Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
--------------------- ---------------------
March 31,1997 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, $.001 par value 2,585,600 Shares
----------------------------- ----------------------------
(Class) (Outstanding at May 30, 1997)
<PAGE>
HUNGARIAN BROADCASTING CORP.
INDEX
Page No.
--------
Part I. Financial Information
Consolidated balance sheets as of March 31, 1997 (unaudited)
and December 31, 1996 2
Consolidated statements of operations for the three months ended
March 31, 1997 (unaudited) and March 31, 1996 (unaudited) 3
Consolidated statements of cash flows for the three months ended
March 31, 1997 (unaudited) and March 31, 1996 (unaudited) 4
Notes to consolidated financial statements (unaudited) 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information 15
Signature 17
<PAGE>
PART I. FINANCIAL INFORMATION
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED BALANCE SHEETS
(expressed in US$)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(Unaudited)
A S S E T S
Current assets
<S> <C> <C>
Cash and cash equivalents $ 588,411 $ 375,823
Accounts receivable, net of allowance for doubtful accounts
of $26,076 and $28,546 550,037 605,826
Program rights costs, net of amortization of $521,500 and
$236,000 856,500 1,142,000
Prepaid expenses and other current assets 190,803 117,331
Due from related parties 469,000 --
---------- ----------
Total current assets 2,654,751 2,240,980
Investments 299,200 --
Plant, property and equipment, net of accumulated depreciation
of $56,928 and $44,080 414,124 443,633
Broadcast license costs, net of accumulated amortization of
$777,457 and $669,931 1,373,057 1,480,583
Deferred financing and other intangibles, net of accumulated
amortization of $4,262 and $28,870 36,154 46,329
Other -- 89,680
---------- ----------
Total assets $4,777,286 $4,301,205
========== ==========
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
Current portion of notes payable $1,038,847 $1,867,700
Accounts payable 738,887 763,821
Accrued expenses 338,407 387,844
Due to related parties 823,961 1,731,737
Other 83,709 60,852
---------- ----------
Total current liabilities 3,023,811 4,811,954
---------- ----------
Commitments and contingencies (Note 7)
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 2,583,600 2,583 2,583
Additional paid-in capital 10,479,188 7,119,001
Accumulated deficit (8,829,874) (7,758,648)
Cumulative translation adjustment 101,051 126,215
----------- ----------
Total stockholders' equity 1,753,475 (510,749)
----------- ----------
Total liabilities and stockholders' equity $4,777,286 $ 4,301,205
========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in US$)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1997 March 31, 1996
-------------- --------------
(unaudited) (Unaudited)
<S> <C> <C>
Net revenues $ 573,515 $ 47,527
Expenses
Other operating costs and expenses 410,205 302,715
Amortization of deferred program 285,500 --
Amortization of broadcast license costs 107,526 94,693
Selling, general and administrative expenses 935,764 537,057
----------- -----------
1,738,995 934,465
----------- -----------
Operating loss (1,165,480) (886,938)
Interest and other income 136,941 95,493
Interest expense (61,783) (138,807)
Foreign currency exchange rate gain 19,096 --
----------- ------------
Net loss $(1,071,226) (930,252)
Net loss per share $ (0.42) $ (0.36)
Weighted average number of common shares outstanding 2,583,600 2,577,500
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
3
<PAGE>
HUNGARIAN BROADCASTING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in US$)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
------------------ -------------------
Cash flows from operating activities: (unaudited) (unaudited)
<S> <C> <C>
Net loss $(1,071,226) $ (930,252)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of intangibles 420,086 123,686
Depreciation 22,190 1,568
Foreign exchange (gains) (19,759) --
Changes in operating assets and liabilities:
(Increase)decrease in accounts receivable 3,474 (19,407)
(Increase) decrease in VAT receivable (34,509) 51,798
Increase in prepaid expenses and other current assets (81,979) (112,193)
Decrease in other assets 89,680 --
Increase in accounts payable 30,504 226,129
Decrease in accrued expenses (36,809) (40,093)
Increase in other liabilities 60,000 391,990
----------- -----------
Net cash used in operating activities (618,348) (306,774)
----------- -----------
Cash flows from investing activities:
Purchase of plant, property and equipment (16,849) (66,151)
Purchase of program rights costs -- (750,000)
Purchase of investments (300,000) --
----------- -----------
Net cash used in investing activities (316,849) (816,151)
----------- -----------
Cash flows from financing activities:
(Decrease) in advances from related parties (1,352,200) (167,019)
Proceeds (costs) from issuance of common stock -- (153,886)
Proceeds from issuance of preferred stock 4,265,000 --
Payments for offering costs (893,888) --
Payment of notes payable (850,000) (1,060,000)
----------- -----------
Net cash provided (used) by financing activities 1,168,912 (1,380,905)
Effect of exchange rate changes on cash and cash equivalents (21,127) 184,198
Net change in cash and cash equivalents 212,588 (2,319,632)
Cash and cash equivalents at beginning of period 375,823 4,978,307
Cash and cash equivalents at end of period $ 588,411 $ 2,658,675
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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
a wholly-owned subsidiary known as HBC (Hungary) Kft. ("HBC") which was
organized in November 1994. The Company acquired a 90% interest in VI-DOK Video
es Filmgyarto Studio Kft. ("VI-DOK") as of June 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 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 (subsequently renamed MSAT)
commenced in September 1994. The 90% interest in VI-DOK was acquired for
$240,000 and the 80% interest in DNTV for $176,000. In September 1996 the
Company began broadcasting throughout Hungary and renamed its station "MSAT."
From the date of inception through September 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 1995.
The operations of the Company are essentially in Hungary where the majority
of revenues and expenditures are incurred. At March 31, 1997 and December 31,
1996, respectively, 56% and 62% of total assets, and 30% and 24% of total
liabilities of the Company were maintained in the Company's Hungarian
subsidiaries accounts.
2. 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 this statement.
3. 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 March 31, 1997, and operating results and cash
flows for the three 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.
5
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
4. 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 former secretary/director. 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 rescind during
November 1995. The revised terms required that only one-half of the notes were
due upon the earlier of December 31, 1995 or the successful consummation of the
subsequent IPO. The balance of the notes are due on June 30, 1997. Consequently,
the amortization expense relating to the original issue discount and deferred
financing expenses were recomputed over the revised expected term of the notes.
Total original issue discount of $437,000 (an imputed interest rate of 19% per
annum) has been recorded and is being amortized over the expected term of the
notes, along with the $122,100 of financing expenses related to the debt portion
of the private placement. The remaining unamortized original issue discount and
deferred financing expenses totaled $21,153 and $5,910 and $42,294 and $11,820,
respectively, as of March 31, 1997 and December 31, 1996. During January 1996,
$1,060,000 of the notes were repaid.
In December 1996, the Company borrowed $850,000 by issuing promissory notes
payable upon the earlier of one year from the date of issuance or the
consummation of a public offering of securities by the Company with interest at
18% per annum. These notes are collateralized by a pledge of 370,000 shares of
common stock owned by the President of the Company, Peter E. Klenner, and 30,000
shares owned by Frank R. Cohen, Secretary and Treasurer of the Company at that
time. In February 1997, these borrowings were repaid from proceeds of a public
offering by the Company.
5. Units: Preferred Stock and Common Stock Purchase Warrants
In September 1996, the Company sold 100,000 shares of Series A Convertible
Cumulative Redeemable Preferred Stock ("Preferred Stock") for $450,000 in a
private offering. Subsequently, the Company agreed to issue (for no additional
consideration) 100,000 Common Stock Purchase Warrants to the purchasers in such
offering on the basis of one warrant for each share of Preferred Stock purchased
in order to permit the purchasers to own and offer Units identical to those
being offered by the Company in a public offering in February 1997. Proceeds of
the private placement, net of issuance costs, were $329,972.
In February 1997, the Company, in a public securities offering, sold
426,500 Units of Preferred Stock and Common Stock Purchase Warrants for $10.00
per Unit. Net proceeds to the Company after expenses from the Offering were
$3,292,138. The components of the Units will not be separately transferable
until November 5, 1997 or such earlier date as the underwriter may determine.
6
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
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. The Preferred Stock is redeemable by
the Company at the redemption price of $12.00 per share plus accumulated
dividends, but only after the closing price of the Common Stock equals or
exceeds $10.00 per share for 20 of 30 consecutive trading days prior to
redemption notice. Shares of Preferred Stock are entitled to one vote per share
voting together with the Common Stock. If dividends payable on the Preferred
Stock have been unpaid for two dividend periods, the holders of the Preferred
Stock, voting as a class, shall be entitled to elect two directors to the Board
of Directors. Preferred Stock will be entitled to a preference on liquidation
equal to $10 per share, plus accumulated unpaid dividends.
Common Stock Purchase Warrants (the "Warrants") have the same terms as the
Common Stock Purchase Warrants issued during the initial public offering in
December 1995. 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 after the Units are separated at $0.25 per share provided
that the closing price of the underlying Common Stock equals or exceeds $8.50
per share on at least 20 of 30 consecutive trading days prior to notice of
redemption.
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
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.
6. Related Party Transactions
Certain officers and directors of the Company formerly controlled a company
(the "related party") that purchased $800,000 of unsecured promissory notes and
100,000 shares of common stock in the December 1994 private placement (Note 4).
As additional compensation, the related party received an option (which was
exercised in March 1995) to purchase 150,000 shares of common stock at $3.00 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. The amount
outstanding relating to the unsecured promissory notes was $387,316 and $374,631
as of March 31,1997 and December 31, 1996, respectively, and has been included
in notes payable on the balance sheets. In addition, the related party had
advanced approximately $120,000 to the Company, amounts which were repaid in
January 1996. During the six months ended June 30, 1996, the related party made
interest free short term loans to the Company for operational purposes. The
total amount outstanding relating to this loan was approximately $59,000 and
$64,000 at March 31, 1997 and December 31, 1996, respectively. In February 1997,
the Company loaned $350,000 to the related party at 6% interest due June 30,
1997 and secured by the note from the Company to the related party.
7
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
On June 30, 1995, the minority shareholders of two of the Company's
subsidiaries were owed $416,000, as a result of the Company's purchase of their
stock in those two subsidiaries. In February 1996, $189,800 was paid and in
February 1997 $50,000 was paid, leaving balances due of $176,200 and $226,200 at
March 31, 1997 and December 31, 1996, respectively. The amount due to related
parties at March 31, 1997 and December 31, 1996 also includes $0 and $260,000,
respectively, due to an officer/director. Included above is an advance made by
an officer/director of $200,000 to the Company in November 1996. As partial
inducement for this loan, the Company awarded to this officer/director five year
options to purchase 95,000 shares of Common Stock at $5.00 per share.
In February 1996, the Company licensed for $750,000 the exclusive Hungarian
rights to certain programming for MSAT for the period April through December
1996 from Power Television Limited ("Power TV"), a company owned by Justin
Bodle, a director of the Company. In July 1996, the Company agreed to license
for $1,378,000 the exclusive Hungarian rights to additional programming for the
period October 1, 1996 through December 31, 1997 from Power TV. Amounts payable
totaling $0 and $1,151,500 are included in due to related parties at March 31,
1997 and December 31, 1996, respectively.
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 non-registered Common Stock per
month. Compensation expenses relating to these consultant services totaled
approximately $15,000 for the three months ended March 31, 1997. At March 31,
1997 the Company had accrued $45,000 for these services as the securities had
not been paid to the consultant.
In November 1996, Justin Bodle was granted options to purchase 40,000
shares of Common Stock at $5.00 per share as partial inducement to defer
approximately $700,000 due to Power TV under the July 1996 license agreement
described above.
7. Commitments and Contingencies
Consulting and Compensation Agreements
The Company has an employment agreement with the President of the Company
that pays $10,000 per month expiring December 31, 2000.
In January 1996, an officer/director resigned and 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.
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.
8
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
Leases
The Company has a five year lease agreement with Nethold Central Europe
B.V. ("Nethold"), commencing on October 6, 1996 and extending through October 6,
2001, at a quarterly rental fee of $100,000 plus $75,000 of value in barter
solely to promote Nethold. In May 1997, the Company signed a termination of
services agreement with Nethold whereby Nethold's services would terminate on
June 30, 1997. The contract further obligated Nethold to pay $1,400,000 as
compensation to the Company for the contract termination, $200,000 representing
forgiveness of service charges for the period January 1, 1997 through June 30,
1997. Also in May 1997, to replace the Nethold services, the Company contracted
with Antenna Hungaria to provide satellite-to-cable broadcast services via space
that it holds on the Amos satellite. This new satellite transmission service
begins on June 26, 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.
The Company has a five year lease for broadcasting and office facilities in
Budapest, Hungary, with minimum monthly payments before value added taxes of
$12,000, ending June 30, 2001.
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 Company license 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. The Company's outside legal counsel expects a
confirmation of the Court's prior ruling. However, if the ruling is overturned
and the Supreme Court rules that the Company's licenses are invalid, the Company
intends to apply for new licenses. If these are denied, the absence of
broadcasting licenses would have a material adverse effect on the Company's
financial position, results of operations and liquidity.
9
<PAGE>
HUNGARIAN BROADCASTING CORP.
Notes to Consolidated Financial Statements
(Unaudited)
8. Subsequent Events
In April 1997, the Company purchased 80% of Studio II. Ltd., a Budapest
based animation studio. This company was purchased from Peter E. Klenner,
President of the Company, for $743,819 of which $443,819 is represented by an
unsecured note with annual, simple interest of 81/2% due December 31, 1997. The
Company made a deposit of $300,000 in March 1997 approximately one week prior to
closing of the purchase.
In April 1997. Imre Kovats, Executive Vice President of the Company, and
Frank R. Cohen, Secretary and Treasurer of the Company, resigned as officers and
directors. Mr. Kovats was recently appointed president and Mr. Cohen, chairman,
of Hungarian Teleconstruct Corp., a provider of internet services in Hungary.
James H. Season, Chief Financial Officer of the Company, was elected a director
and appointed Treasurer. Ronald Scott Moss was appointed Secretary.
In April 1997, the Company contracted 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). The
Offering is intended to be made on a "best efforts" basis. Each GDR represents
one share of the Company's Common Stock, and it is anticipated that the GDRs
will be listed in the "Listed B Category" on the Budapest Stock Exchange. In the
event that the issue is not completed, the Company would need to seek
alternative sources of financing to fund continued development and operations of
the Company.
During the first half of 1997, Nethold Development B.V., the Company's
contractor for its satellite downlink services with the Astra 1E satellite,
announced that it planned to reduce its presence in Hungary. In May 1997, the
Company signed a termination of services agreement with Nethold whereby
Nethold's services would terminate on June 30, 1997. The contract further
obligated Nethold to pay $1,400,000 as compensation to the Company for the
contract termination, $200,000 representing forgiveness of service charges for
the period January 1, 1997 through June 30, 1997. Also in May 1997, to replace
the Nethold services, the Company contracted with Antenna Hungaria to provide
satellite-to-cable broadcast services via space that it holds on the Amos
satellite. This new satellite transmission service begins on June 26, 1997.
10
<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 and the third leading television broadcaster after the two state
controlled terrestrial stations, MTV-1 and MTV-2. The station distributes to
1.35 million households or 36% 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.
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 211/2hours 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
determined 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."
The Company's revenues are derived primarily from the sale of television
advertising to national, international 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 air time 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.
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 depreciation, barter expense and foreign exchange gains or losses) of
approximately 85 million forints ($450,000, at current exchange rates) per month
and anticipates this approximate level of expenses to continue through 1998.
11
<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 an estimated 64 million forints
($350,000) in May 1997.
Management believes that its rapid 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. Over
the last few months, national coverage has grown from about 15% to 36% of all
television households. The Company expects to increase its reach to as many as
48% of Hungary's television households as it signs up additional cable
companies. DUNA-TV, a satellite-to-cable station begun in 1993 currently has a
broadcast reach of about 48%. The Hungarian television advertising market in
1996 was about $180 million; $165 million, after agency commissions. The
Company's current rate of sales represents less than 2.4% of this rapidly
growing market. The Company expects growth in the number of households that
currently watch the station. Hungarian Broadcasting will face additional
competition in Fall 1997 when an existing state channel and a new state channel
are privatized.
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 under Hungarian law and foreign currency regulations. 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 and AM-Micro licenses in Hungary.
The Hungarian Media Law does not require additional licenses for
satellite-to-cable broadcast distribution. The AM-Micro license expires in July
2000. Management believes that, assuming the Company is in compliance with media
regulations (and it intends to so comply), its AM-Micro licenses will be renewed
as a matter of course. Other European countries have granted medium term
broadcasting licenses which are nearly always extended without controversy. If
the Company should lose one or more of its television licenses and the Company
is not able to obtain a new license, the loss would have a material adverse
effect on its business.
TV3, a competitor of the Company, instituted legal action against the
Ministry of Culture in December 1994 to overturn the grant of the AM-Micro
licenses to two of the Hungarian subsidiaries of the Company on the grounds that
the authority of the committee that awarded the licenses had expired prior to
the date the licenses were granted. The Ministry of Culture denied TV3's
application. After TV3 turned to the courts, the Metropolitan Court ruled in
favor of the Company. TV3 requested a review of the matter by the Supreme Court,
which is currently pending. Should the Supreme Court rule the licenses invalid,
the Company plans to apply for new licenses. If these licenses are not granted,
the Company may not be able to reach its AM-Micro viewers, which would have a
material adverse effect on the Company's operations.
12
<PAGE>
The Company has built its business from a start up operation. 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.
Results of Operations
Three months ended March 31, 1997 compared to three months ended
March 31, 1996
The Company's revenues increased by $525,988 or 1,100% to 573,515 in the
three months ended March 31, 1997 from $47,527 in the three months ended March
31, 1996. The increase is attributable to the general increase in advertising at
the station, particularly since the station's relaunch in April 1996. Barter
revenue was $84,000 for the period compared to negligible barter revenues in the
earlier period.
Other operating costs and expenses, including amortization of deferred
program costs, increased by $298,297 to $695,705 in the three months ended
December 31, 1996 from $397,408 in the three months ended March 31, 1996. This
increase reflects the higher programming and production costs inherent in an
entertainment station compared to the music and sponsored segment formats of the
earlier period.
Amortization of the broadcast license costs of $107,526 and $94,693 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.
Selling, general and administrative expenses increased $398,707 to $935,764
for the three months ended March 31, 1997 from $537,057 in the three months
ended March 31, 1996. This increase reflects larger sales and management staffs
and the increased cost of their support.
Net interest income of $75,158 for the three months ended March 31, 1997
compared to net interest expense of $43,314 in the three months ended March 31,
1996. .
Thus far, a majority of operating expenses have been paid for with funds
raised from investors rather than from money derived from sales. In April 1997,
the Company contracted with a Hungarian securities broker to offer the
equivalent of up to 1,500,000 shares of common stock on a "best efforts" basis,
with the securities to be listed on the Budapest Stock Exchange. In the event
that this offering is not completed, the Company would need to seek alternative
sources of financing to fund the continued development and operation of the
Company.
13
<PAGE>
Liquidity and Capital Resources
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. Management believes that this growth will continue and that within
the next few months the Company will generate more cash than is needed to pay
its operating costs.
Net cash used in operating activities were $618,348 and $306,774 for the
three months ended March 31,1997 and March 31, 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 offset
most of these expenditures.
Comparing March 31, 1997 balance sheet items with those of December
31,1996, many of the debt items have been reduced out of proceeds of funds
raised in February 1997.
As the Company gains maturity and begins to generate cash flow in excess of
its operating requirements, the need to raise the funds from investors will end.
Most of the proceeds of future offerings will be used for acquisitions and
expansion into other businesses. Management believes that the television
broadcasting operation will, in the next few months, begin to generate positive
cash flow.
The Company has only limited capital spending requirements. It rents its
operations building. While its studio equipment also is rented, 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.
From its inception through November, 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. In December 1995, 220,000 shares owned by
three officers of the Company were contributed to the Company for no
consideration. In December 1995, the Company completed an initial public
offering with proceeds $4,995,338, net of underwriting commissions and expenses.
In September 1996 and February 1997, the Company sold 526,500 Units of
convertible preferred stock and warrants for proceeds, net of expenses, of
$3,622,110.
The Company believes that its existing cash balance, cash from future
operations and the net proceeds from a planned securities 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. In particular, the Company has notes that are due on June
30, 1997 of approximately $1,060,000. The Company plans to negotiate an
extension of the due date and pay the notes out of the proceeds of the planned
offering mentioned above, or from financing from other sources.
14
<PAGE>
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 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See "Legal Proceedings" in Notes to Consolidated Financial Statements.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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**
(a)(i)Form of Common Stock Purchase Warrant Certificate**
(b) Form of Underwriter's Warrant**
(c) Form of Underwriter's Stock Warrant**
15
<PAGE>
(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,
February 28 and July 29, 1996***
(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, June 26, 1996
(t) Lease agreement with Investor Holding Rt. dated
June 25, 1996.***
(u) Settlement Agreement with Nethold Development BV
dated May 22, 1997 ****
(21) Subsidiaries of the Registrant***
- --------------
* Filed with Registration Statement No. 33-96674
** Filed with Registration Statement No. 33-80177
*** 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
three months ended March 31, 1996:
Form 8-K filed March 4, 1997 - Change in fiscal year to
December 31, 1996.
16
<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, therunto duly authorized, in the
City of New York, State of New York, on the 12th day of June, 1997.
HUNGARIAN BROADCASTING CORP.
By /s/ James H. Season
----------------------------
James H.Season
Chief Financial Officer and Treasurer
17
This Agreement, dated as of May 22, 1997, by and between Nethold Development
B.V., formerly known as Nethold Central Europe B. V., ("Nethold"), a company
incorporated in The Netherlands, whose registered office is at Jupiteastrart
56,2132 HD Hoofddorp, The Netherlands, and Hungary Broadcasting Corp. ("HBC"),
a company incorporated in the State of Delaware, with an office at 445 Park
Avenue, l5th Floor, New York, New York.
WHEREAS, Nethold and HBC entered into a Heads of Agreement (the "Agreement"),
dated July 5,1996, under which Nethold was to provide HBC with certain essential
services, including digitally compressing, multiplexing, encrypting and
uplinking HBC programing to a satellite transponder, for a period of five years
and in consideration of certain initial and periodic payments to Nethold by HBC;
and
WHEREAS, Nethold and HBC now wish to terminate the Agreement and to release one
another from all outstanding and future obligations under the Agreement on the
terms and conditions provided herein:
NOW, THEREFORE, in consideration of the premises, and other good and valuable
consideration, the adequacy of which is hereby deemed sufficient, Nethold and
HBC agree as follows:
1. Provided the terms of this agreement are fully complied with, HBC and
Nethold hereby release each other from all prior and future obligations
under the Agreement, except as provided herein, and agree that all Tights
and obligations thereunder are hereby terminated.
2. Nethold shall pay HBC the sum of One Million Two Hundred Thousand Dollars
(US$1,200,000) in two installments of Six Hundred Thousand Dollars
(US$600,000) each. Such installments shall be paid within seven business
days of receipt by Nethold of HBC's invoice, the first such invoice to be
deliverable upon execution of this agreement and the second such invoice
to be deliverable upon full compliance by HBC with the provisions of
paragraph three below.
3. Within one month after ~ of the first installment, HBC shall, at its own
expense, deliver to Nethold's offices in Hoofddorp all materials and
equipment supplied to HBC by Nethold pursuant to the Agreement and
currently in HBC's possession or control.
4. Upon HBC's request, Nethold shall continue to provide HBC with the services
specified in the Agreement until June 30,1997.
5. This agreement contains the entire agreement between the parties with
respect to the subject matter hereof; constituting full and final
settlement of any and all claims by or against either party, and/or either
party's associated or affiliated companies, arising out of or related to
the Agreement. There are no representations or warranties other than as
contained herein. No waiver or modification shall be valid unless in
writing. This agreement may be executed in duplicate copies.
IN WITNESS WHEREOF, the parties have set their hand as of the date first above
written.
NETHOLD DEVELOPMENT B.V. HUNGARIAN BROADCASTING CORP
.
By: /s/ G. McSloy By: /s/ Peter Klenner
Title: Director Title: President and CEO
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 558,411
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<RECEIVABLES> 550,037
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<TOTAL-LIABILITY-AND-EQUITY> 4,777,286
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