -----------
Net cash provided (used) by financing activities 1,231,793 (577,516)
Effect of exchange rate changes on cash and
cash equivalents (77,760) 238,448
Net change in cash and cash equivalents (44,551) (4,408,440)
Cash and cash equivalents at beginning of period 375,823 4,978,307
Cash and cash equivalents at end of period $ 331,272 $ 569,867
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Hungarian Broadcasting Corp. (the "Company"), which was incorporated in the
State of Delaware in September 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
wholly-owned subsidiaries known as HBC (Hungary) Kft. ("HBC Kft."), which was
organized in November 1994 and Hungarian Broadcasting Corporation Televizios
Reszventyarsasag. ("HBC Rt."), which was organized in May 1997. The Company
acquired a 90% interest in VI-DOK Video es Filmgyarto Studio Kft. ("VI-DOK") as
of June 1995, and an 80% interest in DNTV Kft. (DNTV) as of May 1995, two
Hungarian companies (the "Licensees") which had been granted television licenses
by the Hungarian Cultural Ministry in April 1994 to broadcast on Channel
AM-Micro A3 ("A3") from July 1994 through June 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. In September 1996, the Company
began broadcasting throughout Hungary and renamed its station "MSAT."
The operations of the Company are essentially in Hungary where the majority
of revenues and expenditures are incurred. At September 30, 1997 and December
31, 1996, respectively, 64% and 62% of total assets, and 32% and 24% of total
liabilities of the Company were maintained in the Company's Hungarian
subsidiaries' accounts.
In April 1997, the Company acquired a 77% interest in Studio 2 Kft.,
incorporated in Budapest, Hungary. See Note 2 -- "Acquisition."
In May 1997, the Company organized HBC Rt., a wholly-owned subsidiary, for
an initial investment of $200,000. HBC Rt. has replaced HBC Kft. as the
operating subsidiary in Hungary. The Rt. format provides greater flexibility to
the Company in conducting its business.
In September 1997, the Company, pursuant to a contract between HBC Rt. and
Antenna Hungaria, began broadcasting 24 hours per day on a newly available
channel in the AM Micro broadcasting system in Budapest. Terms of the contract
provide for broadcasting rights indefinitely into the future.
In November 1997, the Company was awarded a national television license for
its satellite operations. This license allows the Company to broadcast its
programming without code, which lowers the cost of reception by cable television
companies and by direct-to-home customers.
2. Acquisition
In April 1997, the Company acquired 77% of the issued and outstanding stock
of Studio 2 Kft., a Budapest based animation studio. This company was purchased
from M&A Management Kft., a company wholly owned by the President and Chief
Executive Officer of the Company, for $743,819, of which $300,000 was paid in
cash and $443,819 was represented by an unsecured note with annual simple
interest of 8 1/2 % due December 31, 1997. The acquisition has been accounted
for as a purchase and, accordingly, the results of Studio 2 Kft. have been
included in the Company's consolidated financial statements from the date of
acquisition. The purchase price of $743,819 has been fully allocated to the
underlying assets of Studio 2 Kft. based upon their respective fair values at
the time of acquisition. The unsecured note was subsequently converted into
equity in July 1997, when M&A Management Kft. received 173,266 shares of
unregistered common stock in the Company. The Company recognized no gain or loss
on the conversion.
5
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
4. Notes Payable
On June 30, 1997, promissory notes totaling $1,060,000 were due. The
company offered the note holders compensation to extend the notes for one year
to June 30, 1998. Note holders representing $740,000 of the outstanding debt
agreed, in writing, to extend the maturity date on the notes. Note holders
representing $40,000 of the outstanding debt requested immediate repayment and
the note holders comprising the remaining balance either agreed orally to the
extension or have not responded to the Company's inquiries. Note holders
agreeing to the extension were paid 50% of the interest accrued as of June 30,
1997 and received 2,500 common stock purchase warrants per unit on November 1,
1997; the market value which equaled $1 1/4 per warrant at their date of grant.
Note holders requiring immediate repayment were paid at a price below the notes
carrying value. The Company has recognized a gain of $16,600 from the debt
repayment.
5. Preferred Stock
In September 1996, February 1997 and March 1997, the Company sold a total
of 526,500 shares of Series A convertible cumulative redeemable preferred stock
("Preferred Stock"). Each share of Preferred Stock is convertible into two
shares of common stock and is entitled to cumulative annual dividends of $1.20,
payable on September 15 of each year. The Company may, at its option, pay
dividends in shares of common stock, in lieu of cash. In September 1997, the
Company issued 131,625 shares of unregistered common stock as payment in full
for the dividends due. The Company's dividend obligation of $631,800 was paid
with unregistered common stock with a fair market value of $410,684 (reflecting
a 35% discount due to the restricted nature of the common stock).
6. Change in Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
is effective for periods ending after December 15, 1997, including interim
periods. This statement simplifies the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of
earnings per share data on an international basis. The Company intends to fully
adopt SFAS 128 for the year ended December 31, 1997, but has not yet determined
the impact of the implementation of this statement.
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," is effective for fiscal years beginning after December
15, 1997, including interim periods. This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. The Company intends to adopt SFAS 130
for the quarter ended March 31, 1998.
7. Financial Information
Financial data as of December 31, 1996 was derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with those consolidated financial statements and related notes. In
the opinion of management, the accompanying unaudited consolidated financial
statements of the Company include all adjustments necessary to present fairly
its financial position as of September 30, 1997, and operating results and cash
flows for the nine months then ended. For additional information, see the notes
to the Company's audited consolidated financial statements for the year ended
December 31, 1996 which are included in the Company's Annual Report filed on
Form 10-KSB with the Securities and Exchange Commission.
6
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
8. Related Party Transactions
Beginning in July 1996, the Company hired Justin Bodle as a consultant for
a two year period at a fee of 1,000 shares of unregistered common stock per
month. Compensation expense relating to these consultant services totaled
approximately $45,000 for the nine months ended September 30, 1997. At September
30, 1997 the Company had accrued $75,000 for these services as the securities
had not been issued to the consultant.
In February 1997, the Company loaned Euroweb International Corp. (formerly
Hungarian Teleconstruct Corp.), a company formerly run by officers and directors
of the Company, $350,000 bearing 6% interest due June 30, 1997 secured by a
previously outstanding note to the related party. Subsequently, the note was
extended until June 30, 1998.
In July 1997, the Company granted the Chief Accountant and the Chief
Financial Officer 10,000 and 20,000 stock options, respectively, pursuant to the
Company's stock option plan as amended in June 1996. The options, which have a
five year expiration, were granted at their fair market value of $3.50. Each
option may be exchanged for one share of the Company's common stock.
9. Commitments and Contingencies
Consulting and Compensation Agreements
In January 1996, an officer/director resigned, forfeited remaining payments
on an employment contract and canceled an option to purchase 40,000 shares of
Common Stock. At the time, the Company agreed to pay this officer/director
$144,000 if there were a change of control of the Company prior to January 17,
1998.
In September 1997, the Company terminated its contract, entered into in
April 1997, with a Budapest-based securities broker to initiate a Hungarian
offering jointly with another Hungarian investment firm, of up to 1,500,000
Global Depository Receipts ("GDR' s"). As an alternative, in September 1997, the
Company contracted with another investment banking firm to manage and arrange
the private placement of a debt offering of up to $5,000,000. The issued debt
will be convertible into the Company's common stock. Proceeds from the offering,
planned for the first quarter of 1998, will be used to repay the notes, fund
operations and finance the Company's growth.
At September 30, 1997, the Company was not in compliance with the new
NASDAQ Small Cap listing requirements. The new criteria requires companies to
maintain net tangible assets, defined as total assets, excluding goodwill, minus
total liabilities, of $2.0 million or net income in the latest fiscal year, or
in two of the last three years, of $500,000 or a market capitalization of $ 35.0
million. The Company has until February 22, 1998 to comply with these
requirements or it may be delisted from the NASDAQ Small Cap market and instead
listed on the NASDAQ Bulletin Board. The Company is pursuing several strategies,
including the sale of additional common shares, to meet these new listing
requirements.
Leases
During the first quarter of 1997, Nethold Development B.V., the Company's
contractor for satellite downlink services with the Astra 1E satellite, notified
the Company of its plans to reduce its activities in Hungary and expressed its
desire to terminate its satellite contract with the Company. In May 1997, the
Company and Nethold signed a termination agreement whereby Nethold's services
ended on June 30, 1997.
7
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
The contract obligated Nethold to pay $1,400,000 as compensation to the Company
($200,000 representing forgiveness of service charges for the period January 1,
1997 through June 30, 1997). After receiving final payment in October 1997,
total cash received was $30,000 less than the contracted amount, representing
the fee charged the Company for the late return of Nethold's equipment. To
replace this service, the Company contracted with Antenna Hungaria for
satellite-to-cable broadcast services using the Amos satellite, which began in
late-June 1997.
The Company has a nine year lease agreement with Orion Atlantic Satellite
Services ("Orion Atlantic"), commencing on August 31, 1996 and extending through
August 31, 2005, at a monthly rental fee of $27,240, whereby Orion Atlantic
provides the Company with space on its satellite to transmit its broadcast
signal to Nethold's uplink facilities in the Netherlands. In May 1997, Nethold
and the Company agreed to terminate Nethold's services and the Company is
exploring possibilities for others to take over the Orion contract.
Legal Proceeding
TV3, a competitor of the Company, which was granted a six year, 24 hour per
day microwave license on the AM Micro system in Budapest, applied to the
Ministry of Culture to overturn the grant of the licenses to the Licensees and
NAP TV made in March 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 that 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 licenses to the Licensees and to NAP TV. TV3 thereafter
instituted a legal action in December 1994 against the Ministry of Culture, but
not against either of the Licensees, to overturn its decision in awarding the
licenses in the Metropolitan Court of Budapest. At a hearing, 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.
In April 1995, the Company received a letter from the Ministry confirming that
the licenses had been granted to the Licensees and that the Licensees may
operate in accordance with the terms of the licenses. In November 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 the hearing). The Appeals Court further ruled that the
only issue to be decided by the Municipal 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
final determination by the Ministry committee. In its ruling in June 1996, the
Metropolitan Court ruled in favor of the Company. Subsequently, TV3 has
requested a review of this matter by the Supreme Court, which is currently
pending. If this ruling is overturned, this would have no adverse effect on the
Company's ability to continue broadcasting as the Company began
broadcasting under a new contract, granted by Antenna Hungaria, on a new AM
Micro channel in September 1997.
10. Subsequent Events
In October 1997, the Company agreed in principle with a nonaffiliated
entity (on a 50-50 ownership basis) to form a provider of teletext services in
Hungary. The business is to be named SAT-TEXT Kft Ltd. The amount of funding and
other terms are being negotiated.
In October 1997, M&A Management Kft. advanced $100,000 to the Company and
an additional $25,000 to Studio 2 Kft. These advances were both used to fund
operations.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company is the leading satellite-to-cable television broadcaster in
Hungary. The station distributes to 1.6 million households or 43% of all
television households in the country. The Company's strategy is to continue to
expand its broadcasting reach, promote its Western-style programming and
aggressively pursue additional advertising. The Company expects to benefit from
the projected high rates of growth for television advertising in Hungary. In
October 1997, two new private national television stations began broadcasting;
one on a newly activated terrestrial frequency and the other on the frequency
formerly held by one of the state channels.
The Company was organized in September 1994. In November 1994, it obtained
a six month option to acquire majority interests in DNTV and VI-DOK, two
Hungarian corporations that were granted licenses in March 1994 for a six year
term (commencing July 1994) to broadcast over Budapest television channel
AM-Micro A3. Broadcasting began on a limited basis in September 1994 and
increased to 21 1/2 hours per day in December 1994. In May and June 1995, the
Company purchased 80% of DNTV and 90% of VI-DOK, respectively. Initially, the
station broadcast only music clips. After changing to a civic format in June
1995, the Company returned to the video music clip format in October 1995.
In December 1995, the Company sold shares in an initial public offering and
planned to relaunch its broadcasting as a Western-style entertainment station.
In April 1996, the Company introduced new programming for the hours 7:30 p.m. to
11:00 p.m. featuring American and British syndicated series that had previously
been successful in prime time in those countries. The Company dubbed these
programs into Hungarian. Audience acceptance of these programs has been
favorable and has increased over time.
In September 1996, the Company began transmitting its signal from the Astra
1E Satellite and in October 1996, the station was renamed "MSAT." In July 1997,
the Company switched its satellite transmission service from the Astra satellite
to the Amos satellite. In September 1997, the Company contracted for a new AM
Micro channel and began broadcasting 24 hours per day on the Budapest microwave
system. In November 1997, ORTT, the television regulatory body in Hungary,
awarded the Company a national license to broadcast via satellite. This license
permits the Company to send its digital signal without code. Accordingly, cable
television companies and direct-to-home customers can receive the signal without
having to acquire expensive decoders.
The Company's revenues are derived primarily from the sale of television
advertising to international, national and local advertisers. Billing is
determined by the program ratings as measured by AGB-Hungarian Meter System, an
independent audience rating service. The Company's direct customers are
generally fewer than a dozen international advertising agencies that arrange the
broadcast of commercials for their clients. The Company engages in certain
barter transactions in which it exchanges unsold commercial airtime for services
and goods. In addition, the Company receives small payments from cable operators
who contract to carry MSAT's signal. The Company experiences seasonality, with
advertising sales tending to be lowest in January of each year as the major
advertising agencies negotiate the next year's buy and in the summer months of
July and August. The highest level of advertising activity is during the fourth
quarter of each year as new programming is often launched in the Fall and
advertising tends to increase as Christmas approaches. Because of new entrants
in the market in the fall of 1997, revenues for established stations will be
reduced in the fourth quarter due to this increased competition
The primary expenses incurred in operating a broadcasting station are
programming costs, employee salaries, broadcast transmission expenses and
selling, general and administrative expenses.
The Company is currently operating with expenses (excluding non-cash items
such as amortization, depreciation, barter expense and foreign exchange gains or
losses) of approximately 85 million forints ($430,000, at current exchange
rates) per month and anticipates this approximate level to continue through
1998.
9
<PAGE>
Since the station was relaunched in April 1996, revenues have grown
rapidly. Revenues (before barter) of nine million forints in May 1996 have risen
to 39 million forints in November 1996 and to about 70 million forints
($350,000) in October 1997.
Once the impact of the new stations are absorbed in the market, management
believes that its growth of sales will continue for several reasons. The Company
is a new entrant in the Hungarian television market, essentially being available
to viewers in Budapest only since spring 1996. The April 1996 relaunch was after
the Company's initial public offering and marked the beginning of its
Western-style entertainment format. Only since Fall 1996 have others in Hungary
begun to receive the Company's channel. And only since September 1997 have
viewers in the important Budapest microwave market received the Company's
programs in the 5:00 PM to 7:30 PM time period. Over the last few months,
national coverage has grown from about 15% to about 43% of all television
households. The Company expects to increase its reach to as much as 60% of
Hungary's television households as it signs up additional cable companies and
benefits from a growing direct-to-home market. DUNA-TV, a government-owned
satellite-to-cable station begun in 1993, currently has a broadcast reach of
approximately 53%. The Hungarian television advertising market in 1996 was about
$190 million ($165 million after agency commissions). The market is expected to
grow to about $230 million in 1997. The Company's current rate of sales is less
than 3% of the market. Since October 1997, Hungarian Broadcasting has faced
additional competition from two new private television channels.
The Company conducts its operations through its Hungarian subsidiaries.
Accordingly, the primary internal sources of the Company's cash are dividends
and other distributions from its subsidiaries. The Company's ability to obtain
dividends or other distributions is subject to, among other things, restrictions
on dividends and foreign currency regulations under Hungarian law. The
subsidiaries' ability to make distributions to the Company is also subject to
legal availability of sufficient operating funds which are not needed for
operations, obligations or other business plans.
The Company's revenues and a majority of expenses are denominated in
Hungarian forints. Accordingly, the business operations of the Company are
impacted only to a limited degree by foreign exchange fluctuations. Inflation
also is of limited direct importance. In Hungary, advertising in general and
television advertising in particular have consistently grown more rapidly than
the rate of inflation. Of greater importance, is the potential impact of
currency fluctuations and inflation on the health of the Hungarian economy.
Growth in Hungarian television advertising is directly impacted by the overall
health and growth of the Hungarian economy.
The Company operates with studio licenses, an AM-Micro license and a
national broadcasting license for satellite operations.
The Company has built its business from start up. During the quarter ended
December 31, 1995, the Company emerged from its development stage. Although the
Company has displayed rapid growth in sales, and sales have recently grown to
approach cash expenses, there is no assurance that the Company will generate
enough revenue to pay its costs. The Company will also have to deal with the
increased competition from two new national television stations.
Recent Developments
During the first quarter of 1997, Nethold Development B.V., the Company's
contractor for satellite downlink services with the Astra 1E satellite, notified
the Company of its plans to reduce its activities in Hungary and expressed its
desire to terminate its satellite contract with the Company. In May 1997, the
Company and Nethold signed a termination agreement whereby Nethold's services
ended on June 30, 1997. The contract obligated Nethold to pay $1,400,000 as
compensation to the Company ($200,000 representing forgiveness of service
charges for the period January 1, 1997 through June 30, 1997). After receiving
final payment in October 1997, total cash received was $30,000 less than the
contracted amount, representing the fee charged the Company for the late return
of Nethold's equipment. To replace this service, the Company contracted with
Antenna Hungaria for satellite-to-cable broadcast services using the Amos
satellite, which began in late-June 1997.
10
<PAGE>
The Company has a nine year lease agreement with Orion Atlantic Satellite
Services ("Orion Atlantic"), commencing on August 31, 1996 and extending through
August 31, 2005, at a monthly rental fee of $27,240, whereby Orion Atlantic
provides the Company with space on its satellite to transmit its broadcast
signal to Nethold's uplink facilities in the Netherlands. In May 1997, Nethold
and the Company agreed to terminate Nethold's services and the Company is
exploring possibilities for others to take over the Orion contract. The Company
believes that it will not incur any penalties or fees associated with the
termination of this contract,
In May 1997, the Company organized HBC Rt., a wholly-owned subsidiary, for
an initial investment of $200,000. HBC Rt. has replaced HBC Kft. as the
operating subsidiary in Hungary. The Rt. format provides greater flexibility to
the Company in conducting its business.
On June 30, 1997, promissory notes totaling $1,060,000 were due. The
company offered the note holders compensation to extend the notes for one year
to June 30, 1998. Note holders representing $740,000 of the outstanding debt
agreed, in writing, to extend the maturity date on the notes. Note holders
representing $40,000 of the outstanding debt requested immediate repayment and
the note holders comprising the remaining balance either agreed orally to the
extension or have not responded to the Company's inquiries. Note holders
agreeing to the extension were paid 50% of the interest accrued as of June 30,
1997 and received 2,500 common stock purchase warrants per unit on November 1,
1997; the market value which equaled $1 1/4 per warrant at their date of grant.
Note holders requiring immediate repayment were paid at a price below the notes
carrying value. The Company has recognized a gain of $16,600 from the debt
repayment.
In September 1997, the Company, pursuant to a contract between HBC Rt. and
Antenna Hungaria, began broadcasting 24 hours per day on a newly available
channel in the AM Micro broadcasting system in Budapest. Terms of the contract
provide for broadcasting rights indefinitely into the future. This new agreement
improves and supersedes the Company's prior contract (held by the Licensees)
that provided for limited broadcasting time (excluding 5:00 PM to 7:30 PM daily)
with a termination date of July 1, 2000.
In September 1997, the Company terminated its contract, entered into in
April 1997, with a Budapest-based securities broker to initiate a Hungarian
offering jointly with another Hungarian investment firm, of up to 1,500,000
Global Depository Receipts ("GDR's"). As an alternative, in September 1997, the
Company contracted with another investment banking firm to manage and arrange
the private placement of a debt offering of up to $5,000,000. The issued debt
will be convertible into the Company's common stock. Proceeds from the offering,
planned for the first quarter of 1998, will be used to repay notes, fund
operations and finance the Company's growth
At September 30, 1997, the Company was not in compliance with the new
NASDAQ Small Cap listing requirements. The new criteria requires companies to
maintain net tangible assets, defined as total assets, excluding goodwill, minus
total liabilities, of $2.0 million or net income in the latest fiscal year, or
in two of the last three years, of $500,000 or a market capitalization of $35.0
million. The Company has until February 22, 1998 to comply with these
requirements or it may be delisted from the NASDAQ Small Cap market and instead
listed on the NASDAQ Bulletin Board. The Company is pursuing several strategies,
including the sale of additional common shares, to meet these new listing
requirements.
In October 1997, the Company agreed in principle with a nonaffiliated
entity (on a 50-50 ownership basis) to form a provider of teletext services in
Hungary. The business is to be named SAT-TEXT Kft Ltd. The amount of funding and
other terms are being negotiated.
In October 1997, M&A Management Kft., a company wholly owned by the
President and Chief Executive Officer of the Company, advanced $100,000 to the
Company and an additional $25,000 to Studio 2 Kft. These advances were both used
to fund operations.
11
<PAGE>
In November 1997, the Company was awarded a national television license for
its satellite operations. This license allows the Company to broadcast its
programming without code, which lowers the cost of reception by cable television
companies and by direct-to-home customers.
Results of Operations
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED
SEPTEMBER 30, 1996
The Company's revenues increased by $326,330 or 92% to $679,645 in the
quarter ended September 30, 1997 from $353,315 in the quarter ended September
30, 1996. The increase is attributable to the general increase in advertising at
the station, largely due to the increased market reach of the station. Barter
revenues were about $74,000 for the period compared to negligible barter
revenues in the earlier period.
Other operating costs and expenses, including amortization of deferred
program costs, decreased by $97,371 to $763,984 in the quarter ended September
30, 1997 from $861,355 in the quarter ended September 30, 1996. This decrease
primarily reflects a reclassification of some expenditures from operating costs
to selling, general and administrative expenses since the prior period. .
Amortization of the broadcast license costs of $102,772 and $105,763 for
the two periods, respectively, reflects the amortization of the initial costs of
the licenses over the remaining lives of the licenses ending in July 2000. In
September 1997, a 24 hour license of indefinite duration was awarded to HBC Rt.
Selling, general and administrative expenses increased $308,206 to $662,054
for the quarter ended September 30, 1997 from $353,848 in the quarter ended June
30, 1996. This increase reflects both a reclassification of some expenditures
from operating costs to selling, general and administrative expenses since the
prior period and larger sales and management staffs and the increased cost of
their support.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
The Company's revenues increased by $1,754,752 or 273% to $2,396,504 in the
nine months ended September 30, 1997 from $641,752 in the nine months ended
September 30, 1996. The increase is attributable to the general increase in
advertising at the station, particularly since the station's relaunch in April
1996. Barter revenues were about $273,000 for the period compared to negligible
barter revenues in the prior year period.
Other operating costs and expenses, including amortization of deferred
program costs, increased by $127,725 to $2,469,679 in the nine months ended
September 30, 1997 from $2,341,954 in the nine months ended September 30, 1996.
This increase reflects the increased costs of the station mostly offset by a
reclassification of some expenditures from operating costs to selling, general
and administrative expenses since the prior period. .
Amortization of the broadcast license costs of $317,284 and $329,353 for
the two periods, respectively, reflects the amortization of the initial costs of
the licenses over the remaining life of the license ending in July 2000. In
September 1997, a 24-hour license of indefinite duration was awarded to HBC Rt.
Selling, general and administrative expenses increased $1,536,217 to
$2,685,787 for the nine months ended September 30, 1997 from $1,149,570 in the
nine months ended September 30, 1996. This increase reflects both
reclassification of some expenditures from operating costs to selling, general
and administrative expenses since the prior period and larger sales and
management staffs and the increased cost of their support in the more recent
period.
Interest income and other income were increased by $1,194,531, of which
$1,170,000 was due to the settlement contract made with Nethold B.V.. The
Company recognized $1,170,000 of nonoperating income in the first nine months
due to the termination of the Nethold agreement consisting of $970,000 from the
cash settlement payment and $200,000 of transmission expenses to Nethold that
were cancelled.
12
Plan of Operation
The Company has historically derived its cash for capital expenditures,
working capital and operations primarily from the sale of securities to and
borrowing from investors. As the broadcasting station has established itself in
the market and as its broadcasting reach has expanded through satellite-to-cable
distribution, the Company's cash flow and revenues have risen significantly, so
that currently a majority of cash needed to operate the Company is derived from
operations. Cash generation for the fourth quarter of 1997 is expected to be
less than operating requirements and below the Company's previous plan. This has
largely been due to the increased competition provided by the entrance of two
new stations into the market. Management believes that in 1998, however, the
Company will generate more cash from its business, both due to higher prices and
to increased advertising volumes, than will be required to pay its operating
costs.
Net cash used in operating activities was $713,172 and $3,022,046 for the
nine months ended September 30,1997 and September 30, 1996, respectively.
Starting in April 1996, the Company made significant expenditures in providing
an entertainment format and, beginning in fall 1996, in gaining
satellite-to-cable distribution. Only in recent months have revenues grown
significantly to mostly offset these expenditures.
Comparing September 30, 1997 balance sheet items with those of December
31,1996, $850,000 of notes payable and $526,500 due to a related party for
program acquisition costs were paid out of proceeds of funds raised in the
Company's February 1997 offering of Units.
Other receivable increased by $226,720; $170,000 representing the balance
of monies owed to the Company pursuant to the Nethold settlement. Due from
related parties primarily represents a $350,000 loan due June 30, 1998 made to
Euroweb International Corp. (formerly Hungarian Teleconstruct Corp., a company
partially owned and formerly operated by an officer/director of the Company).
Movie copyright and movie production assets relate to the acquisition of Studio
2 Kft. And the minority interest provision represents the ownership interest by
others in Studio 2 Kft.
The Company has only limited capital spending requirements. It rents its
operations building. While its studio equipment also is leased, the Company
intends to purchase its current equipment, or other similar equipment, at
advantageous prices. The Company purchases its programming in advance pursuant
to short-term contracts.
The Company believes that its existing cash balance, cash from future
operations and the net proceeds from a planned convertible debt offering will be
sufficient to fund the Company's operations for the next twelve months. There is
no assurance, however, that the planned offering will be consummated, or that
revenues will increase as expected. If the planned offering is delayed or
canceled, the Company may need to raise funds from financial institutions or
from other investors.
Foreign Currency
The Company's broadcasting operations in Hungary incur both general
revenues and operating expenses in Hungarian forints. A portion of the Company's
expenses, primarily programming, is denominated mostly in United States dollars.
Assets and liability accounts are translated from Hungarian forints into United
States dollars at 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 separate component of stockholders'
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.
The Company does not hedge against foreign currency exchange risks.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See "Legal Proceedings" in Notes to Consolidated Financial Statements.
Item 2. Changes in Securities
See "Commitments and Contingencies" in Notes to Consolidated Financial
Statements.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
See "Organization and Business" and "Acquisition" in Notes to
Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits (numbers below are references to Regulations S-B)
(3) (a) Certificate of Incorporation filed September 14, 1994*
(b) Certificate of Amendment to Certificate of Incorporation
filed by June 28, 1996*
(c) By-laws*
(4) (a) Form of Warrant Agreement**
(b) Form of Common Stock Purchase Warrant Certificate**
(c) Form of Underwriter's Warrant**
(d) Form of Underwriter's Stock Warrant**
(10) (a) Employment Agreement with Peter E. Klenner*
(b) Employment Agreement with Imre M. Kovats* (c) Financial
Consultant Agreement with Robert Genova* (d) 1994 Incentive
Stock Plan*
(e) Sharing agreement for space and facilities between Registrant
and Hungarian Telephone and Cable Corp.*
(f) Agreement to purchase shares in DNTV* (g) Agreement to
purchase shares in VI-DOK* (h) Letter of intent with
Kablecom*
(i) Offer from OKK Kft. to Registrant to rent satellite space to
Company*
(j) Agreement with Land Studios Kft*
(k) Lease agreement with Hakon Ltd. for space at Szamado,
Budapest*
(l) Form of 6% Bridge Note*
(m) License to broadcast on A3*
(n) Form of Consulting Agreement with J.W. Barclay & Co., Inc.**
(o) Form of Mergers and Acquisitions Agreement with J.W. Barclay
& Co., Inc.**
(p) Purchase of programming agreement with Power TV Ltd., dated
February 28 and July 29, 1996***
14
<PAGE>
(q) Satellite space agreement with Nethold Central Europe BV***
(r) Management and consulting agreement with Justin Bodle dated
June 15, 1996.*** (s) Uplink and downlink agreement with Banknet,
dated June 26, 1996***
(t) Rental lease with Investor Holding Rt. dated June 25, 1996 ***
(u) Settlement Agreement with Nethold Development B.V.,
dated May 22, 1997****
(21) Subsidiaries of the Registrant*
- ------------------
* Filed with Registration Statement No. 33-96674
** Filed with Registration Statement No. 333-13371
*** Filed with Form 10-KSB dated June 30, 1996
**** Filed with Form 10-QSB dated March 31, 1997
B. The following reports on Form 8-K have been filed during the quarter
ended September 30, 1997:
None.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 17th day of November, 1997.
HUNGARIAN BROADCASTING CORP.
By /s/ James H. Season
----------------------------
James H. Season
Chief Financial Officer and Treasurer
16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 331,272
<SECURITIES> 0
<RECEIVABLES> 758,366
<ALLOWANCES> (23,498)
<INVENTORY> 0
<CURRENT-ASSETS> 1,929,819
<PP&E> 494,992
<DEPRECIATION> (81,690)
<TOTAL-ASSETS> 4,300,387
<CURRENT-LIABILITIES> 2,946,869
<BONDS> 0
<COMMON> 10,878,099
0
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<OTHER-SE> (9,654,227)
<TOTAL-LIABILITY-AND-EQUITY> 4,300,387
<SALES> 2,396,504
<TOTAL-REVENUES> 2,396,504
<CGS> 0
<TOTAL-COSTS> 5,472,750
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,059
<INCOME-PRETAX> (1,895,579)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,895,579)
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<EXTRAORDINARY> 0
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<NET-INCOME> (1,895,579)
<EPS-PRIMARY> (0.72)
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